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, 1999
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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The Issuer had $7,847,000 in revenues for the fiscal year ended June 30, 1999.
As of September 27, 1999, there were issued and outstanding 597,198 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 13, 1999, was $8.1 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 the Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1999.
Part III of Form 10-KSB - Portions of the Proxy Statement for the 1999 Annual
Meeting of Shareholders.
Transitional Small Business Disclosure Format YES [ ] NO [X]
<PAGE>
PART I
Item 1. Description of Business
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, Washington
Federal 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. In December 1998, Wellman Federal Savings, a full-service
branch of Washington Federal was opened in Wellman, Iowa. 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 (the "FDIC") to the fullest extent permitted by
law and regulation.
Washington Federal attracts deposits from the general public in its local market
areas 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 an application with the Office of Thrift Supervision
("OTS") on August 19, 1998 to branch into Richland, Iowa, a small rural
community of 500, which currently has only a branch office of a large regional
bank. Washington Federal is researching the opening of the branch by April 1,
2000.
Rubio attracts deposits from the general public and businesses in its local
market area. The deposits are primarily invested in U.S. 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, 1999, the Company had assets of approximately $103.0 million,
deposits of approximately $75.7 million and stockholders' equity of
approximately $10.7 million.
The executive office of the Company is located at 102 East Main Street,
Washington, Iowa 52353, telephone (319) 653-7256.
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.
<PAGE>
Impact of the Year 2000
In preparation for the century date change, the Banks have completed upgrades
and replacements of all computer systems and software that did not meet Year
2000 standards. Testing of the new products has been completed and the Banks are
satisfied with the results. Four separate special examinations for Year 2000
issues have been conducted by regulators since July 1, 1998 and the Banks have
utilized the guidance of the OTS and the Federal Deposit Insurance Corporation
(the "FDIC") in applying their Year 2000 plans. Communication with vendors and
service providers is ongoing to assure uninterrupted services. The Banks have
worked with local officials in developing community-wide contingency plans for
vital community-wide services and have communicated with customers with regard
to their Year 2000 preparations and concerns. A cash management plan has been
formulated to meet anticipated additional cash needs of our customers. Capital
expenditures for Year 2000 readiness to date are approximately $91,000, with an
expected total of $120,000. These expenses are not expected to have a
significant impact on financial position or results of operations.
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, 1999, the Company's net loan portfolio totaled $72.8 million. Loans
secured by first mortgages on one- to four-family residences totaled $49.5
million, or 67.5% of the Company's total loan portfolio at June 30, 1999. 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 $990,000 as of June 30,
1999. 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 $709,000. 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.
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 $588,000 as of June 30, 1999.
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 $504,000. All of the loans to this
borrower have performed in accordance with their terms since their origination.
<PAGE>
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 $15.9
million at June 30, 1999.
<TABLE>
At June 30,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate Loans:
One- to four-family ................... $49,464 67.5% $45,303 68.4% $40,696 77.14% $33,914 78.66% $33,328 82.01%
Home equity and second mortgage ....... 1,258 1.7 1,164 1.7 1,233 2.34 1,569 3.64 1,669 4.11
Multi-family and commercial real estate 8,612 11.8 7,411 11.2 4,775 9.05 2,896 6.72 1,741 4.28
Other ................................. - - - - - - - - 99 0.19 115 0.27 472 1.16
----------------------------------------------------------------------------------------
Total mortgages .................... 59,334 81.0 53,878 81.3 46,803 88.72 38,494 89.29 37,210 91.56
Construction loans ...................... 796 1.1 152 0.2 694 1.32 1,119 2.60 589 1.45
----------------------------------------------------------------------------------------
Total real estate loans ............ 60,130 82.1 54,030 81.5 47,497 90.03 39,613 91.89 37,799 93.01
----------------------------------------------------------------------------------------
Commercial business loans ............... 8,714 11.9 8,164 12.3 2,715 5.15 1,546 3.59 1,084 2.67
----------------------------------------------------------------------------------------
Consumer Loans:
Automobile ............................ 3,161 4.3 3,065 4.6 1,899 3.60 1,134 2.62 785 1.93
Deposit account ....................... 1,245 1.7 1,014 1.6 645 1.22 822 1.90 970 2.39
----------------------------------------------------------------------------------------
Total consumer loans ............... 4,407 6.0 4,079 6.2 2,544 4.82 1,956 4.52 1,755 4.32
----------------------------------------------------------------------------------------
Total loans ............................. 73,251 100.0% 66,273 100.0% 52,756 100.00% 43,115 100.00% 40,638 100.00%
====== ====== ======= ======= =======
Less:
Allowance for loan losses ............. 472 388 226 209 203
------- ------- ------- ------- -------
Total loans receivable, net ........ $72,779 $65,885 $52,530 $42,906 $40,435
======= ======= ======= ======= =======
</TABLE>
There are no foreign loans outstanding for any of the years presented.
<PAGE>
Loan Maturities. The following schedule illustrates the contractual maturity and
weighted average rates of the Company's loan portfolio at June 30, 1999. 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>
(In Thousands)
Due during
period ending
June 30,
- ---------------
2000 $ 7,462 8.42% $ 796 7.52% $ 5,398 9.34% $ 1,041 10.68% $14,697 8.87%
2001 8,288 8.36 -- -- 795 9.04 876 10.65 9,959 8.62
2002 15,049 8.35 -- -- 1,205 8.46 888 10.14 17,142 8.45
2003 and 2004 4,007 8.09 -- -- 770 8.48 1,555 10.02 6,332 8.61
2005 to 2009 4,196 8.17 -- -- 546 8.70 42 8.79 4,784 8.24
2010 to 2014 6,975 8.51 -- -- -- -- 5 9.24 6,980 8.51
2015 and
thereafter .. 13,357 8.09 -- -- -- -- -- -- 13,357 8.09
-----------------------------------------------------------------------------------------------
$59,334 $ 796 $ 8,714 $ 4,407 $73,251
======= ======= ======= ======= =======
</TABLE>
As of June 30, 1999, the total amount of loans due after June 30, 2000 which
have predetermined interest rates was $42.7 million, while the total amount of
loans due after such date which have floating or adjustable interest rates was
$15.9 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 area. 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
six one- to four-family real estate loans for the secondary market during fiscal
1999. Washington Federal originated one 90% Farm Service Agency, Guaranteed Farm
Ownership, and Guaranteed Operation Loans totaling $256,000 during fiscal year
1999. The loans are backed by 90% guarantees of the U.S. 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 on 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.
Year Ended June 30,
---------------------------------
1999 1998 1997
---------------------------------
(Dollars in Thousands)
Originations by type:
Real estate
One- to four-family ...................... $ 22,118 $ 15,744 $ 14,265
Home equity and second mortgage ......... 992 1,036 751
Multi-family and commercial ............. 5,860 5,177 5,438
real estate
Construction ............................ 1,623 686 1,319
Non real estate
Commercial business ..................... 6,827 6,348 3,666
Consumer ................................ 4,728 3,142 2,811
---------------------------------
Total loans originated ............... 42,148 32,133 28,250
Loans sold to secondary market ............. (522) (1,474) --
Principal (repayments) ..................... (34,648) (25,096) (18,609)
Balance of loans outstanding, net from ..... -- 7,849 --
acquisition of Rubio
Increase in allowance
for loan losses .......................... (84) (57) (17)
---------------------------------
Net increase (decrease) .................... $ 6,894 $ 13,355 $ 9,624
=================================
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 of 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 Freddie Mac,
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, 1999, home
equity and second mortgage loans amounted to $1.3 million which represented 1.7%
of the Company's total loan portfolio.
<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, 1999, $8.6
million or 11.8% of the Company's total loan portfolio consisted of loans
secured by existing multi-family residential real estate and commercial real
estate, including primarily farm real estate and one- to four- family housing
developments. All of the Company's multi-family and commercial real estate loans
are secured by properties located in its market area. The largest multi-family
and commercial real estate loan as of June 30, 1999 totaled $400,000, and was
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, 1999,
construction loans amounted to $796,000, or 1.1% of the Company's total loan
portfolio. Construction loan rates are fixed at prime- based 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, 1999, the Company had no speculative loans to
builders.
Commercial Business Lending. At June 30, 1999, $8.7 million or 11.9% 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 totaled $253,000 at June 30,
1999 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, 1999, the Company's consumer loan portfolio
totaled $4.4 million or 6.0% of its total loan portfolio.
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,
1999, the Company's automobile loans totaled $3.2 million or 4.3% of the
Company's total loan portfolio.
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 the applicant's 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, 1999, $7,000 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, 1999. The amounts presented
represent the total remaining principal balances of the elapsed loans, rather
than the actual payment amounts which are overdue.
Loans Delinquent at June 30,
1999 for:
<TABLE>
30-59 Days 60-89 Days 90 Days & Over Total
-------------------- -------------------- ------------------ ---------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate:
Mortgage Loans .. 34 $816 84.6% 5 $119 23.5% 4 $144 92.9% 43 $1,079 66.4%
Consumer ........ 22 80 8.3 3 10 2.0 9 7 4.5 34 97 6.0
Commercial Business 8 68 7.1 7 377 74.5 2 4 2.6 17 449 27.6
-----------------------------------------------------------------------------------------
Total ........... 64 $964 100.0% 15 $506 100.0% 15 $155 100.0% 94 $1,625 100.0%
=========================================================================================
</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,
--------------------------
1999 1998 1997
--------------------------
(Dollars in Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ..................................... $144 $ 6 $215
Consumer ..................................... 7 39 14
Commercial business .......................... 4 44 --
-------------------------
Foreclosed assets:
One- to four-family .......................... 39 -- --
Nonresidential real estate ................... 132 -- --
-------------------------
Total non-performing assets ...................... $326 $ 89 $229
=========================
Total as a percentage of total assets ............ 0.32% 0.09% 0.35%
=========================
Other Loans of Concern. In addition to the non-performing loans set forth in the
tables above, as of June 30, 1999, there was $625,000 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 $220,000 on June 30, 1999, and
was secured by land for development of one- to four-family residences.
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.
<PAGE>
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 two
foreclosed real estate properties at June 30, 1999. One property has been sold
and the other is currently being rented and has a pending purchase agreement.
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
presented make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as a loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is unwarranted. Assets may also be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as a 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, 1999, the Company had classified $199,000 of its assets as substandard,
and $0 as doubtful as compared to $317,000 and $6,000 at June 30, 1998
classified as substandard and doubtful, respectively.
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 $472,000, or as a ratio of total loans was 0.65%,
at June 30, 1999.
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 their
loan portfolios. This has resulted in a greater than normal increase in the
reserve allowance established by the Banks' respective Boards of Directors. The
Banks also anticipate continuing with the current schedule of provisions 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,
----------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -----------------------
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
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage Loans .............. $205 82.1% $168 81.5% $106 90.0%
Commercial Business Loans ... 155 11.9 141 12.3 68 5.2
Consumer Loans .............. 74 6.0 61 6.2 41 4.8
Unallocated ................. 38 -- 18 -- 11 --
-------------------------------------------------------------
$472 100.0% $388 100.0% $226 100.0%
=============================================================
</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,
---------------------------
1999 1998 1997
---------------------------
(Dollars in Thousands)
Balance at beginning of period ................... $ 388 $ 226 $ 209
Balance of the allowance for loan losses
of Rubio at date of acquisition ................. -- 105 --
Charge offs:
Mortgage ..................................... -- -- --
Consumer ..................................... (47) (46) (33)
---------------------------
Total charge offs ......................... (47) (46) (33)
Recoveries ....................................... 18 14 10
---------------------------
Net charge offs .................................. (29) (32) (23)
Provisions charged to operations ................. 113 89 40
---------------------------
Balance at end of period ......................... $ 472 $ 388 $ 226
===========================
Ratio of net charge offs during the period to
average loans outstanding during the period .... .04% .05% 0.04%
===========================
Ratio of net charge offs during the period to
average nonperforming assets ................... 14.8% 35.30% 17.16%
===========================
<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, 1999, the Company had an
investment portfolio of approximately $22.3 million, consisting primarily of
U.S. Treasury securities, U.S. government agency obligations and corporate
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 U.S. 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.
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>
<PAGE>
At June 30,
----------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- -----------------------
Percent of Percent of Percent of
Book Value Total Book Value Total Book Value Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Investment Securities:
Available for sale (1):
U.S. treasury securities ... $ 1,708 7.65% $ 6,337 30.08% $ 402 3.90%
U.S. government agencies ... 13,623 61.05 6,770 32.14 6,999 67.85
State and political ........ 439 1.97 348 1.65 354 3.43
subdivisions
Mortgage-backed securities . -- -- 51 0.24 140 1.36
Corporations ............... 4,925 22.07 5,616 26.66 1,955 18.95
Certificates of deposit with
financial institutions ... -- -- -- -- -- --
------------------------------------------------------------------
Total Available for
Sale ............... $20,695 92.74 19,122 90.78 9,850 95.48
Held to maturity(1):
State and political ........... 761 3.41 1,131 5.37 -- --
subdivisions
Mortgage-backed securities .... -- -- -- -- -- --
------------------------------------------------------------------
Total held to maturity ... 761 3.41 1,131 5.37 -- --
------------------------------------------------------------------
Total Investment .........
Securities ............. 21,456 96.15 20,253 96.15 9,850 95.48
FHLB Stock ........................ 860 3.85 812 3.85 466 4.52
------------------------------------------------------------------
Total Investment Securities
and FHLB Stock .......... $22,316 100.00% $21,065 100.00% $10,316 100.00%
===================================================================
Average remaining life of
investment securities (excluding
FHLB Stock) ..................... 3.9 Years 2.4 Years 3.9 Years
Interest-Earning Assets:
Interest-bearing deposits with
banks ........................ $ 901 100.00% $ 1,859 100.00% $ 575 100.00%
===================================================================
<FN>
(1) Securities classified as available for sale were carried at fair value at
June 30, 1999, 1998 and 1997. Securities classified as held to maturity
were carried at historical cost at all respective dates.
</FN>
</TABLE>
The fair value of the available for sale investment portfolio at June 30, 1999
was $22.3 million resulting in a net unrealized loss at that date of
approximately $236,000.
<PAGE>
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. Maturities and sales of U.S. treasury securities
have been reinvested primarily in U.S. agency securities to realize a higher
interest yield.
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, 1999.
<TABLE>
At June 30, 1999
------------------------------------------------------
Book Value of Investment Securities Maturing In
------------------------------------------------------
Total
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
U.S. treasury securities ........................ $ 1,406 $ 302 $ -- $ -- $ 1,708
U.S. government agencies ........................ 499 8,423 4,701 -- 13,623
State and political subdivisions ................ 260 688 155 96 1,199
Mortgage-backed securities ...................... -- -- -- -- --
Corporations .................................... 350 3,131 1,445 -- 4,926
Certificates of deposit with
financial institutions ......................... -- -- -- -- --
---------------------------------------------------
Total ...................................... $ 2,515 $12,544 $ 6,301 $ 96 $21,456
===================================================
Weighted average yield .......................... 6.17% 5.75% 6.19% 4.96% 5.92%
===================================================
</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 in FHLB advances outstanding at June 30, 1999.
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 bi-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.
Savings accounts constituted $5.7 million, or 7.6% of the Company's deposit
portfolio at June 30, 1999. Certificates of deposit constituted $50.0 million or
66.0% of the deposit portfolio of which $3.2 million or 4.3% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. MMDA
accounts constituted $11.5 million or 15.1% of the Company's deposit portfolio
at June 30, 1999. As of June 30, 1999, the Banks had no brokered deposits. At
June 30, 1999, transactions deposits were $8.5 million or 11.3% of total
deposits.
<PAGE>
Savings Deposit Activities. The following table sets forth the savings activity
at the Banks during the period indicated.
<TABLE>
Year Ended June 30,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
(Dollars in Thousands)
Opening balance ....................................... $ 66,595 $ 44,754 $ 44,176
Balance of deposits of Rubio at acquisition ........... -- 19,959 --
Net increase (decrease) before interest
credited ............................................ 6,647 (33) (1,226)
Interest credited ..................................... 2,447 1,915 1,804
---------------------------------
Ending balance ........................................ $ 75,689 $ 66,595 $ 44,754
=================================
Net increase .......................................... $ 9,094 $ 21,841 $ 578
=================================
Percent increase ...................................... 13.66% 48.8% 1.31%
=================================
</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,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Transactions and Savings Deposits
Demand and NOW Accounts (0.00%-3.35%) ......... $ 8,536 11.22% $ 8,246 12.31% $ 3,094 6.88%
Money Market Accounts (2.30% - 5.00%) ......... 11,471 15.08 10,473 15.63 9,044 20.11
Passbook Savings Accounts (2.30% - 3.00%) ..... 5,728 7.53 5,537 8.26 2,182 4.85
--------------------------------------------------------
Total Non-Certificates ........................ 25,735 33.83 24,256 36.20 14,320 31.84
--------------------------------------------------------
Certificates
2.00% - 3.00% ................................. 361 0.47 155 0.23 13 .03
3.01% - 4.00% ................................. -- -- -- -- -- --
4.01% - 5.00% ................................. 11,423 15.01 2,550 3.81 2,205 4.90
5.01% - 6.00% ................................. 31,959 42.01 32,583 48.63 23,247 51.69
6.01% - 7.00% ................................. 6,211 8.17 7,050 10.52 4,969 11.05
7.01% - 8.00% ................................. -- -- -- -- -- --
8.01% - 9.00% ................................. -- -- -- -- -- --
9.01% and over ................................ -- -- -- -- -- --
--------------------------------------------------------
Total Certificates ............................ 49,954 65.66 42,339 63.19 30,434 67.67
--------------------------------------------------------
Accrued Interest .............................. 388 0.51 409 0.61 221 0.49
--------------------------------------------------------
Total Deposits and Accrued Interest ........... $76,077 100.00% $67,004 100.00% $44,975 100.00%
========================================================
</TABLE>
<PAGE>
The following table shows rate and maturity information for the Company's
certificates of deposit as of June 30, 1999.
<TABLE>
0.00- 4.01- 5.01- 6.01- Percent of
4.00% 5.00% 6.00% 7.00% Total Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificate accounts maturing in quarter
ending:
- -------------------------------------------
September 30, 1999 ........................ $ 49 $ 2,273 $ 5,820 $ 319 $ 8,461 16.94%
December 31, 1999 ......................... 65 2,437 4,151 318 6,971 13.95
March 31, 2000 ............................ 211 2,337 4,834 100 7,482 14.98
June 30, 2000 ............................. 36 2,405 1,956 125 4,522 9.05
September 30, 2000 ........................ -- 786 890 210 1,886 3.78
December 31, 2000 ......................... -- 563 1,151 355 2,069 4.14
March 31, 2001 ............................ -- 218 793 2,218 3,229 6.46
June 30, 2001 ............................. -- 123 2,992 2,365 5,480 10.97
September 30, 2001 ........................ -- 26 5,174 168 5,368 10.75
December 31, 2001 ......................... -- 93 2,202 33 2,328 4.66
March 31, 2002 ............................ -- 26 275 -- 301 .60
June 30, 2002 ............................. -- 136 542 -- 678 1.36
Thereafter ................................ -- -- 1,179 -- 1,170 2.36
-----------------------------------------------------------------
Total ..................................... $ 361 $11,423 $31,959 $ 6,211 $49,954 100.00%
=================================================================
Percent of Total ....................... 0.72% 22.87% 63.98% 12.43% 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, 1999.
<TABLE>
MATURITY
-------------------------------------------------
3 Months Over 3- 6 Over 6-12 Over 12
or Less Months Months Months Total
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Certificates of Deposit less than
$100,000 .................................. $7,941 $6,152 $10,717 $21,911 $46,721
Certificates of Deposit of $100,000
or More ................................... 520 819 1,287 607 3,233
-------------------------------------------------
Total Certificates of Deposit ............... $8,461 $6,971 $12,004 $22,518 $49,954
=================================================
</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, 1999 Washington Federal had $15.7 million of
borrowings.
<PAGE>
The following table sets forth the maximum month-end balance and average balance
of FHLB advances at and for the dates indicated.
At and For the Year Ended June 30,
---------------------------------------
1999 1998 1997
---------------------------------------
(Dollars in Thousands)
Maximum Balance ................ $16,628 $15,724 $ 9,311
Average Balance ................ $15,537 $11,519 $ 6,504
The following table sets forth certain information as to Washington Federal's
FHLB advances at the dates indicated.
June 30,
--------------------------
1999 1998 1997
--------------------------
(Dollars in Thousands)
FHLB Advances ..................................... $15,706 $15,724 $ 8,652
Weighted average interest rate during the period of
FHLB advances ................................... 5.68% 5.55% 5.19%
Weighted average interest rate at end of period of
FHLB advances ..................................... 5.66% 5.54% 5.50%
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.
Wellman Federal Savings, a division of Washington Federal, is one of two
financial institutions serving its immediate market area of Wellman, Iowa. The
competition for deposits comes from a branch owned by a multi-bank holding
company as well as financial institutions in outlying communities. The closest
community is approximately seven miles away and has two banks owned by
multi-bank holding companies. Loan competition varies depending upon 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.
<PAGE>
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, 1999, Washington Federal was authorized to invest up to
approximately $1.6 million in the stock of, or loans to, service corporations
(based upon the 2% limitation).
Washington Federal has one wholly owned subsidiary. The subsidiary conducts
business under the name of Washington Financial Services, Inc. ("Washington
Financial"). Washington Federal's investment in its subsidiary totaled $120,000
at June 30, 1999. The subsidiary's source of income is brokerage fees, and it
had net income of $23,000, $24,000 and $22,000 for the years ended June 30,
1999, 1998 and 1997, respectively. The primary activity of the subsidiary is the
brokering of credit life and disability insurance products. In addition,
Washington Federal has 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 is 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 U.S. government. Accordingly, Washington Federal is subject to
broad federal regulation and oversight extending to all its operations by the
Office of Thrift Supervision (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
Washington Federal.
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 Rubio can engage in 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, 1999 was $25,000. Rubio is subject to similar regulation and
oversight by the ISB and the FRB and was last examined as of January 22, 1998.
<PAGE>
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.
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,
1999 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, 1999, Washington Federal's and Rubio's lending
limit under these restrictions were $990,000 and $588,000, 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 U.S. 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 semi-annual 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 U.S. Treasury or
for any other reason deemed necessary by the FDIC.
<PAGE>
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 Payment, which was paid to the FDIC in November 1996, was approximately
$294,000. This amount was accrued by Washington Federal at September 30, 1996 by
a charge to earnings.
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.
In addition, SAIF-insured institutions are required to pay a Financing
Corporation (FICO) assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s, equal to approximately 6.48 basis points
for each $100 in domestic deposits, while BIF-insured institutions pay an
assessment equal to approximately 1.52 basis points for each $100 in domestic
deposits. The assessment is expected to be reduced to approximately 2.43 no
later than January 1, 2000, when BIF insured institutions fully participate in
the assessment. These assessments, which may be revised based upon the level of
BIF and SAIF deposits will continue until the bonds mature in the year 2015.
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, 1999, Washington
Federal did not have any intangible assets and an excludable valuation
allowable, net of tax of $216,000.
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, 1999, Washington Federal had one excludable
subsidiary.
At June 30, 1999, Washington Federal had tangible capital of $6.7 million, or
8.53% of adjusted total assets, which is approximately $5.5 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 allows it to maintain a 3% ratio. At June 30, 1999, Washington Federal
had no intangibles which were subject to these tests.
At June 30, 1999, Washington Federal had core capital equal to $6.7 million, or
8.53% of adjusted total assets, which is $3.6 million above the minimum leverage
ratio requirement of 4% as in effect on that date.
<PAGE>
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, 1999, Washington Federal had no
capital instruments that qualify as supplementary capital and $355,000 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, 1999.
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, 1999, Washington Federal had total capital of $7.1 million and
risk-weighted assets of $54.7 million or total capital of 12.92% of
risk-weighted assets. This amount was $2.7 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, 1999, Rubio had Tier 1 or leverage capital of $2.6 million,
or 11.09% of average total assets, which is approximately $1.9 million above the
minimum requirement of 3% of average total assets in effect on that date.
At June 30, 1999, Rubio had Tier 1 risk-based capital of $2.6 million, or 20.72%
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, 1999, Rubio had risk-based capital of $2.7 million, or 21.65% 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.
<PAGE>
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. 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 remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution 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."
<PAGE>
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. At June 30, 1999, Washington Federal had a liquidity ratio of
18.8%.
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, 1999, Washington Federal met
the test and has always met the test since its effectiveness.
<PAGE>
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 August 1999 and received
a rating of satisfactory.
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 June 30, 1999,
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.
<PAGE>
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.
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."
<PAGE>
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.
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,
1999, 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, 1999, Washington Federal had an aggregate of
$860,000 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 7.09% and were
6.44% for fiscal year 1999.
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 to its
capital.
<PAGE>
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.
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, 1999 Washington Federal's Excess for tax purposes
totaled approximately $314,000.
The Company files consolidated federal income tax returns with the Banks on a
calendar year basis using the accrual method of accounting. Savings
associations, such as Washington Federal, 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.
<PAGE>
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.
Chris Davies, age 44, became Vice President and Cashier of Rubio Savings Bank of
Brighton in 1983. Prior to joining Rubio, he was Vice President of Seymour State
Bank, Seymour, Iowa.
Dean Edwards, age 64, 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.
Quintin T. Harmon, age 36, became Vice President, Managing Officer of the
Wellman Federal Savings Branch in December 1998. Prior to that time he was Vice
President and Branch Manager of the corporate office for Prospect Federal
Savings Bank, Worth, Illinois.
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 35, became Executive Vice President of Washington Federal
Savings Bank in 1999 and has acted as the financial and accounting officer since
1995. From 1992 to 1995 she was a loan officer for Washington Federal.
Employees
As of June 30, 1999, the Company had 27 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.
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 $1.6 million with a net
book value of $875,000 at June 30, 1999. The following table sets forth
information regarding the Company's properties:
<TABLE>
Net Book Value
of Real Property
Leased/ or Leasehold Improvements Year
Owned at June 30, 1999 Opened
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Washington Federal Locations:
Main Office Owned $200,000 1976
102 East Main Street
Washington, Iowa
Drive-thru Owned $215,000 1994
220 East Washington Street
Washington, Iowa
Wellman Branch Office Owned $ 73,000 1999
801 6th Street
Wellman, Iowa
Rubio Location:
Main Office Owned $210,000 1984
122 East Washington
Ruibo, Iowa
</TABLE>
<PAGE>
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, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 54 and 55 of the attached 1999 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 1999 Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
Pages 20 to 51 of the Company's 1999 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning directors and executive officers of the Company is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of the
Company and the 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, 1999, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with by such persons.
<PAGE>
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.
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
- ---------------------
<FN>
* 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.
</FN>
</TABLE>
(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, 1999.
<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 27, 1999 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 Rick R. Hofer, Director
Officer and Director
Date: September 27, 1999 Date: September 27, 1999
----------------------------------- -------------------------------
/s/ Myron L. Graber /s/ Richard L. Weeks
- ---------------------------------------- -------------------------------------
Myron L. Graber, Director Richard L. Weeks, Director
Date: September 27, 1999 Date: September 27, 1999
----------------------------------- -------------------------------
/s/ Mary Levy /s/ James D. Gorham
- ---------------------------------------- -------------------------------------
Mary Levy, Director James D. Gorham, Director
Date: September 27, 1999 Date: September 27, 1999
----------------------------------- -------------------------------
/s/ J. Richard Wiley /s/ Leisha A. Linge
- ---------------------------------------- -------------------------------------
J. Richard Wiley, Director Leisha A. Linge, Executive Vice
President and Treasurer (Principal
Financial and Accounting Officer)
Date: September 27, 1999 Date: September 27, 1999
----------------------------------- --------------------------------
/s/ Dean Edwards
- ----------------------------------------
Dean Edwards, Chairman of the Board
Date: September 27, 1999
----------------------------------
Exhibit 11
Washington Bancorp
Computation of Earnings per Common Share
Twelve Months ended
June 30, 1999
----------------------
Basic EPS Diluted EPS
----------------------
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 ........ (42,313) (42,313)
Stock Ownership Plan (ESOP) at the beginning
to the period
Weighted average common shares released by the ....... 2,171 2,171
ESOP during the period
Weighted average common shares outstanding -
Stock Option Plan ................................... -- 14,812
Weighted average common shares purchased .............
for treasury ........................................ (47,688) (47,688)
---------------------
Weighted average number of common shares ............. 563,303 578,115
---------------------
Net income ........................................... 831,200 831,200
---------------------
Net income per common share .......................... 1.48 1.44
=====================
Washington Bancorp
1999 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, 1999
(Dollars in Thousands)
Total assets ............................................... $102,984
Total loans, net ........................................... 72,779
Investment securities and other
earning assets ........................................... 24,557
Deposits ................................................... 75,689
Borrowings ................................................. 15,706
Net income ................................................. 831
Stockholders' equity ....................................... 10,711
Stockholders' equity as a percent of
assets ................................................... 10.40%
ANNUAL MEETING
The Annual Meeting of Stockholders of Washington
Bancorp will be held on October 19, 1999 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 21, 1999
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 Rubio Savings Bank of Brighton present our fourth 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, 1999, those
assets had grown to $102,984,080, an increase of more than 69%.
This has been an exciting and enriching year with the addition to the Washington
Bancorp family of Wellman Federal Savings, a division of Washington Federal
Savings Bank. The Wellman community has greeted us warmly and appears to be
enjoying the full services of a locally-owned community bank. An Advisory Board
of local residents will soon be in place to enable Wellman Federal to respond to
the unique needs of the Wellman area.
In addition to the geographical growth in the Washington Bancorp locations which
now cross Washington County from north to south, we have formed a collaborative
relationship with Eagle One Financial Services, LLC, which will provide
financial planning services conveniently located within the main office of
Washington Bancorp. This will broaden the investment choices available to the
community beyond our traditional FDIC-insured offerings to include stocks,
bonds, mutual funds and insurance products.
Our mission at Washington Bancorp is for our community-involved financial
institutions to offer diversified services by friendly and competent staff
committed to developing lasting customer relationships. The Annual Report and
the Annual Meeting are for you, our stockholders, and we invite your
participation and thank you for your support and confidence. Our present
Washington Bancorp family consists of more than 400 different individuals/family
members who own our stock. We look forward to an exciting year 2000.
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,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets ....................................... $102,984 $ 94,327 $ 64,875 $ 60,891 $ 55,100
Loans receivable, net .............................. 72,779 65,885 52,530 40,906 40,435
Cash and cash equivalents .......................... 2,557 3,306 808 1,903 1,658
Investment securities .............................. 21,456 20,254 9,850 14,628 11,517
Investment in Federal Home Loan Bank ("FHLB") Stock 860 812 466 369 362
Goodwill, net ...................................... 1,281 1,375 -- -- --
Deposits ........................................... 75,689 66,595 44,754 44,176 42,950
Borrowed funds ..................................... 15,706 15,724 8,652 5,505 7,230
Stockholders' equity ............................... 10,711 10,971 10,675 10,548 4,400
</TABLE>
<TABLE>
Year Ended June 30,
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income ...................................... $7,455 $6,034 $4,990 $4,207 $3,939
Total interest expense ..................................... 4,295 3,259 2,553 2,499 2,181
-------------------------------------------
Net interest income ...................................... 3,160 2,775 2,437 1,708 1,758
Provision for loan losses .................................. 112 89 40 15 --
-------------------------------------------
3,048 2,686 2,397 1,693 1,758
Total noninterest income ................................... 392 320 231 197 138
Total noninterest expense .................................. 2,077 1,744 1,712 1,206 1,278
-------------------------------------------
Income before income taxes ................................. 1,363 1,262 916 684 618
Income tax expense ......................................... 532 439 351 243 259
-------------------------------------------
Net income ................................................. $ 831 $ 823 $ 565 $ 441 $ 359
===========================================
Earnings per common share:
Basic .................................................... $ 1.48 $1.36 $ 0.92 $ 0.25* N/A
==================================
Diluted .................................................. $ 1.44 $1.33 $ 0.91 $ 0.25* N/A
==================================
Tangible earnings per common share(1) ...................... $ 1.60 $1.40 $ 0.91 $ 0.25* 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.
(1) Tangible earnings per common share is calculated by dividing the total of
goodwill expense plus net income by the weighted average number of diluted
common shares outstanding.
</FN>
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30,
---------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets) ........................... 0.83% 1.06% 0.90% 0.78% 0.67%
total assets)
Interest rate spread information:
Average during period ............................. 2.81 2.95 3.09 2.55 3.04
End of period ..................................... 3.21 2.95 3.09 2.96 2.91
Net interest margin(1) ............................ 3.31 3.70 3.97 3.13 3.38
Ratio of operating expense to average total assets 2.18 2.24 2.72 2.15 2.38
Return on equity (ratio of net income to average
equity) ......................................... 7.79 7.56 5.34 6.94 8.41
Quality Ratios:
Non-performing assets to total assets at end of
period(2) ....................................... 0.15 0.09 0.35 0.07 0.54
Allowance for loan losses to non-performing loans . 304.64 435.99 98.52 475.00 68.81
Capital Ratios:
Equity to total assets at end of period ........... 10.40 11.63 16.45 17.32 7.99
Average equity to average assets .................. 10.62 13.99 16.80 11.31 7.96
Ratio of average interest-earning assets to average
interest-bearing liabilities .................... 111.04 117.22 121.22 112.79 108.01
Number of full service offices ...................... 3 2 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, 1999.
Capital Level
OTS Requirement at June 30, 1999(1)
--------------- ---------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
---------------------------------------------
(Dollars in Thousands)
Capital Standard
Tangible Capital ......... 1.50% $1,184 8.53% $6,728 $5,544
Core Capital ............. 4.00% $3,156 8.53% $6,728 $3,572
Risk-based Capital ....... 8.00% $4,372 12.92% $7,062 $2,690
(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 Office of Thrift
Supervision ("OTS") regulations.
<PAGE>
The following table sets forth Rubio Savings Bank's compliance with its capital
requirements at June 30, 1999.
Capital Level
Requirement at June 30, 1999
--------------- -------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
-------------------------------------------
(Dollars in Thousands)
Tier 1 or Leverage Capital ...... 3.00% $ 700 11.09% $2,587 $1,887
Tier 1 Risk-based Capital ....... 4.00% 499 20.72% 2,587 2,088
Risk-based Capital .............. 8.00% 999 21.65% 2,704 1,705
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. In December 1998, Washington Federal
opened a branch office, Wellman Federal Savings, in Wellman, Iowa. 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 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>
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.
Earnings Per Share
Basic per share amounts are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted per share amounts
assume the conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce a loss or increase the income per
common share from continuing operations. In accordance with Statement of
Position 93-6, shares owned by the the Company's employee stock ownership plan
("ESOP") that have not been committed to be released are not considered
outstanding for the purpose of computing earnings per share.
In addition to the earnings per share ("EPS") information typically disclosed,
the Company provided "tangible" EPS as an alternative measure for evaluating the
Company's ability to grow tangible capital. The Company's tangible EPS is
calculated by dividing the total of goodwill expense plus net income by the
weighted average number of diluted common shares outstanding.
Impact of the Year 2000
In preparation for the century date change, the Banks have completed upgrades
and replacements of all computer systems and software that did not meet Year
2000 standards. Testing of the new products has been completed and the Banks are
satisfied with the results. Four separate special examinations for Year 2000
issues have been conducted by regulators since July 1, 1998 and the Banks have
utilized the guidance of the OTS and the Federal Deposit Insurance Corporation
(the "FDIC") in applying their Year 2000 plans. Communication with vendors and
service providers is ongoing to assure uninterrupted services. The Banks have
worked with local officials in developing community-wide contingency plans for
vital community-wide services and have communicated with customers with regard
to their Year 2000 preparations and concerns. A cash management plan has been
formulated to meet anticipated additional cash needs of our customers. Capital
expenditures for Year 2000 readiness to date have been approximately $91,000,
with an expected total of $120,000. These expenses are not expected to have a
significant impact on financial position or results of operations.
Financial Condition
Total Assets. Total assets increased from $64.9 million at June 30, 1997 to
$94.3 million at June 30, 1998 and to $103.0 million at June 30, 1999. 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. The net increase from 1998 to 1999 was primarily due to a $6.9
million increase in loans receivable, net, a $1.2 million increase in investment
securities, and a $681,000 increase in federal funds sold, partially offset by a
$749,000 decrease in cash and cash equivalents.
<PAGE>
Loans receivable. Loans receivable, net increased from $52.5 million at June 30,
1997 to $65.9 million at June 30, 1998 to $72.8 million at June 30, 1999. The
increase from 1997 to 1998 was primarily due to the acquisition of Rubio with
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 increase from 1998 to 1999 was due to the continued
mortgage loan demand in the Company's market area, as well as an increase in
commercial and agriculture loan demand. The majority of commercial loan growth
is in the agriculture sector. These loans provide for a higher rate of return to
the Company, but also carry some increased risk over our traditional residential
loan products. The Company believes that it follows appropriate underwriting
guidelines in order to reduce this potential risk. In addition, the Company
obtains guarantees through the Farm Service Agency Guarantee Lender's Program
when possible, to further manage portfolio risk. Commercial and agriculture
loans increased $3.4 million from June 30, 1998 to June 30, 1999.
The Company's non-performing assets were $155,000 or 0.15% of totals assets at
June 30, 1999 as compared to $89,000 or .09% of total assets at June 30, 1998.
Management is committed to maintaining the non-performing assets to total asset
ratio within industry standards.
Deposits. 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 was a result
of the Rubio acquisition and their larger amount of commercial checking
accounts.
Deposits increased $9.1 million or 13.7% to $75.7 million at June 30, 1999 from
$66.6 million at June 30, 1998. Transaction and savings deposits decreased as a
percentage of total deposits from $24.3 million or 36.4% at June 30, 1998 to
$25.7 million or 34.0% at June 30, 1999. Certificates of deposit increased as a
percentage of total deposits from $42.3 million or 63.6% at June 30, 1998 to
$50.0 million or 66.0% at June 30, 1999. The increase in certificates of deposit
was primarily due to Washington Federal offering more competitive rates on
certain of its certificate of deposit products.
Stockholders' Equity. Stockholders' equity increased from $10.7 million at June
30, 1997 to $11.0 million at June 30, 1998, and decreased to $10.7 million at
June 30, 1999. 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 ESOP of $72,000,
the amortization of compensation under the Company's Recognition and Retention
Plan of $67,000, the exercise of 1,096 shares of common stock under the
Company's Stock Option and Incentive Plan ("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 ESOP of $84,000 and the retirement of 1,096 shares of
common stock of $21,000. The decrease from June 30, 1998 to June 30, 1999 was
primarily due to $684,000 in payments for the repurchase of 37,000 shares of the
Company's common stock, dividends paid of $272,000 and the increase in
unrealized losses on available for sale securities of $235,000 partially offset
by net income of $831,000 and the allocation of ESOP shares of $73,000. The
portfolio of available-for-sale securities is comprised primarily of investment
securities carrying fixed interest rate. 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, 1999.Net Interest Income Analysis
<PAGE>
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,
---------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) ................ $69,013 $ 5,979 8.66% $59,089 $ 5,138 8.69% $47,538 $ 4,128 8.68%
Investment securities .............. 21,692 1,253 5.78 13,622 800 5.87 11,528 757 6.57
FHLB stock ......................... 851 55 6.43 596 40 6.77 411 29 7.01
Other interest-earning assets ...... 3,897 168 4.32 1,654 56 3.40 1,822 76 4.18
----------------- ----------------- ------------------
Total interest-earning assets(1).. $95,453 $ 7,455 7.81 $74,961 $ 6,034 8.05 $61,299 $ 4,990 8.14
----------------- ----------------- ------------------
Interest-bearing liabilities:
Certificates of deposit ............ $48,250 $ 2,712 5.62 $35,753 $ 2,060 5.76 $30,682 $ 1,741 5.68
NOW, money market and passbook ..... 21,991 700 3.18 16,508 558 3.38 13,226 472 3.57
savings
Advances from borrowers for taxes .. 185 1 0.46 167 2 1.02 155 2 1.52
and insurance
FHLB advances ...................... 15,537 882 5.68 11,519 639 5.55 6,504 337 5.19
----------------- ----------------- ------------------
Total interest-bearing liabilities $85,963 $ 4,295 5.00 $63,947 $ 3,259 5.10 $50,567 $ 2,553 5.05
----------------- ----------------- ------------------
Net interest income .................. $ 3,160 $ 2,775 $ 2,437
======= ======= =======
Net interest rate spread(2) .......... 2.81% 2.95% 3.09%
===== ===== =====
Net interest-earning assets .......... $ 9,490 $11,014 $10,732
======= ======= =======
Net yield on average interst-earnings
assets ............................. 3.31% 3.70% 3.97%
===== ===== =====
Average interest-earning assets to
average interest-earning
liabilities ........................ 111.04% 117.22% 121.22%
======= ======= =======
<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,
--------------------------
1999 1998 1997
--------------------------
Weighted average yield on:
Loans receivable ............................. 8.44% 8.61% 8.55%
Investment securities ........................ 5.92 5.94 6.61
Other interest-earning assets ................ 5.50 5.86 5.96
Combined weighted average yield on interest- ... 7.81 7.93 8.21
earning assets
Weighted average rate paid on:
Passbook savings accounts .................... 1.55 2.36 2.30
NOW accounts ................................. 1.50 2.32 2.29
Money market accounts ........................ 3.47 3.87 3.92
Certificates of deposit ...................... 5.40 5.73 5.74
Advances from borrowers for taxes & .......... -- 2.30 2.30
insurance
FHLB advances ............................... 5.66 5.54 5.50
Combined weighted average rate paid on ........ 4.60 4.98 5.12
interest-bearing liabilities
Spread ........................................ 3.21 2.95 3.09
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. Year Ended June 30,
<TABLE>
1999 vs. 1998 1998 vs. 1997
----------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $859 $ (18) $ 841 $1,005 $ 5 $1,010
Investment securities 465 (12) 453 129 (86) 43
FHLB stock 17 (2) 15 12 (1) 11
Other interest-earning
assets 94 18 112 (7) (13) (20)
----------------------------------------------------------------------
Total interest-earning
assets $1,435 $(14) 1,421 $1,139 $(95) 1,044
======================================================================
Interest-bearing liabilities:
Certificates of Deposit $ 704 $ (51) 704 $ 294 $ 25 319
NOW, money market, and
passbook savings 177 (35) 142 112 (26) 86
Advances from borrowers for
taxes and insurance --- (1) (1) --- (1) (1)
FHLB advances 227 15 242 277 25 302
-----------------------------------------------------------------------
Total interest-bearing
liabilities $ 1,108 $ 72 1,036 $ 683 $ 23 706
=======================================================================
Net interest income $ 385 $ 338
===== =====
</TABLE>
<PAGE>
Comparison of Operating Results For The Years Ended June 30, 1999 and 1998
Performance Summary. Net income for the year ended June 30, 1999 increased by
$8,000 or 0.9% to $831,000 from $823,000 for the year ended June 30, 1998. The
increase was primarily due to an increase in net interest income of $385,000 and
an increase in non-interest income of $72,000, partially offset by an increase
in non-interest expense of $333,000, an increase in income tax expense of
$92,000 and an increase in provision for loan loss of $24,000. For the years
ended June 30, 1999 and 1998 the return on average assets was 0.83% and 1.06%
respectively, while the return on average equity was 7.79% and 7.56%
respectively.
Net Interest Income. For the year ended June 30, 1999, net interest income
increased by $385,000 to $3.1 million from $2.7 million for the year ended June
30, 1998. Interest income increased $1.4 million to $7.4 million for the year
ended June 30, 1999 from $6.0 million for the year ended June 30, 1998 partially
offset by a $1.0 million increase in interest expense to $4.3 for the year ended
June 30, 1999 from $3.3 million for the year ended June 30, 1998. The net
increase was primarily due to the increase in net interest-earning assets.
For the year ended June 30, 1999, the average yield on interest-earning assets
was 7.81% compared to 8.05% for the year ended June 30, 1998. The average cost
of interest-bearing liabilities was 5.00% for the year ended June 30, 1999
compared to 5.10% for the year ended June 30, 1998. The average balance of
interest-earning assets increased by $20.5 million to $95.5 million for the year
ended June 30, 1999 from $75.0 million for the year ended June 30, 1998. During
the same time period, the average balance of interest-bearing liabilities
increased by $22.1 million to $86.0 million for the year ended June 30, 1999
from $63.9 million for the year ended June 30, 1998.
Due to the lower returns on interest-earning assets, and despite the lower rates
on interest-bearing liabilities, the average interest rate spread was 2.81% for
the year ended June 30, 1999 compared to 2.95% for the year ended June 30, 1998.
In addition, the lower ratio of interest-earning assets to interest-bearing
liabilities, as a result of market pricing, has caused the average net interest
margin to be reduced by 29 basis points, to 3.31% for the year ended June 30,
1999 compared to 3.70% for the year ended June 30, 1998.
Provision for Loan Loss. For the year ended June 30, 1999, the provision for
loan loss increased $24,000 to $113,000 from $89,000 for the year ended June 30,
1998. The primary reason for the provision was the increased size of the loan
portfolio, particularly in commercial and agriculture loans which are considered
to carry a higher risk of default than residential loans. The Company's loan
portfolio remains primarily residential mortgage loans and has experienced a
minimal amount of charge-offs in the past three years. The allowance for loan
losses of $472,000 or .65% of loans receivable, net at June 30, 1999 is an
increase when compared to $388,000 or .59% of loans receivable, net at June 30,
1998. The allowance for loan losses as a percentage of non-performing assets was
304.64% at June 30, 1999 compared to 435.99% at June 30, 1998.
Management will continue to monitor the Company's 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 or that additional provisions for loan losses will not be
required in the future.
Non-interest Income. For the year ended June 30, 1999, non-interest income
increased $72,000 or 22.6% to $392,000 from $320,000 for the year ended June 30,
1998. The increase was primarily due to a $75,000 increase in bank service
charges and fees, a $13,000 increase in other non-interest income, and a $10,000
increase in gain on securities, available-for-sale, partially offset by a
$25,000 decrease in insurance commissions and a $1,000 decrease in loan
origination and commitment fees.
<PAGE>
Bank service charges and fees increased $75,000 to $284,000 for the year ended
June 30, 1999 from $209,000 for the year ended June 30, 1998. The increase is
primarily due to a $46,000 increase in overdraft fees, a $17,000 increase in
checking account charges, a $6,000 increase in credit card related fees, and a
$3,000 increase in late fees assessed. The primary reason for the increase in
bank service charges and fees is due to the inclusion of Rubio's service charges
and fees for the entire year as compared to only a six-month period in fiscal
1998.
Other non-interest income increased $13,000 to $33,000 for the year ended June
30,1999 from $20,000 for the year ended June 30, 1998. The increase is primarily
due to an increase in gain realized on foreclosed properties. Gain on the sale
of available- for- sale securities increased $10,000 to $15,000 for the year
ended June 30, 1999 from $5,000 for the year ended June 30, 1998 primarily due
to the sale of U.S. Treasury securities. Insurance commissions decreased $25,000
to $51,000 for the year ended June 30, 1999 from $76,000 for the year ended June
30, 1998 primarily due to fluctuations in the volume of sales of credit life and
disability insurance products.
Non-interest Expense. For the year ended June 30, 1999, non-interest expense
increased $333,000 to $2.1 million for the year ended June 30, 1999 from $1.7
million for the year ended June 30, 1998. The increase is primarily due to a
$136,000 increase in compensation and benefits, an $88,000 increase in other
expense, a $51,000 increase in goodwill, a $42,000 increase in occupancy and
equipment, an $8,000 increase in deposit insurance premiums, and a $7,000
increase in data processing.
Compensation and benefits increased $136,000 to $1.1 million for the year ended
June 30, 1999 from $929,000 for the year ended June 30, 1998. The increase was
primarily due to the addition of three full-time equivalent employees as a
result of Washington Federal's new branch in Wellman, Iowa, and to a lesser
extent, normal salary increases.
Other non-interest expense increased $88,000 to $549,000 for the year ended June
30, 1999 from $460,000 for the year ended June 30, 1998 primarily due to the
increased cost of operating additional offices since the acquisition of Rubio
and the opening of Washington Federal's branch in Wellman, Iowa. The increase
was primarily due to a $34,000 increase in supplies, a $22,000 increase in fees
paid for services provided by outside contractors, a $14,000 increase in ATM and
debit card processing fees, a $12,000 increase in postage and delivery expense,
a $12,000 increase in real estate owned expense, a $10,000 increase in checking
accounts, and a $9,000 increase in non-capitalized expenses related to the Year
2000 issue, partially offset by a $25,000 decrease in professional fees paid.
Goodwill expense increased $51,000 to $95,000 for the year ended June 30, 1999
from $43,000 for the year ended June 30, 1998 due to the acquisition of Rubio.
Occupancy and equipment expense increased $42,000 to $225,000 for the year ended
June 30, 1999 from $183,000 for the year ended June 30, 1998 primarily due to
the addition of Washington Federal's branch in Wellman, Iowa and the Rubio's
office building. FDIC insurance premiums increased $8,000 to $57,000 for the
year ended June 30, 1999 from $48,000 for the year ended June 30, 1998 primarily
due to the increase in deposits. Data processing expense increased $7,000 to
$87,000 for the year ended June 30, 1999 from $80,000 for the year ended June
30, 1998.
Income Taxes. Income tax expense increased $92,000 to $532,000 for the year
ended June 30, 1999 from $440,000 for the year ended June 30, 1998. The
effective income tax rates for the years ended June 30, 1999 and 1998 were 39.0%
and 34.8%, respectively. The increase was primarily due to the non-deductible
goodwill expense.
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 an 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.
<PAGE>
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 lower returns on interest-earnings assets and 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 of 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.
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.
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.
<PAGE>
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 ESOP 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.
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 Savings Association Insurance Fund (the
"SAIF") assessment for the year ended June 30, 1997, and a $34,000 decrease in
deposit insurance premiums.
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
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 prior to
September 1996 had not yet achieved its required reserves. A recapitalization
plan for the SAIF was signed by the President on September 30, 1996 as part of
the Economic Growth and Regulatory Paperwork Reduction Act and provided 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 was 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.
<PAGE>
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 adjustments to market conditions.
Accordingly, the Company's primary one- to four-family loan product has been a
balloon loan which accounted for $30.7 million of its $72.7 million loan
portfolio, or 42.3% at June 30, 1999. Adjustable rate loans account for $15.9
million of its $72.7 million loan portfolio, or 21.8% 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.
Net Portfolio Value. In order to encourage savings associations to reduce their
interest rate risk, the 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, 1999, 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 300 basis points in accordance with OTS
regulations. For example, a 300 basis point increase in interest rates would
decrease Washington Federal's NPV by $1.5 million or 19% and a 300 basis point
decrease in interest rates would increase Washington Federal's NPV by $1.4
million or 17%. As previously mentioned, the OTS has informed Washington Federal
that it is not subject to the IRR component as discussed above. Further, were
Washington Federal subject to the IRR component at June 30, 1999, 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 could reduce Washington Federal's NPV.
At June 30, 1999
- --------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
- ----------------------------------------------------- ------------------------
Change in
Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 6,437 -1,532 -19% 8.40% -157 bp
+200 bp 7,036 -933 -12% 9.04% -93 bp
+100 bp 7,544 -425 -5% 9.56% -41bp
0 bp 7,969 9.97%
- -100 bp 8,348 379 +5% 10.32% +35 bp
- -200 bp 8,781 813 +10% 10.71% +74 bp
- -300 bp 9,333 1,364 +17% 11.22% +125 bp
<PAGE>
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, 1999.
<TABLE>
Maturing Within
----------------------------------------------
0-6 6-12 1-2 2-3
Months Months Years Years Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Assets
Loans receivable ...................................... $ 2,057 $ 2,126 $ 1,867 $ 7,193 $ 13,243
Securities ............................................ 500 1,550 1,510 3,071 6,631
----------------------------------------------------------
Total interest-earning assets ...................... 2,557 3,676 3,377 11,264 19,874
----------------------------------------------------------
Liabilities
Interest-bearing deposits ............................. 11,797 4,102 2,248 334 18,481
----------------------------------------------------------
Asset/(Liability) funding GAP ........................... (9,240) (426) 1,129 10,930 1,393
----------------------------------------------------------
GAP ratio (assets/liabilities) .......................... 22% 90% 150% 103% 108%
</TABLE>
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, 1999, 1998, and 1997,
the Company originated loans for its portfolio in the amount of $42.1 million,
$32.1 million, and $28.2 million, respectively. These activities were funded
primarily by deposits, principal repayments of loans, and FHLB borrowings. 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.
<PAGE>
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
4.0% 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 18.84%, 13.17%, and 8.7%, respectively, at June 30, 1999, 1998 and
1997.
Cash was generated by the Company's operating activities during the years ended
June 30, 1999, 1998 and 1997, primarily as a result of net income. 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 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, 1999, 1998 and 1997, cash and cash
equivalents were $2.6 million, $3.3 million, and $808,000, respectively.
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 1999, 1998
and 1997, 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, 1999, the Company had outstanding loan commitments of $2.8 million
and undisbursed loans in process of $546,000. 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, 1999 were $27.4 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 June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instrument and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement must be adopted no later than June 30, 2002,
although earlier application is permitted. The adoption of Statement 133 is not
expected to have a material impact on the Company.
<PAGE>
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, 1999
<PAGE>
Contents
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
Consolidated statements of financial condition
Consolidated statements of income
Consolidated statements of comprehensive 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, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Cedar Rapids, Iowa
August 12, 1999
<PAGE>
Washington Bancorp and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (Note 2):
Interest-bearing ........................................................... $ 901,346 $ 1,858,527
Noninterest-bearing ........................................................ 1,656,084 1,447,847
Investment securities (Notes 2 and 3):
Held to maturity (fair value approximates $760,520 at June 30, 1999) ....... 760,520 1,131,478
Available-for-sale ......................................................... 20,695,366 19,122,283
Federal funds sold ............................................................ 1,340,000 659,497
Loans receivable, net of allowance for loan losses of $472,187
in 1999 and $388,034 in 1998 (Notes 4, 8 and 15) ........................... 72,779,177 65,884,941
Accrued interest receivable (Note 5) .......................................... 1,190,600 959,663
Federal Home Loan Bank stock .................................................. 860,000 812,400
Foreclosed real estate ........................................................ 235,914 - -
Premises and equipment, net (Note 6) .......................................... 874,551 799,806
Goodwill ...................................................................... 1,280,526 1,375,087
Other assets .................................................................. 409,996 275,416
------------------------------
Total assets .................................................... $102,984,080 $ 94,326,945
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Noninterest-bearing ..................................................... $ 2,596,143 $ 2,768,561
Interest-bearing ........................................................ 73,093,323 63,826,915
------------------------------
Total deposits .................................................. 75,689,466 66,595,476
Borrowed funds (Notes 3 and 8) ............................................. 15,706,290 15,724,071
Advances from borrowers for taxes and insurance ............................ 223,033 221,911
Accrued expenses and other liabilities ..................................... 464,638 660,492
------------------------------
Total liabilities ............................................... 92,083,427 83,201,950
------------------------------
Commitments and Contingencies (Note 13)
Redeemable Common Stock Held by Employee Stock
Ownership Plan (ESOP) (Note 9) ............................................. 189,972 153,788
------------------------------
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 1999 and 1998 651,133 shares ..................................... 6,511 6,511
Additional paid-in capital ................................................. 6,150,310 6,122,664
Retained earnings ......................................................... 6,384,863 5,825,363
Accumulated other comprehensive income, unrealized (losses)
on debt securities, net ................................................. (235,778) (507)
------------------------------
12,305,906 11,954,031
Less:
Cost of common shares acquired for the treasury
1999 50,935 shares; 1998 16,127 shares ................................ (946,435) (300,944)
Deferred compensation (Note 9) .......................................... (79,098) (104,962)
Maximum cash obligation related to ESOP shares (Note 9) ................. (189,972) (153,788)
Unearned ESOP shares (Note 9) ........................................... (379,720) (423,130)
------------------------------
Total stockholders' equity ...................................... 10,710,681 10,971,207
------------------------------
Total liabilities and stockholders' equity ...................... $102,984,080 $ 94,326,945
==============================
</TABLE>
See Notes to Financial Statements
<PAGE>
Washington bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended June 30, 1999, 1998 and 1997
1999 1998 1997
- ------------------------------------------------------------------------------
Interest income:
Loans receivable:
First mortgage loans ............... $4,662,591 $4,156,209 $3,549,039
Consumer and other loans ........... 1,316,663 981,498 578,635
Investment securities:
Taxable ............................ 1,396,926 847,215 840,485
Nontaxable ......................... 79,037 49,330 21,516
----------------------------------
Total interest income ...... 7,455,217 6,034,252 4,989,675
----------------------------------
Interest expense:
Deposits (Note 7) ..................... 3,413,212 2,619,618 2,215,768
Borrowed funds ........................ 881,818 639,162 337,405
----------------------------------
Total interest expense ..... 4,295,030 3,258,780 2,553,173
----------------------------------
Net interest income ........ 3,160,187 2,775,472 2,436,502
Provision for loan losses (Note 4) ....... 112,500 89,000 40,085
----------------------------------
Net interest income after
provision for loan losses 3,047,687 2,686,472 2,396,417
----------------------------------
Noninterest income:
Securities gains, net (Note 3) ........ 15,205 5,383 388
Loan origination and commitment fees .. 7,588 8,744 7,724
Service charges and fees .............. 284,425 209,127 117,241
Insurance commissions ................. 51,750 76,295 77,922
Other ................................. 33,348 20,404 27,893
----------------------------------
Total noninterest income ... 392,316 319,953 231,168
----------------------------------
Noninterest expense:
Compensation and benefits (Note 9) .... 1,064,847 929,224 722,087
Occupancy and equipment ............... 224,963 183,009 149,738
SAIF deposit insurance premium ........ 56,699 48,365 376,862
Data processing ....................... 86,907 79,507 75,196
Goodwill amortization ................. 94,561 43,341 - -
Other ................................. 548,804 460,463 388,258
----------------------------------
Total noninterest expense .. 2,076,781 1,743,909 1,712,141
----------------------------------
Income before income taxes . 1,363,222 1,262,516 915,444
Income tax expense (Note 10) ............. 532,022 439,680 350,767
----------------------------------
Net income ................. $ 831,200 $ 822,836 $ 564,677
==================================
Earnings per common share (Note 11):
Basic ................................. $ 1.48 $ 1.36 $ 0.92
==================================
Diluted ............................... $ 1.44 $ 1.33 $ 0.91
==================================
Weighted average common shares for:
Basic earnings per share .............. 563,303 603,589 611,539
==================================
Diluted earnings per share ............ 578,115 620,266 617,602
==================================
See Notes to Financial Statements.
<PAGE>
Washington bancorp and Subsidiaries
Consolidated Statements of comprehensive income
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ........................................ $ 831,200 $ 822,836 $ 564,677
---------------------------------
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during
the year, net of income taxes 1999 $135,393;
1998 $3,688; 1997 $39,087 ................... (225,737) 6,175 65,145
Reclassification adjustments for net (gains)
realized in net income, net of income taxes
1999 $5,671; 1998 $2,008; 1997 $145 ......... (9,534) (3,375) (243)
---------------------------------
Other comprehensive income (loss) ... (235,271) 2,800 64,902
---------------------------------
Comprehensive income ................ $ 595,929 $ 825,636 $ 629,579
=================================
</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, 1999, 1998 and 1997
<TABLE>
Accum- Cost Of
mulated Common Maximum
Other Shares Cash Total
Additional Compre- Acquired Deferred Obligation Unearned Stock
Preferred Common Paid-In Retained hensive For the Comp- Related to ESOP holders'
Stock Stock Capital Earnings Income Treasury ensation ESOP Shares Shares Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 compen-
sation under stock
award programs ....... - - - - - - - - - - - - 72,294 - - - - 72,294
Allocation of ESOP
shares ............... - - - - 16,055 - - - - - - - - - - 41,000 57,055
Other comprehensive
income ............... - - - - - - - - 64,902 - - - - - - - - 64,902
Change related to ESOP
shares ............... - - - - - - - - - - - - - - (69,392) - - (69,392)
--------------------------------------------------------------------------------------------------------
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
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)
Other comprehensive
income ................ - - - - - - - - 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
(continue....)
<PAGE>
Accum- Cost Of
mulated Common Maximum
Other Shares Cash Total
Additional Compre- Acquired Deferred Obligation Unearned Stock
Preferred Common Paid-In Retained hensive For the Comp- Related to ESOP holders'
Stock Stock Capital Earnings Income Treasury ensation ESOP Shares Shares Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(continued)
Balance, June 30, 1998 ..... - - 6,511 6,122,664 5,825,363 (507) (300,944) (104,962) (153,788) (423,130) 10,971,207
Net income .............. - - - - - - 831,200 - - - - - - - - - - 831,200
Dividends ($0.48 per
share) ................ - - - - - - (271,700) - - - - - - - - - - (271,700)
Acquisition of 37,000
shares of common stock
for the treasury ...... - - - - - - - - - - (684,125) - - - - - - (684,125)
Issuance of 2,192 shares
under stock awards
program ............... - - - - (2,181) - - - - 38,634 (36,453) - - - - - -
Amortization of compen-
sation under stock award
program ............... - - - - - - - - - - - - 62,317 - - - - 62,317
Allocation of ESOP
shares ................ - - - - 29,827 - - - - - - - - - - 43,410 73,237
Other comprehensive
income ................ - - - - - - - - (235,271) - - - - - - - - (235,271)
Change related to ESOP
shares ................ - - - - - - - - - - - - - - (36,184) - - (36,184)
-------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 ..... $ - - $6,511 $6,150,310 $6,384,863 $(235,778) $(946,435) $(79,098) $(189,972) $(379,720) $10,710,681
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Washington BANCORP and subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 1999, 1998 AND 1997
<TABLE>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ........................................... $ 831,200 $ 822,836 $ 564,677
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts on
debt securities ................................. (58,188) 48,049 37,771
Amortization of goodwill .......................... 94,561 43,341 - -
Provision for loan losses ......................... 112,500 89,000 40,085
(Gain) on sale of investment securities ........... (15,205) (5,383) (388)
(Gain) on sale of foreclosed real estate .......... (21,424) (10,573) (36,911)
Depreciation ...................................... 77,289 70,548 56,620
Compensation under stock awards ................... 62,317 67,329 72,294
ESOP contribution expense ......................... 73,237 71,701 57,055
Deferred income taxes ............................. (76,153) (31,383) (16,798)
(Increase) in accrued interest receivable ......... (230,936) (87,398) (102,439)
(Increase) decrease in other assets ............... (134,582) (171,664) (27,718)
Increase (decrease) in accrued expenses and
other liabilities ............................... 21,363 (140,901) 54,215
---------------------------------------
Net cash provided by operating activities 735,979 765,502 698,463
---------------------------------------
Cash Flows from Investing Activities
Held-to-maturity securities:
Maturities and calls .............................. 368,250 153,250 - -
Purchases ......................................... - - (65,000) - -
Available-for-sale securities:
Sales ............................................. 1,800,000 1,416,719 911
Maturities ........................................ 22,336,682 12,054,554 11,238,648
Purchases ......................................... (26,010,000) (12,250,000) (6,395,000)
Federal funds sold, net .............................. (680,503) 527,272 - -
Purchase of Federal Home Loan Bank stock ............. (47,600) (346,800) (96,500)
Loans made to customers, net ......................... (7,221,225) (5,584,292) (9,627,628)
Purchase of premises and equipment ................... (152,033) (93,489) (63,245)
Purchase of stock of Rubio Savings Bank of Brighton,
net of cash and cash equivalents received (Note 16) - - (2,466,021) - -
----------------------------------------
Net cash (used in) investing activities ... (9,606,429) (6,653,807) (4,942,814)
----------------------------------------
Cash Flows from Financing Activities
Net increase in deposits ............................. $9,093,990 $ 1,881,828 $ 577,880
Proceeds from Federal Home Loan Bank advances ........ 9,500,000 50,450,000 98,650,000
Principal payments on Federal Home Loan Bank
advances .......................................... (9,517,781) (43,377,694) (95,502,977)
Net increase in advances from borrowers for taxes
and insurance ..................................... 1,122 17,234 (13,829)
Proceeds from issuance of common stock ............... - - 12,330 - -
Acquisition of common stock .......................... (684,125) (328,899) (348,563)
Dividends paid ....................................... (271,700) (267,925) (213,707)
-----------------------------------------
Net cash provided by financing activities 8,121,506 8,386,874 3,148,804
-----------------------------------------
Net increase (decrease) in cash and
cash equivalents .................... (748,944) 2,498,569 (1,095,547)
Cash and cash equivalents:
Beginning ............................................ 3,306,374 807,805 1,903,352
-----------------------------------------
Ending ............................................... $ 2,557,430 $ 3,306,374 $ 807,805
-----------------------------------------
</TABLE>
(Continued)
<PAGE>
Washington Bancorp and subsidiaries
Consolidated Statements of Cash Flows ( Continued)
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors .............................................. $3,434,349 $ 2,562,216 $2,225,796
Interest paid on other obligations ....................................... 881,818 639,162 337,405
Income taxes, net of refunds ............................................. 558,300 684,779 288,713
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate .............................. $ 485,722 $ 110,427 $ 106,289
Contract sales of foreclosed real estate .................................... 271,233 121,000 143,200
Stock issued under stock awards program ..................................... 36,453 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
===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Nature of activities: Washington Bancorp is a multibank holding company engaged
in the business of banking. The Company's two wholly-owned subsidiary banks are
Washington Federal Savings Bank, Washington, Iowa and Rubio Savings Bank of
Brighton, Brighton, Iowa. The Banks are full service banks extending their
services to individuals, businesses, governmental units and institutional
customers primarily in the communities of Washington, Wellman and Brighton,
Iowa.
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.
Certain significant estimates: The allowance for loan losses, fair values of
securities and other financial instruments, and stock-based compensation expense
involve certain significant estimates made by management. These estimates are
reviewed by management routinely and it is reasonably possible that
circumstances that exist at June 30, 1999 may change in the near-future and that
the effect could be material to the consolidated financial statements.
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, the Company purchased all of the
outstanding stock of Rubio in a transaction accounted for as a purchase.
Investment securities: Held-to-maturity securities consist solely of debt
securities which the Banks have the positive intent and ability to hold to
maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities not classified as
trading or held to maturity. Available-for-sale securities are stated at fair
value, and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders' equity. There were
no trading securities as of June 30, 1999 and 1998.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual
lives of those securities. The method of amortization results in a constant
effective yield on those securities (the interest method). Realized gains and
losses on investment securities are included in income, determined on the basis
of the cost of the specific securities sold.
Loans receivable: Loans receivable are stated at unpaid principal balances less
the allowance for loan losses.
<PAGE>
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.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment to the related
loans yield.
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.
Earnings per common 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.
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.
<PAGE>
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 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.
Recently issued accounting standards: SFAS No. 130, "Reporting Comprehensive
Income," establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. The Statement requires that an enterprise:
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company has adopted this
accounting standard for the year ended June 30, 1999 and retroactively presented
prior year statements of comprehensive income.
Other recently issued accounting standards are not expected to materially affect
the Company's financial statements.
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 represent 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.
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, 1999. In addition, Washington is required to maintain a
minimum balance of unpledged cash and investment securities totaling
approximately $2,228,000 as of June 30, 1999 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, 1999 and 1998 are as follows:
<TABLE>
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
U. S. Treasury securities ........................ $ 1,704,558 $ 3,192 $ - - $ 1,707,750
U. S. Government agencies ........................ 13,871,569 - - (248,191) 13,623,378
Corporations and other ........................... 5,053,899 179 (128,573) 4,925,505
State and political subdivisions ................. 442,485 257 (4,009) 438,733
-------------------------------------------------------
$21,072,511 $ 3,628 $ (380,773) $20,695,366
=======================================================
1998:
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
=======================================================
</TABLE>
The amortized cost and fair value of investment securities held to maturity are
as follows:
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------
State and political subdivisions:
1999 .......................... $ 760,520 $ - - $ - - $ 760,520
============================================
1998 .......................... $1,131,478 $ - - $ - - $1,131,478
============================================
<PAGE>
The amortized cost and fair value of debt securities as of June 30, 1999 by
contractual maturity are shown below.
<TABLE>
Amortized Fair
Cost Value
------------------------
<S> <C> <C>
Available for sale:
Due in one year or less ......................................................... $ 2,364,459 $ 2,365,089
Due after one year through five years ........................................... 12,252,601 12,037,768
Due after five years through ten years .......................................... 6,355,024 6,196,077
Due after ten years ............................................................. 100,428 96,432
------------------------
21,072,512 20,695,366
------------------------
Held to maturity:
Due in one year or less ......................................................... 150,022 150,022
Due after one year through five years ........................................... 505,498 505,498
Due after five years through ten years .......................................... 105,000 105,000
------------------------
760,520 760,520
------------------------
$21,833,032 $ 21,455,886
========================
</TABLE>
Investment securities with a carrying amount of $3,741,599 and $3,302,984 at
June 30, 1999 and 1998, respectively, were pledged as collateral on public
deposits.
Securities gains (losses) for the years ended June 30, 1999, 1998 and 1997 are
as follows:
1999 1998 1997
-----------------------------
Realized gains ......................... $20,367 $ 5,383 $ 388
Realized (losses) ...................... (5,162) - - - -
-----------------------------
$15,205 $ 5,383 $ 388
=============================
Note 4. Loans Receivable
Loans receivable are summarized as follows:
June 30,
------------------------
1999 1998
------------------------
First mortgage loans (principally conventional):
Secured by one-to-four family residences ...... $49,464,296 $45,302,569
Home equity and second mortgage ............... 1,257,725 1,164,377
Multifamily and commercial real estate ........ 8,611,583 7,411,209
Construction loans ............................ 796,418 152,143
------------------------
Total mortgage loans ............... 60,130,022 54,030,298
Commercial loans ................................. 8,714,483 8,163,641
Consumer and other loans:
Automobile .................................... 3,161,472 3,064,531
Other ......................................... 1,245,387 1,014,505
------------------------
Total loans ........................ 73,251,364 66,272,975
Less allowance for loan losses ................ 472,187 388,034
------------------------
$72,779,177 $65,884,941
========================
<PAGE>
Loans receivable are net of loans in process of $546,229 and $335,835 as of June
30, 1999 and 1998, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
1999 1998 1997
--------------------------------
Balance, beginning ......................... $388,034 $225,650 $209,394
Provision charged to expense ............ 112,500 89,000 40,085
Charge-offs ............................. (47,208) (46,428) (33,841)
Recoveries .............................. 18,861 14,638 10,012
Allowance of Rubio at date of acquisition - - 105,174 - -
--------------------------------
Balance, ending ............................ $472,187 $388,034 $225,650
================================
The Banks have no loans receivable at June 30, 1999 and 1998 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:
1999 1998
-----------------------
Investment securities .............................. $ 324,475 $ 206,974
Loans receivable ................................... 866,125 752,689
-----------------------
$1,190,600 $ 959,663
=======================
Note 6. Premises and Equipment
Premises and equipment consisted of the following at June 30:
1999 1998
-----------------------
Land ............................................... $ 83,080 $ 83,080
Building ........................................... 812,799 724,357
Furniture, fixtures and equipment .................. 745,915 682,322
-----------------------
1,641,794 1,489,759
Less accumulated depreciation ...................... 767,243 689,953
-----------------------
$ 874,551 $ 799,806
=======================
<PAGE>
Note 7. Deposits
Deposits at June 30 are as follows:
<TABLE>
Weighted
Average
Rate At 1999 1998
June 30, -------------------- ---------------------
1999 Amount Percent Amount Percent
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-bearing
deposits 1999 $2,596,143;
1998 $2,768,561 ............. 1.22% $ 8,536,323 11.3% $ 8,246,486 12.4%
Money market ................... 3.47 11,470,925 15.1 10,472,641 15.7
Passbook savings ............... 2.04 5,728,502 7.6 5,537,316 8.3
-------------------------------------------
25,735,750 34.0 24,256,443 36.4
-------------------------------------------
Certificates of deposit:
2.01% to 3% ................. 2.11 360,797 0.5 155,246 0.2
4.01% to 5% ................. 4.65 11,423,071 15.1 2,550,322 3.8
5.01% to 6% ................. 5.54 31,958,585 42.2 32,583,131 48.9
6.01% to 7% ................. 6.29 6,211,263 8.2 7,050,334 10.7
-------------------------------------------
49,953,716 66.0 42,339,033 63.6
-------------------------------------------
4.38 $75,689,466 100.0% $66,595,476 100.0%
===========================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,233,000 and $6,329,000 at June 30,
1999 and 1998, respectively. Deposits in excess of $100,000 are not insured by
the FDIC.
At June 30, 1999, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
Year Ending June 30,
------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2% to 3% ........... $ 360,797 $ - - $ - - $ - - $ - - $ 360,797
4.01% to 5% ........ 9,452,215 1,689,624 281,232 - - - - 11,423,071
5.01% to 6% ........ 16,760,271 5,826,329 8,192,437 336,448 843,100 31,958,585
6.01% to 7% ........ 862,214 5,148,570 200,479 - - - - 6,211,263
------------------------------------------------------------------------------
$27,435,497 $12,664,523 $ 8,674,148 $ 336,448 $ 843,100 $49,953,716
==============================================================================
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1999 1998 1997
---------------------------------
Money market ............................ $ 404,713 $ 360,080 $ 384,112
Passbook savings ........................ 184,866 116,880 53,293
NOW ..................................... 111,094 82,454 36,907
Certificates of deposit ................. 2,712,539 2,060,204 1,741,456
----------------------------------
$3,413,212 $2,619,618 $2,215,768
==================================
Note 8. Borrowed Funds
Borrowed funds at June 30 are as follows:
1999 1998
------------------------
Short-term advances from the Federal Home Loan Bank . $ 8,750,000 $ 9,596,975
Long-term advances from the Federal Home Loan Bank .. 6,956,290 6,127,096
------------------------
$15,706,290 $15,724,071
========================
<PAGE>
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 with a face amount of $41,935,000. Of this
total, $8,750,000 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, 1999 have maturity dates as follows:
Year Ending June 30,
June 30, Interest Rate 1999
- --------------------------------------------------------------------------------
2000 4.79% to 6.33% $ 9,013,041
2001 5.31% to 6.33% 1,279,115
2002 5.79% to 6.33% 296,173
2003 5.41% to 6.33% 814,275
2004 5.79% to 6.33% 333,481
Thereafter 5.79% to 6.33% 3,970,204
-----------
$15,706,289
===========
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 $74,924 and $68,865 for the years ended June 30, 1999 and 1998,
respectively.
Shares of common stock held by the ESOP at June 30, 1999 and 1998 are as
follows:
1999 1998
-------------------
Allocated shares .............................. $ 12,376 $ 8,202
Shares released for allocation ................ 2,254 2,087
Unreleased (unearned) shares .................. 37,972 42,313
-------------------
52,602 52,602
-------------------
Fair value of unreleased (unearned) shares .... $576,795 $785,329
===================
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, 1999 and 1998, $6,005 and $2,503,
respectively, was charged to expense.
<PAGE>
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 $18,920 and $5,961 for the years ended June 30, 1999 and
1998, respectively.
Stock-based compensation plans: 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,
------------------------------
1999 1998 1997
------------------------------
Pro forma net income ................ $806,468 $781,465 $534,323
Pro forma earnings per share:
Basic ............................ 1.43 1.29 0.87
Diluted .......................... 1.39 1.26 0.87
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 1999, 1998 and 1997: dividend rates of 2.2%, 1.9% and
3.2%; price volatility of 22.79%, 8.25% and 14.2%; 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.
A summary of the status of the Company's stock option plan is as follows:
Weighted-
Average
Exercise
Shares Price
--------------------------
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
Granted .................................... 5,479 16.63
Exercised .................................. - -
Forfeited .................................. - -
--------------------------
Outstanding at June 30, 1999 .................. 52,600 12.22
==========================
1999 1998 1997
-----------------------------
Weighted-average fair value per option of
options granted during the year .......... $ 4.16 $ 3.27 $ 1.82
============================
<PAGE>
Other pertinent information related to the options outstanding at June 30, 1999
is as follows:
Remaining
Number Exercise Contractual Number
Outstanding Price Life Exercisable
- -----------------------------------------------------
44,303 $ 11.25 7 Years 17,726
2,818 18.94 8 Years 564
5,479 16.63 9 Years - -
- ----------------------- ------------
52,600 $ 12.22 18,290
======================= ============
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, 1999, 1998 and 1997, awards were granted for
2,192 shares, 2,127 shares and 19,914 shares respectively, with a fair value of
$16.63, $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, 1999, 1998 and 1997 totaled $62,317, $67,329 and
$72,294, respectively. Shares of common stock are issued upon vesting.
Note 10. Income Taxes
Net deferred income tax assets (liabilities) consist of the following components
as of June 30, 1999 and 1998:
1999 1998
-------------------
Deferred tax assets:
Unrealized loss on investment securities
available for sale ....................... $141,368 $ 304
Accrued compensation ........................ 29,387 24,301
Allowance for loan losses ................... 147,888 122,762
-------------------
318,643 147,367
-------------------
Deferred tax liabilities:
Recapture of allowance for loan losses ...... 130,040 136,541
FHLB stock dividends ........................ 44,067 44,067
Premises and equipment ...................... 87,556 77,420
Accrued expenses ............................ 32,201 48,408
Other ....................................... 6,411 39,780
-------------------
300,275 346,216
-------------------
Net deferred tax asset (liability) $ 18,368 $(198,849)
===================
The net change in the deferred income taxes is reflected in the financial
statements for the years ended June 30, 1999, 1998 and 1997 as follows:
1999 1998 1997
-----------------------------
Statement of income ............................. $ 76,153 $ 31,383 $ 16,798
Statement of stockholders' equity* .............. 141,064 (1,680) (38,942)
Deferred taxes related to acquisition of Rubio .. - - (122,753) - -
-----------------------------
$217,217 $(93,050) $(22,144)
=============================
* Change in deferred taxes related to unrealized loss on investment securities
available for sale.
<PAGE>
The provision for income taxes charged to operations for the years ended June
30, 1999, 1998 and 1997 consisted of the following:
1999 1998 1997
------------------------------
Current .................................... $608,175 $471,063 $367,565
Deferred ................................... (76,153) (31,383) (16,798)
------------------------------
$532,022 $439,680 $350,767
==============================
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, 1999, 1998 and 1996 due to the following:
<TABLE>
Years Ended June 30,
-------------------------------------------------------------
1999 1998 1997
------------------ ------------------- --------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
expense ............... $ 477,128 35.0% $ 441,881 35.0% $ 320,405 35.0%
Tax-exempt interest ...... (34,454) (2.5) (26,760) (2.1) (9,833) (1.1)
State income taxes, net of
federal benefit ....... 50,009 3.7 37,811 3.0 32,271 3.5
Nondeductible goodwill
amortization .......... 33,097 2.4 15,169 1.2
Other, net ............... 6,242 0.4 (28,421) (2.3) 7,924 0.9
-------------------------------------------------------------
$ 532,022 39.0% $ 439,680 34.8% $ 350,767 38.3%
=============================================================
</TABLE>
Note 11. Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
<TABLE>
Year Ended June 30,
----------------------------
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common stockholders, basic . $831,200 $822,836 $564,677
============================
Weighted average shares outstanding, basic ......... 563,303 603,589 611,539
============================
Basic earnings per share ........................... $ 1.48 $ 1.36 $ 0.92
============================
Diluted earnings per share:
Net income available to common shareholders, diluted
(Note 1) ........................................ $831,200 $822,836 $564,677
============================
Weighted average shares outstanding, basic ......... 563,303 603,589 611,539
Effect of dilutive securities, stock options .... 14,812 16,677 6,063
----------------------------
Weighted average shares outstanding, diluted ....... 578,115 620,266 617,602
============================
Diluted earnings per share ......................... $ 1.44 $ 1.33 $ 0.91
============================
</TABLE>
<PAGE>
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, 1999 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------------------------
Washington:
Tangible capital .......................... 8.53% 1.5%
Risk-based capital ........................ 12.92 8.0
Core capital .............................. 8.53 4.0
According to the Office of Thrift Supervision ("OTS"), Washington is considered
to be "well capitalized."
Minimum
Actual Requirements
------------------------
Rubio:
Tier 1 risk-based capital ................... 20.72% 4.0%
Total risk-based capital .................... 21.65 8.0
Leverage ratio .............................. 11.09 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 parties 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.
Unless noted otherwise, the Banks require collateral or other security to
support financial instruments with credit risk.
Contract
Or
National
Amount
----------
Financial instruments whose contract amounts
represent credit risk, commitments to
extend credit:
First mortgage loans ............................................ $1,910,601
Consumer and other loans ........................................ 1,412,509
----------
$3,323,110
==========
<PAGE>
The above commitments are to make fixed rate loans with a June 30, 1999 weighted
average interest rate of 8.52%.
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, 1999, the Banks have
approximately $12,642,000 of agriculturally dependent loans.
Risks and uncertainies: Certain data processing application systems could fail
or perform improperly 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 Banks have identified, assessed and
tested critical information systems and are developing contingency plans for
their own applications. There is risk that in the early weeks of the Year 2000,
the Banks could experience disruptions that may affect its operations.
Management believes that the Year 2000 problem will not pose significant
operations problems for the Bank's computer systems, but disruptions could be
material to the financial statements if there are significant interruptions in
basic services, such as the electric power grid, telephone services or the
banking system. These risks cannot be estimated.
Note 14. Fair Value of Financial Instruments
The carrying value and estimated fair values of financial instruments at June
30, 1999 and 1998 are as follows:
<TABLE>
1999 1998
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ...................... $ 2,557,430 $ 2,557,430 $ 3,306,374 $ 3,306,374
Investment securities:
Held to maturity ............................ 760,520 760,520 1,131,478 1,131,478
Available-for-sale .......................... 20,695,366 20,695,366 19,122,283 19,122,283
Federal funds sold ............................. 1,340,000 1,340,000 659,497 659,497
Loans .......................................... 72,779,177 72,830,503 65,884,941 65,763,645
Financial liabilities:
Deposits ....................................... 75,689,466 76,479,543 66,595,476 67,042,333
Borrowed funds ................................. 15,706,290 15,225,298 15,724,071 15,662,707
Face Amount Face Amount
----------- -----------
Off-balance sheet instruments,
loan commitments ............................... $ 3,323,110 $ - - $ 3,208,419 $ - -
</TABLE>
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.
<PAGE>
Aggregate loan transactions with related parties were as follows:
Year Ended June 30,
-----------------------
1999 1998
-----------------------
Balance, beginning ............................... $ 791,826 $ 602,041
Loans to directors and officers of Rubio at
date of acquisition ......................... - - 259,097
New loans ..................................... 1,174,375 387,281
Repayments .................................... (1,015,936) (456,593)
-----------------------
Balance, ending .................................. $ 950,265 $ 791,826
=======================
Maximum balance during the year .................. $1,085,305 $1,219,418
=======================
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 and 1997, as
though Rubio had been acquired as of July 1, 1996, are not significantly
different than the reported amounts of the Company.
<PAGE>
Note 17. 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, 1999 and 1998
<TABLE>
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash ............................................................................... $ 4,632 $ 458,809
Investment in subsidiary banks, at cost plus equity in
undistributed earnings .......................................................... 10,526,726 10,616,841
Other assets ....................................................................... 369,295 67,288
---------------------------
$10,900,653 $11,142,938
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Liabilities, accrued expenses and other liabilities ................................ $ - - $ 17,943
---------------------------
Redeemable common stock held by Employee Stock
Ownership Plan (ESOP) ........................................................... 189,972 153,788
---------------------------
Stockholders' equity:
Preferred stock
Common stock .................................................................... 6,511 6,511
Additional paid-in capital ...................................................... 6,150,310 6,122,664
Retained earnings ............................................................... 6,384,863 5,825,363
Accumulated other comprehensive income, unrealized (losses)
on debt securities, net ...................................................... (235,778) (507)
--------------------------
12,305,906 11,954,031
Less:
Cost of common shares acquired for the treasury
1999 50,935 shares; 1998 16,127 shares ..................................... (946,435) (300,944)
Deferred compensation ........................................................ (79,098) (104,962)
Maximum cash obligation related to ESOP shares ............................... (189,972) (153,788)
Unearned shares, Employee Stock Ownership Plan ............................... (379,720) (423,130)
---------------------------
10,710,681 10,971,207
---------------------------
$10,900,653 $11,142,938
===========================
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF INCOME
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries ............................. $ 782,292 $2,800,000 $ - -
Interest income ......................................... 2,043 5,666 5,693
Miscellaneous income .................................... 8,359 25 - -
Miscellaneous expense ................................... (46,663) (60,593) (65,600)
-------------------------------------
Income (loss) before equity in
subsidiaries' undistributed
income and taxes on income ............ 746,031 2,745,098 (59,907)
Equity in undistributed net income (loss) of subsidiaries 71,919 (1,945,071) 604,285
-------------------------------------
Income before taxes on income ............. 817,950 800,027 544,378
Federal and state income taxes (credits) ................ (13,250) (22,809) (20,299)
-------------------------------------
Net income ................................ $ 831,200 $ 822,836 $ 564,677
=====================================
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ..................................................... $ 831,200 $ 822,836 $ 564,677
Adjustments to reconcile net income to net cash
provided by operations:
Equity in net income of subsidiaries ........................ (854,211) (854,929) (604,285)
(Increase) in other assets .................................. (302,007) 114,853 (74,818)
Increase (decrease) in accrued expenses and other liabilities (17,943) 4,338 (47,858)
-------------------------------------
Net cash provided by (used in) operating activities . (342,961) 87,098 (162,284)
-------------------------------------
Cash Flows from Investing Activities
Dividends received from subsidiaries ........................... 782,292 2,800,000 - -
Return of equity from subsidiaries ............................. - - 1,000,000 - -
Maturity of available-for-sale securities ...................... - - - - 500,000
Purchase of stock of Rubio ..................................... - - (4,797,689) - -
-------------------------------------
Net cash provided by (used in) investing activities . 782,292 (997,689) 500,000
-------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of shares of common stock ............... - - 12,330 - -
Payments received from subsidiary for compensation
under stock awards .......................................... 62,317 67,329 - -
Acquisition of common stock .................................... (684,125) (328,899) (348,563)
Dividends paid ................................................. (271,700) (267,925) (213,707)
-------------------------------------
Net cash (used in) financing activities ............. (893,508) (517,165) (562,270)
-------------------------------------
(Decrease) in cash .................................. (454,177) (1,427,756) (224,554)
Cash balance:
Beginning ...................................................... 458,809 1,886,565 2,111,119
-------------------------------------
Ending ......................................................... $ 4,632 $ 458,809 $1,886,565
=====================================
Supplemental Disclosures
Cash payments for income taxes, net of payments
from subsidiary ............................................. $ 221,103 $ 148,806 $ 129,458
</TABLE>
<PAGE>
WASHINGTON BANCORP
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Stan Carlson Rick R. Hofer
President and Chief Executive Personnel Manager,
Officer, Washington and Washington Sitler Electric Supply
Federal
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
Retired business owner Chairman of the Board, Washington
and Washington Federal
President and Chief Executive Officer,
Rubio Savings Bank
Executive Officers
Stan Carlson Leisha Linge
President and Chief Executive Officer Executive Vice President and Treasurer
Jeff Johnson Chris Davies
Vice President Vice President
Quintin T. Harmon
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. Washington Federal opened a branch in Wellman, Iowa in December 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 Wellman Federal Savings Bank
Main Office Branch office of Washington Federal
122 East Washington Street 801 Sixth Street
Brighton, Iowa Wellman, 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, 1999 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, 1999,
the Company had 417 stockholders of record and 600,198 outstanding shares of
common stock. Price Range of Common Stock
<PAGE>
The table below shows the range of high and low inter-dealer 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
1999
- ----
First quarter ................ $ 18.125 $ 17.00 $ .12
Second quarter ............... $ 17.00 $ 15.00 $ .12
Third quarter ................ $ 17.00 $ 15.00 $ .12
Fourth quarter ............... $ 15.50 $ 14.50 $ .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 CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999 FORM 10-KSB OF WASHINGTON BANCORP AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,656
<INT-BEARING-DEPOSITS> 901
<FED-FUNDS-SOLD> 1,340
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,695
<INVESTMENTS-CARRYING> 761
<INVESTMENTS-MARKET> 761
<LOANS> 73,251
<ALLOWANCE> 472
<TOTAL-ASSETS> 102,984
<DEPOSITS> 75,689
<SHORT-TERM> 15,706
<LIABILITIES-OTHER> 688
<LONG-TERM> 0
190
0
<COMMON> 7
<OTHER-SE> 10,704
<TOTAL-LIABILITIES-AND-EQUITY> 102,984
<INTEREST-LOAN> 5,979
<INTEREST-INVEST> 1,476
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,455
<INTEREST-DEPOSIT> 3,413
<INTEREST-EXPENSE> 4,295
<INTEREST-INCOME-NET> 3,160
<LOAN-LOSSES> 113
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 2,077
<INCOME-PRETAX> 1,363
<INCOME-PRE-EXTRAORDINARY> 831
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831
<EPS-BASIC> 1.48
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 3.31
<LOANS-NON> 0
<LOANS-PAST> 155
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 388
<CHARGE-OFFS> 47
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 472
<ALLOWANCE-DOMESTIC> 472
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 38
</TABLE>
