SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ___________________
Commission File Number 0-25076
WASHINGTON BANCORP
(Exact Name of Small Business Issuer in its Charter)
Iowa 42-1446740
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
102 East Main Street
Washington, Iowa 52353
- ---------------------------------------- --------
(Address of Principal Executive Offices) Zip Code
Issuer's telephone number, including area code: (319) 653-7256
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer had $5,221,000 in revenues for the fiscal year ended June 30, 1997.
As of September 8, 1997, there were issued and outstanding 651,133 shares of the
Issuer's Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the Issuer, computed by reference to the last known sale price
of such stock as of September 8, 1997, was $11.2 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Issuer that such person is an affiliate of the
Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997. Part III of Form 10-KSB - Portions of the Proxy
Statement for the 1997 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
Forward-Looking Statements
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project,"
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligations, to
revise any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
General
Washington Bancorp ("Washington" or the "Company") is an Iowa corporation which
was organized in October 1995 by Washington Federal Savings Bank ("Washington
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company. Washington Federal is a federally chartered savings bank headquartered
in Washington, Iowa. Originally chartered in 1934, the Bank converted to a
federal savings bank in 1994. Its deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation ("FDIC").
In March 1996, the Bank converted to the stock form of organization through the
sale and issuance of its common stock to the Company. The principal asset of the
Company is the outstanding stock of the Bank, its wholly owned subsidiary. The
Company presently has no separate operation and its business consists of the
business of the Bank. All references to the Company, unless otherwise indicated,
at or before March 11, 1996 refer to the Bank.
Washington attracts deposits from the general public in its local market area
and uses such deposits primarily to invest in one- to four-family residential
loans secured by owner occupied properties and non-residential properties, as
well as construction loans on such properties. Washington also makes commercial
loans, consumer loans, automobile loans, and has occasionally been a purchaser
of fixed-rate mortgage-backed securities.
In anticipation of possible federal legislation that may inhibit future
branching opportunities for savings associations, Washington Federal filed
applications with the Office of Thrift Supervision ("OTS") on October 20, 1995
for three branch offices. These applications were approved but have since
expired. The purpose of these applications was to possibly preserve Washington
Federal's branching opportunities. If future applications are submitted, no
assurance can be given that such applications will satisfy the legislation nor
that Washington Federal will open any branch offices.
As of June 24, 1997, the Company entered into a definitive agreement to acquire
Rubio Savings Bank of Brighton ("Rubio") pursuant to a merger in which the
Company will pay Rubio stockholders a total of approximately $4.6 million in
cash (the "Rubio Merger"). Rubio is headquartered in Brighton, Iowa and as of
June 30, 1997 had assets of approximately $21.3 million, deposits of
approximately $17.9 million and stockholder's equity of approximately $3.2
million. The Rubio Merger will be accounted for as a purchase, is subject to
regulatory and stockholder approval and is expected to close by calendar year
end.
At June 30, 1997, the Company had assets of approximately $65.9 million,
deposits of approximately $44.8 million and stockholders' equity of
approximately $10.7 million.
The executive office of the Company is located at 102 East Main Street,
Washington, Iowa 52353, telephone (319) 653-7256.
<PAGE>
Lending Activities
General. Washington's loan portfolio predominantly consists of mortgage loans
secured by one- to four-family residences. Washington also makes home equity and
second mortgage loans, multi-family and commercial real estate loans,
construction loans, commercial business loans and consumer loans.
At June 30, 1997, Washington's net loan portfolio totalled $52.5 million. Loans
secured by first mortgages on one- to four-family residences totalled $40.7
million, or 77% of Washington's loan portfolio at June 30, 1997, before net
items. Washington originates and retains substantially all of its mortgage loan
portfolio, and currently originates only a limited number of mortgage loans for
sale to the secondary market.
Loan Approval Authority. Loans for the purchase of real estate, construction
loans, first mortgage refinances, second mortgages, or commercial loans to
existing customers for more than $100,000, secured consumer loans for more than
$30,000, unsecured consumer loans for more than $20,000 and commercial loans to
new customers for more than $40,000 require loan committee approval. All other
loans require the approval of two loan officers. The Board of Directors is
provided a listing of all loans granted on a monthly basis for ratification.
Loans to One Borrower. Savings banks are subject to the same limits as those
applicable to national banks, which under current regulations limit loans-to-one
borrower to an amount equal to 15% of unimpaired capital and retained income on
an unsecured basis and an additional amount equal to 10% of unimpaired capital
and retained income if the loan is secured by readily marketable collateral
(generally financial instruments, not real estate) or $500,000, whichever is
higher. Washington's maximum loan-to-one borrower limit was approximately $2.1
million as of June 30, 1997. Washington's largest amount outstanding to one
borrower or group of related borrowers was a group of loans secured by
commercial real estate and equipment in the aggregate amount of $552,000. All of
the loans to this borrower have performed in accordance with their terms since
their origination. In addition to regulatory limitations, Washington has adopted
an internal maximum loan-to-one-borrower limit of $750,000.
Loan Portfolio Composition. The following information sets forth the composition
of Washington's loan portfolio in dollar amounts and in percentages at the dates
indicated. All of the loans in the table have fixed interest rates, except for
the commercial business loans which have adjustable rates, and certain
adjustable rate one- to four-family real estate loans offered beginning in March
1996. The amount of adjustable rate one- to four-family loans totaled $16.1
million at June 30, 1997.
<TABLE>
At June 30,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family ..................... $40,696 77.14% $33,914 78.66% $33,328 82.01% $30,496 80.97% $28,895 86.41%
Home equity and second mortgage ......... 1,233 2.34 1,569 3.64 1,669 4.11 956 2.54 786 2.35
Multi-family and commercial real estate . 4,775 9.05 2,896 6.72 1,741 4.28 1,825 4.85 330 0.99
Other ................................... 99 0.19 115 0.27 472 1.16 299 0.79 753 2.25
---------------------------------------------------------------------------------------
Total mortgages .................... 46,803 88.72 38,494 89.29 37,210 91.56 33,576 89.15 30,764 92.00
Construction loans ...................... 694 1.32 1,119 2.60 589 1.45 438 1.16 209 0.63
---------------------------------------------------------------------------------------
Total real estate loans ............ 47,497 90.03 39,613 91.89 37,799 93.01 34,014 90.31 30,973 92.63
---------------------------------------------------------------------------------------
Commercial Business Loans ............... 2,715 5.15 1,546 3.59 1,084 2.67 1,780 4.73 219 0.65
---------------------------------------------------------------------------------------
Consumer Loans
Automobile ............................ 1,899 3.60 1,134 2.62 785 1.93 685 1.82 793 2.37
Deposit account ....................... 645 1.22 822 1.90 970 2.39 1,185 3.14 1,456 4.35
---------------------------------------------------------------------------------------
Total consumer loans ............... 2,544 4.82 1,956 4.52 1,755 4.32 1,870 4.96 2,249 6.72
---------------------------------------------------------------------------------------
Total Loans ............................. 52,756 100.00% 43,115 100.00% 40,638 100.00% 37,664 100.00% 33,441 100.00%
======= ======= ======= ======= =======
Less
Allowance for loan losses ............... 226 209 203 203 202
------- ------- ------- ------- -------
Total loans receivable, net ........ $52,530 $42,906 $40,435 $37,461 $33,239
======= ======= ======= ======= =======
</TABLE>
<PAGE>
There are no foreign loans outstanding for any of the years presented.
Loan Maturities. The following schedule illustrates the contractual maturity and
weighted average rates of Washington's loan portfolio at June 30, 1997. Loans
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
Real Estate
----------------------------------------
Mortgage Construction Commercial Business Consumer Total
------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------- --------- ------- -------- ------- -------- ------- ---------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due during
period ending
June 30,
- -----------------
1998 ........... $ 7,617 8.49% $ 694 8.50% $ 973 9.47% $ 706 9.56% $ 9,990 8.66%
1999 ........... 10,370 8.63 -- -- 100 8.02 394 11.28 10,864 8.72
2000 ........... 8,378 8.53 -- -- 585 9.07 534 11.22 9,497 8.71
2001 and 2002 .. 2,644 8.40 -- -- 698 7.98 884 9.77 4,226 8.62
2003 to 2007 ... 2,035 8.07 -- -- 211 9.96 20 10.42 2,266 8.27
2008 to 2012 ... 2,651 8.08 -- -- -- 6 9.26 2,657 8.08
2013 and
thereafter ..... 13,108 8.08 -- -- 148 9.50 -- -- 13,256 8.10
-------- ------- --------- ------- ----------
$ 46,803 $ 694 $ 2,715 $ 2,544 $ 52,756
======== ======= ========= ======= ==========
</TABLE>
As of June 30, 1997, the total amount of loans due after June 30, 1998 which
have predetermined interest rates was $24.7 million, while the total amount of
loans due after such date which have floating or adjustable interest rates was
$18.1 million.
Loan Originations, Purchases and Sales. Real estate loans are originated by
Washington's staff of salaried loan officers who receive applications from
existing customers, walk-in customers from the local community, advertising, and
referrals from realtors and contractors.
While the Company originates both adjustable-rate and fixed-rate loans, its
ability to originate loans is dependent upon the relative customer demand for
loans in its market. Demand is affected by the interest rate environment.
The Company originates loans for its own portfolio and originates a limited
number of loans for sale on the secondary market. Washington Federal originated
no loans for the secondary market during fiscal 1997.
In periods of rising interest rates, the Company's ability to originate large
dollar volumes of real estate loans may be substantially reduced or restricted,
with a resultant decrease in related fee income and operating earnings.
<PAGE>
The following table shows the loan origination, purchase, sale and repayment
activities of Washington Federal for the periods indicated.
Year Ended June 30,
-------------------------------------
1997 1996 1995
-------- -------- ---------
(In Thousands)
Originations by type:
Real estate
One- to four-family .................. $ 14,265 $ 9,915 $ 6,988
Home equity and second mortgage ...... 751 1,098 182
Multi-family and commercial
real estate ....................... 5,438 484 --
Construction ......................... 1,319 1,647 449
Other ................................ -- -- 255
Non real estate
Commercial business .................. 3,666 1,551 1,406
Consumer ............................. 2,811 2,198 1,822
Total loans originated .......... 28,250 16,893 11,102
Purchases ............................ -- -- --
Loans sold to secondary market ....... -- (208) --
Principal (repayments) ............... (18,609) (14,208) (8,128)
Decrease (increase) in allowance
for loan losses ..................... (17) (6) --
-------- -------- --------
Net increase (decrease) .............. $ 9,624 $ 2,471 $ 2,974
======== ======== ========
One- to Four-Family Residential Mortgage Lending. Washington's primary lending
activity consists of the origination of residential mortgage loans secured by
property located in Washington's market area of Washington County, Iowa and
adjoining counties. Washington will not normally originate any loan which
exceeds 90% of the lesser of the appraised value or selling price of the
mortgaged property.
Prior to March 1996, Washington primarily originated three year balloon mortgage
loans with an amortization up to 30 years. Since March 1996, Washington has
primarily originated adjustable rate mortgages for terms of up to 30 years, with
interest rates that primarily adjust annually after an initial three year term.
Interest rates charged on mortgage loans are competitively priced based on
market conditions and Washington's cost of funds. Washington generally does not
charge origination fees for loans. Washington originates its loans for its own
portfolio and originates a limited number of loans for sale to the secondary
market. Accordingly, Washington's portfolio lending may not conform to secondary
market guidelines, such as FHLMC, primarily as it relates to appraisal
requirements. It is the current policy of Washington to remain primarily a
portfolio lender.
Loan originations are generally obtained from existing customers, members of the
local community, advertising, and referrals from realtors and contractors within
Washington's market area. Mortgage loans originated and held by Washington in
its portfolio generally include due-on-sale clauses which provide Washington
with the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without Washington's
consent.
Washington also has a limited amount of non-owner-occupied permanent residential
one- to four-family mortgage loans in its portfolio. These loans are
underwritten using generally the same criteria as owner-occupied permanent
residential one- to four-family mortgage loans, except that an origination fee
is generally charged.
Home Equity and Second Mortgage Lending. Washington originates home equity and
second mortgage improvement loans. Home equity and second mortgage loans,
together with loans secured by all prior liens, are generally limited to 90% or
less of the appraised value. Generally, such loans have a maximum term of up to
three years with an amortization of up to 15 years. As of June 30, 1997, home
equity and second mortgage loans amounted to $1,232,736 which represented 2.34%
of Washington's total loan portfolio, before net items.
<PAGE>
Multi-Family and Commercial Real Estate Loans. Washington Federal has
historically engaged in a limited amount of multi-family and commercial real
estate lending. Generally such loans adjust to prime annually with a term of
three years and an amortization of up to thirty years, and have loan-to-value
ratios of up to 80%. At June 30, 1997, $4,775,000 or 9.05% of Washington's total
loan portfolio, before net items, consisted of loans secured by existing
multi-family residential real estate and commercial real estate, including
primarily a professional building, grocery store, a condominium and a hog
confinement facility. All of Washington's multi-family and commercial real
estate loans are secured by properties located in its market area. The average
outstanding balance of multi-family and commercial real estate loans was
$3,579,000 during the year ended June 30, 1997, and the largest as of June 30,
1997 was $280,000, secured by farm land and buildings. The loan has performed in
accordance with its terms since origination.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. Washington generally attempts to
mitigate the risks associated with multi-family residential and commercial real
estate lending by, among other things, lending on collateral located in its
market area and generally to individuals who reside in its market.
Washington requires appraisals on all properties securing non-residential and
multi-family residential real estate loans. Such appraisals are completed by
Washington's staff. If these loans exceed $250,000 a certified appraisal is
completed by a fee appraiser not employed by Washington. In originating
multi-family residential and non-residential real estate loans, Washington
considers the quality of the property, the credit of the borrower, cash flow
projections, location of real estate and the quality of management involved with
the property.
Construction Loans. Washington makes construction loans primarily to individuals
for the construction of single-family residences. At June 30, 1997, construction
loans amounted to $694,000, or 1.32% of Washington's total loan portfolio, after
net items. Construction loan rates are fixed at prime during the construction
period. The terms of these loans are generally six months with an option to
renew for an additional six months, at which time the loans are due. During the
construction period, only interest payments are due, and on a case by case
basis, the Company may allow the payment of interest from loan proceeds. The
Washington construction loan agreements generally provide that loan proceeds are
disbursed in increments as construction progresses. Washington periodically
reviews the progress of the underlying construction project. Construction loans
are underwritten pursuant to the same general guidelines used for originating
permanent one- to four-family loans. Construction lending is generally limited
to Washington's market area.
Construction lending is generally considered to involve a higher degree of
credit risk than long- term financing of residential properties. Washington's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, Washington may be compelled to advance additional funds to complete
the construction. Furthermore, if the estimate of value proves to be inaccurate,
Washington may be confronted, at or prior to the maturity of the loan, with a
property with a value that is insufficient to assure full repayment. For the
small number of speculative loans originated to builders, the ability of the
builder to sell completed dwelling units will depend, among other things, on
demand, pricing and availability of comparable properties, and economic
conditions. As of June 30, 1997, the Company had $121,700 in speculative loans
to builders.
Commercial Business Lending. At June 30, 1997, $2,715,000 or 5.15% of the
Company's total loans were comprised of commercial business loans. The Company's
current commercial business lending portfolio is predominantly secured by
accounts receivable, inventory, and equipment. The largest commercial business
loan was $354,000 at June 30, 1997 and was secured by machinery and equipment.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment and other income
and which are secured by real property, the value of which tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are sometimes, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
<PAGE>
Consumer Lending. Washington offers a variety of consumer loans, including
automobile loans and loans secured by deposits. Washington currently originates
substantially all of its consumer loans in its market area generally to its
existing customers. At June 30, 1997, Washington's consumer loan portfolio
totalled $2,544,000 or 4.82% of its total loan portfolio, before net items.
A component of Washington's consumer loan portfolio consists of automobile
loans. Washington originates new and used automobile loans on a direct basis,
where the Company extends credit directly to the borrower. These loans generally
have terms that do not exceed five years and carry a fixed rate of interest.
Generally, loans on new vehicles are made in amounts up to 90% of dealer cost
and loans on used vehicles are made in amounts up to 90% of purchase price or
its published value, whichever is less. At June 30, 1997, Washington's
automobile loans totalled $1,899,000 or 3.60% of Washington's total loan
portfolio, before net items.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting standards
employed by Washington for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1997, $14,000 of Washington's consumer loans were
non-performing. See "- Non-Performing Assets and Classified Assets." There can
be no assurances, however, that delinquencies will not increase in the future.
Asset Quality Loan Delinquencies. Washington's collection procedures provide
that when a mortgage loan is 15 days past due, a notice of nonpayment is sent.
If payment is still delinquent after 30 days, the customer will receive a letter
and/or telephone call from a representative of Washington. If the delinquency
continues to 90 days, similar subsequent efforts are made to eliminate the
delinquency. If the loan continues in a delinquent status for 90 days and no
repayment plan is in effect, a notice of right to cure default is mailed to the
customer giving 30 additional days to bring the account current before
foreclosure is commenced. The loan committee meets regularly to determine when
foreclosure proceedings should be initiated and the customer is notified when
foreclosure has been commenced.
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of category at June 30, 1997. The amounts presented
represent the total remaining principal balances of the elapsed loans, rather
than the actual payment amounts which are overdue.
<TABLE>
Loans Delinquent at June 30, 1997 for:
-------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days & Over Total
--------------------- ----------------------- ------------------------ ----------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
--- ------ ------- ---- ----- ------- --- ------- ------- --- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Mortgage Loans ......... 33 $1,061 94.99% 6 $154 99.35% 6 $ 215 93.89% 45 $1,430 95.27%
Consumer ................. 10 56 5.01 1 1 0.65 6 14 6.11 17 71 4.73
--------------------------------------------------------------------------------------------------
Total .................... 43 $1,117 100.00% 7 $155 100.00% 12 $ 229 100.00% 62 $1,501 100.00%
==================================================================================================
</TABLE>
<PAGE>
Non-Performing Assets. The following table sets forth information regarding
accruing loans delinquent more than 90 days and foreclosed assets. Loans are
reviewed on a monthly basis and are generally placed on a non-accrual status
when the loan becomes more than 90 days delinquent and, in the opinion of
management, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
in the opinion of management, the collection of additional interest on loans
delinquent more than 90 days is not doubtful. Therefore, there are no
nonaccruing loans. For all years presented, the Company had no troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
At June 30,
1997 1996 1995
(Dollars in Thousands)
At June 30,
----------------------
1997 1996 1995
---- ---- ----
(Dollars In Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ............................... $215 $ 27 $256
Consumer ............................... 14 17 39
---- ---- ----
229 44 295
---- ---- ----
Foreclosed assets:
One- to four-family ..................... -- -- --
---- ---- ----
Total non-performing assets ................. $229 $ 44 $295
==== ==== ====
Total as a percentage of total assets ....... 0.35% 0.07% 0.54%
==== ==== ====
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions which covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may also be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
June 30, 1997, Washington had classified $93,000 of its assets as substandard,
and $2,000 as doubtful as compared to $53,000 and $1,000 at June 30, 1996
classified as substandard and doubtful, respectively. While there has been an
increase in assets classified as substandard and doubtful, according to industry
standards the Bank's classified assets are still low. The Bank continues to
increase reserves for loan losses to cover any additional risk perceived by this
slight increase in classified assets. None of the mortgage loans delinquent more
than 90 days have an outstanding balance in excess of $53,000 at June 30, 1997.
<PAGE>
Other Loans of Concern. In addition to the non-performing loans set forth in the
tables above, as of June 30, 1997, there was $148,000 of loans designated as
special mention for which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to havesome doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories. The largest loan classified
as special mention had an outstanding balance of $50,000 on June 30, 1997, and
was secured by a multi-family property in Louisa County, Iowa.
Foreclosed Real Estate. Real estate acquired by Washington as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
Washington records loans as in-substance foreclosures if the borrower has little
or no equity in the property based upon its documented current fair value,
Washington can only expect repayment of the loan to come from the sale of the
property and if the borrower has effectively abandoned control of the collateral
or has continued to retain control of the collateral but because of the current
financial status of the borrower, it is doubtful the borrower will be able to
repay the loan in the foreseeable future. In-substance foreclosures are
accounted for as real estate acquired through foreclosure. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures. Washington had no
foreclosed real estate at June 30, 1997.
It is management's policy to provide for losses on unidentified loans in its
loan portfolio. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in
Washington's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers Washington's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions. The amount of provisions recorded in future periods
may be significantly greater or less than the provisions taken in the past. The
allowance for loan losses was $226,000, or as a ratio of total loans was 1.90%,
at June 30, 1997.
Washington's reserve for loan loss requirement is calculated as a percentage of
the total loans outstanding and total delinquent loans as of a particular
quarter end. Over the past 12 months the Bank has seen an increase in its loan
portfolio and the Bank's delinquent loans have increased slightly over the last
year. This has resulted in a greater than normal increase in the reserve
allowance established by the Bank's Board of Directors. The Bank also
anticipates a stepped up schedule of reserve deposits to keep up with expected
increases in loans outstanding during the next fiscal year.
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of Washington's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
<TABLE>
At June 30,
-------------------------------------------------------------
1997 1996 1995
------------------- -------------------- -------------------
Percent of Percent of Percent of
Loans In Loans In Loans In
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans ........................... $106 90.03% $121 88.09% $ 95 93.01%
Commercial Business Loans ................ 68 5.15 13 3.54 11 2.67
Consumer Loans ........................... 41 4.82 36 8.37 30 4.32
Unallocated .............................. 11 -- 39 -- 67 --
---- ------- ---- ------- ---- -------
$226 100.00% $209 100.00% $203 100.00%
==== ======= ==== ======= ==== =======
</TABLE>
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to Washington's allowance for loan losses at the dates
and for the periods indicated:
Year Ended June 30,
-------------------------
1997 1996 1995
----- ----- -----
(Dollars in Thousands)
Balance at beginning of period ................ $ 209 $ 203 $ 203
Charge offs:
Mortgage .................................. -- -- --
Consumer .................................. (33) (14) (19)
----- ----- -----
Total charge offs ..................... (33) (14) (19)
Recoveries .................................... 10 5 19
----- ----- -----
Net Charge offs ............................... (23) (9) --
----- ----- -----
Provisions charged to operations .............. 40 15 --
----- ----- -----
Balance at end of period ...................... $ 226 $ 209 $ 203
===== ===== =====
Ratio of net charge offs during the period to
average loans outstanding during the period ... .04% 0.02% ---%
===== ===== =====
Ratio of net charge offs during the period to
average nonperforming assets .................. 17.16% 20.45% ---%
====== ====== =====
Investment Activities
Washington is required under federal regulations to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities and
certain other investments. See "Regulation -- Federal Regulation of Savings
Associations" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the Annual
Report to Stockholders attached hereto as Exhibit 13. Washington has
continuously maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the short-term demand for funds to be used in Washington's loan
origination and other activities. At June 30, 1997, Washington had an investment
portfolio of approximately $10.3 million, consisting primarily of U.S. Treasury
Securities, U.S. government agency obligations and corporations securities. To a
lesser extent, the portfolio also includes mortgage-backed and related
securities, municipal bonds, and FHLB stock, as permitted by OTS regulations.
Washington classifies its investments as held to maturity or available for sale.
Washington has found its level of investment securities and mortgage-backed and
related securities has decreased in recent years as a result of increased loan
demand. Washington will continue to seek high quality investments. Federally
chartered savings institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of Washington, as established by the Board of
Directors, is to invest funds among various categories of investments and
maturities based upon Washington's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
<PAGE>
Investment Portfolio. The following table sets forth the carrying value of
Washington's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed and related securities at the dates indicated. At
June 30, 1995, the market value of Washington's held to maturity investment
securities portfolio was $3,091,000. The net unrealized gain of $12,000 as of
June 30, 1995, on such investment securities is not reflected in the table below
because these securities are classified as held to maturity and are therefore
not reported at fair value. For additional information concerning Washington's
investments, see Note 3 of the Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached hereto as Exhibit 13.
<TABLE>
At June 30,
-------------------------------------------------------------
1997 1996 1995
------------------ --------------------- -------------------
Percent Percent Percent
Of Of Of
Book Value Total Book Value Total Book Value Total
---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Available for sale (1):
U.S. Treasury securities ............. $ 402 3.90% $ 394 2.63% $ 495 4.17%
U.S. Government agencies ............. 6,999 67.85 7,961 53.08 2,329 19.61
State and political subdivisions ..... 354 3.43 404 2.69 -- --
Mortgage-backed securities ........... 140 1.36 152 1.01 -- --
Corporations ......................... 1,955 18.95 4,217 28.12 5,616 47.27
Certificates of deposit with
financial institutions ............. -- -- 1,500 10.00 -- --
------- ------ ------- ------ ------- ------
Total Available for sale ....... 9,850 95.48 14,628 97.53 8,440 71.05
------- ------ ------- ------ ------- ------
Held to maturity(1):
State and political subdivisions ........ -- -- -- -- 1,238 10.42
Mortgage-backed securities .............. -- -- -- -- 1,839 15.48
------- ------ ------- ------ ------- ------
Total held to maturity ............. -- -- -- -- 3,077 25.90
------- ------ ------- ------ ------- ------
Total Investment Securities ........ -- -- 14,628 97.53 11,517 96.95
------- ------ ------- ------ ------- ------
FHLB Stock .................................. 466 4.52 369 2.47% 362 3.05
------- ------ ------- ------ ------- ------
Total Investment Securities
and FHLB Stock .................... $10,316 100.00% $14,997 100.00% $11,879 100.00%
======= ======= ======= ======= ======= =======
Average remaining life of investment
securities (excluding FHLB Stock) ......... 3.9 Years 3.3 Years 3.2 Years
Interest-Earning Assets:
Interest-bearing deposits with banks ..... $ 575 100.00% $ 1,110 100.00% $ 1,290 100.00%
======= ======= ======= ======= ======= =======
- ---------------------
<FN>
(1) Securities classified as available for sale were carried at fair value at
June 30, 1997, 1996 and 1995. Securities classified as held to maturity
were carried at historical cost at all respective dates.
</FN>
</TABLE>
In November, 1995 the Financial Accounting Standards Board issued a Special
Report entitled "A Guide Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities". The Special Report contained
guidance on applying the provisions of Statement 115 and, in addition, contained
a provision which allowed entities to reassess the classification of their
investment securities and to make transfers from the held to maturity category
without calling into question the intent of the entity to hold securities to
maturity in the future. Accordingly, in December 1995, Washington Federal
elected to transfer all of the Bank's investment securities in the held to
maturity category to the available for sale category. The carrying value of the
investment securities transferred was approximately $2,907,000 and an unrealized
loss of $35,000, net of related deferred income tax, was recorded in the
Statement of Stockholders' Equity. The fair value of the available for sale
investment portfolio at June 30, 1997 was $9.8 million resulting in a net
unrealized loss at that date of approximately $3,000.
<PAGE>
The category of investment securities entitled "corporations" is comprised of
investments in corporate bonds, except for approximately $300,000 invested in a
mutual fund at June 30, 1995. The mutual fund investment was sold during
December of 1995. The corporate bonds are considered investment grade bonds, but
carry additional credit risk compared to bonds guaranteed by the U.S. government
or agencies thereof. Washington evaluates the benefit of higher yields on these
bonds versus increased credit risk as compared to U.S. Treasury or agency
securities. The quality of these bonds is monitored primarily by reviewing the
investment ratings assigned to the bonds by independent sources such as Standard
& Poors, etc.
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of Washington's investment securities portfolio at June 30, 1997.
<TABLE>
At June 30, 1997
---------------------------------------------------------------------
Total
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
Book Value Book Value Book Value Book Value Book Value
---------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities ......................... $ 300 $ 102 $ -- $ -- $ 402
U.S. government agencies ......................... -- 5,353 1,646 -- 6,999
State and political subdivisions ................. 56 238 60 -- 354
Mortgage-backed securities ....................... -- -- -- 140 140
Corporations ..................................... 1,303 652 -- -- 1,955
Certificates of deposit with financial
institutions .................................... -- -- -- -- --
------ ------ ------ ------ ------
Total ....................................... $1,659 $6,345 $1,706 $ 140 $9,850
====== ====== ====== ======= ======
Weighted average yield ........................... 6.15% 6.61% 7.15% 5.94% 6.61%
====== ====== ====== ======= ======
</TABLE>
Sources of Funds
General. Deposits are the major external source of Washington's funds for
lending and other investment purposes. Washington derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, mortgage-backed securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. Washington had $8.7
million FHLB advances outstanding at June 30, 1997.
Deposits. Consumer and commercial deposits are attracted principally from within
Washington's market area through the offering of a broad selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. Washington also offers individual retirement accounts
("IRA"), NOW accounts and money market deposit accounts ("MMDA"). Deposit
account terms vary according to the minimum balance required, the time period
the funds must remain on deposit, and the interest rate, among other factors.
The interest rates paid by Washington on deposits are set weekly at the
direction of the Board of Directors. Washington determines the interest rate to
offer the public on new and maturing accounts by reviewing the current Treasury
rate for the term and the market interest rates offered by competitors.
Washington Federal reviews, weekly, the interest rates being offered by the
other principal financial institutions within its market area.
Savings accounts constituted $2.2 million, or 4.9% of Washington's deposit
portfolio at June 30, 1997. Certificates of deposit constituted $30.4 million or
68.0% of the deposit portfolio of which $1.2 million or 2.68% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. MMDA
accounts constituted $9.0 million or 20.2% of Washington's deposit portfolio at
June 30, 1997. As of June 30, 1997, Washington Federal had no brokered deposits.
At June 30, 1997, transactions and savings deposits were $14.3 million or 32.0%
of total deposits. At June 30, 1996, transactions and savings deposits were
$13.9 million or 31.2% of total deposits.
<PAGE>
Savings Deposit Activities. The following table sets forth the savings activity
at Washington Federal during the period indicated.
<TABLE>
Year Ended June 30,
----------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ....................................... $ 44,176 $ 42,950 $ 43,872
Net increase (decrease) before
interest credited ................................... (1,226) (390) (2,473)
Interest credited ..................................... 1,804 1,616 1,551
-------- -------- --------
Ending balance ........................................ $ 44,754 $ 44,176 $ 42,950
======== ======== ========
Net increase (decrease) ............................... $ 578 $ 1,226 $ (922)
======== ======== ========
Percent increase (decrease) ........................... 1.31% 2.85% (2.10)%
======== ======== ========
</TABLE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by Washington Federal for the periods
indicated.
<TABLE>
June 30,
--------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------ ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
- ---------------------------------
Demand and NOW Accounts (0.00%-3.35%) $ 3,094 6.88% $ 2,529 5.70% $ 2,129 4.93%
Money Market Accounts (2.30% - 5.00%) 9,044 20.11 9,087 20.46 8,310 19.25
Passbook Savings Accounts (2.30% - 3.00%) 2,182 4.85 2,244 5.05 2,187 5.07
-------- ------ ------- ------ ------- ------
Total Non-Certificates 14,320 31.84 13,860 31.21 12,626 29.25
-------- ------ ------- ------ ------- ------
Certificates
- -------------
2.00% - 3.00% 13 .03 --- --- --- ---
3.01% - 4.00% --- --- 28 0.06 1,203 2.79
4.01% - 5.00% 2,205 4.90 4,976 11.21 6,160 14.27
5.01% - 6.00% 23,247 51.69 14,445 32.53 11,297 26.16
6.01% - 7.00% 4,969 11.05 10,867 24.47 11,521 26.68
7.01% - 8.00% --- --- --- --- 143 0.33
8.01% - 9.00% --- --- --- --- --- ---
9.01% and over --- --- --- --- --- ---
-------- ------ ------- ------ ------- ------
Total Certificates 30,434 67.67 30,316 68.27 30,324 70.23
-------- ------ ------- ------ ------- ------
Accrued Interest 221 .49 231 0.52 226 0.52
-------- ------ ------- ------ ------- ------
Total Deposits and Accrued Interest $ 44,975 100.00% $44,407 100.00% $43,176 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
<PAGE>
The following table shows rate and maturity information for Washington's
certificates of deposit as of June 30, 1997.
<TABLE>
0.00- 4.01- 5.01- 6.01- Percent of
4.00% 5.00% 6.00% 7.00% Total Total
----- ------ ------- ------ ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts maturing in
quarter ending:
September 30, 1997 $ 13 $1,440 $ 3,333 $ 198 $ 4,984 16.38
December 31, 1997 --- 401 3,934 81 4,416 14.51
March 31, 1998 --- 304 3,684 2,764 6,752 22.19
June 30, 1998 --- 60 3,514 790 4,364 14.34
September 30, 1998 --- --- 1,853 115 1,968 6.47
December 31, 1998 --- --- 3,142 85 3,227 10.00
March 31, 1999 --- --- 881 39 920 3.02
June 30, 1999 --- --- 496 95 591 1.94
September 30, 1999 --- --- 446 115 561 1.84
December 31, 1999 --- --- 1,111 222 1,333 4.38
March 31, 2000 --- --- 205 102 307 1.01
June 30, 2000 --- --- 183 128 311 1.02
Thereafter --- --- 465 235 700 2.30
----- ------ ------- ------ ------- ------
Total $ 13 $2,205 $23,247 $4,969 $30,434 100.00%
===== ====== ======= ====== ======= ======
Percent of Total 0.04% 7.25% 76.39% 16.33% 100.00%
===== ====== ======= ====== =======
</TABLE>
The following table indicates the amount of Washington's certificates of deposit
by time remaining until maturity as of June 30, 1997.
<TABLE>
MATURITY
----------------------------------------
3 Months Over 3- 6 Over 6-12 Over 12
or Less Months Months Months Total
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of Deposit less than
$100,000 ................................... $ 4,984 $ 4,416 $ 10,002 $ 9,784 $ 29,186
Certificates of Deposit of $100,000 or More .. -- -- 1,114 134 1,248
-------- -------- -------- -------- --------
Total Certificates of Deposit ................ $ 4,984 $ 4,416 $ 11,116 $ 9,918 $ 30,434
======== ======== ======== ======== ========
</TABLE>
Borrowings
Deposits are the primary source of funds of Washington's lending and investment
activities and for its general business purposes. In addition, Washington may
obtain advances from the FHLB of Des Moines to supplement its supply of lendable
funds. Advances from the FHLB of Des Moines are typically secured by a pledge of
Washington's stock in the FHLB of Des Moines and a portion of Washington's first
mortgage loans and certain other assets. Washington, if the need arises, may
also access the Federal Reserve discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At June 30, 1997,
Washington had $8.7 million of borrowings.
<PAGE>
The following table sets forth the maximum month-end balance and average balance
of FHLB advances at and for the dates indicated.
At and For the Year Ended June 30,
------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
Maximum Balance ................... $9,311 $6,433 $7,230
Average Balance ................... $6,504 $4,621 $4,773
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
June 30,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Advances ..................................... $ 8,652 $ 5,505 $ 7,230
Weighted average interest rate during the period of 5.19% 5.48% 5.13%
FHLB advances
Weighted average interest rate at end of period of
FHLB advances ..................................... 5.50% 5.46% 5.85%
</TABLE>
Washington is one of five financial institutions serving its immediate market
area of Washington, Iowa. The competition for deposit products comes from two
banks owned by multi-bank holding companies, a local independent community bank
and a credit union. Deposit competition also includes a number of insurance
products sold by local agents, and investment products such as mutual funds and
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions.
Washington has traditionally maintained a competitive position in mortgage loan
originations and market share throughout its service area by virtue of its local
presence and its involvement in the community. Washington believes that it has
been able to effectively market its loans and other financial products and
services when compared to other local-based institutions and its superior
customer service when compared to other institutions and mortgage bankers based
outside of Washington's market area.
Washington believes that it is one of the few area lenders that has consistently
offered a variety of loans throughout all types of economic conditions.
Washington believes that it has been able to effectively market its loans and
other financial products and services when compared to other local-based
institutions, and it has superior customer service when compared to the branch
of a larger institution based outside of Washington's market area.
Subsidiary Activity
Washington is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of June 30, 1997, Washington Federal was authorized to invest up to
approximately $1,296,000 in the stock of, or loans to, service corporations
(based upon the 2% limitation).
Washington Federal has one wholly owned subsidiary. The subsidiary conducts
business under the name of Washington Financial Services, Inc. Washington
Federal's investment in its subsidiary totalled $74,000 at June 30, 1997. The
subsidiary's source of income is brokerage fees, and it had net income of
$22,000, $12,000 and $10,000 for the years ended June 30, 1997, 1996 and 1995,
respectively. The primary activity of the subsidiary is the brokering of
mortgage insurance.
<PAGE>
Regulation
General. Washington Federal is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Washington Federal is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Des Moines and is subject to certain limited regulation by
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
As the savings and loan holding company of the Bank, the Company also is subject
to federal regulation and oversight. The purpose of the regulation of the
Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund ("BIF") are the two
deposit insurance funds administered by the FDIC, and the deposits of the Bank
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority over
the operations of savings associations. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS examination of the
Bank was as of September 30, 1996. The FDIC has not examined the Bank in the
last five years. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended June 30, 1997 was $21,000.
The OTS also has extensive enforcement authority over all savings institutions
and their holding companies, including the Bank and the Company. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS is
required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the permissible
level of investment by federal associations in loans secured by non-residential
real property may not exceed 400% of total capital, except with approval of the
OTS. Federal savings associations are also generally authorized to branch
nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower is equal
to the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1997,
the Bank's lending limit under this restriction was $2.1 million. The Bank is in
compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted guidelines
establishing safety and soundness standards on such matters as loan underwriting
and documentation, asset quality, earnings standards, internal controls and
audit systems, interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action.
<PAGE>
Insurance of Accounts and Regulation by the FDIC. Washington Federal is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least
6% and a risk-based capital ratio of at least 10%) and considered healthy pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF members and
SAIF members ranged from .23% to .31% of deposits. As is the case with the SAIF,
the FDIC is authorized to adjust the insurance premium rates for banks that are
insured by the BIF of the FDIC in order to maintain the reserve ratio of the BIF
at 1.25% of BIF insured deposits. As a result of the BIF reaching its statutory
reserve ratio the FDIC revised the premium schedule for BIF insured institutions
to provide a range of .04% to .31% of deposits. The revisions became effective
in the third quarter of 1995. In addition, the BIF rates were further revised,
effective January 1996, to provide a range of 0% to .27%. The SAIF rates,
however, were not adjusted. At the time the FDIC revised the BIF premium
schedule, it noted that, absent legislative action (as discussed below), the
SAIF would not attain its designated reserve ratio until the year 2002. As a
result, insured members would continue to be generally subject to higher deposit
insurance premiums than BIF members until, all things being equal, the SAIF
attains the required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage between
BIF and SAIF member institutions with respect to deposit insurance premiums,
legislation to recapitalize the SAIF was enacted in September 1996. The
legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$294,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected The Bank's results of
operations for the year ended June 30, 1997. As a result of the special
assessment, the Bank's deposit insurance premiums was reduced to 6.48 basis
points based upon its current risk classification and the new assessment
schedule for SAIF insured institutions. These premiums are subject to change in
future periods.
Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
<PAGE>
Regulatory Capital Requirements. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain noncumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage servicing rights, must
be deducted from tangible capital. At June 30, 1997, the Bank did not have any
intangible assets and an excludable valuation allowable, net of tax of $3,307.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 1997, the Bank had one excludable
subsidiary.
At June 30, 1997, the Bank had tangible capital of $8.6 million, or 13.41% of
adjusted total assets, which is approximately $7.7 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of adjusted
total assets. Core capital generally consists of tangible capital plus certain
intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no intangibles which were subject to these tests.
At June 30, 1997, the Bank had core capital equal to $8.7 million, or 13.41% of
adjusted total assets, which is $6.7 million above the minimum leverage ratio
requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
June 30, 1997, the Bank had no capital instruments that qualify as supplementary
capital and $226,000 of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank had $21,000 of
such exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan to value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA or FHLMC.
<PAGE>
OTS regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is also uncertain as to when this evaluation
may be completed. Any savings association with less than $300 million in assets
and a total capital ratio in excess of 12% is exempt from this requirement
unless the OTS determines otherwise.
On June 30, 1997, the Bank had total capital of $8.9 million and risk-weighted
assets of $42.7 million or total capital of 20.8% of risk-weighted assets. This
amount was $5.5 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against savings associations that fail to meet their
capital requirements. The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Washington
Federal may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common
Stock, such issuance may result in the dilution in the percentage of ownership
of the Company.
Limitations on Dividends and Other Capital Distributions. OTS regulations impose
various restrictions on savings associations with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
<PAGE>
Generally, savings associations, such as the Bank, that before and after the
proposed distribution meet their capital requirements, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including Washington Federal, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
Washington Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report to Stockholders filed as Exhibit 13
hereto. This liquid asset ratio requirement may vary from time to time (between
4% and 10%) depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of the association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At June 30, 1997, Washington Federal was in compliance with both
requirements, with an overall liquid asset ratio of 8.65% and a short-term
liquid assets ratio of 3.56%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP by the
OTS, require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including Washington
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At
<PAGE>
June 30, 1997, the Bank met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the CRA
regulations and the methodology for determining an institution's compliance with
the CRA. The Bank was examined for CRA compliance in April 1996 and received a
rating of Satisfactory - "2".
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
Holding Company Regulation. The Company is a unitary savings and loan holding
company subject to regulatory oversight by the OTS. As such, the Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS will has enforcement authority
over the Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
<PAGE>
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If Washington fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of any
other SAIF-insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions are
permitted based on specific state authorization or in a supervisory acquisition
of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, Washington was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Dallas, which
is one of 12 regional FHLBs, that administers the home financing credit function
of savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines. At June 30, 1997, Washington Federal had $466,000 in FHLB stock,
which was in compliance with this requirement. In past years, Washington Federal
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 7.58% and were 7.00% for fiscal year 1997.
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low- and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of
Washington Federal's FHLB stock may result in a corresponding reduction in the
Bank's capital.
<PAGE>
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that is used to compute a
savings association's bad debt reserve deduction under the percentage of taxable
income method (the "percentage bad debt deduction") is 8%. The percentage bad
debt deduction thus computed is reduced by the amount permitted as a deduction
for non-qualifying loans under the experience method. The availability of the
percentage of taxable income method permits qualifying savings associations to
be taxed at a lower effective federal income tax rate than that applicable to
corporations generally (approximately 31.3% assuming the maximum percentage bad
debt deduction).
If an association's specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain government
obligations) constitute less than 60% of its total assets, the association may
not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period.
Under the percentage of taxable income method, the percentage bad debt deduction
cannot exceed the amount necessary to increase the balance in the reserve for
"qualifying real property loans" to an amount equal to 6% of such loans
outstanding at the end of the taxable year or the greater of (i) the amount
deductible under the experience method or (ii) the amount which when added to
the bad debt deduction for "non-qualifying loans" equals the amount by which 12%
of the amount comprising savings accounts at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. At June
30, 1997, the 6% and 12% limitations did not restrict the percentage bad debt
deduction available to the Bank. It is not expected that these limitations would
be a limiting factor in the foreseeable future.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts must recapture that portion of
the reserve that exceeds the amount that could have been taken under the
specific charge-off method for post-1987 tax years. The legislation also
requires thrifts to account for bad debts for federal income tax purposes on the
same basis as commercial banks for tax years beginning after December 31, 1995.
The recapture will occur over a six-year period,the commencement of which will
be delayed until the first taxable year beginning after December 31, 1997,
provided the institution meets certain residential lending requirements. The
management of the Company and the Bank do not believe that the legislation will
have a material impact on the Company or the Bank. In addition to the regular
income tax, corporations, including savings associations such as the Bank,
generally are subject to a minimum tax. An alternative minimum tax is imposed at
a minimum tax rate of 20% on alternative minimum taxable income, which is the
sum of a corporation's regular taxable income (with certain adjustments) and tax
preference items, less any available exemption. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax and net
operating losses can offset no more than 90% of alternative minimum taxable
income. For taxable years beginning after 1986 and before 1996, corporations,
including savings associations such as the Bank, are also subject to an
environmental tax equal to 0.12% of the excess of alternative minimum taxable
income for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
<PAGE>
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1997 the Bank's Excess for tax purposes totalled
approximately $418,000.
The Company files consolidated federal income tax returns with the Bank on a
fiscal year basis using the accrual method of accounting. Savings associations,
such as the Bank, that file federal income tax returns as part of a consolidated
group are required by applicable Treasury regulations to reduce their taxable
income for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
The Company has not been audited by the IRS for the last five years. With
respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Company.
Iowa Taxation. Washington Federal is subject to a franchise tax by the state of
Iowa. The franchise tax is imposed annually in an amount equal to 5% of
Washington Federal's adjusted federal taxable income, computed before any net
operating loss deduction. An alternative minimum tax is imposed on Washington
Federal to the extent such tax exceeds Washington Federal's regular tax
liability. The franchise tax is in lieu of Iowa income tax imposed on
corporations doing business within the State. The Company is not subject to the
Iowa franchise tax, but is subject to Iowa's regular corporate income tax.
Executive Officers
Set forth below are the names, ages and positions of each of the executive
officers of the Company. Except as otherwise indicated, the persons named have
served as officers of the Company since it became the holding company of the
Bank, and all offices and positions described below are with the Company and the
Bank. There are no arrangements or understandings between the persons named and
any other person pursuant to which such officers were selected.
Stan Carlson, age 40, was appointed President and Chief Executive Officer of
Washington Federal in 1993. Prior to joining the Bank, he was Executive Vice
President of Northwoods State Bank, Northwoods, Iowa.
Sandra K. Bush, age 28, has been an employee of Washington Federal for thirteen
years. Mrs. Bush is the Vice President of customer service for Washington
Federal and is primarily responsible for deposits.
Jeff Johnson, age 38, became Vice President of Washington Federal primarily
responsible for the Bank's lending department in June 1995. Prior to that time,
he was branch manager with Midland Savings Bank, Des Moines, Iowa.
Leisha A. Linge, age 32, has been an employee of Washington Federal for five
years. She became Controller of Washington Federal in 1995 and acts as the
Bank's chief financial and accounting officer. Prior to that time, she was a
loan officer.
Employees
As of June 30, 1997 Washington Federal had 14 full-time and 7 part-time and
seasonal employees. None of Washington Federal's employees are represented by a
collective bargaining group. Washington Federal believes that its relationship
with its employees is satisfactory.
<PAGE>
Item 2. Description of Property
Washington Federal operates from its main office and one drive-up facility.
Washington's total investment in offices, office property and equipment is
$1,191,000 with a net book value of $550,000 at June 30, 1997. The following
table sets forth information regarding Washington's properties:
Net Book Value
Of Real Property
Leased/ or Leasehold Improvements Year
Owned At June 30, 1997 Opened
------- ------------------------- ------
Location:
Main Office
102 East Main Street
Washington, Iowa Owned $215,000 1976
Drive-thru
220 East Washington Street
Washington, Iowa Owned $222,965 1994
Item 3. Legal Proceedings
Washington, from time to time, is a party to ordinary routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which Washington holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of Washington Federal. The resolution of
these proceedings should not have a material adverse effect on the Company or
Washington.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 48 and 49 of the attached 1997 Annual Report to Stockholder is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 6 to 17 of the attached 1997 Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
Pages 18 to 46 of the Company's 1997 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors
Information concerning directors and executive officers of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of the
Company and the Bank who are not also directors contained in Part I of this Form
10-KSB is incorporated herein by reference.
<PAGE>
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Company common stock and other equity
securities of the Company by the tenth of the month following a change.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 1997, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
- -------------- ---------------------------------------------- ---------------
2 Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession None
4.1 Articles of Incorporation and *
amendments thereto
4.2 Bylaws 4.2
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
Employment Agreement with Stan Carlson *
Employee Stock Ownership Plan *
Stock Option Plan *
Recognition and Retention Plan *
11 Statement re computation of per share earnings 11
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant None
18 Letter re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted None
to vote
23 Consent of Accountants None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ---------------------
* Filed on January 3, 1996, as exhibits to the Company's Form S-1
registration statement (File number 33-98778). All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company during the three
months ended June 30, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WASHINGTON BANCORP
Date: September 26, 1997 By: /S/ STAN CARLSON
----------------
Stan Carlson
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/S/STAN CARLSON /S/RICK R. HOFER
- ---------------------------------------- -------------------------------
Stan Carlson, President, Chief Executive Rick R. Hofer, Chairman of the
Officer and Director Board
Date: September 26, 1997 Date: September 26, 1997
/S/MYRON L. GRABER /S/RICHARD L. WEEKS
- ---------------------------------------- -------------------------------
Myron L. Graber, Director Richard L. Weeks, Director
Date: September 26, 1997 Date: September 26, 1997
/S/MARY LEVY /S/JAMES D. GORHAM
- ---------------------------------------- -------------------------------
Mary Levy, Director James D. Gorham, Director
Date: September 26, 1997 Date: September 26, 1997
/S/J. RICHARD WILEY /S/LEISHA A. LINGE
- ---------------------------------------- -------------------------------
J. Richard Wiley, Director Leisha A. Linge, Treasurer
(Principal Financial and Accounting
Officer)
Date: September 26, 1997 Date: September 26, 1997
AMENDED AND RESTATED BYLAWS OF WASHINGTON BANCORP.
ARTICLE I
OFFICES
The principal office of the Corporation in the State of Iowa shall be located in
the City of Washington, Washington County. The Corporation may have such other
offices, within or without the State of Iowa, as the business of the Corporation
may require from time to time.
The registered office and registered agent of the Corporation required by the
Iowa Business Corporation Act to be continuously maintained in Iowa shall be
initially as provided in the Articles of Incorporation and shall be subject to
change from time to time by resolution of the Board of Directors and notifying
the Iowa Secretary of State by either filing of a statement of such change or
indicating such change in its annual report.
ARTICLE II
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The amual meeting of shareholders shall be held on
such date as the Board of Directors shall by resolution specify within a period
commencing on January 1 and ending on December 31 in each year, beginning with
1996. At each annual meeting the election of the directors shall take place and
such other business shall be transacted as may be properly presented to such
meeting. If the day fixed for the annual meeting shall be a legal holiday, such
meeting shall be held on the next succeeding business day. If the election of
directors shall not be held on the day designated herein for any annual meeting,
or at any adjournment thereof, the Board of Directors shall cause the election
to be held at a meeting of the shareholders as soon thereafter as conveniently
may be.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called
by the Board of Directors. The holders of at least ten percent of all the votes
entitled to be cast on any issue proposed to be considered at the proposed
special meeting may cause a special meeting of the shareholders to be held upon
compliance with the requirements of Section 702(l)(b) of the Iowa Business
Corporation Act.
SECTION 3. PLACE OF MEETING. The Board of Directors may designate any place,
either in or out of the State of Iowa, as the place of meeting for any annual
meeting or for any special meeting called by the Board of Directors. A waiver of
notice signed by all shareholders may designate any place, either in or out of
the State of Iowa, as the place for the holding of such meeting. If no
designation is made, or if a special meeting be otherwise called, the place of
meeting shall be the Corporation's principal office.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the date, time and place
of the meeting and, in the case of a special meeting, a description of the
purpose or purposes for which the meeting is called, shall be mailed, unless
oral notice is reasonable under the circumstances, not fewer than ten nor more
than sixty days before the date of the meeting, by or at the direction of the
President, the Secretary, or the officer or persons calling the meeting to each
shareholder of record entitled to vote at the meeting. If mailed, such notice is
effective when mailed addressed to the shareholder's address shown in the
Corporation's current record of shareholders, with postage prepaid.
SECTION 5. RECORD DATE. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders; such date in any case to be not more than sixty
days and, in case of a meeting of shareholders, not less than ten days prior to
the date on which the particular action, requiring such determination of
shareholders, is to be taken. If no record date is fixed for the determination
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which resolution of
the Board of Directors declaring such dividend is adopted, as the case may be,
shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
one hundred twenty (120) days after the date fixed for the original meeting.
<PAGE>
SECTION 6. VOTING LIST. The officer or agent having charge of the stock transfer
books for shares of the Corporation shall make, at least two business days after
notice of each meeting of shareholders is given, a complete alphabetical list of
the shareholders entitled to notice of such meeting or any adjournment thereof,
arranged by voting group and within each voting group by class or series of
shares, with the address of and the number of shares held by each. The
shareholders' list must be available for inspection by any shareholder beginning
two (2) business days after notice of the meeting is given for which the list
was prepared and continuing through the meeting, at the Corporation's principal
office or at a place identified in the meeting notice in the city where the
meeting will be held. A shareholder, or a shareholder's agent or attorney, is
entitled on written demand to inspect and, subject to the requirements of Iowa
Business Corporation Act Section 490.1602, subsection 3, to copy the list,
during regular business hours and at the person's expense, during the period it
is available for inspection. The Corporation shall make the shareholders' list
available at the meeting, and any shareholder, or a shareholder's agent or
attorney, is entitled to inspect the list at any time during the meeting or any
adjournment. Refusal or failure to comply with the requirements of this section
shall not affect the validity of any action taken at such meeting.
SECTION 7. QUORUM OF SHAREHOLDERS. The holders of at least one third of all
shares of stock entitled to vote at a meeting, represented in person or by
proxy, shall constitute a quorum of that voting group at a meeting of
shareholders unless a greater number may be required by law. Where a separate
vote by a class or classes is required a majority of the shares of such class or
classes, represented in person or by proxy (after giving effect to the
provisions of Article IV of the Articles of Incorporation), shall constitute a
quorum entitled to take action with respect to that vote on that matter. Shares
entitled to vote as a separate voting group may take action on a matter only if
a quorum of those shares exists with respect to that matter. If a quorum of a
voting group is present, the affirmative vote of the majority of the shares
representing the voting group at the meeting and entitled to vote on the subject
matter shall be the act of the shareholders, unless the vote of a greater number
or approval by other voting groups is required by the Iowa Business Corporation
Act, the Articles of Incorporation or the Bylaws. Once a share is represented
for any purpose at a meeting, it is deemed present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is or must be set for that adjourned meeting.
SECTION 8. PROXIES. At all meetings of the shareholders, a shareholder may vote
the shareholder's shares either in person or by proxy. A shareholder may appoint
a proxy to vote or otherwise act for the shareholder by signing an appointment
form either by the shareholder or by the shareholder's attorney-in-fact. No
proxy shall be valid after eleven months from the date of its execution, unless
otherwise provided in the appointment form. Proxies shall be effective when
filed with the secretary or other officer or agent authorized to tabulate votes.
SECTION 9. VOTING OF SHARES. Subject to the provisions of Section 10 this
Article and Article IV of the Articles of Incorporation, each outstanding share
of stock shall be entitled to one vote upon each matter submitted to vote at a
meeting of the shareholders.
SECTION 10. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of this Corporation
owned directly or indirectly by another corporation if a majority of the shares
entitled to vote for election of directors of such other corporation is held
directly or indirectly by this Corporation shall not be voted at any meeting.
If the name signed on a vote, consent, waiver, or proxy appointment corresponds
to the name of a shareholder, the Corporation if acting in good faith is
entitled to accept the vote, consent, waiver, or proxy appointment and give it
effect as the act of the shareholder:
If the name signed on a vote, consent, waiver, or proxy appointment does not
correspond to the name of its shareholder, the Corporation if acting in good
faith is nevertheless entitled to accept the vote, consent, waiver, or proxy
appointment and give it effect as the act of the shareholder if
a. The shareholder is an entity and the name signed purports to be that of an
officer or agent of the entity.
b. The name signed purports to be that of an administrator, executor, guardian
of the property, or conservator representing the shareholder and, if the
Corporation requests, evidence of fiduciary status acceptable to the
Corporation has been presented with respect to the vote, consent, waiver,
or proxy appointment.
c. The name signed purports to be that of a receiver or trustee in bankruptcy
of the shareholder and, if the Corporation requests, evidence of this
status acceptable to the Corporation has been presented with respect to the
vote, consent, waiver, or proxy appointment.
<PAGE>
d. The name signed purports to be that of a pledgee, beneficial owner, or
attorney-in-fact of the shareholder and, if the Corporation requests,
evidence acceptable to the Corporation of the signatory's authority to sign
for the shareholder has been presented with respect to the vote, consent,
waiver, or proxy appointment.
e. Two or more persons are the shareholders as co-tenants or fiduciaries and
the name signed purports to be the name of at least one of the co-owners
and the person signing appears to be acting on behalf of all the co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the Secretary or other officer or agent authorized to tabulate
votes, acting in good faith, has reasonable basis for doubt about the validity
of the signature on it or about the signatory's authority to sign for the
shareholder.
The Corporation and its officer or agent who accepts or rejects a vote, consent,
waiver, or proxy appointment in good faith and in accordance with the standards
of this Section are not liable in damages to the shareholder for the
consequences of the acceptance or rejection.
Corporate action based on the acceptance or rejection of a vote, consent,
waiver, or proxy appointment under this Section is valid unless a court of
competent jurisdiction determines otherwise.
SECTION 11. ACTION WITHOUT MEETING OF SHAREHOLDERS. No action required or
permitted by the Iowa Business Corporation Act to be taken at a meeting of the
shareholders may be taken without a meeting or vote.
SECTION 12. VOTING BY BALLOT. Voting on any question or in any election may be
voice vote unless the presiding officer shall order or any shareholder shall
demand that voting be by ballot.
SECTION 13. ORGANIZATION. Such person as the Board of Directors may have
designated or, in the absence of such a person, the President of the Corporation
or, in his or her absence, such person as may be chosen by the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
shall call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary of
the meeting shall be such person as the chairman appoints.
SECTION 14. CONDUCT OF BUSINESS.
(a) The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in
order. The date and time of the opening and closing of the polls for each
matter upon which the stockholders will vote at the meeting shall be
announced at the meeting.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this section 14(b). For business to
be properly brought before an annual meeting by a stockholder, the business
must relate to a proper subject matter for stockholder action and the
stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered or mailed to and received at the principal executive offices of
the Corporation not less than ninety (90) days prior to the date of the
annual meeting; provided, however, that in the event that less than one
hundred (100) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the 10th
day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A stockholder's
notice to the Secretary shall set forth as to each matter such stockholder
proposes to bring before the annual meeting (i) a brief description of the
business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and
address, as they appear on the Corporation's books, of the stockholder who
proposed such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder
and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be brought before or conducted at an annual meeting except in accordance
with the provisions of this Section 14(b). The officer of the Corporation
or other person presiding over the annual meeting shall, if the facts so
warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of
this Section 14(b) and, if he should so determine, he shall so declare to
the meeting and any such business so determined to be not properly brought
before the meeting shall not be transferred.
<PAGE>
At an special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors or the holders of the Corporation's
stock calling the special meeting.
(c) Only persons who are nominated in accordance with the procedures set forth
in these Bylaws shall be eligible for election as directors. Nominations of
persons for election to the Board of Directors of the Corporation may be
made at a meeting of stockholders at which directors are to be elected only
(i) by or at the direction of the Board of Directors or (ii) by any
stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth
in this Section 14(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered or mailed to and received at the principal
executive offices of the Corporation not less than ninety (90) days prior
to the date of the meeting; provided, however, that in the event that less
than one hundred (100) days' notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on
the l0th day following the day on which such notice of the date of the
meeting was mailed or such prior public disclosure was made. Such
stockholder's notice shall set forth (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a
director if elected); and (ii) as to the stockholder giving the notice (a)
the name and address, as they appear on the Corporation's books, of such
stockholder and (b) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the
request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the provisions of this Section 14(c). The officer of the
Corporation or other person presiding at the meeting shall, if the facts so
warrant, determine that a nomimtion was not made in accordance with such
provisions and, if he or she should so determine, he or she shall so
declare to the meeting and the defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation managed under
the direction of, the Board of Directors.
SECTION 2. NUMBER AND ELECTION OF DIRECTORS. The number of directors shall be
seven (7). Such number may be increased or decreased as provided herein without
action of the shareholders. By amendment to these Bylaws, the Board of Directors
may increase or decrease by thirty (30) percent or less the number of directors
last approved by the shareholders. Only the shareholders may increase or
decrease by more than thirty (30) percent the number of directors last approved
by the shareholders. Any increase by the Board of Directors in the size of the
Board of Directors shall create a vacancy which may be filled immediately by the
existing directors without any vote of the shareholders. Any increase by the
shareholders in the size of the Board of Directors shall create a vacancy which
may be filled by a vote of the shareholders. No decrease in the number of
directors shall have the effect of shortening the term of office of any
incumbent director.
The directors, other than those who may be elected by the holders of any class
or series of preferred stock, shall be divided, with respect to the time for
which they severally hold office, into three classes, with the term of office of
the first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
director to hold office until his or her successor shall have been duly elected
and qualified.
<PAGE>
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held without other notice than this Bylaw, immediately after, and at the same
place as, the annual meeting of shareholders. The Board of Directors may provide
by resolution the time and place, either in or out of the State of Iowa, for the
holding of additional regular meetings without other notice than such
resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by or at the request of the President or one-third (rounded up to the
nearest whole number) of the directors. The person or persons authorized to call
special meetings of the Board of Directors may fix any place, either in or out
of the State of Iowa, as the place for holding any special meeting of the Board
of Directors called by them.
SECTION 5. NOTICE. Special meetings of the Board of Directors shall be preceded
by at least two (2) days' written notice, unless oral notice is reasonable under
the circumstances, of the date, time, and place of the meeting communicated to
each director. If mailed, such notice must be deposited in the United States
mail correctly addressed and postage prepaid at least seven (7) days prior to
the date of the meeting. The attendance of a director at any meeting shall
constitute a waiver of notice of such meeting, unless a director at the
beginning of a meeting or promptly upon the director's arrival objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
SECTION 6. QUORUM. A majority of the number of the directors fixed by these
Bylaws shall constitute a quorum for the transaction of business; provided, that
if less than a majority of such number of directors are present at said meeting,
a majority of the directors present may adjourn the meeting from time to time
without further notice.
SECTION 7. MANNER OF ACTING. If a quorum is present when a vote is taken, the
affirmative vote of a majority of directors present is the act of the Board of
Directors unless the Articles of Incorporation or the Bylaws require the vote of
a greater number of directors.
SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of a majority of the remaining directors though
less than a quorum of the Board of Directors. A director elected to fill a
vacancy shall be elected for the unexpired term of his predecessor in office;
but if the director is elected to fill a vacancy created by an increase in the
number of directors, his term shall expire at the time designated for the class.
SECTION 9. COMPENSATION. The Board of Directors, by the affmative vote of a
majority of the directors then in office, and irrespective of any personal
interest of any of its members, shall have authority to establish reasonable
compensation of all directors or other persons for services to the Corporation
as directors, officers or otherwise. By resolution of the Board of Directors,
the directors may be paid their expenses, if any, of attendance at each meeting
of the Board.
SECTION 10. PRESUMPTION OF ASSENT. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors when corporate
action is taken is deemed to have assented to the action taken unless one or
more of the following occurs:
a. The director objects at the beginning of the meeting or promptly upon the
director's arrival to holding it or transacting business at the meeting.
b. The director's dissent or abstention from the action taken is entered in
the minutes of the meeting.
c. The director delivers written notice of the director's dissent or
abstention to the presiding officer of the meeting before its adjournment
or to the Corporation immediately after adjournment of the meeting.
The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
SECTION 11. ACTION WITHOUT MEETING OF THE BOARD OF DIRECTORS. Any action
required or permitted by the Iowa Business Corporation Act to be taken at a
meeting of directors of the Corporation, or a committee of directors, may be
taken without a meeting if one or more written consents describing the action
taken, shall be signed by all of the directors or all of the members of the
committee of directors, as the case may be, and included in the minutes or filed
with the corporate records reflecting the action taken. Action taken under this
Section is effective when the last director signs the consent, unless the
consent specifies a different effective date. A consent signed under this
Section has the effect of a meeting vote and may be described as such in any
document.
<PAGE>
SECTION 12. TELEPHONE CONFERENCE MEETINGS. Subject to other applicable
provisions contained in these Bylaws, any action required or permitted by the
Iowa Business Corporation Act to be taken at a meeting of directors of the
Corporation, or a committee of directors, may be taken by any means of
communication by which all directors participating in the meeting can
simultaneously hear each other during the meeting. A director participating in a
meeting pursuant to this provision is deemed to be present in person at the
meeting.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The officers of the Corporation shall consist of a President,
one or more Vice Presidents (the number of whom the Board of Directors shall
determine), a Secretary and a Treasurer, and such Assistant Treasurers,
Assistant Secretaries or other officers as may be elected or appointed by the
Board of Directors. Any two or more offices may be held by the same person. The
directors may also elect from their number a chairman to preside at all meetings
of the Board of Directors.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be
elected annually by the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of shareholders. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as conveniently may be. Vacancies may be filled or new offices
created and filled at any meeting of the Board of Directors. Each officer shall
hold office until his successor shall have been duly elected and qualified or
until his death, or until he shall resign or shall have been removed in the
manner hereinafter provided. Election or appointment of an officer or agent
shall not of itself create contract rights.
SECTION 3. REMOVAL. Any officer or agent may be removed by the Board of
Directors at any time with or without cause, but such removal does not affect
the contract rights, if any, with the Corporation of the person so removed.
SECTION 4. VACANCIES AND RESIGNATION. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term. An officer may resign at any
time by delivering notice to the Corporation. A resignation is effective when
the notice is delivered unless the notice specifies a later effective date. If a
resignation is made effective at a later date and the Corporation accepts the
future effective date, the Board of Directors may fill the pending vacancy
before the effective date if the Board of Directors provides that the successor
does not take office until the effective date.
SECTION 5. THE PRESIDENT. The President shall be the chief executive officer of
the Corporation and shall have general and active supervision and direction over
the day to day business operations of the Corporation and over its other
officers and employees. Subject to the limitations imposed by the Board of
Directors, he shall have the power to appoint and remove agents and employees of
the Corporation. He shall see that all orders and resolutions of the Board of
Directors are carried out. He may sign, with the Secretary or Assistant
Secretary certificates for shares of the Corporation, deeds, mortgages, bonds,
notes, contracts or other instruments which the Board of Directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the Board of Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be required
by law to be otherwise signed or executed. In general, he shall perform all
duties incident to the office of the President and such other duties as may from
time to time be assigned to him by the Board of Directors.
SECTION 6. THE VICE PRESIDENT(S). In the absence of the President, or in the
event of his inability to act, the Vice President (or in the event there be more
than one Vice President, the Vice Presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Any Vice President
may sign with the Secretary or an Assistant Secretary, certificates for shares
of the Corporation, and shall perform such other duties as from time to time may
be assigned to him by the President or by the Board of Directors.
SECTION 7. THE TREASURER. If required by the Board of Directors, the Treasurer
shall give a bond for the faithful discharge of his duties in such sum and with
such surety or sureties as the Board of Directors shall determine. He shall have
charge and custody of and be responsible for all funds and securities of the
Corporation; receive and give receipts for monies due and payable to the
Corporation; and deposit all such monies in the name of the Corporation in such
banks, trust companies or other depositaries as shall be selected in accordance
with the provisions of Article V of these Bylaws. He shall in general perform
all duties incident to the office of Treasurer and such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.
<PAGE>
SECTION 8. THE SECRETARY. The Secretary shall keep the minutes of the
shareholders and of the Board of Directors meetings in one or more books
provided for that purpose; see that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law; be custodian of the
corporate records and the seal of the Corporation, if any; authenticate records
of the Corporation as required from time to time; keep a register of the post
office address of each shareholder which shall be furnished to the Secretary by
each shareholder; sign with the President or a Vice President certificates for
shares of the Corporation, the issue of which shall have been authorized by
resolution of the Board of Directors; have general charge of the stock transfer
books of the Corporation; and in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the President or by the Board of Directors.
SECTION 9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The Assistant
Treasurers shall respectively, if required by the Board of Directors, give bonds
for the faithful discharge of their duties in such sums and with such sureties
as the Board of Directors shall determine. The Assistant Secretaries, as
thereunto authorized by the Board of Directors, may sign with the President or a
Vice President certificates for shares of the Corporation, the issue of which
shall have been authorized by a resolution of the Board of Directors. The
Assistant Treasurers and Assistant Secretaries, in general, shall perform such
duties as shall be assigned to them by the Treasurer or the Secretary,
respectively, or by the President or the Board of Directors.
SECTION 10. SALARIES. The salaries of the officers shall be fixed from time to
time by the Board of Directors and no officer shall be prevented from receiving
such salary by reason of the fact that he is also a director of the Corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation and
no evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the
payment of money, notes or other evidence of indebtedness issued in the name of
the Corporation, shall be signed by such officer or officers, agent or agents of
the Corporation, and in such manner as shall from time to time be determined by
resolution of the Board of Directors.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositaries as the Board of Directors may select.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Subject to the provisions of Section 490.625
of the Iowa Business Corporation Act, certificates representing shares of the
Corporation shall be in such form as may be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President and the Secretary or an Assistant Secretary of the Corporation. The
signatures of the President or a Vice President and the Secretary or an
Assistant Secretary upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent, or registered by a registrar, other than the
Corporation itself or an employee of the Corporation. All certificates for
shares shall be consecutively numbered or otherwise identified. The name of the
person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the books of the Corporation. All
certificates surrendered to the Corporation for transfer shall be cancelled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and cancelled, except that in case
of a lost, destroyed or mutilated certificate, a new one may be issued therefor
upon such terms and indemnity to the Corporation as the Board of Directors may
prescribe.
<PAGE>
SECTION 2. TRANSFER OF SHARES. Subject to the rights conferred by the Code of
Iowa, transfers of shares of the Corporation shall be made only on the books of
the Corporation by the holder of record thereof, or by his legal attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation, and only on surrender for cancellation of the
certificate for such shares. Except as otherwise provided by law, the person in
whose name shares stand on the books of the Corporation shall be deemed the
owner thereof for all purposes as regards the Corporation.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on July 1 in each year and shall
end on June 30 in each year.
ARTICLE VIII
DIVIDENDS
The Board of Directors may, from time to time, declare and the Corporation may
pay dividends on its outstanding shares in the manner and upon the terms and
conditions provided by the Iowa Business Corporation Act and the Articles of
Incorporation.
ARTICLE IX
SEAL
This Corporation shall have no corporate seal.
ARTICLE X
WAIVER OF NOTICE
WAIVER OF NOTICE BY SHAREHOLDERS. A shareholder may waive any notice required by
the Iowa Business Corporation Act, of Incorporation, or the Bylaws before or
after the date and time stated in the notice. The waiver must be in writing, be
signed by the shareholder entitled to the notice, and be delivered to the
Corporation for inclusion in the minutes or filing with the corporate records.
A shareholder's attendance at a meeting:
a. Waives objection to lack of notice or defective notice of the meeting,
unless the shareholder at the beginning of the meeting or promptly upon the
shareholder's arrival objects to holding the meeting or transacting
business at the meeting.
b. Waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter when it is
presented.
SECTION 2. WAIVER OF NOTICE BY DIRECTORS.
a. A director may waive any notice required by the Iowa Business Corporation
Act, the Articles of Incorporation, or Bylaws before or after the date and
time stated in the notice. Except as provided by subsection b, the waiver
must be in writing, signed by the director entitled to the notice, and
filed with the minutes or corporate records.
b. A director's attendance at or participation in a meeting waives any
required notice to that director of the meeting unless the director at the
beginning of the meeting or promptly upon the director's arrival objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.
<PAGE>
ARTICLE XI
AMENDMENTS
Unless either of the following apply, these Bylaws may be amended or repealed
and new Bylaws may be adopted at any meeting of the Board of Directors of the
Corporation at which a quorum is present, by a majority vote of the directors
present at the meeting:
a. The Articles of Incorporation or the Iowa Business Corporation Act reserve
the power to amend or repeal the Corporation's Bylaws exclusively to the
shareholders in whole or in part.
b. The shareholders in amending or repealing a particular Bylaw provide
expressly that the Board of Directors shall not amend or repeal that
Bylaws.
The Corporation's shareholders may amend or repeal the Bylaws by a vote of at
least 80% of the voting power of the then-outstanding shares of stock entitled
to vote in the election of directors (after giving effect to Article IV of the
Articles of Incorporation) voting together as a single class, even though the
Board of Directors may also amend or repeal the Bylaws.
ARTICLE XII
VOTING OF STOCK IN OTHER CORPORATIONS
In the absence of a resolution of the Board of Directors to the contrary, the
President or the Vice President of this Corporation is authorized and empowered
to act for and on behalf of the Corporation by attending meetings, voting
shares, executing proxies, waiving notice, executing any formal consent, or
taking similar or related actions, all respecting stock of other corporations
which is owned by the Corporation, all without further authority than as herein
contained. The Board of
Directors may, in its discretion, designate any officer or person as a proxy or
attorney-in-fact to vote the shares of stock in any other corporation in which
this Corporation may own or hold shares of stock.
ARTICLE XIII
COMMITTEES
The Board of Directors may create one or more committees and appoint
members of the Board of Directors to serve on them. Each committee may have two
(2) or more members, who serve at the pleasure of the Board of Directors. The
creation of a committee and appointment of members to it must be approved by the
greater of either:
a. A majority of all the directors in office when the action is taken.
b. The number of directors required by Article III, Section 6, of these Bylaws
to take action.
The provisions of Article III of the Bylaws which govern meetings,action without
meetings, notice and waiver of notice, and quorum and voting requirements of the
Board of Directors, apply to committees and their members as well.
Each committee may exercise the authority of the Board of Directors under
Article III, Section 1, of the Bylaws. A committee shall not, however:
a. Authorize distributions.
b. Approve or propose to shareholders action that the Iowa Business
Corporation Act requires be approved by shareholders.
c. Fill vacancies on the Board of Directors or on any of its committees.
d. Amend the Articles of Incorporation pursuant to Section 490.1002 of the
Iowa Business Corporation Act.
e. Adopt, amend, or repeal the Bylaws.
f. Approve a plan of merger not requiring shareholder approval.
g. Authorize or approve reacquisition of shares, except according to a formula
or method prescribed by the Board of Directors.
h. Authorize or approve the issuance or sale or contract for sale of shares,
or determine the designation and relative rights, preferences, and
limitations of a class or series of shares, except that the Board of
Directors may authorize a committee or a senior executive officer of the
Corporation to do so within the limits specifically prescribed by the Board
of Directors.
Exhibit 11
Washington Bancorp
Computation of Earnings per Common Share
Twelve Months ended
June 30, 1997
Computation of weighted average number of
common shares outstanding:
Common shares outstanding at the beginning of the ............. 657,519
period
Unreleased common shares held by the Employee
Stock Ownership Plan (ESOP) at the beginning
to the period ................................................ (50,433)
Weighted average common shares released by the
ESOP during the period ....................................... 2,050
Weighted average common shares outstanding -
Stock Option Plan ............................................ 6,063
Weighted average common shares purchased to
fund the Recognition and Retention Plan ...................... (11,537)
Weighted average common shares outstanding -
Recognition and Retention Plan ............................... 13,940
---------
Weighted average number of common shares ...................... 617,602
---------
Net income .................................................... $ 564,677
---------
Net income per common share ................................... $ 0.91
=========
Washington Bancorp
1997 Annual Report
<PAGE>
WASHINGTON BANCORP
TABLE OF CONTENTS
Letter to Stockholders........................................
Selected Consolidated Financial Information...................
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................
Report of Independent Auditors ...............................
Consolidated Financial Statements.............................
Directors and Executive Officers .............................
Stockholder Information.......................................
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 1997
(Dollars in Thousands)
Total assets ......................................... $64,875
Total loans, net ..................................... 52,530
Investment securities and other earning assets ....... 10,890
Deposits ............................................. 44,754
Borrowings ........................................... 8,652
Net income ........................................... 565
Stockholders' equity ................................. 10,675
Stockholders' equity as a percent of assets .......... 16.45%
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of Washington Bancorp will be held on October
15, 1997 at 4:30 P.M. at the office of the Company, located at 102 East Main
Street, Washington, Iowa.
- --------------------------------------------------------------------------------
<PAGE>
WASHINGTON BANCORP
102 East Main Street
Washington, Iowa 52353
September 15, 1997
Dear Fellow Stockholders:
It is with pleasure that the board of directors, officers, and staff of
Washington Bancorp and our wholly owned subsidiary, Washington Federal Savings
Bank, provide you with our second annual report.
Washington Federal Savings has served the mortgage and consumer credit needs of
Southeast Iowa for over sixty years as a mutual company. In our two years as a
stock company, and specifically a public company, our goals have not changed.
Our mission is to continue as a strong, customer-driven, community-involved
financial institution providing diversified services for both depositors and
borrowers, with attention to present and future needs.
Net income for the year ended June 30, 1997 was $564,677. This represented an
increase of 28% over last year. Capital levels grew to $10,675,431 compared to
$10,548,165 at June 30, 1996. This results in a capital ratio of 16.45% at June
30, 1997 compared to 17.32% at June 30, 1996. Total assets grew from $60,890,943
to $64,875,034, an increase of $3,984,091 or 6.5% when compared to June 30,
1996.
Our directors, officers and staff have strong ties to our community. Numerous
local civic and charitable organizations flourish because of their enthusiasm
and participation. Washington Federal Savings Bank is committed to future growth
and performance and will demonstrate this commitment within our community. We
have a sixty year history of stability and quality of service to the communities
we serve. Due to our high quality, dedicated personnel, coupled with the support
of you, our stockholders, we embrace the future with confidence and enthusiasm.
We thank our customers for their loyalty, our directors and employees for their
dedication, and our stockholders for their support and confidence.
Sincerely,
Stan Carlson
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial information does not purport to be complete
and is qualified in its entirety by reference to the more detailed consolidated
financial information contained elsewhere herein.
<TABLE>
At June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .................................... $64,875 $60,891 $55,100 $52,985 $48,253
Loans receivable, net ........................... 52,530 40,906 40,435 37,461 33,239
Cash and cash equivalents ....................... 808 1,903 1,658 735 2,346
Investment securities ........................... 9,850 14,628 11,517 13,280 11,531
Investment in Federal Home Loan Bank ("FHLB")
stock ......................................... 466 369 362 320 320
Deposits ........................................ 44,754 44,176 42,950 43,872 44,268
Borrowed funds .................................. 8,652 5,505 7,230 4,489 ---
Stockholders' equity ............................ 10,675 10,548 4,400 4,141 3,562
Year Ended June 30,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------
(in Thousands)
Selected Operations Data:
Total interest income .......................... $4,990 $4,207 $ 3,939 $ 3,854 $ 3,850
Total interest expense ......................... 2,553 2,499 2,181 2,043 2,248
-------------------------------------------------------
Net interest income (expense) ................ 2,437 1,708 1,758 1,811 1,602
Provision for loan losses ...................... 40 15 --- -- 133
-------------------------------------------------------
2,397 1,693 1,758 1,811 1,469
Total noninterest income ....................... 231 197 138 209 153
Total noninterest expense ...................... 1,712 1,206 1,278 1,149 989
-------------------------------------------------------
Income before income taxes ..................... 916 684 618 871 633
Income tax expense ............................. 351 243 259 291 170
-------------------------------------------------------
Net income ..................................... $ 565 $ 441 $ 359 $ 580 $ 463
=======================================================
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets) .......................... 0.90% 0.78% 0.67% 1.14% 0.98%
Interest rate spread information:
Average during period ............................ 3.09 2.55 3.04 3.44 3.29
End of period .................................... 3.09 2.96 2.91 3.47 3.42
Net interest margin(1) ............................. 3.97 3.13 3.38 3.70 3.54
Ratio of operating expense to average total assets. 2.72 2.15 2.38 2.27 2.10
Return on equity (ratio of net income to average
equity) .......................................... 5.34 6.94 8.41 15.06 13.90
Quality Ratios:
Non-performing assets to total assets at end
of period(2) ................................... 0.35 0.07 0.54 0.39 0.72
Allowance for loan losses to non-performing loans. 98.52 475.00 68.81 98.07 57.93
Capital Ratios:
Equity to total assets at end of period........... 16.45 17.32 7.99 7.82 7.38
Average equity to average assets ................. 16.80 11.31 7.96 7.60 7.08
Ratio of average interest-earning assets to
average interest-bearing liabilities .......... 121.22 112.79 108.01 106.24 105.20
Number of full service offices ..................... 1 1 1 1 1
- ---------------------
<FN>
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets consist of nonaccruing loans, accruing loans past-due
90 or more days and foreclosed assets.
</FN>
</TABLE>
Capital Requirements. The following table sets forth Washington Federal Savings
Bank's compliance with its capital requirements at June 30, 1997.
Capital Level
OTS Requirement at June 30, 1997(1)
--------------- --------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
--------------- --------------------------
(Dollars in Thousands)
Capital Standard
- ----------------
Tangible Capital ........... 1.5% $ 972 13.4% $8,693 $7,721
Core Capital ............... 3.0% $1,945 13.4% $8,693 $6,748
Risk-based Capital ......... 8.0% $3,415 20.8% $8,898 $5,483
- -------------------
(1) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets in accordance with OTS regulations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Washington Bancorp ("Washington" or the "Company"), an Iowa corporation, became
the holding company of Washington Federal Savings Bank (the "Bank") on March 11,
1996. The Bank is a federally chartered stock savings bank headquartered in
Washington, Iowa. The principal asset of the Company is the outstanding stock of
the Bank, its wholly-owned subsidiary. The Company presently has no separate
operations and its business consists only of the business of the Bank. All
references to the Company, unless otherwise indicated, at or before March 11,
1996 refer to the Bank.
The earnings of Washington depend primarily on its level of net interest income,
which is the difference between interest earned on interest-earning assets,
consisting primarily of mortgage loans, and investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is a function of Washington's "interest rate spread," which
is the difference between the average yield earned on interest-earning assets
and the average rate paid on interest-bearing liabilities. The interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. Washington, like other
financial institutions, is subject to interest-rate risk to the degree that its
interest-earning assets mature or reprice at different times, or on a different
basis, than its interest-bearing liabilities. To a lesser extent, Washington's
operating results are also affected by the amount of its non-interest income,
including service charges and loan fees, and other income which includes
commissions from sales of insurance by the Bank's service corporation.
Non-interest expense consists primarily of compensation and benefits, occupancy
and equipment, federal insurance premiums, data processing, and other operating
expenses. Washington's operating results are significantly affected by general
economic conditions, in particular, the changes in market interest rate,
government policies and actions by regulatory authorities.
Washington's basic mission is to originate mortgage loans on a profitable basis
to the communities it serves. In seeking to accomplish this mission, the Board
of Directors and management have adopted a business strategy designed (i) to
maintain Washington's capital level in excess of regulatory requirements; (ii)
to maintain Washington's asset quality; (iii) to control operating expenses;
(iv) to maintain, and if possible, increase Washington's interest rate spread
and other income; and (v) to manage Washington's exposure to changes in interest
rates. Washington has attempted to achieve these goals by focusing on
originating first mortgage home loans, consumer loans and by offering a full
range of deposit products.
On June 24, 1997, the Company entered into a definitive agreement to acquire
Rubio Savings Bank of Brighton ("Rubio") pursuant to a merger in which the
Company will pay Rubio stockholders a total of approximately $4.6 million in
cash (the "Rubio Merger"). Rubio is headquartered in Brighton, Iowa and as of
June 30, 1997 had assets of approximately $21.3 million, deposits of
approximately $17.9 million and stockholder's equity of approximately $3.2
million. The Rubio Merger will be accounted for as a purchase, is subject to
regulatory and stockholder approval and is expected to close by calendar year
end.
Financial Condition
Total Assets. Total assets increased from $55.1 million at June 30, 1995 to
$60.9 million at June 30, 1996 to $64.9 million at June 30, 1997. The net
increase from 1995 to 1996 was primarily funded by the net proceeds from the
Company's initial public offering ("IPO"). The net increase from 1996 to 1997
was primarily funded by $3.1 million in borrowings from the Federal Home Loan
Bank ("FHLB") of Des Moines and a $4.8 million decrease in investment securities
due to the maturity and call of certain of such securities.
Loans Receivable. Loans receivable, net increased from $40.4 million at June 30,
1995 to $42.9 million at June 30, 1996 to $52.5 million at June 30, 1997. The
increases have been primarily due to increased loan demand in Washington's
market area. The Company's non-performing assets were $229,000 or .35% of total
assets at June 30, 1997 as compared to $44,000 or .07% of total assets at June
30, 1996. Management feels that non-performing assets to total assets was
unusually low at June 30, 1996 and that the increase at June 30, 1997 remains
within industry standards. Management is committed to maintaining the
non-performing assets to total asset ratio within industry standards.
Deposits. Deposits increased $600,000 or 1.36 % to $44.8 million, at June 30,
1997 from $44.2 million at June 30, 1996. Transaction and savings deposits rose
as a percentage of total deposits from $13.9 million or 31.2% at June 30, 1996
to $14.3 million or 32.0% at June 30, 1997. Certificates of deposit dropped as a
percentage of total deposits from $30.3 million or 68.3% at June 30, 1996 to
$30.4 million or 68.0% at June 30, 1997.
<PAGE>
Deposits increased $1.3 million or 2.9% to $44.2 million, at June 30, 1996 from
$42.9 million at June 30, 1995. Transaction and savings deposits rose as a
percentage of total deposits from $12.6 million or 29.3% at June 30, 1995 to
$13.9 million or 31.2% at June 30, 1996. Certificates of deposit dropped as a
percentage of total deposits from $30.3 million or 70.5% at June 30, 1995 to
$30.3 million or 68.3% at June 30, 1996.
Stockholders' Equity. Stockholders' equity increased from $4.4 million at June
30, 1995 to $10.5 million at June 30, 1996 to $10.7 million at June 30, 1997.
The increase from June 30, 1995 to June 30, 1996 was primarily due to the net
proceeds from the IPO. The increase from June 30, 1996 to June 30, 1997 was
primarily due to net income of $565,000, the amortization of compensation under
the Recognition and Retention Plan of $72,000, the net reduction in unrealized
losses on available for sale securities of $65,000, and the allocation of shares
in the Employee Stock Ownership Plan of $57,000 partially offset by the $349,000
payment for the repurchase of 26,300 shares of Washington's common stock and
dividends paid of $214,000. The portfolio of available for sale securities is
comprised primarily of investment securities carrying fixed interest rates. The
fair value of these securities is subject to changes in interest rates and the
fair value of these securities is less than their carrying value as of June 30,
1997 due to an increase in interest rates since the purchase date of securities.
<PAGE>
Net Interest Income Analysis
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
<TABLE>
Year Ended June 30,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ---------------------------- ------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) ............... $47,538 $ 4,128 8.68% $41,329 $3,446 8.34% $39,077 $ 3,183 8.15%
Investment securities ............. 11,528 757 6.57 9,580 632 6.60 12,044 710 5.90
FHLB stock ........................ 411 29 7.01 366 26 7.10 338 26 7.69
Other interest-earning assets ..... 1,822 76 4.18 3,311 103 3.11 572 20 3.50
------- ------- ------ ------- ------ ------- ------- ------- -------
Total interest-earning assets (1) $61,299 $ 4,990 8.14% $54,586 $4,207 7.71% $52,031 $ 3,939 7.57%
======= ======= ======= ======= ====== ======= ======= ======= =======
Interest-bearing liabilities:
Certificates of deposit ........... $30,682 $ 1,741 5.68% $30,658 $1,746 5.70% $28,691 $ 1,499 5.22%
NOW, money market and passbook
savings ......................... 13,226 472 3.57 12,955 496 3.83 14,546 432 2.97
Advances from borrowers for taxes
and insurance ................... 155 2 1.52 163 4 2.45 163 5 3.07
FHLB advances ..................... 6,504 337 5.19 4,621 253 5.48 4,773 245 5.13
------- ------- ------- ------ ------- -------
Total interest-bearing
liabilities ................... $50,567 $ 2,553 5.05 $48,397 $2,499 5.16 $48,173 $ 2,181 4.53
======= ======= ======= ====== ======= =======
Net interest income ................. $ 2,437 $1,708 $ 1,758
======= ====== =======
Net interest rate spread(2) ......... 3.09% 2.55% 3.04%
======= ======= ======
Net interest-earning assets ......... $10,732 $ 6,189 $ 3,858
======= ======= =======
Net yield on average interest-
earnings assets ................... 3.97% 3.13% 3.38%
======= ======= ======
Net interest-earnings assets to
average interest-earning
liabilities ...................... 121.22% 112.79% 108.01%
======= ======= =======
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
</FN>
</TABLE>
<PAGE>
The following table presents the weighted average yields on loans, investments
and other interest-earning assets, and the weighted average rates paid on
deposits and borrowings and the resultant interest rate spreads at the dates
indicated.
At June 30,
-------------------------
1997 1996 1995
-------------------------
Weighted average yield on:
Loans receivable ............................... 8.55% 8.52% 8.30%
Investment securities .......................... 6.61 6.87 6.85
Other interest-earning assets .................. 5.96 5.33 5.92
Combined weighted average yield on interest-
earning assets .................................. 8.21 8.05 7.93
Weighted average rate paid on:
Passbook savings accounts ...................... 2.30 2.30 2.50
NOW accounts ................................... 2.29 2.30 2.50
Money market accounts .......................... 3.92 4.14 3.26
Certificates of deposit ........................ 5.74 5.67 5.62
Advances from borrowers for taxes & insurance .. 2.30 2.30 2.50
FHLB advances .................................. 5.50 5.46 5.85
Combined weighted average rate paid on interest-
bearing liabilities ............................ 5.12 5.09 5.02
Spread ........................................... 3.09 2.96 2.91
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes due to
changes in outstanding balances and those due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to the volume and the changes
due to rate.
<TABLE>
Year Ended June 30,
-----------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------- -------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
--------------- Increase ------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ----- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ............................... $ 536 $ 146 $ 682 $ 188 $ 75 $ 263
Investment securities .......................... 128 (3) 125 (156) 78 (78)
FHLB stock ..................................... 3 -- 3 2 (2) --
Other interest-earning assets .................. (55) 28 (27) 85 (2) 83
----- ----- ----- ----- ----- -----
Total interest-earning assets .................... $ 612 $ 171 $ 783 $ 119 $ 149 $ 268
===== ===== ===== ===== ===== =====
Interest-bearing liabilities:
Certificates of Deposit ......................... $ 1 $ (6) $ (5) $ 106 $ 141 $ 247
NOW, money market, and passbook savings ......... 10 (34) (24) (51) 115 64
Advances from borrowers for
taxes and insurance ............................ -- (1) (1) -- (1) (1)
FHLB advances .................................. 98 (14) 84 (8) 16 8
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities ............... $ 109 $ (55) $ 54 $ 47 $ 271 $ 318
===== ===== ===== ===== ===== =====
Net interest income .............................. $ 729 $ (50)
===== =====
</TABLE>
Comparison of Operating Results for the Years Ended June 30, 1997 and 1996
Performance Summary. Net income for the year ended June 30, 1997 increased by
$124,000 or 27.9% to $565,000 from $441,000 for the year ended June 30, 1996.
The increase was primarily due to an increase in net interest income of $729,000
and an increase in noninterest income of $34,000, partially offset by an
increase in noninterest expense of $506,000, an increase in provision for loan
losses of $25,000 and an increase in income tax expense of $108,000. For the
years ended June 30, 1997 and 1996 the return on average assets was .90% and
.78%, respectively, while return on average equity was 5.34% and 6.94%,
respectively.
<PAGE>
Net Interest Income. For the year ended June 30, 1997, net interest income
increased by $729,000 as compared to June 30, 1996. This reflects an increase of
$783,000 in interest income to $5.0 million from $4.2 million and an increase in
interest expense of $54,000 to $2.6 million from $2.5 million. The net increase
was primarily due to the increase in interest-earning assets as a result of a
strong loan demand as well as an increase in the net interest rate spread.
For the year ended June 30, 1997 the average yield on interest-earning assets
was 8.14% compared to 7.71% for 1996. The average cost of interest-bearing
liabilities was 5.05% for the year ended June 30, 1997, a decrease from 5.16%
for the year ended June 30, 1996. The average balance of interest-earning assets
increased by $6.7 million to $61.3 million for the year ended June 30, 1997 from
$54.6 million for the year ended June 30, 1996. During this same time period,
the average balance of interest-bearing liabilities increased by $2.2 million to
$50.6 million for the year ended June 30, 1997 from $48.4 million for the year
ended June 30, 1996.
Due to the lower funding costs, the average interest rate spread was 3.09% for
the year ended June 30, 1997 compared to 2.55% for the year ended June 30, 1996.
The average net interest margin was 3.97% for the year ended June 30, 1997
compared to 3.13% for the year ended June 30, 1996.
Provision for Loan Loss. During the year ended June 30, 1997 the provision for
loan loss was $40,000 compared to $15,000 for the year ended June 30, 1996. The
primary reason for the provision was the increased size of the loan portfolio
during the last few years. The Company's loan portfolio consists primarily of
residential mortgage loans, and it has experienced and a minimal amount of
charge-offs in the past three years. The allowance for loan losses of $226,000
or .43% of loans receivable, net at June 30, 1997 compares to $209,000 or .49%
of loans receivable, net at June 30, 1996. The allowance for loan losses as a
percentage of non-performing assets was 98.52% at June 30, 1997, compared to
475.00% at June 30, 1996.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions dictate. Although Washington maintains its allowance for loan losses
at a level which management considers to be adequate to provide for loan losses,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in the
future.
Non-Interest Income. For the year ended June 30, 1997, non-interest income
increased $34,000 or 17.3% compared to the year ended June 30, 1996 due
primarily to a $32,000 increase in bank service charges and fees, a $23,000
increase in insurance commissions, and an $100,000 increase in other
non-interest income offset by a $32,000 decrease in securities gains.
Bank service charges and fees increased $32,000 from $85,000 for the year ended
June 30, 1996 to $117,000 for the year ended June 30, 1997 primarily due to a
$16,000 increase in overdraft fees and a $9,000 increase in ATM and other
electronic funds transfer fees. Insurance commissions increased $23,000 from
$55,000 at June 30, 1996 to $78,000 at June 30, 1997 due to an increase in sales
of credit life and disability insurance products through Washington Financial
Services. Other non-interest income increased $11,000 from $17,000 at June 30,
1996 to $28,000 at June 30, 1997 primarily due to a gain realized as a result of
the disposition of an REO property.
Non-Interest Expense. For the year ended June 30, 1997, non-interest expense
increased $506,000 to $1.7 million compared to $1.2 million for the year ended
June 30, 1996 primarily due to a $260,000 increase in SAIF deposit insurance
premium, a $140,000 increase in compensation and benefits, a $99,000 increase in
other non-interest expense and a $12,000 increase in occupancy and equipment
offset by a $5,000 decrease in data processing.
<PAGE>
SAIF deposit insurance premium expense increased $260,000 from $117,000 at June
30, 1996 to $377,000 at June 30, 1997 primarily due to the one-time SAIF
assessment. Compensation and benefits increased $140,000 to $722,000 for the
year ended June 30, 1997 from $582,000 for the year ended June 30, 1997
primarily due to $107,000 increase in employee benefits through the ESOP and RRP
plans and a $38,000 increase in employee's salaries. Other non-interest expense
increased $99,000 from $289,000 at June 30, 1996 to $388,000 at June 30, 1997
primarily due to the increase in professional fees and overhead costs since the
conversion. Auditing and accounting fees increased $38,000, legal fees increased
$16,000 and postage and delivery increased $10,000. Management feels that these
fees can and are being controlled but not eliminated as a result of the SEC
reporting requirements and the increased shareholder correspondence since the
conversion to a public company in March 1996. Occupancy and equipment expense
increased $12,000 from $138,000 at June 30, 1996 to $150,000 at June 30, 1997
primarily due to a $10,000 increase in property tax as a result of the increase
in assessed value of the drive-through facility. Data processing expense
decreased $5,000 from $80,000 at June 30, 1996 to $75,000 at June 30, 1997
primarily due to the timing of bill payments.
The deposits of savings institutions such as the Bank are presently insured by
the Savings Association Insurance Fund (the "SAIF"), which, along with the Bank
Insurance Fund (the "BIF"), are the two insurance funds administered by the
Federal Deposit Insurance Corporation (the "FDIC"). Financial institutions which
are members of the BIF have experienced substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves, while the
SAIF prior to September, 1996 had not yet achieved its required reserves. A
recapitalization plan for the SAIF was signed by the President on September 30,
1996 as part of the Economic Growth and Regulatory Paperwork Reduction Act and
provided for a one-time special assessment of .657% of deposits imposed on all
SAIF insured institutions to enable the SAIF to achieve its required level of
reserves. The assessment of .657% was assessed based on deposits as of March 31,
1995 and the Bank's special assessment amounted to approximately $294,000 after
taxes. Accordingly, this special assessment significantly increased non-interest
expense, and adversely affected the Company's results of operations. Conversely,
depending upon the Bank's capital level and supervisory rating, future annual
deposit insurance premiums are expected to decrease for periods beginning
January 1, 1997, to approximately .064% from .23% of deposits previously paid by
the Bank.
As part of the legislation, Congress is considering requiring all federal thrift
institutions, such as the Bank, to either convert to a national bank or a
state-chartered depository institution by January 1, 1998. The OTS also would be
abolished and its functions transferred among the other federal banking
regulators. Certain aspects of the legislation remain to be resolved and
therefore no assurance can be given as to whether or in what form the
legislation will be enacted or its effect on the Company and the Bank.
In addition, legislation was recently passed which will require the recapture of
a portion of the Bank's tax bad debt reserve. The recapture will occur over a
six-year period and began with the Bank's fiscal year ending June 30, 1997. It
is not anticipated that this recapture will have a material adverse effect on
the Company's results of operations because the Bank had already established a
deferred tax liability of approximately $156,000 on its balance sheet for this
purpose.
Income Taxes. Income taxes increased $108,000 to $351,000 for the year ended
June 30, 1997 from $243,000 for the year ended June 30, 1996. The effective
income tax rates for the years ended June 30, 1997 and 1996 were 38.3% and
35.5%, respectively. The fluctuations in the effective income tax rate relates
primarily to changes in the amount of federally tax-exempt municipal interest
income.
Comparison of Operating Results for the Years Ended June 30, 1996 and 1995
Performance Summary. Net income for the year ended June 30, 1996 increased by
$82,000 or 23% to $441,000 from $359,000 for the year ended June 30, 1995. The
increase was primarily due to an increase in noninterest income of $59,000, a
decrease in noninterest expense of $72,000, and a decrease in income tax expense
of $16,000, partially offset by a decrease in net interest income of $50,000 and
an increase in provision for loan losses of $15,000. For the years ended June
30, 1996 and 1995 the return on average assets was .78% and .67%, respectively,
while return on average equity was 6.94% and 8.41%, respectively.
<PAGE>
Net Interest Income. For the year ended June 30, 1996, net interest income
decreased by $50,000 as compared to the year ended June 30, 1995. This reflects
an increase of $268,000 in interest income to $4.2 million from $3.9 million and
an increase in interest expense of $318,000 to $2.5 million from $2.2 million.
The net decrease was primarily due to the cost of the Company's interest-bearing
liabilities increasing as a result of customer preference for higher yielding
products partially offset by an increase in the yield on interest-earning
assets.
For the year ended June 30, 1996 the average yield on interest-earning assets
was 7.71% compared to 7.57% for 1995. The average cost of interest-bearing
liabilities was 5.16% for the year ended June 30, 1996 an increase from 4.53%
for the year ended June 30, 1995. The average balance of interest-earning assets
increased by $2.6 million to $54.6 million for the year ended June 30, 1996 from
$52.0 million for the year ended June 30, 1995. During this same time period,
the average balance of interest-bearing liabilities increased by $.2 million to
$48.4 million for the year ended June 30, 1996 from $48.2 million for the year
ended June 30, 1995.
Due to the higher funding costs, the average interest rate spread was 2.55% for
the year ended June 30, 1996 compared to 3.04% for the year ended June 30, 1995.
The average net interest margin was 3.13% for the year ended June 30, 1996
compared to 3.38% for the year ended June 30, 1995.
Provision for Loan Loss. During the year ended June 30, 1996 the provision for
loan loss was $15,000 compared to none for the year ended June 30, 1995. The
primary reason for the provision was the increased size of the loan portfolio
during the last few years. The Company's loan portfolio consists primarily of
residential mortgage loans, and it has experienced little change in the
composition of the loan portfolio and a minimal amount of charge-offs in the
past three years. The allowance for loan losses of $209,000 or .49% of loans
receivable, net at June 30, 1996 compares to $203,000 or .50% of loans
receivable, net at June 30, 1995. The allowance for loan losses as a percentage
of non-performing assets was 475.00% at June 30, 1996, compared to 68.81% at
June 30, 1995.
Management will continue to monitor its allowance for loan losses and make
additions to the allowance through the provision for loan losses as economic
conditions dictate. Although Washington maintains its allowance for loan losses
at a level which management considers to be adequate to provide for loan losses,
there can be no assurance that future losses will not exceed estimated amounts
or that additional provisions for loan losses will not be required in the
future.
Non-Interest Income. For the year ended June 30, 1996, non-interest income
increased $59,000 or 42.8% compared to the year ended June 30, 1995 due
primarily to security gains recognized in fiscal year 1996 and a $30,000 other
than temporary impairment on equity securities in fiscal year 1995, offset by a
net decrease in bank service charges, primarily due to an increase in overdraft
fees which had the effect of reducing the number of accounts in an overdraft
position. Management is committed to realigning the Bank's service charges to be
more competitive with other financial service corporations our size yet
remaining conscious of the needs of our customers.
Non-Interest Expense. For the year ended June 30, 1996, non-interest expense has
decreased $72,000 to $1.2 million compared to $1.3 million for the year ended
June 30, 1995. Compensation and benefits decreased $32,000 to $582,000 for the
year ended June 30, 1996 from $614,000 for the year ended June 30, 1995 due to a
reduction in average full-time equivalent employees during the year ended June
30, 1996. Other expenses decreased $48,000 to $289,000 for the year ended June
30, 1996 from $338,000 for the year ended June 30, 1995. The decrease can be
primarily attributed to legal and accounting fees incurred during fiscal year
1995 relative to isolated data processing and compensation issues.
Income Taxes. Income taxes decreased $16,000 to $243,000 for the year ended June
30, 1996 from $259,000 for the year ended June 30, 1995. The effective income
tax rates for the years ended June 30, 1996 and 1995 were 35.4% and 41.9%,
respectively. The fluctuations in the effective income tax rate relates
primarily to the changes to the over\under accrual of income taxes.
<PAGE>
Asset/Liability Management
One of Washington's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Washington has sought to reduce exposure of its earnings to changes in market
interest rates by managing the mismatch between asset and liability maturities
and interest rates. The principal element in achieving this objective has been
to increase the interest-rate sensitivity of Washington's assets by originating
loans with interest rates subject to periodic adjustment to market conditions.
Accordingly, Washington's primary one- to four-family loan product has been a
three year balloon loan accounting for $20.9 million of its $52.5 million loan
portfolio, or 39.8% at June 30, 1997. In keeping with the objective to improve
interest-rate sensitivity and in order to satisfy customer preferences,
management made the decision to discontinue the three year balloon product and
replace it with an array of adjustable rate mortgage loan products effective
March 1996. Adjustable rate loans account for $16.0 million of its $52.5 million
loan portfolio, or 30.5% at June 30, 1997.
Washington has historically relied upon retail deposit accounts as its primary
source of funds and will continue to do so. Management believes that retail
deposit accounts and long term borrowings as sources of funds, compared to
brokered deposits, reduce the effects of interest rate fluctuations because
these deposits and borrowings generally represent a more stable source of funds.
In addition, Washington has emphasized longer term certificate accounts in an
effort to extend the maturity of its liabilities.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the Office of Thrift Supervision ("OTS") adopted a rule
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its net portfolio
value ("NPV") to changes in interest rates. NPV is the difference between
incoming and outgoing discounted cash flows from assets, liabilities, and
off-balance sheet contracts. An institution's IRR is measured as the change to
its NPV as a result of hypothetical 200 basis point ("bp") changes in market
interest rates. A resulting change in NPV of more than 2% of the estimated
market value of its assets will require the institution to deduct from its
capital 50% of that excess change. The rules provide that the OTS will calculate
the IRR component quarterly for each institution. Washington, based on asset
size and risk-based capital, has been informed by the OTS that it is exempt from
this rule.
Presented on the following table, as of June 30, 1997, is an analysis of
Washington's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points in accordance with OTS regulations. For example, a
400 basis point increase in interest rates would decrease Washington's NPV by
$2.2 million or 22% and a 400 basis point decrease in interest rates would
increase Washington's NPV by $1.3 million or 13%. As previously mentioned, the
OTS has informed the Bank that it is not subject to the IRR component discussed
above. Further, were the Bank subject to the IRR component at June 30, 1997, it
would not have been considered to have had a greater than normal level of
interest rate exposure and a deduction from capital would not have been
required, although it is still subject to interest rate risk and, as can be seen
below, increasing rates will reduce the Bank's NPV.
At June 30, 1997
- ----------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
- -------------------------------------------------- ------------------------
Change in Rate $ Amount $ Change % Change NPV Ratio Change
- ---------------- -------- -------- --------- ---------- ---------
(Dollars in Thousands)
+400 bp ........ $ 7,971 $(2,190) (22)% 12.75% (264) bp
+300 bp ........ 8,608 (1,553) (15) 13.56 (183) bp
+200 bp ........ 9,206 (956) (9) 14.29 (109) bp
+100 bp ........ 9,736 (425) (4) 14.92 (47) bp
0 bp ........ 10,161 -- -- 15.39 --
- -100 bp ........ 10,453 291 3 15.67 28 bp
- -200 bp ........ 10,685 524 5 15.87 48 bp
- -300 bp ........ 10,993 832 8 16.15 76 bp
- -400 bp ........ 11,448 1,287 13 16.60 121 bp
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Although certain assets and liabilities may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, Washington's primary loan products, the three-year balloon
and adjustable rate loans, may permit Washington to adjust to changes in
interest rates on a short-term basis and over the life of the asset. The
proportion of three-year balloon and adjustable rate loans could be reduced in
future periods if market interest rates decrease and remain at lower levels for
a sustained period, due to increased refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their three-year balloon and adjustable
rate mortgage loans may decrease in the event of a sustained interest rate
increase.
Liquidity and Capital Resources
Washington's primary sources of funds are deposits, long-term borrowings from
the FHLB, repayments and prepayments of loans, the maturity of investment
securities and interest income. Although maturity and scheduled amortization of
loans are relatively predictable sources of funds, deposit flows and prepayments
on loans are influenced significantly by general interest rates, economic
conditions and competition.
The primary investing activity of Washington is originating mortgage loans to be
held to maturity. For the fiscal years ended June 30, 1997, 1996 and 1995,
Washington originated loans for its portfolio in the amount of $28.2 million,
$16.7 million and $11.1 million, respectively. These activities were funded
primarily by FHLB borrowings and principal repayments of loans, and proceeds
from the IPO. FHLB borrowings have been more costly than deposits, but less than
other financing sources available.
For investment and liquidity purposes, Washington maintains a portfolio of
investment securities including U.S. Treasury securities, U.S. government
agencies, state and political subdivisions, mortgaged-backed securities and
corporation and other securities.
The Bank is required to maintain minimum levels of liquid assets under the OTS
regulations. Savings institutions are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, and specified
U.S. Government, state or federal agency obligations) of not less than 5.0% of
its average daily balance of net withdrawal accounts plus short-term borrowings.
It is the Bank's policy to maintain its liquidity portfolio in excess of
regulatory requirements. The Bank's liquidity ratios were 8.7%, 14.6% and 8.6%
respectively, at June 30, 1997, 1996 and 1995.
Cash was generated by Washington's operating activities during the years ended
June 30, 1997, 1996 and 1995, primarily as a result of net income and, in 1996
the IPO. The adjustments to reconcile net income to net cash provided by
operations during the periods presented consisted primarily of amortization of
premiums and discounts on debt securities, depreciation expense, deferred income
taxes and increases and decreases in other assets and other liabilities. The
primary investing activities of Washington are the origination of loans and the
purchase of investment securities; which are funded with cash provided from
operations and financing activities, as well as proceeds from amortization and
prepayments on existing loans and proceeds from sales and maturities of
securities. The primary financing activities (other than the IPO in 1996)
consist of deposits, borrowing/repayments with the FHLB of Des Moines.
Washington's most liquid assets are cash and cash equivalents, which include
short-term investments. At June 30, 1997, 1996 and 1995, cash and cash
equivalents were $808,000, $1,903,000 and $1,658,000, respectively.
Liquidity management for Washington is both an ongoing and long-term function of
Washington's asset/liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB of Des Moines or financial
institutions. Should Washington require funds beyond its ability to generate
them internally, additional sources of funds are available through FHLB of Des
Moines advances. Washington would pledge its FHLB of Des Moines stock and
certain other assets as collateral for such advances. During fiscal 1997, 1996
and 1995, Washington used FHLB advances to meet cash flow requirements and
finance loan growth. The FHLB advances are generally at a higher rate of
interest than transaction and savings deposit accounts.
<PAGE>
At June 30, 1997, Washington had outstanding loan commitments of $1.6 million
and undisbursed loans in process of $500,000. Washington anticipates it will
have sufficient funds available to meet its current loan commitments, including
loan applications received and in process prior to the issuance of firm
commitments. Certificates of deposit which are scheduled to mature in one year
or less at June 30, 1997 were $20,515,000. Based on past experience, management
believes that a significant portion of such deposits will remain with the
Company.
Under federal law, the Bank is required to meet certain tangible, core and risk
based capital requirements. For information regarding Washington's regulatory
capital compliance, see "Selected Consolidated Financial Information."
Recent Accounting Developments
Effective January 1, 1997, the Company adopted the requirements of Financial
Accounting Standards Board Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
provisions of Statement 125 have not significantly impacted the consolidated
financial statements as the Company has not entered into transactions which give
rise to differences in existing accounting as a result of Statement 125.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 is effective for the year ending after
December 15, 1997, for both interim and annual periods, and replaces the
presentation of primary and fully diluted earnings per share with a presentation
of basic and diluted earnings per share. The adoption of Statement 128 is not
expected to have a material impact on earnings per share reported by the
Company.
In February 1997, the Financial Accounting Standards Board issued Statement No.
129, "Disclosure of Information about Capital Structure." Statement 129 is
effective for financial statements for periods ending after December 15, 1997.
Statement 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure.
In August 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." Statement 130 is effective for financial
statements for years beginning after December 15, 1997 and requires
comprehensive income to be reported as part of a full set of financial
statements. The adoption of Statement 130 is not expected to have a material
impact on the financial statements of the Company.
In August 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement 131 is effective for years beginning after December 15, 1997 and
broadens the definition of an operating segment. The adoption of Statement 131
is not expected to have a material impact on the Company.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of Washington's operations. Nearly all the
assets and liabilities of Washington are financial, unlike most industrial
companies. As a result, Washington's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
Washington's ability to match the interest sensitivity of its financial assets
to the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on
Washington's performance. Changes in interest rates do not necessarily move to
the same extent as changes in the price of goods and services. The liquidity and
the maturity structure of Washington's assets and liabilities are critical to
the maintenance of acceptable performance levels.
<PAGE>
CONTENTS
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated statements of financial condition
Consolidated statements of income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to financial statements
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Washington Bancorp
Washington, Iowa
We have audited the accompanying consolidated statements of financial condition
of Washington Bancorp and its subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Bancorp
and subsidiary as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Cedar Rapids, Iowa
August 6, 1997
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and 1996
<TABLE>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents (Note 2):
Interest-bearing ........................................................ $ 574,736 $ 1,109,583
Noninterest-bearing ..................................................... 233,069 793,769
Available-for-sale securities (Notes 2, 3 and 8) ........................... 9,849,991 14,628,089
Loans receivable, net (Notes 4, 8 and 14) .................................. 52,530,153 42,905,699
Accrued interest receivable (Note 5) ....................................... 568,228 465,789
Federal Home Loan Bank stock ............................................... 465,600 369,100
Premises and equipment, net (Note 6) ....................................... 550,231 543,606
Other assets ............................................................... 103,026 75,308
----------- -----------
Total assets ................................................. $64,875,034 $60,890,943
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7) ....................................................... $44,754,328 $44,176,448
Borrowed funds (Notes 3 and 8) .......................................... 8,651,765 5,504,742
Advances from borrowers for taxes and insurance ......................... 204,677 218,506
Accrued expenses and other liabilities .................................. 519,441 443,082
----------- -----------
Total liabilities ............................................ 54,130,211 50,342,778
----------- -----------
Commitments and Contingencies (Note 12)
Redeemable Common Stock Held by Employee Stock
Ownership Plan (ESOP) (Note 9) .......................................... 69,392 --
----------- -----------
Stockholders' Equity (Notes 11 and 16)
Preferred stock, $.01 par value, authorized 1,000,000
shares; none issued and outstanding .................................. -- --
Common stock, $.01 par value, authorized 4,000,000
shares; issued 1997 and 1996 657,519 shares .......................... 6,575 6,575
Additional paid-in capital .............................................. 6,150,032 6,172,680
Retained earnings ...................................................... 5,292,419 4,941,449
Unrealized (losses) on investment securities available
for sale, net of income taxes (Note 3) ............................... (3,307) (68,209)
----------- -----------
11,445,719 11,052,495
Less:
Cost of 6,386 common shares acquired for the treasury ................ (85,827) --
Deferred compensation ................................................ (151,739) --
Maximum cash obligation related to ESOP shares (Note 9) .............. (69,392) --
Unearned ESOP shares (Note 9) ........................................ (463,330) (504,330)
----------- -----------
Total stockholders' equity ................................... 10,675,431 10,548,165
----------- -----------
Total liabilities and stockholders' equity ................... $64,875,034 $60,890,943
=========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1997, 1996 and 1995
1997 1996 1995
---------- ---------- ----------
Interest income:
Loans receivable:
First mortgage loans ............... $3,430,290 $2,987,869 $2,763,772
Consumer and other loans ........... 697,384 458,102 419,044
Investment securities:
Taxable ............................ 840,485 713,988 687,754
Nontaxable ......................... 21,516 46,702 68,973
---------- ---------- ----------
Total interest income ...... 4,989,675 4,206,661 3,939,543
---------- ---------- ----------
Interest expense:
Deposits (Note 7) ..................... 2,215,768 2,246,017 1,936,410
Borrowed funds ........................ 337,405 252,657 244,862
---------- ---------- ----------
Total interest expense ..... 2,553,173 2,498,674 2,181,272
---------- ---------- ----------
Net interest income ........ 2,436,502 1,707,987 1,758,271
Provision for loan losses (Note 4) ....... 40,085 15,000 --
---------- ---------- ----------
Net interest income after
provision for loan losses 2,396,417 1,692,987 1,758,271
---------- ---------- ----------
Noninterest income:
Securities gains (losses), net (Note 3) 388 32,534 (30,000)
Loan origination and commitment fees .. 7,724 8,316 3,379
Service charges and fees .............. 117,241 84,512 111,063
Insurance commissions ................. 77,922 54,615 38,961
Other ................................. 27,893 17,026 14,238
---------- ---------- ----------
Total noninterest income ... 231,168 197,003 137,641
---------- ---------- ----------
Noninterest expense:
Compensation and benefits (Note 9) .... 722,087 581,896 613,962
Occupancy and equipment ............... 149,738 138,032 144,408
SAIF deposit insurance premium ........ 376,862 116,690 116,888
Data processing ....................... 75,196 80,076 65,533
Other ................................. 388,258 289,496 337,575
---------- ---------- ----------
Total noninterest expense .. 1,712,141 1,206,190 1,278,366
---------- ---------- ----------
Income before income taxes . 915,444 683,800 617,546
Income tax expense (Note 10) ............. 350,767 242,378 258,947
---------- ---------- ----------
Net income ................. $ 564,677 $ 441,422 $ 358,599
========== ========== ==========
Earnings per common and common equivalent
share subsequent to conversion (Note 1) $ 0.91 $ 0.25 $ N/A
========== ========== ==========
Weighted average common and common
equivalent shares .................... 617,602 606,002 N/A
========== ========== ==========
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 11 AND 16)
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
Unrealized
(Losses) On
Investment
Securities
Available
Additional For Sale,
Preferred Common Paid-In Retained Net of Income
Stock Stock Capital Earnings Taxes
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 .................. $ -- $ -- $ -- $4,141,428 $ --
Net income ........................... -- -- -- 358,599 --
Cumulative effect of accounting
change as of July 1, 1994 (Note 3). -- -- -- -- (91,602)
Net change in unrealized (losses) on
investment securities available
for sale, net of income taxes ..... -- -- -- -- (8,269)
-------------------------------------------------------------
Balance, June 30, 1995 .................. -- -- -- 4,500,027 (99,871)
Net income ........................... -- -- -- 441,422 --
Issuance of 604,917 shares of
common stock (Note 15) ............ -- 6,049 6,043,121 -- --
Expenses incurred relating to
conversion to stock form (Note 15) -- -- (396,477) -- --
Issuance of 52,602 shares of common
stock to ESOP (Note 9) ............ -- 526 525,494 -- --
Allocation of ESOP shares (Note 9) ... -- -- 542 -- --
Net change in unrealized (losses) on
investment securities available for
sale, net of income taxes ......... -- -- -- -- 31,662
-------------------------------------------------------------
Balance, June 30, 1996 .................. -- 6,575 6,172,680 4,941,449 (68,209)
Net income ........................... -- -- -- 564,677 --
Dividends ............................ -- -- -- (213,707) --
Acquisition of 26,300 shares of
common stock for the treasury ..... -- -- -- -- --
Issuance of 19,914 shares under stock
awards program .................... -- -- (38,703) -- --
Amortization of compensation under
stock awards program .............. -- -- -- -- --
Allocation of ESOP shares (Note 9) ... -- -- 16,055 -- --
Net change in unrealized (losses) on
investment securities available for
sale, net of income taxes ......... -- -- -- -- 64,902
Change related to ESOP shares ........ -- -- -- -- --
-------------------------------------------------------------
Balance, June 30, 1997 .................. $ -- $ 6,575 $ 6,150,032 $ 5,292,419 $ (3,307)
=============================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 11 AND 16) (continued)
Years Ended June 30, 1997, 1996 and 1995
<TABLE>
Cost Of Unearned
Common Maximum Shares,
Shares Cash Employee
Acquired Obligation Stock Total
For the Deferred Related to Ownership Stockholders'
Treasury Compensation ESOP Shares Plan (Note 9) Equity
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 .................. $ -- $ -- $ -- $ -- $1,414,428
Net income ........................... -- -- -- -- 358,599
Cumulative effect of accounting
change as of July 1, 1994 (Note 3). -- -- -- -- (91,602)
Net change in unrealized (losses) on
investment securities available
for sale, net of income taxes ..... -- -- -- -- (8,269)
-------------------------------------------------------------
Balance, June 30, 1995 .................. -- -- -- -- 4,400,156
Net income ........................... -- -- -- -- 441,422
Issuance of 604,917 shares of
common stock (Note 15) ............ -- -- -- -- 6,049,170
Expenses incurred relating to
conversion to stock form (Note 15) -- -- -- -- (396,477)
Issuance of 52,602 shares of common
stock to ESOP (Note 9) ............ -- -- -- (526,020) --
Allocation of ESOP shares (Note 9) ... -- -- -- 21,690 22,232
Net change in unrealized (losses) on
investment securities available for
sale, net of income taxes ......... -- -- -- -- 31,662
-------------------------------------------------------------
Balance, June 30, 1996 .................. -- -- -- (504,330) 10,548,165
Net income ........................... -- -- -- -- 564,677
Dividends ............................ -- -- -- -- (213,707)
Acquisition of 26,300 shares of
common stock for the treasury ..... (348,563) -- -- -- (348,563)
Issuance of 19,914 shares under stock
awards program .................... 262,736 (224,033) -- -- --
Amortization of compensation under
stock awards program .............. -- 72,294 -- -- 72,294
Allocation of ESOP shares (Note 9) ... -- -- -- 41,000 57,055
Net change in unrealized (losses) on
investment securities available for
sale, net of income taxes ......... -- -- -- -- 64,902
Change related to ESOP shares ........ -- -- (69,392) -- (69,392)
-------------------------------------------------------------
Balance, June 30, 1997 .................. $ (85,827) $(151,739) $ (69,392) $ (463,330) $10,675,431
=============================================================
</TABLE>
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ............................................ $ 564,677 $ 441,422 $ 358,599
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts on
debt securities .................................. 37,771 80,890 93,263
Provision for loan losses .......................... 40,085 15,000 --
Provision for impairment on available-for-sale
securities ....................................... -- -- 30,000
(Gain) on sale of investment securities ............ (388) (32,534) --
(Gain) on sale of foreclosed real estate ........... (36,911) -- (10,338)
Depreciation ....................................... 56,620 68,847 76,474
Compensation under stock awards .................... 72,294 -- --
ESOP contribution expense .......................... 57,055 22,232 --
Deferred income taxes .............................. (16,798) 28,360 44,221
(Increase) decrease in accrued interest receivable . (102,439) (44,527) 29,334
(Increase) decrease in other assets ................ (27,718) 59,192 (1,638)
Increase in accrued expenses and other liabilities . 54,215 75,415 52,004
---------- ----------- -----------
Net cash provided by operating activities . 698,463 714,297 671,919
---------- ----------- -----------
Cash Flows from Investing Activities
Held-to-maturity securities:
Maturities and calls ............................... -- 166,988 379,660
Purchases .......................................... -- -- (100,000)
Available-for-sale securities:
Sales .............................................. 911 3,807,939 --
Maturities ......................................... 11,238,648 2,556,485 1,800,000
Purchases .......................................... (6,395,000) (9,647,200) (642,300)
Purchase of Federal Home Loan Bank stock .............. (96,500) -- --
Loans made to customers, net .......................... (9,627,628) (2,485,965) (2,913,533)
Purchase of premises and equipment .................... (63,245) (39,776) (93,253)
---------- ----------- -----------
Net cash (used in) investing activities .... (4,942,814) (5,641,529) (1,569,426)
---------- ----------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in deposits ................... $ 577,880 $ 1,226,649 $ (922,602)
Proceeds from Federal Home Loan Bank advances ......... 98,650,000 16,820,000 51,415,000
Principal payments on Federal Home Loan Bank
advances ........................................... (95,502,977) (18,545,473) (48,673,522)
Net increase in advances from borrowers for taxes and
insurance .......................................... (13,829) 18,672 1,810
Proceeds from issuance of 604,917 shares of common
stock .............................................. -- 6,049,170 --
Acquisition of 26,300 shares of common stock
for the treasury ................................... (348,563) -- --
Dividends paid ........................................ (213,707) -- --
Payments for expenses incurred relating to conversion
to stock form ...................................... -- (396,477) --
---------- ----------- -----------
Net cash provided by financing activities . 3,148,804 5,172,541 1,820,686
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ..................... (1,095,547) 245,309 923,179
Cash and cash equivalents:
Beginning ............................................. 1,903,352 1,658,043 734,864
---------- ----------- -----------
Ending ................................................ $ 807,805 $ 1,903,352 $ 1,658,043
========== =========== ===========
</TABLE>
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors ........................ $ 2,225,796 $ 2,241,023 $ 1,875,273
Interest paid on other obligations ................. 337,405 252,657 271,862
Income taxes, net of refunds ....................... 288,713 99,356 297,442
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate ........ $ 106,289 $ -- $ 33,152
Contract sales of foreclosed real estate .............. 143,200 -- 93,395
Stock issued under stock awards program ............... 262,736 -- --
Transfer of held-to-maturity securities to
available-for-sale securities in accordance
with the adoption of FAS No. 115 ................... $ -- $ -- $ 9,919,066
Investment securities transferred from held to maturity
portfolio to available for sale, at fair value ..... $ -- $ 2,872,058 $ --
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Organization: On March 11, 1996, Washington Bancorp issued 604,917 shares of
common stock at $10 per share and simultaneously invested $3,089,356 for all the
outstanding common shares of Washington Federal Savings Bank in a transaction
accounted for like a pooling of interests.
Prior to March 11, 1996, the Savings Bank was a federally chartered mutual
savings bank. After a reorganization, effective March 11, 1996, the Savings Bank
is now a federally chartered stock savings bank and 100% of the Savings Bank's
common stock is owned by Washington Bancorp. See Note 15 for a description of
the reorganization.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Washington Bancorp (the "Company"), Washington Federal
Savings Bank (the "Savings Bank"), and its wholly-owned subsidiary, Washington
Federal Financial Services, Inc., which is a discount brokerage firm. The
activity of the Savings Bank's subsidiary is not material. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents: Cash equivalents consist of FHLB-daily time, cash on hand, and
funds due from banks. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be equivalents. Cash flows from loans and deposits are
reported net.
Investment in debt securities and accounting change: The Company has investments
in debt securities, which consist primarily of obligations of the U. S.
Government and related agencies and corporations, state governments and domestic
corporations.
The Company adopted the provisions of FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," as of July 1, 1994.
Statement No. 115 requires that management determine the appropriate
classification of securities at the date of adoption and, thereafter, at the
date individual investment securities are acquired, and that the appropriateness
of such classification be reassessed at each balance sheet date. The
classifications are as follows:
Securities available for sale: Securities classified as available for sale are
those debt securities that the Company intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses, net of related deferred tax
effect, are reported as increases or decreases in the Company's equity. Realized
gains or losses, determined on the basis of the cost of specific securities
sold, are included in earnings.
Securities held to maturity: Securities classified as held to maturity are those
debt securities the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives. The cost of such securities sold is
determined using the specific identification method.
Prior to the adoption of Statement No. 115, the Company stated its debt
securities at amortized cost. Under both the newly adopted accounting standard
and the Company's former accounting practices, premiums and discounts on
investments in debt securities are amortized over their contractual lives. The
method of amortization results in a constant effective yield on those securities
(the interest method). Interest on debt securities is recognized in income as
earned. Realized gains and losses, including losses from declines in value of
specific securities determined by management to be other-than-temporary, are
included in income. Realized gains and losses are determined on the basis of the
specific securities sold.
<PAGE>
Pursuant to a FASB Special Report, "A Guide to Implementation of Statement No.
115 on Accounting for Certain Investments in Debt and Equity Securities," the
Company's subsidiary savings bank transferred, at fair value, $2,872,058 of
investment securities from held to maturity to available for sale in December
1995.
Loans receivable: Loans receivable are stated at unpaid principal balances less
the allowance for loan losses.
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Savings Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
In accordance with Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," loans are considered impaired when, based on all current information
and events, it is probable the Savings Bank will not be able to collect all
amounts due. The portion of the allowance for loan losses applicable to impaired
loans has been computed based on the present value of the estimated future cash
flows of interest and principal discounted at the loan's effective interest rate
or on the fair value of the collateral for collateral dependent loans. The
entire change in present value of expected cash flows or impaired loans is
reported as bad debt expense in the same manner in which impairment initially
was recognized or as a reduction in the amount of bad debt expense that
otherwise would be reported. Interest income on impaired loans is recognized on
the cash basis.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less estimated selling
expenses at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management. If the carrying value of a
property exceeds its estimated fair value less estimated selling expenses,
either an allowance for losses is established, or the property's carrying value
is reduced, by a charge to income.
Premises and equipment: Premises and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed by the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per common share: The earnings per common and common equivalent share,
assuming no dilution, were computed using the weighted average number of shares,
stock options and stock awards outstanding during the periods presented. In
accordance with Statement of Position 93-6, shares owned by the ESOP that have
not been committed to be released are not considered to be outstanding for the
purpose of computing earnings per share. Dilutive common stock equivalents
related to the stock options were determined using the treasury stock method.
Dilutive common stock equivalents related to a stock award plan are considered
to be common stock equivalents at all times since they were awarded. Earnings
per share information for the year ended June 30, 1996 is calculated by dividing
net income, subsequent to the mutual to stock conversion, by the weighted
average number of shares outstanding. Net income subsequent to the conversion
was $150,832 for the period ended June 30, 1996. Earnings per share information
is not applicable for the years ended June 30, 1995 because the Savings Bank was
a mutual association at that time.
Earnings per common and common equivalent shares, assuming full dilution, for
the years ended June 30, 1997 and 1996 are the same as the earnings per common
and common equivalent shares, assuming no dilution.
<PAGE>
ESOP obligations and expense: The receivable from the Company's ESOP has been
treated as a reduction of equity. Any principal repayment of the debt is treated
as an increase in equity. Compensation expense for the ESOP is based upon the
fair value of shares allocated to participants.
Stock awards: Expense for common stock to be issued under the Company's
recognition and retention plan is based upon the fair value of the shares at the
date of grant, allocated over the period of vesting.
Redeemable common stock held by ESOP: The Company's maximum cash obligation
related to these shares is classified outside stockholders' equity because the
shares are not readily traded and could be put to the Company for cash.
Stock options issued to employees: In fiscal year 1996, the Company adopted the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which
establishes a fair value based method for the financial reporting of its
stock-based employee compensation plans. However, as allowed by the new
standard, the Company has elected to continue to measure compensation using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under this method,
compensation is measured as the difference between the market value of the stock
on the grant date, less the amount required to be paid for the stock. The
difference, if any, is charged to expense over the periods of service.
Fair value of financial instruments: FASB Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or their valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Investment securities (including mortgage-backed securities): Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and have no
significant change in credit risk, the fair values are based on carrying
values. The fair values of other loans are determined using estimated future
cash flows, discounted at the interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
Deposits: The fair values of demand deposits equal their carrying amounts
which represents the amount payable on demand. The carrying amounts for money
market and passbook savings accounts approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Borrowed funds: Fair values for borrowed funds are estimated using a
discounted cash flow calculation that applies interest rates currently being
charged for borrowed funds of similar maturities.
Off-balance sheet instruments: Fair values for the Company's off-balance
sheet instruments are valued based upon the current fee structure for
outstanding letters of credit. Unfunded loan commitments are not valued since
the loans are generally priced at market at the time of funding.
Recently issued accounting standards: The Company believes that the adoption of
recently issued accounting standards will not have a material or significant
effect on the financial statements.
<PAGE>
Note 2. Restrictions on Cash Due from Banks and Investments
The Savings Bank is required to maintain reserve balances in cash or on deposit
with Federal Reserve Banks. The total of those reserve balances was
approximately $25,000 at June 30, 1997. In addition, the Savings Bank is
required to maintain a minimum balance of unpledged cash and investment
securities totaling approximately $2,548,000 as of June 30, 1997 to provide
liquidity for deposits.
Note 3. Investment Securities and Accounting Change
As discussed in Note 1, the Company adopted FASB Statement No. 115 as of July 1,
1994. The cumulative effect of adopting Statement No. 115 decreased the July 1,
1994 equity by $91,602, net of the $54,494 related deferred tax effect, to
recognize the net unrealized holding loss on securities at that date.
The amortized cost and fair value of investment securities available for sale as
of June 30, 1997 and 1996 are as follows:
<TABLE>
1997
-------------------------------------------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U. S. Treasury securities ........................... $ 400,237 $ 2,386 $ (263) $ 402,360
U. S. Government agencies ........................... 6,994,454 9,180 (4,904) 6,998,730
Corporations and other .............................. 1,958,104 1,475 (4,499) 1,955,080
State and political subdivisions .................... 353,750 -- -- 353,750
Mortgage-backed securities .......................... 148,737 -- (8,666) 140,071
----------- ----------- ----------- -----------
$ 9,855,282 $ 13,041 $ (18,332) $ 9,849,991
=========== =========== =========== ===========
1996
-------------------------------------------------------
U. S. Treasury securities ........................... $ 402,253 $ 3,653 $ (12,250) $ 393,656
U. S. Government agencies ........................... 7,998,939 3,145 (40,743) 7,961,341
Corporations and other .............................. 4,279,374 1,810 (64,036) 4,217,148
State and political subdivisions .................... 403,750 -- -- 403,750
Mortgage-backed securities .......................... 152,908 -- (714) 152,194
Certificates of deposit with
financial institutions ........................... 1,500,000 -- -- 1,500,000
----------- ----------- ----------- -----------
$14,737,224 $ 8,608 $ (117,743) $14,628,089
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair value of mortgage-backed securities are as follows:
<TABLE>
June 30,
-----------------------------------------------
1997 1996
--------------------- ---------------------
Cost Or Cost Or
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
GNMA certificates ................................... $ -- $ -- $ 624 $ 624
FHLMC certificates .................................. 148,737 140,071 152,284 151,570
-------- -------- -------- --------
$148,737 $140,071 $152,908 $152,194
======== ======== ======== ========
</TABLE>
<PAGE>
The amortized cost and fair value of debt securities as of June 30, 1997 by
contractual maturity are shown below. Maturities may differ from contractual
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid without any penalties. Therefore, these
securities are not included in the maturity categories in the following maturity
summary.
Amortized Fair
Cost Value
---------- ----------
Available for sale:
Due in one year or less ...................... $1,658,181 $1,659,337
Due after one year through five years ........ 6,343,178 6,345,182
Due after five years through ten years ....... 1,705,186 1,705,401
Mortgage-backed securities ................... 148,737 140,071
---------- ----------
$9,855,282 $9,849,991
========== ==========
Investment securities with a carrying amount of $3,306,610 and $3,322,469 at
June 30, 1997 and 1996, respectively, were pledged as collateral on public
deposits. Investment securities with a carrying amount of $4,801,396 and
$3,521,611 at June 30, 1997 and 1996, respectively, were pledged as collateral
on FHLB advances.
Securities gains (losses) for the years ended June 30, 1997, 1996 and 1995 are
as follows:
1997 1996 1995
-------- ------- --------
Realized gains ......................... $ 388 $91,644 $ --
Realized (losses) ...................... -- (59,110) --
Other provision for impairment on
equity securities .................... -- -- (30,000)
-------- ------- --------
$ 388 $32,534 $(30,000)
======== ======= ========
The Company transferred securities with an amortized cost of $2,907,058 and an
unrealized loss of $35,000 from held-to-maturity portfolio to the
available-for-sale portfolio on December 1, 1995, based on management's
reassessment of their previous descriptions of securities giving consideration
to liquidity needs, management of interest rate risk and other factors.
Note 4. Loans Receivable
Loans receivable are summarized as follows:
June 30,
--------------------------
1997 1996
----------- -----------
First mortgage loans (principally conventional):
Secured by one-to-four family residences ....... $40,695,861 $33,914,215
Home equity and second mortgage ................ 1,232,736 1,568,747
Multifamily and commercial real estate ......... 4,775,465 2,896,215
Construction loans ............................. 693,766 1,118,765
Other .......................................... 98,653 114,617
Total first mortgage loans .......... 47,496,481 39,612,559
Commercial loans .................................. 2,715,020 1,545,856
Consumer and other loans:
Automobile ..................................... 1,899,763 1,134,405
Other .......................................... 644,539 822,273
Total loans ......................... 52,755,803 43,115,093
Less allowance for loan losses ................. 225,650 209,394
----------- -----------
$52,530,153 $42,905,699
=========== ===========
Loans receivable are net of loans in process of $500,182 and $561,976 as of June
30, 1997 and 1996, respectively.
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1997 1996 1995
---------- ---------- ----------
Balance, beginning .................. $ 209,394 $ 203,074 $ 202,526
Provision charged to expense ..... 40,085 15,000 --
Charge-offs ...................... (33,841) (13,574) (19,402)
Recoveries ....................... 10,012 4,894 19,950
---------- ---------- ----------
Balance, ending ..................... $ 225,650 $ 209,394 $ 203,074
========== ========== ==========
The Savings Bank has no loans receivable at June 30, 1997 and 1996 that it
considers to be impaired that are not part of a homogeneous group of loans.
Accordingly, no separate allowance has been provided for these loans.
Note 5. Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
1997 1996
-------- --------
Investment securities ............................ $ 94,470 $144,064
Loans receivable ................................. 473,758 321,725
-------- --------
$568,228 $465,789
======== ========
Note 6. Premises and Equipment
Premises and equipment consisted of the following at June 30:
1997 1996
---------- ----------
Land ......................................... $ 83,080 $ 83,080
Building ..................................... 504,357 502,624
Furniture, fixtures and equipment ............ 603,503 553,269
---------- ----------
1,190,940 1,138,973
Less accumulated depreciation ................ 640,709 595,367
---------- ----------
$ 550,231 $ 543,606
========== ==========
Note 7. Deposits
Deposits at June 30 are as follows:
<TABLE>
Weighted
Average
Rate At 1997 1996
June 30, --------------------- --------------------
1997 Amount Percent Amount Percent
-------- ------------ ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-bearing
deposits 1997 $1,401,119;
1996 $973,103 ............... 1.25% $ 3,094,048 6.9% $ 2,529,246 5.7%
Money market ................... 3.92 9,044,368 20.2 9,086,719 20.6
Passbook savings ............... 2.30 2,181,904 4.9 2,243,982 5.0
----------- ------ ----------- ------
14,320,320 32.0 13,859,947 31.3
----------- ------ ----------- ------
Certificates of deposit:
3% to 4% .................... 2.62 12,525 -- 27,711 0.1
4.01% to 5% ................. 4.73 2,205,090 4.9 4,976,426 11.3
5.01% to 6% ................. 5.69 23,247,461 51.9 14,445,459 32.7
6.01% to 7% ................. 6.42 4,968,932 11.1 10,866,905 24.6
----------- ------ ----------- ------
30,434,008 68.0 30,316,501 68.7
----------- ------ ----------- ------
4.89 $44,754,328 100.0% 44,176,448 100.0%
=========== ====== =========== ======
</TABLE>
<PAGE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,248,000 and $919,000 at June 30,
1997 and 1996, respectively. Deposits in excess of $100,000 are not insured by
the FDIC.
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
Year Ending June 30,
------------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
3% to 4% ............... $ 12,525 $ -- $ -- $ -- $ -- $ 12,525
4.01% to 5% ............ 2,205,090 -- -- -- -- 205,090
5.01% to 6% ............ 14,465,235 6,372,632 1,944,196 282,242 183,156 23,247,461
6.01% to 7% ............ 3,832,363 333,783 567,685 235,101 -- 4,968,932
----------- ----------- ----------- ----------- ----------- -----------
$20,515,213 $ 6,706,415 $ 2,511,881 $ 517,343 $ 183,156 $30,434,008
=========== =========== =========== =========== =========== ===========
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1997 1996 1995
---------- ---------- ----------
Money market ................... $ 384,112 $ 399,720 $ 330,703
Passbook savings ............... 53,293 63,349 74,041
NOW ............................ 36,907 36,856 32,883
Certificates of deposit ........ 1,741,456 1,746,092 1,498,783
---------- ---------- ----------
$2,215,768 $2,246,017 $1,936,410
========== ========== ==========
Note 8. Borrowed Funds
Borrowed funds at June 30 are as follows:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Short-term advances from the Federal Home Loan Bank (A) ..... $1,750,000 $2,500,000
Long-term advances from the Federal Home Loan Bank (B) ...... 6,901,765 3,004,742
---------- ----------
$8,651,765 $5,504,742
========== ==========
</TABLE>
(A) Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
these advances are collateralized by pledged investment securities with a
carrying amount of $4,801,396 and $3,521,611 at June 30, 1997 and 1996,
respectively.
(B) Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
these advances are collateralized by all the Institution's stock in the
FHLB and qualifying first mortgage loans. Of this total, $4,000,000 of the
advances are callable beginning August 15, 1997 and then every three months
thereafter with a three calendar day notice. Therefore, these advances are
categorized as maturing within one year per the schedule below.
Advances at June 30, 1997 have maturity dates as follows:
Year Ending June 30,
June 30 Interest Rate 1997
- ------------------------------------------------------
1998 4.983% to 5.74% $6,861,074
1999 4.983% to 5.74% 1,611,120
2000 5.74% 14,979
2001 5.74% 15,862
2002 5.74% 16,796
Thereafter 5.74% 131,934
----------
$8,651,765
==========
<PAGE>
Note 9. Employee Benefit Plans
Employee Stock Ownership Plan: In conjunction with the Savings Bank's conversion
to stock ownership, the Company established an Employee Stock Ownership Plan
(ESOP) for eligible employees. Employees of the Bank are eligible to participate
after they attain age 21 and complete one year of service during which they work
at least 1,000 hours. The Company issued 52,602 shares of common stock to the
ESOP on the date of the conversion and reorganization.
The Savings Bank makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. Contributions to the ESOP and shares released from
the suspense account in an amount proportional to the repayment of the ESOP loan
are allocated among ESOP participants on the basis of compensation in the year
of allocation. Benefits generally become 100% vested after seven years of
credited service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment.
As shares are released, the Company reports compensation expense equal to the
current fair value of the shares, and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation expense
totaled $56,620 and $22,232 for the years ended June 30, 1997 and 1996.
Shares of common stock held by the ESOP at June 30, 1997 and 1996 are as
follows:
1997 1996
-------- --------
Allocated shares .............................. 4,337 --
Share released for allocation ................. 1,932 2,169
Unreleased (unearned) shares .................. 46,333 50,433
-------- --------
52,602 52,602
======== ========
Fair value of unreleased (unearned) shares .... $741,328 $529,547
======== ========
The ESOP plan may allow, at the discretion of the Advisory Committee, employees
to elect to defer up to fifteen percent of compensation annually. The Company
may, at the discretion of the Advisory Committee, make matching contributions on
an annual basis.
Payments to a previous defined contribution plan were at the discretion of the
Board of Directors. The expense for this previous plan was $30,815 for the year
ended June 30, 1995.
Stock-based compensation plans: At June 30, 1997, the Company has two
stock-based compensation plans which are described below. As permitted under
generally accepted accounting principles, grants under those plans are accounted
for following APB Opinion No. 25 and related interpretations. Had compensation
cost for the two stock-based compensation plans been determined based on the
grant date fair values of the awards (the method prescribed in SFAS No. 123),
reported net income and earnings per common and common equivalent share would
have been reduced to the pro forma amounts shown below:
Year Ended June 30,
---------------------
1997 1996
---------------------
Pro forma net income ................................... $ 506,840 $ N/A
Pro forma income per common and common equivalent share 0.82 N/A
The pro forma effects of applying SFAS No. 123 are not indicative of future
amounts.
The fair value of each grant and award is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1997: dividend rate of 2.3%; price volatility of
14.42%; risk-free interest rates of 6.0%; and expected life of 5 years.
Stock options: During the year ended June 30, 1997, the Company adopted a stock
option plan for certain officers and directors whereby up to 65,751 shares were
reserved for grants. The Board has granted options at prices equal to the fair
value of the stock on the dates of the grants. All options are for a term of ten
years after vesting and 20% become exercisable each year for the next five
years.
<PAGE>
A summary of the status of the Company's stock option plan is as follows:
Weighted-
Average
Exercise
Shares Price
----------------------
Outstanding at June 30, 1996 .................. -- $ --
Granted .................................. 52,600 11.25
Exercised ................................ -- --
Forfeited ................................ (2,818) 11.25
-------
Outstanding at June 30, 1997 .................. 49,782 11.25
=======
1997 1996 1995
----------------------------
Weighted-average fair value per option of
options granted during the year ......... $ 5.70 N/A N/A
===========================
Other pertinent information related to the options outstanding at June 30, 1997
is as follows:
Remaining
Number Exercise Contractual Number
Outstanding Price Life Exercisable
- ----------------------------------------------------------------
49,782 $11.25 12 Years --
====== ====== ========
Stock awards: The Company adopted a recognition and retention plan in October
1996 whereby 26,300 shares of common stock have been reserved for issuance to
certain executive officers and directors. Shares awarded under the plan vest in
five equal annual installments, beginning on the anniversary of the grants.
During the year ended June 30, 1997, awards were granted for 19,914 shares with
a fair value of $11.25 per share at the date of the grant.
The expense under the plan is based upon the fair value of the shares on the
date of the grant, allocated over the five-year term of vesting. The expense for
the year ended June 30, 1997 totaled $72,294 and is included in accrued
expenses. Shares of common stock are issued upon vesting.
Note 10. Income Taxes
Net deferred income tax liabilities consist of the following components as of
June 30, 1997 and 1996:
1997 1996
--------- --------
Deferred tax assets:
Unrealized loss on investment securities
available for sale ........................... $ 1,984 $ 40,926
Accrued compensation ............................ 26,966 --
Allowance for loan losses ....................... 84,167 68,191
Other ........................................... -- 7,343
--------- --------
113,117 116,460
--------- --------
Deferred tax liabilities:
Recapture of allowance for loan losses .......... 156,048 156,048
FHLB stock dividends ............................ 44,067 44,067
Premises and equipment .......................... 7,908 --
Other ........................................... 10,893 --
--------- --------
218,916 200,115
--------- --------
Net deferred tax liability included in
other liabilities ............... $(105,799) $(83,655)
========= ========
<PAGE>
The net change in the deferred income taxes is reflected in the financial
statements for the years ended June 30, 1997, 1996 and 1995 as follows:
1997 1996 1995
-------- -------- --------
Statement of income ....................... $ 16,798 $(28,360) $(44,221)
Statement of stockholders' equity* ........ (38,942) (18,996) 59,922
-------- -------- --------
$(22,144) $(47,356) $ 15,701
======== ======== ========
* Change in deferred tax asset related to unrealized loss on investment
securities available for sale.
The provision for income taxes charged to operations for the years ended June
30, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995
-------- -------- --------
Current ......................... $367,565 $214,018 $214,726
Deferred ........................ (16,798) 28,360 44,221
-------- -------- --------
$350,767 $242,378 $258,947
======== ======== ========
The income tax provision differs from the amount of income tax determined by
applying the U. S. Federal income tax rate to pretax income for the years ended
June 30, 1997, 1996 and 1995 due to the following:
<TABLE>
Years Ended June 30,
------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- --------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
expense ............... $ 320,405 35.0% $ 239,330 35.0% $ 216,141 35.0%
Tax-exempt interest ...... (9,833) (1.1) (16,346) (2.4) (24,140) (3.9)
State income taxes, net of
federal benefit ....... 32,271 3.5 20,287 2.9 20,070 3.2
Other, net ............... 7,924 0.9 (893) (0.1) 46,876 7.6
-------------------------------------------------------------------
$ 350,767 38.3% $ 242,378 35.4% $ 258,947 41.9%
===================================================================
</TABLE>
Note 11. Regulatory Capital Requirements
The following is a reconciliation of the Savings Bank's capital in accordance
with generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under the requirement of FIRREA at June 30, 1997:
<TABLE>
Regulatory Capital - Unaudited
--------------------------------------------------------------------------------
Percent Percent Percent
Of Of Of Risk-
Tangible Tangible Core Tangible Risk-Based Based
Capital Assets Capital Assets Capital Assets
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Savings Bank
equity .............. $ 8,689,723 $ 8,689,723 $ 8,689,723
Unrealized losses of
available-for-sale
securities .......... 3,307 3,307 3,307
Allowance for loan
losses .............. -- -- 225,650
Other assets required
to be deducted ...... -- -- (20,700)
-----------------------------------------------------------------------------------
Regulatory capital
computed ....... 8,693,030 13.4% 8,693,030 13.4% 8,897,980 20.8%
Minimum capital
requirement ......... 972,405 1.5 1,944,810 3.0 3,415,343 8.0
-----------------------------------------------------------------------------------
Regulatory capital
excess .............. $ 7,720,625 11.9% $ 6,748,220 10.4% $ 5,482,637 12.8%
===================================================================================
</TABLE>
<PAGE>
The Savings Bank's equity reported to the Office of Thrift Supervision ("OTS")
was the same as that shown in the above table as of June 30, 1997.
The ability of the Company to pay dividends to its stockholders is dependent
upon dividends paid by its subsidiary. The Savings Bank is subject to certain
statutory and regulatory restrictions on the amount they may pay in dividends.
To maintain acceptable capital ratios in the subsidiary bank, certain of their
retained earnings are not available for the payment of dividends.
Note 12. Commitments and Contingencies
Financial instruments with off-balance sheet risk: The Savings Bank is a party
to financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position.
The Savings Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Savings
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-statement of financial condition instruments.
Unless noted otherwise, the Savings Bank requires collateral or other security
to support financial instruments with credit risk.
Contract
Or
Notional
Amount
----------
Financial instruments whose contract amounts
represent credit risk, commitments to extend credit:
First mortgage loans ........................................ $1,980,682
Consumer and other loans .................................... 69,500
----------
$2,050,182
----------
The above commitments are to make fixed rate loans with a June 30, 1997 weighted
average interest rate of 8.35%.
Commitments to extend credit are agreements to lend to a customer as long as
there is not violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Savings Bank, upon extension of credit is based on
management's credit evaluation of the party. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Concentrations of credit risk: Most of the Savings Bank's lending activity is
with customers located within the state. The Savings Bank generally originates
single-family residential loans within its primary lending area of southeastern
Iowa. The Savings Bank's underwriting policies require such loans to be an 85%
loan to value based upon appraised values. These loans are secured by the
underlying properties. The Savings Bank is also active in originating secured
consumer loans to its customers, primarily automobile and home equity loans. As
of June 30, 1996, the Bank has approximately $1,943,000 of agriculturally
dependent loans.
Purchase commitment: On July 2, 1997, the Company entered into a definitive
agreement to acquire Rubio Savings Bank of Brighton ("Rubio") pursuant to a
merger in which the Company will pay Rubio stockholders a total of approximately
$4.6 million in cash (the "Rubio Merger"). Rubio is headquartered in Brighton,
Iowa and as of June 30, 1997 had assets of approximately $21.3 million, deposits
of approximately $17.9 million and stockholder's equity of approximately $3.2
million. The Rubio merger will be accounted for as a purchase, is subject to
regulatory and stockholder approval and is expected to close by calendar year
end.
<PAGE>
Note 13. Fair Value of Financial Instruments
The fair value of financial instruments at June 30, 1997 and 1996 are as
follows:
1997 1996
------------------------ -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
Financial assets:
Cash and cash equivalents $ 807,805 $ 807,805 $ 1,903,352 $ 1,903,352
Investment securities
available-for-sale ... 9,849,991 9,849,991 14,628,089 14,628,089
Loans ................... 52,530,153 52,593,286 42,905,699 42,826,036
Financial liabilities:
Deposits ................ 44,754,328 45,985,031 44,176,448 44,603,760
Borrowed funds .......... 8,651,765 8,580,789 5,504,742 5,432,513
Face Amount Face Amount
----------- -----------
Off-balance sheet instruments .............. $2,050,182 $1,775,095
Note 14. Transactions with Related Parties
The Savings Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have, in the opinion of management, on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
others.
Aggregate loan transactions with related parties were as follows:
Year Ended June 30,
--------------------------
1997 1996
---------- ----------
Balance, beginning ...................... $ 899,503 $ 847,878
New loans ............................ 377,840 298,306
Repayments ........................... (675,302) (148,075)
Loans of former officers and directors -- (98,606)
---------- ----------
Balance, ending ......................... $ 602,041 $ 899,503
========== ==========
Maximum balance during the year ......... $1,153,058 $1,146,184
========== ==========
Note 15. Reorganization and Conversion to Stock Ownership
On September 7, 1995, the Board of Directors of the Savings Bank adopted a plan
of conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. The conversion was accomplished through an amendment of the
Savings Bank's Federal charter and the issuance of the holding company's common
stock through a public stock offering.
The reorganization and stock offering was completed on March 11, 1996 and the
holding company received stock offering proceeds of $5,652,693, net of costs of
$396,477. The Savings Bank concurrently issued one share of common stock to the
holding company representing 100% of the common stock of the Savings Bank at a
price of $3,089,356.
Persons who had liquidation rights with respect to the mutual savings bank as of
the date of reorganization shall, as long as they remain depositors of the
Savings Bank, continue to have such rights solely with respect to the mutual
savings bank after the reorganization.
<PAGE>
Note 16. Parent Company Only Financial Information
Following is condensed financial information of the Company (Parent Company
only):
WASHINGTON BANCORP
CONDENSED STATEMENTS OF FINANCIAL CONDITION
As Of June 30, 1997 and 1996
<TABLE>
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash ............................................................................... $ 1,886,565 $ 2,111,119
Investment securities available for sale ........................................... -- 500,000
Investment in subsidiary bank, at cost plus equity in
undistributed earnings .......................................................... 8,762,017 7,963,481
Other assets ....................................................................... 109,846 35,028
----------- -----------
$10,758,428 $10,609,628
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, accrued expenses and other liabilities ................................ $ 13,605 $ 61,463
----------- -----------
Redeemable common stock held by Employee Stock
Ownership Plan (ESOP) ........................................................... 69,392 --
----------- -----------
Stockholders' equity:
Preferred stock
Common stock .................................................................... 6,575 6,575
Additional paid-in capital ...................................................... 6,150,032 6,172,680
Retained earnings ............................................................... 5,292,419 4,941,449
Unrealized (losses) on investment securities available
for sale of bank subsidiary .................................................. (3,307) (68,209)
----------- -----------
11,445,719 11,052,495
Less:
Cost of common shares acquired for the treasury, 6,386 shares ................ (85,827) --
Deferred compensation ........................................................ (151,739) --
Maximum cash obligation related to ESOP shares (Note 9) ...................... (69,392) --
Unearned shares, Employee Stock Ownership Plan ............................... (463,330) (504,330)
----------- -----------
10,675,431 10,548,165
----------- -----------
$10,758,428 $10,609,628
=========== ===========
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF INCOME
Years Ended June 30, 1997 and 1996
1997 1996
-------- --------
Interest income ............................................ $ 5,693 $ 35,027
Miscellaneous expense ...................................... 65,600 30
Income (loss) before equity in subsidiary's
undistributed income and taxes on income $(59,907) $ 34,997
Equity in undistributed net income of bank subsidiary ...... 604,285 420,075
-------- --------
Income before taxes on income ................ 544,378 455,072
Federal and state income taxes (credits) ................... (20,299) 13,650
-------- --------
Net income ................................... $564,677 $441,422
======== ========
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income ................................................... $ 564,677 $ 441,422
Adjustments to reconcile net income to net cash
provided by operations:
Equity in net income of subsidiary ........................ (604,285) (420,075)
(Increase) in other assets ................................ (74,818) (35,028)
Increase in accrued expenses and other liabilities ........ (47,858) 61,463
---------- ----------
Net cash provided by (used in) operating activities (162,284) 47,782
---------- ----------
Cash Flows from Investing Activities
Purchases of available-for-sale securities ................... -- (500,000)
Maturity of available-for-sale securities .................... 500,000 --
Acquisition of stock in subsidiary ........................... -- (3,089,356)
---------- ----------
Net cash provided by (used in) investing activities 500,000 (3,589,356)
---------- ----------
Cash Flows from Financing Activities
Proceeds from issuance of common stock ....................... -- 6,049,170
Payments for expenses incurred related to
conversion of stock form .................................. -- (396,477)
Acquisition of common stock for the treasury ................. (348,563) --
Dividends paid ............................................... (213,707) --
---------- ----------
Net cash provided by (used in) financing activities (562,270) 5,652,693
---------- ----------
Increase (decrease) in cash ....................... (224,554) 2,111,119
Cash balance:
Beginning .................................................... 2,111,119 --
---------- ----------
Ending ....................................................... $1,886,565 $2,111,119
========== ==========
Supplemental Disclosures
Cash payments for income taxes, net of
payments from subsidiary .................................. $ 129,458 $ --
</TABLE>
<PAGE>
WASHINGTON BANCORP
and
WASHINGTON FEDERAL SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Stan Carlson Rick R. Hofer
President and Chief Executive Chairman of the Board, Washington
Officer, Washington and the Bank and the Bank
Employee, Sitler Electric Supply
James D. Gorham Mary Levy
District Agent, Northwestern Mutual Treasurer and co-owner, Mose Levy
Life Insurance Co. Steel Company
Myron L. Graber Richard L. Weeks
Co-owner, Graber Home Owner, Sitler Electric Supply, Inc.
Improvement, Inc.
J. Richard Wiley
Owner, Wiley Computers
Executive Officers
Stan Carlson Leisha Linge
President and Chief Executive Officer Controller
Jeff Johnson Sandra K. Bush
Vice President Vice President and Secretary
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
Washington is an Iowa corporation which was organized in 1995 by the Bank for
the purpose of becoming a thrift institution holding company. The Bank was
organized in 1934 and converted to a federal savings bank in 1994. In March
1996, the Bank converted to the stock form of organization and concurrently
became the wholly-owned subsidiary of Washington through the sale and issuance
of common stock. The principal asset of Washington is the outstanding stock of
the Bank, its wholly owned subsidiary. Washington presently has no separate
operations and its business consists only of the business of the Bank. The
Bank's primary business consists of attracting deposits from the general public
and using these deposits to provide financing for the purchase and construction
of residential and, to a lesser extent, other properties.
Main Office Drive-thru Office
102 East Main Street 220 East Washington Street
Washington, Iowa Washington, Iowa
Independent Auditors Local Counsel
McGladrey & Pullen, LLP Washington County Abstract Co.
Town Centre, Suite 300 225 W. Main Street
221 Third Avenue, SE Washington, Iowa 52353
Cedar Rapids, Iowa 52401
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cramford, New Jersey Washington, D.C. 20005
Form 10-KSB Report
A copy of Washington's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997 including financial statements, as filed with the SEC, will be
furnished without charge to stockholders of Washington upon written request to
the Secretary, Washington Bancorp, 102 East Main Street, Washington, Iowa 52353.
Stock Listing
Washington's common stock is reported on the National Daily Quotation Service by
the National Quotation Bureau under the symbol "WBIO". As of July 31, 1997,
Washington had 418 stockholders of record and 651,133 outstanding shares of
common stock.
Price Range of Common Stock
The table below shows the range of high and low interdealer prices. These prices
do not include retail markups, markdowns or commissions and may not represent
actual transactions. The table below also shows dividends paid by the Company.
High Low Dividend
----------- ----------- ----------
1996
- ----
Third quarter ............... $ 11.50 $ 10.50 $ --
Fourth quarter .............. $ 11.38 $ 10.50 $ --
1997
- ----
First quarter ............... $ 11.38 $ 10.63 $ .08
Second quarter .............. $ 12.63 $ 10.88 $ .08
Third quarter ............... $ 15.00 $ 12.88 $ .10
Fourth quarter .............. $ 15.35 $ 13.75 $ .10
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization
- ------------------ ---------------------------------- --------- ------------
Washington Bancorp Washington Federal Savings Bank 100% Federal
Washington Federal Washington Financial Services, Inc. 100% Iowa
Savings Bank
The financial statements of the Registrant are consolidated with those of its
subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 233
<INT-BEARING-DEPOSITS> 575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,850
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 52,530
<ALLOWANCE> 226
<TOTAL-ASSETS> 64,875
<DEPOSITS> 44,754
<SHORT-TERM> 1,750
<LIABILITIES-OTHER> 724
<LONG-TERM> 6,902
0
0
<COMMON> 7
<OTHER-SE> 10,668
<TOTAL-LIABILITIES-AND-EQUITY> 64,875
<INTEREST-LOAN> 4,128
<INTEREST-INVEST> 862
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,990
<INTEREST-DEPOSIT> 2,216
<INTEREST-EXPENSE> 2,553
<INTEREST-INCOME-NET> 2,437
<LOAN-LOSSES> 40
<SECURITIES-GAINS> 388
<EXPENSE-OTHER> 1,712
<INCOME-PRETAX> 915
<INCOME-PRE-EXTRAORDINARY> 565
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
<YIELD-ACTUAL> 3.97
<LOANS-NON> 0
<LOANS-PAST> 229
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 209
<CHARGE-OFFS> 33
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 226
<ALLOWANCE-DOMESTIC> 226
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 11
</TABLE>
