Exhibit 13
Washington Bancorp
2000 Annual Report
<PAGE>
WASHINGTON BANCORP
TABLE OF CONTENTS
Letter to Stockholders................................
Selected Consolidated Financial Information...........
Management's Discussion and Analysis of
Financial Condition and Results of Operations........
Report of Independent Auditors........................
Consolidated Financial Statements.....................
Directors and Executive Officers......................
Stockholder Information...............................
CONSOLIDATED FINANCIAL HIGHLIGHTS
June 30, 2000
(Dollars in Thousands)
Total assets................................................. $115,422
Total loans, net............................................. 83,988
Investment securities and other
earning assets............................................. 26,076
Deposits..................................................... 73,297
Borrowings................................................... 30,193
Net income................................................... 1,016
Stockholders' equity......................................... 10,821
Stockholders' equity as a percent of
assets..................................................... 9.38%
ANNUAL MEETING
The Annual Meeting of Stockholders of Washington
Bancorp will be held on October 17, 2000 at 4:00 P.M.
at the office of the Company, located at 102 East
Main Street, Washington, Iowa.
<PAGE>
WASHINGTON BANCORP
102 East Main Street
Washington, Iowa 52353
September 20, 2000
Dear Stockholders:
On July 18, 2000, the Board of Directors of Washington Bancorp declared
a $.50 per share annual cash dividend on the outstanding shares of common stock.
This cash dividend was paid on August 15, 2000 to all shareholders of record on
July 31, 2000.
The Board of Directors believes that the present stock price, the
financial condition of the Company and its subsidiaries and the current earnings
warrant the payment of a cash dividend. The payment of future dividends will be
subject to the Board's periodic review of financial condition, earnings, capital
requirements and future prospects.
The continuation of the payment of cash dividends may or may not be a
prudent use of the income generated by Washington Bancorp. Potential
alternatives may be to retain earnings in an effort to increase the capital
position of the Company, to take advantage of growth opportunities or to enter
into another stock repurchase program.
Each of these alternatives may be advantageous to the long-term growth
of Washington Bancorp. The Board of Directors has not determined to discontinue
a dividend payment to shareholders at this time, but does invite all
shareholders to express to bank management their opinions on the payment of
dividends.
At the invitation of local citizens, Washington Federal Savings Bank
has opened a new branch in Richland, Iowa. Richland Federal Savings is located
in a remodeled existing brick building on the square and will offer complete
banking services, including safe deposit boxes. This expands the customer base
of the banks of Washington Bancorp into Keokuk County.
We sincerely appreciate and want to thank you, our customers and
stockholders, for your continued support.
Sincerely,
/s/ Stan Carlson
---------------------------
Stan Carlson
President & CEO
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following consolidated financial information does not purport to be
complete and is qualified in its entirety by reference to the more detailed
consolidated financial information contained elsewhere herein.
<TABLE>
At June 30,
-----------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets......................................... $115,422 $102,984 $94,327 $64,875 $60,891
Loans receivable, net................................ 83,988 72,779 65,885 52,530 40,906
Cash and cash equivalents............................ 2,849 2,557 3,306 808 1,903
Investment securities................................ 22,377 21,456 20,254 9,850 14,628
Investment in Federal Home Loan Bank ("FHLB") Stock. 1,729 860 812 466 369
Goodwill, net........................................ 1,186 1,281 1,375 --- ---
Deposits............................................. 73,297 75,689 66,595 44,754 44,176
Borrowed funds....................................... 30,193 15,706 15,724 8,652 5,505
Stockholders' equity................................. 10,821 10,711 10,971 10,675 10,548
</TABLE>
<TABLE>
Year Ended June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income................................ $8,260 $7,455 $6,034 $4,990 $4,207
Total interest expense............................... 4,706 4,295 3,259 2,553 2,499
-------------------------------------------------------------
Net interest income................................ 3,554 3,160 2,775 2,437 1,708
Provision for loan losses............................ 187 112 89 40 15
---------------------------------------------------------------
3,367 3,048 2,686 2,397 1,693
Total noninterest income............................. 511 392 320 231 197
Total noninterest expense............................ 2,149 2,077 1,744 1,712 1,206
--------------------------------------------------------------
Income before income taxes........................... 1,729 1,363 1,262 916 684
Income tax expense................................... 713 532 439 351 243
---------------------------------------------------------------
Net income........................................... $1,016 $ 831 $ 823 $ 565 $ 441
=============================================================
Earnings per common share:
Basic.............................................. $ 1.86 $ 1.48 $ 1.36 $ 0.92 $ 0.25*
=============================================================
Diluted............................................ $ 1.83 $ 1.44 $ 1.33 $ 0.91 $ 0.25*
=============================================================
Earnings per common share:
Tangible(1)........................................ $ 2.00 $ 1.60 $ 1.40 $ 0.91 $ 0.25*
=============================================================
<FN>
* Earnings per share information for the year ended June 30, 1996 is
calculated by dividing net income, subsequent to the mutual to stock
conversion, by the weighted average number of shares outstanding. Net
income subsequent to the conversion was $150,832 for the 3 1/2 month period
ended June 30, 1996.
(1) Tangible earnings per share is calculated by dividing the total of goodwill
expense plus net income by the weighted average number of diluted common
shares outstanding.
</FN>
</TABLE>
<PAGE>
<TABLE>
Year Ended June 30,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net earnings to
average total assets)............................ 0.93% 0.83% 1.06% 0.90% 0.78%
Interest rate spread information:
Average during period.............................. 2.94 2.81 2.95 3.09 2.55
End of period...................................... 2.92 3.21 2.95 3.09 2.96
Net interest margin(1)............................. 3.41 3.31 3.70 3.97 3.13
Ratio of operating expense to average total assets 1.96 2.18 2.24 2.72 2.15
Return on equity (ratio of net income to average
equity) ......................................... 9.44 7.79 7.56 5.34 6.94
Quality Ratios:
Non-performing assets to total assets at end of
period(2) ....................................... 0.57 0.15 0.09 0.35 0.07
Allowance for loan losses to non-performing loans.. 72.33 304.64 435.99 98.52 475.00
Capital Ratios:
Equity to total assets at end of period............ 9.38 10.40 11.63 16.45 17.32
Average equity to average assets.................. 9.81 10.62 13.99 16.80 11.31
Ratio of average interest-earning assets to average
interest-bearing liabilities...................... 110.35 111.04 117.22 121.22 112.79
Number of full service offices....................... 3 3 2 1 1
---------------------
<FN>
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets consist of nonaccruing loans, accruing loans past-due
90 or more days and foreclosed assets.
</FN>
</TABLE>
Capital Requirements. The following table sets forth Washington
Federal's compliance with its capital requirements at June 30, 2000.
Capital Level
OTS Requirement at June 30, 2000(1)
---------------------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
---------------------------------------------
(Dollars in Thousands)
Capital Standard
Tangible Capital............. 1.50% $1,387 7.97% $7,370 $5,983
Core Capital................. 4.00% 3,698 7.97% 7,370 3,672
Risk-based Capital........... 8.00% 5,071 12.32% 7,810 2,739
-----------------
(1) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets in accordance with Office of Thrift
Supervision ("OTS") regulations.
The following table sets forth Rubio Savings Bank's compliance with its
capital requirements at June 30, 2000.
Capital Level
OTS Requirement at June 30, 2000
---------------------------------------------
% of % of Amount
Assets Amount Assets Amount of Excess
---------------------------------------------
(Dollars in Thousands)
Tier 1 or Leverage Capital.... 3.00% $ 685 10.56% $2,409 $1,724
Tier 1 Risk-based Capital..... 4.00% 624 15.44% 2,409 1,784
Risk-based Capital............ 8.00% 1,248 16.63% 2,595 1,347
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Washington Bancorp ("Washington", and with its subsidiaries, the
"Company"), an Iowa corporation, became the holding company of Washington
Federal Savings Bank ("Washington Federal") on March 11, 1996. Washington
Federal is a federally chartered stock savings bank headquartered in Washington,
Iowa. On June 24, 1997, Washington entered into a merger agreement to acquire
Rubio Savings Bank of Brighton, Brighton, Iowa ("Rubio"). Rubio is held as a
separate subsidiary of Washington. In January 1998, Washington became a bank
holding company upon the completion of its acquisition of Rubio. In December
1998, Washington Federal opened a branch office, Wellman Federal Savings, in
Wellman, Iowa. In September 2000, Washington Federal has opened a branch office,
Richland Federal Savings, 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 only of the
business of the Banks. All references to the Company, unless otherwise
indicated, at or before March 11, 1996 refer to Washington Federal.
The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans and investment
securities, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and FHLB borrowings. Net interest income is a function of
the Company's "interest rate spread," which is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest- bearing liabilities. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. The Company, like other financial institutions, is
subject to interest-rate risk to the degree that its interest-earning assets
mature or reprice at different times, or on a different basis, than its
interest-bearing liabilities. To a lesser extent, the Company's operating
results are also affected by the amount of its non-interest income, including
service charges and loan fees, and other income which includes commissions from
sales of insurance by Washington Federal's service corporation. Non-interest
expense consists primarily of compensation and benefits, occupancy and
equipment, federal insurance premiums, data processing and other operating
expenses. The Company's operating results are significantly affected by general
economic conditions, in particular, the changes in market interest rate,
government policies and actions by regulatory authorities.
The Company's basic mission is to maximize shareholder value through
the origination of mortgage loans on a profitable basis to the communities it
serves. In seeking to accomplish this mission, the Board of Directors and
management have adopted a business strategy designed (i) to maintain the
Company's capital level in excess of regulatory requirements; (ii) to maintain
the Company's asset quality; (iii) to control operating expenses; (iv) to manage
the Company's exposure to changes in interest rates. The Company has attempted
to achieve these goals by focusing on originating first mortgage home loans,
consumer loans and commercial loans and by offering a full range of deposit
products.
Forward-Looking Statements
This document, including information included in or incorporated by
reference to, contains, and future filings by the Company on Form 10-KSB, Form
10-QSB and Form 8-K and future oral and written statements by the Company and
its management may contain, forward-looking statements about the Company and its
subsidiaries which we believe are within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements with respect to anticipated future operating and
financial performance, growth opportunities, interest rates, acquisition and
divestiture opportunities, and synergies, efficiencies, cost savings and funding
advantages expected to be realized from our prior acquisition. Words such as
"may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
these forward-looking statements. Forward-looking statements by the Company and
its management are based on beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions of management and are not guarantees of
future performance. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise. The important factors we discuss below and
elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this document and identified in our filings with the SEC and
those presented elsewhere by our management from time to time, could cause
actual results to differ materially from those indicated by the forward-looking
statements made in this document.
<PAGE>
Earnings Per Share
Basic per share amounts are computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted per share amounts
assume the conversion, exercise or issuance of all potential common stock
instruments unless the effect is to reduce a loss or increase the income per
common share from continuing operations. In accordance with Statement of
Position 93-6 of the American Institute of Certified Public Accountants, shares
owned by the Company's employee stock ownership plan ("ESOP") that have not been
committed to be released are not considered outstanding for the purpose of
computing earnings per share.
In addition to disclosing earnings per share ("EPS") information, the
Company has also provided "tangible" EPS information as an alternative measure
for evaluating the Company's ability to grow tangible capital. The Company's
tangible earnings per share is calculated by dividing the total of goodwill
expense plus net income by the weighted average number of diluted common shares
outstanding.
Financial Condition
Total Assets. Total assets increased from $94.3 million at June 30,
1998 to $103.0 million at June 30, 1999 and to $115.4 million at June 30, 2000.
The net increase from 1998 to 1999 was primarily due to a $6.9 million increase
in loans receivable, net, a $1.2 million increase in investment securities, and
a $681,000 increase in federal funds sold, partially offset by a $749,000
decrease in cash and cash equivalents. The net increase from 1999 to 2000 was
primarily due to a $11.2 million increase in loans receivable, net, a $921,000
increase in investment securities and an $870,000 increase in FHLB stock,
partially offset by a $1.2 million decrease in fed funds sold.
Loans receivable. Loans receivable, net increased from $65.9 million at
June 30, 1998 to $72.8 million at June 30, 1999 and to $84.0 million at June 30,
2000. The increase from 1998 to 1999, and from 1999 to 2000, was due to
continued mortgage loan demand in the Company's market area, as well as an
increase in commercial and agriculture loan demand. The majority of commercial
loan growth is in the agriculture sector. These loans provide for a higher rate
of return to the Company, but also carry some increased risk over our
traditional residential loan products. We believe that we follow appropriate
underwriting guidelines in order to reduce this potential risk. In addition, the
Company obtains guarantees through the Farm Service Agency Guarantee Lender's
Program when possible, to further manage portfolio risk. Commercial and
agriculture loans increased $4.8 million from June 30, 1999 to June 30, 2000.
The Company's non-performing assets were $648,000 or 0.57% of total
assets at June 30, 2000 as compared to $155,000 or 0.15% of totals assets at
June 30, 1999. Non-performing assets have increased primarily due to the
acquisition of two real estate properties which were voluntarily deeded back to
the Company and one real estate property deeded in-lieu of foreclosure. The
Company is in the process of liquidating the assets and no losses are expected.
Deposits. Deposits increased $9.1 million or 13.7% to $75.7 million at
June 30, 1999 from $66.6 million at June 30, 1998. Transaction and savings
deposits decreased as a percentage of total deposits from $24.3 million or 36.4%
at June 30, 1998 to $25.7 million or 34.0% at June 30, 1999. Certificates of
deposit increased as a percentage of total deposits from $42.3 million or 63.6%
at June 30, 1998 to $50.0 million or 66.0% at June 30, 1999. The increase in
certificates of deposit was primarily due to Washington Federal offering more
competitive rates on certain of its certificate of deposit products.
Deposits decreased $2.4 million or 3.2% to $73.3 million at June 30,
2000 from $75.7 million at June 30, 1999. Transaction and savings deposits
increased as a percentage of total deposits from $25.7 million or 34.0% at June
30, 1999 to $26.6 million or 36.3% at June 30, 2000. Certificates of deposit
decreased as a percentage of total deposits from $50.0 million or 66.0% at June
30, 1999 to $46.7 million or 63.7% at June 30, 2000. This decrease was a result
of increased local competition in a rising interest rate environment.
Stockholders' Equity. Stockholders' equity decreased from$11.0 million
at June 30, 1998 to $10.7 million at June 30, 1999 and increased to $10.8
million at June 30, 2000. The decrease from June 30, 1998 to June 30, 1999 was
primarily due to $684,000 in payments for the repurchase of 37,000 shares of the
Company's common stock, dividends paid of $272,000 and the increase in
unrealized losses on available for sale securities of $235,000, partially offset
by net income of $831,000 and the allocation of ESOP shares of $73,000. The
portfolio of available-for-sale securities is comprised primarily of investment
securities carrying fixed interest rates. The fair value of these securities is
subject to changes in interest rates and the fair value of these securities was
less than their carrying value as of June 30, 1999.
<PAGE>
The increase from June 30, 1999 to June 30, 2000 was primarily due to
net income of $1.0 million, the allocation of ESOP shares of $64,000 and the
amortization of deferred compensation of $29,000, partially offset by $680,000
in payments for the repurchase of 50,710 shares of the Company's common stock,
the increase in unrealized losses on available for sale securities of $212,000,
dividends paid of $67,000, and the increase in maximum cash obligation on ESOP
shares of $39,000.
Net Interest Income Analysis
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. No tax equivalent
adjustments were made. All average balances are monthly average balances.
<TABLE>
Year Ended June 30,
-----------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ---------------------------- ------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............... $ 78,148 $6,688 8.56% $69,013 $5,979 8.66% $59,089 $5,138 8.69%
Investment securities............. 23,058 1,412 6.12 21,692 1,253 5.78 13,622 800 5.87
FHLB stock........................ 1,198 78 6.53 851 55 6.43 596 40 6.77
Other interest-earning assets..... 1,866 82 4.41 3,897 168 4.32 1,654 56 3.40
----------------- ---------------- -----------------
Total interest-earning assets(1) 104,270 8,260 7.92 95,453 7,455 7.81 74,961 6,034 8.05
----------------- ---------------- -----------------
Interest-bearing liabilities:
Certificates of deposit........... 48,785 2,629 5.39 48,250 2,712 5.62 35,753 2,060 5.76
NOW, money market and passbook
savings......................... 22,263 696 3.13 21,991 700 3.18 16,508 558 3.38
Advances from borrowers for taxes
and insurance................... --- --- --- 185 1 0.46 167 2 1.02
FHLB advances..................... 23,441 1,381 5.89 15,537 882 5.68 11,519 639 5.55
---------------- ---------------- -----------------
Total interest-bearing liabilities 94,489 4,706 4.98 85,963 4,295 5.00 63,947 3,259 5.10
---------------- ---------------- -----------------
Net interest income................. $ 3,554 $ 3,160 $ 2,775
======= ======= =======
Net interest rate spread(2)......... 2.94% 2.81% 2.95%
==== ==== ====
Net interest-earning assets......... $ 9,781 $ 9,490 $11,014
======= ======= =======
Net yield on average interest-earning
assets............................ 3.41% 3.31% 3.70%
=== ==== ====
Average interest-earning assets to 110.35% 111.04% 117.22%
average interest-earning liabilities ====== ====== ======
---------------------
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
</FN>
</TABLE>
<PAGE>
The following table presents the weighted average yields on loans,
investments and other interest- earning assets, and the weighted average rates
paid on deposits and borrowings and the resultant interest rate spreads at the
dates indicated.
At June 30,
-------------------------
2000 1999 1998
-------------------------
Weighted average yield on:
Loans receivable ............................ 8.57% 8.44% 8.61%
Investment securities ....................... 6.23 5.92 5.94
Other interest-earning assets ............... 6.41 5.50 5.86
Combined weighted average yield on interest- ..
earning assets ............................... 8.04 7.81 7.93
Weighted average rate paid on:
Passbook savings accounts ................... 3.29 1.55 2.36
NOW accounts ................................ 1.82 1.50 2.32
Money market accounts ....................... 4.35 3.47 3.87
Certificates of deposit ..................... 5.47 5.40 5.73
Advances from borrowers for taxes & .........
insurance .................................. -- -- 2.30
FHLB advances ............................... 6.38 5.66 5.54
Combined weighted average rate paid on ........
interest-bearing liabilities ................. 5.12 4.60 4.98
Spread ........................................ 2.92 3.21 2.95
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
due to changes in outstanding balances and those due to changes in interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (i.e., changes in volume multiplied by prior interest rate) and (ii)
changes in rate (i.e., changes in rate multiplied by prior volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the changes due to the volume
and the changes due to rate.
<TABLE>
Year Ended June 30,
-------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-------------------------------- --------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
-------------------------------- --------------------------------
Volume Rate (Decrease) Volume Rate (Decrease)
-------------------------------- --------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................. $ 779 $ (70) $ 709 $ 859 $ (18) $ 841
Investment securities............. 82 77 159 465 (12) 453
FHLB stock........................ 22 1 23 17 (2) 15
Other interest-earning
assets........................... (90) 4 (86) 94 18 112
----------------------------- ------------------------------
Total interest-earning
assets............................ $ 793 $ 12 $ 805 $1,435 $ (14) $1,421
============================= ==============================
Interest-bearing liabilities:
Certificates of Deposit............ $ 30 $(113) $ 30 $ 704 $ (51) $ 704
NOW, money market, and
passbook savings.................. 8 (12) (4) 177 (35) 142
Advances from borrowers for
taxes and insurance............... --- (1) (1) --- (1) (1)
FHLB advances..................... 465 34 499 227 15 242
----------------------------- -----------------------------
Total interest-bearing
liabilities........................ $ 503 $ (92) $ 411 $ 1,108 $ 72 $ 1,036
============================= =============================
Net interest income................. $ 394 $ 385
====== =======
</TABLE>
<PAGE>
Comparison of Operating Results For The Years Ended June 30, 2000 and 1999
Performance Summary. Net income for the year ended June 30, 2000,
increased by $185,000 or 22.26% to $1.0 million from $831,000 for the year ended
June 30, 1999. The increase was primarily due to an increase in net interest
income of $394,000 and an increase in non-interest income of $118,000, partially
offset by an increase in income tax expense of $181,000, an increase in
provision for loan loss of $74,000 and an increase in non-interest expense of
$72,000. For the years ended June 30, 2000 and 1999, the return on average
assets was 0.93% and 0.83%, respectively, while the return on average equity was
9.44% and 7.79%, respectively.
Net Interest Income. For the year ended June 30, 2000, net interest
income increased by $394,000 to $3.5 million from $3.1 million for the year
ended June 30, 1999. Interest income increased $805,000 to $8.2 million for the
year ended June 30, 2000 from $7.4 million for the year ended June 30, 1999,
partially offset by a $411,000 increase in interest expense to $4.7 million for
the year ended June 30, 2000 from $4.3 million for the year ended June 30, 1999.
The net increase was primarily due to the increase in net interest- earning
assets.
For the year ended June 30, 2000, the average yield on interest-earning
assets was 7.92% compared to 7.81% for the year ended June 30, 1999. The average
cost of interest-bearing liabilities was 4.98% for the year ended June 30, 2000
compared to 5.00% for the year ended June 30, 1999. The average balance of
interest-earning assets increased by $8.8 million to $104.3 million for the year
ended June 30, 2000 from $95.5 million for the year ended June 30, 1999. During
the same time period, the average balance of interest-bearing liabilities
increased by $8.5 million to $94.5 million for the year ended June 30, 2000 from
$86.0 million for the year ended June 30, 1999.
The average interest rate spread was 2.94% for the year ended June 30,
2000 compared to 2.81% for the year ended June 30, 1999, primarily due to the
increase in the percentage of loans receivable, which carry a higher interest
rate than other interest earning assets.
Provision for Loan Loss. For the year ended June 30, 2000, the
provision for loan loss increased $74,000 to $187,000 from $113,000 for the year
ended June 30, 1999. The primary reason for the increase in the provision was
the increased size of the loan portfolio, particularly in commercial and
agriculture loans which are considered to carry a higher risk of default than
residential loans. Despite this increase, the Company's loan portfolio remains
primarily residential mortgage loans and has experienced a minimal amount of
charge-offs in the past three years. The allowance for loan losses of $648,000
or 0.77% of loans receivable, net at June 30, 2000 is an increase when compared
to $472,000 or .65% of loans receivable, net at June 30, 1999. The allowance for
loan losses as a percentage of non-performing assets was 72.33% at June 30, 2000
compared to 304.64% at June 30, 1999.
Management will continue to monitor the Company's allowance for loan
losses and will make additions to the allowance through the provision for loan
losses as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level which management considers to be adequate
to provide for loan losses, there can be no assurance that future losses will
not exceed estimated amounts or that additional provisions for loan losses will
not be required in the future.
Non-interest Income. For the year ended June 30, 2000, non-interest
income increased $119,000 to $511,000 from $392,000 for the year ended June 30,
1999. The increase was primarily due to a $95,000 increase in bank service
charges and fees, a $29,000 increase in investment commissions, and an $18,000
increase in insurance commissions, partially offset by a $25,000 decrease in
securities gain, net.
Bank service charges and fees increased $95,000 to $387,000 for the
year ended June 30, 2000 from $292,000 for the year ended June 30, 1999. The
increase was primarily due to a $78,000 increase in overdraft fees, a $14,000
increase in credit card related fees, and a $3,000 increase in ATM and debit
card income. The investment center opened in July of 1999 and generated $29,000
in commissions during fiscal 2000. Insurance commissions increased $18,000 to
$70,000 for the year ended June 30, 2000 from $52,000 for the year ended June
30, 1999. This increase was primarily due to increases in the volume of credit
life and disability sales. Security gains, net decreased $25,000 to a loss of
$9,000 for the year ended June 30, 2000 from a gain of $15,000 for the year
ended June 30, 1999 due to the sale of two available-for-sale agency securities
which contained call options. These instruments were sold to reduce Washington
Federal's interest rate risk exposure.
<PAGE>
Non-interest Expense. For the year ended June 30, 2000, non-interest
expense increased $72,000 to $2.1 million from $2.1 million for the year ended
June 30, 1999. The increase was primarily due to a $55,000 increase in
compensation and benefits, a $15,000 increase in data processing expenses and a
$15,000 increase in other non-interest expenses, partially offset by an $8,000
decrease in occupancy and equipment expense and a $5,000 decrease in deposit
insurance premiums.
Compensation and benefits increased $55,000 to $1.1 million for the
year ended June 30, 2000 from $1.1 million for the year ended June 30, 1999.
This increase was primarily due to the increased level of staffing to prepare
for the opening of Washington Federal's branch office, Richland Federal Savings,
in Richland, Iowa. Data processing increased $15,000 to $102,000 for the year
ended June 30, 2000 from $87,000 for the year ended June 30, 1999. This increase
was primarily due to the expense of upgrading communication systems. Other
non-interest expenses increased $15,000 to $564,000 for the year ended June 30,
2000 from $549,000 for the year ended June 30, 1999. This increase was primarily
due to the increase in examination and auditing fees.
Occupancy and equipment expenses decreased $8,000 to $217,000 for the
year ended June 30, 2000 from $225,000 for the year ended June 30, 1999. This
decrease was primarily due to a decrease in the accrual of real estate taxes and
a decrease in the cost of equipment maintenance, partially offset by an increase
in depreciation expense. FDIC deposit insurance premiums decreased $5,000 to
$51,000 for the year ended June 30, 2000 from $56,000 for the year ended June
30, 1999. This decrease was primarily due to the decrease in Washington
Federal's regulatory assessment rate.
Income Tax Expense. Income tax expense increased $181,000 to $713,000
for the year ended June 30, 2000 from $532,000 for the year ended June 30, 1999.
The increase was primarily due to the increase in income before income taxes.
The effective income tax rates for the years ended June 30, 2000 and 1999 were
41.2% and 39.0%, respectively.
Comparison of Operating Results For The Years Ended June 30, 1999 and 1998
Performance Summary. Net income for the year ended June 30, 1999
increased by $8,000 or 0.9% to $831,000 from $823,000 for the year ended June
30, 1998. The increase was primarily due to an increase in net interest income
of $385,000 and an increase in non-interest income of $72,000, partially offset
by an increase in non-interest expense of $333,000, an increase in income tax
expense of $92,000 and an increase in provision for loan loss of $24,000. For
the years ended June 30, 1999 and 1998 the return on average assets was 0.83%
and 1.06% respectively, while the return on average equity was 7.79% and 7.56%
respectively.
Net Interest Income. For the year ended June 30, 1999, net interest
income increased by $385,000 to $3.1 million from $2.7 million for the year
ended June 30, 1998. Interest income increased $1.4 million to $7.4 million for
the year ended June 30, 1999 from $6.0 million for the year ended June 30, 1998
partially offset by a $1.0 million increase in interest expense to $4.3 for the
year ended June 30, 1999 from $3.3 million for the year ended June 30, 1998. The
net increase was primarily due to the increase in net interest- earning assets.
For the year ended June 30, 1999, the average yield on interest-earning
assets was 7.81% compared to 8.05% for the year ended June 30, 1998. The average
cost of interest-bearing liabilities was 5.00% for the year ended June 30, 1999
compared to 5.10% for the year ended June 30, 1998. The average balance of
interest-earning assets increased by $20.5 million to $95.5 million for the year
ended June 30, 1999 from $75.0 million for the year ended June 30, 1998. During
the same time period, the average balance of interest-bearing liabilities
increased by $22.1 million to $86.0 million for the year ended June 30, 1999
from $63.9 million for the year ended June 30, 1998.
Due to the lower returns on interest-earning assets, and despite the
lower rates on interest-bearing liabilities, the average interest rate spread
was 2.81% for the year ended June 30, 1999 compared to 2.95% for the year ended
June 30, 1998. In addition, the lower ratio of interest-earning assets to
interest-bearing liabilities, as a result of market pricing, has caused the
average net interest margin to be reduced by 29 basis points, to 3.31% for the
year ended June 30, 1999 compared to 3.70% for the year ended June 30, 1998.
<PAGE>
Provision for Loan Loss. For the year ended June 30, 1999, the provision
for loan loss increased $24,000 to $113,000 from $89,000 for the year ended June
30, 1998. The primary reason for the provision was the increased size of the
loan portfolio, particularly in commercial and agriculture loans which are
considered to carry a higher risk of default than residential loans. The
Company's loan portfolio remains primarily residential mortgage loans and has
experienced a minimal amount of charge-offs in the past three years. The
allowance for loan losses of $472,000 or .65% of loans receivable, net at June
30, 1999 is an increase when compared to $388,000 or .59% of loans receivable,
net at June 30, 1998. The allowance for loan losses as a percentage of
non-performing assets was 304.64% at June 30, 1999 compared to 435.99% at June
30, 1998.
Management will continue to monitor the Company's allowance for loan
losses and will make additions to the allowance through the provision for loan
losses as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level which management considers to be adequate
to provide for loan losses, there can be no assurance that future losses will
not exceed estimated amounts or that additional provisions for loan losses will
not be required in the future.
Non-interest Income. For the year ended June 30, 1999, non-interest
income increased $72,000 or 22.6% to $392,000 from $320,000 for the year ended
June 30, 1998. The increase was primarily due to a $75,000 increase in bank
service charges and fees, a $13,000 increase in other non-interest income, and a
$10,000 increase in gain on securities, available-for-sale, partially offset by
a $25,000 decrease in insurance commissions and a $1,000 decrease in loan
origination and commitment fees.
Bank service charges and fees increased $75,000 to $284,000 for the
year ended June 30, 1999 from $209,000 for the year ended June 30, 1998. The
increase is primarily due to a $46,000 increase in overdraft fees, a $17,000
increase in checking account charges, a $6,000 increase in credit card related
fees, and a $3,000 increase in late fees assessed.
Other non-interest income increased $13,000 to $33,000 for the year
ended June 30,1999 from $20,000 for the year ended June 30, 1998. The increase
is primarily due to an increase in gain realized on foreclosed properties. Gain
on the sale of available- for- sale securities increased $10,000 to $15,000 for
the year ended June 30, 1999 from $5,000 for the year ended June 30, 1998
primarily due to the sale of U.S. Treasury securities. Insurance commissions
decreased $25,000 to $51,000 for the year ended June 30, 1999 from $76,000 for
the year ended June 30, 1998 primarily due to fluctuations in the volume of
sales of credit life and disability insurance products.
Non-interest expense. For the year ended June 30, 1999, non-interest
expense increased $333,000 to $2.1 million from $1.7 million for the year ended
June 30, 1998. The increase is primarily due to a $136,000 increase in
compensation and benefits, an $88,000 increase in other expense, a $51,000
increase in goodwill, a $42,000 increase in occupancy and equipment, an $8,000
increase in deposit insurance premiums, and a $7,000 increase in data
processing.
Compensation and benefits increased $136,000 to $1.1 million for the
year ended June 30, 1999 from $929,000 for the year ended June 30, 1998. The
increase was primarily due to the addition of three full-time equivalent
employees as a result of Washington Federal's new branch in Wellman, Iowa, and
to a lesser extent, normal salary increases.
Other non-interest expense increased $88,000 to $549,000 for the year
ended June 30, 1999 from $460,000 for the year ended June 30, 1998 primarily due
to the increased cost of operating additional offices since the acquisition of
Rubio and the opening of Washington Federal's branch in Wellman, Iowa. The
increase was primarily due to a $34,000 increase in supplies, a $22,000 increase
in fees paid for services provided by outside contractors, a $14,000 increase in
ATM and debit card processing fees, a $12,000 increase in postage and delivery
expense, a $12,000 increase in real estate owned expense, a $10,000 increase in
checking accounts, and a $9,000 increase in non-capitalized expenses related to
the Year 2000 issue, partially offset by a $25,000 decrease in professional fees
paid.
<PAGE>
Goodwill expense increased $51,000 to $95,000 for the year ended June
30, 1999 from $43,000 for the year ended June 30, 1998 due to the acquisition of
Rubio. Occupancy and equipment expense increased $42,000 to $225,000 for the
year ended June 30, 1999 from $183,000 for the year ended June 30, 1998
primarily due to the addition of Washington Federal's branch in Wellman, Iowa
and the Rubio's office building. FDIC insurance premiums increased $8,000 to
$57,000 for the year ended June 30, 1999 from $48,000 for the year ended June
30, 1998 primarily due to the increase in deposits. Data processing expense
increased $7,000 to $87,000 for the year ended June 30, 1999 from $80,000 for
the year ended June 30, 1998.
Income tax expense. Income tax expense increased $92,000 to $532,000
for the year ended June 30, 1999 from $440,000 for the year ended June 30, 1998.
The effective income tax rates for the years ended June 30, 1999 and 1998 were
39.0% and 34.8%, respectively. The increase was primarily due to the non-
deductible goodwill expense.
Asset/Liability Management
One of the Company's principal financial objectives is to achieve
long-term profitability while reducing its exposure to fluctuations in interest
rates. The Company has sought to reduce exposure of its earnings to changes in
market interest rates by managing the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
has been to increase the interest-rate sensitivity of the Company's assets by
originating loans with interest rates subject to periodic adjustments to market
conditions. Accordingly, the Company's primary one- to four-family loan product
has been a 3 year balloon loan. Balloon loans accounted for $33.6 million of its
$84.0 million loan portfolio, or 40.0% at June 30, 2000. Adjustable rate loans
account for an additional $12.3 million of its $84.0 million loan portfolio, or
14.6% at June 30, 2000.
The Company has historically relied upon retail deposit accounts as its
primary source of funds and will continue to do so. Management believes that
retail deposit accounts and long term borrowings as sources of funds, compared
to brokered deposits, reduce the effects of interest rate fluctuations because
these deposits and borrowings generally represent more stable sources of funds.
Net Portfolio Value. In order to encourage savings associations to
reduce their interest rate risk, the OTS adopted a rule incorporating an
interest rate risk ("IRR") component into the risk-based capital rules. The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of
hypothetical 200 basis point ("bp") changes in market interest rates. A
resulting change in NPV of more than 2% of the estimated market value of its
assets will require the institution to deduct from its capital 50% of that
excess change. The rules provide that the OTS will calculate the IRR component
quarterly for each institution. The Company, based on asset size and risk-based
capital, has been informed by the OTS that it is exempt from this rule.
<PAGE>
Presented on the following table, as of June 30, 2000, is an analysis
of Washington Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 300 basis points in accordance with OTS
regulations. For example, a 300 basis point increase in interest rates would
decrease Washington Federal's NPV by $1.3 million or 18% and a 300 basis point
decrease in interest rates would increase Washington Federal's NPV by $69,000 or
1%. As previously mentioned, the OTS has informed Washington Federal that it is
not subject to the IRR component as discussed above. Further, were Washington
Federal subject to the IRR component at June 30, 2000, it would not have been
considered to have had a greater than normal level of interest rate exposure and
a deduction from capital would not have been required, although it is still
subject to interest rate risk and, as can be seen below, increasing rates could
reduce Washington Federal's NPV.
At June 30, 2000
--------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
----------------------------------- ------------------------
Change in
Rates $ Amount $ Change % Change NPV Ratio Change
-------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 5,941 -1,290 -18% 6.77% -126 bp
+200 bp 6,395 -837 -22% 7.20% -73 bp
+100 bp 6,811 -400 -6% 7.59% -34 bp
0 bp 7,232 7.93%
-100 bp 7,459 226 3% 8.09% -15 bp
-200 bp 7,317 85 1% 7.87% -6 bp
-300 bp 7,301 69 1% 7.78% -16 bp
Management of interest sensitivity of Rubio has historically been
accomplished by matching the maturities of interest-earning assets and
interest-bearing liabilities. The following table illustrates the
asset/(liability) funding gaps for selected maturity periods as of June 30,
2000.
<TABLE>
Maturing Within
------------------------------ ------------------
0-6 6-12 1-2 2-3
Months Months Years Years Total
----------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Assets
Loans receivable ............... $ 3,113 $ 2,588 $ 1,763 $ 1,894 $ 9,358
Securities ..................... 300 1,213 1,154 1,450 4,117
----------------------------------------------------
Total interest-earning assets 3,413 3,801 2,917 3,344 13,475
Liabilities
Interest-bearing deposits ...... 6,964 3,508 1,564 211 12,247
----------------------------------------------------
Asset/(Liability) funding GAP .... $(3,551) $ 293 $ 1,353 $ 3,133 $ 1,228
====================================================
GAP ratio (assets/liabilities) ... 49% 108% 187% 1,585% 110%
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in the computation of NPV. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice,
they may react differently to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, the Company's primary loan
products, the three-year balloon and adjustable rate loans, may permit the
Company to adjust to changes in interest rates on a short- term basis and over
the life of the asset. The proportion of three-year balloon and adjustable rate
loans could be reduced in future periods if market interest rates decrease and
remain at lower levels for a sustained period, due to increased refinance
activity. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
the table. Finally, the ability of many borrowers to service their three-year
balloon and adjustable rate mortgage loans may decrease in the event of a
sustained interest rate increase.
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, long-term
borrowings from the FHLB, repayments and prepayments of loans, the maturity of
investment securities and interest income. Although maturity and scheduled
amortization of loans are relatively predictable sources of funds, deposit flows
and prepayments on loans are influenced significantly by general interest rates,
economic conditions and competition.
The primary investing activity of the Company is originating mortgage
loans to be held to maturity. For the fiscal years ended June 30, 2000, 1999,
and 1998, the Company originated loans for its portfolio in the amount of $42.6
million, $42.1 million, and $32.1 million, respectively. These activities were
funded primarily by deposits, principal repayments of loans and FHLB borrowings.
FHLB borrowings have been less costly than new certificates of deposit, and less
than other financing sources available.
For investment and liquidity purposes, the Company maintains a
portfolio of investment securities including U.S. Treasury securities, U.S.
government agencies, state and political subdivisions, mortgage- backed
securities and corporation and other securities.
Washington Federal is required to maintain minimum levels of liquid
assets under OTS regulations. Savings institutions are required to maintain an
average daily balance of liquid assets (including cash, certain time deposits,
and specified U.S. government, state or federal agency obligations) of not less
than 4.0% of its average daily balance of net withdrawal accounts plus
short-term borrowings. It is Washington Federal's policy to maintain its
liquidity portfolio in excess of regulatory requirements. Washington Federal's
liquidity ratios were 17.21%, 18.84% and 13.17%, respectively, at June 30, 2000,
1999 and 1998.
Cash was generated by the Company's operating activities during the
years ended June 30, 2000, 1999 and 1998, primarily as a result of net income.
The adjustments to reconcile net income to net cash provided by operations
during the periods presented consisted primarily of amortization of premiums and
discounts on debt securities, depreciation expense, amortization of goodwill,
deferred income taxes and increases and decreases in other assets and other
liabilities. The primary investing activities of the Company are the origination
of loans and the purchase of investment securities, which are funded with cash
provided from operations and financing activities, as well as proceeds from
amortization and prepayments on existing loans and proceeds from sales and
maturities of securities. The Company's primary financing activities (other than
the IPO in 1996) have consisted of deposits and borrowing/repayments with the
FHLB of Des Moines.
The Company's most liquid assets are cash and cash equivalents, which
include unpledged U.S. Government agency securities and other short-term
investments. At June 30, 2000, 1999 and 1998, cash and cash equivalents were
$2.8 million, $2.6 million and $3.3 million, respectively.
Liquidity management for the Company is both an ongoing and long-term
function of the Company's asset/liability management strategy. Excess funds
generally are invested in overnight deposits at the FHLB of Des Moines or at
other financial institutions. Should the Company require funds beyond its
ability to generate them internally, additional sources of funds are available
through FHLB of Des Moines advances. The Company would pledge its FHLB of Des
Moines stock and certain other assets as collateral for such advances. During
fiscal 2000, 1999 and 1998, the Company used FHLB advances to meet cash flow
requirements and finance loan growth. The FHLB advances are generally at a
higher rate of interest than transaction and savings deposit accounts.
At June 30, 2000, the Company had outstanding loan commitments of $3.9
million and undisbursed loans in process of $1.8 million. The Company
anticipates it will have sufficient funds available to meet its current loan
commitments, including loan applications received and in process prior to the
issuance of firm commitments. Certificates of deposit which are scheduled to
mature in one year or less at June 30, 2000 were $30.5 million. Based on past
experience, management believes that a significant portion of such deposits will
remain with the Company.
Under federal law, the Banks are required to meet certain tangible,
core and risk based capital requirements. For information regarding the
Company's regulatory capital compliance, see "Selected Consolidated Financial
Information."
<PAGE>
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instrument and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement must be adopted no later
than June 30, 2002, although earlier application is permitted. The adoption of
Statement 133 is not expected to have a material impact on the Company.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which generally requires the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of the Company's operations.
Nearly all the assets and liabilities of the Company are financial, unlike most
industrial companies. As a result, the Company's performance is directly
impacted by changes in interest rates, which are indirectly influenced by
inflationary expectations. The Company's ability to match the interest
sensitivity of its financial assets to the interest sensitivity of its financial
liabilities in its asset/liability management may tend to minimize the effect of
change in interest rates on the Company's performance. Changes in interest rates
do not necessarily move to the same extent as changes in the price of goods and
services. The liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable performance levels.
<PAGE>
AUDITORS' REPORT
[INSERT HERE]
19
<PAGE>
AUDITED FINANCIAL STATEMENTS
[INSERT HERE]
20
<PAGE>
WASHINGTON BANCORP
DIRECTORS AND EXECUTIVE OFFICERS
Directors
Stan Carlson Rick R. Hofer
President and Chief Executive Personnel Manager,
Officer, Washington, Washington Sitler Electric Supply
Federal and President, Rubio
James D. Gorham Mary Levy
Sales Agent, Northwestern Mutual Treasurer and co-owner, Mose Levy
Life Insurance Co. Steel Company
Myron L. Graber Richard L. Weeks
Co-owner, Graber Home Owner, Sitler Electric Supply, Inc.
Improvement, Inc.
J. Richard Wiley Dean Edwards
Chairman of the Board, Washington Past President, Rubio Savings Bank
and Washington Federal of Brighton
Owner, Wiley Computer
Executive Officers
Stan Carlson Leisha Linge
President and Chief Executive Officer Executive Vice President and
Treasurer
Jeff Johnson Chris Davies
Vice President Vice President and Chief Executive
Officer, Rubio Savings Bank of
Brighton
<PAGE>
STOCKHOLDER INFORMATION
Corporate Profile
The Company is an Iowa corporation which was organized in 1995 by
Washington Federal for the purpose of becoming a thrift institution holding
company. Washington Federal was organized in 1934 and converted to a federal
savings bank in 1994. In March 1996, Washington Federal converted to the stock
form of organization and concurrently became the wholly-owned subsidiary of
Washington through the sale and issuance of common stock. Rubio was acquired in
January 1998. Washington Federal opened a branch in Wellman, Iowa in December
1998. Washington Federal opened a branch in Richland, Iowa in September 2000.
The principal assets of the Company are the outstanding stock of the Banks, its
wholly owned subsidiaries. The Company presently has no separate operations and
its business consists only of the business of the Banks. The Banks' primary
business consists of attracting deposits from the general public and using these
deposits to provide financing for the purchase and construction of residential
and, to a lesser extent, other properties.
Washington Federal Savings Bank Washington Federal Savings Bank
Main Office Drive-thru Office
102 East Main Street 220 East Washington Street
Washington, Iowa 52353 Washington, Iowa 52353
Richland Federal Savings Wellman Federal Savings
Branch Office of Washington Federal Branch office of Washington Federal
107 Richland Street 801 Sixth Street
Richland, Iowa 52585 Wellman, Iowa 52356
Rubio Savings Bank of Brighton
Main Office
122 East Washington Street
Brighton, Iowa 52540
Independent Auditors Local Counsel
McGladrey & Pullen, LLP Tindal, Erdahl, Goddard & Nestor, PLC
Town Centre, Suite 300 Attorneys at Law
221 Third Avenue, SE 305 West Main Street - Suite A
Cedar Rapids, Iowa 52401 Washington, Iowa 52353
Transfer Agent Special Counsel
Registrar & Transfer Co. Silver, Freedman & Taff, L.L.P.
10 Commerce Drive 1100 New York Avenue, N.W.
Cranford, New Jersey 07016 Washington, D.C. 20005
<PAGE>
Form 10-KSB Report
A copy of the Company's Annual Report on Form 10-KSB for the fiscal
year ended June 30, 2000 including financial statements, as filed with the SEC,
will be furnished without charge to stockholders of the Company upon written
request to the Secretary, Washington Bancorp, 102 East Main Street, Washington,
Iowa 52353.
Stock Listing
The Company's common stock is reported on the National Daily Quotation
Service by the National Quotation Bureau under the symbol "WBIO". As of August
31, 2000, the Company had 391 stockholders of record and 540,034 outstanding
shares of common stock.
Price Range of Common Stock
The table below shows the range of high and low inter-dealer prices.
These prices do not include retail markups, markdowns or commissions and may not
represent actual transactions. The table below also shows dividends paid by the
Company.
High Low Dividend
-------------------------------
1997
First quarter.......................... $11.38 $10.63 $.08
Second quarter......................... $12.63 $10.88 $.08
Third quarter.......................... $15.00 $12.88 $.10
Fourth quarter......................... $15.35 $13.75 $.10
1998
First quarter.......................... $17.00 $15.50 $.10
Second quarter......................... $17.75 $17.00 $.10
Third quarter.......................... $18.50 $18.00 $.12
Fourth quarter......................... $18.675 $18.125 $.12
1999
First quarter.......................... $18.125 $17.00 $.12
Second quarter......................... $17.00 $15.00 $.12
Third quarter.......................... $17.00 $15.00 $.12
Fourth quarter......................... $15.50 $14.50 $.12
2000
First quarter.......................... $15.50 $13.25 $.12
Second quarter......................... $13.25 $13.00 $---*
Third quarter.......................... $13.00 $12.75 $---*
Fourth quarter......................... $13.75 $12.75 $---*
* As of July 1999 the Company announced its intention to pay dividends from time
to time, as deemed appropriate, but in any event no more frequently than
annually.
<PAGE>
Washington Bancorp
and Subsidiary
Consolidated Financial Report
June 30, 2000
<PAGE>
Contents
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated statements of financial condition
Consolidated statements of income
Consolidated statements of comprehensive income
Consolidated statements of stockholders' equity
Consolidated statements of cash flows
Notes to financial statements
--------------------------------------------------------------------------------
<PAGE>
Independent Auditor's Report
To the Board of Directors
Washington Bancorp
Washington, Iowa
We have audited the accompanying consolidated statements of financial condition
of Washington Bancorp and its subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Washington Bancorp
and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000 in conformity with generally accepted accounting principles.
/s/ McGLADREY & PULLEN, LLP
Cedar Rapids, Iowa
August 14, 2000
<PAGE>
Washington Bancorp and Subsidiaries
Consolidated Statements of Financial Condition
June 30, 2000 and 1999
<TABLE>
ASSETS 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (Note 2):
Interest-bearing ................................................... $ 1,859,278 $ 901,346
Noninterest-bearing ................................................ 990,107 1,656,084
Investment securities (Notes 2 and 3):
Held to maturity (fair value approximates $774,629 at June 30, 2000) 774,629 760,520
Available-for-sale ................................................. 21,602,351 20,695,366
Federal funds sold .................................................... 110,000 1,340,000
Loans receivable, net of allowance for loan losses of $647,605
in 2000 and $472,187 in 1999 (Notes 4, 8 and 15) ................... 83,988,473 72,779,177
Accrued interest receivable (Note 5) .................................. 1,463,838 1,190,600
Federal Home Loan Bank stock .......................................... 1,729,600 860,000
Foreclosed real estate ................................................ 271,302 235,914
Premises and equipment, net (Note 6) .................................. 818,228 874,551
Goodwill .............................................................. 1,185,964 1,280,526
Other assets .......................................................... 628,668 409,996
-----------------------------
Total assets ............................................ $115,422,438 $102,984,080
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------
Liabilities
Deposits (Note 7):
Noninterest-bearing ............................................. $ 4,225,007 $ 3,068,058
Interest-bearing ................................................ 69,072,090 76,621,408
----------------------------
Total deposits .......................................... 73,297,097 75,689,466
Borrowed funds (Notes 3 and 8) ..................................... 30,193,250 15,706,290
Advances from borrowers for taxes and insurance .................... 249,683 223,033
Accrued expenses and other liabilities ............................. 632,003 464,638
----------------------------
Total liabilities ....................................... 104,372,033 92,083,427
----------------------------
Commitments and Contingencies (Note 13)
Redeemable Common Stock Held by Employee Stock
Ownership Plan (ESOP) (Note 9) ..................................... 228,947 189,972
----------------------------
Stockholders' Equity (Note 12)
Preferred stock, $.01 par value, authorized 1,000,000 shares;
none issued and outstanding ..................................... - - - -
Common stock, $.01 par value, authorized 4,000,000 shares;
issued 2000 and 1999 651,133 shares ............................. 6,511 6,511
Additional paid-in capital ......................................... 6,169,796 6,150,310
Retained earnings ................................................. 7,333,909 6,384,863
Accumulated other comprehensive (loss) ............................. (447,899) (235,778)
----------------------------
13,062,317 12,305,906
Less:
Cost of common shares acquired for the treasury
2000 103,399 shares; 1999 50,935 shares ....................... (1,658,017) (946,435)
Deferred compensation (Note 9) .................................. (21,060) (79,098)
Maximum cash obligation related to ESOP shares (Note 9) ......... (228,947) (189,972)
Unearned ESOP shares (Note 9) ................................... (332,835) (379,720)
----------------------------
Total stockholders' equity .............................. 10,821,458 10,710,681
----------------------------
Total liabilities and stockholders' equity .............. $115,422,438 $102,984,080
============================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Washington bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans, including fees:
First mortgage loans ............... $4,301,666 $4,662,591 $4,156,209
Consumer and other loans ........... 2,386,385 1,316,663 981,498
Investment securities:
Taxable ............................ 1,428,419 1,342,164 806,851
Nontaxable ......................... 65,418 79,037 49,330
Federal Home Loan Bank stock .......... 78,192 54,762 40,364
-------------------------------------
Total interest income ...... 8,260,080 7,455,217 6,034,252
-------------------------------------
Interest expense:
Deposits (Note 7) ..................... 3,325,496 3,413,212 2,619,618
Borrowed funds ........................ 1,380,504 881,818 639,162
-------------------------------------
Total interest expense ..... 4,706,000 4,295,030 3,258,780
-------------------------------------
Net interest income ........ 3,554,080 3,160,187 2,775,472
Provision for loan losses (Note 4) ....... 186,500 112,500 89,000
-------------------------------------
Net interest income after
provision for loan losses 3,367,580 3,047,687 2,686,472
-------------------------------------
Noninterest income:
Securities gains (losses), net (Note 3) (9,456) 15,205 5,383
Service charges and fees .............. 387,345 292,013 217,871
Insurance commissions ................. 69,931 51,750 76,295
Investment commissions ................ 29,132 - - - -
Other ................................. 33,923 33,348 20,404
-------------------------------------
Total noninterest income ... 510,875 392,316 319,953
-------------------------------------
Noninterest expense:
Compensation and benefits (Note 9) .... 1,120,107 1,064,847 929,224
Occupancy and equipment ............... 217,059 224,963 183,009
SAIF deposit insurance premium ........ 50,788 56,699 48,365
Data processing ....................... 102,226 86,907 79,507
Goodwill amortization ................. 94,562 94,561 43,341
Other ................................. 564,034 548,804 460,463
-------------------------------------
Total noninterest expense .. 2,148,776 2,076,781 1,743,909
-------------------------------------
Income before income taxes . 1,729,679 1,363,222 1,262,516
Income tax expense (Note 10) ............. 713,437 532,022 439,680
-------------------------------------
Net income ................. $1,016,242 $ 831,200 $ 822,836
=====================================
Earnings per common share (Note 11):
Basic ................................. $ 1.86 $ 1.48 $ 1.36
=====================================
Diluted ............................... $ 1.83 $ 1.44 $ 1.33
=====================================
Weighted average common shares for:
Basic earnings per share .............. 545,963 563,303 603,589
=====================================
Diluted earnings per share ............ 555,606 578,115 620,266
=====================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Washington bancorp and Subsidiaries
Consolidated Statements of comprehensive income
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ........................................... $1,016,242 $ 831,200 $ 822,836
------------------------------------
Other comprehensive income, net of income taxes:
Unrealized holding gains (losses) arising during
the year, net of income taxes 2000 $148,513;
1999 $135,393; 1998 $(3,688) ................... (218,059) (225,737) 6,175
Reclassification adjustments for net losses (gains)
realized in net income, net of income taxes
2000 $(3,518); 1999 $5,671; 1998 $2,008 ........ 5,938 (9,534) (3,375)
------------------------------------
Other comprehensive income (loss) ...... (212,121) (235,271) 2,800
------------------------------------
Comprehensive income ................... $ 804,121 $ 595,929 $ 825,636
====================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
Washington Bancorp and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Notes 9, 12 and 17)
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
Cost Of
Common
Accumumated Shares
Additional Other Acquired
Preferred Common Paid-In Retained Comprehensive For The
Stock Stock Capital Earnings Income Treasury
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ - - $6,575 $6,150,032 $5,292,419 $ (3,307) $ (85,827)
Net income - - - - - - 822,836 - - - -
Dividends ($0.44 per share) - - - - - - (267,925) - - - -
Acquisition of 16,500 shares of common stock
for the treasury - - - - - - - - - - (307,938)
Forfeiture of 1,754 shares under stock awards - - - - 3,507 - - - - (23,240)
program
Issuance of 2,127 shares under stock awards - - - - 10,051 - - - - 30,234
program
Retire 6,386 shares of common stock from the - - (64) (63,796) (21,967) - - 85,827
treasury
Stock options exercised for 1,096 shares - - 11 12,319 - - - - - -
Amortization of compensation under stock award - - - - - - - - - - - -
program
Allocation of ESOP shares - - - - 31,501 - - - - - -
Acquisition of 1,096 shares of common stock - - (11) (20,950) - - - - - -
for retirement
Other comprehensive income - - - - - - - - 2,800 - -
Change related to ESOP shares - - - - - - - - - - - -
------------------------------------------------------------------------
Balance, June 30, 1998 - - 6,511 6,122,664 5,825,363 (507) (300,944)
Net income - - - - - - 831,200 - - - -
Dividends ($0.48 per share) - - - - - - (271,700) - - - -
Acquisition of 37,000 shares of common stock
for the treasury - - - - - - - - - - (684,125)
Issuance of 2,192 shares under stock awards - - - - (2,181) - - - - 38,634
program
Amortization of compensation under stock award - - - - - - - - - - - -
program
Allocation of ESOP shares - - - - 29,827 - - - - - -
Other comprehensive income - - - - - - - - (235,271) - -
Change related to ESOP shares - - - - - - - - - - - -
------------------------------------------------------------------------
Balance, June 30, 1999 - - 6,511 6,150,310 6,384,863 (235,778) (946,435)
Net income - - - - - - 1,016,242 - - - -
Dividends ($0.12 per share) - - - - - - (67,196) - - - -
Acquisition of 50,710 shares of common stock
for the treasury - - - - - - - - - - (680,232)
Forfeiture of 1,754 shares under stock awards - - - - 2,181 - - - - (31,350)
program
Amortization of compensation under stock award - - - - - - - - - - - -
program
Allocation of ESOP shares - - - - 17,305 - - - - - -
Other comprehensive income - - - - - - - - (212,121) - -
Change related to ESOP shares - - - - - - - - - - - -
------------------------------------------------------------------------
Balance, June 30, 2000 $ - - $6,511 $6,169,796 $7,333,909 $(447,899) $(1,658,017)
========================================================================
(Continued...)
</TABLE>
See Notes to Financial Statements.
<PAGE>
Washington Bancorp and Subsidiaries
Consolidated Statements of Stockholders' Equity (Notes 9, 12 and 17)
Years Ended June 30, 2000, 1999 and 1998
(Continued)
<TABLE>
Maximum
Cash
Obligation Unearned Total
Deferred Related to ESOP Stockholders'
Compensation ESOP Shares Shares Equity
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 $(151,739) $(69,392) $(463,330) $10,675,431
Net income - - - - - - 822,836
Dividends ($0.44 per share) - - - - - - (267,925)
Acquisition of 16,500 shares of common stock
for the treasury - - - - - - (307,938)
Forfeiture of 1,754 shares under stock awards 19,733 - - - - - -
program
Issuance of 2,127 shares under stock awards (40,285) - - - - - -
program
Retire 6,386 shares of common stock from the - - - - - - - -
treasury
Stock options exercised for 1,096 shares - - - - - - 12,330
Amortization of compensation under stock award 67,329 - - - - 67,329
program
Allocation of ESOP shares - - - - 40,200 71,701
Acquisition of 1,096 shares of common stock - - - - - - (20,961)
for retirement
Other comprehensive income - - - - - - 2,800
Change related to ESOP shares - - (84,396) - - (84,396)
----------------------------------------------------
Balance, June 30, 1998 (104,962) (153,788) (423,130) 10,971,207
Net income - - - - - - 831,200
Dividends ($0.48 per share) - - - - - - (271,700)
Acquisition of 37,000 shares of common stock
for the treasury - - - - - - (684,125)
Issuance of 2,192 shares under stock awards (36,453) - - - - - -
program
Amortization of compensation under stock award 62,317 - - - - 62,317
program
Allocation of ESOP shares - - - - 43,410 73,237
Other comprehensive income - - - - - - (235,271)
Change related to ESOP shares - - (36,184) - - (36,184)
---------------------------------------------------
Balance, June 30, 1999 (79,098) (189,972) (379,720) 10,710,681
Net income - - - - - - 1,016,242
Dividends ($0.12 per share) - - - - - - (67,196)
Acquisition of 50,710 shares of common stock
for the treasury - - - - - - (680,232)
Forfeiture of 1,754 shares under stock awards 29,169 - - - - - -
program
Amortization of compensation under stock award 28,869 - - - - 28,869
program
Allocation of ESOP shares - - - - 46,885 64,190
Other comprehensive income - - - - - - (212,121)
Change related to ESOP shares - - (38,975) - - (38,975)
---------------------------------------------------
Balance, June 30, 2000 $ (21,060) $(228,947) $(332,835) $10,821,458
===================================================
</TABLE>
<PAGE>
Washington Bancorp and subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income .................................................................. $ 1,016,242 $ 831,200 $ 822,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums and discounts on
debt securities ........................................................ 19,835 (58,188) 48,049
Amortization of goodwill ................................................. 94,562 94,561 43,341
Provision for loan losses ................................................ 186,500 112,500 89,000
(Gain) loss on sale of investment securities ............................. 9,456 (15,205) (5,383)
(Gain) on sale of foreclosed real estate ................................. (7,606) (21,424) (10,573)
Depreciation ............................................................. 88,106 77,289 70,548
Compensation under stock awards .......................................... 28,869 62,317 67,329
ESOP contribution expense ................................................ 64,190 73,237 71,701
Deferred income taxes .................................................... 14,000 (76,153) (31,383)
(Increase) in accrued interest receivable ................................ (273,238) (230,936) (87,398)
(Increase) decrease in other assets ...................................... 67,690 (134,582) (171,664)
Increase (decrease) in accrued expenses and
other liabilities ...................................................... 11,997 21,363 (140,901)
---------------------------------------------
Net cash provided by operating activities ....................... 1,320,603 735,979 765,502
---------------------------------------------
Cash Flows from Investing Activities
Held-to-maturity securities:
Maturities and calls ..................................................... 198,750 368,250 153,250
Purchases ................................................................ (215,000) - - (65,000)
Available-for-sale securities:
Sales .................................................................... 1,250,000 1,800,000 1,416,719
Maturities ............................................................... 2,358,750 22,336,682 12,054,554
Purchases ................................................................ (4,900,000) (26,010,000) (12,250,000)
Federal funds sold, net ..................................................... 1,230,000 (680,503) 527,272
Purchase of Federal Home Loan Bank stock .................................... (869,600) (47,600) (346,800)
Loans made to customers, net ................................................ (11,423,578) (7,221,225) (5,584,292)
Purchase of premises and equipment .......................................... (31,783) (152,033) (93,489)
Purchase of stock of Rubio Savings Bank of Brighton,
net of cash and cash equivalents received (Note 16) ...................... - - - - (2,466,021)
----------------------------------------------
Net cash (used in) investing activities .......................... (12,402,461) (9,606,429) (6,653,807)
----------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in deposits ......................................... $ (2,392,369) $ 9,093,990 $ 1,881,828
Proceeds from Federal Home Loan Bank advances ............................... 524,350,000 9,500,000 50,450,000
Principal payments on Federal Home Loan Bank
advances ................................................................. (509,863,040) (9,517,781) (43,377,694)
Net increase in advances from borrowers for taxes
and insurance ............................................................ 26,650 1,122 17,234
Proceeds from issuance of common stock ...................................... - - - - 12,330
Acquisition of common stock ................................................. (680,232) (684,125) (328,899)
Dividends paid .............................................................. (67,196) (271,700) (267,925)
----------------------------------------------
Net cash provided by financing activities ....................... 11,373,813 8,121,506 8,386,874
----------------------------------------------
Net increase (decrease) in cash and
cash equivalents ........................................... 291,955 (748,944) 2,498,569
Cash and cash equivalents:
Beginning ................................................................... 2,557,430 3,306,374 807,805
----------------------------------------------
Ending ...................................................................... $ 2,849,385 $ 2,557,430 $ 3,306,374
==============================================
</TABLE>
<PAGE>
Washington Bancorp and subsidiaries
Consolidated Statements of Cash Flows
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors .............................................. $ 3,292,959 $ 3,434,349 $ 2,562,216
Interest paid on other obligations ....................................... 1,371,867 881,818 639,162
Income taxes, net of refunds ............................................. 701,222 558,300 684,779
Supplemental Schedule of Noncash Investing and
Financing Activities
Transfers from loans to foreclosed real estate .............................. $ 114,811 $ 485,722 $ 110,427
Contract sales of foreclosed real estate .................................... 72,250 271,233 121,000
Stock issued under stock awards program ..................................... - - 36,453 40,285
Acquisition of assets and liabilities from Rubio Savings Bank of Brighton
(Note 16): Assets acquired:
Cash and cash equivalents .............................................. $ 2,331,668
Federal funds sold ..................................................... 1,186,769
Investment securities, held to maturity ................................ 1,221,156
Investment securities, available for sale .............................. 10,530,323
Loans .................................................................. 7,848,923
Premesis and equipment ................................................. 226,634
Goodwill ............................................................... 1,418,428
Other assets ........................................................... 304,762
-------------
25,068,663
Liabilities assumed:
Deposits ............................................................... (19,959,320)
Other liabilities ...................................................... (311,654)
------------
Cash purchase price ...................................................... $ 4,797,689
============
</TABLE>
See Notes to Financial Statements.
<PAGE>
WASHINGTON BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Nature of activities: Washington Bancorp is a multibank holding company engaged
in the business of banking. The Company's two wholly-owned subsidiary banks are
Washington Federal Savings Bank, Washington, Iowa and Rubio Savings Bank of
Brighton, Brighton, Iowa. The Banks are full service banks extending their
services to individuals, businesses, governmental units and institutional
customers primarily in the communities of Washington, Wellman and Brighton,
Iowa.
Principles of consolidation: The accompanying consolidated financial statements
include the accounts of Washington Bancorp (the "Company"), Washington Federal
Savings Bank ("Washington") and Rubio Savings Bank of Brighton ("Rubio") and
collectively known as (the "banks"), and Washington Federal Savings Bank's
wholly-owned subsidiary, Washington Financial Services, Inc., which is a
discount brokerage firm. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Accounting estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain significant estimates: The allowance for loan losses, fair values of
securities and other financial instruments, and stock-based compensation expense
involve certain significant estimates made by management. These estimates are
reviewed by management routinely and it is reasonably possible that
circumstances that exist at June 30, 2000 may change in the near-future and that
the effect could be material to the consolidated financial statements.
Cash equivalents: Cash equivalents consist of FHLB-daily time, cash on hand, and
funds due from banks. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be equivalents. Cash flows from loans and deposits are
reported net.
Acquisition of a business: On January 15, 1998, the Company purchased all of the
outstanding stock of Rubio in a transaction accounted for as a purchase.
Investment securities: Held-to-maturity securities consist solely of debt
securities which the Banks have the positive intent and ability to hold to
maturity and are stated at amortized cost.
Available-for-sale securities consist of debt securities not classified as
trading or held to maturity. Available-for-sale securities are stated at fair
value, and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders' equity. There were
no trading securities as of June 30, 2000 and 1999.
Stock of the Federal Home Loan Bank is carried at cost.
Premiums and discounts on debt securities are amortized over the contractual
lives of those securities. The method of amortization results in a constant
effective yield on those securities (the interest method). Realized gains and
losses on investment securities are included in income, determined on the basis
of the cost of the specific securities sold.
Loans receivable: Loans receivable are stated at unpaid principal balances less
the allowance for loan losses.
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest is discontinued on a loan when management believes, after considering
collection efforts and other factors, that the borrower's financial condition is
such that collection of interest is doubtful.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount is amortized as an adjustment to the related
loans yield.
The allowance for loan losses is increased by provisions charged to income and
reduced by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Banks' past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and current economic conditions.
<PAGE>
Loans are considered impaired when, based on all current information and events,
it is probable the Banks will not be able to collect all amounts due. The
portion of the allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows on impaired loans is reported as
bad debt expense in the same manner in which impairment initially was recognized
or as a reduction in the amount of bad debt expense that otherwise would be
reported. Interest income on impaired loans is recognized on the cash basis.
Foreclosed real estate: Real estate properties acquired through loan foreclosure
are initially recorded at the lower of cost or fair value less estimated selling
expenses at the date of foreclosure. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management. If the carrying value of a
property exceeds its estimated fair value less estimated selling expenses,
either an allowance for losses is established, or the property's carrying value
is reduced by a charge to income.
Credit related financial instruments: In the ordinary course of business, the
Banks have entered into commitments to extend credit, including commitments
under commercial letters of credit and standby letters of credit. Such financial
instruments are recorded when they are funded.
Transfers of financial assets: Transfers of financial assets are accounted for
as sales, when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Bank, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets and (3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
Premises and equipment: Premises and equipment are carried at cost, net of
accumulated depreciation. Depreciation is computed by the straight-line and
declining-balance methods over the estimated useful lives of the assets.
Goodwill: Goodwill resulting from the Company's acquisition of Rubio is being
amortized by the straight-line method over 15 years. Goodwill is periodically
reviewed for impairment based upon an assessment of future operations to ensure
that it is appropriately valued.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Earnings per common share: Basic per-share amounts are computed by dividing net
income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock unless the effect is to
reduce the loss or increase the income per common share from continuing
operations. Shares owned by the ESOP that have not been committed to be released
are not considered to be outstanding for the purpose of computing earnings per
share.
Unearned ESOP shares and expense: The unearned ESOP shares have been treated as
a reduction of equity. This amount is reduced as the ESOP shares are allocated.
Compensation expense for the ESOP is based upon the fair value of shares
allocated to participants.
Stock awards: Expense for common stock to be issued under the Company's
recognition and retention plan is based upon the fair value of the shares at the
date of grant, allocated over the period of vesting.
<PAGE>
Redeemable common stock held by ESOP: The Company's maximum cash obligation
related to these shares is classified outside stockholders' equity because the
shares are not readily traded and could be put to the Company for cash.
Stock options issued to employees: The Company adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," which establishes a fair
value based method for the financial reporting of its stock-based employee
compensation plans. However, as allowed by the standard, the Company has elected
to continue to measure compensation using the intrinsic value based method as
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Under this method, compensation is measured as the
difference between the market value of the stock on the grant date, less the
amount required to be paid for the stock. The difference, if any, is charged to
expense over the periods of service.
Recently issued accounting standards: The Financial Accounting Standards Board
has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for all fiscal quarters of fiscal years
beginning June 15, 2000. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. Management believes that
adoption of this Statement will not have an effect on the Company's financial
statements.
Fair value of financial instruments: FASB Statement No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. Statement No.
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Federal funds sold: The carrying amounts reported in the balance sheet for
federal funds sold approximate their fair values.
Loans and accrued interest receivable: For variable-rate loans that reprice
frequently and have no significant change in credit risk, the fair values are
based on carrying values. The fair values of other loans are determined using
estimated future cash flows, discounted at the interest rates currently being
offered for loans with similar terms to borrowers with similar credit
quality. The carrying amount of accrued interest receivable approximates its
fair value.
Deposits: The fair values of demand deposits equal their carrying amounts
which represent the amount payable on demand. The carrying amounts for money
market and passbook savings accounts approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits. The carrying amount of accrued
interest payable approximates its fair value.
Borrowed funds: Fair values for borrowed funds are estimated using a
discounted cash flow calculation that applies interest rates currently being
charged for borrowed funds of similar maturities.
Off-balance sheet instruments: Fair values for the Company's off-balance
sheet instruments are valued based upon the current fee structure for
outstanding letters of credit. Unfunded loan commitments are not valued since
the loans are generally priced at market at the time of funding.
<PAGE>
Note 2. Restrictions on Cash Due from Banks and Investments
Washington is required to maintain reserve balances in cash or on deposit with
Federal Reserve Banks. The total of those reserve balances was approximately
$25,000 at June 30, 2000 and 1999. In addition, Washington is required to
maintain a minimum balance of unpledged cash and investment securities totaling
approximately $3,010,000 and $2,228,000 as of June 30, 2000 and 1999,
respectively, to provide liquidity for deposits.
Note 3. Investment Securities
The amortized cost and fair value of investment securities available for sale as
of June 30, 2000 and 1999 are as follows:
<TABLE>
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
<S> <C> <C> <C> <C>
2000:
U. S. Treasury securities ........................ $ 299,993 $ 7 $ - - $ 300,000
U. S. Government agencies ........................ 16,517,807 - - (462,027) 16,055,780
Corporations and other ........................... 5,185,907 - - (265,731) 4,920,176
State and political subdivisions ................. 332,905 - - (6,510) 326,395
------------------------------------------------------
$22,336,612 $ 7 $ (734,268) $21,602,351
======================================================
1999:
U. S. Treasury securities ........................ $ 1,704,558 $ 3,192 $ - - $ 1,707,750
U. S. Government agencies ........................ 13,871,569 - - (248,191) 13,623,378
Corporations and other ........................... 5,053,899 179 (128,573) 4,925,505
State and political subdivisions ................. 442,485 257 (4,009) 438,733
------------------------------------------------------
$21,072,511 $ 3,628 $ (380,773) $20,695,366
======================================================
</TABLE>
The amortized cost and fair value of investment securities held to maturity are
as follows:
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------
State and political subdivisions:
2000 ............. $774,629 $ - - $ - - $774,629
============================================
1999 ............. $760,520 $ - - $ - - $760,520
============================================
The amortized cost and fair value of debt securities as of June 30, 2000 by
contractual maturity are shown below.
<TABLE>
Amortized Fair
Cost Value
------------------------
<S> <C> <C>
Available for sale:
Due in one year or less ......................................................... $ 1,312,397 $ 1,301,375
Due after one year through five years ........................................... 16,430,754 15,851,313
Due after five years through ten years .......................................... 3,293,965 3,181,204
Due after ten years ............................................................. 1,299,496 1,268,459
------------------------
22,336,612 21,602,351
------------------------
Held to maturity:
Due in one year or less ......................................................... 262,129 262,129
Due after one year through five years ........................................... 267,500 267,500
Due after five years through ten years .......................................... 245,000 245,000
------------------------
774,629 774,629
------------------------
$23,111,241 $22,376,980
========================
</TABLE>
<PAGE>
Investment securities with a carrying amount of $1,260,631 and $3,741,599 at
June 30, 2000 and 1999, respectively, were pledged as collateral on public
deposits.
For the years ended June 30, 2000, 1999 and 1998, proceeds from sales of
securities available for sale amounted to $1,250,000, $1,800,000 and $1,416,719,
respectively.
Securities gains (losses) for the years ended June 30, 2000, 1999 and 1998 are
as follows:
2000 1999 1998
-------------------------------
Realized gains ......................... $ $20,367 $ 5,383
Realized (losses) ...................... (9,456) (5,162) - -
-------------------------------
$(9,456) $15,205 $ 5,383
===============================
Note 4. Loans Receivable
Loans receivable are summarized as follows:
June 30,
------------------------
2000 1999
------------------------
Mortgage loans on real estate:
Residential 1-4 family ....................... $50,766,522 $49,464,296
Home equity and second mortgage .............. 2,430,726 1,257,725
Multifamily and commercial real estate ....... 13,726,769 8,611,583
Construction loans ........................... 1,781,924 796,418
------------------------
Total mortgage loans .............. 68,705,941 60,130,022
Commercial loans ................................ 10,963,334 8,714,483
Consumer and other loans:
Automobile ................................... 4,141,674 3,161,472
Other ........................................ 825,129 1,245,387
------------------------
Total loans ....................... 84,636,078 73,251,364
Less allowance for loan losses ............... 647,605 472,187
------------------------
$83,988,473 $72,779,177
========================
Loans receivable are net of loans in process of $1,807,091 and $546,229 as of
June 30, 2000 and 1999, respectively.
Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
2000 1999 1998
--------------------------------
Balance, beginning ......................... $472,187 $388,034 $225,650
Provision charged to expense ............ 186,500 112,500 89,000
Charge-offs ............................. (44,033) (47,208) (46,428)
Recoveries .............................. 32,951 18,861 14,638
Allowance of Rubio at date of acquisition - - - - 105,174
--------------------------------
Balance, ending ............................ $647,605 $472,187 $388,034
================================
Information regarding impaired loans is as follows:
The Banks have no material loans receivable at June 30, 2000 and 1999 that
they consider to be impaired that are not part of a homogenous group of
loans. Accordingly, no separate allowance has been provided for these loans.
Note 5. Accrued Interest Receivable
Accrued interest receivable at June 30 is summarized as follows:
2000 1999
------------------------
Investment securities ................... $ 388,206 $ 324,475
Loans receivable ........................ 1,075,632 866,125
------------------------
$1,463,838 $1,190,600
========================
<PAGE>
Note 6. Premises and Equipment
Premises and equipment consisted of the following at June 30:
2000 1999
----------------------
Land .......................................... $ 83,080 $ 83,080
Building ...................................... 812,799 812,799
Furniture, fixtures and equipment ............. 777,698 745,915
----------------------
1,673,577 1,641,794
Less accumulated depreciation ................. 855,349 767,243
----------------------
$ 818,228 $ 874,551
======================
Note 7. Deposits
Deposits at June 30 are as follows:
<TABLE>
Weighted
Average
Rate At 2000 1999
June 30, ------------------- -------------------
2000 Amount Percent Amount Percent
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest-bearing
deposits 2000 $4,225,007;
1999 $3,068,058 ............. 0.98 $ 9,459,327 12.9% $ 8,536,323 11.3%
Money market ................... 4.35 11,580,033 15.8 11,470,925 15.1
Passbook savings ............... 3.29 5,531,253 7.6 5,728,502 7.6
-----------------------------------------
26,570,613 36.3 25,735,750 34.0
-----------------------------------------
Certificates of deposit:
2.01% to 3% ................. 2.61 260,335 0.4 360,797 0.5
2.01% to 3% ................. 3.12 185,203 0.2
4.01% to 5% ................. 4.59 9,843,292 13.4 11,423,071 15.1
5.01% to 6% ................. 5.43 21,965,258 30.0 31,958,585 42.2
6.01% to 7% ................. 5.67 14,472,396 19.7 6,211,263 8.2
-----------------------------------------
46,726,484 63.7 49,953,716 66.0
-----------------------------------------
4.44 $73,297,097 100.0% $75,689,466 100.0%
=========================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,282,000 and $3,233,000 at June 30,
2000 and 1999, respectively. Deposits in excess of $100,000 are not insured by
the FDIC.
At June 30, 2000, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
Year Ending June 30,
-----------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2% to 3% $ 260,335 $ - - $ - - $ - - $ - - $ 260,335
3.01% to 4% 185,203 - - - - - - - - 185,203
4.01% to 5% 8,440,318 1,133,472 269,502 - - - - 9,843,292
5.01% to 6% 8,911,401 9,933,057 1,917,641 921,786 281,373 21,965,258
6.01% to 7% 12,744,960 573,981 1,062,703 90,752 - - 14,472,396
-----------------------------------------------------------------------------------
$30,542,217 $11,640,510 $ 3,249,846 $ 1,012,538 $ 281,373 $46,726,484
===================================================================================
</TABLE>
<PAGE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
2000 1999 1998
----------------------------------
Money market ........................ $ 420,364 $ 404,713 $ 360,080
Passbook savings .................... 175,702 184,866 116,880
NOW ................................. 100,135 111,094 82,454
Certificates of deposit ............. 2,629,295 2,712,539 2,060,204
----------------------------------
$3,325,496 $3,413,212 $2,619,618
==================================
Note 8. Borrowed Funds
Borrowed funds at June 30 are as follows:
2000 1999
------------------------
Short-term advances from the Federal Home Loan Bank .. $24,500,000 $ 8,750,000
Long-term advances from the Federal Home Loan Bank ... 5,693,250 6,956,290
------------------------
$30,193,250 $15,706,290
========================
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB), these
advances are collateralized by all the Institution's stock in the FHLB and
qualifying first mortgage loans with a face amount of $43,836,000. Of this
total, $7,500,000 of the advances are callable every three months thereafter
with a three calendar day notice. Therefore, these advances are categorized as
maturing within one year per the schedule below.
Advances at June 30, 2000 have maturity dates as follows:
Year Ending June 30,
June 30, Interest Rate 2000
-------------------------------------------------------------------------------
2001 5.31% to 6.33% $24,779,115
2002 5.79% to 6.33% 296,174
2003 5.41% to 6.33% 814,275
2004 5.79% to 6.33% 333,481
2005 5.79% to 6.33% 353,868
Thereafter 5.79% to 6.33% 3,616,337
-----------
$30,193,250
===========
Note 9. Employee Benefit Plans
Employee Stock Ownership Plan: The Company has established an Employee Stock
Ownership Plan "(ESOP)" for eligible employees. The Company has financed the
ESOP's purchase of the Company's stock and, therefore, the ESOP is considered to
be internally leveraged. Employees are eligible to participate after they attain
age 21 and complete one year of service during which they work at least 1,000
hours. The Company issued 52,602 shares of common stock to the ESOP on the date
of the conversion and reorganization.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by the ESOP
are used to pay debt service. Contributions to the ESOP and shares released from
the suspense account in an amount proportional to the repayment of the ESOP loan
are allocated among ESOP participants on the basis of compensation in the year
of allocation. Benefits generally become 100% vested after seven years of
credited service. Forfeitures will be reallocated among remaining participating
employees, in the same proportion as contributions. Benefits may be payable in
the form of stock or cash upon termination of employment.
As shares are released, the Company reports compensation expense equal to the
current fair value of the shares, and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
recorded as a reduction of debt and accrued interest. ESOP compensation expense
totaled $69,872, $74,924 and $68,865 for the years ended June 30, 2000, 1999 and
1998, respectively.
<PAGE>
Shares of common stock held by the ESOP at June 30, 2000 and 1999 are as
follows:
2000 1999
-------------------
Allocated shares .................................. $ 16,884 $ 12,376
Shares released for allocation .................... 2,435 2,254
Unreleased (unearned) shares ...................... 33,283 37,972
-------------------
$ 52,602 $ 52,602
-------------------
Fair value of unreleased (unearned) shares ........ $713,283 $576,795
===================
The ESOP plan may allow, at the discretion of the Advisory Committee, employees
to elect to defer up to fifteen percent of compensation annually. The Company
may, at the discretion of the Advisory Committee, make matching contributions on
an annual basis. For the years ended June 30, 2000, 1999 and 1998, $7,225,
$6,005 and $2,503, respectively, was charged to expense.
Defined contribution plan:
-------------------------
Rubio has a defined contribution retirement plan covering substantially all of
its employees. Contributions, which are 10% of each covered employee's
compensation, totaled $18,640, $18,920 and $5,961 for the years ended June 30,
2000, 1999 and 1998, respectively.
Stock-based compensation plans: The Company has two stock-based compensation
plans which are described below. As permitted under generally accepted
accounting principles, grants under those plans are accounted for following APB
Opinion No. 25 and related interpretations. Had compensation cost for the two
stock-based compensation plans been determined based on the grant date fair
values of the awards (the method prescribed in SFAS No. 123), reported net
income and earnings per common share would have been reduced to the pro forma
amounts shown below:
2000 1999 1998
-------------------------------
Pro forma net income ................ $989,015 $806,468 $781,465
Pro forma earnings per share:
Basic ............................ 1.81 1.43 1.29
Diluted .......................... 1.78 1.39 1.26
The pro forma effects of applying SFAS No. 123 are not indicative of future
amounts.
The fair value of each grant and award is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1999 and 1998: dividend rates of 2.2% and 1.9%; price
volatility of 22.79% and 8.25%; risk-free interest rates of 6.0%; and expected
life of 5 years.
Stock options: During the year ended June 30, 1997, the Company adopted a stock
option plan for certain officers and directors whereby up to 65,751 shares were
reserved for grants. The Board has granted options at prices equal to the fair
value of the stock on the dates of the grants. All options are for a term of ten
years and 20% become exercisable each year for the next five years.
A summary of the status of the Company's stock option plan is as follows:
Weighted-
Average
Exercise
Shares Price
-------------------
Outstanding at June 30, 1998 .................. 47,121 $11.71
Granted .................................... 5,479 16.63
Exercised
Forfeited
-------------------
Outstanding at June 30, 1999 .................. 52,600 12.22
Granted
Exercised
Forfeited .................................. (5,479) 16.63
-------------------
Outstanding at June 30, 2000 .................. 47,121 11.71
===================
<PAGE>
2000 1999 1998
--------------------------------
Weighted-average fair value per option of
options granted during the year ...... $ - - $ 4.16 $ 3.27
================================
Other pertinent information related to the options outstanding at June 30, 2000
is as follows:
Remaining
Number Exercise Contractual Number
Outstanding Price Life Exercisable
----------------------------------------------------
44,303 $ 11.25 6 Years 26,589
2,818 18.94 7 Years 1,128
----------------------- -----------
47,121 $ 11.71 27,717
======================= ===========
Stock awards: The Company adopted a recognition and retention plan in October
1996 whereby 26,300 shares of common stock have been reserved for issuance to
certain executive officers and directors. Shares awarded under the plan vest in
five equal annual installments, beginning on the anniversary of the grants.
During the year ended June 30, 2000, 1999 and 1998, awards were granted for no
shares, 2,192 shares and 2,127 shares, respectively, with a fair value of none,
$16.63 and $18.94 per share at the date of the grant, respectively.
The expense under the plan is based upon the fair value of the shares on the
date of the grant, allocated over the five-year term of vesting. The expense for
the years ended June 30, 2000, 1999 and 1998 totaled $28,869, $62,317 and
$67,329, respectively. Shares of common stock are issued upon vesting.
Note 10. Income Taxes
Net deferred income tax assets (liabilities) consist of the following components
as of June 30, 2000 and 1999:
2000 1999
------------------
Deferred tax assets:
Unrealized loss on investment securities
available for sale ......................... $286,363 $141,368
Accrued compensation .......................... 26,272 29,387
Allowance for loan losses ..................... 168,845 147,888
Other ......................................... 7,640
------------------
489,120 318,643
------------------
Deferred tax liabilities:
Recapture of allowance for loan losses ........ 104,032 130,040
FHLB stock dividends .......................... 44,067 44,067
Premises and equipment ........................ 91,735 87,556
Accrued expenses .............................. 28,374 32,201
Loan origination fees and costs ............... 68,170 - -
Other ......................................... 3,379 6,411
------------------
339,757 300,275
------------------
Net deferred tax asset ............. $149,363 $ 18,368
==================
The net change in the deferred income taxes is reflected in the financial
statements for the years ended June 30, 2000, 1999 and 1998 as follows:
<TABLE>
2000 1999 1998
-------------------------------
<S> <C> <C> <C>
Statement of income ............................. $ (14,000) $ 76,153 $ 31,383
Statement of stockholders' equity* .............. 144,995 141,064 (1,680)
Deferred taxes related to acquisition of Rubio .. - - - - (122,753)
-------------------------------
$130,995 $217,217 $(93,050)
===============================
</TABLE>
* Change in deferred taxes related to unrealized loss on investment securities
available for sale.
<PAGE>
The provision for income taxes charged to operations for the years ended June
30, 2000, 1999 and 1998 consisted of the following:
2000 1999 1998
------------------------------
Current ................................. $699,437 $608,175 $471,063
Deferred ................................ 14,000 (76,153) (31,383)
------------------------------
$713,437 $532,022 $439,680
==============================
The income tax provision differs from the amount of income tax determined by
applying the U. S. Federal income tax rate to pretax income for the years ended
June 30, 2000, 1999 and 1998 due to the following:
<TABLE>
Years Ended June 30,
-----------------------------------------------------------------
2000 1999 1998
-------------------- ------------------- ----------------------
% Of % Of % Of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax expense ........ $ 605,388 35.0% $ 477,128 35.0% $ 441,881 35.0%
Tax-exempt interest ... (23,754) (1.4) (34,454) (2.5) (26,760) (2.1)
State income taxes, net
of federal benefit . 62,376 3.6 50,009 3.7 37,811 3.0
Nondeductible goodwill
amortization ....... 33,097 1.9 33,097 2.4 15,169 1.2
Other, net ............ 36,330 2.1 6,242 0.4 (28,421) (2.3)
------------------------------------------------------------------
$ 713,437 41.2% $ 532,022 39.0% $ 439,680 34.8%
==================================================================
</TABLE>
Note 11. Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
<TABLE>
Year Ended June 30,
------------------------------------
2000 1999 1998
------------------------------------
<S> <C> <C> <C>
Basic earnings per share:
Net income available to common stockholders, basic . $1,016,242 $ 831,200 $ 822,836
====================================
Weighted average shares outstanding, basic ......... 545,963 563,303 603,589
====================================
Basic earnings per share ........................... $ 1.86 $ 1.48 $ 1.36
====================================
Diluted earnings per share:
Net income available to common shareholders, diluted
(Note 1) ........................................ $1,016,242 $ 831,200 $ 822,836
====================================
Weighted average shares outstanding, basic ......... 545,963 563,303 603,589
Effect of dilutive securities, stock options .... 9,643 14,812 16,677
------------------------------------
Weighted average shares outstanding, diluted ....... 555,606 578,115 620,266
====================================
Diluted earnings per share ......................... $ 1.83 $ 1.44 $ 1.33
====================================
</TABLE>
Note 12. Regulatory Capital Requirements
The ability of the Company to pay dividends to its shareholders is dependent
upon dividends paid by its subsidiary banks.
<PAGE>
Federal regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. Risk-based capital
standards have requirements for a minimum Tier 1 capital to assets ratio
(leverage ratio). In addition, regulatory agencies consider the published
capital levels as minimum levels and may require a financial institution to
maintain capital at higher levels.
A comparison of the Banks' capital as of June 30, 2000 and 1999 with the minimum
requirements is presented below:
Actual
---------------------- Minimum
2000 1999 Requirements
-----------------------------------
Washington:
Tangible capital ................. 7.97% 8.53% 1.5%
Risk-based capital ............... 12.32 12.92 8.0
Core capital ..................... 7.97 8.53 4.0
According to the Office of Thrift Supervision ("OTS"), Washington is considered
to be "well capitalized."
Actual
------------------ Minimum
2000 1999 Requirements
----------------------------------
Rubio:
Tier 1 risk-based capital ........ 15.4% 20.7% 4.0%
Total risk-based capital ......... 16.6 21.7 8.0
Leverage ratio ................... 10.6 11.1 3.0
According to FDIC capital guidelines, Rubio is considered to be "well
capitalized."
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. Under these
restrictions, the Company's subsidiary banks may not pay dividends that would
result in its capital levels being reduced below the minimum requirements shown
above.
Note 13. Commitments and Contingencies
Financial instruments with off-balance sheet risk: The Banks are parties to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statement of financial position.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Banks
use the same credit policies in making commitments and conditional obligations
as they do for on-statement of financial condition instruments.
Unless noted otherwise, the Banks require collateral or other security to
support financial instruments with credit risk.
Contract Or
Notional Amount
------------------------
June 30, June 30,
2000 1999
------------------------
Financial instruments whose contract
amounts represent credit risk,
commitments to extend credit:
First mortgage loans ................ $2,847,198 $1,910,601
Consumer and other loans ............ 2,890,459 1,412,509
------------------------
$5,737,657 3,323,110
========================
The above commitments are to make fixed rate loans with a June 30, 2000 and 1999
weighted average interest rate of 8.97% and 8.52%, respectively.
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is not violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Banks evaluate each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks, upon extension of credit is based on management's credit evaluation
of the party. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Concentrations of credit risk: Most of the Banks' lending activity is with
customers located within the state. The Banks generally originate single-family
residential loans within its primary lending area of southeastern Iowa. The
Banks' underwriting policies require such loans to be an 85% loan to value based
upon appraised values. These loans are secured by the underlying properties. The
Banks are also active in originating secured consumer loans to its customers,
primarily automobile and home equity loans. As of June 30, 2000, the Banks have
approximately $14,760,000 of agriculturally dependent loans.
Note 14. Fair Value of Financial Instruments
The carrying value and estimated fair values of financial instruments at June
30, 2000 and 1999 are as follows:
<TABLE>
2000 1999
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------ ------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ...................... $ 2,849,385 $ 2,849,385 $ 2,557,430 $ 2,557,430
Investment securities:
Held to maturity ............................ 774,629 774,629 760,520 760,520
Available-for-sale .......................... 21,602,351 21,602,351 20,695,366 20,695,366
Federal funds sold ............................. 110,000 110,000 1,340,000 1,340,000
Loans .......................................... 83,988,473 82,934,380 72,779,177 72,830,503
Accrued interest receivable .................... 1,463,838 1,463,838 1,190,600 1,190,600
Financial liabilities:
Deposits ....................................... 73,297,097 73,622,836 75,689,466 76,479,543
Borrowed funds ................................. 30,193,250 29,559,753 15,706,290 15,225,298
Accrued interest payable ....................... 420,601 420,601 388,063 388,063
Face Face
Amount Amount
---------- ----------
Off-balance sheet instruments,
loan commitments ............................... $ 5,737,657 $ - - $ 3,323,110 $ - -
</TABLE>
Note 15. Transactions with Related Parties
The Banks have had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have, in the opinion of management, on the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
others.
Aggregate loan transactions with related parties were as follows:
Year Ended June 30,
--------------------------
2000 1999
--------------------------
Balance, beginning .................... $ 950,265 $ 791,826
New loans .......................... 689,250 1,174,375
Repayments ......................... (295,960) (1,015,936)
--------------------------
Balance, ending ....................... $1,343,555 $ 950,265
==========================
Maximum balance during the year ....... $1,411,639 $ 1,085,305
==========================
<PAGE>
Note 16. Acquisition of a Business
Effective January 15, 1998, the Company acquired for cash all of the outstanding
shares of Rubio. The total acquisition cost was $4,797,689. The excess of the
acquisition cost over the fair value of the net assets acquired was $1,418,428
and is being amortized over fifteen years by the straight-line method. The
acquisition was accounted for as a purchase and the results of operations since
the date of the acquisition are included in the Company's statement of income.
Unaudited proforma net income and earnings per share for 1998, as though Rubio
had been acquired as of July 1, 1997 are not significantly different than the
reported amounts of the Company.
Note 17. Parent Company Only Financial Information
Following is condensed financial information of the Company (Parent Company
only):
WASHINGTON BANCORP
CONDENSED STATEMENTS OF FINANCIAL CONDITION
As Of June 30, 2000 and 1999
<TABLE>
ASSETS 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash ............................................................................... $ 432,621 $ 4,632
Investment in subsidiary banks, at cost plus equity in
undistributed earnings .......................................................... 10,516,430 10,526,726
Other assets ....................................................................... 102,614 369,295
--------------------------
$11,051,665 $10,900,653
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
Liabilities, accrued expenses and other liabilities ................................ $ 1,260 $ - -
--------------------------
Redeemable common stock held by Employee Stock
Ownership Plan (ESOP) ........................................................... 228,947 189,972
--------------------------
Stockholders' equity:
Preferred stock
Common stock .................................................................... 6,511 6,511
Additional paid-in capital ...................................................... 6,169,796 6,150,310
Retained earnings ............................................................... 7,333,909 6,384,863
Accumulated other comprehensive income, unrealized (losses)
on debt securities, net ...................................................... (447,899) (235,778)
--------------------------
13,062,317 12,305,906
Less:
Cost of common shares acquired for the treasury
2000 103,399 shares; 1999 50,935 shares .................................... (1,658,017) (946,435)
Deferred compensation ........................................................ (21,060) (79,098)
Maximum cash obligation related to ESOP shares ............................... (228,947) (189,972)
Unearned shares, Employee Stock Ownership Plan ............................... (332,835) (379,720)
--------------------------
10,821,458 10,710,681
--------------------------
$11,051,665 $10,900,653
==========================
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF INCOME
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries ............................. $ 914,560 $ 782,292 $2,800,000
Interest income ......................................... - - 2,043 5,666
Miscellaneous income .................................... 7,762 8,359 25
Miscellaneous expense ................................... (43,715) (46,663) (60,593)
--------------------------------------
Income (loss) before equity in
subsidiaries' undistributed
income and taxes on income ............ 878,607 746,031 2,745,098
Equity in undistributed net income (loss) of subsidiaries 137,635 71,919 (1,945,071)
--------------------------------------
Income before taxes on income ............. 1,016,242 817,950 800,027
Federal and state income taxes (credits) ................ - - (13,250) (22,809)
--------------------------------------
Net income ................................ $1,016,242 $ 831,200 $ 822,836
======================================
</TABLE>
<PAGE>
WASHINGTON BANCORP
STATEMENTS OF CASH FLOWS
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income ........................................ $ 1,016,242 $ 831,200 $ 822,836
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Equity in net income of subsidiaries ........... (1,052,195) (854,211) (854,929)
(Increase) decrease in other assets ............ 266,681 (302,007) 114,853
Increase (decrease) in accrued expenses and
other liabilities ............................ 1,260 (17,943) 4,338
---------------------------------------
Net cash provided by (used in) operating
activities ......................... 231,988 (342,961) 87,098
---------------------------------------
Cash Flows from Investing Activities
Dividends received from subsidiaries .............. 914,560 782,292 2,800,000
Return of equity from subsidiaries ................ - - - - 1,000,000
Purchase of stock of Rubio ........................ - - - - (4,797,689)
---------------------------------------
Net cash provided by (used in) investing
activities ......................... 914,560 782,292 (997,689)
---------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of shares of common stock .. - - - - 12,330
Payments received from subsidiary for compensation
under stock awards ............................. 28,869 62,317 67,329
Acquisition of common stock ....................... (680,232) (684,125) (328,899)
Dividends paid .................................... (67,196) (271,700) (267,925)
---------------------------------------
Net cash (used in) financing activities (718,559) (893,508) (517,165)
---------------------------------------
Increase (decrease) in cash ............ 427,989 (454,177) (1,427,756)
Cash balance:
Beginning ......................................... 4,632 458,809 1,886,565
---------------------------------------
Ending ............................................ $ 432,621 $ 4,632 $ 458,809
=======================================
Supplemental Disclosures
Cash payments for income taxes, net of payments
from subsidiary ................................ $ 120,035 $ 221,103 $ 148,806
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