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, 2000
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
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(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 $8,771,000 in revenues for the fiscal year ended June
30, 2000.
As of September 27, 2000, there were issued and outstanding 538,134
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 18, 2000, was $7.2 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the Issuer that such person is an affiliate
of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the
Fiscal Year Ended June 30, 2000.
Part III of Form 10-KSB - Portions of the Proxy Statement for the 2000
Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format YES NO X
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<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. In September 2000, Richland Federal Savings, a full-service branch of
Washington Federal, was opened in Richland, 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 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.
Rubio attracts deposits from the general public and businesses in its
local market area. The deposits are primarily invested in U.S. government
agencies, 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, 2000, the Company had assets of approximately $115.4
million, deposits of approximately $73.3 million and stockholders' equity of
approximately $10.8 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.
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.
<PAGE>
At June 30, 2000, the Company's net loan portfolio totaled $84.0
million. Loans secured by first mortgages on one- to four-family residences
totaled $50.8 million, or 60.0% of the Company's total loan portfolio at June
30, 2000. The Company originates and retains substantially all of its mortgage
loan portfolio, and currently originates only a limited number of mortgage loans
for sale to the secondary market.
Loan Approval Authority. Loans for the purchase of real estate,
construction loans, first mortgage refinances, second mortgages, or commercial
loans to existing customers for more than $125,000, secured consumer loans for
more than $35,000, unsecured consumer loans for more than $20,000 and commercial
loans to new customers for more than $50,000 require loan committee approval.
All other loans require the approval of two loan officers. The Board of
Directors is provided a listing of all loans granted on a monthly basis for
ratification.
Loans to One Borrower. Washington Federal, a savings bank, is subject
to the same limits as those applicable to national banks which, under current
regulations, limit loans-to-one borrower to an amount equal to the greater of
$500,000 or 15% of unimpaired capital and surplus (except for loans fully
secured by certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). Washington Federal's
maximum loan-to-one borrower limit was approximately $1.0 million as of June 30,
2000. Washington Federal's largest amount outstanding to one borrower or group
of related borrowers, as of that date, was a group of loans secured by
agricultural real estate and agricultural operating loans in the aggregate
amount of $757,000. All of the loans to this borrower have performed in
accordance with their terms since their origination.
Rubio, a state bank, is subject to current regulations which 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 $524,000 as of June 30, 2000.
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 $470,000. All of the loans to this
borrower have performed in accordance with their terms since their origination.
Loan Portfolio Composition. The following information sets forth the
composition of the Company's loan portfolio in dollar amounts and in percentages
at the dates indicated. All of the loans in the table have fixed interest rates,
except for the commercial business loans which have adjustable rates, and
certain adjustable rate one- to four-family real estate loans offered beginning
in March 1996. The amount of adjustable rate one- to four-family loans totaled
$12.3 million at June 30, 2000.
<TABLE>
At June 30,
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2000 1999 1998 1997 1996
--------------- ---------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------- ---------------- ---------------- ---------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
-----------------
One- to four-family ................... $50,766 60.0% $49,464 67.5% $45,303 68.4% $40,696 77.1% $33,914 78.7%
Home equity and second mortgage ....... 2,431 2.9 1,258 1.7 1,164 1.7 1,233 2.3 1,569 3.6
Multi-family and commercial real estate 13,727 16.2 8,612 11.8 7,411 11.2 4,775 9.1 2,896 6.7
Other ................................. -- -- -- -- -- -- 99 0.2 115 0.3
----------------------------------------------------------------------------------------
Total mortgages .................... 66,924 79.1 59,334 81.0 53,878 81.3 46,803 88.7 38,494 89.3
Construction loans .................... 1,782 2.1 796 1.1 152 0.2 694 1.3 1,119 2.6
----------------------------------------------------------------------------------------
Total real estate loans ............ 68,706 81.2 60,130 82.1 54,030 81.5 47,497 90.0 39,613 91.9
----------------------------------------------------------------------------------------
Commercial business loans ............... 10,963 12.9 8,714 11.9 8,164 12.3 2,715 5.2 1,546 3.6
----------------------------------------------------------------------------------------
Consumer Loans:
Automobile ............................ 4,142 4.9 3,161 4.3 3,065 4.6 1,899 3.6 1,134 2.6
Deposit account ....................... 825 1.0 1,245 1.7 1,014 1.6 645 1.2 822 1.9
----------------------------------------------------------------------------------------
Total consumer loans ............... 4,967 5.9 4,407 6.0 4,079 6.2 2,544 4.8 1,956 4.5
----------------------------------------------------------------------------------------
Total loans ............................. 84,636 100.0% 73,251 100.0% 66,273 100.0% 52,756 100.0% 43,115 100.0%
====== ====== ====== ====== ======
Less:
Allowance for loan losses ............. 648 472 388 226 209
------- ------- ------- ------- -------
Total loans receivable, net ........ $83,988 $72,779 $65,885 $52,530 $42,906
======= ======= ======= ======= =======
</TABLE>
<PAGE>
There are no foreign loans outstanding for any of the years presented.
Loan Maturities. The following schedule illustrates the contractual
maturity and weighted average rates of the Company's loan portfolio at June 30,
2000. 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
------------------------------------
Commercial
Mortgage Construction Business Consumer Total
------------------ ---------------- ----------------- ----------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Period Ending
June 30,
---------------------
2001................. $10,913 8.64% $1,782 7.90% $ 7,055 9.28% $1,196 10.52% $20,946 8.90%
2002................. 12,650 8.39 --- --- 826 8.37 868 10.61 14,344 8.58
2003................. 16,287 8.57 --- --- 1,112 8.99 1,326 10.33 18,725 8.72
2004 and 2005........ 5,147 8.46 --- --- 1,060 8.93 1,542 10.10 7,749 8.85
2006 to 2010......... 4,035 8.04 --- --- 624 9.37 29 7.45 4,688 8.21
2011 to 2015......... 7,080 8.05 --- --- 286 9.10 6 9.24 7,372 8.09
2016 and thereafter.. 10,812 8.21 --- --- --- --- --- --- 10,812 8.21
------- ------ ------- ------ -------
$66,924 $1,782 $10,963 $4,967 $84,636
======= ====== ======= ====== =======
</TABLE>
As of June 30, 2000, the total amount of loans due after June 30, 2001
which have predetermined interest rates was $51.4 million, while the total
amount of loans due after such date which have floating or adjustable interest
rates was $12.3 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 two one- to four-family real estate loans for the secondary market
during fiscal 2000. Washington Federal originated six 90% Farm Service Agency,
Guaranteed Farm Ownership, and Guaranteed Operation Loans totaling $1.3 million
during fiscal year 2000. Rubio originated two 90% Farm Service Agency,
Guaranteed Farm Ownership, and Guaranteed Operation Loans totaling $451,000
during fiscal year 2000. The loans are backed by 90% guarantees of the U.S.
government.
In periods of rising interest rates, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related fee income and operating
earnings.
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
Year Ended June 30,
--------------------------------
2000 1999 1998
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Originations by type:
--------------------
Real estate
One- to four-family ..................................... $ 12,869 $ 22,118 $ 15,744
Home equity and second mortgage ........................ 1,072 992 1,036
Multi-family and commercial real estate ................ 9,070 5,860 5,177
Construction ........................................... 3,914 1,623 686
Non real estate
Commercial business .................................... 10,906 6,827 6,348
Consumer ............................................... 4,748 4,728 3,142
-------- -------- --------
Total loans originated .............................. 42,579 42,148 32,133
Loans sold to secondary market ............................ (157) (522) (1,474)
Principal (repayments) .................................... (31,037) (34,648) (25,096)
Balance of loans outstanding, net from acquisition of Rubio -- -- 7,849
Increase in allowance for loan losses ..................... (175) (84) (57)
-------- -------- --------
Net increase (decrease) ................................... $ 11,210 $ 6,894 $ 13,355
======== ======== ========
</TABLE>
One- to Four-Family Residential Mortgage Lending. The Company's primary
lending activity consists of the origination of residential mortgage loans
secured by property located in the Company's market area of Washington County,
Iowa and adjoining counties. The Company will not normally originate any loan
which exceeds 85% 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 25 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's
guidelines, primarily as they relate 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, 2000,
home equity and second mortgage loans amounted to $2.4 million which represented
2.9% of the Company's total loan portfolio.
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 25 years, and have loan-to-value ratios of up to 80%. At
June 30, 2000, $13.7 million or 16.2% 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, 2000 totaled
$389,000, and was secured by farm land and buildings. The loan has performed in
accordance with its terms since origination.
<PAGE>
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, 2000,
construction loans amounted to $1.8 million, or 2.1% 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 having 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, 2000, the Company had two
speculative loans to builders secured by the property being constructed totaling
$335,000.
Commercial Business Lending. At June 30, 2000, $11.0 million or 13.0%
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, totaling $6.2 million at June 30, 2000, is primarily secured by
livestock, growing crops, machinery and equipment. The largest commercial
business loan totaled $296,000 at June 30, 2000.
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, 2000, the Company's consumer loan
portfolio totaled $5.0 million or 5.9% of its total loan portfolio.
<PAGE>
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,
2000, the Company's automobile loans totaled $4.1 million or 4.9% 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, 2000, $29,000 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 letters
and/or telephone calls from a representative of the Company. If the loan
continues in a delinquent status for 90 days and no repayment plan is in effect,
a notice of right to cure default is mailed to the customer giving 30 additional
days to bring the account current before foreclosure is commenced. The loan
committee meets regularly to determine when foreclosure proceedings should be
initiated and the customer is notified when foreclosure has been commenced.
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of category at June 30, 2000. The amounts
presented represent the total remaining principal balances of the elapsed loans,
rather than the actual payment amounts which are overdue.
<TABLE>
Loans Delinquent at June 30, 2000 for:
-------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days & Over Total
--------------------- ------------------- ------------------- ---------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
--------------------- ------------------- ------------------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Mortgage Loans... 20 $751 77.9% 12 $479 84.6% 5 $164 43.6% 37 $1,394 73.1%
Consumer........... 26 88 9.1 13 58 10.3 19 29 7.7 58 175 9.2
Commercial Business 17 125 13.0 12 29 5.1 4 183 48.7 33 337 17.7
-------------------- ------------------- ------------------- ---------------------
Total.............. 63 $964 100.0% 37 $566 100.0% 28 $376 100.0% 128 $1,906 100.0%
==================== =================== =================== =====================
</TABLE>
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding accruing loans delinquent more than 90 days and foreclosed assets.
Loans are reviewed on a monthly basis and are generally placed on a non-accrual
status when the loan becomes more than 90 days delinquent and, in the opinion of
management, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
in the opinion of management, the collection of additional interest on all 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,
-------------------------
2000 1999 1998
-------------------------
(Dollars in Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ..................................... $164 $144 $ 6
Consumer ..................................... 29 7 39
Commercial business .......................... 183 4 44
Foreclosed assets:
One- to four-family .......................... -- 39 --
Nonresidential real estate ................... 271 132 --
---- ---- ----
Total non-performing assets ...................... $647 $326 $ 89
---- ==== ====
Total as a percentage of total assets ............ 0.56% 0.32% 0.09%
==== ==== ====
Other Loans of Concern. In addition to the non-performing loans set
forth in the table above, as of June 30, 2000, there was $1.5 million 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 $154,000 on June 30,
2000, 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.
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, 2000. One property has a pending
purchase agreement 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.
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but 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, 2000, the Company had classified $830,000 of its assets as substandard,
and $10,000 as doubtful as compared to $199,000 and $0 at June 30, 1999
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 $648,000, or as a ratio of total loans was 0.77%,
at June 30, 2000.
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.
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,
---------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans .............. $403 81.2% $205 82.1% $168 81.5%
Commercial Business Loans ... 152 12.9 155 11.9 141 12.3
Consumer Loans .............. 86 5.9 74 6.0 61 6.2
Unallocated ................. 7 -- 38 -- 18 --
--------------------------------------------------------------------
$648 100.0% $472 100.0% $388 100.0%
====================================================================
</TABLE>
<PAGE>
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:
<TABLE>
Year Ended June 30,
-------------------------
2000 1999 1998
-------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ......................................... $ 472 $ 388 $ 226
Balance of the allowance for loan losses of Rubio at date of acquisition -- -- 105
Charge offs:
Mortgage ........................................................... -- -- --
Consumer ........................................................... (44) (47) (46)
----- ----- -----
Total charge offs ............................................... (47) (47) (46)
Recoveries ............................................................. 33 18 14
----- ----- -----
Net charge offs ........................................................ (11) (29) (32)
----- ----- -----
Provisions charged to operations ....................................... 187 113 89
----- ----- -----
Balance at end of period ............................................... $ 648 $ 472 $ 388
===== ===== =====
Ratio of net charge offs during the period to average loans outstanding
during the period ..................................................... .01% .04% .05%
===== ===== =====
Ratio of net charge offs during the period to average nonperforming
assets ................................................................ 2.16% 14.8% 35.30%
===== ===== =====
</TABLE>
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, 2000, the Company had an
investment portfolio of approximately $24.1 million, consisting primarily of
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 federal banking 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.
<PAGE>
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment securities portfolio, short-term investments, FHLB
stock, and mortgage-backed and related securities at the dates indicated. For
additional information concerning the Company's investments, see Note 3 of the
Notes to Consolidated Financial Statements in the Annual Report to Stockholders
attached hereto as Exhibit 13.
<TABLE>
At June 30,
--------------------------------------------------------------
2000 1999 1998
------------------- -------------------- --------------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
------------------- -------------------- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Available for sale (1):
U.S. treasury securities ....... $ 300 1.24% $ 1,708 7.65% $ 6,337 30.08%
U.S. government agencies ....... 16,056 66.60 13,623 61.05 6,770 32.14
State and political subdivisions 326 1.35 439 1.97 348 1.65
Mortgage-backed securities ..... -- -- -- -- 51 0.24
Corporations ................... 4,920 20.41 4,925 22.07 5,616 26.66
--------------------------------------------------------------------------
Total Available for Sale . 21,602 89.61 20,695 92.74 19,122 90.78
-----------------------------------------------------------
Held to maturity(1):
State and political subdivisions 775 3.21 761 3.41 1,131 5.37
Mortgage-backed securities ..... -- -- -- -- -- --
-----------------------------------------------------------
Total held to maturity ... 775 3.21 761 3.41 1,131 5.37
-----------------------------------------------------------
Total Investment Securities .. 22,377 92.82 21,456 96.15 20,253 96.15
-----------------------------------------------------------
FHLB Stock ............................ 1,730 7.18 860 3.85 812 3.85
-----------------------------------------------------------
Total Investment Securities ...
and FHLB Stock .............. $24,107 100.00% $22,316 100.00% 21,065 100.00%
===========================================================
Average remaining life of investment
securities (excluding FHLB Stock) ... 4.3 years 3.9 Years 2.4 Years
Interest-Earning Assets:
Interest-bearing deposits with
banks .............................. $ 1,859 100.00% $ 901 100.00% $ 1,859 100.00%
===========================================================
--------------------
<FN>
(1) Securities classified as available for sale were carried at fair value at
June 30, 2000, 1999 and 1998. 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, 2000 was $21.6 million resulting in an unrealized loss, net of income tax,
at that date of approximately $448,000.
The category of investment securities entitled "corporations" is
comprised of investments in corporate bonds. The corporate bonds are considered
investment grade bonds, but carry additional credit risk compared to bonds
guaranteed by the U.S. government or agencies thereof. The Company evaluates the
benefit of higher yields on these bonds versus increased credit risk as compared
to U.S. Treasury or agency securities. The quality of these bonds is monitored
primarily by reviewing the investment ratings assigned to the bonds by
independent sources such as Standard & Poors, etc. Maturities and sales of U.S.
treasury securities have been reinvested primarily in U.S. agency securities to
realize a higher interest yield.
<PAGE>
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, 2000.
<TABLE>
At June 30, 2000
----------------------------------------------------------
Book Value of Investment Securities Maturing In
----------------------------------------------------------
Total
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities ....... $ 300 $ -- $ -- $ -- $ 300
U.S. government agencies ....... 940 11,760 2,182 1,174 16,056
State and political subdivisions 324 389 294 94 1,101
Corporations ................... -- 3,970 950 -- 4,920
----------------------------------------------------------
Total ..................... $ 1,564 $16,119 $ 3,426 $ 1,268 $22,377
==========================================================
Weighted average yield ......... 5.64% 6.07% 7.05% 7.78% 6.29%
==========================================================
</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
$30.2 million in FHLB advances outstanding at June 30, 2000.
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 $5.5 million, or 7.3% of the Company's
deposit portfolio at June 30, 2000. Certificates of deposit constituted $46.7
million or 61.7% of the deposit portfolio of which $3.6 million or 3.5% of the
deposit portfolio were certificates of deposit with balances of $100,000 or
more. MMDA accounts constituted $11.6 million or 15.3% of the Company's deposit
portfolio at June 30, 2000. As of June 30, 2000, the Banks had no brokered
deposits. At June 30, 2000, transactions deposits were $9.5 million or 12.5% of
total deposits.
Savings Deposit Activities. The following table sets forth the savings
activity at the Banks during the period indicated.
<TABLE>
Year Ended June 30,
---------------------------------
2000 1999 1998
---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance ................................ $ 75,689 $ 66,595 $ 44,754
Balance of deposits of Rubio at acquisition .... -- -- 19,959
Net increase (decrease) before interest credited (4,576) 6,647 (33)
Interest credited .............................. 2,184 2,447 1,915
-------- -------- --------
Ending balance ................................. $ 73,297 $ 75,689 $ 66,595
======== ======== ========
Net increase (decrease) ........................ $ (2,932) $ 9,094 $ 21,841
======== ======== ========
Percent increase (decrease) .................... (3.16)% 13.66% 48.8%
======== ======== ========
</TABLE>
<PAGE>
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,
--------------------------------------------------------
2000 1999 1998
------------------ ----------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------ ----------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
-----------------------------------------
Demand and NOW Accounts (0.00%-3.35%) ... $ 9,459 12.83% $8,536 11.22% $ 8,246 12.31%
Money Market Accounts (2.30% - 5.00%) ... 11,580 15.71 11,471 15.08 10,473 15.63
Passbook Savings Accounts (2.30% - 3.00%) 5,531 7.50 5,728 7.53 5,537 8.26
---------------------------------------------------------
Total Non-Certificates .................. 26,570 36.04 25,735 33.83 24,256 36.20
---------------------------------------------------------
Certificates
2.00% - 3.00% ........................... 260 0.35 361 0.47 155 0.23
3.01% - 4.00% ........................... 185 0.25 -- -- -- --
4.01% - 5.00% ........................... 9,843 13.35 11,423 15.01 2,550 3.81
5.01% - 6.00% ........................... 21,965 29.80 31,959 42.01 32,583 48.63
6.01% - 7.00% ........................... 14,473 19.63 6,211 8.17 7,050 10.52
---------------------------------------------------------
Total Certificates ...................... 46,726 63.39 49,954 65.66 42,339 63.19
---------------------------------------------------------
Accrued Interest ........................ 421 0.57 388 0.51 409 0.61
---------------------------------------------------------
Total Deposits and Accrued Interest ..... $73,717 100.00% $76,077 100.00% $67,004 100.00%
=========================================================
</TABLE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 2000.
<TABLE>
0.00- 4.01- 5.01- 6.01- Percent of
4.00% 5.00% 6.00% 7.00% Total Total
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts
maturing in quarter
ending:
---------------------
September 30, 2000 $ 29 $ 2,525 $ 3,450 $ 3,121 $ 9,215 19.72%
December 31, 2000 . 130 2,621 2,096 1,750 6,597 14.12
March 31, 2001 .... 269 2,230 545 5,449 8,493 18.18
June 30, 2001 ..... 18 1,064 2,730 2,426 6,238 13.35
September 30, 2001 -- 384 5,611 300 6,296 13.47
December 31, 2001 . -- 463 2,962 231 3,656 7.82
March 31, 2002 .... -- 51 696 -- 747 1.60
June 30, 2002 ..... -- 208 664 43 915 1.96
September 30, 2002 -- 122 675 -- 797 1.71
December 31, 2002 . -- 121 1,006 514 1,641 3.51
March 31, 2003 .... -- 53 172 539 764 1.64
June 30, 2003 ..... -- 1 64 0 74 0.16
Thereafter ........ -- -- 1,203 1 1,294 2.77
---------------------------------------------------------------
Total ............. $ 446 $ 9,843 $21,964 $14,473 $46,726 100.00%
================================================================
Percent of Total 0.95% 21.07% 47.01% 30.97% 100.00%
==================================================
</TABLE>
<PAGE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of June 30, 2000.
MATURITY
-----------------------------------------------
3 Months Over 3- 6 Over 6-12 Over 12
or Less Months Months Months Total
-----------------------------------------------
(Dollars in Thousands)
Certificates of Deposit less
than $100,000 ............... $ 8,715 $ 6,025 $13,640 $15,745 $44,125
Certificates of Deposit of
$100,000 or More ............ 500 572 1,091 438 2,601
-----------------------------------------------
Total Certificates of Deposit . $ 9,215 $ 6,597 $14,731 $16,183 $46,726
===============================================
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, 2000 Washington Federal had $30.2 million of
borrowings.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances at and for the dates indicated.
At and For the Year Ended June 30,
---------------------------------------
2000 1999 1998
---------------------------------------
(Dollars in Thousands)
Maximum Balance ................ $30,193 $16,628 $15,724
Average Balance ................ $23,441 $15,537 $11,519
The following table sets forth certain information as to Washington
Federal's FHLB advances at the dates indicated.
June 30,
------------------------------
2000 1999 1998
------------------------------
(Dollars in Thousands)
FHLB Advances ............................... $30,193 $15,706 $15,724
Weighted average interest rate during the
period of FHLB advances ................... 5.89% 5.68% 5.55%
Weighted average interest rate at end of
period of FHLB advances ................... 6.38% 5.66% 5.54%
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.
<PAGE>
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.
Richland Federal Savings, a division of Washington Federal, is one of
two financial institutions serving its immediate market area of Richland, Iowa.
The competition for deposits comes from a branch owned by a large multi-bank
holding company as well as financial institutions in outlying communities. The
closest community is approximately ten miles away and has three banks owned by
multi-bank holding companies, a local independent bank and three credit unions.
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.
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, 2000, 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 $138,000 at June 30, 2000. The subsidiary's source of income is
brokerage fees, and it had net income of $18,000, $23,000 and $24,000 for the
years ended June 30, 2000, 1999 and 1998, 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 began offering non-insured
investment products to meet the needs of current customers and the community on
July 1, 1999. 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.
<PAGE>
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. 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, 2000 was $26,000. Rubio is subject to similar regulation and
oversight by the ISB and the FRB.
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, 2000 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, 2000,
Washington Federal's and Rubio's lending limit under these restrictions were
$1.0 million and $524,000, 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.
<PAGE>
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.
For fiscal 2000, the SAIF insurance premium range was 0 to 27 basis points per
$100 of domestic deposits. Washington Federal qualified for the minimum SAIF
assessment.
In addition, 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 2.08 basis points for each $100
in domestic deposits for both BIF and SAIF-insured deposits. These assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the years 2017 through 2019.
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, 2000, Washington
Federal did not have any intangible assets and an excludable valuation
allowable, net of tax of $377,000.
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, 2000, Washington Federal had one excludable
subsidiary.
At June 30, 2000, Washington Federal had tangible capital of $7.4
million, or 7.97% of adjusted total assets, which is approximately $5.9 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, 2000,
Washington Federal had no intangibles which were subject to these tests.
At June 30, 2000, Washington Federal had core capital equal to $7.4
million, or 7.97% of adjusted total assets, which is $3.7 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, 2000, Washington Federal had no
capital instruments that qualify as supplementary capital and $461,000 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, 2000.
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, 2000, Washington Federal had total capital of $7.8 million
and risk-weighted assets of $63.4 million or total capital of 12.32% 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, 2000, Rubio had Tier 1 or leverage capital of
$2.4 million, or 10.56% of average total assets, which is approximately $1.7
million above the minimum requirement of 3% of average total assets in effect on
that date.
At June 30, 2000, Rubio had Tier 1 risk-based capital of $2.4 million,
or 15.44% of total risk- based assets, which is approximately $1.8 million above
the minimum requirement of 4% of total risk-based assets in effect on that date.
At June 30, 2000, Rubio had risk-based capital of $2.6 million, or
16.63% of total risk-based assets, which is approximately $1.3 million above the
minimum requirement of 8% of total risk- based assets in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against institutions that fail to meet their
capital requirements. They are generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such institution must submit a
capital restoration plan and until such plan is approved by its primary federal
regulator may not increase its assets, acquire another institution, establish a
branch or engage in any new activities, and generally may not make capital
distributions. The OTS and the FDIC are authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
<PAGE>
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."
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).
<PAGE>
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, 2000, Washington Federal had a liquidity ratio of
17.2%.
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, 2000, Washington Federal met
the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS and the FDIC, in connection with the examination of Washington
Federal and Rubio, respectively, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Washington Federal. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS and the FDIC.
<PAGE>
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, 2000,
Washington Federal and Rubio were in compliance with the above restrictions.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS and the
FDIC. These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. Bank holding companies such as Washington
are subject to comprehensive regulation by the FRB under the BHCA and the
regulations of the FRB. As a bank holding company, Washington is required to
file reports with the FRB and such additional information as the FRB may
require, and is subject to regular inspections by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would own
or control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
<PAGE>
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, 2000, 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 and Rubio are members
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 and Rubio are required to purchase and
maintain stock in the FHLB of Des Moines. At June 30, 2000, Washington Federal
had an aggregate of $1.7 million and Rubio had an aggregate of $74,000 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 6.87% and were 6.55% for fiscal year
2000.
<PAGE>
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.
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, 2000 Washington Federal's Excess for tax purposes
totaled approximately $244,000.
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 43, was appointed President and Chief Executive
Officer of Washington Federal in 1993 and President of Rubio in 2000. Prior to
joining Washington Federal, he was Executive Vice President of Northwoods State
Bank, Northwoods, Iowa.
Chris Davies, age 45, became Vice President and Chief Executive Officer
of Rubio Savings Bank of Brighton in 2000. From 1983 to 2000, he was Vice
President and Cashier of Rubio. Prior to joining Rubio, he was Vice President of
Seymour State Bank, Seymour, Iowa.
Dean Edwards, age 65, retired in 1999 and had been an employee of Rubio
since 1953. He was appointed President and Chief Executive Officer of Rubio in
1966. Mr. Edwards serves as a director of the Company.
Jeff Johnson, age 41, 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 36, became Executive Vice President of Washington
Federal 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, 2000, 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 $818,000 at June 30, 2000. The following table sets forth
information regarding the Company's properties:
Net Book Value
of Real Property
Leased/ or Leasehold Improvements Year
Owned at June 30, 2000 Opened
---------------------------------------------
Washington Federal Locations:
Main Office
102 East Main Street
Washington, Iowa Owned $188,000 1976
Drive-thru
220 East Washington Street
Washington, Iowa Owned $210,000 1994
Wellman Branch Office
801 6th Street
Wellman, Iowa Owned $ 66,000 1999
Rubio Location:
Main Office
122 East Washington
Rubio, Iowa Owned $203,000 1984
The branch location for the
new Richland office was acquired
subsequent to June 30, 2000
<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, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 53 and 54 of the attached 2000 Annual Report to Stockholder is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 6 to 18 of the attached 2000 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
Pages 19 to 51 of the Company's 2000 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, 2000, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with by such persons.
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.
<PAGE>
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, 2000.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WASHINGTON BANCORP
Date: September 28, 2000 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 28, 2000 Date: September 28, 2000
----------------------------------- ----------------------------
/s/ Myron L. Graber /s/ Richard L. Weeks
---------------------------------------- ----------------------------------
Myron L. Graber, Director Richard L. Weeks, Director
Date: September 28, 2000 Date: September 28, 2000
----------------------------------- -----------------------------
/s/ Mary Levy /s/ James D. Gorham
---------------------------------------- ----------------------------------
Mary Levy, Director James D. Gorham, Director
Date: September 28, 2000 Date: September 28, 2000
----------------------------------- -----------------------------
/s/ J. Richard Wiley /s/ Leisha A. Linge
---------------------------------------- ----------------------------------
J. Richard Wiley, Chairman of the Board Leisha A. Linge, Executive Vice
President and Treasurer
(Principal Financial and
Accounting Officer)
Date: September 28, 2000 Date: September 28, 2000
----------------------------------- ----------------------------
/s/ Dean Edwards
----------------------------------------
Dean Edwards, Director
Date: September 28, 2000
-----------------------------------
