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, 1998
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. [ ]
The Issuer had $6,354,000 in revenues for the fiscal year ended June
30, 1998.
As of September 21, 1998, there were issued and outstanding 598,006
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 4, 1998, was $8.6 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, 1998.
Part III of Form 10-KSB - Portions of the Proxy
Statement for the 1998 Annual Meeting of Shareholders.
Transitional Small Business disclosure Format YES . NO X .
<PAGE>
PART I
Item 1. Description of Business
Forward-Looking Statements
When used in this Form 10-KSB 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.
Impact of the Year 2000
The Banks have conducted a comprehensive review of their computer
systems to identify applications that could be affected by the "Year 2000"
issue, and have developed implementation plans to address the issue. Rubio's
data processing is performed in-house. Washington Federal's data processing is
out-sourced. The Banks have already contacted each vendor to request time tables
for Year 2000 compliance and expected costs, if any, to be passed along to the
Banks. To date, the Banks have been informed that their primary service
providers anticipate that all reprogramming efforts will be completed by
December 31, 1998, allowing the Banks adequate time for testing. Certain other
vendors have not yet responded, however, the Banks will pursue other options if
it appears that these vendors will be unable to comply. Management does not
expect these costs to have a significant impact on their financial position or
results of operations, however, there can be no assurance that the vendors
systems will be Year 2000 compliant, consequently the Banks could incur
incremental costs to convert to another vendor. The Banks have identified
certain of their hardware and software equipment that will not be Year 2000
compliant and have already purchased new equipment and software. These capital
expenditures are expected to total approximately $85,000.
General
Washington Bancorp ("Washington," and with its subsidiaries, the
"Company") is an Iowa corporation which was organized in October 1995 by
Washington Federal Savings Bank ("Washington Federal") 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.
In March 1996, Washington Federal converted to the stock form of
organization through the sale and issuance of its common stock to the Company.
Washington, on June 24, 1997, entered into a merger agreement to acquire Rubio
Savings Bank of Brighton, Brighton, Iowa ("Rubio") for an aggregate merger
consideration of approximately $4.6 million. Rubio is held as a separate
subsidiary of the Company. In January 1998, the Company became a bank holding
company upon its acquisition of Rubio. The principal assets of the Company are
Washington Federal and Rubio (collectively, the "Banks"). The Company presently
has no separate operation and its business consists of the business of the
Banks. Deposits of both institutions are insured by the Federal Deposit
Insurance Corporation to the full extent permitted by law and regulation.
<PAGE>
Washington Federal 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 Federal also makes commercial loans, consumer loans, automobile
loans, and has occasionally been a purchaser of fixed-rate mortgage-backed
securities.
Washington Federal filed applications with the Office of Thrift
Supervision ("OTS") on August 19, 1998 for two branch offices. The application
to branch into Wellman, Iowa, a small rural community of 1,000 people located 20
miles north of Washington, has been approved. The application to branch into
Richland, Iowa, a small rural community of 500 people is pending. Both Wellman
and Richland currently have branch offices of large regional banks. Washington
Federal has received requests from its customers residing in both communities to
assist in the restoration of an active local banking relationship by opening
branches. Washington Federal initially intends to open the Wellman branch using
a temporary facility to allow for an assessment of the long-term needs before
constructing a permanent facility. The temporary facility will then be moved to
facilitate the branch opening in Richland.
Rubio attracts deposits from the general public in its local market
area and the businesses in the Brighton area. The deposits are primarily
invested in United States Treasury bonds, agricultural operating loans,
commercial loans, one- to four-family residential real estate loans, and farm
real estate loans. Rubio also makes commercial real estate loans, automobile
loans, and other consumer loans.
At June 30, 1998, the Company had assets of approximately $94.3
million, deposits of approximately $66.6 million and stockholders' equity of
approximately $11.0 million.
The executive office of the Company is located at 102 East Main Street,
Washington, Iowa 52353, telephone (319) 653-7256.
Lending Activities
General. The Company's loan portfolio predominantly consists of
mortgage loans secured by one- to four-family residences. The Company 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, 1998, the Company's net loan portfolio totalled $65.9
million. Loans secured by first mortgages on one- to four-family residences
totalled $45.3 million, or 68.4% of the Company's loan portfolio at June 30,
1998, before net items. The Company 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 $125,000, secured consumer loans for
more than $35,000, unsecured consumer loans for more than $20,000 and commercial
loans to new customers for more than $50,000 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. Washington Federal, a savings bank, is 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 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). Washington Federal's
maximum loan-to-one borrower limit was approximately $1.7 million as of June 30,
1998. Washington Federal's largest amount outstanding to one borrower or group
of related borrowers was a group of loans secured by agricultural real estate
and agricultural operating loans in the aggregate amount of $742,000. All of the
loans to this borrower have performed in accordance with their terms since their
origination. In addition to regulatory limitations, Washington Federal has
adopted an internal maximum loan-to-one-borrower limit of $750,000.
<PAGE>
Rubio, a state bank, is subject to limits, which under current
regulations limit loans-to-one borrower to an amount equal to 15% of the
aggregate capital (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of aggregate capital.)
Rubio's maximum loan-to-one borrower limit was approximately $566,000 as of June
30, 1998, Rubio's largest amount outstanding to one borrower or group of related
borrowers was a group of loans secured by agricultural real estate and
agricultural operating loans in the aggregate amount of $311,000. All of the
loans to this borrower have performed in accordance with their terms since their
origination.
Loan Portfolio Composition. The following information sets forth the
composition of the Company'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
$21.5 million at June 30, 1998.
<TABLE>
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
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 ..................... $45,303 68.4% $40,696 77.1% $33,914 78.66% $33,328 82.01% $30,496 80.97%
Home equity and second mortgage ......... 1,164 1.7 1,233 2.3 1,569 3.64 1,669 4.11 956 .54
Multi-family and commercial real estate . 7,411 11.2 4,775 9.1 2,896 6.72 1,741 4.28 1,825 4.85
Other ................................... 0 0 99 0.2 115 0.27 472 1.16 299 0.79
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Total mortgages ...................... 53,878 81.3 46,803 88.7 38,494 89.29 37,210 91.56 33,576 89.15
Construction loans ........................ 152 0.2 694 1.3 1,119 2.60 589 1.45 438 1.16
--------------------------------------------------------------------------------------
Total real estate loans .............. 54,030 81.5 47,497 90.0 39,613 91.89 37,799 93.01 34,014 90.31
Commercial Business Loans ................. 8,164 12.3 2,715 5.2 1,546 3.59 1,084 2.67 1,780 4.73
-------------------------------------------------------------------------------------
Consumer Loans:
Automobile .............................. 3,065 4.6 1,899 3.6 1,134 2.62 785 1.93 685 1.82
Deposit account ......................... 1,014 1.6 645 1.2 822 1.90 970 2.39 1,185 3.14
--------------------------------------------------------------------------------------
Total consumer loans ................. 4,079 6.2 2,544 4.8 1,956 4.52 1,755 4.32 1,870 4.96
--------------------------------------------------------------------------------------
Total Loans ............................... 66,273 100.00% 52,756 100.00% 43,115 100.00% 40,638 100.00% 37,664 100.00%
======= ======= ======= ======= =======
Less:
Allowance for loan losses ............... 388 226 203 203 209
------- ------- ------- ------- -------
Total loans receivable, net .......... $65,885 $52,530 $42,906 $40,435 $37,461
======= ======= ======= ======= =======
</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 the Company's loan portfolio at June 30,
1998. 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
----------------- ------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 8,852 8.87% $ 152 8.50% $5,070 9.54% $ 806 10.18% $14,880 9.17%
2000 11,337 8.28 --- --- 1,577 10.09 1,633 11.60 14,547 8.85
2001 9,209 8.50 --- --- 244 8.75 721 10.34 10,174 8.64
2002 and 2003 1,316 8.66 --- --- 996 8.34 903 9.81 3,215 8.88
2004 to 2008 3,404 8.16 --- --- 277 9.18 10 12.00 3,691 8.25
2009 to 2013 4,119 8.07 --- --- --- --- 6 --- 4,125 8.07
2014 and
thereafter 15,641 8.10% --- --- --- --- --- --- 15,641 8.10
------- ------- ------ ------ -------
$53,878 $ 152 $8,164 $4,079 $66,273
======= ======= ====== ====== =======
</TABLE>
As of June 30, 1998, the total amount of loans due after June 30, 1999
which have predetermined interest rates was $30.0 million, while the total
amount of loans due after such date which have floating or adjustable interest
rates was $21.5 million.
Loan Originations, Purchases and Sales. Real estate loans are
originated by the Company'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 predominately 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 four one- to four-family real estate loans for the secondary market
during fiscal 1998. Washington Federal originated seven 90% farm Service Agency,
Guaranteed Farm Ownership, and Guaranteed Operation Loans totaling $1.2 million
during fiscal year 1998. The loans are backed by 90% guarantees of the United
States Government and the guaranteed portions were sold by Washington Federal in
the secondary market to FarmerMac. In addition to the portion of each loan
retained, Washington Federal also retained the servicing of the loans.
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 the Company for the periods indicated.
<TABLE>
Year Ended June 30,
--------------------------------
1998 1997 1996
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Real estate
One- to four-family ....................................... $ 15,744 $ 14,265 $ 9,915
Home equity and second mortgage .......................... 1,036 751 1,098
Multi-family and commercial .............................. 5,177 5,438 484
real estate
Construction ............................................. 686 1,319 1,647
Non real estate
Commercial business ...................................... 6,348 3,666 1,551
Consumer ................................................. 3,142 2,811 2,198
--------------------------------
Total loans originated ................................ 32,133 28,250 16,893
Loans sold to secondary market .............................. (1,474) -- (208)
Principal (repayments) ...................................... (25,096) (18,609) (14,208)
Balance of loans outstanding, net from ...................... 7,849 -- --
acquisition of Rubio
Decrease (increase) in allowance ............................ (57) (17) (6)
for loan losses
--------------------------------
Net increase (decrease) ..................................... $ 13,355 $ 9,624 $ 2,471
================================
</TABLE>
One- to Four-Family Residential Mortgage Lending. The Company's primary
lending activity consists of the origination of residential mortgage loans
secured by property located in the Company's market area of Washington County,
Iowa and adjoining counties. The Company will not normally originate any loan
which exceeds 90% of the lesser of the appraised value or selling price of the
mortgaged property.
The Company primarily originates three year balloon mortgage loans with
an amortization up to 30 years. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Company's cost of funds.
The Company generally does not charge origination fees for loans. The Company
originates its loans for its own portfolio and originates a limited number of
loans for sale to the secondary market. Accordingly, the Company'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 the Company
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 the Company's market area. Mortgage loans originated and held
by the Company in its portfolio generally include due-on-sale clauses which
provide the Company with the contractual right to deem the loan immediately due
and payable in the event that the borrower transfers ownership of the property
without the Company's consent.
The Company 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.
Home Equity and Second Mortgage Lending. The Company 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, 1998,
home equity and second mortgage loans amounted to $1.2 million which represented
1.7% of the Company's total loan portfolio, before net items.
<PAGE>
Multi-Family and Commercial Real Estate Loans. The Company has
historically engaged in a limited amount of multi-family and commercial real
estate lending. Generally such loans have 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, 1998, $7.4 million or 11.2% of the Company's total loan portfolio,
before net items, consisted of loans secured by existing multi-family
residential real estate and commercial real estate, including primarily two
convenience stores, a small meat processing plant, a condominium and a hog
confinement facility. All of the Company's multi-family and commercial real
estate loans are secured by properties located in its market area. The largest
multifamily and commercial real estate loan as of June 30, 1998 was $290,000,
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. The Company
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.
The Company requires appraisals on all properties securing
non-residential and multi-family residential real estate loans. Such appraisals
are completed by the Company's staff. If these loans exceed $250,000 a certified
appraisal is completed by a fee appraiser not employed by the Company. In
originating multi-family residential and non-residential real estate loans, the
Company 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. The Company makes construction loans primarily to
individuals for the construction of single-family residences. At June 30, 1998,
construction loans amounted to $152,000, or 0.2% of the Company'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 Company construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Company
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 the Company's market area.
Construction lending is generally considered to involve a higher degree
of credit risk than long- term financing of residential properties. The
Company'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, the Company may be compelled to advance
additional funds to complete the construction. Furthermore, if the estimate of
value proves to be inaccurate, the Company 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, 1998, the Company had no
speculative loans to builders.
Commercial Business Lending. At June 30, 1998, $8.2 million or 12.3% 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 Company's agricultural
loan portfolio is primarily secured by livestock, growing crops, machinery and
equipment. The largest commercial business loan was $306,000 at June 30, 1998
and was secured by machinery and equipment.
<PAGE>
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.
Consumer Lending. The Company offers a variety of consumer loans,
including automobile loans and loans secured by deposits. The Company currently
originates substantially all of its consumer loans in its market area, generally
to its existing customers. At June 30, 1998, the Company's consumer loan
portfolio totaled $4.1 million or 6.2% of its total loan portfolio, before net
items.
The largest component of the Company's consumer loan portfolio consists
of automobile loans. The Company 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 the
purchase price or the vehicle's published value, whichever is less. At June 30,
1998, the Company's automobile loans totaled $3.1 million or 4.6% of the
Company'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 the Company 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, 1998, $39,000 of the Company'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. The Company'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 the Company. 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.
<PAGE>
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of category at June 30, 1998. 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, 1998 for:
------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days & Over Total
-------------------- -------------------- ---------------------- ----------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
-------------------- -------------------- ---------------------- ----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Mortgage Loans ........ 21 $653 88.36% 7 $255 75.89% 1 $ 6 6.74% 29 $ 914 78.52%
Consumer .............. 18 41 5.55 6 14 4.17 14 39 43.82 38 94 8.08
Commercial Business .... 8 45 6.09 2 67 19.94 5 44 49.44 15 156 13.40
-------------------------------------------------------------------------------------------
Total .................. 47 $739 100.00% 15 $336 100.00% 20 $ 89 100.00% 82 $1,164 100.0%
===========================================================================================
</TABLE>
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,
--------------------
1998 1997 1996
--------------------
(Dollars in Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ....................................... $ 6 $215 $ 27
Consumer ....................................... 39 14 17
Commercial Business ............................ 44 -- --
--------------------
Foreclosed assets:
One- to four-family ............................ -- -- --
--------------------
Total non-performing assets ........................ $ 89 $229 $ 44
====================
Total as a percentage of total assets .............. 0.09% 0.35% 0.07%
====================
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.
<PAGE>
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, 1998, the Company had classified $317,000 of its assets as substandard,
and $6,000 as doubtful as compared to $93,000 and $2,000 at June 30, 1997
classified as substandard and doubtful, respectively.
Other Loans of Concern. In addition to the non-performing loans set
forth in the tables above, as of June 30, 1998, there was $171,000 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 have some 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 $45,000 on June 30,
1998, and was secured by a one- to four-family residential mortgage.
Foreclosed Real Estate. Real estate acquired by the Company 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.
The Company records loans as in-substance foreclosures if the borrower
has little or no equity in the property based upon its documented current fair
value, the Company 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. The Company had no
foreclosed real estate at June 30, 1998.
Allowances for Loan Losses
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
the Company'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 the Company'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 $388,000, or as a ratio of total loans was 0.59%,
at June 30, 1998.
The Company'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 Banks have seen an increase
in its loan portfolio. This has resulted in a greater than normal increase in
the reserve allowance established by the Banks' Boards of Directors. The Banks
also anticipate continuing with the current schedule of reserve deposits to keep
up with expected increases in loans outstanding during the next fiscal year.
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Company'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,
--------------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------------
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 ........................ $168 81.5% $106 90.0% $121 88.1%
Commercial Business Loans ............. 141 12.3 68 5.2 13 3.5
Consumer Loans ........................ 61 6.2 41 4.8 36 8.4
Unallocated ........................... 18 0 11 0 39 0
---------------------------------------------------------
$388 100.0% $226 100.0% $209 100.0%
=========================================================
</TABLE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Company's allowance for loan losses at the dates
and for the periods indicated:
Year Ended June 30,
------------------------
1998 1997 1996
------------------------
(Dollars in Thousands)
Balance at beginning of period ...................... $ 226 $ 209 $ 203
Balance of the allowance for loan losses
of Rubio at date of acquisition .................... 105 -- --
Charge offs:
Mortgage ........................................ -- -- --
Consumer ........................................ (46) (33) (14)
------------------------
Total charge offs ........................... (46) (33) (14)
Recoveries .......................................... 14 10 5
------------------------
Net Charge offs ..................................... (32) (23) (9)
------------------------
Provisions charged to operations .................... 89 40 15
------------------------
Balance at end of period ............................ $ 388 $ 226 $ 209
========================
Ratio of net charge offs during the period to
average loans outstanding during the period ........ .05% 0.04% 0.02%
========================
Ratio of net charge offs during the period to
average nonperforming assets ........................ 35.30% 17.16% 20.45%
========================
<PAGE>
Investment Activities
The Company 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. The Company 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 the Company's loan
origination and other activities. At June 30, 1998, the Company had an
investment portfolio of approximately $21.0 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. The Company classifies its investments as held to maturity or
available for sale.
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 the Company, as established by the
Board of Directors, is to invest funds among various categories of investments
and maturities based upon the Company'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 the Company's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed and related securities at the dates indicated. For
additional information concerning the Company'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,
-------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------
Percent of Percent of Percent 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 ........ $ 6,337 30.09% $ 402 3.89% $ 394 2.63%
U.S. Government agencies ........ 6,770 32.14 6,999 67.85 7,961 53.08
State and political subdivisions 348 1.65 354 3.43 404 2.69
Mortgage-backed securities ...... 51 0.24 140 1.36 152 1.01
Corporations .................... 5,616 26.66 1,955 18.95 4,217 28.12
Certificates of deposit with
financial institutions ........ -- -- -- -- 1,500 10.00
-----------------------------------------------------------------------
Total Available for Sale .. 19,122 90.78 9,850 95.48 14,628 97.53
-----------------------------------------------------------------------
Held to maturity(1):
State and political subdivisions ... 1,131 5.37 -- -- -- --
Mortgage-backed securities ......... -- -- -- -- -- --
-----------------------------------------------------------------------
Total held to maturity ........ 1,131 5.37 -- -- -- --
-----------------------------------------------------------------------
Total Investment Securities ... 20,253 96.15 -- -- 14,628 97.53
-----------------------------------------------------------------------
FHLB Stock ............................. 812 3.85 466 4.52 369 2.47%
-----------------------------------------------------------------------
Total Investment Securities
and FHLB Stock ............... $21,065 100.00% $10,316 100.00% $14,997 100.00%
=======================================================================
Average remaining life of investment
securities (excluding FHLB Stock) .... 2.4 Years 3.9 Years 3.3 Years
Interest-Earning Assets:
Interest-bearing deposits with ...... $ 1,859 100.00% $ 575 100.00% $ 1,110 100.00%
=======================================================================
<FN>
(1) Securities classified as available for sale were carried at fair value at
June 30, 1998, 1997 and 1996. Securities classified as held to maturity
were carried at historical cost at all respective dates.
</FN>
</TABLE>
<PAGE>
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 its 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, 1998 was $19.1 million resulting in a net
unrealized loss at that date of approximately $1,000.
The category of investment securities entitled "corporations" is
comprised of investments in corporate bonds. 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. The Company 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 the Company's investment securities portfolio at June 30, 1998.
<TABLE>
At June 30, 1998
-------------------------------------------------------
Book Value of Investment Securities Maturing In
-------------------------------------------------------
Total
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
-------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities .......................... $ 2,805 $ 3,532 $ -- $ -- $ 6,337
U.S. government agencies .......................... 582 4,193 1,995 -- 6,770
State and political subdivisions .................. 379 860 240 -- 1,479
Mortgage-backed securities ........................ -- -- -- 51 51
Corporations ...................................... 4,261 353 1,002 -- 5,616
Certificates of deposit with financial institutions -- -- -- -- --
-----------------------------------------------------
Total ........................................ $ 8,027 $ 8,938 $ 3,237 $ 51 $20,253
=====================================================
Weighted average yield ............................ 5.77% 6.11% 6.12% 6.13% 5.98%
=====================================================
</TABLE>
Sources of Funds
General. Deposits are the major external source of the Company's funds
for lending and other investment purposes. The Company 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. The Company had
$15.7 million FHLB advances outstanding at June 30, 1998.
Deposits. Consumer and commercial deposits are attracted principally
from within the Banks' market area through the offering of a broad selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. The Banks also offer individual retirement
accounts ("IRA"), NOW accounts, checking 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 the Banks on deposits are set weekly at the
direction of management and the Board of Directors. The Banks determine 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. The Banks review, weekly, the interest rates being offered by the
other principal financial institutions within its market area.
<PAGE>
Savings accounts constituted $5.5 million, or 8.3% of the Company's
deposit portfolio at June 30, 1998. Certificates of deposit constituted $42.3
million or 63.6% of the deposit portfolio of which $6.3 million or 2.4% of the
deposit portfolio were certificates of deposit with balances of $100,000 or
more. MMDA accounts constituted $10.5 million or 15.7% of the Company's deposit
portfolio at June 30, 1998. As of June 30, 1998, the Banks had no brokered
deposits. At June 30, 1998, transactions deposits were $8.2 million or 12.4% of
total deposits.
Savings Deposit Activities. The following table sets forth the savings activity
at the Banks during the period indicated.
<TABLE>
Year Ended June 30,
----------------------------------
1998 1997 1996
----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance .................................... $ 44,754 $ 44,176 $ 42,950
Balance of deposits of Rubio at acquisition ........ 19,959
Net increase (decrease) before interest
credited ......................................... (33) (1,226) (390)
Interest credited .................................. 1,915 1,804 1,616
----------------------------------
Ending balance ..................................... $ 66,595 $ 44,754 $ 44,176
==================================
Net increase (decrease) ............................ $ 21,841 $ 578 $ 1,226
==================================
Percent increase (decrease) ........................ 48.8% 1.31% (2.85)%
==================================
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Banks for the periods
indicated.
<TABLE>
June 30,
--------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- --------------------
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%) $ 8,246 12.31% $3,094 6.88% $ 2,529 5.70%
Money Market Accounts (2.30% - 5.00%) 10,473 15.63 9,044 20.11 9,087 20.46
Passbook Savings Accounts (2.30% - 3.00%) 5,537 8.26 2,182 4.85 2,244 5.05
--------------------------------------------------------------------
Total Non-Certificates 24,256 36.20 14,320 31.84 13,860 31.21
--------------------------------------------------------------------
Certificates
2.00% - 3.00% 156 0.23 13 .03 --- ---
3.01% - 4.00% --- --- --- --- 28 0.06
4.01% - 5.00% 2,550 3.81 2,205 4.90 4,976 11.21
5.01% - 6.00% 32,583 48.63 23,247 51.69 14,445 32.53
6.01% - 7.00% 7,050 10.52 4,969 11.05 10,867 24.47
7.01% - 8.00% --- --- --- --- --- ---
8.01% - 9.00% --- --- --- --- --- ---
9.01% and over --- --- --- --- --- ---
-------------------------------------------------------------------
Total Certificates 42,339 63.19 30,434 67.67 30,316 68.27
-------------------------------------------------------------------
Accrued Interest 409 0.61 221 0.49 231 0.52
-------------------------------------------------------------------
Total Deposits and Accrued Interest $67,004 100.00% $44,975 100.00% $44,407 100.00%
===================================================================
</TABLE>
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1998.
<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, 1998 $52 $1,019 $6,492 $ 199 $ 7,762 18.33%
December 31, 1998 68 843 6,541 357 7,809 18.44
March 31, 1999 18 355 6,310 299 6,982 16.49
June 30, 1999 18 317 5,105 122 5,562 13.13
September 30, 1999 --- 8 1,646 310 1,964 4.63
December 31, 1999 --- 8 2,680 309 2,997 7.08
March 31, 2000 --- --- 874 98 972 2.30
June 30, 2000 --- --- 757 124 881 2.08
September 30, 2000 --- --- 478 293 771 1.82
December 31, 2000 --- --- 511 338 849 2.01
March 31, 2001 --- --- 150 2,185 2,335 5.52
June 30, 2001 --- --- 348 2,385 2,733 6.46
Thereafter --- --- 691 31 722 1.71
---------------------------------------------------------------------
Total $156 $2,550 $32,583 $7,050 $42,339 100.00%
=====================================================================
Percent of Total 0.37% 6.02% 76.96% 16.65% 100.00%
====================================================
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of June 30, 1998
<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 .............................. $ 5,022 $ 6,846 $10,336 $13,806 $36,010
Certificates of Deposit of $100,000
or More ............................... 2,740 963 2,208 418 6,329
---------------------------------------------------
Total Certificates of Deposit ........... $ 7,762 $ 7,809 $12,544 $14,224 $42,339
===================================================
</TABLE>
Borrowings
Deposits are the primary source of funds of the Company's lending and
investment activities and for its general business purposes. In addition,
Washington Federal 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 Federal's stock in the FHLB of Des Moines and
a portion of the Company's first mortgage loans and certain other assets. The
Company, 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, 1998, Washington Federal had $15.7 million of
borrowings.
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,
----------------------------------
1998 1997 1996
----------------------------------
(Dollars in Thousands)
Maximum Balance ...................... $15,724 $ 9,311 $ 6,433
Average Balance ...................... $11,519 $ 6,504 $ 4,621
<PAGE>
The following table sets forth certain information as to the Bank's
FHLB advances at the dates indicated.
June 30,
---------------------------
1998 1997 1996
---------------------------
(Dollars in Thousands)
FHLB Advances ..................................... $15,724 $ 8,652 $ 5,505
Weighted average interest rate during the period of 5.55% 5.19% 5.48%
FHLB advances
Weighted average interest rate at end of period of
FHLB advances ..................................... 5.54% 5.50% 5.46%
Competition
Washington Federal 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.
Rubio is located in Brighton, Iowa, a small rural community of 800
people. The competition for deposits comes from financial institutions in
outlying communities. The closest community with another financial institution
is approximately ten miles away. Deposit competition also includes insurance and
investment products such as annuities, mutual funds, and other securities sold
by local and regional brokers. Loan competition varies depending on market
conditions.
Washington Federal 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. Rubio has
traditionally maintained a competitive position in commercial and agricultural
loan originations and market share throughout its services area by virtue of its
local presence and its involvement in the community. The Company 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 other institutions and mortgage bankers based
outside of the Company's market area.
The Company believes that it is one of the few area lenders that has
consistently offered a variety of loans throughout all types of economic
conditions. The Company 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 the Company's market area.
Subsidiary Activity
Washington Federal 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, 1998, Washington Federal was authorized to invest up to
approximately $1.4 million in the stock of, or loans to, service corporations
(based upon the 2% limitation).
<PAGE>
Washington Federal has one wholly owned subsidiary. The subsidiary
conducts business under the name of Washington Financial Services, Inc.
("Washington Financial"). Washington Federal's investment in its subsidiary
totaled $98,000 at June 30, 1998. The subsidiary's source of income is brokerage
fees, and it had net income of $24,000, $22,000 and $12,000 for the years ended
June 30, 1998, 1997 and 1996, respectively. The primary activity of the
subsidiary is the brokering of credit life and disability insurance products.
Washington Federal has recently entered into an arrangement with Eagle One
Investment Group ("Eagle One") to provide support for Washington Financial's
investment services office. Washington Financial intends to begin offering
non-insured investment products to meet the needs of current customers and the
community. Eagle One is a locally-owned investment firm with offices in banks
throughout the Midwest. Eagle One offers investment options to include stocks,
bonds, mutual funds, tax-advantaged investments and insurance. Washington
Financial will be the only Eagle One retail office in Washington Federal's
market area.
Regulation
General. Washington Federal is a federally chartered savings bank, the
deposits of which are federally insured by the FDIC 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 by the OTS. Washington Federal is a member of the FHLB of Des Moines
and is subject to certain limited regulation by the Federal Reserve Board (the
"FRB"). Washington Federal 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. As a result, the FDIC has
certain regulatory and examination authority over the Bank.
Rubio is an Iowa chartered savings bank and, as such, is subject to
extensive regulation, supervision and examination by the Iowa Superintendent of
Banking (the "ISB") and the FDIC, which are its state and primary federal
regulators, respectively. As with Washington Federal, such regulation and
supervision governs the activities in which it can engage and the manner in
which such activities are conducted and is intended primarily for the protection
of the insurance fund and depositors.
Washington is regulated as a bank holding company by the FRB. Bank
holding companies are subject to comprehensive regulation and supervision by the
FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA") and the
regulations of the FRB. As a bank holding company, Washington must file reports
with the FRB and such additional information as the FRB may require, and is
subject to regular inspections by the FRB. Washington is subject to the activity
limitations imposed under the BHCA and in general may engage in only those
activities that the FRB has determined to be closely related to banking.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Regulation of Savings Associations and Savings Banks. The OTS has
extensive authority over the operations of savings associations. As part of this
authority, Washington Federal 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 Washington Federal was as of June 30, 1998. Under
agency scheduling guidelines, it is likely that another examination will be
initiated within 18 months. When these examinations are conducted by the OTS and
the FDIC, the examiners may require Washington Federal 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, 1998 was $23,000. Rubio is subject to similar regulation and
oversight by the ISB and the FRB and was last examined as of January 22, 1998.
Each federal banking regulator has extensive enforcement authority over
its regulated institutions. 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. Except under
certain circumstances, public disclosure of final enforcement actions by the
regulator is required.
<PAGE>
In addition, the investment, lending and branching authority of
Washington Federal is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. Rubio is subject to
similar restrictions under state law and federal law. Federal savings
associations are also generally authorized to branch nationwide regardless of
state law whereas Iowa chartered banks, such as Rubio, are subject to certain
state law restrictions. At June 30, 1998, Washington Federal and Rubio were in
compliance with the noted restrictions.
Washington Federal'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). Rubio's general permissible lending limit for
loans-to-one borrower is an amount equal to 15% of the aggregate capital (except
for loans fully secured by certain readily marketable collateral, in which case
this limit is increased to 25% of aggregate capital.) At June 30, 1998,
Washington Federal's and Rubio's lending limit under this restriction were $1.7
million and $566,000, respectively. Washington Federal and Rubio are in
compliance with the loans-to-one-borrower limitation.
The federal banking agencies have 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.
Insurance of Accounts and Regulation by the FDIC. Washington Federal is
a member of the SAIF and Rubio is a member of BIF, each of 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
an 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 or the BIF will be
less than the designated reserve ratio of 1.25% of SAIF or the BIF insured
deposits, respectively. 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.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalize with a one-time assessment on virtually all
SAIF-insured institutions, such as Washington Federal, equal to 65.7 basis
points on SAIF-insured deposits maintained by those institutions as of March 31,
1995. The SAIF, which was paid to the FDIC in November 1996, was approximately
$294,000. These amounts were accrued by Washington Federal at September 30, 1996
by a charge to earnings.
<PAGE>
As a result of the SAIF recapitalization, the FDIC amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective January 1, 1997, the SAIF insurance premium range was 0
to 27 basis points per $100 of domestic deposits. Washington Federal qualifies
for the minimum SAIF assessment.
Additionally, the FDIC has imposed a Financing Corporation ("FICO")
obligation assessment on SAIF-assessable deposits for the first semi-annual
period of 1998 equal to 6.48 basis points per $100 of domestic deposits, as
compared to a FICO assessment on BIF-assessable deposits for that same period
equal to 1.30 basis points per $100 of domestic deposits.
Regulatory Capital Requirements. Federally insured depository
institutions, such as Washington Federal and Rubio, are required to maintain a
minimum level of regulatory capital. For savings associations, 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. The OTS is also authorized
to impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The OTS 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, 1998, Washington
Federal did not have any intangible assets and an excludable valuation
allowable, net of tax of $5,881.
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, 1998, Washington Federal had one excludable
subsidiary.
At June 30, 1998, Washington Federal had tangible capital of $6.7
million, or 9.65% of adjusted total assets, which is approximately $5.7 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The OTS capital standards also require core capital equal to at least
4% 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,
1998, Washington Federal had no intangibles which were subject to these tests.
At June 30, 1998, Washington Federal had core capital equal to $6.7
million, or 9.65% of adjusted total assets, which is $3.9 million above the
minimum leverage ratio requirement of 4% 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. The
OTS is also authorized to require a saving association to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At June 30, 1998, Washington Federal had no
capital instruments that qualify as supplementary capital and $297,000 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. Washington Federal had
$21,000 of such exclusions from capital and assets at June 30, 1998.
<PAGE>
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.
The OTS has adopted a final rule that requires 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 provides for a two-quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. 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, 1998, Washington Federal had total capital of $7.0 million
and risk-weighted assets of $50.2 million or total capital of 13.99% of
risk-weighted assets. This amount was $3.0 million above the 8% requirement in
effect on that date.
Rubio is subject to capital requirements similar to those required of
Washington Federal. At June 30, 1998 Rubio had tier 1 or leverage capital of
$2.5 million, or 10.76% of average total assets, which is approximately $1.8
million above the minimum requirement of 3% of average total assets in effect on
that date.
At June 30, 1998 Rubio had tier 1 risk-based capital of $2.5 million,
or 23.30% of total risk-based assets, which is approximately $2.1 million above
the minimum requirement of 4% of total risk-based assets in effect on that date.
At June 30, 1998 Rubio had risk-based capital of $2.6 million, or
24.15% of total risk-based assets, which is approximately $1.7 million above the
minimum requirement of 8% of total risk-based assets in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against institutions that fail to meet their
capital requirements. They are 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 institution must submit a
capital restoration plan and until such plan is approved by its primary federal
regulator 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 and the FDIC are 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 institution 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 institution 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 institutions. In addition, the
institutions must be placed in receivership or conservatorship, with certain
limited exceptions, within 90 days after it becomes critically undercapitalized.
<PAGE>
Any undercapitalized institution 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 and the FDIC are 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 or Rubio may have a substantial adverse effect on their
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.
Generally, savings associations, such as Washington Federal, 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. Washington
Federal 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."
Rubio may pay dividends, in cash or property, only out of its undivided
profits. In addition, FRB regulations prohibit the payment of dividends by a
state member bank if losses have at any time been sustained by such bank that
equal or exceed its undivided profits then on hand, unless (i) the prior
approval of the FRB has been obtained and (ii) at least two-thirds of the shares
of each class of stock outstanding have approved the dividend payment. FRB
regulations also prohibit the payment of any dividend by a state member bank
without the prior approval of the FRB if the total of all dividends declared by
the bank in any calendar year exceeds the total of its net profits for that year
combined with its retained net profits of the previous two calendar years (minus
any required transfers to a surplus or to a fund for the retirement of any
preferred stock).
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 depending
upon economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%. Rubio has no liquidity
requirement.
<PAGE>
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. Washington Federal is in compliance
with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
the OTS may make more stringent than GAAP, to 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 June 30, 1998, Washington Federal 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 and the FDIC, in connection with the examination of Washington
Federal and Rubio, respectively, 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 Washington Federal. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS and the FDIC.
The federal banking agencies, including the OTS and the FDIC, have
recently revised the CRA regulations and the methodology for determining an
institution's compliance with the CRA. Due to the heightened attention being
given to the CRA in the past few years, Washington Federal and Rubio may be
required to devote additional funds for investment and lending in its local
community. Washington Federal was examined for CRA compliance in July 1998 and
received a rating of satisfactory. Rubio was examined for CRA compliance in
October 1996 and received a rating of satisfactory.
<PAGE>
Transactions with Affiliates. Generally, transactions between an
FDIC-insured institution 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 institution's capital. Affiliates of
Washington Federal and Rubio include the Company and any company which is under
common control with Washington Federal and Rubio. Directors, officers or
controlling persons are also subject to regulations that restrict 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, except
if the loans are made pursuant to an employee benefit plan. At September 30,
1998, Washington Federal and Rubio were in compliance with the above
restrictions.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS and the
FDIC. 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. Bank holding companies such as Washington
are subject to comprehensive regulation by the FRB under the BHCA and the
regulations of the FRB. As a bank holding company, Washington is required to
file reports with the FRB and such additional information as the FRB may
require, and is subject to regular inspections by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as Washington Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
<PAGE>
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Riegle-Neal Act allows the
FRB to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The FRB may not approve the acquisition of
a bank that has not been in existence for the minimum time period (not exceeding
five years) specified by the statutory law of the host state or if the applicant
(and its depository institution affiliates) controls or would control more than
10% of the insured deposits in the United States or 30% or more of the deposits
in the target bank's home state or in any state in which the target bank
maintains a branch. Iowa has adopted a five year minimum existence requirement.
The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit.
Additionally, since June 1, 1997, the federal banking agencies have
been authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. States were also permitted to allow
such transactions before such time by enacting authorizing legislation.
Interstate acquisitions of branches or the establishment of a new branch is
permitted only if the law of the state in which the branch is located permits
such acquisitions. Interstate mergers and branch acquisitions are also subject
to the nationwide and statewide insured deposit concentration amounts described
above. Iowa permits interstate branching only by merger.
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that its net income for the
past year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the holding company's capital needs, asset
quality and overall financial condition. The FRB also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
The FRB has established capital requirements for bank holding companies
that generally parallel the capital requirements for commercial banks and
federal thrift institutions such as Washington Federal and Rubio. Washington is
in compliance with these requirements.
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.
<PAGE>
Federal Reserve System. The FRB 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, 1998, Washington was in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements that may be imposed by the OTS. See "-
Liquidity."
Depository institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but FRB regulations require such institutions to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. Washington Federal is a member of the
FHLB of Des Moines, 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, Washington Federal is required to purchase and maintain
stock in the FHLB of Des Moines. At June 30, 1998, Washington Federal had an
aggregate of $812,000 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 7.42% and were 6.81% for fiscal year 1998.
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.
Federal and State Taxation
Federal Taxation. Prior to the enactment of legislation in August 1996
(discussed below), savings associations such as Washington Federal that met
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 could, 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" was 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) is computed under the experience method.
In August 1996, legislation was enacted that repealed the percentage of
taxable income method of accounting used by many thrifts, including Washington
Federal, 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 experience 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 was delayed until the first taxable year
beginning after December 31, 1997, for institutions which met certain
residential lending requirements. The management of the Company and Washington
Federal do not believe that the legislation will have a material impact on the
Company or Washington Federal.
<PAGE>
In addition to the regular income tax, corporations, including savings
associations such as Washington Federal, 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.
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, 1998 Washington Federal's Excess for tax purposes
totalled approximately $366,000.
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 and Rubio are subject to a franchise
tax by the state of Iowa. The franchise tax is imposed annually in an amount
equal to 5% of the Banks' adjusted federal taxable income, computed before any
net operating loss deduction. An alternative minimum tax is imposed on the Banks
to the extent such tax exceeds the Banks' 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 Washington Federal, and all offices and positions described below are with
the Company and the Banks. There are no arrangements or understandings between
the persons named and any other person pursuant to which such officers were
selected.
Stan Carlson, age 42, was appointed President and Chief Executive
Officer of Washington Federal in 1993. Prior to joining Washington Federal, he
was Executive Vice President of Northwoods State Bank, Northwoods, Iowa.
Dean Edwards, age 63, has been an employee of Rubio since 1953. He was
appointed President and Chief Executive Officer of Rubio in 1966. Mr. Edwards
serves as a director of the Company.
Jeff Johnson, age 40, 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 34 has been an employee of Washington Federal
since 1992. Ms. Linge became Controller of Washington Federal in 1995 and acts
as Washington Federal's chief financial and accounting officer. Prior to that
time, she was a loan officer.
Employees
As of June 30, 1998 the Company had 21 full time and 12 part-time and
seasonal employees. None of the Company's employees are represented by a
collective bargaining group. The Company believes that its relationship with its
employees is satisfactory.
<PAGE>
Item 2. Description of Property
The Company conducts its business at its main offices. The Company's
total investment in offices, office property and equipment is $1.5 million with
a net book value of $800,000 at June 30, 1998. The following table sets forth
information regarding the Company's properties:
Net Book Value
of Real Property
Leased/ or Leasehold Improvements Year
Owned at June 30, 1998 Opened
Washington Federal Location:
Main Office Owned $203,000 1976
102 East Main Street
Washington, Iowa
Drive-thru Owned $218,000 1994
220 East Washington Street
Washington, Iowa
Rubio Location:
Main Office Owned $217,000 1984
122 East Washington
Ruibo, Iowa
Item 3. Legal Proceedings
The Company, 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 the Company holds
security interests, claims involving the making and servicing of real property
loans, and other issues incident to the business of the Banks. The resolution of
these proceedings should not have a material adverse effect on the Company.
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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 53 and 54 of the attached 1998 Annual Report to Stockholder is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 6 to 19 of the attached 1998 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
Pages 20 to 51 of the Company's 1998 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
<PAGE>
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 Banks who are not also directors contained in Part I of
this Form 10-KSB is incorporated herein by reference.
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, 1998, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with except Dean Edwards who failed to file one
required Form 4 which should have reported two transactions. These two
transactions have been timely reported on a Form 5.
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:
<TABLE>
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
- ---------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
3 (i) Articles of Incorporation and *
amendments thereto
(ii) Bylaws *
4 Instruments defining the rights of holders None
9 Voting Trust Agreement None
10 Material Contracts
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
</TABLE>
- ---------------------
* 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, 1998.
<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 28, 1998 By: /s/ Stan Carlson
-----------------------------------------------
Stan Carlson
President, Chief Executive Officer and Director
(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 Officer Rick R. Hofer, Chairman of the Board
of Director
Date: September 28, 1998 Date: September 28, 1998
/s/ Myron L. Graber /s/ Richard L. Weeks
- ------------------------------------ -------------------------------------
Myron L. Graber, Director Richard L. Weeks, Director
Date: September 28, 1998 Date: September 28, 1998
/s/ Mary Levy /s/ James D. Gorham
- ------------------------------------ -------------------------------------
Mary Levy, Director James D. Gorham, Director
Date: September 28, 1998 Date: September 28, 1998
/s/ J. Richard Wiley /s/ Leisha A. Linge
- ------------------------------------ -------------------------------------
J. Richard Wiley, Director Leisha A. Linge, Vice President,
Treasurer and Controller
(Principal Financial and Accounting
Officer)
Date: September 28, 1998 Date: September 28, 1998
/s/ Dean Edwards
- ------------------------------------
Dean Edwards, Director
Date: September 28, 1998
Exhibit 11
Washington Bancorp
Computation of Earnings per Common Share
Twelve Months ended
June 30, 1998
<TABLE>
Basic EPS Diluted EPS
-----------------------
<S> <C> <C>
Computation of weighted average number of
common shares outstanding:
Common shares outstanding at the beginning of the ......... 651,133 651,133
period
Unreleased common shares held by the Employee ............. (46,333) (46,333)
Stock Ownership Plan (ESOP) at the beginning
to the period
Weighted average common shares released by the ............ 2,010 2,010
ESOP during the period
Weighted average common shares outstanding - .............. -- 16,677
Stock Option Plan
Weighted average common shares to fund the ............... 45 45
Recognition and Retention Plan
Weighted average common shares purchased
for treasury ............................................. (3,266) (3,266)
--------- ---------
Weighted average number of common shares .................. 603,589 620,266
--------- ---------
Net income ................................................ $ 822,836 822,836
--------- ---------
Net income per common share ............................... $ 1.36 $ 1.33
========= =========
</TABLE>
WASHINGTON BANCORP
1998 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, 1998
(Dollars in Thousands)
Total assets ................................................ $94,327
Total loans, net ............................................ 65,885
Investment securities and other
earning assets ............................................ 23,584
Deposits .................................................... 66,595
Borrowings .................................................. 15,724
Net income .................................................. 823
Stockholders' equity ........................................ 10,971
Stockholders' equity as a percent of
assets .................................................... 11.63%
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of Washington
Bancorp will be held on October 20, 1998 at 4:00 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 18, 1998
Dear Fellow Stockholder,
It is with pleasure and pride that the Board of Directors, the
Officers and the Staff of Washington Bancorp and its subsidiaries, Washington
Federal Savings Bank and the Rubio Savings Bank present our third annual report.
In 1996, when this organization first became a public stock corporation, our
total assets were $60,890,943. When our year officially ended on June 30, 1998,
those assets had grown to $94,326,945.
This has been an exciting and enriching year with the addition of the
Rubio Savings Bank of Brighton with its assets of more than approximately $24
million to the Washington Bancorp family. The Rubio Bank is a state-chartered
bank which began back in 1906 in the little village of Rubio. As one of the few
banks to remain open throughout the Depression, the Bank moved its offices to
nearby Brighton in 1941, as that community had been without the services of any
Bank for more than a decade. This stable history links very nicely with that of
Washington Federal Savings Bank, which began in the dark days of banking, 1934,
when around 50 local citizens invested $100 apiece to be able to provide secure
savings and affordable loans to local citizens.
As the horizon opens ahead of us in fiscal 1999, Washington Federal is
in the process of finalizing plans to open branch Banks in the communities of
Wellman and Richland. At the time this letter was written the applications were
in the approval process with the Office of Thrift Supervision. Management
anticipates receiving approval in the fourth quarter of calendar year 1998. This
will spread the services and involvement of Washington Bancorp across Washington
County from north to south.
Our mission is to be a community involved financial institution that
provides diversified products and services. We try to be as friendly and helpful
as we can be in supporting our customers with their needs. This customer focused
attitude helps to build lasting relationships for years to come.
The Annual Report and the Annual Meeting are for you, our
stockholders, and we invite your participation and appreciate your support and
confidence. Our present Bancorp family consists of more than 400 individuals who
own our stock. We thank you for your support and confidence and look forward to
an exciting 1999.
Sincerely,
/s/ Stan Carlson
- -----------------
Stan Carlson
President & CEO
<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,
-----------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ....................................... $94,327 $64,875 $60,891 $55,100 $52,985
Loans receivable, net .............................. 65,885 52,530 40,906 40,435 37,461
Cash and cash equivalents .......................... 3,306 808 1,903 1,658 735
Investment securities .............................. 20,254 9,850 14,628 11,517 13,280
Investment in Federal Home Loan Bank ("FHLB") Stock 812 466 369 362 320
Goodwill, net ...................................... 1,375 -- -- -- --
Deposits ........................................... 66,595 44,754 44,176 42,950 43,872
Borrowed funds ..................................... 15,724 8,652 5,505 7,230 4,489
Stockholders' equity ............................... 10,971 10,675 10,548 4,400 4,141
</TABLE>
<TABLE>
Year Ended June 30,
-------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ................................... $6,034 $4,990 $4,207 $3,939 $3,854
Total interest expense .................................. 3,259 2,553 2,499 2,181 2,043
-------------------------------------------
Net interest income ................................... 2,775 2,437 1,708 1,758 1,811
Provision for loan losses ............................... 89 40 15 -- --
-------------------------------------------
2,686 2,397 1,693 1,758 1,811
Total noninterest income ................................ 320 231 197 138 209
Total noninterest expense ............................... 1,744 1,712 1,206 1,278 1,149
-------------------------------------------
Income before income taxes .............................. 1,262 916 684 618 871
Income tax expense ...................................... 439 351 243 259 291
-------------------------------------------
Net income .............................................. $ 823 $ 565 $ 441 $ 359 $ 580
===========================================
Earnings per common share:
Basic ................................................. $ 1.36 $ 0.92 $ 0.25* N/A N/A
-------------------------
Diluted ............................................... $ 1.33 $ 0.91 $ 0.25* N/A N/A
-------------------------
<FN>
* 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.
</FN>
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30,
------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------
<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) ........................... 1.06% 0.90% 0.78% 0.67% 1.14%
Interest rate spread information:
Average during period ............................. 2.95 3.09 2.55 3.04 3.44
End of period ..................................... 2.95 3.09 2.96 2.91 3.47
Net interest margin(1) ............................ 3.70 3.97 3.13 3.38 3.70
Ratio of operating expense to average total assets 2.24 2.72 2.15 2.38 2.27
Return on equity (ratio of net income to average . 7.56 5.34 6.94 8.41 15.06
equity)
Quality Ratios:
Non-performing assets to total assets at end of
period(2) ....................................... 0.09 0.35 0.07 0.54 0.39
Allowance for loan losses to non-performing loans . 435.99 98.52 475.00 68.81 98.07
Capital Ratios:
Equity to total assets at end of period ........... 11.63 16.45 17.32 7.99 7.82
Average equity to average assets .................. 13.99 16.80 11.31 7.96 7.60
Ratio of average interest-earning assets to average
interest-bearing liabilities ..................... 117.22 121.22 112.79 108.01 106.24
Number of full service offices 2 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's
compliance with its capital requirements at June 30, 1998.
Capital Level
OTS Requirement at June 30, 1998(1)
--------------- ----------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
--------------- ----------------------------
(Dollars in Thousands)
Capital Standard
Tangible Capital ......... 1.50% $1,048 9.65% $6,740 $5,692
Core Capital ............. 4.00% $2,795 9.65% $6,740 $3,945
Risk-based Capital ....... 8.00% $4,013 13.99% $7,017 $3,004
(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.
The following table sets forth Rubio Savings Bank's compliance with its capital
requirements at June 30, 1998.
Capital Level
Requirement at June 30, 1998(1)
-------------- --------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
-------------- --------------------------
(Dollars in Thousands)
Tier 1 or Leverage Capital .... 3.00% $ 698 10.76% $2,503 7.76%
Tier 1 Risk-based Capital ..... 4.00% 429 23.30 2,503 19.30
Risk-based Capital ............ 8.00% 859 24.15 2,594 16.15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Annual Report 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", and with its subsidiaries, the
"Company"), an Iowa corporation, became the holding company of Washington
Federal Savings Bank ("Washington Federal") on March 11, 1996. Washington
Federal is a federally chartered stock savings bank headquartered in Washington,
Iowa. On June 24, 1997, Washington entered into a merger agreement to acquire
Rubio Savings Bank of Brighton, Brighton, Iowa ("Rubio"). Rubio is held as a
separate subsidiary of Washington. In January 1998, Washington became a bank
holding company upon the completion of its acquisition of Rubio. The principal
assets of the Company are Washington Federal and Rubio (collectively, the
"Banks"). The Company presently has no separate operations and its business
consists only of the business of the Banks. All references to the Company,
unless otherwise indicated, at or before March 11, 1996 refer to Washington
Federal.
The earnings of the Company 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 the Company'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. The Company, 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, the Company'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 Washington Federal's service corporation. Non-interest expense consists
primarily of compensation and benefits, occupancy and equipment, federal
insurance premiums, data processing, and other operating expenses. The Company'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.
The Company'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 the Company's capital level in excess of regulatory
requirements; (ii) to maintain the Company's asset quality; (iii) to control
operating expenses; (iv) to maintain, and if possible, increase the Company's
interest rate spread and other income; and (v) to manage the Company's exposure
to changes in interest rates. The Company has attempted to achieve these goals
by focusing on originating first mortgage home loans, consumer loans and
commercial loans and by offering a full range of deposit products.
<PAGE>
Financial Condition
Total Assets. Total assets increased from $60.9 million at June 30,
1996 to $64.9 million at June 30, 1997 to $94.3 million at June 30, 1998. 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. The net increase from 1997 to 1998 was primarily due
to the acquisition of Rubio, with total assets of $25.1 million, as well as a
$5.5 million increase in Loans receivable, net partially offset by a $1.3
million decrease in investment securities.
Loans Receivable. Loans receivable, net increased from $42.9 million
at June 30, 1996 to $52.5 million at June 30, 1997 to $65.9 million at June 30,
1998. The increase from 1996 to 1997 was primarily due to increased loan demand
in the Company's market area. The increase from 1997 to 1998 was primarily due
to the acquisition of Rubio with the loans receivable, net of $7.8 million.
There was also a $5.5 million increase in loans receivable, net due to the
continued increase in loan demand in the Company's market area. The Company's
non-performing assets were $89,000 or .09% of total assets at June 30, 1998 as
compared to $229,000 or .35% of total assets at June 30, 1997. 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 increased 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 decreased 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.
Deposits increased $21.8 million or 48.7 % to $66.6 million, at June
30, 1998 from $44.8 million at June 30, 1997. Transaction and savings deposits
increased as a percentage of total deposits from $14.3 million or 32.0% at June
30, 1997 to $24.3 million or 36.4% at June 30, 1998. Certificates of deposit
decreased as a percentage of total deposits from $30.4 million or 68.0% at June
30, 1997 to $42.3 million or 63.6% at June 30, 1998. This decrease in percentage
was a result of the Rubio acquisition and their larger amount of commercial
checking accounts.
Stockholders' Equity. Stockholders' equity increased from $10.5
million at June 30, 1996 to $10.7 million at June 30, 1997 to $11.0 million at
June 30, 1998. 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 $349,000 in
payments for the repurchase of 26,300 shares of the Company's common stock and
dividends paid of $214,000. The increase from June 30, 1997 to June 30, 1998 was
primarily due to net income of $823,000, the allocation of shares in the
Employee Stock Ownership Plan of $72,000, the amortization of compensation under
the Recognition and Retention Plan of $67,000, the exercise of 1,096 shares of
common stock under the Stock Option Plan of $12,000, and the net reduction in
unrealized losses on available for sale securities of $3,000 partially offset by
$308,000 in payments for the repurchase of 16,500 shares of the Company's common
stock, dividends paid of $268,000, of redeemable common stock under the Employee
Stock Ownership Plan of $84,000 and the retirement of 1,096 shares of common
stock of $21,000. 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, 1998.
<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,
---------------------------------------------------------
1998 1997 1996
------------------------------ ---------------------------- ----------------------------
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) ..................... $59,089 $ 5,138 8.69% $47,538 $4,128 8.68% $41,329 $3,446 8.34%
Investment securities ................... 13,622 800 5.87 11,528 757 6.57 9,580 632 6.60
FHLB stock .............................. 596 40 6.77 411 29 7.01 366 26 7.10
Other interest-earning assets ........... 1,654 56 3.40 1,822 76 4.18 3,311 103 3.11
------------------ ---------------- -----------------
Total interest-earning assets(1)....... $74,961 $ 6,034 8.05 $61,299 $4,990 8.14 $54,586 $4,207 7.71
================== ================ =================
Interest-bearing liabilities:
Certificates of deposit ................. $35,753 $ 2,060 5.76 $30,682 $1,741 5.68 $30,658 $1,746 5.70
NOW, money market and passbook savings .. 16,508 558 3.38 13,226 472 3.57 12,955 496 3.83
Advances from borrowers for taxes and
insurance ............................. 167 2 1.02 155 2 1.02 163 2 1.52
FHLB advances ......................... 11,519 639 5.55 6,504 337 5.19 4,621 253 5.48
------------------ ---------------- -----------------
Total interest-bearing liabilities .... $63,947 $ 3,259 5.10 $50,567 $2,553 5.05 $48,397 $2,497 5.16
======= ================ =================
Net interest income ....................... $ 2,775 $2,437 $1,708
======= ====== ======
Net interest rate spread(2) ............... 2.95% 3.09% 2.55%
===== ===== =====
Net interest-earning assets ............... $11,014 $10,732 $ 6,189
======= ======= =======
Net yield on average interest-earnings
assets .................................. 3.70% 3.97% 3.13%
===== ===== =====
Average interest-earning assets to average
interest-earning liabilities ............ 117.22% 121.22% 112.79%
======= ======= =======
<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,
-------------------------
1998 1997 1996
-------------------------
Weighted average yield on:
Loans receivable ............................... 8.61% 8.55% 8.52%
Investment securities .......................... 5.94 6.61 6.87
Other interest-earning assets .................. 5.86 5.96 5.33
Combined weighted average yield on interest- ..... 7.93 8.21
earning assets .................................. 8.05
Weighted average rate paid on:
Passbook savings accounts ...................... 2.36 2.30 2.30
NOW accounts ................................... 2.32 2.29 2.30
Money market accounts .......................... 3.87 3.92 4.14
Certificates of deposit ........................ 5.73 5.74 5.67
Advances from borrowers for taxes & ............ 2.30 2.30
insurance ..................................... 2.30
FHLB advances .................................. 5.54 5.50 5.46
Combined weighted average rate paid on ........... 4.98 5.12
interest-bearing liabilities .................... 5.09
Spread ........................................... 2.95 3.09 2.96
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,
---------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------ -------------------------------
Increase (Decrease) Increase (Decrease)
Due To Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable ........................ $ 1,005 $ 5 $ 1,010 $ 536 $ 146 $ 682
Investment securities ................... 129 (86) 43 128 (3) 125
FHLB stock .............................. 12 (1) 11 3 -- 3
Other interest-earning assets ........... (7) (13) (20) (55) 28 (27)
-------------------------------------------------------------
Total interest-earning assets ............. $ 1,139 $ (95) $ 1,044 $ 612 $ 171 $ 783
-------------------------------------------------------------
Interest-bearing liabilities:
Certificates of Deposit .................. $ 294 $ 25 $ 319 $ 1 $ (6) $ (5)
NOW, money market, and passbook savings .. 112 (26) 86 10 (34) (24)
Advances from borrowers for taxes and
insurance ............................... -- (1) (1) -- (1) (1)
FHLB advances ........................... 277 25 302 98 (14) 84
-------------------------------------------------------------
Total interest-bearing
liabilities .............................. $ 683 $ 23 $ 706 $ 109 $ (55) $ 54
=============================================================
Net interest income ....................... $ 338 $ 729
======= =======
</TABLE>
<PAGE>
Comparison of Operating Results For The Years Ended June 30, 1998 And 1997
Performance Summary. Net income for the year ended June 30, 1998
increased by $258,000 or 45.7% to $823,000 from $565,000 for the year ended June
30, 1997. The increase was primarily due to an increase in net interest income
of $338,000 and an increase in non-interest income of $89,000, partially offset
by an increase in provision for loan losses of $49,000, and increase in
non-interest expense of $32,000 and an increase in income tax expense of
$89,000. For the years ended June 30, 1998 and 1997 the return on average assets
was 1.06% and .90%, respectively, while the return on average equity was 7.56%
and 5.34%, respectively.
Net Interest Income. For the year ended June 30, 1998, net interest
income increased by $338,000 to $2.7 million from $2.4 million for the year
ended June 30, 1997. Interest income increased $1.0 million to $6.0 million for
the year ended June 30, 1998 from $5.0 million for the year ended June 30, 1997
offset by a $706,000 increase in interest expense to $3.3 million for the year
ended June 30, 1998 from $2.6 million for the year ended June 30, 1997. The net
increase was primarily due to the increase in net interest-earning assets caused
by the acquisition of Rubio as well as a result of strong loan demand in the
Company's market area.
For the year ended June 30, 1998, the average yield on
interest-earning assets was 8.05% compared to 8.14% for the year ended June 30,
1997. The average cost of interest-bearing liabilities was 5.10% for the year
ended June 30, 1998 compared to 5.05% for the year ended June 30, 1997. The
average balance of interest-earning assets increased by $13.7 million to $75.0
million for the year ended June 30, 1998 from $61.3 for the year ended June 30,
1997. During the same time period, the average balance of interest-bearing
liabilities increased by $13.3 million to $63.9 million for the year ended June
30, 1998 from $50.6 million for the year ended June 30, 1997.
Due to the lower returns on interest-earnings assets and the higher
funding costs on interest-bearing liabilities, the average interest rate spread
was 2.95% for the year ended June 30, 1998 compared to 3.09% for the year ended
June 30, 1997. The average net interest margin was 3.70% for the year ended June
30, 1998 compared to 3.97% for the year ended June 30, 1997.
Provision for Loan Loss. For the year ended June 30, 1998, the
provision for loan loss increased $49,000 to $89,000 from $40,000 for the year
ended June 30, 1997. The primary reason for the provision was the increased size
of the loan portfolio, particularly in commercial loans which are considered to
carry a higher risk of default than residential loans, but do earn a higher rate
of return. The Company's loan portfolio remains primarily residential mortgage
loans and it has experienced a minimal amount of charge-offs in the past three
years. The allowance of loan losses of $388,000 or .59% of loans receivable, net
at June 30, 1998 is an increase, partially due to the acquisition of Rubio, when
compared to $226,000 or .43% of loans receivable, net at June 30, 1997. The
allowance for loan losses as a percentage of non-performing assets was 435.99%
at June 30, 1998 compared to 98.52% at June 30, 1997.
Management will continue to monitor its allowance for loan losses and
will make additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Company 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 nor that additional provisions for loan losses will not be
required in the future.
Non-interest Income. For the year ended June 30, 1998, non-interest
income increased $89,000 or 38.4% to $320,000 from $231,000 for the year ended
June 30, 1997. The increase was primarily due to a $92,000 increase in bank
service charges and fees, a $5,000 increase in gain on securities, available for
sale, and a $1,000 increase in loan origination and commitment fees, partially
offset by a $7,000 decrease in other non-interest income and a $2,000 decrease
in insurance commissions.
<PAGE>
Bank service charges and fees increased $92,000 to $209,000 for the
year ended June 30, 1998 from $117,000 for the year ended June 30, 1997. The
increase is primarily due to a $60,000 increase in overdraft fees, an $18,000
increase in checking account charges, a $5,000 increase in merchant discount
income, a $5,000 increase in late charges assessed, a $2,000 increase in safe
deposit rental, $1,000 increase in credit card fee income, and a $1,000 increase
in exchange fees. These increases are largely due to the acquisition of Rubio.
Gain on securities, available for sale increased $5,000 to $5,000 for the year
ended June 30, 1998 from $0 for the year ended June 30, 1997 due to the Company
taking an opportunity to realize gain on securities classified as available for
sale. Loan origination and commitment fee income increased $1,000 to $9,000 for
the year ended June 30, 1998 from $8,000 for the year ended June 30, 1997. Other
non-interest income decreased $7,000 to $21,000 for the year ended June 30, 1998
from $28,000 for the year ended June 30, 1997 due to a decrease in the gain
realized on foreclosed properties. Insurance commissions decreased $2,000 to
$76,000 for the year ended June 30, 1998 from $78,000 for the year ended June
30, 1997 due to the fluctuation in the volume of sales of credit life and
disability products.
Non-interest Expense. For the year ended June 30, 1998, non-interest
expense increased $32,000 or 1.9% from $1.7 million for the year ended June 30,
1997. The increase is primarily due to a $207,000 increase in compensation and
benefits, a $115,000 increase in other non-interest expense, a $33,000 increase
in occupancy and equipment, and a $5,000 increase in data processing expense
offset by a $328,000 decrease in deposit insurance premiums.
Compensation and benefits increased $207,000 to $929,000 for the year
ended June 30, 1998 from $722,000 for the year ended June 30, 1997. The increase
is primarily due to a $145,000 increase in employee salaries, a $24,000 increase
in employee insurance premiums, a $21,000 increase in retirement and Employee
Stock Option Plan expense, a $15,000 increase in bonuses accrued and incentives
paid for product promotion, a $7,000 increase in director's fees, and a $4,000
increase in employee travel and work expenses partially offset by a $5,000
decrease in the Recognition and Retention Plan expense and a $4,000 decrease in
credit life and disability broker fees. The increase is primarily due to an
increase in full-time equivalent employees as a result of the Rubio acquisition
and normal salary increases.
Other non-interest expense increased $115,000 to $503,000 for the year
ended June 30, 1998 from $388,000 for the year ended June 30, 1997. The increase
is primarily due to a $43,000 increase in the amortization of goodwill, a
$13,000 increase in office supplies, a $12,000 increase in postage and delivery
primarily due to special promotional mailings, an $11,000 increase in checking
account expenses due to a new checking account program, a $10,000 increase in
charges assessed by the FHLB of Des Moines, a $9,000 increase in advertising, a
$9,000 increase in ATM and debit card processing fees, an $8,000 increase in
appraisal and inspection fees, and an $8,000 increase in professional
organization dues partially offset by an $8,000 decrease in accounting and
auditing fees. Most of these changes resulted from the Rubio acquisition.
Occupancy and equipment expense increased $33,000 to $183,000 for the
year ended June 30, 1998 from $150,000 for the year ended June 30, 1997. The
increase is primarily due to a $9,000 increase in small asset purchases, a
$7,000 increase in the equipment repairs, a $5,000 increase in property tax
expense, a $4,000 increase in utilities, a $3,000 increase in office building
depreciation, a $3,000 increase in building maintenance expense, and a $2,000
increase in telephone expenses. Data processing expenses increased $5,000 to
$80,000 for the year ended June 30, 1998 from $75,000 for the year ended June
30, 1997 due to an additional services provided in relation to Year 2000
preparedness. It is important for financial institutions to assess their
computer and communications systems for their ability to process dates into the
20th Century. Washington Bancorp, Washington Federal and Rubio Savings Bank have
established technology teams that have been working on issues surrounding the
Year 2000 problem. The teams have completed the evaluation process, upgrading
when necessary the computers and computer-generated programs which directly
involve the Banks. They have contacted vendors and service providers asking that
they assess their technology systems and advise of their readiness. Bank
customers have received mailings and the Banks have utilized the local media to
increase public awareness of the issues. Testing the applications will be the
major focus of these teams in the upcoming months with a goal of test completion
by March 31, 1999.
Deposit insurance premiums decreased $328,000 to $49,000 for the year
ended June 30, 1998 from $377,000 for the year ended June 30, 1997. The decrease
is primarily due to the $294,000 one-time SAIF assessment for the year ended
June 30, 1997, and a $34,000 decrease in deposit insurance premiums.
<PAGE>
The deposits of Washington Federal are insured by the Savings
Association Insurance Fund "the "SAIF"), and the deposits of Rubio are insured
by the Bank Insurance Fund (the "BIF"). The two insurance funds are
administrated by the Federal Deposit Insurance Corporation (the "FDIC"). Prior
to September 1996, financial institutions which are members of the BIF had
experienced substantially lower deposit insurance premiums because the BIF had
achieved its required level of reserves, while the SAIF proir 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 the one-time special
assessment of 0.657% of deposits imposed on all SAIF insured institutions to
enable the SAIF to achieve its required levels of reserves. The assessment of
0.657% was assessed based on deposits as of March 31, 1995 and Washington
Federal's special assessment amounted to approximately $294,000. As a result of
the special assessment, Washington Federal's deposit insurance premium was
reduced to 0.065% from 0.23% of deposits previously paid by Washington Federal.
Rubio's deposit insurance premium is 0.012% of deposits.
Income Taxes. Income taxes increased $89,000 to $440,000 for the year
ended June 30, 1998 from $351,000 for the year ended June 30, 1997. The
effective income tax rates for the years ended June 30, 1998 and 1997 were 34.8%
and 38.3% respectively. The fluctuations in the effective income tax rate
relates primarily to the treatment of the Recognition and Retention expense for
income tax purposes.
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.
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 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.
<PAGE>
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 $11,000 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.
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, 1998 from $582,000 for the year ended June
30, 1998 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.
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.
Asset/Liability Management
One of the Company's principal financial objectives is to achieve
long-term profitability while reducing its exposure to fluctuations in interest
rates. The Company 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 the Company's assets by
originating loans with interest rates subject to periodic adjustment to market
conditions. Accordingly, the Company's primary one- to four-family loan product
has been a three year balloon loan accounting for $23.6 million of its $65.9
million loan portfolio, or 35.7% at June 30, 1998. Adjustable rate loans account
for $21.5 million of its $65.9 million loan portfolio, or 32.6% at June 30,
1998.
The Company 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.
<PAGE>
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. The Company, 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, 1998, is an analysis
of Washington Federal'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 Federal's NPV by $1.1 million or 14% and a 400 basis point
decrease in interest rates would increase Washington Federal's NPV by $779,000
or 10%. As previously mentioned, the OTS has informed Washington Federal that it
is not subject to the IRR component discussed above. Further, were Washington
Federal subject to the IRR component at June 30, 1998, 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 Washington Federal's NPV.
At June 30, 1998
- --------------------------------------------------------------------------------
NPV as % of
Net Portfolio Value PV of Assets
- ------------------------------------------------------- -------------------
Change in
Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in Thousands)
+400 bp 6,467 -1,054 -14% 9.56% -107bp
+300 bp 6,871 -649 -9% 10.03% -61bp
+200 bp 7,199 -321 -4% 10.38% -25bp
+100 bp 7,422 -98 -1% 10.59% -4bp
0 bp 7,520 10.63%
-100 bp 7,582 61 +1% 10.62% -1bp
-200 bp 7,700 180 +2% 10.68% +5bp
-300 bp 7,978 458 +6% 10.93% +30bp
-400 bp 8,299 779 +10% 11.22% +59bp
Management of interest sensitivity of Rubio has historically been
accomplished by matching the maturities of interest-earning assets and
interest-bearing liabilities. The following table illustrates the
asset/(liability) funding gaps for selected maturity periods as of June 30,
1998.
<TABLE>
Maturing Within
----------------------------------------------
0-6 6-12 1-2 2-3
Months Months Years Years Total
---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Loans receivable ...................................... $ 2,996 $ 3,002 $ 2,127 $ 4,221 $ 12,346
Securities ............................................ 2,145 1,858 3,381 1,907 9,291
---------------------------------------------------------
Total interest-earning assets ...................... 5,141 4,860 5,508 6,128 21,637
---------------------------------------------------------
Liabilities
Interest-bearing deposits ............................. 12,923 4,202 1,183 360 18,668
---------------------------------------------------------
Asset/(Liability) funding GAP ........................... (7,782) 658 4,325 5,768 2,969
---------------------------------------------------------
GAP ratio (assets/liabilities) .......................... 40% 116% 466% 1,702% 116%
</TABLE>
<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, the Company's primary loan products, the three-year
balloon and adjustable rate loans, may permit the Company 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
The Company'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 the Company is originating mortgage
loans to be held to maturity. For the fiscal years ended June 30, 1998, 1997 and
1996, the Company originated loans for its portfolio in the amount of $32.1
million, $28.2 million and $16.7 million, respectively. These activities were
funded primarily by FHLB borrowings and principal repayments of loans. FHLB
borrowings have been more costly than deposits, but less than other financing
sources available.
For investment and liquidity purposes, the Company 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.
Washington Federal 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 Washington Federal's policy to maintain its
liquidity portfolio in excess of regulatory requirements. Washington Federal's
liquidity ratios were 13.17%, 8.7% and 14.6% respectively, at June 30, 1998,
1997 and 1996.
Cash was generated by the Company's operating activities during the
years ended June 30, 1998, 1997 and 1996, 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,
amortization of goodwill, deferred income taxes and increases and decreases in
other assets and other liabilities. The primary investing activities of the
Company 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.
The Company's most liquid assets are cash and cash equivalents, which
include short-term investments. At June 30, 1998, 1997 and 1996, cash and cash
equivalents were $3.3 million, $808,000 and $1.9 million, respectively.
<PAGE>
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds
generally are invested in overnight deposits at the FHLB of Des Moines or
financial institutions. Should the Company require funds beyond its ability to
generate them internally, additional sources of funds are available through FHLB
of Des Moines advances. The Company would pledge its FHLB of Des Moines stock
and certain other assets as collateral for such advances. During fiscal 1998,
1997 and 1996, the Company 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.
At June 30, 1998, the Company had outstanding loan commitments of $3.2
million and undisbursed loans in process of $336,000. The Company 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, 1998 were $28.1 million. Based on past experience,
management believes that a significant portion of such deposits will remain with
the Company.
Under federal law, the Banks are required to meet certain tangible,
core and risk based capital requirements. For information regarding the
Company's regulatory capital compliance, see "Selected Consolidated Financial
Information."
Recent Accounting Developments
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 Company adopted
Statement 128 and the effect has not had a material impact on earnings per share
reported by the Company.
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 the Company's operations.
Nearly all the assets and liabilities of the Company are financial, unlike most
industrial companies. As a result, the Company's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Company'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 the Company'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 the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
<PAGE>
WASHINGTON BANCORP
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORT
JUNE 30, 1998
<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 subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended June 30, 1998. 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 audit 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 subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1998 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Cedar Rapids, Iowa
July 30, 1998
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and 1997
<TABLE>
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (Note 2):
Interest-bearing ............................................ $ 1,858,527 $ 574,736
Noninterest-bearing ......................................... 1,447,847 233,069
Investment securities (Notes 2 and 3):
Held to maturity ............................................ 1,131,478
Available-for-sale securities ............................... 19,122,283 9,849,991
Federal funds sold ............................................. 659,497
Loans receivable, net (Notes 4, 8 and 15) ...................... 65,884,941 52,530,153
Accrued interest receivable (Note 5) ........................... 959,663 568,228
Federal Home Loan Bank stock ................................... 812,400 465,600
Premises and equipment, net (Note 6) ........................... 799,806 550,231
Goodwill ....................................................... 1,375,087
Other assets ................................................... 275,416 103,026
--------------------------
Total assets ..................................... $94,326,945 $64,875,034
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
Liabilities
Deposits (Note 7) ........................................... $66,595,476 $44,754,328
Borrowed funds (Notes 3 and 8) .............................. 15,724,071 8,651,765
Advances from borrowers for taxes and insurance ............. 221,911 204,677
Accrued expenses and other liabilities ...................... 660,492 519,441
--------------------------
Total liabilities ................................ 83,201,950 54,130,211
--------------------------
Commitments and Contingencies (Note 13)
Redeemable Common Stock Held by Employee Stock
Ownership Plan (ESOP) (Note 9) .............................. 153,788 69,392
--------------------------
Stockholders' Equity (Note 12)
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 1998 651,133 shares; 1997 657,519 shares .......... 6,511 6,575
Additional paid-in capital .................................. 6,122,664 6,150,032
Retained earnings .......................................... 5,825,363 5,292,419
Unrealized (losses) on investment securities available
for sale, net of income taxes (Note 3) ................... (507) (3,307)
--------------------------
11,954,031 11,445,719
Less:
Cost of common shares acquired for the treasury
1998 16,127 shares; 1997 6,386 shares .................. (300,944) (85,827)
Deferred compensation (Note 9) ........................... (104,962) (151,739)
Maximum cash obligation related to ESOP shares (Note 9) .. (153,788) (69,392)
Unearned ESOP shares (Note 9) ............................ (423,130) (463,330)
--------------------------
Total stockholders' equity ....................... 10,971,207 10,675,431
--------------------------
Total liabilities and stockholders' equity ....... $94,326,945 $64,875,034
==========================
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable:
First mortgage loans ............... $ 3,738,973 $ 3,430,290 $ 2,987,869
Consumer and other loans ........... 1,398,734 697,384 458,102
Investment securities:
Taxable ............................ 847,215 840,485 713,988
Nontaxable ......................... 49,330 21,516 46,702
----------------------------------
Total interest income ...... 6,034,252 4,989,675 4,206,661
----------------------------------
Interest expense:
Deposits (Note 7) ..................... 2,619,618 2,215,768 2,246,017
Borrowed funds ........................ 639,162 337,405 252,657
----------------------------------
Total interest expense ..... 3,258,780 2,553,173 2,498,674
----------------------------------
Net interest income ........ 2,775,472 2,436,502 1,707,987
Provision for loan losses (Note 4) ....... 89,000 40,085 15,000
----------------------------------
Net interest income after
provision for loan losses 2,686,472 2,396,417 1,692,987
----------------------------------
Noninterest income:
Securities gains, net (Note 3) ........ 5,383 388 32,534
Loan origination and commitment fees .. 8,744 7,724 8,316
Service charges and fees .............. 209,127 117,241 84,512
Insurance commissions ................. 76,295 77,922 54,615
Other ................................. 20,404 27,893 17,026
----------------------------------
Total noninterest income ... 319,953 231,168 197,003
----------------------------------
Noninterest expense:
Compensation and benefits (Note 9) .... 929,224 722,087 581,896
Occupancy and equipment ............... 183,009 149,738 138,032
SAIF deposit insurance premium ........ 48,365 376,862 116,690
Data processing ....................... 79,507 75,196 80,076
Other ................................. 503,804 388,258 289,496
----------------------------------
Total noninterest expense .. 1,743,909 1,712,141 1,206,190
----------------------------------
Income before income taxes . 1,262,516 915,444 683,800
Income tax expense (Note 10) ............. 439,680 350,767 242,378
----------------------------------
Net income ................. $ 822,836 $ 564,677 $ 441,422
==================================
Earnings per common share (Note 11):
Basic ................................. $ 1.36 $ 0.92 $ 0.25
==================================
Diluted ............................... $ 1.33 $ 0.91 $ 0.25
==================================
Weighted average common shares for:
Basic earnings per share .............. 603,589 611,539 606,002
==================================
Diluted earnings per share ............ 620,266 617,602 606,002
==================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (NOTES 9, 12 AND 17)
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
Unrealized
(Losses) On
Investment Cost Of Unearned
Securities Common Maximum Shares,
Available Shares Cash Employee Total
Additional For Sale, Acquired Deferred Obligation Stock Stock-
Preferred Common Paid-In Retained Net of For the Compen- Related To Ownership holders'
Stock Stock Capital Earnings Income Taxes Treasury sation ESOP Shares Plan Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 .. $- - $ - - $ - - $4,500,027 $(99,871) $ - - $ - - $ - - $ - - $4,400,156
Net income ........... - - - - - - 441,422 - - - - - - - - - - 441,422
Issuance of 604,917
shares of common
stock .............. - - 6,049 6,043,121 - - - - - - - - - - - - 6,049,170
Expenses incurred
relating to conver-
sion to stock form . - - - - (396,477) - - - - - - - - - - - - (396,477)
Issuance of 52,602
shares of common
stock to ESOP
(Note 9) ........... - - 526 525,494 - - - - - - - - - - (526,020) - -
Allocation of ESOP
shares ............. - - - - 542 - - - - - - - - - - 21,690 22,232
Net change in unreal-
ized (losses) on
investment securities
available for sale,
net of income taxes . - - - - - - - - 31,662 - - - - - - - - 31,662
-------------------------------------------------------------------------------------------------
Balance, June 30, 1996 ... - - 6,575 6,172,680 4,941,449 (68,209) - - - - - - (504,330) 10,548,165
Net income ............ - - - - - - 564,677 - - - - - - - - - - 564,677
Dividends ($0.36 per
share) .............. - - - - - - (213,707) - - - - - - - - - - (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 ..... - - - - (38,703) - - - - 262,736 (224,033) - - - - - -
Amortization of
compensation under
stock awards program - - - - - - - - - - - - 72,294 - - - - 72,294
Allocation of ESOP
shares ............. - - - - 16,055 - - - - - - - - - - 41,000 57,055
Net change in unreal-
ized (losses) on
investment securities
available for sale,
net of income taxes.. - - - - - - - - 64,902 - - - - - - - - 64,902
Change related to ESOP
shares .............. - - - - - - - - - - - - - - (69,392) - - (69,392)
-------------------------------------------------------------------------------------------
<PAGE>
Unrealized
(Losses) On
Investment Cost Of Unearned
Securities Common Maximum Shares,
Available Shares Cash Employee Total
Additional For Sale, Acquired Deferred Obligation Stock Stock-
Preferred Common Paid-In Retained Net of For the Compen- Related To Ownership holders'
Stock Stock Capital Earnings Income Taxes Treasury sation ESOP Shares Plan Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 ... - - 6,575 6,150,032 5,292,419 (3,307) (85,827) (151,739) (69,392) (463,330) 10,675,431
Net income ............ - - - - - - 822,836 - - - - - - - - - - 822,836
Dividends ($0.44 per
share) .............. - - - - - - (267,925) - - - - - - - - - - (267,925)
Acquisition of 16,500
shares of common
stock stock for the
treasury ............ - - - - - - - - - - (307,938) - - - - - - (307,938)
Forfeiture of 1,754
shares under stock
awards program ...... - - - - 3,507 - - - - (23,240) 19,733 - - - - - -
Issuance of 2,127 shares
under stock awards
program ............. - - - - 10,051 - - - - 30,234 (40,285) - - - - - -
Retire 6,386 shares of
common stock from the
treasury ............ - - (64) (63,796) (21,967) - - 85,827 - - - - - - - -
Stock options exercised
for 1,096 shares .... - - 11 12,319 - - - - - - - - - - - - 12,330
Amortization of compen-
sation under stock
award program ....... - - - - - - - - - - - - 67,329 - - - - 67,329
Allocation of ESOP
shares .............. - - - - 31,501 - - - - - - - - - - 40,200 71,701
Acquisition of 1,096
shares of common
stock for retirement - - (11) (20,950) - - - - - - - - - - - - (20,961)
Net change in unreal-
ized (losses) on
investment securities
available for sale,
net of income taxes.. - - - - - - - - 2,800 - - - - - - - - 2,800
Change related to ESOP
shares .............. - - - - - - - - - - - - - - (84,396) - - (84,396)
------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 ... $- - $6,511 $6,122,664 $5,825,363 $ (507) $(300,944) $(104,962) $(153,788) $(423,130) $10,971,207
======================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
1997 1996 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income .................................................................. $ 822,836 $ 564,677 $ 441,422
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts on
debt securities ........................................................ 48,049 37,771 80,890
Amortization of goodwill ................................................. 43,341 - - - -
Provision for loan losses ................................................ 89,000 40,085 15,000
(Gain) on sale of investment securities .................................. (5,383) (388) (32,534)
(Gain) on sale of foreclosed real estate ................................. (10,573) (36,911) - -
Depreciation ............................................................. 70,548 56,620 68,847
Compensation under stock awards .......................................... 67,329 72,294 - -
ESOP contribution expense ................................................ 71,701 57,055 22,232
Deferred income taxes .................................................... (31,383) (16,798) 28,360
(Increase) in accrued interest receivable ................................ (87,398) (102,439) (44,527)
(Increase) decrease in other assets ...................................... (171,664) (27,718) 59,192
Increase (decrease) in accrued expenses and
other liabilities ...................................................... (140,901) 54,215 75,415
-------------------------------------------
Net cash provided by operating activities ....................... 765,502 698,463 714,297
-------------------------------------------
Cash Flows from Investing Activities
Held-to-maturity securities:
Maturities and calls ..................................................... 153,250 - - 166,988
Purchases ................................................................ (65,000) - - - -
Available-for-sale securities:
Sales .................................................................... 1,416,719 911 3,807,939
Maturities ............................................................... 12,054,554 11,238,648 2,556,485
Purchases ................................................................ (12,250,000) (6,395,000) (9,647,200)
Federal funds sold, net ..................................................... 527,272 - - - -
Purchase of Federal Home Loan Bank stock .................................... (346,800) (96,500) - -
Loans made to customers, net ................................................ (5,584,292) (9,627,628) (2,485,965)
Purchase of premises and equipment .......................................... (93,489) (63,245) (39,776)
Purchase of stock of Rubio Savings Bank of Brighton,
net of cash and cash equivalent received (Note 16) ....................... (2,466,021) - - - -
-------------------------------------------
Net cash (used in) investing activities .......................... (6,653,807) (4,942,814) (5,641,529)
-------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits .................................................... $ 1,881,828 $ 577,880 $ 1,226,649
Proceeds from Federal Home Loan Bank advances ............................... 50,450,000 98,650,000 16,820,000
Principal payments on Federal Home Loan Bank
advances ................................................................. (43,377,694) (95,502,977) (18,545,473)
Net increase in advances from borrowers for taxes
and insurance ............................................................ 17,234 (13,829) 18,672
Proceeds from issuance of common stock ...................................... 12,330 - - 6,049,170
Acquisition of common stock ................................................. (328,899) (348,563) - -
Dividends paid .............................................................. (267,925) (213,707) - -
Payments for expenses incurred relating to
conversion to stock form ................................................. - - - - (396,477)
-------------------------------------------
Net cash provided by financing activities ....................... 8,386,874 3,148,804 5,172,541
-------------------------------------------
Net increase (decrease) in cash and
cash equivalents ........................................... 2,498,569 (1,095,547) 245,309
Cash and cash equivalents:
Beginning ................................................................... 807,805 1,903,352 1,658,043
-------------------------------------------
Ending ...................................................................... $ 3,306,374 $ 807,805 $ 1,903,352
===========================================
<PAGE>
1997 1996 1998
- -------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors .............................................. $ 2,562,216 $ 2,225,796 $ 2,241,023
Interest paid on other obligations ....................................... 639,162 337,405 252,657
Income taxes, net of refunds ............................................. 684,779 288,713 99,356
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate .............................. $ 110,427 $ 106,289
Contract sales of foreclosed real estate .................................... 121,000 143,200
Stock issued under stock awards program ..................................... 40,285 262,736
Acquisition of assets and liabilities from Rubio Savings Bank of Brighton
(Note 16):
Assets acquired:
Cash and cash equivalents .............................................. $ 2,331,668
Federal funds sold ..................................................... 1,186,769
Investment securities, held to maturity ................................ 1,221,156
Investment securities, available for sale .............................. 10,530,323
Loans .................................................................. 7,848,923
Premesis and equipment ................................................. 226,634
Goodwill ............................................................... 1,418,428
Other assets ........................................................... 304,762
------------
25,068,663
Liabilities assumed:
Deposits ............................................................... (19,959,320)
Other liabilities ...................................................... (311,654)
------------
Cash purchase price ...................................................... $ 4,797,689
============
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 SUBSIDIARIES
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 17 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 ("Washington") and Rubio Savings Bank of Brighton ("Rubio") and
collectively known as (the "banks"), and Washington Federal Savings Bank's
wholly-owned subsidiary, Washington Financial Services, Inc., which is a
discount brokerage firm. The activity of Washington Financial Services Inc., 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.
Acquisition of a business: On January 15, 1998, Washington Bancorp purchased all
of the outstanding stock of Rubio in a transaction accounted for as a purchase.
Investment in debt securities: 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.
FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that management determine the appropriate classification
of securities at the date individual investment securities are acquired, and
reassesses the appropriateness of such classification 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.
<PAGE>
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.
Pursuant to a FASB Special Report, "A Guide to Implementation of Statement No.
115 on Accounting for Certain Investments in Debt and Equity Securities,"
Washington 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 Banks' 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.
Loans are considered impaired when, based on all current information and events,
it is probable the Banks 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 on 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.
Goodwill: Goodwill resulting from the Company's acquisition of Rubio is being
amortized by the straight-line method over 15 years. Goodwill is periodically
reviewed for impairment based upon an assessment of future operations to ensure
that it is appropriately valued.
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.
<PAGE>
Earnings per common share: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share." Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic per-share amounts are computed by dividing net
income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock unless the effect is to
reduce the loss or increase the income per common share from continuing
operations. 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. The Company initially applied Statement No. 128 for the year ended June
30, 1998 and has restated all per share information for the prior years to
conform to Statement No. 128.
Unearned ESOP shares and expense: The unearned ESOP shares have been treated as
a reduction of equity. This amount is reduced as the ESOP shares are allocated.
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.
Federal funds sold: The carrying amounts reported in the balance sheet for
federal funds sold approximate their values.
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.
<PAGE>
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: In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," both of which are required to be adopted for fiscal years
beginning after December 15, 1997. SFAS No. 130 will require the Company to
report in its financial statements all nonowner related changes in equity for
the periods being reported. SFAS No. 131 will require the Company to disclose
revenues, earnings, and other financial information pertaining to the business
segments by which the Company is managed, as well as what factors management
used to determine these segments. The Company is currently evaluating the
requirements of SFAS No. 130 and 131 to determine how to present the required
information in its financial statements and related disclosures.
Note 2. Restrictions on Cash Due from Banks and Investments
Washington 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, 1998. In addition, Washington is required to maintain a
minimum balance of unpledged cash and investment securities totaling
approximately $1,831,000 as of June 30, 1998 to provide liquidity for deposits.
Note 3. Investment Securities
The amortized cost and fair value of investment securities available for sale as
of June 30, 1998 and 1997 are as follows:
<TABLE>
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
1998
------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities ........................... $ 6,329,349 $ 9,417 $ (1,857) $ 6,336,909
U. S. Government agencies ........................... 6,774,264 2,778 (6,582) 6,770,460
Corporations and other .............................. 5,621,549 1,379 (6,776) 5,616,152
State and political subdivisions .................... 347,500 735 - - 348,235
Mortgage-backed securities,
FHLMC certificates ............................... 50,432 95 - - 50,527
------------------------------------------------------
$19,123,094 $ 14,404 $ (15,215) $19,122,283
======================================================
1997
------------------------------------------------------
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,
FHLMC certificates ............................... 148,737 - - (8,666) 140,071
------------------------------------------------------
$ 9,855,282 $ 13,041 $ (18,332) $ 9,849,991
======================================================
</TABLE>
<PAGE>
The amortized cost and fair value of investment securities held to maturity are
as follows:
<TABLE>
1998
------------------------------------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------------
<S> <C> <C> <C> <C>
State and political subdivisions ........ $1,131,478 $ - - $ - - $1,131,478
=================================================
</TABLE>
The amortized cost and fair value of debt securities as of June 30, 1998 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.
<TABLE>
Amortized Fair
Cost Value
------------------------
<S> <C> <C>
Available for sale:
Due in one year or less ......................................................... $ 7,701,172 $ 7,704,078
Due after one year through five years ........................................... 8,286,106 8,289,775
Due after five years through ten years .......................................... 3,085,384 3,077,903
Mortgage-backed securities, FHLMC certificates .................................. 50,432 50,527
------------------------
19,123,094 19,122,283
------------------------
Held to maturity:
Due in one year or less ......................................................... 322,677 322,677
Due after one year through five years ........................................... 648,801 648,801
Due after five years through ten years .......................................... 160,000 160,000
------------------------
1,131,478 1,131,478
------------------------
$20,254,572 $20,253,761
========================
</TABLE>
Investment securities with a carrying amount of $3,302,984 and $3,306,610 at
June 30, 1998 and 1997, respectively, were pledged as collateral on public
deposits. Investment securities with a carrying amount of none and $4,801,396 at
June 30, 1998 and 1997, respectively, were pledged as collateral on FHLB
advances.
Securities gains (losses) for the years ended June 30, 1998, 1997 and 1996 are
as follows:
1998 1997 1996
--------------------------------
Realized gains ............... $ 5,383 $ 388 $ 91,644
Realized (losses) ............ - - - - (59,110)
--------------------------------
$ 5,383 $ 388 $ 32,534
================================
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.
<PAGE>
Note 4. Loans Receivable
Loans receivable are summarized as follows:
June 30,
-------------------------
1998 1997
-------------------------
First mortgage loans (principally conventional):
Secured by one-to-four family residences ....... $45,302,569 $40,695,861
Home equity and second mortgage ................ 1,164,377 1,232,736
Multifamily and commercial real estate ......... 7,411,209 4,775,465
Construction loans ............................. 152,143 693,766
Other .......................................... - - 98,653
-------------------------
Total mortgage loans ................ 54,030,298 47,496,481
Commercial loans .................................. 8,163,641 2,715,020
Consumer and other loans:
Automobile ..................................... 3,064,531 1,899,763
Other .......................................... 1,014,505 644,539
-------------------------
Total loans ......................... 66,272,975 52,755,803
Less allowance for loan losses ................. 388,034 225,650
-------------------------
$65,884,941 $52,530,153
=========================
Loans receivable are net of loans in process of $335,835 and $500,182 as of June
30, 1998 and 1997, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1998 1997 1996
----------------------------
Balance, beginning ............................. $225,650 $209,394 $203,074
Balance of the allowance for loan losses of
Rubio at date of acquisition .............. 105,174 - - - -
Provision charged to expense ................ 89,000 40,085 15,000
Charge-offs ................................. (46,428) (33,841) (13,574)
Recoveries .................................. 14,638 10,012 4,894
----------------------------
Balance, ending ................................ $388,034 $225,650 $209,394
============================
The Banks have no loans receivable at June 30, 1998 and 1997 that they consider
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:
1998 1997
-------------------
Investment securities ............................ $206,974 $ 94,470
Loans receivable ................................. 752,689 473,758
-------------------
$959,663 $568,228
===================
Note 6. Premises and Equipment
Premises and equipment consisted of the following at June 30:
1998 1997
----------------------
Land ................................................ $ 83,080 $ 83,080
Building ............................................ 724,357 504,357
Furniture, fixtures and equipment ................... 682,322 603,503
----------------------
1,489,759 1,190,940
Less accumulated depreciation ....................... 689,953 640,709
----------------------
$ 799,806 $ 550,231
======================
<PAGE>
Note 7. Deposits
Deposits at June 30 are as follows:
<TABLE>
Weighted
Average
Rate At 1998 1997
June 30, ------------------------ --------------------------
1998 Amount Percent Amount Percent
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-bearing
deposits 1998 $2,768,561;
1997 $1,401,119 1.25% $ 8,246,486 12.4% $ 3,094,048 6.9%
Money market 3.92 10,472,641 15.7 9,044,368 20.2
Passbook savings 3.50 5,537,316 8.3 2,181,904 4.9
--------------------------------------------------------
24,256,443 36.4 14,320,320 32.0
--------------------------------------------------------
Certificates of deposit:
2.01% to 3% 2.43 155,246 0.2 - - - -
3.00% to 4% - - - - - - 12,525 - -
4.01% to 5% 4.73 2,550,322 3.8 2,205,090 4.9
5.01% to 6% 5.74 32,583,131 48.9 23,247,461 51.9
6.01% to 7% 6.18 7,050,334 10.7 4,968,932 11.2
-----------------------------------------------------
42,339,033 63.6 30,434,008 68.0
-----------------------------------------------------
4.71 $66,595,476 100.0% $44,754,328 100.0%
=====================================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $6,329,000 and $1,248,000 at June 30,
1998 and 1997, respectively. Deposits in excess of $100,000 are not insured by
the FDIC.
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
Year Ending June 30,
------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2% to 3% $ 155,246 $ $ $ $ $ 155,246
4.01% to 5% 2,534,198 16,124 2,550,322
5.01% to 6% 24,447,499 5,957,285 1,487,447 391,409 299,491 32,583,131
6.01% to 7% 977,181 841,335 5,200,897 30,921 7,050,334
------------------------------------------------------------------------------------
$ 28,114,124 $ 6,814,744 $ 6,688,344 $ 422,330 $ 299,491 $ 42,339,033
====================================================================================
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1998 1997 1996
------------------------------------
Money market ................... $ 360,080 $ 384,112 $ 399,720
Passbook savings ............... 116,880 53,293 63,349
NOW ............................ 82,454 36,907 36,856
Certificates of deposit ........ 2,060,204 1,741,456 1,746,092
------------------------------------
$2,619,618 $2,215,768 $2,246,017
====================================
<PAGE>
Note 8. Borrowed Funds
Borrowed funds at June 30 are as follows:
<TABLE>
1998 1997
-------------------------
<S> <C> <C>
Short-term advances from the Federal Home Loan Bank ...... $ 9,596,975 $ 1,750,000
Long-term advances from the Federal Home Loan Bank ....... 6,127,096 6,901,765
-------------------------
$15,724,071 $ 8,651,765
=========================
</TABLE>
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, $8,000,000 of the advances are
callable 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, 1998 have maturity dates as follows:
Year Ending June 30
June 30 Interest Rate 1998
- --------------------------------------------------------------------------------
1999 4.79% to 6.33% $ 9,773,971
2000 5.74% to 6.33% 937,921
2001 5.31% to 6.33% 1,199,521
2002 5.74% to 6.33% 211,838
2003 5.41% to 6.33% 724,916
Thereafter 5.74% to 6.33% 2,875,904
-----------
$15,724,071
===========
Note 9. Employee Benefit Plans
Employee Stock Ownership Plan: The Company has established an Employee Stock
Ownership Plan (ESOP) for eligible employees. The Company has financed the
ESOP's purchase of the Company's stock and, therefore, the ESOP is considered to
be internally leveraged. Employees 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 Company 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 $68,865 and $56,620 for the years ended June 30, 1998 and 1997,
respectively.
<PAGE>
Shares of common stock held by the ESOP at June 30, 1998 and 1997 are as
follows:
1998 1997
-------------------
Allocated shares .............................. 8,202 4,337
Shares released for allocation ................ 2,087 1,932
Unreleased (unearned) shares .................. 42,313 46,333
-------------------
52,602 52,602
===================
Fair value of unreleased (unearned) shares .... $785,329 $741,328
===================
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. For the years ended June 30, 1998 and 1997, $2,503 and none,
respectively, was charged to expense.
Defined contribution plan:
Rubio has a defined contribution retirement plan covering substantially all of
its employees. Contributions, which are 10% of each covered employee's
compensation, totaled $5,961 for the year ended June 30, 1998.
Stock-based compensation plans: At June 30, 1998, 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 share would have been reduced to the
pro forma amounts shown below:
Year Ended June 30,
----------------------------
1998 1997 1996
----------------------------
Pro forma net income ................. $781,465 $534,323 N/A
Pro forma earnings per share:
Basic ............................. 1.29 0.87 N/A
Diluted ........................... 1.26 0.87 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 1998 and 1997: dividend rates of 1.9% and 3.2%; price
volatility of 8.25% and 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
Granted .................................. 2,818 18.94
Exercised ................................ (1,096) 11.25
Forfeited ................................ (4,383) 11.25
-------
Outstanding at June 30, 1998 .................. 47,121 11.71
=======
1998 1997 1996
------------------------
Weighted-average fair value per option of
options granted during the year ............. $ 3.27 1.82 N/A
========================
Other pertinent information related to the options outstanding at June 30, 1998
is as follows:
Remaining
Number Exercise Contractual Number
Outstanding Price Life Exercisable
- --------------------------------------------------------
44,303 $11.25 11 Years 8,863
2,818 18.94 12 Years - -
- ------------------------------ --------
47,121 $11.71 8,863
============================== ========
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, 1998 and 1997, awards were granted for 2,127
shares and 19,914 shares with a fair value of $18.94 and $11.25 per share at the
date of the grant, respectively.
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 years ended June 30, 1998 and 1997 totaled $67,329 and $72,294,
respectively. Shares of common stock are issued upon vesting.
<PAGE>
Note 10. Income Taxes
Net deferred income tax liabilities consist of the following components as of
June 30, 1998 and 1997:
1998 1997
-------------------
Deferred tax assets:
Unrealized loss on investment securities
available for sale ........................... $ 304 $ 1,984
Accrued compensation ............................ 24,301 26,966
Allowance for loan losses ....................... 122,762 84,167
---------------------
147,367 113,117
---------------------
Deferred tax liabilities:
Recapture of allowance for loan losses .......... 136,541 156,048
FHLB stock dividends ............................ 44,067 44,067
Premises and equipment .......................... 77,420 7,908
Accrued expenses ................................ 48,408 - -
Other ........................................... 39,780 10,893
---------------------
346,216 218,916
---------------------
Net deferred tax liability included in
other liabilities ............... $(198,849) $(105,799)
=====================
The net change in the deferred income taxes is reflected in the financial
statements for the years ended June 30, 1998, 1997 and 1996 as follows:
<TABLE>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Statement of income ............................................. $ 31,383 $ 16,798 $ (28,360)
Statement of stockholders' equity* .............................. (1,680) (38,942) (18,996)
Deferred taxes related to acquisition of Rubio .................. (122,753)
---------------------------------
$ (93,050) $ (22,144) $ (47,356)
=================================
</TABLE>
* 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, 1998, 1997 and 1996 consisted of the following:
1998 1997 1996
-------------------------------
Current ................................... $471,063 $367,565 $214,018
Deferred .................................. (31,383) (16,798) 28,360
-------------------------------
$439,680 $350,767 $242,378
===============================
<PAGE>
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, 1998, 1997 and 1996 due to the following:
<TABLE>
Years Ended June 30,
----------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
expense $441,881 35.0% $320,405 35.0% $239,330 35.0%
Tax-exempt interest (26,760) (2.1) (9,833) (1.1) (16,346) (2.4)
State income taxes, net of
federal benefit 37,811 3.0 32,271 3.5 20,287 2.9
Other, net (13,252) (1.1) 7,924 0.9 (893) (0.1)
-----------------------------------------------------------------
$439,680 34.8% $350,767 38.3% $242,378 35.4%
=================================================================
</TABLE>
Note 11. Earnings Per Share
In compliance with Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," issued in February 1997, the Company has changed its
method of computing earnings per share effective with the third quarter of
fiscal 1998. All prior periods presented have been restated to conform to the
new requirements which exclude contingently issuable shares and the dilutive
effect of stock options from the number of weighted average shares used in the
computation of basic earnings per share. The effect of Statement No. 128 on
diluted earnings per share is immaterial compared to previously disclosed fully
diluted earnings per share. Basic and diluted earnings per share are calculated
as follows:
<TABLE>
Year Ended June 30,
-----------------------------
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common stockholders, basic ..... $822,836 $564,677 $150,832*
==============================
Weighted average shares outstanding, basic ............. 603,589 611,539 606,002
==============================
Basic earnings per share ............................... $ 1.36 $ 0.92 $ 0.25
==============================
Diluted earnings per share:
Net income available to common shareholders, diluted
(Note 1) ............................................ $822,836 $564,677 $150,832
==============================
Weighted average shares outstanding, basic ............. 603,589 611,539 606,002
Effect of dilutive securities, employee stock options 16,677 6,063 - -
------------------------------
Weighted average shares outstanding, diluted ........... 620,266 617,602 606,002
==============================
Diluted earnings per share ............................. $ 1.33 $ 0.91 $ 0.25
==============================
<PAGE>
<FN>
* 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.
</FN>
</TABLE>
Note 12. Regulatory Capital Requirements
The ability of the Company to pay dividends to its shareholders is dependent
upon dividends paid by its subsidiary banks.
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. Risk-based capital
standards have requirements for a minimum Tier 1 capital to assets ratio
(leverage ratio). In addition, regulatory agencies consider the published
capital levels as minimum levels and may require a financial institution to
maintain capital at higher levels.
A comparison of the Banks' capital as of June 30, 1998 with the minimum
requirements is presented below:
Actual
---------- Minimum
Washington Requirements
--------------------------
Tangible capital ........................... 9.65% 1.5%
Risk-based capital ......................... 13.99 8.0
Core capital ............................... 9.65 4.0
According to the Office of Thrift Supervision ("OTS"), Washington is considered
to be "well capitalized."
Actual
------ Minimum
Rubio Requirements
---------------------
Tier 1 risk-based capital ...................... 23.30% 4.0%
Total risk-based capital ....................... 24.15 8.0
Leverage ratio ................................. 10.76 3.0
According to FDIC capital guidelines, Rubio is considered to be "well
capitalized."
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. Under these
restrictions, the Company's subsidiary banks may not pay dividends that would
result in its capital levels being reduced below the minimum requirements shown
above.
Note 13. Commitments and Contingencies
Financial instruments with off-balance sheet risk: The Banks are 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 Banks' 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 Banks
use the same credit policies in making commitments and conditional obligations
as they do for on-statement of financial condition instruments.
<PAGE>
Unless noted otherwise, the Banks require 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 ........................................... $2,153,777
Consumer and other loans ....................................... 1,054,642
----------
$3,208,419
==========
The above commitments are to make fixed rate loans with a June 30, 1998 weighted
average interest rate of 8.55%.
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 Banks evaluate each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks, 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 Banks' lending activity is with
customers located within the state. The Banks generally originate single-family
residential loans within its primary lending area of southeastern Iowa. The
Banks' 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
Banks are also active in originating secured consumer loans to its customers,
primarily automobile and home equity loans. As of June 30, 1998, the Banks have
approximately $7,512,000 of agriculturally dependent loans.
Year 2000 plans: Information technology experts believe that many data
processing application systems could fail or improperly perform as a result of
erroneous calculation or data integrity problems if they are unable to process
date information beyond December 31, 1999, an issue known as Year 2000. The
Company is heavily dependent upon computer processing and has addressed this
issue by the near completion of an assessment of its information systems. The
Company's plan is to complete the testing and validation and certification for
the more critical functions. The Company anticipates it will incur approximately
$85,000 of capital expenditures over the next two years to replace and upgrade
hardware and software and will verify that the acquisitions are compliant. For
other applications, it will complete its assessment, testing, and validation
processes with internal resources.
Note 14. Fair Value of Financial Instruments
The fair value of financial instruments at June 30, 1998 and 1997 are as
follows:
1998 1997
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
Financial assets:
Cash and cash equivalents $ 3,306,374 $ 3,306,374 $ 807,805 $ 807,805
Investment securities:
Held to maturity ..... 1,131,478 1,131,478
Available-for-sale ... 19,122,283 19,122,283 9,849,991 9,849,991
Federal funds sold ...... 659,497 659,497
Loans ................... 65,884,941 65,763,645 52,530,153 52,593,286
Financial liabilities:
Deposits ................ 66,595,476 67,042,333 44,754,328 45,985,031
Borrowed funds .......... 15,724,071 15,662,707 8,651,765 8,580,789
Face Face
Amount Amount
---------------------------------------------
Off-balance sheet instruments ... $3,208,419 $ - - $2,050,182 $ - -
<PAGE>
Note 15. Transactions with Related Parties
The Banks have 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,
-----------------------
1998 1997
-----------------------
Balance, beginning .............................. $ 602,041 $ 899,503
Loans to directors and officers of Rubio
at date of acquisition ..................... 259,097 - -
New loans .................................... 387,281 377,840
Repayments ................................... (456,593) (675,302)
-----------------------
Balance, ending ................................. $ 791,826 $ 602,041
=======================
Maximum balance during the year ................. $1,219,418 $1,153,058
=======================
Note 16. Acquisition of a Business
Effective January 15, 1998, the Company acquired for cash all of the outstanding
shares of Rubio. The total acquisition cost was $4,797,689. The excess of the
acquisition cost over the fair value of the net assets acquired was $1,418,428
and is being amortized over fifteen years by the straight-line method. The
acquisition was accounted for as a purchase and the results of operations since
the date of the acquisition are included in the Company's statement of income.
Unaudited proforma net income and earnings per share for 1998, 1997 and 1996, as
though Rubio had been acquired as of July 1, 1995, are not significantly
different than the reported amounts of the Company.
Note 17. Reorganization and Conversion to Stock Ownership
On September 7, 1995, the Board of Directors of Washington 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
Washington 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. Washington concurrently issued one share of common stock to the
holding company representing 100% of the common stock of Washington 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
Washington, continue to have such rights solely with respect to the mutual
savings bank after the reorganization.
<PAGE>
Note 18. 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, 1998 and 1997
<TABLE>
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash ............................................................................... $ 458,809 $ 1,886,565
Investment in subsidiary bank, at cost plus equity in
undistributed earnings .......................................................... 10,616,841 8,762,017
Other assets ....................................................................... 67,288 109,846
--------------------------
$11,142,938 $10,758,428
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Liabilities, accrued expenses and other liabilities ................................ $ 17,943 $ 13,605
--------------------------
Redeemable common stock held by Employee Stock
Ownership Plan (ESOP) ........................................................... 153,788 69,392
--------------------------
Stockholders' equity:
Preferred stock
Common stock .................................................................... 6,511 6,575
Additional paid-in capital ...................................................... 6,122,664 6,150,032
Retained earnings ............................................................... 5,825,363 5,292,419
Unrealized (losses) on investment securities available
for sale of bank subsidiaries, net ........................................... (507) (3,307)
--------------------------
11,954,031 11,445,719
Less:
Cost of common shares acquired for the treasury
1998 16,127 shares; 1997 6,386 shares ...................................... (300,944) (85,827)
Deferred compensation ........................................................ (104,962) (151,739)
Maximum cash obligation related to ESOP shares ............................... (153,788) (69,392)
Unearned shares, Employee Stock Ownership Plan ............................... (423,130) (463,330)
--------------------------
10,971,207 10,675,431
--------------------------
$11,142,938 $10,758,428
==========================
</TABLE>
WASHINGTON BANCORP
STATEMENTS OF INCOME
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries ............................. $2,800,000 $ - - $ - -
Interest income ......................................... 5,666 5,693 35,027
Miscellaneous income .................................... 25 - - - -
Miscellaneous expense ................................... (60,593) (65,600) (30)
--------------------------------------
Income (loss) before equity in
subsidiaries' undistributed
income and taxes on income ............ 2,745,098 (59,907) 34,997
Equity in undistributed net income (loss) of subsidiaries (1,945,071) 604,285 420,075
--------------------------------------
Income before taxes on income ............. 800,027 544,378 455,072
Federal and state income taxes (credits) ................ (22,809) (20,299) 13,650
--------------------------------------
Net income ................................ $ 822,836 $ 564,677 $ 441,422
======================================
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ................................................... $ 822,836 $ 564,677 $ 441,422
Adjustments to reconcile net income to net cash
provided by operations:
Equity in net income of subsidiaries ...................... (854,929) (604,285) (420,075)
(Increase) in other assets ................................ 114,853 (74,818) (35,028)
Increase in accrued expenses and other liabilities ........ 4,338 (47,858) 61,463
--------------------------------------
Net cash provided by (used in) operating activities 87,098 (162,284) 47,782
--------------------------------------
Cash Flows from Investing Activities
Dividends received from subsidiaries ......................... 2,800,000 - - - -
Return of equity from subsidiaries ........................... 1,000,000 - - - -
Purchase of available-for-sale securities .................... (500,000) - - - -
Acquisition of stock in subsidiary ........................... (3,089,356) - - - -
Maturity of available-for-sale securities .................... 500,000 - - - -
Purchase of stock of Rubio ................................... (4,797,689) - - - -
--------------------------------------
Net cash provided by (used in) investing activities (997,689) 500,000 (3,589,356)
--------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of shares of common stock ............. 12,330 - - 6,049,170
Payments of expenses incurred related to conversion
of stock form ............................................. - - - - (396,477)
Payments received from subsidiary for compensation
under stock awards ........................................ 67,329 - - - -
Acquisition of common stock .................................. (328,899) (348,563) - -
Dividends paid ............................................... (267,925) (213,707) - -
--------------------------------------
Net cash provided by (used in) financing activities (517,165) (562,270) 5,652,693
--------------------------------------
Increase (decrease) in cash ....................... (1,427,756) (224,554) 2,111,119
Cash balance:
Beginning .................................................... 1,886,565 2,111,119 - -
--------------------------------------
Ending ....................................................... $ 458,809 $1,886,565 $2,111,119
======================================
Supplemental Disclosures
Cash payments for income taxes, net of payments
payments from subsidiary .................................. $ 148,806 $ 129,458 $ - -
</TABLE>
<PAGE>
WASHINGTON BANCORP
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Stan Carlson Rick R. Hofer
President and Chief Executive Chairman of the Board, Washington
Officer, Washington and Washington and Washington Federal
Federal Employee, Sitler Electric Supply
James D. Gorham Mary Levy
Sales 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 Dean Edwards
Owner, Wiley Computers President and Chief Executive
Officer,
Rubio Savings Bank
Executive Officers
Stan Carlson Leisha Linge
President and Chief Executive Officer Treasurer and Principal Financial
Officer
Jeff Johnson
Vice President
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
The Company is an Iowa corporation which was organized in 1995 by
Washington Federal for the purpose of becoming a thrift institution holding
company. Washington Federal was organized in 1934 and converted to a federal
savings bank in 1994. In March 1996, Washington Federal converted to the stock
form of organization and concurrently became the wholly-owned subsidiary of
Washington through the sale and issuance of common stock. Rubio was acquired in
January 1998. The principal assets of the Company are the outstanding stock of
the Banks, its wholly owned subsidiaries. The Company presently has no separate
operations and its business consists only of the business of the Banks. The
Banks' 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.
Washington Federal Savings Bank Washington Federal Savings Bank
Main Office Drive-thru Office
102 East Main Street 220 East Washington Street
Washington, Iowa Washington, Iowa
Rubio Savings Bank
Main Office
122 East Washington Street
Brighton, Iowa
Independent Auditors Local Counsel
McGladrey & Pullen, LLP Tindal, Erdahl, Goddard & Nestor, PLC
Town Centre, Suite 300 Attorneys at Law
221 Third Avenue, SE 305 West Main Street - Suite A
Cedar Rapids, Iowa 52401 Washington, Iowa 52353
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cranford, New Jersey Washington, D.C. 20005
Form 10-KSB Report
A copy of the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1998 including financial statements, as filed with the SEC,
will be furnished without charge to stockholders of the Company upon written
request to the Secretary, Washington Bancorp, 102 East Main Street, Washington,
Iowa 52353.
Stock Listing
The Company's common stock is reported on the National Daily Quotation
Service by the National Quotation Bureau under the symbol "WBIO". As of August
31, 1998, the Company had 415 stockholders of record and 603,006 outstanding
shares of common stock.
<PAGE>
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
1998
First quarter ................ $ 17.00 $ 15.50 $ .10
Second quarter ............... $ 17.75 $ 17.00 $ .10
Third quarter ................ $ 18.50 $ 18.00 $ .12
Fourth quarter ............... $ 18.675 $ 18.125 $ .12
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
Parent Subsidiary Ownership Organization
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Bancorp Washington Federal Savings Bank 100% Federal
Washington Bancorp Rubio Savings Bank of Brighton 100% Iowa
Washington Federal Savings Bank Washington Financial Services, Inc. 100% Iowa
</TABLE>
The financial statements of the Registrant are consolidated with those of
its subsidiaries.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998 FORM 10-KSB OF WASHINGTON BANCORP AND IS QUALIFIED IN ITS ENTRIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,448
<INT-BEARING-DEPOSITS> 1,858
<FED-FUNDS-SOLD> 659
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,122
<INVESTMENTS-CARRYING> 1,131
<INVESTMENTS-MARKET> 1,131
<LOANS> 66,273
<ALLOWANCE> 388
<TOTAL-ASSETS> 94,327
<DEPOSITS> 66,595
<SHORT-TERM> 9,597
<LIABILITIES-OTHER> 882
<LONG-TERM> 6,127
0
0
<COMMON> 7
<OTHER-SE> 10,964
<TOTAL-LIABILITIES-AND-EQUITY> 94,327
<INTEREST-LOAN> 5,138
<INTEREST-INVEST> 896
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 6,034
<INTEREST-DEPOSIT> 2,620
<INTEREST-EXPENSE> 3,259
<INTEREST-INCOME-NET> 2,775
<LOAN-LOSSES> 89
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 1,744
<INCOME-PRETAX> 1,263
<INCOME-PRE-EXTRAORDINARY> 823
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 823
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 3.70
<LOANS-NON> 0
<LOANS-PAST> 89
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 171
<ALLOWANCE-OPEN> 226
<CHARGE-OFFS> 46
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 388
<ALLOWANCE-DOMESTIC> 370
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18
</TABLE>
