FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended......................... March 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26584
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1691604
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 S. First Avenue Walla Walla, Washington 99362
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(Address of principal executive offices and zip code)
(509) 527-3636
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock $.01 par value per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. x
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 31, 1998:
Common Stock - $282,954,432
The number of shares outstanding of the issuer's classes of common stock as of
May 31, 1998:
Common Stock, $.01 par value - 10,635,437 shares
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DOCUMENT INCORPORATED BY REFERENCE
Portions of Proxy Statement for Annual Meeting of Shareholders to be held July
24, 1998 are incorporated by reference into Part III.
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC., AND SUBSIDIARIES
Table of Contents
PART I Page #
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Acquisition and Mergers . . . . . . . . . . . . . . . . . . . 4
Adoption of Dividend Reinvestment and Stock Purchase Plan . . 4
Lending Activities. . . . . . . . . . . . . . . . . . . . . . 4
Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . 12
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . 14
Investment Activities . . . . . . . . . . . . . . . . . . . . 18
Deposit Activities and Other Sources of Funds . . . . . . . . 22
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Environmental Regulation. . . . . . . . . . . . . . . . . . . 26
Competition . . . . . . . . . . . . . . . . . . . . . . . . . 26
Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management Personnel. . . . . . . . . . . . . . . . . . . . . 32
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 33
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . 37
Comparison of Results of Operations
March 31, 1998 vs. 1997 . . . . . . . . . . . . . . . . 39
March 31, 1997 vs. 1996 . . . . . . . . . . . . . . . . 41
Market Risk and Asset/ Liability Management. . . . . . . . 46
Liquidity and Capital Resources. . . . . . . . . . . . . . 49
Capital Requirements . . . . . . . . . . . . . . . . . . . 50
Effect of Inflation and Changing Prices. . . . . . . . . . 50
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 50
Item 9. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure . . . . . . . . . . . 50
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . 51
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 13. Certain Relationships and Related Transactions. . . . . . . . 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 52
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 53
2
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PART 1
Item 1 - Business General
First Savings Bank of Washington Bancorp, Inc. (the Company), a Delaware
corporation, is primarily engaged in the business of planning, directing, and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW) and Inland Empire Bank (IEB) (together, the
Banks). FSBW is a Washington-chartered savings bank the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings
Association Insurance Fund (SAIF). FSBW conducts business from its main office
in Walla Walla, Washington and its sixteen branch offices and three loan
production offices located in southeast, central, north central and western
Washington. IEB is an Oregon-chartered commercial bank whose deposits are
insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts
business from its main office in Hermiston, Oregon and its five branch offices
and two loan production offices located in northeast Oregon. The Company's
main office is located at 10 S. First Avenue, Walla Walla, WA 99362 and its
telephone number is (509) 527-3636.
The operating results of the Company depend substantially on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of loans and securities, and interest expense on interest-
bearing liabilities, composed primarily of deposits and borrowings. Net
interest income is a function of the Company's interest rate spread, which is
the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities. The Company's net income also is affected by
provisions for loan losses and the level of its other income, including
deposit service charges, loan and servicing fees, and gains and losses on the
sale of loans and securities, as well as its non-interest operating expenses
and income tax provisions.
First Savings Bank of Washington is a community oriented savings bank which
has traditionally offered a wide variety of deposit products to its retail
customers while concentrating its lending activities on real estate loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
activities also have included the origination of multi-family, commercial real
estate and consumer loans. FSBW's primary business has been that of a
traditional thrift institution, originating loans for portfolio in its primary
market area. FSBW has also been an active participant in the secondary
market, originating residential loans for sale and on occasion acquiring loans
for portfolio. More recently, FSBW has begun making non-mortgage commercial
and agribusiness loans to small businesses and farmers. In addition to loans,
FSBW has maintained a significant portion of its assets in marketable
securities. The securities portfolio has been weighted toward mortgage-backed
securities secured by one- to four-family residential properties. This
portfolio also has included a significant amount of tax exempt municipal
securities, primarily issued by entities located in the State of Washington.
In addition to interest income on loans and investment securities, FSBW
receives other income from deposit service charges, loan servicing fees and
from the sale of loans and investments. FSBW has sought to increase its other
income by retaining loan servicing rights on some of the loans that it has
sold. FSBW also has a wholly-owned subsidiary, Northwest Financial
Corporation, which serves as the trustee under FSBW's mortgage loan documents,
is engaged in real estate sales, and receives commissions from the sale of
annuities.
Inland Empire Bank is a community oriented commercial bank which historically
has offered a wide variety of deposits and loan products to its consumer and
commercial customers. Lending activities have included origination of
consumer, commercial, agribusiness and real estate loans. IEB also has
engaged in mortgage banking activity with respect to residential lending
within its local markets, originating loans for sale generally on a servicing
released basis. Additionally, IEB has maintained a significant portion of its
assets in marketable securities, particularly U.S. Treasury and government
agency securities as well as tax exempt municipal securities issued primarily
by entities located in the State of Oregon. IEB operates a division, Inland
Financial Services, which offers insurance and brokerage services to its
customers. IEB has two wholly owned subsidiaries: Pioneer American Property
Company, which owns a building that is leased to IEB, and Inland Securities
Corporation, which previously made a market for IEB's stock but is currently
inactive.
The Company and the Banks are subject to regulation by the Federal Reserve
Board (FRB) and the FDIC, the State of Washington Department of Financial
Institutions, Division of Banks (Division), and the State of Oregon Department
of Consumer and Business Services.
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Acquisitions and Mergers
Towne Bank
On April 1, 1998 the Company completed the acquisition of Towne Bancorp, Inc.
(TB). The Company paid approximately $28.1 million in cash and common stock
for all of the outstanding common shares and stock options of TB. The Company
issued 775,884 shares of stock and paid out $7.65 million in cash to TB
shareholders in connection with the completion of the acquisition. TB is the
holding company for Towne Bank, headquartered in Woodinville, Washington, a
Seattle suburb. The acquisition will be accounted for as a purchase and will
result in the recording of approximately $19.2 million of costs in excess of
the fair value of Towne Bank net assets acquired (goodwill). Goodwill assets
will be amortized over a 14 year period and will result in a charge to
earnings to approximately $1,375,000 per year. Founded in 1991, Towne Bank is
a community business bank with approximately $146 million in total assets,
$134 million in deposits, $120 million in loans and $9.3 million in
shareholders' equity at March 31, 1998. Towne Bank operates four full service
branches in the Seattle, Washington metropolitan area in Woodinville, Redmond,
Bellevue and Renton and plans to open its Bothell branch in June 1998.
Whatcom State Bancorp, Inc.
On June 15, 1998 the Company announced the signing of a definitive agreement
to acquire Whatcom State Bancorp, Inc., in an all stock offer valued at
approximately $12.5 million, including the assumption of outstanding Whatcom
State Bancorp stock options. Whatcom State Bancorp, Inc., the holding company
for Whatcom State Bank in Bellingham, Washington, is not a publicly traded
institution. This valuation represents 2.10 times book value and 19.6 times
earnings for the twelve months ended March 31, 1998 for Whatcom State Bancorp,
Inc. According to the terms of the definitive agreement, the Company will
exchange 0.697 shares of its common stock for each Whatcom State Bancorp
share. The acquisition, which has been approved by the Boards of Directors of
each company, is subject to, among other contingencies, approval by regulators
and Whatcom State Bancorp shareholders. The transaction is expected to close
by the end of the third quarter of fiscal 1999.
Founded in 1980, Whatcom State Bank is a commercial community bank with
approximately $89.4 million in assets, $76.5 million in deposits, $67.6
million in loans and $5.9 million in shareholders' equity at March 31, 1998.
Whatcom State Bank operates five full service branches serving the communities
of Bellingham, Ferndale, Lynden, Blaine and Point Roberts. It also operates
the Mt. Baker Home Loan Center in Oak Harbor. Whatcom State Bank has focused
its lending operations on small business and consumer loans within Whatcom
County, although it has recently expanded its real estate lending activities
to include areas of Island County serviced by the Mt. Baker Home Loan Center.
Adoption of Dividend Reinvestment and Stock Purchase Plan
In October 1997, the Company adopted a dividend reinvestment and stock
purchase plan. Under the terms of the plan all registered stockholders with
100 or more shares of stock may automatically reinvest all or a portion of
their cash dividends in additional shares of the Company's common stock. In
addition, qualifying participants may also make optional monthly cash payments
of $50 to $1,500 to purchase additional shares of Company stock.
Lending Activities
General: Historically, the Banks have offered a wide range of loan products
to meet the demands of their customers. The Banks originate loans for both
their own loan portfolios and for sale in the secondary market. Management's
strategy has been to maintain a significant percentage of assets in these loan
portfolios in loans with more frequent repricing terms or shorter maturities
than traditional long term fixed-rate mortgage loans. As part of this effort,
the Banks have developed a variety of floating or adjustable-rate products.
In response to customer demand, however, both Banks continue to originate
fixed-rate loans including fixed-rate mortgage loans with terms up to 30
years. The relative amount of fixed-rate loans and adjustable-rate loans that
can be originated at any time is largely determined by the demand for each in
a competitive environment.
FSBW's primary lending focus is on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences and loans for the
construction of one- to four-family residences. FSBW also originates, to a
lesser degree, consumer, commercial real estate, multi-family real estate and
land loans. More recently, FSBW has begun marketing non-mortgage commercial
and agribusiness loans to small businesses and farmers. Management expects
this type of lending to increase at FSBW. At March 31, 1998, FSBW's net loan
portfolio totaled $601.8 million. Over 73% of the FSBW's first mortgage loans
are secured by properties located in the State of Washington.
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The aggregate amount of loans that FSBW is permitted to make under applicable
federal regulations to any one borrower, including related entities, is the
greater of 15% of unimpaired capital and surplus or $500,000. At March 31,
1998, the maximum amount which FSBW could have lent to any one borrower and
the borrower's related entities was $13.5 million. At March 31, 1998, FSBW
had no loans to one borrower with an aggregate outstanding balance in excess
of this amount. FSBW had 38 borrowers with total loans outstanding in excess
of $2.0 million at March 31, 1998. At that date, the largest amount
outstanding to any one borrower and the borrower's related entities totaled
$9.6 million, which consisted of 35 single family, land development and lot
loans in the Tacoma, Bellevue and Tri-Cities, Washington; and Portland, Oregon
areas. At March 31, 1998, these loans were performing in accordance with
their terms.
Lending activities at Inland Empire Bank have included origination of
consumer, commercial, agribusiness and commercial real estate loans. In
particular, IEB has developed significant expertise and market share with
respect to small business and agricultural loans within its local markets. In
addition, IEB has originated one- to four-family residential real estate loans
for sale in the secondary market.
At March 31, 1998, IEB's net loan portfolio totaled $122.6 million. The
aggregate amount of loans that IEB is permitted to make under applicable state
and federal regulations to any one borrower, including related entities, is
15% of the aggregate paid-up and unimpaired capital and surplus. At March 31,
1998, the maximum amount IEB could have lent to any one borrower and the
borrower's related entities was $4.1 million. At that date, the largest
amount outstanding to any one borrower of IEB totaled $3.0 million.
One- to Four-Family Residential Real Estate Lending: The Banks originate
loans secured by first mortgages on owner-occupied, one- to four-family
residences and loans for the construction of one- to four-family residences in
the communities where they have established full service branches. In
addition, the Banks operate loan production offices in Bellevue, Puyallup, and
Spokane, Washington and LaGrande and Condon, Oregon. FSBW also has a
significant relationship with a mortgage loan broker in the greater Portland,
Oregon market. At March 31, 1998, $423.8 million, or 51.5% of the Company's
loan portfolio, consisted of permanent loans on one- to four-family
residences.
Historically, FSBW has originated both fixed-rate loans and adjustable-rate
residential loans for its portfolio. Since the early 1980s, FSBW has
restructured its loan portfolio to reflect a larger percentage of
adjustable-rate loans. Fifteen and 30-year fixed-rate residential loans
generally have been sold into the secondary market; however, a portion of the
fixed-rate loans originated by FSBW have been retained in the loan portfolio
to meet asset/liability management objectives. The number of fixed-rate loans
retained by FSBW increased substantially during 1996 and remained high in
fiscal years 1998 and 1997 in response to the capital deployment and growth
objectives of the Company. For the past six months FSBW has been selling a
larger portion of its newly originated fixed rate loans as a part of its
interest rate risk management strategy.
Historically, Inland Empire Bank has sold most of its residential loans into
the secondary market and has continued to so do subsequent to its acquisition
by the Company. Generally IEB has sold loans on a servicing-released basis
such that no revenue is realized by IEB after the sale.
In the loan approval process, the Banks assess the borrower's ability to repay
the loan, the adequacy of the proposed security, the employment stability of
the borrower and the creditworthiness of the borrower. As part of the loan
application process, qualified independent appraisers inspect and appraise the
security property. All appraisals are subsequently reviewed by a loan
underwriter and, if necessary, by the Banks' chief appraiser.
The Banks' residential loans are generally underwritten and documented in
accordance with the guidelines established by Freddie Mac and Fannie Mae.
Government insured loans are generally underwritten and documented in
accordance with the guidelines established by the Department of Housing and
Urban Development (HUD) and the Veterans Administration (VA). The Banks' loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.
The Banks sell whole loans on either a servicing-retained or servicing-
released basis. All loans are sold without recourse. Occasionally, the Banks
will sell a participation interest in a loan or pool of loans to an investor.
In these instances, the Banks retain a small percentage of the loan(s) and
pass through a net yield to the investor on the percentage sold. The decision
to hold or sell loans is based on asset/liability management goals and
policies and market conditions. Recently, FSBW has retained a portion of its
conventional fixed-rate and adjustable-rate mortgage originations and sold all
of its government insured loans into the secondary market. IEB has continued
to sell most of its residential loan originations.
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The Banks offer adjustable-rate mortgages (ARMs) at rates and terms
competitive with market conditions. The Banks offer several ARM products which
adjust annually after an initial period ranging from one to five years subject
to a limitation on the annual increase of 1.0% to 2.0% and an overall
limitation of 5.0% to 6.0%. Certain ARM loans are originated with an option
to convert the loan to a 30-year fixed-rate loan at the then prevailing market
interest rate. Generally these ARM products utilize the weekly average yield
on one-year U.S. Treasury securities adjusted to a constant maturity of one
year plus a margin of 2.75% to 3.25%. ARM loans held in the Banks' portfolios
do not permit negative amortization of principal and carry no prepayment
restrictions. Borrower demand for ARM loans versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan. In recent years borrower demand
for ARM loans has been limited and the Banks have chosen not to aggressively
pursue ARM loans by offering minimally profitable deeply discounted teaser
rates. As a result ARM loans have represented only a small portion of loans
originated during this period.
The retention of ARM loans in the Banks' loan portfolios can help reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates. It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Banks
generally provide, as a marketing incentive, for initial rates of interest
below the rates which would apply were the adjustment index plus the margin
used for pricing initially, these loans are subject to increased risks of
default or delinquency. The Banks attempt to reduce the potential for
delinquencies and defaults on ARM loans by qualifying the borrower based on
the borrower's ability to repay the ARM loan assuming that the maximum
interest rate that could be charged at the first adjustment period remains
constant during the loan term. Another consideration is that although ARM
loans allow the Banks to increase the sensitivity of their asset bases to
changes in the interest rates, the extent of this interest sensitivity is
limited by the periodic and lifetime interest rate adjustment limits (caps).
Because of these considerations, the Company has no assurance that yields on
ARM loans will be sufficient to offset increases in its cost of funds.
It is the Banks' present policy to lend up to 95% of the lesser of the
appraised value of the property or purchase price of the property on
conventional loans, although ARM loans are normally restricted to not more
than 90%. Higher loan-to-value ratios are available on certain government
insured programs. The Banks generally require private mortgage insurance on
residential loans with a loan-to-value ratio at origination exceeding 80%.
Construction and Land Lending: Since 1988, FSBW has invested a significant
proportion of its loan portfolio in residential construction loans to
professional home builders. This activity has been prompted by favorable
economic conditions in the Northwest, lower long-term interest rates and an
increased demand for housing units as a result of the migration of people from
other parts of the country to the Northwest. To a lesser extent, FSBW also
originates land loans. IEB also originates construction and land loans
although to a much smaller degree than FSBW. At March 31, 1998, construction
and land loans totaled $108.5 million, or 15.3% of total loans of the Company.
Construction loans made by both Banks include both those with a sale contract
or permanent loan in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period. The Banks monitor the number of unsold homes in
their construction loan portfolios, and generally maintain the portfolios so
that no more than 60-70% of their construction loans are secured by homes for
which there is not a sale contract in place.
Construction and land lending affords the Banks the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Banks may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, the Banks may be confronted at, or prior to, the maturity of the
loan with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and
builders and by the failure of builders to pay subcontractors. Loans to
builders to construct homes for which no purchaser has been identified carry
more risk because the payoff for the loan is dependent on the builder's
ability to sell the property prior to the time that the construction loan is
due. The Banks have sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices.
The maximum number of speculative loans approved for each builder is based on
a combination of factors, including the financial capacity of the builder, the
market demand for the finished product, and the ratio of sold to unsold
inventory the builder maintains. The Banks have chosen to diversify the risk
associated with speculative construction lending by doing business with a
large number of smaller builders spread over a relatively large geographic
area.
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Loans for the construction of one- to four-family residences are generally
made for a term of 12 months. The Banks' loan policies include maximum
loan-to-value ratios of up to 80% for speculative loans. Each individual
speculative loan request is supported by an independent appraisal of the
property and the loan file includes a set of plans, a cost breakdown and a
completed specifications form. All speculative construction loans must be
approved by senior loan officers. At March 31, 1998, the Company's
speculative construction portfolio included loans to 138 individual builders
in 71 separate communities. At March 31, 1998, the Company had 18 home
builders, who individually in the aggregate, had construction loans
outstanding with balances exceeding $1.0 million.
The Company regularly monitors the construction loan portfolio and the
economic conditions and housing inventory in each of its markets and will
decrease construction lending if it perceives there are unfavorable market
conditions. The Company believes that the internal monitoring system in place
mitigates many of the risks inherent in its construction lending.
To a much lesser extent, the Banks make land loans to developers, builders and
individuals to finance the acquisition and/or development of improved lots or
unimproved land. In making land loans the Banks follow underwriting policies
and disbursement procedures similar to those for construction loans. The
initial term on land loans is typically one to three years with interest only
payments, payable monthly, and provisions for principal reduction as lots are
sold and released.
Multifamily and Commercial Real Estate Lending: The Banks also originate loans
secured by multifamily and commercial real estate. At March 31, 1998, the
Company's loan portfolio included $74.1 million in multifamily and $112.0
million in commercial real estate loans (including construction lending).
Multifamily and commercial real estate lending affords the Banks an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multifamily and commercial properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy.
Multifamily and commercial real estate loans originated by the Banks are
predominately fixed rate loans with intermediate terms of 10 years. Rates on
these ARM loans generally adjust annually after an initial period ranging from
one to ten years. Rate adjustments for the more seasoned loans in the
portfolio predominantly reflect changes in the Federal Home Loan Bank (FHLB)
National Monthly Median Cost of Funds index. More recently originated
multifamily and commercial loans are linked to various constant maturity U.S.
Treasury indices or certain prime rates. The Banks' commercial real estate
portfolios consist of loans on a variety of property types including motels,
nursing homes, office buildings, and mini-warehouses. Multifamily loans
generally are secured by small to medium sized projects.
Many of the Banks' multifamily and commercial real estate loans are considered
by management to be older or seasoned loans although $50.4 million of these
loans were originated in 1998. At March 31, 1998, the Banks' loan portfolio
included 125 multifamily loans, the average loan balance of which was
$478,000. At March 31, 1998, the Banks had 33 multifamily and commercial
real estate loans with balances over $1.0 million, the largest of which was
$5.3 million. All of the properties securing the multifamily and commercial
real estate loans are located in the Northwest with the exception of three
seasoned participation loans on properties located in the greater Stockton,
California area.
Agriculture/commercial Lending. Inland Empire Bank has been very active in
small business and agricultural lending, with over 40% of presently
outstanding loans being made to finance businesses and farmers. IEB's
management has devoted a great deal of effort to developing customer
relationships and the ability to serve this type of borrower. It is
management's belief that many very large banks have in the past neglected
small business lending, thus contributing to IEB's success. IEB will continue
to emphasize this segment of lending in its market areas. Management intends
to leverage its past success and local decision making ability to continue to
expand this market niche.
First Savings Bank has recently begun making non-mortgage agricultural and
commercial loans. FSBW has staffed its Walla Walla, Tri-Cities, Clarkston
and Yakima offices with experienced commercial bankers and anticipates a
steady growth in the origination of small business and agricultural loans.
It is expected the growth will come primarily from FSBW's existing customer
base and referrals from officers and Directors. In addition to providing
higher yielding assets, it is anticipated that this type of lending will
increase the deposit base of these branches. Expanding non mortgage
agricultural/commercial lending is currently an area of significant effort at
FSBW.
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Similar to consumer loans, agricultural and commercial loans may entail
greater risk than do residential mortgage loans. Agricultural and commercial
loans may be unsecured or secured by special purpose or rapidly depreciating
assets, such as equipment, crops, live stock, inventory and receivables which
may not provide an adequate source of repayment on defaulted loans. In
addition, agricultural and commercial loans are dependent on the borrower's
continuing financial stability and management ability as well as market
conditions for various products, services and commodities. For these reasons,
agricultural and commercial loans generally provide higher yields than
residential loans but also require more administrative and management
attention. Interest rates on agricultural and commercial loans may be either
fixed or adjustable. Loan terms including the fixed or adjustable interest
rate, the loan maturity and the collateral considerations vary significantly
and are negotiated on an individual loan basis. At March 31, 1998, the Banks
had 3 agribusiness/commercial loans with balances greater than $1.0 million
totaling $5.1 million, the largest of which was $1.8 million.
Consumer and Other Lending: The Banks originate a variety of consumer loans,
including secured second mortgage loans, automobile loans, credit card loans
and loans secured by deposit accounts. Consumer and other lending has
traditionally been a small part of FSBW's business. However, recent efforts
at FSBW have led to a substantial increase in credit card loans to its
existing customer base. Inland Empire Bank, on the other hand, has been an
active originator of consumer loans. At March 31, 1998, the Company had $30.8
million, or 3.8% of its loans receivable, in outstanding consumer and other
loans.
Consumer loans often entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Banks, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral.
Loan Solicitation and Processing: The Banks originate real estate loans by
direct solicitation of real estate brokers, builders, depositors, and walk-in
customers. Loan applications are taken by the Banks' loan officers and are
processed in each branch location. Most underwriting and all audit functions
are performed by loan administration personnel at each Bank's main office.
Applications for fixed-rate and adjustable-rate mortgages on one- to
four-family properties are generally underwritten and closed based on Freddie
Mac/Fannie Mae standards, and other loan applications are underwritten and
closed based on the Banks' own written guidelines.
Consumer loans are originated through various marketing efforts directed
primarily toward existing deposit and loan customers of the Banks. Consumer
loan applications may be processed at branch locations or by administrative
personnel at the Banks', main offices.
Commercial and agricultural loans are solicited by loan officers of each Bank
by means of call programs focused on local businesses and farmers. Credit
decisions on significant commercial and agricultural loans are made by senior
loan officers or in certain instances by the Board of Directors of each Bank
or the Company.
Loan Originations, Sales and Purchases
While the Banks originate a variety of loans, their ability to originate loans
and their ability to originate each type of loan is dependent upon the
relative customer demand and competition for loans in each market. For the
years ended March 31, 1998, 1997 and 1996, the Banks originated $513.5
million, $330.3 million and $219.5 million of loans, respectively. The
Company's net loan portfolio grew $111.0 million or 17.2% in fiscal 1998
compared to $230.6 million of growth in fiscal 1997 ($90.5 million excluding
acquisition of IEB) and $115.9 million of growth in fiscal 1996.
8
<PAGE>
<PAGE>
In recent years prior to 1996 the Company generally sold most of its 30-year
fixed-rate one- to four-family residential mortgage loans to secondary market
purchasers. For the years ended March 31, 1996 and 1997 the Company sold a
smaller portion of its fixed-rate loan originations choosing to retain loans
in response to its capital deployment and growth objectives. In the second
half of fiscal year 1998 the Company increased the amount of new fixed-rate
residential loan sold as part of its interest rate risk managerial strategy.
Sales of loans by the Company for the years ended March 31, 1998, 1997 and
1996 totaled $80.6 million, $36.6 million and $44.9 million, respectively.
Sales of whole loans generally are beneficial to the Company since these sales
may generate income at the time of sale, provide funds for additional lending
and other investments and increase liquidity. The Company sells loans on both
a servicing-retained and a servicing-released basis. See "Loan Servicing-Loan
Servicing Portfolio." At March 31, 1998, the Company had $12.4 million in
loans held for sale.
The Banks, especially FSBW, purchase whole loans and loan participation
interests primarily during periods of reduced loan demand in their primary
market. Any such purchases are made consistent with the Banks' underwriting
standards; however, the loans may be located outside of the Banks' normal
lending area. For the years ended March 31, 1997 and 1996 the Banks
substantially increased their loan purchases acquiring primarily whole loan
and participation interests in pools of seasoned one- to four-family
residential ARM and 15-year fixed-rate loans and seasoned multifamily and
commercial real estate loans. The properties securing these seasoned loans for
the most part are located outside of the Banks' normal lending territory.
During the years ended March 31, 1998, 1997 and 1996, the Company purchased
$51.1 million, $74.1 million and $65.9 million, respectively, of loans and
loan participation interests. In recent years, the Company's primary source
of loan participation interests (exclusive of the whole loan and participation
interests in seasoned loans purchased) has been with a commercial bank in
Reno, Nevada. The participation interests are in short-term construction
loans secured by residential properties located in the Reno and Las Vegas,
Nevada markets. FSBW normally requires the lead lender to maintain a large
interest in the loans and typically the loans have been funded one-half by the
subsidiary bank and one- half by the lead lender or other participants.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated (in thousands):
Years Ended March 31,
-----------------------------------
1998 1997 1996
---- ---- ----
Total loans at beginning of period $ 707,816 $ 456,466 $ 333,685
--------- --------- ---------
Acquisition of IEB -- 91,860 --
--------- --------- ---------
Loan originations:
One- to four-family real estate 200,942 161,189 129,703
Commercial and multifamily properties 50,442 17,285 9,810
Construction and land loans 119,941 100,169 73,420
Agriculture/commercial 107,502 26,938 --
Consumer and other loans 34,657 24,717 6,607
--------- --------- ---------
Total loans originated 513,484 330,298 219,540
--------- --------- ---------
Loans purchased:
One- to four-family real estate 7,846 34,294 57,323
Commercial and multifamily properties 34,279 21,155 1,636
Construction and land loans 7,625 18,642 6,970
Agriculture/commercial 1,300 -- --
--------- --------- ---------
Total loans purchased 51,050 74,091 65,929
--------- --------- ---------
Loans sold:
One- to four-family whole loans 80,589 36,623 44,329
One- to four-family participation loans -- -- 588
--------- --------- ---------
Total loans sold 80,589 36,623 44,917
--------- --------- ---------
Principal repayments 369,190 208,276 117,771
--------- --------- ---------
Net increase in loans 114,755 251,350 122,781
--------- --------- ---------
Total loans at end of period $ 822,571 $ 707,816 $ 456,466
========= ========= =========
9
<PAGE>
<PAGE>
<TABLE>
Loan Portfolio Analysis. The following table sets forth the composition of the Company's loan portfolio
(including loans held for sale) by type of loan as of the dates indicated.
March 31
-----------------------------------------------------------------------------------
- --
1998 1997 1996 1995 1994
---------------- --------------- --------------- --------------- --------------
- --
Amount Percent Amount Percent Amount Percent Amount Percent Amount
Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -----
- --
(Dollars in thousands)
Type of Loan:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
real estate $423,850 51.53% $395,418 55.86% $311,472 68.24% $199,585 59.81% $134,401
46.84%
Commercial and
multifamily
properties1 67,859 20.41 129,198 18.25 77,613 16.99 73,443 22.01 69,962
24.38
Construction and
land 132,409 16.10 110,262 15.58 62,177 13.62 57,913 17.36 79,458
27.69
Agriculture/commercial 67,611 8.22 47,846 6.76 871 .19 902 .27 1,152
.68
Consumer and other 30,842 3.74 25,092 3.55 4,333 .96 1,842 .55 1,963
.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
- -
Total loans 822,571 100.00% 707,816 100.00% 456,466 100.00% 333,685 100.00% 286,936
100.00%
-------- ====== -------- ====== -------- ====== -------- ====== --------
======
Undisbursed funds
for loans in
progress 54,500 52,412 35,244 28,507 35,069
Deferred loan fees
and discounts 3,297 2,775 1,876 2,226 2,174
Allowance for loan
losses 7,857 6,748 4,051 3,549 3,429
Total loans -------- -------- -------- -------- --------
receivable, net $756,917 $645,881 $415,295 $299,403 $246,264
======== ======== ======== ======== ========
10
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Loan Maturity and Repricing
The following table sets forth certain information at March 31, 1998 regarding the dollar amount of loans
maturing in the Company's portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of
undisbursed loan proceeds, unamortized premiums and discounts, and exclude the allowance for loan losses
(in thousands):
Maturing Maturing Maturing
Maturing within within within Maturing
Within 1 to 3 to 5 to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One-to four-family real estate $ 4,091 $ 2,722 $ 4,519 $ 11,567 $ 385,867 $ 408,766
Commercial and
multifamily properties 9,528 13,284 44,025 39,834 60,050 166,721
Construction and land 79,129 7,990 255 718 2,683 90,775
Agriculture/commercial 36,304 8,115 11,501 6,493 5,231 67,644
Consumer and other 12,010 7,118 6,929 2,400 2,411 30,868
--------- -------- -------- -------- --------- ---------
Total loans $ 141,062 $ 39,229 $ 67,229 $ 61,012 $ 456,242 $ 764,774
========= ======== ======== ======== ========= =========
</TABLE>
<TABLE>
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The
average life of loans is substantially less than their contractual terms because of prepayments. In
addition, due-on-sale clauses on loans generally give the Company the right to declare loans immediately
due and payable in the event that the borrower sells the real property subject to the mortgage and the
loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans and, conversely,
decreases when rates on existing mortgage loans are substantially higher than current mortgage loan
market rates. The following table sets forth the dollar amount of all loans due after March 31, 1999,
which have fixed interest rates and floating or adjustable interest rates (in thousands).
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
<S> <C> <C> <C>
One-to four-family real estate $ 310,720 $ 93,955 $ 404,675
Commercial and
multifamily properties 78,743 78,450 157,193
Construction and land 3,443 8,203 11,646
Agriculture/commercial 11,426 19,914 31,340
Consumer and other 11,964 6,894 18,858
--------- --------- ---------
Total $ 416,296 $207,416 $ 623,712
========= ======== =========
11
</TABLE>
<PAGE>
<PAGE>
Loan Servicing
General: The Banks receive fees from a variety of institutional mortgage
owners in return for performing the traditional services of collecting
individual payments and managing the loan portfolio. At March 31, 1998, the
Banks were servicing $208.4 million of loans for others. Loan servicing
includes processing payments, accounting for loan funds and collecting and
paying real estate taxes, hazard insurance and other loan-related items such
as private mortgage insurance. When the Banks receive the gross mortgage
payment from individual borrowers, they remit to the investor in the mortgage
a predetermined net amount based on the yield on that mortgage. The
difference between the coupon on the underlying mortgage and the predetermined
net amount paid to the investor is the gross loan servicing fee. In addition,
the Banks retain certain amounts in escrow for the benefit of the lender for
which the Banks incur no interest expense but are able to invest the funds
into earning assets. At March 31, 1998, the Banks held $4.2 million in escrow
for their portfolios of loans serviced for others.
Loan Servicing Portfolio: The loan servicing portfolio at March 31, 1998 was
composed primarily of $46.0 million of Fannie Mae mortgage loans and $140.4
million of Freddie Mac mortgage loans. The balance of the loan servicing
portfolio at March 31, 1998, consisted of loans serviced for a variety of
private investors. At March 31, 1998, the portfolio included loans secured by
property located primarily in the states of Washington or Oregon. For the
year ended March 31, 1998, $813,000 of loan servicing fees, net of $100,000 of
servicing rights amortization, were recorded.
Mortgage Servicing Rights: In addition to the origination of mortgage
servicing rights (MSRs) on the loans that FSBW originates and sells in the
secondary market on a servicing retained basis, FSBW has also purchased
mortgage servicing rights. The cost of MSRs is capitalized and amortized in
proportion to, and over the period of, the estimated future net servicing
income. For the years ending March 31, 1998 and 1997 FSBW capitalized $442,000
and none, respectively, of mortgage servicing rights relating to loans sold
with servicing retained and no MSRs were purchased in fiscal years 1998 and
1997. Management periodically evaluates the estimates and assumptions used to
determine the carrying values of MSRs and the amortization of MSRs. These
carrying values are adjusted when the valuation indicates the carrying value
is impaired. At March 31, 1998, MSRs were carried by FSBW at a value net of
amortization of $697,000, and no valuation allowance for impairment was
considered necessary. MSRs generally are adversely affected by current and
anticipated prepayments resulting from decreasing interest rates.
Asset Quality
Each Bank's asset classification committee meets at least monthly to review
all classified assets, to approve action plans developed to resolve the
problems associated with the assets and to review recommendations for new
classifications, any changes in classifications and recommendations for
reserves. The committee reports to the Board of Directors quarterly as to the
current status of classified assets and action taken in the preceding quarter.
Federal regulations require that the Banks review and classify their problem
assets on a regular basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations have also created a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. If an asset or portion thereof is classified loss, the
insured institution establishes specific allowances for loan losses for the
full amount of the portion of the asset classified loss. A portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
12
<PAGE>
<PAGE>
At March 31, 1998, 1997 and 1996, the aggregate amounts of the Banks'
classified assets (as determined by the Banks) were as follows (in thousands):
At March 31
--------------------------------
1998 1997 1996
---- ---- ----
Loss $ -- $ -- $ --
Doubtful -- -- --
Substandard assets 2,776 4,175 2,078
Special mention -- -- --
Non-performing Assets and Delinquencies.
Real Estate Loans: When a borrower fails to make a required payment when due,
the Banks follow established collection procedures. The first notice is mailed
to the borrower within 10 to 17 days after the payment due date and attempts
to contact the borrower by telephone begin within five to ten days after the
late notice is mailed to the borrower. If the loan is not brought current by
30 days after the payment due date, the Banks will mail a second written
notice to the borrower. If a satisfactory response is not obtained,
continuous follow-up contacts are attempted until the loan has been brought
current. Generally, within 30 to 45 days into the delinquency procedure, the
Banks notify the borrower that home ownership counseling is available. In
most cases, delinquencies are cured promptly; however, if after 90 days of
delinquency no response has been received nor an approved reinstatement plan
established, foreclosure according to the terms of the security instrument and
applicable law is initiated. Interest income on loans after 90 days of
delinquency is no longer accrued and the full amount of accrued and
uncollected interest is reversed.
Agriculture/commercial and Consumer Loans: When a borrower fails to make
payments as required, a late notice is sent to the borrower. If payment is
still not made the responsible loan officer is advised and contact is made my
telephone or letter. Continuous follow-up contacts are attempted until the
loan has been brought current. Generally, if the loan is not current within
45 to 60 days, action is taken to take possession of the security. A small
claims or lawsuit is normally filed on unsecured loans or deficiency balances
at 90 to 120 days. Loans over 90 days delinquent, repossessions, loans in
foreclosure and bankruptcy no longer accrue interest unless a satisfactory
repayment plan has been agreed upon, the loan is a full recourse contract or
fully secured by a deposit account.
13
<PAGE>
<PAGE>
The following table sets forth information with respect to the Banks'
non-performing assets and restructured loans within the meaning of SFAS No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, at
the dates indicated (dollars in thousands).
At March 31
----------------------------------------------
1998 1997 1996 1995 1994
Loans accounted for on a ---- ---- ---- ---- ----
nonaccrual basis:
Real estate
One- to four-family $ 367 $1,644 $ 526 $ 336 $ 391
Commercial and multifamily 448 187 -- -- 280
Construction and land -- -- -- -- --
Agriculture/commercial 414 206 -- -- --
Consumer and other 41 45 -- 5 13
------ ------ ------ ----- ------
Total 1,270 2,082 526 341 684
Accruing loans which are ------ ------ ------ ----- ------
contractually past due 90
days or more:
Real estate
One-to four family 52 -- -- -- --
Commercial and multifamily 33 -- -- -- --
Construction and land 32 -- -- -- --
Agriculture/commercial -- -- -- -- --
Consumer and other 33 30 12 -- --
------ ------ ------ ----- ------
Total 150 30 12 -- --
------ ------ ------ ----- ------
Total non-performing loans 1,420 2,112 538 341 684
Real estate held for sale 882 1,057 712 588 750
Total non-performing ------ ------ ------ ----- ------
assets $2,302 $3,169 $1,250 $ 929 $1,434
====== ====== ====== ===== ======
Restructured loans (1) $ 305 $ 238 $ 156 $ 165 $ --
Total non-performing loans
to net loans 0.19% 0.33% 0.13% 0.11% 0.28%
Total non-performing loans
to total assets 0.20% 0.21% 0.07% 0.07% 0.16%
Total non-performing assets
to total assets 0.20% 0.31% 0.17% 0.19% 0.34%
(1) These loans are performing under their restructured terms but are
classified substandard.
For the year ended March 31, 1998, $125,000 in interest income would have been
recorded had nonaccrual loans been current, and no interest income on such
loans was included in net income for such period.
Allowance for Loan Losses
General: The Banks have established systematic methodologies for the
determination of provisions for loan losses. The methodologies are set forth
in a formal policy and take into consideration the need for an overall general
valuation allowance as well as specific allowances that are tied to individual
problem loans.
In originating loans, the Banks recognize that losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Banks increase their allowance for loan losses
by charging provisions for possible loan losses against the Banks' income.
14
<PAGE>
<PAGE>
On April 1, 1995, the Company and its subsidiary Banks adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an
amendment of SFAS No. 114. These statements require that impaired loans that
are within their scope be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the
measurement of impaired loans shall be included within the provision for loan
losses in the same manner in which impairment initially was recognized or as a
reduction in the provision that would otherwise be reported. The adoption of
these statements had no material impact on the Company's or Banks' financial
condition or results of operations. Prior to the adoption of these statements
a reserve for specific losses was provided for loans when any significant,
permanent decline in value was deemed to have occurred. As of March 31, 1998,
the Company and its subsidiary Banks had no impaired loans as defined by the
statement. The statements also apply to all loans that are restructured in a
troubled debt restructuring, subsequent to the adoption of SFAS No. 114, as
defined by SFAS No. 15. A troubled debt restructuring is a restructuring in
which the creditor grants a concession to the borrower that it would not
otherwise consider. At March 31, 1998, the Company had $305,000 of
restructured loans that, though performing, were classified substandard.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, actual loan loss
experience, current and anticipated economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Additions to these allowances are charged to
earnings. Provisions for losses that are related to specific assets are
usually applied as a reduction of the carrying value of the assets and charged
immediately against the income of the period. The reserve is based upon
factors and trends identified by management at the time financial statements
are prepared.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation. At March 31, 1998, the
Company had no specific loss allowances.
A provision for losses is charged against income on a monthly basis to
maintain an adequate allowance. At March 31, 1998, the Company had an
allowance for loan losses of $7.9 million which represented .96% of total
loans. Fiscal 1998 loan growth included $22.1 million of growth in higher risk
construction and land loans and the addition of new lines of lending business,
including $19.8 million of growth in agriculture/commercial loans and $5.7
million of growth in consumer lending. These loans, based on historical
industry statistics, have a higher percentage of losses than the Company has
previously experienced in its prior mortgage related lending and for this
reason management anticipates that future losses will be higher than
historical levels Management believes that the amount maintained in the
allowance will be adequate to absorb possible losses in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
While the Company believes that the Banks have established their existing
allowance for loan losses in accordance with Generally Accepted Accounting
Principles (GAAP), there can be no assurance that regulators, in reviewing the
Banks' loan portfolio, will not request the Banks to increase significantly
their allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.
Real Estate Held for Sale: Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
held for sale until it is sold. When property is acquired it is recorded at
the lower of its cost (the unpaid principal balance of the related loan plus
foreclosure costs), or fair value. Subsequent to foreclosure, the property is
carried at the lower of the foreclosed amount or fair value. Upon receipt of
a new appraisal and market analysis, the carrying value is written down
through the establishment of a specific reserve to the anticipated sales price
less selling and holding costs. At March 31, 1998, the Company had $882,000
of real estate owned.
15
<PAGE>
<PAGE>
The following table sets forth an analysis of the Company's gross allowance
for possible loan losses for the periods indicated.
Years Ended March 31
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period $ 6,748 $ 4,051 $ 3,549 $ 3,429 $ 3,105
------- ------- ------- ------- -------
Acquired with IEB -- 1,416 -- -- --
------- ------- ------- ------- -------
Provision for loan losses 1,628 1,423 524 391 440
Recoveries: ------- ------- ------- ------- -------
Secured by real estate
One - to four-family 6 38 -- -- --
Commercial and multifamily -- -- -- -- --
Construction and land -- -- -- -- --
Agriculture/commercial 29 -- -- -- --
Consumer and other 16 16 -- -- 2
------- ------- ------- ------- -------
Total recoveries 51 54 -- -- 2
------- ------- ------- ------- -------
Charge-offs:
Secured by real estate
One - to four-family 359 127 -- -- 15
Commercial and multifamily -- -- -- 271 101
Construction and land 11 -- -- -- --
Agriculture/commercial 19 3 -- -- --
Consumer and other 181 66 22 -- 2
------- ------- ------- ------- -------
Total charge-offs 570 196 22 271 118
------- ------- ------- ------- -------
Net charge-offs 519 142 22 271 116
------- ------- ------- ------- -------
Balance at end of period $ 7,857 $ 6,748 $ 4,051 $ 3,549 $ 3,429
======= ======= ======= ======= =======
Ratio of allowance to total
loans outstanding at the
end of the period 0.96% 0.95% 0.89% 1.06% 1.20%
Ratio of net loan charge-
offs to the average net
book value of loans
outstanding during the
period 0.01% 0.04% 0.01% 0.10% 0.05%
16
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated.
At March 31
----------------------------------------------------------------------------------
1998 1997 (2) 1996 1995 1994
---------------- ---------------- --------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Total Total Total Total Total
to to to to to
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ----- ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific or allocated
loss allowances:
Secured by real estate
One- to four-family $1,059 51.53% $1,098 55.86% $ -- 68.24% $ 11 59.81% $ 11 46.84%
Commercial and
multifamily 849 20.41 547 18.25 -- 16.99 46 22.01 317 24.38
Construction and land 856 16.10 844 15.58 -- 13.62 -- 17.36 -- 27.69
Agriculture/commercial 835 8.22 422 6.76 -- .19 -- .27 -- .68
Consumer and other 307 3.74 237 3.55 -- .96 -- .55 -- .41
Unallocated general
loss allowance(1) (2) 3,951 N/A 3,600 N/A 4,051 N/A 3,492 N/A 3,101 N/A
Total allowance for ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
loan losses $7,857 100.00% $6,748 100.00% $4,051 100.00% $3,549 100.00% $3,429 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
_________
(1) The Company establishes specific loss allowances when individual loans are identified that present a
possibility of loss (i.e., that full collectibility is not reasonably assured). The remainder of the
allowance for loan losses is established for the purpose of providing for estimated losses which are
inherent in the loan portfolio.
(2) For 1997 the Company has not changed how it determines the adequacy of its allowance for loan losses
other than to allocate the non-specific loan loss reserves to loan categories that were the basis for
its accrual. In the periods prior to 1997, it was not the Company's practice to allocate general
loan loss allowances to specific loan categories.
17
</TABLE>
<PAGE>
<PAGE>
Investment Activities
Under Washington and Oregon state law, banks are permitted to invest in
various types of marketable securities. Authorized securities include but are
not limited to U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of
insured banks and savings institutions, banker's acceptances, repurchase
agreements, federal funds, commercial paper, corporate debt and equity
securities and obligations of states and their political sub-divisions. The
investment policies of the Banks are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The Banks' policies generally limit investments
to U.S. Government and agency securities, municipal bonds, certificates of
deposit, marketable corporate debt obligations and mortgage-backed securities.
Investment in mortgage-backed securities includes those issued or guaranteed
by Freddie Mac (FHLMC), Fannie Mae (FNMA), Government National Mortgage
Association (GNMA) and privately-issued collateralized mortgage-backed
securities that have an AA credit rating or higher. A high credit rating
indicates only that the rating agency believes there is a low risk of loss or
default. However, all of the Banks' investment securities, including those
that have high credit ratings, are subject to market risk in so far as a
change in market rates of interest or other conditions may cause a change in
an investment's market value.
At March 31, 1998, the Company's consolidated investment portfolio totaled
$302.6 million and consisted principally of U.S. Government and agency
obligations, mortgage-backed securities, municipal bonds, corporate debt
obligations, and stock of FNMA and FHLMC. From time to time, investment
levels may be increased or decreased depending upon yields available on
investment alternatives, and management's projections as to the demand for
funds to be used in the Banks' loan originations, deposits and other
activities. During fiscal 1998 investments and securities increased by $14.1
million. Holdings of mortgage-backed securities increased $22.8 million and
U.S. Treasury and agency obligations decreased $1.8 million. Ownership of
corporate and other securities decreased $5.0 million as a result of sales,
maturities and bond calls. Municipal bonds decreased $1.9 million primarily
as a result of maturities and bond calls.
Mortgage-Backed and Mortgage-Related Securities: The Company's subsidiary,
FSBW, purchases mortgage-backed securities in order to: (i) generate positive
interest rate spreads on large principal balances with minimal administrative
expense; (ii) lower the credit risk of the Company as a result of the
guarantees provided by FHLMC, FMNA, and GNMA; (iii) enable the Company to use
mortgage-backed securities as collateral for financing; and (iv) increase
liquidity. The Company invests primarily in federal agency mortgage-backed
securities, principally FNMA, FHLMC and GNMA. The Company also invests in
agency sponsored and corporate collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs). At March 31, 1998, net
mortgage-backed securities totaled $197.1 million, or 17.1% of total assets.
At March 31, 1998, 81.3% of the mortgage-backed securities were
adjustable-rate and 18.9% were fixed-rate. The estimated fair value of the
Company's mortgage-backed securities at March 31, 1998, was $197.1 million,
which is $54,000 less than the amortized cost of $197.2 million. At March 31,
1998, the Company's portfolio of mortgage-backed securities had a weighted
average coupon rate of 7.02% and a weighted average maturity on period to
repricing of 22.12 years. The estimated weighted average remaining life of the
portfolio was 6.4 years based on the 3 month "constant prepayment rate" (CPR)
or the most recent CPR if less than 3 months history is available.
Mortgage-backed securities known as PC's or mortgage pass-through certificates
represent a participation interest in a pool of single-family or multifamily
mortgages. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and resell
the participation interests in the form of securities, to investors such as
the Company. Mortgage participation certificates generally yield less than
the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, PC's are usually more liquid
than individual mortgage loans and may be used to collateralized certain
liabilities and obligations of the Company. These types of securities also
permit the Company to optimize its regulatory capital because of their low
risk weighting.
CMOs and REMICs are mortgage-related obligations and are often considered as
derivative financial instruments because they are created by redirecting the
cash flows from the pool of mortgages or mortgage-backed securities underlying
these securities into two or more classes (or tranches) with different
maturity or risk characteristics. Management believes these securities may
represent attractive alternatives relative to other investments due to the
wide variety of maturity, repayment and interest rate options available.
Current investment practices of the Bank does not provide for the purchase of
CMOs and REMICs classified as high risk by the Federal Financial Institutions
Examination Council (FFIEC). At March 31, 1998 the Company held CMOs and
REMICs with a net carrying value of $170.9 million. At that date, two CMO's
with a carrying value of $429,000 were identified as a high risk security
under the FFIEC standards and are included in the Company's available for sale
portfolio.
18
<PAGE>
<PAGE>
Of the Company's $197.1 million mortgage-backed securities portfolio at March
31, 1998, $168.5 million with a weighted average yield of 6.17% had
contractual maturities or period to repricing within ten years and $28.6
million with a weighted average yield of 7.08% had contractual maturities or
period to repricing over ten years. However, the actual maturity of a
mortgage-backed security is usually less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in rapid
amortization of premiums or discounts and thereby affect the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because, to the extent that the Company's
mortgage-backed securities amortize or prepay faster than anticipated, the
Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. In contrast to mortgage-backed securities
in which cash flow is received (and hence, prepayment risk is shared) pro rata
by all securities holders, the cash flow from the mortgages or mortgage-backed
securities underlying REMICs or CMOs is segmented and paid in accordance with
a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of REMICs and CMOs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
Municipal Bonds: The Company's tax exempt municipal bond portfolio, which at
March 31, 1998, totaled $32.1 million at estimated fair value ($30.6 million
at amortized cost), was comprised of general obligation bonds (i.e., backed by
the general credit of the issuer) and revenue bonds (i.e., backed by revenues
from the specific project being financed) issued by various authorities,
hospitals, water and sanitation districts located in the states of Washington
and Oregon. At March 31, 1998, general obligation bonds and revenue bonds had
total estimated fair values of $19.9 million and $12.2 million, respectively.
Most of the municipal bonds are not rated by a nationally recognized credit
rating agency (e.g., Moody's or Standard and Poor's). At March 31, 1998, the
Company's municipal bond portfolio had a weighted average maturity of
approximately 7.6 years and an average coupon rate of 6.37%. The largest
security in the portfolio was an industrial revenue bond issued by the City of
Kent, Washington, with an amortized cost of $3.67 million and a fair value of
$3.67 million.
Corporate Bonds: The Company's corporate bond portfolio, which totaled $4.3
million at fair value ($4.3 million at amortized cost) at March 31, 1998, was
composed of short to intermediate-term fixed-rate securities. At March 31,
1998, the portfolio had a weighted average maturity of 5.6 years and a
weighted average coupon rate of 6.52%. The longest term bond, which had an
amortized cost of $2.0 million and a term to maturity of 10.4 years, is
subject to put options in favor of the Company exercisable in August 1998.
U.S. Government and Agency Obligations: The Company's portfolio of U.S.
Government and agency obligations had a fair value of $65.6 million ($65.4
million at amortized cost) at March 31, 1998. The Company's subsidiary,
FSBW, has invested a small portion of its securities portfolio in structured
notes. The structured notes in which FSBW has invested provide for periodic
adjustments in coupon rates on specified dates based on various indices and
formulae. At March 31, 1998, structured notes, which totaled $2.0 million at
fair value ($2.0 million at amortized cost), consisted of a U.S. Government
agency obligation which matured in April 1998.
Off Balance Sheet Derivatives: Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate
or index. Such derivatives include "forwards," "futures," "options" or
"swaps." The Company generally has not invested in "off balance sheet"
derivative instruments, although investment policies authorize such
investments. On March 31, 1998 the Company had no off balance sheet
derivatives and no outstanding commitments to purchase or sell securities.
19
<PAGE>
<PAGE>
The following tables sets forth certain information regarding carrying values
and percentage of total carrying values, which is estimated market value, of
the Company's consolidated portfolio of securities classified as available
for sale and held to maturity (in thousands).
At March 31
-------------------------------------------------------
Available for Sale: 1998 1997 1996
- ------------------ ----------------- ------------------ -----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
value Total value Total value Total
----- ----- ----- ----- ----- -----
U.S. Government
Treasury and
agency obligations $ 65,594 21.69% $ 67,417 23.45% $ 70,389 24.13%
Municipal bonds 32,093 10.61 33,969 11.81 29,365 10.07
Corporate bonds 4,304 1.42 7,997 2.78 11,632 3.99
Other 3,298 1.09 3,758 1.31 3,116 1.07
Mortgage-backed or related
securities
Mortgage-backed
securities:
GNMA 16,862 5.58 20,273 7.05 22,181 7.60
FHLMC 3,361 1.11 3,868 1.35 5,010 1.72
FNMA 6,048 2.00 7,281 2.53 8,413 2.88
Private issue -- --. -- --. 10,760 3.69
-------- ------ -------- ------ -------- ------
Total mortgage-backed
securities 26,271 8.69 31,422 10.93 46,364 15.89
Mortgage-related
securities
CMOs-agency backed 146,300 48.38 117,212 40.77 104,771 35.92
CMOs-Non-agency 24,559 8.12 25,741 8.95 26,050 8.93
Total mortgage- -------- ------ -------- ------ -------- ------
related securities 170,859 56.50 142,953 49.72 130,821 44.85
-------- ------ -------- ------ -------- ------
Total 197,130 65.19 174,375 60.65 177,185 60.74
-------- ------ -------- ------ -------- ------
Total securities
available for sale $302,419 100.00% $287,516 100.00% $291,687 100.00%
======== ====== ======== ====== ======== ======
Held to Maturity:
- ----------------
Certificates of deposit
Carrying value $ 194 100.00% $ 987 100.00% $ 2,059 100.00%
======== ====== ======== ====== ======== ======
Estimated market
value $ 194 $ 987 $ 2,059
======== ======== ========
20
<PAGE>
<PAGE>
<TABLE>
The following table shows the maturity or period to repricing of the Company's consolidated portfolio of
securities (dollars in thousands):
At March 31 1998
------------------------------------------------------------------------------------------------
Over One to Over Five to Over Ten to Over
One Year or Less Five Years Ten Years Twenty Years Twenty Years Total
---------------- ---------------- --------------- -------------- ---------------- ------------
Weigh- Weigh- Weigh- Weigh- Weigh- Weigh-
Carry- ted Carry- ted Carry- ted Carry- ted ted Carry- ted
ing Average ing Average ing Average ing Average Average ing Average
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available
for Sale
U. S.
Government
Treasury
and agency
obligations
Fixed-
rate $ 28,554 5.59% $23,361 6.26% $ 7,999 6.61% $ 3,681 7.16% $ -- --% $ 63,595 6.05%
Adjustable-
rate 1,999 5.66 -- -- -- -- -- -- -- -- 1,999 5.66
-------- ------- ------- ------- ------- --------
30,553 5.59 23,361 6.26 7,999 6.61 3,681 7.16 -- -- 65,594 6.04
Municipal
bonds 3,494 6.18 9,495 6.33 9,595 6.21 8,191 6.70 1,318 6.45 32,093 6.37
Corporate
bonds
Fixed-
rate -- -- 2,311 7.05 -- -- 1,993 3.77 -- -- 4,304 5.51
Mortgage-backed
obligations:
Fixed-rate 13 11.55 643 6.11 104 9.63 2,024 9.46 16,046 6.38 18,830 6.65
Adjustable-
rate 7,075 6.99 366 7.09 -- -- -- -- -- -- 7,441 6.97
-------- ------- ------- ------- ------- --------
7,088 6.98 1,009 6.47 104 9.63 2,024 9.46 16,046 6.38 26,271 6.74
Mortgage-
related
obligations:
Fixed-rate -- -- -- -- 7,503 6.76 3,410 7.00 7,152 8.02 18,065 7.30
Adjustable-
rate 152,794 6.10 -- -- -- -- -- -- -- -- 152,794 6.10
-------- ------- ------- ------- ------- --------
152,794 6.10 -- -- 7,503 6.76 3,410 7.00 7,152 8.02 170,859 6.23
-------- ------- ------- ------- ------- --------
Total
mortgage-
backed or
related
obliga-
tions 159,882 6.14 1,009 6.47 7,607 6.80 5,434 7.92 23,198 6.89 197,130 6.30
Other
stock 542 6.72 2,755 8.80 -- -- -- -- -- -- 3,298 8.46
-------- ------- ------- ------- ------- --------
Total
securities
available
for sale
carrying
value $194,471 6.06% $38,931 6.51% $25,201 6.51% $19,299 6.83% $24,516 6.86% $302,419 6.26%
======== ======= ======= ======= ======= ========
Total
securities
available
for sale
amortized
cost $194,654 $35,833 $24,888 $18,472 $24,499 $298,346
======== ======= ======= ======= ======= ========
Held to
Maturity
Certifi-
cates of
deposit-
Fixed-
rate $ 194 5.00% $ -- -- $ -- -- $ -- -- $ -- -- $ 194 5.00%
======== ======= ======= ======= ======= ========
21
</TABLE>
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or borrowings) and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced significantly
by general interest rates and money market conditions. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer-term basis for
general business purposes. The Banks do not currently solicit brokered
deposits.
Deposit Accounts: Deposits are attracted from within the Banks' primary
market areas through the offering of a broad selection of deposit instruments,
including demand checking accounts, NOW accounts, money market deposit
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of their deposit
accounts, the Banks consider current market interest rates, profitability to
the Banks, matching deposit and loan products and their customer preferences
and concerns. The Banks generally review their deposit mix and pricing
weekly.
The Banks compete with other financial institutions and financial
intermediaries in attracting deposits. Competition from mutual funds has been
particularly strong in recent years due to the performance of the stock
market. In addition, there is strong competition for savings dollars from
commercial banks, credit unions, and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.
The Banks, especially FSBW, have been most successful in attracting a broad
range of retail time deposits and, at March 31, 1998, the Banks had a total of
$371.6 million in retail time deposits, of which $295.8 million had original
maturities of one year or longer.
As illustrated in the following table, certificates of deposit have accounted
for a larger percentage of the deposit portfolio than have other transaction
accounts. However, as reflected in the balances and percentages for March
31, 1998 and 1997, the acquisition of IEB has added significantly to demand,
NOW and Money Market accounts for the Company.
22
<PAGE>
<PAGE>
<TABLE>
The following table sets forth the balances of deposits in the various types of accounts offered by the
Banks at the dates indicated (in thousands).
At March 31
---------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------------- -----------------
% of Increase % of Increase % of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW checking $101,238 17.11% 7,608 $ 93,630 17.18% $ 54,635 $ 38,995 10.42%
Regular savings accounts 42,084 7.11 (2,047) 44,131 8.10 11,632 32,499 8.69
Money market accounts 76,642 12.96 (227) 76,869 14.11 47,282 29,587 7.91
Certificates which mature:
Within 1 year 240,074 40.59 27,221 212,853 39.05 34,431 178,422 47.70
After 1 year, but within
2 years 74,519 12.60 20,966 53,553 9.83 21,903 31,650 8.46
After 2 years, but
within 5 years 43,505 7.35 2,542 40,963 7.52 (3,129) 44,092 11.79
Certificates maturing
thereafter 13,509 2.28 (9,459) 22,968 4.21 4,149 18,819 5.03
-------- ------ ------ -------- ------ -------- -------- ------
Total $591,571 100.00% 46,604 $544,967 100.00% $170,903 $374,064 100.00%
======== ====== ====== ======== ====== ======== ======== ======
</TABLE>
<TABLE>
The following table sets forth the deposit activities of the Banks for the periods indicated (in
thousands).
Year Ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 544,967 $ 374,064 $ 360,352
Acquisition of subsidiary IEB -- 134,610 --
Net increase (decrease)
before interest credited 21,315 14,557 (5,264)
Interest credited 25,289 21,736 18,976
--------- --------- ---------
Net increase in savings deposits 46,604 170,903 13,712
--------- --------- ---------
Ending balance $ 591,571 $ 544,967 $ 374,064
========= ========= =========
</TABLE>
<TABLE>
The following table indicates the amount of the Banks' jumbo certificates of deposit by time remaining
until maturity as of March 31, 1998. Jumbo certificates of deposit require a minimum deposit of $100,000
and rates paid on such accounts are negotiable (in thousands).
Jumbo
Maturity Period Certificates
- --------------- of deposits
-----------
<S> <C>
Six months or less $ 34,140
Six through twelve months 18,081
Over twelve months 28,387
--------
Total $ 80,608
========
23
</TABLE>
<PAGE>
<PAGE>
Borrowings: Deposits are the primary source of funds for the Banks' lending
and investment activities and for their general business purposes. FSBW also
uses borrowings to supplement its supply of lendable funds, to meet deposit
withdrawal requirements and to more effectively leverage its capital position.
The FHLB-Seattle serves as FSBW's primary borrowing source. Advances from the
FHLB-Seattle are typically secured by FSBW's first mortgage loans. At March
31, 1998, FSBW had $297.2 million of borrowings from the FHLB-Seattle at a
weighted average rate of 6.04%. FSBW has been authorized by the FHLB-Seattle
to borrow up to 45% of it's total assets under a blanket floating lien
security agreement, permitting a borrowing capacity of $428.7 million at March
31, 1998. Additional funds may be obtained through commercial banking credit
lines.
The FHLB-Seattle functions as a central reserve bank providing credit for
member financial institutions. As a member, FSBW is required to own capital
stock in the FHLB-Seattle and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
FSBW also uses retail repurchase agreements due generally within 90 days as a
source of funds. At March 31, 1998, retail repurchase agreements totaling
$6.3 million with interest rates from 5.39% to 7.18% were secured by a pledge
of certain FNMA, GNMA and FHLMC mortgage-backed securities with a market value
of $9.8 million.
FSBW also borrows funds through the use of secured wholesale repurchase
agreements with securities brokers. The broker holds FSBW's securities while
FSBW continues to receive the principal and interest payments from the
security. FSBW's outstanding borrowings at March 31, 1998, under wholesale
repurchase agreements, totaled $85.4 million and were collateralized by
mortgage-backed securities with a fair value of $91.3 million.
(See "Management's Discussion and Analysis of Financial Position and Results
of Operations - Liquidity and Capital Resources.")
The following table sets forth certain information regarding material
borrowings by the Company at the dates and for the periods indicated (dollars
in thousands):
At March 31
----------------------------------
1998 1997 1996
---- ---- ----
Weighted average rate at year end on:
FHLB advances 6.04% 5.96% 5.43%
Retail repurchase agreements 5.78 5.76 5.35
Wholesale repurchase agreements 5.65 5.53 5.41
At March 31
----------------------------------
1998 1997 1996
Maximum amount of borrowings outstanding ---- ---- ----
at any month end for:
FHLB advances $ 299,377 $ 235,098 $ 179,419
Retail repurchase agreements 10,206 11,119 9,789
Wholesale repurchase agreements 85,430 52,174 9,863
Annual average borrowings outstanding for:
FHLB advances 276,328 214,563 66,252
Retail repurchase agreements 6,934 11,322 7,620
Wholesale repurchase agreements 72,276 26,649 162
Annual weighted average rate paid on:
FHLB advances 6.07% 5.83% 5.80%
Retail repurchase agreements 5.77 4.80 6.15
Wholesale repurchase agreements 5.78 5.96 5.41
24
<PAGE>
<PAGE>
Personnel
As of March 31, 1998, the Company had 281 full-time and 45 part-time
employees. The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.
Taxation
Federal Taxation
General. For tax reporting purposes, the Company and the Banks report their
income on a calendar year basis using the accrual method of accounting. The
Company and the Banks are subject to federal income taxation in the same
manner as other corporations with some exceptions including particularly the
reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company and the
Banks.
Bad Debt Reserve. Historically, savings institutions such as FSBW which met
certain definitional tests primarily related to their assets and the nature of
their business ("qualifying thrift") were permitted to establish a reserve for
bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. FSBW's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on FSBW's
actual loss experience, or a percentage equal to 8% of FSBW's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to FSBW's loss experience, it
generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, provisions repealing the current thrift bad debt rules were
enacted by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). FSBW has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, because FSBW is
a "large" bank (i.e., assets in excess of $500 million), FSBW's bad debt
deduction will be determined on the basis of net charge-offs during the
taxable year. The new rules also require FSBW to recapture its $1.5
millionpost-1987 additions to tax basis bad debt reserves ratably over a six
taxable year period beginning with fiscal year March 1999. The recapture of
the post-1987 additions to tax basis bad debt reserves will require FSBW to
pay approximately $85,000 a year in federal income taxes (based upon current
federal income tax rates). This will not result in a charge to earnings as
these amounts are included in the deferred tax liability at March 31, 1998.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution qualifies as a bank as defined by the statute. In
addition, the balance of the pre-1988 bad debt reserves continues to be
subject to provisions of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that FSBW makes "nondividend distributions" to
the Company, such distributions will be considered to result in distributions
from the balance of their bad debt reserves as of December 31, 1987 (or a
lesser amount if FSBW's loan portfolio decreased since December 31, 1987) and
then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in FSBW's taxable income. Nondividend distributions include
distributions in excess of FSBW's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of FSBW's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from FSBW's bad
debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate. FSBW does not
intend to pay dividends that would result in a recapture of any portion of
their tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Banks, whether or not an Alternative
Minimum Tax ("AMT") is paid. Under President Clinton's 1998 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.
25
<PAGE>
<PAGE>
Dividends-Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Banks as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Banks will not file a consolidated
tax return, except that if the Company or the Banks own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
There have not been any IRS audits of the Company's or the Banks' federal
income tax returns during the past five years.
Environmental Regulation
The business of the Company is affected from time to time by federal and state
laws and regulations relating to hazardous substances. Under the federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
owners and operators of properties containing hazardous substances may be
liable for the costs of cleaning up the substances. CERCLA and similar state
laws can affect the Company both as an owner of branches and other properties
used in its business and as a lender holding a security interest in property
which is found to contain hazardous substances. While CERCLA contains an
exemption for holders of security interests, the exemption is not available if
the holder participates in the management of a property, and some courts have
broadly defined what constitutes participation in management of property.
Moreover, CERCLA and similar state statutes can affect the Company's decision
of whether or not to foreclose on a property. Before foreclosing on
commercial real estate, it is the Company's general policy to obtain an
environmental report, thereby increasing the costs of foreclosure. In
addition, the existence of hazardous substances on a property securing a
troubled loan may cause the Company to elect not to foreclose on the property,
thereby reducing the Company's flexibility in handling the loan.
Competition
The Banks encounter significant competition both in attracting deposits and in
originating real estate loans. Their most direct competition for deposits has
come historically from other commercial and savings banks, savings
associations and credit unions in their market areas. More recently, the
Banks have experienced an increased level of competition from securities
firms, insurance companies, money market and mutual funds, and other
investment vehicles. The Banks expect continued strong competition from such
financial institutions and investment vehicles in the foreseeable future. The
ability of the Banks to attract and retain deposits depends on their ability
to provide investment opportunities that satisfy the requirements of investors
as to rate of return, liquidity, risk of loss of principal, convenience of
locations and other factors. The Banks compete for deposits by offering
depositors a variety of deposit accounts and financial services at competitive
rates, convenient business hours, and a high level of personal service and
expertise.
The competition for loans comes principally from commercial banks, loan
brokers, mortgage banking companies, other savings banks and credit unions.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Banks' market
areas as well as the increased efforts by commercial banks and credit unions
to expand mortgage loan originations.
The Banks compete for loans primarily through offering competitive rates and
fees and providing excellent services to borrowers and home builders. Factors
that affect competition include general and local economic conditions, current
interest rate levels and the volatility of the mortgage markets.
26
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Regulation
The Banks
General: As state-chartered, federally insured financial institutions, the
Banks are subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and their state banking regulators and file periodic
reports concerning their activities and financial condition with their
regulators. The Banks' relationship with depositors and borrowers also is
regulated to a great extent by both federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Banks, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Banks have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision: As a state-chartered savings bank, FSBW is
subject to applicable provisions of Washington law and regulations. As a
state-chartered commercial bank, IEB is subject to applicable provisions of
Oregon law and regulations. State law and regulations govern the Banks'
ability to take deposits and pay interest thereon, to make loans on or invest
in residential and other real estate, to make consumer loans, to invest in
securities, to offer various banking services to its customers, and to
establish branch offices. Under state law, savings banks in Washington also
generally have all of the powers that federal mutual savings banks have under
federal laws and regulations. The Banks are subject to periodic examination
and reporting requirements by and of their state banking regulators.
Deposit Insurance: The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of depository institutions. The
FDIC currently maintains two separate insurance funds: the BIF and the SAIF.
As insurer of the Banks' deposits, the FDIC has examination, supervisory and
enforcement authority over the Banks.
FSBW's accounts are insured by the SAIF and IEB's accounts are insured by the
BIF to the maximum extent permitted by law. The Banks pay deposit insurance
premiums based on a risk-based assessment system established by the FDIC.
Under applicable regulations, institutions are assigned to one of three
capital groups that are based solely on the level of an institution's capital
"well capitalized," "adequately capitalized," and "undercapitalized" which are
defined in the same manner as the regulations establishing the prompt
corrective action system, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications.
Pursuant to the Deposit Insurance Funds Act of 1996 (the "DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including FSBW,
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of .065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier
of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits. The DIF Act provides for the merger of the BIF and the SAIF
into the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Banks.
27
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Prompt Corrective Action: Under Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be: (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, has a Tier I risk-based capital ratio of 4.0% or more, has a Tier I
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, has a Tier
I risk-based capital ratio that is less than 4.0% or has a Tier I leverage
capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, has a Tier I risk-based capital ratio that is less
than 3.0% or has a Tier I leverage capital ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1998, the Banks were categorized as "well capitalized" under the
prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness: The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings and (viii) compensation, fees and benefits (Guidelines). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the FDIC determines that
either Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. FDIC regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
Capital Requirements: The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100-200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth.
Any insured bank with a Tier 1 capital to total assets ratio of less than 2%
is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
28
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FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital
(which is defined as Tier 1 capital and Tier 2 or supplementary capital) to
risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier 1 capital.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound, which are
well-managed and have no material or significant financial weaknesses. The
FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate
and/or a bank has a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established in the regulation.
The Company believes that, under the current regulations, the Banks will
continue to meet their minimum capital requirements in the foreseeable future.
However, events beyond the control of the Banks, such as a downturn in the
economy in areas where the Banks have most of their loans, could adversely
affect future earnings and, consequently, the ability of the Banks to meet
their capital requirements.
Activities and Investments of Insured State-Chartered Banks: Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
Federal law provides that an insured state-chartered bank may not, directly,
or indirectly through a subsidiary, engage as "principal" in any activity that
is not permissible for a national bank unless the FDIC has determined that
such activities would pose no risk to the insurance fund of which it is a
member and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly engaged
in any activity that is not permitted for a national bank must cease the
impermissible activity.
Federal Reserve System: In 1980, Congress enacted legislation which imposed
Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any nonpersonal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 3% of the first $47.8
million of transaction accounts, of which the first $4.4 million is exempt,
and 10% on the remainder. The reserve requirement on nonpersonal time deposits
with original maturities of less than 1-1/2 years is 0%. As of March 31,
1998, the Banks met their reserve requirements.
Affiliate Transactions: The Company and the Banks are legal entities separate
and distinct. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Bank's capital and surplus
and limiting all such transactions to 20% of the Bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions
consistent with safe and sound banking practices, including credit standards,
that are substantially the same or at least as favorable to the Banks as those
prevailing at the time for transactions with unaffiliated companies.
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Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act: Banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends: Dividends from the Banks will constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends
payable by the Banks to the Company will depend upon the Banks' earnings and
capital position, and is limited by federal and state laws, regulations and
policies.
Federal law further provides that no insured depository institution may make
any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as
defined in the prompt corrective action regulations. Moreover, the federal
bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.
The Company
General: The Company is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(BHCA) and the regulations of the Federal Reserve. The Company is required to
file with the Federal Reserve annual reports and such additional information
as the Federal Reserve may require and is subject to regular examinations by
the Federal Reserve. The Federal Reserve also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.
30
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Interstate Banking and Branching. The Federal Reserve must approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve may not approve the acquisition of a bank that
has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. Nor may the Federal
Reserve approve an application if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Federal law does not affect the authority of states to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also
waive the 30% state-wide concentration limit contained in the federal law.
The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
Dividends: The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to
the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends.
Bank holding companies, except for certain "well-capitalized" bank holding
companies, are required to give the Federal Reserve prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption of it determines
that the proposal would constitute an unsafe or unsound practice or would
violate any law, regulation, Federal Reserve order, or any condition imposed
by, or written agreement with, the Federal Reserve.
Capital Requirements: The Federal Reserve has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Banks. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets.
The Company's total risk based capital must equal 8% of risk-weighted assets
and one half of the 8% (4%) must consist of Tier 1 (core) capital. As of
March 31, 1998 the Company's total risk based capital was 22.64% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
21.41% of risk-weighted assets.
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MANAGEMENT PERSONNEL
Executive Officers
The following table sets forth information with respect to the executive
officers of the Company.
Name Age (1) Position with Company Position with Banks
- ---- ------- --------------------- -------------------
Gary Sirmon 54 Chief Executive Officer, FSBW - Chief Executive
President and Director Officer, President and
Director, IEB - Director
D. Allan Roth 61 Secretary/Treasurer FSBW - Executive Vice
President and Chief
Financial Officer
Michael K. Larsen 55 Vice President FSBW - Executive Vice
President and Chief
Lending Officer
Jesse G. Foster 59 Director IEB-Chief Executive
Officer, President and
Director
Lloyd Baker 49 None FSBW-Vice President
- -----------------
(1) As of March 31, 1998.
Biographical Information
Set forth below is certain information regarding the executive officers of the
Company. Each resides in Walla Walla and has held his current occupation for
the last five years. There are no family relationships among or between the
directors or executive officers.
Gary Sirmon is Chief Executive Officer, President and a director of the
Company and FSBW; and a Director of IEB. He joined FSBW in 1980 as an
executive vice president and assumed his current position in 1982.
D. Allan Roth is Executive Vice President and Chief Financial Officer of FSBW
and is Secretary/Treasurer of the Company. He joined FSBW in 1965.
Michael K. Larsen is Executive Vice President and Chief Lending Officer of
FSBW and is Vice President of the Company. He joined FSBW in 1981.
Jesse G. Foster is the Chief Executive Officer, President and a Director of
IEB. He joined IEB in 1962.
Lloyd Baker is a Vice President with FSBW. He joined FSBW in 1995 as a Vice
President.
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Item 2 - Properties
The Company's home office, which is owned by the Company, is located in Walla
Walla, Washington. First Savings has, in total, 16 branch offices, all of
which are located in the State of Washington. These offices are located in
the cities of Walla Walla (4), Kennewick (2), Richland, Clarkston, Sunnyside,
Yakima (4), Selah, Wenatchee and Dayton. Of these offices, 13 are owned by
the Company and 3 are leased. The leases expire from 1998 through 2001. In
addition to these, First Savings has three leased loan production offices in
Bellevue, Spokane and Puyallup, Washington. The leases expire from 1998
through 2000. IEB's main office is located in Hermiston, Oregon and is owned
by the Company. IEB has, in total, four branch offices and a drive-up
facility, all of which are located in the State of Oregon. These offices,
which are owned by the Company, are located in Pendleton, Umatilla, Boardman
and Stanfield. IEB also has a remote drive-up facility in Hermiston, which is
owned, and two loan production offices in Condon and La Grande, which are on
month-to-month leases. IEB also leases two facilities in Hermiston for its
mortgage division and for its information systems. The Company's net
investment in its offices, premises, equipment and leaseholds was $11.4
million at March 31, 1998.
Item 3 - Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Banks,
mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Banks hold security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Banks' business. The Company and the Banks are not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
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Part II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Stock Listing
First Savings Bank of Washington Bancorp, Inc. common stock is traded
over-the-counter on the Nasdaq National Market under the symbol "FWWB."
Newspaper stock tables list the company as "FSBWA." Stockholders of record at
March 31, 1998 totaled 781. This total does not reflect the number of persons
or entitles who hold stock in nominee or "street" name through various
brokerage firms. The following tables show the reported high and low sale
prices of the Company's common stock for the three year period ended March 31,
1998.
Cash
Dividends
Fiscal 1998 High Low Declared
----------- ---- --- --------
First quarter $22.25 $18.75 $0.07
Second quarter 24.88 21.63 0.07
Third quarter 28.56 23.25 0.07
Fourth quarter 27.63 23.50 0.09
Cash
Dividends
Fiscal 1997 High Low Declared
----------- ---- --- --------
First quarter $15.63 $13.38 $0.05
Second quarter 17.25 14.50 0.05
Third quarter 19.00 16.56 0.05
Fourth quarter 22.13 18.00 0.07
Cash
Dividends
Fiscal 1996 * High Low Declared
----------- ---- --- --------
Third quarter $13.25 $12.44 $0.05
Fourth quarter 13.50 12.38 0.05
* Year of Conversion
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Item 6 - Selected Consolidated Financial and other Data
These tables set forth selected consolidated financial and other data of the
Company at the dates and for the periods indicated. This information is
derived from and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and Notes thereto presented
elsewhere in this filing. Information for fiscal years prior to March 31,
1996, is for First Savings Bank's former mutual holding company.
FINANCIAL CONDITION DATA: At March 31
--------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $1,154,072 $1,007,633 $743,176 $491,368 $425,936
Loans receivable, net 756,917 645,881 415,295 299,403 246,264
Cash
and securities (1) 345,142 312,991 302,772 175,505 165,065
Deposits 591,571 544,967 374,064 360,352 352,547
Borrowings 389,272 293,700 199,071 70,338 17,655
Equity 150,184 148,636 154,142 50,251 44,931
Shares outstanding
excluding unearned,
restricted shares
held in ESOP 9,237 9,744 10,077 N/A N/A
OPERATING DATA: At or for the Years Ended March 31 (2)
--------------------------------------------------
(In thousands, except 1998 1997 1996 1995 1994
per share data) ---- ---- ---- ---- ----
Interest income $85,147 $67,292 $41,409 $33,652 $31,342
Interest expense 46,651 36,372 23,287 18,230 15,707
------- ------ ------ ------ ------
Net interest income 38,496 30,920 18,122 15,422 15,635
Provision for loan losses 1,628 1,423 524 391 440
Net interest income ------- ------ ------ ------ ------
after provision for
loan losses 36,868 29,497 17,598 15,031 15,195
Gains (losses) from sale
of loans and securities 1,377 676 387 (121) 3,390
Other operating income 3,343 2,394 1,202 1,180 2,045
Other operating expense 21,020 19,330 10,304 9,983 8,610
------- ------ ------ ------ ------
Income before provision
for income taxes and
cumulative effect of
change in accounting 20,568 13,237 8,883 6,107 12,020
Provision for income taxes 7,446 3,923 2,631 1,335 2,635
------- ------ ------ ------ ------
Income before cumulative
effect of change in
accounting 13,122 9,314 6,252 4,772 9,385
Cumulative effect of
change in accounting
(3) -- -- -- 396 --
------- ------ ------ ------ ------
Net income $13,122 $9,314 $6,252 $5,168 $9,385
======= ====== ====== ====== ======
PER SHARE DATA: (4)
Net income: Basic $ 1.43 $ 0.97 N/A N/A N/A
Diluted 1.37 0.96
Stockholders' equity (5) 16.26 15.25 15.30
Cash dividends 0.30 0.22 0.10
Dividend payout ratio 21.90% 22.92% N/A
(footnotes on following page)
35
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KEY FINANCIAL RATIOS:
At or for the Years Ended March 31 (2)
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Performance Ratios:
Return on average
assets (6) 1.21% 1.04% 1.11% 1.12% 2.32%
Return on average
equity (7) 8.70 6.30 6.62 10.85 23.73
Average equity to
average assets 13.86 16.58 16.75 10.34 9.77
Interest rate spread (8) 3.09 2.83 2.49 3.05 3.63
Net interest margin (9) 3.68 3.59 3.33 3.47 4.02
Non-interest expense
to average assets 1.93 2.17 1.83 2.16 2.13
Average interest-earning
assets to interest-
bearing liabilities 113.41 118.11 119.80 110.31 109.72
Asset Quality Ratios:
Allowance for loan
losses as a percent
of total loans at
end of period 0.96 0.95 0.89 1.06 1.20
Net charge-offs as a
percent of average
outstanding loans
during the period 0.08 0.04 0.01 0.10 0.05
Non-performing assets
as a percent of total
assets 0.20 0.31 0.17 0.19 0.34
Ratio of allowance for
loan losses to non-
performing loans (10) 5.39 3.20 7.53 10.41 5.01
Consolidated Capital
Ratio:
Tier 1 leverage capital
ratio 12.17 13.68 20.78 10.19 10.55
- -----------------
Note:
(1) Includes securities available for sale and held to maturity.
(2) Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current period's presentation. These
reclassifications have affected certain ratios for the prior periods.
The effect of such reclassifications is immaterial.
(3) Adjustment net of taxes of $204,000 due to the adoption of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
(4) First Savings Bank converted from mutual to stock ownership on 10/31/95,
therefore data is not meaningful for fiscal years prior to March 31,
1996.
(5) Calculated using shares outstanding excluding unearned restricted shares
held in ESOP.
(6) Net income divided by average assets.
(7) Net income divided by average equity.
(8) Difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(9) Net interest income before provision for loan losses as a percent of
average interest-earning assets.
(10) Non-performing loans consist of nonaccrual and 90 days past due loans.
36
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ITEM 7 - Management's Discussion & Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of First Savings Bank of Washington Bancorp, Inc. Management desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing the Company of the protections of such safe harbor with respect to
all "forward-looking statements" contained in our Annual Report. We have used
"forward-looking statements" to describe future plans and strategies,
including our expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, competitive products and pricing, loan delinquency rates,
and changes in federal and state regulation. These factors should be
considered in evaluating the "forward-looking statements", and undue reliance
should not be placed on such statements.
General
First Savings Bank of Washington Bancorp, Inc. (FWWB or the Company), a
Delaware corporation, is primarily engaged in the business of planning,
directing and coordinating the business activities of its wholly owned
subsidiaries, First Savings Bank of Washington (FSBW) and Inland Empire Bank
(IEB) (together, the Banks). FSBW is a Washington-chartered savings bank the
deposits of which are insured by the Federal Deposit Insurance Corporation
(FDIC) under the Savings Association Insurance Fund (SAIF). FSBW conducts
business from its main office in Walla Walla, Washington and its 16 branch
offices and three loan production offices located in southeast, central, north
central and western Washington. IEB is an Oregon-chartered commercial bank
whose deposits are insured by the FDIC under the Bank Insurance Fund (BIF).
IEB conducts business from its main office in Hermiston, Oregon and its five
branch offices and two loan production offices located in northeast Oregon.
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of cash, loans and investment securities, and interest
expense on interest-bearing liabilities, composed primarily of savings
deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements.
Net interest income is primarily a function of the Company's interest rate
spread, which is the difference between the yield earned on interest-earning
assets and the rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to the
average balance of interest-bearing liabilities. As more fully explained
below, the Company's net interest income significantly increased for both the
most recent quarter and year ended March 31, 1998, when compared to the same
periods for the prior year. This increase in net interest income was largely
due to the substantial growth in average asset and liability balances. The
Company's net income also is affected by provisions for loan losses and the
level of its other income, including deposit service charges, loan origination
and servicing fees, and gains and losses on the sale of loans and securities,
as well as its non-interest operating expenses and income tax provisions. As
further explained below, net income for both the most recent quarter and
fiscal year increased $363,000 and $3.8 million respectively, from the
comparable periods ended March 31, 1997. After adjusting for the special SAIF
assessment of $2.4 million ($1.6 million after tax) that occurred in the
second quarter of fiscal year 1997 (quarter ended September 30, 1996), the
increase in net income was $2.2 million for fiscal 1998 when compared to
fiscal 1997. These increases reflected a rise in net interest income and an
increase in other operating income which were partially offset by increases in
operating expenses and the provision for income taxes. Operating results for
the fiscal year ended March 31, 1997, included only eight months of activity
at Inland Empire Bank, while those for the fiscal year ended March 31, 1998,
included a full twelve months' impact.
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
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Recent Developments and Significant Events Since March 31, 1997
Acquisition of Towne Bank
The Company completed the acquisition of Towne Bancorp, Inc. (TB) effective
April 1, 1998. The Company paid approximately $28.1 million in cash and
common stock for the outstanding common shares and stock options of Towne
Bancorp. Shares of FWWB account for 70% of the transaction payment to Towne
Bank shareholders. Towne Bancorp is the holding company for Towne Bank,
headquartered in Woodinville, Washington, a Seattle suburb.
Founded in 1991, TB is a community business bank with approximately $146
million in total assets, $134 million in deposits, $120 million in loans and
$9.3 million in stockholders' equity at March 31, 1998. TB operates four full
service branches in the Seattle, Washington metropolitan area in Woodinville,
Redmond, Bellevue and Renton and plans to open its Bothell branch in June
1998.
Adoption of Dividend Reinvestment and Stock Purchase Plan
In October 1997, the Company adopted a dividend reinvestment and stock
purchase plan. Under the terms of the plan all registered stockholders with
100 or more shares of stock may automatically reinvest all or a portion of
their cash dividends in additional shares of the Company's common stock. In
addition, qualifying participants may also make optional monthly cash payments
of $50 to $1,500 to purchase additional shares of Company stock.
Year 2000 Compliance
The "Year 2000" (Y2K) issue is the result of older computer programs being
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations including,
among other things, a temporary inability to process transactions, send
statements, or engage in similar normal business activities.
Based on an assessment of computer hardware, software and other equipment
operated by the Company and its subsidiary Banks, the Company presently
believes that all equipment and programs should be Y2K compliant by December
31, 1998. A program for addressing the Y2K issue through awareness,
assessment, renovation and testing has been developed and implemented. The
costs of implementing and completing the program's phases have not been of a
material nature and should continue to be minimal through program completion.
The Company and its subsidiary Banks have initiated formal communications with
all significant suppliers to determine the extent to which they are vulnerable
to those third parties' failures to remedy their own Y2K impact issues. Third
party responses have indicated satisfactory progress in addressing any needs
for equipment or software renovation. The Banks' large customers are also
being contacted to build Y2K awareness and encourage early solutions regarding
potential business disruption due to processing failures. There can be no
guarantee that the systems of other companies on which the Banks' systems rely
will be timely converted, or that a failure to convert by another company, or
a conversion that is incompatible with the Banks' systems, would not have a
material adverse effect on the Banks. However, the Banks will test for the
Y2K preparedness of all internal functions and external functions provided by
third parties whenever possible.
Comparison of Financial Condition at March 31, 1998 and March 31, 1997
Total assets increased $146.0 million, or 14.5%, from $1.01 billion at March
31, 1997, to $1.15 billion at March 31, 1998. The increase reflected, in
general, growth in net loans receivable and was funded primarily with deposit
growth, advances from the FHLB and other borrowings. This growth represented
a continuation of management's plans to further leverage the Company's capital
and reflects the solid economic conditions in the markets where the Company
operates.
38
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Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $111.0 million, or 17.2%, from
$645.9 million at March 31, 1997, to $756.9 million at March 31, 1998. The
increase in gross loans of $114.8 million from $707.8 million at March 31,
1997, to $822.6 million at March 31, 1998, consists of $38.7 million of
mortgages secured by commercial and multifamily real estate, $28.4 million of
residential mortgages, $22.2 million of construction and land loans and $25.5
million of non-mortgage loans such as commercial, agricultural and consumer
loans. A little more than half of the increase in assets was funded by a net
increase of $66.0 million, or 28.5%, in FHLB advances from $231.5 million at
March 31, 1997, to $297.5 million on March 31, 1998. Asset growth was also
funded by increased deposits, other borrowings and net income from operations.
Deposits grew $46.6 million, or 8.6%, from 545.0 million at March 31, 1997, to
$591.6 million at March 31, 1998. Other borrowings, primarily repurchase
agreements with investment banking firms, grew $29.5 million, or 47.5%, from
$62.2 million at March 31, 1997, to $91.7 million at March 31, 1998. Funds
also were used to purchase $14.2 million of treasury stock during the year.
Securities available for sale and held to maturity increased $14.1 million, or
4.9%, from $288.5 million at March 31, 1997, to $302.6 million at March 31,
1998. Federal Home Loan Bank Stock increased $3.2 million as the Company was
required to purchase more stock as a result of its increased use of FHLB
advances. Real estate held for sale decreased $175,000, primarily as a result
of completed sales.
Comparison of Results of Operations for the Years Ended March 31, 1998 and
March 31, 1997
General. Net income for fiscal 1998 was $13.1 million, or $1.37 per share
(diluted), compared to net income of $9.3 million, or $.96 per share
(diluted), recorded in fiscal 1997. Net income for fiscal 1997 was
significantly affected by the $2.4 million ($1.6 million after tax) SAIF
assessment. In addition, fiscal 1998 included $3.0 million of net income from
a full year of operations at IEB, which the Company acquired on August 1,
1996, compared to $1.5 million for eight months in the comparable fiscal 1997
period.
The Company's improved operating results reflect the significant growth of
assets and liabilities. The substantial increase in these balances during the
year since March 31, 1997, resulted from the continued deployment and
leveraging of the $98.6 million in net proceeds raised in the Company's
conversion from mutual to stock ownership on October 31, 1995. This growth
helped to increase the Company's return on average equity from 7.36%
(excluding the SAIF assessment of $1.6 million after tax, 6.30% when the SAIF
assessment is included) for fiscal 1997 to 8.56% for fiscal 1998.
Interest Income. Interest income for the year ended March 31, 1998, was $85.1
million compared to $67.3 million for the year ended March 31, 1997, an
increase of $17.8 million, or 26.5%. The increase in interest income was a
result of a $183.2 million, or 21.3%, growth in average balances of
interest-earning assets combined with a 34 basis point increase in the average
yield on those assets. The yield on average assets rose to 8.15% in fiscal
1998 compared to 7.81% in fiscal 1997. Average loans receivable for fiscal
1998 increased by $185.3 million, or 34.0%, when compared to fiscal 1997.
Interest income on loans increased by $18.1 million, or 39.0%, compared to the
prior year, reflecting the impact of the increase in average loan balances and
a 32 basis point increase in the average yield largely resulting from the
addition of higher yielding loans held by IEB but also reflecting higher
yields on the expanding balances of commercial and multifamily real estate,
construction and land, and non-mortgage loans at First Savings Bank. Loans
yielded 8.86% for fiscal 1998 compared to 8.54% for fiscal 1997. The average
balance of mortgage-backed securities, investment securities, daily
interest-bearing deposits and FHLB stock decreased by $2.1 million in fiscal
1998, causing the interest and dividend income from those investments to
decrease a modest $291,000 for fiscal 1998 compared to fiscal 1997. The
average yield on mortgage-backed securities decreased from 6.86% for the year
ended March 31, 1997, to 6.61% in 1998 reflecting both paydowns in certain
higher yielding securities and lower yields on most adjustable rate securities
as market rates generally declined. The average yield on investment securities
and deposits increased from 5.98% for fiscal 1997 to 6.13% in 1998. Earnings
on FHLB stock increased by $279,000, reflecting an increase of $3.4 million in
the average balance of FHLB stock for the year ended March 31, 1998, and a 9
basis point increase in the dividend yield on that stock.
39
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Interest Expense. Interest expense for the year ended March 31, 1998, was
$46.7 million compared to $36.4 million for the comparable period in 1997, an
increase of $10.3 million, or 28.3%. The increase in interest expense was due
to the $191.8 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1998 was largely
due to a $61.8 million increase in the average balance of FHLB advances and
other borrowings. Average FHLB advances totaled $276.3 million during the year
ended March 31, 1998, as compared to $214.6 million during the year ended
March 31, 1997, resulting in a $4.3 million increase in related interest
expense. The average rate paid on those advances increased to 6.07% for
fiscal 1998 from 5.83% for fiscal 1997. Other borrowings consist of retail
repurchase agreements with customers and repurchase agreements with investment
banking firms secured by certain investment securities. The average balance
for other borrowings increased $41.2 million from $38.0 million for the year
ended March 31, 1997, to $79.2 million for the same period in 1998, and the
related interest expense increased $2.5 million from $2.1 million to $4.6
million for the respective periods. The bulk of this growth in other
borrowings reflects a $45.6 million increase in repurchase agreements with
investment banking firms that are being used to finance a portion of the
Company's assets. The repurchase agreements with investment banking firms
generally carry higher rates than retail agreements; therefore, as they
constitute a greater portion of other borrowings, the weighted average rate
has increased. Deposit interest expense increased $3.6 million for the year
ended March 31, 1998. Average deposit balances increased from $477.4 million
for the year ended March 31, 1997, to $566.2 million for the year ended March
31, 1998, while, at the same time, the average rate paid on deposit balances
decreased 8 basis points. The decline in the rate paid on deposits primarily
reflects the acquisition of IEB's $32.1 million of non-interest-bearing
deposits as well as generally lower rates paid on interest-bearing accounts of
IEB, which impacted the full twelve month period in 1998 in contrast to only
eight months in 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1998, increased by $205,000 to $1.6 million compared to $1.4 million
for fiscal 1997. This increase is primarily reflective of the need to provide
a higher allowance level for the $114.8 million growth in gross loans
receivable for the fiscal year. The allowance for losses on loans is
maintained at a level sufficient to provide for estimated losses based on
evaluating known and inherent risks in the loan portfolio and upon
management's continuing analysis of the factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of
the loan portfolio, actual loan loss experience, current and anticipated
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.
Additions to these allowances are charged to earnings. Provisions for losses
that are related to specific assets are usually applied as a reduction of the
carrying value of the assets and charged immediately against the income of the
period. The reserve is based upon factors and trends identified by management
at the time financial statements are prepared. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to provide additions to the allowance based upon judgments
different from management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Banks'
control.
Other Operating Income. Other operating income increased from $3.1 million
for the year ended March 31, 1997, to $4.7 million for the year ended March
31, 1998. Part of the increase was due to a $921,000 increase in other fees
and service charges due largely to IEB operations earning higher fees as a
commercial bank combined with increased fee income at FSBW reflecting deposit
growth and pricing adjustments. In addition there was a $701,000 increase in
net gains on securities and loans sold in fiscal 1998 as compared to 1997.
This increase primarily reflects inclusion of a full year of activity from
IEB's residential mortgage banking operations and increased sales of loans,
with servicing retained, by FSBW which increased the volume of loans sold in
the secondary market over the prior year. Increased sales of loans at FSBW
were designed to curtail the rate of growth in relatively low yielding fixed
rate residential mortgages during this period of low market rates and to
reduce its exposure to the risk of rising interest rates.
40
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Other Operating Expenses. Other operating expenses for the year ended March
31, 1998 increased $1.7 million from the prior period in fiscal 1997. The
decrease in the $2.4 million special SAIF assessment for the year ended March
31, 1998 was more than offset by a $4.3 million increase in other operating
expenses, which among other increases included a full year of IEB's operations
in the fiscal 1998 period compared to eight months in the comparable period in
fiscal 1997. In addition to the full year impact of IEB, increases in other
operating expenses reflect overall growth in assets and liabilities, customer
relationships and complexity of operations as the Company continues to expand.
The Company's efficiency ratio, excluding the amortization of goodwill and the
$2.4 million SAIF assessment, improved to 46.56% for the year ended March 31,
1998, from 48.11% for fiscal 1997. Other operating expenses as a percentage of
average assets declined to 1.93% (1.85% excluding the amortization of
goodwill) for the year ended March 31, 1998, compared to 2.17% (1.90%
excluding the SAIF assessment) (1.83% excluding the amortization of goodwill)
for the year ended March 31, 1997.
Income Taxes. Income tax expense was $7.4 million for the year ended March
31, 1998, compared to $3.9 million for fiscal 1997. The $3.5 million increase
in the provision for income taxes reflects the higher level of income being
taxed at higher effective rates due to the phase-out of the 34% surtax
exemption; the net effect of IEB's state taxes and non-deductible goodwill
expense and part of the expense recorded in the release of the Employees Stock
Ownership Plan (ESOP) shares are not deductible for tax purposes. Management
is anticipating that the Company's effective tax rate for fiscal 1999 will
increase from the fiscal 1998 rate of 36% to approximately 38%. This increase
is expected as the result of the effects of non-deductible expenses associated
with goodwill amortization combined with expected increases in state taxes
related to filing consolidated returns. In addition, if the Company's average
market price continues to hold or rise above recent fourth quarter levels of
$23 to $25 per share, the non-deductible expense related to recording the
difference between the cost and the fair market value of released ESOP shares
will be greater in fiscal 1999, resulting in an increased tax provision and
effective tax rate for future periods. The Company's effective tax rates for
the years ended March 31, 1998 and 1997, were 36% and 30%, respectively.
Comparison of Results of Operations for the Years Ended March 31, 1997 and
March 31, 1996
General. Net income for fiscal 1997 was $9.3 million, or $.96 per share
(diluted), compared to net income of $6.3 million recorded in fiscal 1996. Net
income for the year ended March 31, 1997 was significantly affected by the
$2.4 million ($1.6 million after tax) non-interest expense representing the
Company's share of an industry-wide special assessment in the second quarter
to recapitalize the SAIF. In addition, the year ended March 31, 1997, included
eight months of combined operations with IEB which the Company acquired on
August 1, 1996. The acquisition significantly affected the Company's operating
results for the year ended March 31, 1997.
The Company's return on average equity for the year ended March 31, 1997,
decreased to 6.30% as compared to 6.62% for the year ended March 31, 1996,
which was due to the large increase in average equity resulting from the
October 31, 1995 stock offering that was present for a full year in fiscal
1997 versus five months in fiscal 1996 and due to the adverse effect of the
SAIF assessment on 1997 results.
Interest Income. Interest income for the year ended March 31, 1997, was $67.3
million compared to $41.4 million for the year ended March 31, 1996, an
increase of $25.9 million, or 62.5%. The increase in interest income was a
result of a $317.7 million, or 58.3%, growth in average balances of
interest-earning assets combined with a 20 basis point increase in the average
yield on those assets. The yield on average assets rose to 7.81% in fiscal
1997 compared to 7.61% in fiscal 1996. Average loans receivable for fiscal
1997 increased by $217.2 million, or 66.2%, when compared to fiscal 1996.
Interest income on loans increased by $19.1 million, or 69.5%, compared to the
prior year, reflecting the impact of the increase in average loan balances and
a 17 basis point increase in the average yield primarily resulting from the
addition of $90.5 million of higher yielding loans held by IEB. Loans yielded
8.54% for fiscal 1997 compared to 8.37% for fiscal 1996. The average balance
of mortgage-backed securities, investment securities, daily interest-bearing
deposits and FHLB stock increased by $100.5 million in fiscal 1997, and
interest and dividend income from those investments rose by $6.8 million for
fiscal 1997 compared to fiscal 1996. The average yield on mortgage-backed
securities rose from 6.65% for the year ended March 31, 1996, to 6.86% in
1997. The average yield on investment securities and deposits decreased from
6.23% for fiscal 1996 to 6.13% in 1997. Earnings on FHLB stock increased by
$561,000 reflecting an increase of $6.9 million in the average balance of FHLB
stock for the year ended March 31, 1997, and a 70 basis point increase in the
dividend yield on that stock.
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Interest Expense. Interest expense for the year ended March 31, 1997, was
$36.4 million compared to $23.3 million for the comparable period in 1996, an
increase of $13.1 million, or 56.2%. The increase in interest expense was due
to the $275.4 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1997 was largely
due to a $178.7 million increase in the average balance of FHLB advances and
other borrowings combined with a $96.8 million growth in average deposits
coming primarily from the acquisition of IEB. Average FHLB advances totaled
$214.6 million during the year ended March 31, 1997, as compared to $66.3
million during the year ended March 31, 1996, resulting in an $8.7 million
increase in related interest expense. The average rate paid on those advances
increased to 5.83% for fiscal 1997 from 5.80% for fiscal 1996. Other
borrowings consist of retail repurchase agreements with customers and
repurchase agreements with investment banking firms secured by certain
investment securities. The average balance for other borrowings increased
$30.4 million from $7.6 million for the year ended March 31, 1996, to $38.0
million for the same period in 1997, and the related interest expense
increased $1.7 million from $469,000 to $2.1 million for the respective
periods. The bulk of this growth in other borrowings reflects an increase in
repurchase agreements with investment banking firms that are being used to
finance a portion of the Company's assets. Deposit interest expense increased
$2.8 million for the year ended March 31, 1997. Average deposit balances
increased from $380.6 million for the year ended March 31, 1996, to $477.4
million for the year ended March 31, 1997, while, at the same time, the
average rate paid on deposit balances decreased 44 basis points. The decline
in the rate paid on deposits primarily reflects the acquisition of IEB's $30.8
million of non-interest-bearing deposits.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1997, increased by $899,000 to $1.4 million compared to $524,000 for
fiscal 1996. This increase was primarily reflective of the need to provide a
higher allowance level for the $140.1 million growth in loans receivable for
the fiscal year (excluding the acquisition of IEB's $90.5 million loan
portfolio).
Other Operating Income. Other operating income increased from $1.6 million
for the year ended March 31, 1996, to $3.1 million for the year ended March
31, 1997. The increase was primarily due to a $1.0 million increase in other
fees and service charges due largely to IEB operations earning higher fees as
a commercial bank combined with increased fee income at FSBW reflecting
deposit growth and pricing adjustments. In addition, there was a $289,000
increase in net gains on securities and loans sold in fiscal 1997 as compared
to 1996.
Other Operating Expenses. Other operating expenses increased $9.0 million
from $10.3 million for the year ended March 31, 1996, to $19.3 million for the
year ended March 31, 1997. The increase in non-interest operating expenses for
fiscal 1997 was primarily due to the addition of $4.2 million of IEB operating
expenses during the eight month period subsequent to acquisition. Included in
these IEB operating expenses is $592,000 of amortization of goodwill. In
addition, fiscal 1997 expenses include the $2.4 million SAIF assessment. The
increase also reflects growth of the Company including increased personnel
costs and increases in legal, accounting and insurance costs relating to
operating as a public company. This aggregate increase was marginally reduced
by a $395,000 increase in capitalized loan origination costs reflecting a
$67.9 million increase in loan origination volume for fiscal 1997 compared to
the same period in 1996.
Income Taxes. Income tax expense for the year ended March 31, 1997, increased
$1.3 million from fiscal 1996. The Company's effective tax rate increased
slightly to 29.64% for fiscal 1997, from 29.62% for fiscal 1996. The
existence of substantial non-taxable interest income from municipal securities
and loans primarily accounts for the reduction in tax rates from statutory
levels. The expected increase in income taxes was due to the $4.4 million
increase in before-tax income during fiscal 1997 as compared to fiscal 1996.
42
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Yields Earned and Rates Paid
The earnings of the Company depend largely on the spread between the yield on
interest-earning assets (primarily loans and investment securities) and the
cost of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Company's interest-earning
assets and interest-bearing liability portfolio.
Table I, Analysis of Net Interest Spread, sets forth, for the periods
indicated, information regarding average balances of assets and liabilities as
well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-earning assets to average interest-bearing
liabilities. Average balances for a period have been calculated using the
daily average during such period.
Changes in the economic and interest rate environment, competition in the
marketplace and changes in asset and liability mix can cause the Company's
average interest rate spread to increase or decrease. While strong competition
and a generally unfavorable interest rate environment (a relatively flat yield
curve brought about largely by declining intermediate and long term interest
rates) have had negative effects on the Company's interest rate spread in
recent periods, for the past two years the most significant impact on the
Company's interest rate spread has come from changes in its asset and
liability mix. On balance, those changes in mix have resulted in an expanding
interest rate spread which has increased from 2.49% in 1996 to 2.83% in 1997
and again to 3.09% in 1998. Contributing to this increased spread has been a
decline in the relative portion of the Company's assets invested in securities
which was 39.8% of average earning assets in 1996, 36.8% in 1997, and 30.1% in
1998. In addition to the relative decline in investment securities and
commensurate increase in loans, the mix of the loan portfolio has changed to
include more higher yielding loans. Changes in the portfolio mix are evident
in the higher yields on mortgage loans which increased from 8.35% in 1996 to
8.38% in 1997 and to 8.69% in 1998. Changes in the portfolio mix are also
reflected in the increased portion of non-mortgage loans which increased from
0.7% of earning assets in 1996 to 5.4% of earning assets in 1997 and to 8.1%
in 1998. Also, contributing to an improved interest rate spread has been a
decline in the cost of deposits primarily brought about by the substantial
increase in the amount of checking and NOW account balances. Deposit costs
declined from 4.99% in 1996 to 4.55% in 1997 and to 4.47% in 1998.
Substantially offsetting the decline in deposit costs has been an increase in
the use of more expensive FHLB advances and other borrowings. As a result,
the cost of total interest-bearing liabilities, which declined from 5.12% in
1996 to 4.98% in 1997, increased to 5.06% in 1998. The acquisition of IEB, a
commercial community bank, on August 1, 1996, significantly contributed to the
changes in loan and deposit portfolio mix. Improvement in the Company's net
interest margin over this same period mostly reflects the same changes
associated with the increased net interest rate spread. However,
counterbalancing to a degree this increased spread is the somewhat adverse
impact on net interest margin resulting from the increased use of leverage
which can be seen in the declining ratio of average interest-earning assets to
average interest-bearing liabilities. Nonetheless, net interest margin
increased from 3.33% in 1996 to 3.59% in 1997 and to 3.68% in 1998. Management
believes that in the future increased net interest income will come primarily
from increased volumes, although continued changes in asset and liability mix
and a slightly more favorable interest rate environment may also add to net
interest income.
43
<PAGE>
<PAGE>
<TABLE>
Table I: Analysis of Net Interest Spread
Years Ended March 31, (dollars in thousands)
1998 1997 1996
----------------------------- -------------------------- --------------------------
Average Interest & Yield/ Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Mortgage loans $ 645,577 $56,111 8.69% $498,578 $41,797 8.38% $324,400 $27,094 8.35%
Agriculture/commercial
loans 57,516 5,587 9.71 30,120 2,829 9.39 886 76 8.58
Consumer and other
loans 27,412 2,997 10.93 16,494 1,923 11.66 2,714 299 11.02
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 730,505 64,695 8.86 545,192 46,549 8.54 328,000 27,469 8.37
Mortgage-backed
securities 189,572 12,522 6.61 181,148 12,420 6.86 107,847 7,170 6.65
Securities and
deposits 110,625 6,783 6.13 124,592 7,455 5.98 104,281 6,463 6.20
FHLB stock 14,661 1,147 7.82 11,222 868 7.73 4,365 307 7.03
Total investment ---------- ------- ----- -------- ------- ----- -------- ------- -----
securities 314,858 20,452 6.50 316,962 20,743 6.54 216,493 13,940 6.44
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 1,045,363 85,147 8.15 862,154 67,292 7.81 544,493 41,409 7.61
Non-interest-earning ------- ----- ------- ----- ------- -----
assets 43,256 30,217 19,706
---------- -------- --------
Total assets $1,088,619 $892,371 $564,199
========== ======== ========
Interest-bearing
liabilities:
Savings accounts 42,937 1,248 2.91 41,114 1,183 2.88 48,581 1,557 3.20
Checking and NOW
accounts(2) 96,166 899 0.93 69,525 864 1.24 32,831 636 1.94
Money market accounts 76,048 3,073 4.04 61,42 62,077 3.38 31,760 1,014 3.19
Certificates of
deposit 351,042 20,069 5.72 305,336 17,612 5.77 267,458 15,769 5.90
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total deposits 566,193 25,289 4.47 477,401 21,736 4.55 380,630 18,976 4.99
Other interest-bearing
liabilities:
FHLB advances 276,328 16,782 6.07 214,563 12,504 5.83 66,252 3,842 5.80
Other borrowings 79,210 4,580 5.78 37,971 2,132 5.61 7,620 469 6.15
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabi-
lities 921,731 46,651 5.06 729,935 36,372 4.98 454,502 23,287 5.12
Non-interest-bearing ---------- ------- ----- -------- ------- ----- -------- ------- -----
liabilities 16,044 14,507 15,213
---------- -------- --------
Total liabilities 937,775 744,442 469,715
---------- -------- --------
Equity 150,844 147,929 94,484
---------- -------- --------
Total liabilities
and equity $1,088,619 $892,371 $564,199
========== ======== ========
Net interest income $38,496 $30,920 $18,122
======= ======= =======
Interest rate spread 3.09% 2.83% 2.49%
==== ==== ====
Net interest margin 3.68% 3.59% 3.33%
Ratio of average ==== ==== ====
interest-earning
assets to average
interest-bearing
liabilities 113.41% 118.11% 119.80%
====== ====== ======
- -------------------
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past
due.
(2) Average balances include non-interest-bearing deposits.
44
</TABLE>
<PAGE>
<PAGE>
<TABLE>
Table II, Rate / Volume Analysis, sets forth the effects of changing rates and volumes on net interest
income of the Company. Information is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) effects on
interest income attributable to changes in rate and volume (change in rate multiplied by change in
volume).
Table II: Rate/Volume Analysis
Year Ended March 31, 1998 Year Ended March 31, 1997
Compared to March 31, 1997 Compared to March 31, 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- --------------------------------
(dollars in thousands)
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) $1,539 $12,319 $456 $14,314 $ 107 $14,544 $ 52 $14,703
Agriculture/commercial loans(1) 98 2,572 88 2,758 8 2,508 237 2,753
Consumer and other loans(1) (119) 1,273 (80) 1,074 17 1,519 88 1,624
------ ------- ---- ------- ------ ------- ------ -------
Total loans(1) 1,518 16,164 464 18,146 132 18,571 377 19,080
Mortgage-backed securities (455) 578 (21) 102 221 4,875 154 5,250
Securities and deposits 184 (835) (21) (672) (223) 1,259 (45) 991
FHLB stock 10 266 3 279 32 481 49 562
------ ------- ---- ------- ------ ------- ------ -------
Total net change in interest income
on interest-earning assets 1,257 16,173 425 17,855 162 25,186 535 25,883
------ ------- ---- ------- ------ ------- ------ -------
Interest-bearing liabilities:
Deposits (416) 4,040 (71) 3,553 (1,643) 4,829 (426) 2,760
FHLB advances 529 3,601 148 4,278 16 8,602 44 8,662
Other borrowings 7 2,373 68 2,448 (40) 1,867 (164) 1,663
Total net change in interest expense ------ ------- ---- ------- ------ ------- ------ -------
on interest-bearing liabilities 120 10,014 145 10,279 (1,667) 15,298 (546) 13,085
------ ------- ---- ------- ------ ------- ------ -------
Net change in net interest income $1,137 $ 6,159 $280 $ 7,576 $1,829 $ 9,889 $1,080 $12,798
====== ======= ==== ======= ====== ======= ====== =======
(1) Does not include interest on loans 90 days or more past due.
45
</TABLE>
<PAGE>
<PAGE>
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), and product caps and floors and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company.
The principal objectives of asset/liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to
reduce the vulnerability of its earnings and capital position to changes in
the level of interest rates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee, which is
comprised of members of the Company's senior management. The committee
closely monitors the Company's interest sensitivity exposure, asset and
liability allocation decisions, liquidity and capital positions, and local and
national economic conditions and attempts to structure the loan and investment
portfolios and funding sources of the Company to maximize earnings within
acceptable risk tolerances.
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company updates and prepares simulation modeling at least
quarterly for review by senior management and the directors. The Company
believes the data and assumptions are realistic representations of its
portfolio and possible outcomes under the various interest rate scenarios.
Nonetheless, the interest rate sensitivity of the Company's net interest
income and net market value of equity could vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used.
46
<PAGE>
<PAGE>
Sensitivity Analysis
Table III, Interest Rate Risk Indicators, sets forth as of March 31, 1998, the
estimated changes in the Company's net interest income over a one year time
horizon and the estimated changes in market value of equity based on the
indicated interest rate environments.
Table III: Interest Rate Risk Indicators
Estimated Change in
------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- ---------------------
(Dollars in thousands)
+400 $ (570) (1.5%) $ (51,291) (32.2%)
+300 355 0.9% (38,352) (24.1%)
+200 902 2.4% (22,884) (14.4%)
+100 728 1.9% (8,715) (5.5%)
0 0 0 0 0
-100 (1,129) (3.0%) (311) (0.2%)
-200 (2,748) (7.3%) (2,791) (1.8%)
-300 (4,747) (12.5%) (9,102) (5.7%)
-400 (7,057) (18.6%) (17,535) (11.0%)
- ---------------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of some borrowers to service their debt may decrease in the event
of a severe interest rate increase.
Table IV, Interest Sensitivity Gap, presents the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at March 31, 1998. The table sets forth the amounts of
interest-earning assets and interest-bearing liabilities which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each
of the future periods shown. At March 31, 1998, total interest-earning assets
maturing or repricing within one year exceeded total interest-bearing
liabilities maturing or repricing in the same time period by $82.5 million,
representing a one-year gap to total assets ratio of 7.15%.
47
<PAGE>
<PAGE>
<TABLE>
Table IV: Interest Sensitivity Gap
6 Months
Within to 1-3 3-5 5-10 Over 10
6 Months One Year Years Years Years Years Total
-------- -------- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $ 40,697 $ 29,262 $ -- $ -- $ -- $ -- $ 69,959
Fixed-rate mortgage loans 38,603 32,601 105,036 80,656 94,440 61,203 412,539
Adjustable-rate mortgage loans 108,398 56,386 12,791 10,072 -- -- 187,647
Fixed-rate mortgage-backed
securities 4,364 4,331 15,540 7,197 4,860 829 37,121
Adjustable-rate mortgage-backed
securities 153,107 4,832 1,062 -- -- -- 159,001
Fixed-rate agriculture/commercial
loans 4,497 3,539 7,981 4,319 1,668 277 22,281
Adjustable-rate agriculture/
commercial loans 45,198 -- -- -- -- -- 45,198
Consumer and other loans 16,190 2,610 7,086 3,918 1,039 -- 30,843
Investment securities and
interest-bearing deposits 61,749 9,895 18,770 6,385 13,370 24,460 134,629
-------- -------- -------- -------- -------- -------- ----------
Total rate-sensitive assets 472,803 143,456 168,266 112,547 115,377 86,769 1,099,218
-------- -------- -------- -------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW accounts 14,672 14,673 34,236 34,236 -- -- 97,817
Money market deposit accounts 38,204 22,922 15,281 -- -- -- 76,407
Certificates of deposit 154,260 92,171 81,725 29,691 13,760 -- 371,607
FHLB advances 108,946 23,250 103,163 61,190 1,000 -- 297,549
Other borrowings 60,451 -- 25,000 -- -- -- 85,451
Retail repurchase agreements 3,403 810 739 1,318 -- -- 6,270
-------- -------- -------- -------- -------- -------- ----------
Total rate-sensitive
liabilities 379,936 153,826 260,144 126,435 14,760 -- 935,101
Excess (deficiency) of interest- -------- -------- -------- -------- -------- -------- ----------
sensitive assets over interest-
sensitive liabilities $ 92,867 $(10,370) $(91,878) $(13,888) $100,617 $ 86,769 $ 164,117
Cumulative excess (deficiency) of ======== ======== ========= ======== ======== ======== ==========
interest-sensitive assets $ 92,867 $ 82,497 $ (9,381) $(23,269) $ 77,348 $164,117 $ 164,117
======== ======== ========= ======== ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 124.44% 115.46% 98.82% 97.47% 108.27% 117.55%
117.55%
======== ======== ========= ======== ======== ======== ========
Interest sensitivity gap to
total assets 8.05% (0.90%) (7.96%) (1.20%) 8.72% 7.52% 14.22%
====== ======== ======= ====== ======= ======= =======
Ratio of cumulative gap to total
assets 8.05% 7.15% (0.81%) (2.02%) 6.70% 14.22% 14.22%
====== ======== ======= ====== ======= ======= ======
(footnotes on following page)
48
</TABLE>
<PAGE>
<PAGE>
Footnotes for Table IV: Interest Sensitivity Gap
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$1.3 million or (0.11%) of total assets. Interest-bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Table I, Analysis of Net
Interest Spread.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.
The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of mortgage loans and, since the acquisition of
IEB, agriculture/commercial and consumer loans. During the years ended March
31, 1998, 1997 and 1996, the Company closed or purchased loans in the amounts
of $562.4 million, $387.8 million and $274.2 million, respectively. This
activity was funded primarily by principal repayments on loans and securities,
sales of loans, increases in FHLB advances, other borrowings, and deposit
growth. During 1996 additional funding was provided from the $98.6 million of
net proceeds from the Company's initial stock offering. For the years ended
March 31, 1998, 1997 and 1996, principal repayments on loans totaled $375.9
million, $207.5 million and $111.5 million respectively. During the three
years ended March 31, 1998, 1997 and 1996, the Company sold $82.0 million,
$36.9 million and $45.5 million, respectively, of mortgage loans. FHLB
advances increased $66.0 million, $52.1 million and $116.7 million,
respectively, for the same three years. During the three years ended March
31, 1998, 1997 and 1996, other borrowings increased $29.5 million, $41.9
million and $12.0 million. Net deposit growth was $46.6 million, $36.3
million excluding $134.6 million of deposits acquired with IEB, and $13.7
million for the years ended March 31, 1998, 1997 and 1996, respectively.
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage
of investment opportunities. During fiscal years 1998, 1997 and 1996, the
Banks used their sources of funds primarily to fund loan commitments, to
purchase securities, and to pay maturing savings certificates and deposit
withdrawals. At March 31, 1998, the Banks had outstanding loan commitments
totaling $74.1 million and undisbursed loans in process totaling $54.5
million. The Banks generally maintain sufficient cash and readily marketable
securities to meet short term liquidity needs. FSBW maintains a credit
facility with the FHLB-Seattle, which provides for advances which in aggregate
may equal up to 45% of FSBW's assets, which as of March 31, 1998, could give a
total credit line of $428.7 million. Advances under this credit facility
totaled $297.2 million, or 31.2% of FSBW's assets at March 31, 1998. IEB also
maintains credit lines with various institutions that would allow it to borrow
up to $7.9 million.
At March 31, 1998, savings certificates amounted to $371.6 million, or 62.8%,
of the Banks' total deposits, including $240.1 million which were scheduled to
mature by March 31, 1999. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it
has adequate resources to fund all loan commitments from savings deposits and
FHLB-Seattle advances and sale of mortgage loans and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
49
<PAGE>
<PAGE>
Capital Requirements
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks, as state
chartered federally insured institutions, is subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of Tier 1 total capital to
risk-weighted assets as well as Tier 1 leverage capital to average assets (see
further discussion in note 17 to financial statements).
At March 31, 1998 the Company and its banking subsidiaries, FSBW and IEB,
exceeded all current regulatory capital requirements and the Banks were
categorized at the highest regulatory standard, "well-capitalized."
Table V, Regulatory Capital Ratios, shows the regulatory capital ratios of the
Company, FSBW and IEB and minimum regulatory requirements for the Banks to be
categorized as "well-capitalized."
Table V: Regulatory Capital Ratios
"Well-
capitalized"
The Minimum
Capital Ratios Company FSBW IEB Ratio
-------------- ------- ---- --- -----
Total capital to risk-
weighted assets 22.64% 18.67% 13.14% 10.00%
Tier 1 capital to risk-
weighted assets 21.41 17.42 12.07 6.00
Tier 1 leverage capital
to average assets 12.17 9.30 8.97 5.00
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk
See pages 46-49 of MD&A
ITEM 8 - Financial Statements and Supplementary Data
For financial statements, see index on page 54.
ITEM 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
50
<PAGE>
<PAGE>
Part III
ITEM 10 - Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I - Election
of Directors" in the Registrant's Proxy Statement is incorporated herein by
reference.
Information regarding the executive officers of the Registrant is provided
herein in Part I, Item 1 hereof.
Reference is made to the cover page of this Annual Report and the section
captioned "Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement for the Annual Meeting of the Stockholders regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934.
ITEM 11- Executive Compensation
Information regarding management compensation and transactions with management
and others is incorporated by reference to the section captioned "Proposal I -
Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
{a} Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement for the Annual Meeting of Stockholders.
{b} Security Ownership of Management
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement for the Annual Meeting of Stockholders.
{c} Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 13 - Certain Relationships and Related Transactions
The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
51
<PAGE>
<PAGE>
Part IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
{a} {1} Financial Statements
See Index to Consolidated Financial Statements on page 54.
{2} Financial Statement Schedules
All financial statement schedules are omitted because that are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes thereto
or in Part 1, Item 1.
{b} Reports on 8-K:
Reports on form 8-k filed during the quarter ended March 31, 1998 are
as follows:
Date Filed Purpose
---------- -------
None
{c} Exhibits
See Index of Exhibits on page 92.
52
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Signatures of Registrant
Pursuant to the requirements of the Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on June 26, 1998.
FIRST SAVINGS BANK OF WASHINGTON
BANCORP, INC.
/s/ Gary Sirmon
--------------------------------------
Gary Sirmon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 26, 1998.
/s/ Gary Sirmon /s/ D. Allan Roth
- ---------------------------------- ----------------------------------
Gary Sirmon D. Allan Roth
President and Chief Executive Executive Vice President and Chief
Officer; Director (Principle Financial Officer (Principle
Executive Officer) Financial and Accounting Officer)
/s/ Wilber Pribilsky /s/ Robert D. Adams
- ---------------------------------- ----------------------------------
Wilber Pribilsky Robert D. Adams
Director Chairman of the Board
/s/ David Casper /s/ Morris Ganguet
- ---------------------------------- ----------------------------------
David Casper Morris Ganguet
Director Director
/s/ R. R. "Pete" Reid /s/ Marvin Sundquist
- ---------------------------------- ----------------------------------
R. R. "Pete" Reid Marvin Sundquist
Director Director
/s/ Dean W. Mitchell /s/Jesse G. Foster
- ---------------------------------- ----------------------------------
Dean W. Mitchell Jesse G. Foster
Director Director
53
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
(Item 8 and Item 14 (a) (1))
Page
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . .56
Consolidated Statements of Financial Condition as of
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . .57
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . .58
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996 . . . . . . . . . . . . .59
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . .61
Notes to the Consolidated Financial Statements. . . . . . . . . . . .63
54
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INDEPENDENT AUDITORS' REPORT
Board of Directors
First Savings Bank of Washington Bancorp, Inc. and Subsidiaries
Walla Walla, Washington
We have audited the accompanying consolidated statements of financial
condition of First Savings Bank of Washington Bancorp, Inc. and subsidiaries
(the Company) as of March 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended March 31, 1998. These consolidated
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, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of March 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
/s/Deloitte and Touche LLP
DELOITTE & TOUCHE LLP
May 22, 1998
Seattle, Washington
55
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
March 31, 1998 and 1997
1998 1997
---- ----
ASSETS
Cash and due from banks $ 42,529 $ 24,488
Securities available for sale, cost
$298,346 and $288,142 302,419 287,516
Securities held to maturity, fair value $194
and $987 194 987
Loans receivable:
Held for sale, fair value $12,436 and $2,940 12,436 2,940
Held for portfolio 752,338 649,689
Allowances for loan losses (7,857) (6,748)
---------- ----------
756,917 645,881
Accrued interest receivable 7,569 6,950
Real estate held for sale, net 882 1,057
Federal Home Loan Bank stock 16,050 12,807
Property and equipment, net 11,379 10,534
Costs in excess of net assets acquired 11,007 11,906
Deferred income tax asset, net -- 1,220
Other assets 5,126 4,287
---------- ----------
$1,154,072 $1,007,633
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing $ 45,740 $ 36,709
Interest-bearing 545,831 508,258
---------- ----------
591,571 544,967
Advances from Federal Home Loan Bank 297,549 231,515
Other borrowings 91,723 62,185
Advances by borrowers for taxes and insurance 4,153 4,112
Accrued expenses and other liabilities 12,273 11,086
Deferred compensation 3,798 2,814
Deferred income taxes payable, net 541 --
Income taxes payable 2,280 2,318
---------- ----------
1,003,888 858,997
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000 shares
authorized, no shares issued -- --
Common stock - $0.01 par value, 25,000,000 shares
authorized, 10,910,625 shares issued:
9,952,953 shares and 10,518,982 shares
outstanding at March 31, 1998 and March
31, 1997, respectively 109 109
Additional paid-in capital 108,885 107,844
Retained earnings 72,962 62,572
Valuation reserve for securities available for
sale 2,680 (401)
Treasury stock, at cost: 957,672 shares and 391,643
shares at March 31, 1998 and March 31, 1997,
respectively (20,979) (6,954)
Unearned shares of common stock issued to employee
stock ownership plan trust (ESOP):
716,270 and 775,105 restricted shares
outstanding at March 31, 1998 and March 31,
1997, respectively, at cost (7,163) (7,751)
Carrying value of shares held in trust for stock-
related compensation plans (6,310) (6,783)
---------- ----------
150,184 148,636
---------- ----------
$1,154,072 $1,007,633
========== ==========
See notes to consolidated financial statements
56
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except for per share data)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Loans receivable $ 64,695 $ 46,549 $ 27,469
Mortgage-backed securities 12,522 12,420 7,170
Securities and cash equivalents 7,930 8,323 6,770
--------- --------- ---------
85,147 67,292 41,409
--------- --------- ---------
INTEREST EXPENSE:
Deposits 25,289 21,736 18,976
Federal Home Loan Bank advances 16,782 12,504 3,842
Other borrowings 4,580 2,132 469
--------- --------- ---------
46,651 36,372 23,287
--------- --------- ---------
Net interest income before provision
for loan losses 38,496 30,920 18,122
PROVISION FOR LOAN LOSSES 1,628 1,423 524
--------- --------- ---------
Net interest income 36,868 29,497 17,598
OTHER OPERATING INCOME:
Loan servicing fees 813 746 723
Other fees and service charges 2,411 1,490 450
Gain on sale of loans 1,375 674 606
Gain (loss) on sale of securities 2 2 (219)
Miscellaneous 119 158 29
--------- --------- ---------
Total other operating income 4,720 3,070 1,589
OTHER OPERATING EXPENSES:
Salary and employee benefits 13,960 11,230 6,143
Less capitalized loan origination costs (2,069) (1,666) (1,272)
Occupancy and equipment 2,881 2,368 1,590
Information and computer data services 1,322 1,012 718
Advertising 502 448 346
Savings Association Insurance Fund
(SAIF) special assessment -- 2,387 --
Deposit insurance 280 497 844
Amortization of costs in excess of net
assets acquired 899 592 --
Miscellaneous 3,245 2,462 1,935
--------- --------- ---------
Total other operating expenses 21,020 19,330 10,304
--------- --------- ---------
Income before provision for income
taxes 20,568 13,237 8,883
PROVISION FOR INCOME TAXES 7,446 3,923 2,631
--------- --------- ---------
NET INCOME $ 13,122 $ 9,314 $ 6,252
========= ========= =========
Earnings per common share:
Basic $ 1.43 $ 0.97 N/A
Diluted $ 1.37 $ 0.96
Cumulative dividends declared per
common share $ 0.30 $ 0.22
See notes to consolidated financial statements
57
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
COMMON STOCK:
Balance, beginning of year $ 109 $ 109 $ --
Proceeds from sale of stock in
initial offering 100
Sale of stock to ESOP 9
--------- --------- ---------
Balance, end of year 109 109 109
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year 107,844 107,370 --
Proceeds from sale of stock in
initial offering net of
underwriting costs 98,533
Sale of stock to ESOP 8,719
Release of earned ESOP shares 839 417 118
Reissuance of treasury stock for
stock-related compensation plans (29) 57
Recognition of tax benefit related
to release of MRP shares 231
--------- --------- ---------
Balance, end of year 108,885 107,844 107,370
RETAINED EARNINGS:
Balance, beginning of year 62,572 55,343 50,099
Net income 13,122 9,314 6,252
Cash dividends (2,732) (2,085) (1,008)
--------- --------- ---------
Balance, end of year 72,962 62,572 55,343
VALUATION RESERVE FOR SECURITIES
AVAILABLE FOR SALE:
Balance, beginning of year (401) 774 152
Change in valuation reserve 3,081 (1,175) 622
--------- --------- ---------
Balance, end of year 2,680 (401) 774
TREASURY STOCK:
Balance, beginning of year (6,954) -- --
Purchases of treasury stock (13,993) (12,905)
Purchases of treasury stock for
exercised stock options (74)
Reissuance of treasury stock for MRP
and/or exercised stock options 74 5,957
Repurchase of forfeited shares from MRP (32) (6)
--------- --------- ---------
Balance, end of year (20,979) (6,954) --
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of year (7,751) (8,331) --
Sales of stock to ESOP (8,728)
Release of earned ESOP shares 588 580 397
--------- --------- ---------
Balance, end of year (7,163) (7,751) (8,331)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS:
Balance, beginning of year (6,783) (1,123) --
Net change in number and/or valuation
of shares held in trust (740) (548) (1,123)
Reissuance of treasury stock for MRP (6,014)
Amortization of compensation related
to MRP 1213 902
--------- --------- ---------
Balance, end of year (6,310) (6,783) (1,123)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 150,184 $ 148,636 $ 154,142
========= ========= =========
58
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
( in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Common stock , shares issued:
Number of shares, beginning of year 10,911 10,911 --
Shares issued in initial offering 10,038
Sale of stock to ESOP 873
--------- --------- ---------
Number of shares, end of year 10,911 10,911 10,911
--------- --------- ---------
TREASURY STOCK, SHARES HELD:
Number of shares, beginning of year (392) -- --
Purchase of treasury stock (564) (795)
Purchase of treasury stock for
exercised stock options (3)
Reissuance of treasury stock to
deferred compensation plan and/
or exercised stock options 3 404
Repurchase of shares forfeited from MRP (2) (1)
--------- --------- ---------
Number of shares, end of year (958) (392) --
--------- --------- ---------
Shares outstanding, end of year 9,953 10,519 10,911
========= ========= =========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of year (775) (833) --
Sale of stock to ESOP (873)
Release of earned shares 59 58 40
--------- --------- ---------
Number of shares, end of year (716) (775) (833)
========= ========= =========
59
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 13,122 $ 9,314 $ 6,252
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred taxes 374 (315) (240)
Depreciation 1,135 744 477
Loss (gain) on sale of securities (2) (2) 220
Net amortization of premiums and
discounts on investments 287 (595) 152
Amortization of costs in excess of
net assets acquired 899 592 --
Amortization of MRP compensation
liability 1,213 902 --
Loss (gain) on disposal of equipment (7) -- --
Loss (gain) on sale of loans (1,375) (699) (607)
Net change in deferred loan fees,
premiums and discounts 523 792 (347)
Loss (gain) on disposal of real
estate held for sale 30 62 --
Amortization of mortgage servicing
rights 100 72 76
Capitalization of mortgage servicing
rights from sale of mortgages
with servicing retained (442) -- --
Provision for losses on loan and real
estate held for sale 1,628 1,423 454
FHLB stock dividend (1,146) (868) (306)
Cash provided (used) in operating
assets and liabilities:
Loans held for sale (9,496) 665 1,022
Accrued interest receivable (619) (335) (1,316)
Other assets (482) 90 (759)
Deferred compensation 288 258 510
Accrued expenses and other
liabilities 1,038 546 2,243
Income taxes payable (38) (256) 1,379
--------- --------- ---------
Net cash provided by
operating activities 7,030 12,390 9,210
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of securities available
for sale (233,660) (485,548) (554,799)
Principal repayments and maturities of
securities available for sale 221,766 534,177 408,063
Sales of securities available for sale 1,405 769 21,183
Purchases of securities held to maturity -- -- (2,215)
Principal repayments and maturities
of securities held to maturity 793 1,092 4,600
Purchases of mortgage servicing rights -- -- (176)
Loans originated and closed, net (511,398) (270,240) (208,303)
Purchases of loans and participating
interest in loans (51,049) (117,584) (65,929)
Sales of loans and participating
interest in loans 82,017 36,942 45,523
Principal repayments on loans 375,868 207,526 111,547
Purchases of FHLB stock (2,097) (2,909) (4,990)
Proceeds from sale of property,
equipment and real estate acquired
for development 13 5 --
Purchases of property and equipment (1,986) (1,463) (1,272)
Additional investment in real estate
held for sale, net of insurance
proceeds (26) -- (34)
Basis of real estate held for sale
acquired in settlement of loans
and disposed of during the year 2,417 652 658
Funds transferred to deferred
compensation plans (91) (94) (858)
Acquisition of IEB, net of cash acquired -- (17,289) --
--------- --------- ---------
Net cash used by investing
activities $(116,028) $(113,964) $(247,002)
--------- --------- ---------
Continued on next page
60
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1998, 1997 and 1996
(Continued from prior page)
1998 1997 1996
---- ---- ----
FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ -- $ -- $ 107,361
Funding provided to ESOP for purchase
of common stock -- -- (8,728)
Compensation expense recognized for
shares released for allocation to
participants of the ESOP:
Original basis of shares 588 580 397
Excess of fair value of released
shares over basis 839 417 118
Increase (decrease) in deposits 46,604 36,293 13,712
Proceeds from FHLB advances 640,025 600,327 480,152
Repayment of FHLB advances (573,991) (548,231) (363,444)
Proceeds from repurchase agreement
borrowings 33,687 42,444 9,863
Repayment of repurchase agreement
borrowings (431) (133) --
Cash dividends paid (2,583) (1,907) (504)
Increase (decrease) in other borrowings (3,718) (398) 2,162
Increase (decrease) in borrowers'
advances for taxes and insurance 41 549 232
Net cost of exercised stock options (29) -- --
Purchases of treasury stock (13,993) (12,905) --
--------- --------- ---------
Net cash provided by financing
activities 127,039 117,036 241,321
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 18,041 15,462 3,529
CASH AND DUE FROM BANKS, BEGINNING
OF PERIOD 24,488 9,026 5,497
--------- --------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 42,529 $ 24,488 $ 9,026
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 46,311 $ 35,744 $ 22,701
Taxes paid $ 7,108 $ 4,494 $ 1,496
Non-cash transactions:
Loans, net of discounts, specific
loss allowances and unearned
income transferred to real estate
held for sale $ 2,246 $ 1,059 $ 678
Securities transferred from held to
maturity to available for sale $ -- $ -- $ 142,519
Net change in accrued dividends
payable $ 149 $ 178 $ 504
Net change in unrealized gain (loss)
in deferred compensation
trust and related liability $ 707 $ 475 $ 284
Treasury stock reissued to MRP $ -- $ 6,014 $ --
Treasury stock forfeited by MRP $ 32 $ 6 $ --
Recognize tax benefit of vested
MRP shares $ 231 $ -- $ --
61
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1998, 1997 and 1996
Note 1: SUMMARY OF ACCOUNTING POLICIES
Basis for Presentation: First Savings Bank of Washington Bancorp, Inc. (the
Company) is a bank holding company incorporated in the state of Delaware. The
Company was organized for the purpose of acquiring all of the capital stock of
First Savings Bank of Washington (FSBW) upon its reorganization from the
mutual holding company form of organization to the stock holding company form
of organization.
First Savings Bank of Washington Bancorp, Inc. is primarily engaged in the
business of planning, directing and coordinating the business activities of
its wholly owned subsidiaries, First Savings Bank of Washington and Inland
Empire Bank (IEB) (together, the Banks). FSBW is a Washington-chartered
savings bank the deposits of which are insured by the Federal Deposit
Insurance Corporation (FDIC) under the Savings Association Insurance Fund
(SAIF). FSBW conducts business from its main office in Walla Walla,
Washington and its sixteen branch offices and three loan production offices
located in southeast, central, north central and western Washington. IEB is
an Oregon-chartered commercial bank whose deposits are insured by the FDIC
under the Bank Insurance Fund (BIF). IEB conducts business from its main
office in Hermiston, Oregon and its five branch offices and two loan
production offices located in northeast Oregon. The Company's only significant
assets are the capital stock of its subsidiaries, its loan to FSBW's ESOP (see
Note 15) and the portion of the net proceeds retained from the offering. The
Company has no significant liabilities.
The Company and its Bank subsidiaries are subject to regulation by the Federal
Reserve Board (FRB) and the FDIC. In addition FSBW and IEB are subject to the
state banking regulations of Washington and Oregon, respectively.
During the year ended March 31, 1996 the Company completed the sale of
10,910,625 shares of its common stock at $10.00 per share through subscription
and community offerings to the FSBW depositors, Board of Directors,
management, employees and the public and used approximately 50% of the net
proceeds from such sales to purchase all of the FSBW common stock issued in
the FSBW conversion to stock form. Such business combination was accounted
for at historical cost in a manner similar to a pooling of interests.
Nature of Business: The operating results of the Company depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets, consisting of loans and securities, and interest
expense on interest-bearing liabilities, composed primarily of savings
deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements.
Net interest income is a function of the Company's interest rate spread, which
is the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities.
FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. FSBW's primary business is originating loans for
portfolio in its primary market area, which consists of southeast, central,
north central, and western Washington state. FSBW's wholly owned subsidiary,
Northwest Financial Corporation, provides trustee services for FSBW, is
engaged in real estate sales and receives commissions from the sale of
annuities.
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IEB is a community oriented commercial bank, chartered in the state of Oregon.
IEB's lending activities consist of granting agribusiness, commercial and
consumer loans to customers throughout the northeastern Oregon region. IEB
has two wholly owned subsidiaries: Pioneer American Property Company, which
owns a building that is leased to IEB, and Inland Securities Corporation,
which previously made a market for IEB's stock but is currently inactive.
In addition to interest income on loans and securities, the Banks receive
other income from deposit service charges, loan origination and servicing fees
and from the sale of loans and investments. FSBW has sought to increase its
other income by retaining loan servicing rights on some of the loans that it
has sold and by purchasing mortgage servicing rights.
Principles of Consolidation: The consolidated financial statements include
the accounts of First Savings Bank of Washington Bancorp, Inc. and its
wholly-owned subsidiaries First Savings Bank of Washington and Inland Empire
Bank. All material intercompany transactions, profits and balances have been
eliminated.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements. The Company has used significant estimates in determining
reported reserves and allowances for loan losses, tax liabilities, and other
contingencies.
Securities: Securities are classified as held to maturity when the Company has
the ability and positive intent to hold them to maturity. Securities
classified as available for sale are available for future liquidity
requirements and may be sold prior to maturity.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts to maturity. Unrealized losses on
securities held to maturity due to fluctuations in fair value are recognized
when it is determined that an other than temporary decline in value has
occurred. Securities available for sale are carried at fair value. Unrealized
gains and losses on securities available for sale are excluded from earnings
and are reported net of tax as a separate component of stockholders' equity
until realized. Realized gains and losses on sale are computed on the
specific identification method and are included in operations on the trade
date sold.
Loans Receivable: The Banks originate mortgage loans for both portfolio
investment and sale in the secondary market. At the time of origination,
mortgage loans are designated as held for sale or held for investment. Loans
held for sale are stated at lower of cost or estimated fair value determined
on an aggregate basis. The Banks also originate commercial, financial,
agribusiness and installment credit loans for portfolio investment. Loans
receivable not designated as held for sale are recorded at the principal
amount outstanding, net of allowance for loan losses, deferred fees,
discounts, and premiums. Premiums, discounts and deferred loan fees are
amortized to maturity using the level yield methodology.
Interest is accrued as earned unless management doubts the collectibility of
the loan or the unpaid interest. Interest accruals are generally discontinued
when loans become 90 days past due for interest. All previously accrued but
uncollected interest is deducted from interest income upon transfer to
nonaccrual status. Future collection of interest is included in interest
income based upon an assessment of the likelihood that the loans will be
repaid or recovered. A loan may be put in nonaccrual status sooner than this
policy would dictate if, in management's judgment, the loan may be
uncollectible. Such interest is then recognized as income only if it is
ultimately collected.
Costs in Excess of Net Assets Acquired: Costs in excess of net assets
acquired (goodwill) is an intangible asset arising from the purchase of IEB.
It is being amortized on a straight line basis over the 14 year period of
expected benefit. The Company periodically evaluates goodwill for impairment.
Mortgage Servicing Rights: Purchased servicing rights represent the cost of
acquiring the right to service mortgage loans. Originated servicing rights
are recorded when mortgage loans are originated and subsequently sold or
securitized with the servicing rights retained. The total cost of the
mortgage loans is allocated to the servicing rights and the loans (without the
servicing rights) based on relative fair values. The cost relating to
purchased and originated servicing is capitalized and amortized in proportion
to, and over the period of, estimated future net servicing income.
63
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The Banks assess the fair value of unamortized remaining servicing rights for
impairment on a stratum by stratum basis every quarter by using secondary
market quotes for comparable packages of serviced loans and a valuation model
that calculates the present value of future cash flows using market discount
rates and market based assumptions for prepayment speeds, servicing costs and
ancillary income for those pools of serviced mortgages for which secondary
market quotes are not readily available. For purposes of measuring
impairment, the servicing rights are stratified based on their original and
remaining term to maturity and balance outstanding.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, effective
for transactions occurring after December 31, 1996. SFAS No. 125 superseded
SFAS No. 122 Accounting for Mortgage Servicing Rights and amended SFAS No. 65,
Accounting for Certain Mortgage Banking Activities to eliminate the
distinction between normal and excess servicing rights. The Banks adopted
SFAS No. 125 on January 1, 1997, and account for their mortgage servicing
rights accordingly. The adoption did not have a material impact.
Allowances for Loan Losses: The adequacy of general and specific reserves is
based on management's continuing evaluation of the pertinent factors
underlying the quality of the loan portfolio, including actual loan loss
experience and current and anticipated economic conditions. This policy is
applicable to all loans except large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. Loans that are
collectively evaluated for impairment by the Banks include residential real
estate and consumer loans. Residential construction and land, commercial real
estate and commercial business loans greater than $150,000 and unsecured loans
greater than $25,000 are individually evaluated for impairment. Loans secured
by real estate with balances less than $150,000 and unsecured loans less than
$25,000 may be evaluated collectively for impairment. Loans are considered
impaired if the present value of expected future cash flows discounted at the
loan's effective interest rate (or, alternatively, the observable market price
of the loan or the fire value of the collateral) is less than the recorded
investment in the impaired loan. Factors involved in determining impairment
include, but are not limited to, the financial condition of the borrower,
value of the underlying collateral and current status of the economy. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of collateral if the
loan is collateral dependent. Subsequent changes in the value of impaired
loans shall be included within the provision for loan losses in the same
manner in which impairment initially was recognized or as a reduction in the
provision that would otherwise be reported.
General loan loss reserves are established to provide for inherent loan
portfolio risks not specifically provided for. The level of general reserves
is based on analysis of potential exposures existing in the Banks' loan
portfolios including evaluation of historical trends, current market
conditions and other relevant factors identified by management at the time the
financial statements are prepared. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of
foreclosure is recorded at the lower of estimated fair value, less cost to
sell, or the principal balance of the defaulted loan. Development,
improvement, and direct holding costs relating to the property are
capitalized. The carrying value of such property is periodically evaluated by
management and, if necessary, allowances are established to reduce the
carrying value to net realizable value. Gains or losses at the time the
property is sold are charged or credited to operations in the period in which
they are realized. The amounts the Banks will ultimately recover from real
estate held for sale may differ substantially from the carrying value of the
assets because of future market factors beyond the Banks' control or because
of changes in the Banks' strategy for recovering the investment.
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Depreciation: The provision for depreciation is based upon the straight-line
method applied to individual assets and groups of assets acquired in the same
year at rates adequate to charge off the related costs over their estimated
useful lives.
Buildings and improvements. . . . . . . . . . . . . . . . . .10-30 years
Furniture and equipment . . . . . . . . . . . . . . . . . . . 3-10 years
Routine maintenance, repairs, and replacement costs are expensed as incurred.
Expenditures which materially increase values or extend useful lives are
capitalized.
Loan Origination and Commitment Fees: Loan origination fees, net of certain
specifically defined direct loan origination costs, are deferred and
recognized as an adjustment of the loans' interest yield using the level
yield method over the contractual term of each loan adjusted for actual loan
prepayment experience. Net deferred fees or costs related to loans held for
sale are recognized in income at the time the loans are sold. Loan commitment
fees are deferred until the expiration of the commitment period unless
management believes there is a remote likelihood that the underlying
commitment will be exercised, in which case the fees are amortized to fee
income using the straight-line method over the commitment period. If a loan
commitment is exercised, the deferred commitment fee is accounted for in the
same manner as a loan origination fee. Deferred commitment fees associated
with expired commitments are recognized as fee income.
Income Taxes: The Company files a consolidated income tax return including all
of its wholly owned subsidiaries on a calendar year basis. Income taxes are
accounted for using the asset and liability method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
which will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Company's income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period of
change. Where state income tax laws do not permit consolidated income tax
returns, applicable state income tax returns are filed.
Employee Stock Ownership Plan: FSBW sponsors an Employee Stock Ownership Plan
(ESOP). The ESOP purchased 8% of the shares of common stock issued in the
reorganization and initial public stock offering pursuant to the subscription
rights granted under the ESOP plan. The ESOP borrowed $8,728,500 from the
Company in order to fund the purchase of common stock. The loan to the ESOP
will be repaid principally from the Company's contribution to the ESOP, and
the collateral for the loan is the Company's common stock purchased by the
ESOP. As the debt is repaid shares are released from collateral based on the
proportion of debt service paid in the year and allocated to participants'
accounts. As shares are released from collateral, compensation expense is
recorded equal to the then current market price of the shares, and the shares
become outstanding for earnings-per-share calculations. Stock and cash
dividends on allocated shares are recorded as a reduction of retained earnings
and paid or distributed directly to participants' accounts. Stock and cash
dividends on unallocated shares are recorded as a reduction of debt and
accrued interest (see additional discussion in Note 15).
New Accounting Standards: In June 1997, FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 131 establishes standards
of reporting by publicly held business enterprises and disclosure of
information about operating segments in annual financial statements and, to a
lesser extent, in interim financial reports issued to shareholders. SFAS Nos.
130 and 131 are effective for fiscal years beginning after December 15, 1997.
As both SFAS Nos. 130 and 131 deal with financial statement disclosure
matters, the Company does not anticipate the adoption of these new standards
will have a material impact on its financial position or results of
operations.
Earnings Per Share: In February 1997, the FASB issued SFAS No. 128, Earnings
Per Share. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock such as options,
warrants, convertible securities or contingent stock agreements if those
securities trade in a public market. This standard specifies computation and
presentation requirements for both basic EPS and, for entities with complex
capital structures, diluted EPS. SFAS No. 128 is effective for reporting
periods ending after December 15, 1997. The Company has adopted the
provisions of SFAS No. 128 and has restated all periods. Earnings per share
are not presented for periods beginning prior to conversion to stock form,
October 31, 1995, as FSBW was a wholly-owned subsidiary of a mutual holding
company.
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Reclassification: Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year's presentation.
Note 2: ACQUISITIONS
Inland Empire Bank:
The Company completed the acquisition of IEB effective August 1, 1996. The
Company paid the former shareholders of IEB $60.8951 per share, in cash, for a
total acquisition price of $32.8 million. The acquisition of IEB was treated
as a purchase for accounting purposes. Accordingly, under GAAP, the assets
and liabilities of IEB have been recorded on the books of the Company at their
respective fair market values at the effective date the acquisition was
consummated. Goodwill, the excess of the purchase price (cost) over the net
fair value of the assets and liabilities acquired, was recorded at $12.5
million. Amortization of goodwill over a 14 year period will result in a
charge to earnings of approximately $893,000 per year. Because of the amount
of assets of IEB acquired by the Company, the financial results for March 31,
1997, are not generally comparable to those of the year before. The combined
organization at March 31, 1997, was significantly larger than it was the year
before.
The financial statements for the year ended, March 31, 1997 include the
operations of the two institutions from August 1, 1996, to March 31, 1997.
The following information presents the actual results of operations for the
year ended March 31, 1998 and the pro forma results of operations for the
years ended March 31, 1997 and 1996, as though the acquisition had occurred on
April 1, 1995. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies.
(in thousands except per share amounts)
Year ended March 31,
--------------------------------------
Actual Unaudited pro forma
--------- ----------------------
1998 1997 1996
---- ---- ----
Net interest income before
provision for loan loss $ 38,496 $ 33,727 $ 26,117
Net income 13,122 9,885 7,983
Net income per share:
Basic $ 1.43 $ 1.03 N/A
Diluted $ 1.37 $ 1.02 N/A
Subsequent acquisition of Towne Bancorp, Inc.:
Subsequent to year end on April 1, 1998 the Company completed the acquisition
of Towne Bancorp, Inc. (TB). The Company paid approximately $28.1 million in
cash and common stock for all of the outstanding common shares and stock
options of TB. TB is the holding company for Towne Bank, headquartered in
Woodinville, Washington, a Seattle suburb. The acquisition will be accounted
for as a purchase and will result in the recording of approximately $19.2
million of costs in excess of the fair value of Towne Bank net assets acquired
(goodwill). Goodwill assets will be amortized over a 14 year period and will
result in a charge to earnings of approximately $1,375,000 per year. Founded
in 1991, Towne Bank is a community business bank with approximately $146
million in total assets, $134 million in deposits, $120 million in loans and
$9.3 million in shareholders' equity at March 31, 1998. Towne Bank operates
four full service branches in the Seattle, Washington metropolitan area in
Woodinville, Redmond, Bellevue and Renton and plans to open its Bothell branch
in June 1998.
TB shareholders overwhelmingly approved the merger on March 10, 1998. TB's
shareholders, who were given the opportunity to make an election, received
either 3.355 shares of the Company's common stock plus $11.78, or $91.62 per
share in cash for each share of TB they owned. The Company issued 775,884
shares of stock and paid out $7.65 million in cash to TB shareholders in
connection with the completion of the acquisition.
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Note 3: CASH AND DUE FROM BANKS
Cash and due from banks consisted of the following (in thousands):
March 31
---------------------------
1998 1997
---- ----
Cash on hand and demand deposits $ 26,942 $ 15,639
Cash equivalents:
Short-term interest-bearing deposits 10,342 1,866
Federal funds sold 5,245 6,983
--------- ---------
$ 42,529 $ 24,488
========= =========
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and short-term
deposits with original maturities less than 90 days.
FRB regulations require depository institutions to maintain certain minimum
reserve balances. Included in cash and demand deposits were reserves required
by the FRB of $2.8 million and $2.5 million at March 31, 1998 and 1997,
respectively.
Note 4: SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale
are summarized as follows (in thousands):
March 31, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
U. S. Government and agency
obligations $ 65,414 $ 232 $ (52) $ 65,594
Municipal bonds 30,607 1,489 (3) 32,093
Corporate bonds 4,279 43 (18) 4,304
Mortgage-backed securities:
FHLMC certificates 3,308 74 (21) 3,361
GNMA certificates 16,499 363 -- 16,862
FNMA certificates 6,010 82 (44) 6,048
Collateralized mortgage
obligations 171,367 1,074 (1,582) 170,859
FHLMC stock 549 2,335 -- 2,884
FARMERMAC stock 10 28 -- 38
FNMA stock 303 73 -- 376
--------- ---------- ---------- ---------
$ 298,346 $ 5,793 $ (1,720) $ 302,419
========= ========== ========== =========
Proceeds from sales of securities during fiscal 1998 were $1,405,000. Gross
gains of $1,800 and gross losses of $0 were realized on those sales.
At March 31, 1998, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
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March 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
U. S. Government and agency
obligations $ 67,986 $ 18 $ (587) $ 67,417
Municipal bonds 32,884 1,186 (101) 33,969
Corporate bonds 8,031 11 (45) 7,997
Mortgage-backed securities:
FHLMC certificates 3,827 66 (25) 3,868
GNMA certificates 20,698 60 (485) 20,273
FNMA certificates 7,286 63 (68) 7,281
Collateralized mortgage
obligations 145,068 607 (2,722) 142,953
FHLMC stock 2,049 1,342 -- 3,391
FARMERMAC stock 10 14 -- 24
FNMA stock 303 40 -- 343
--------- --------- ---------- ---------
$ 288,142 $ 3,407 $ (4,033) $ 287,516
========= ========= ========== =========
Proceeds from sales of securities during fiscal 1997 were $769,000. Gross
gains of $2,000 and gross losses of $0 were realized on those sales.
At March 31, 1997, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
The amortized cost and estimated fair value of securities available for sale
at March 31, 1998, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
March 31, 1998
-----------------------
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 34,508 $ 34,604
Due after one year through five years 35,918 39,019
Due after five years through ten years 40,739 41,610
Due after ten years 187,181 187,186
--------- ---------
$ 298,346 $ 302,419
========= =========
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Note 5: SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity are
summarized as follows (in thousands):
March 31, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Certificates of deposit $ 194 $ -- $ -- $ 194
========= ========== ========== =========
March 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Certificates of deposit $ 987 $ -- $ -- $ 987
========= ========== ========== =========
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1998, by contractual maturity, are shown below (in thousands):
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 194 $ 194
========= ==========
Note 6: ADDITIONAL INFORMATION REGARDING COMPOSITION OF SECURITIES AND CASH
EQUIVALENT INTEREST INCOME
The following table sets forth the composition of income from securities and
deposits for the periods indicated (in thousands):
Years ended
March 31
------------------------------
1998 1997 1996
-------- -------- --------
Taxable interest income $ 4,647 $ 5,227 $ 4,438
Tax-exempt interest income 2,031 2,033 1,855
Other stock-dividend income 105 195 170
Federal Home Loan Bank stock-dividend income 1,147 868 307
-------- -------- --------
Total securities and cash equivalent
interest income $ 7,930 $ 8,323 $ 6,770
======== ======== ========
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Note 7: LOANS RECEIVABLE
Loans receivable at March 31 are summarized as follows (in thousands)
(Includes loans held for sale):
1998 1997
---- ----
One- to four-family real estate loans $ 423,850 $ 395,418
Commercial and multifamily real estate loans 167,859 129,198
Construction and land 132,409 110,262
Agriculture/commercial 67,611 47,846
Credit card, consumer and other 30,842 25,092
---------- ----------
822,571 707,816
Less:
Loans in process (54,500) (52,412)
Deferred loan fees, discounts and premiums (3,297) (2,775)
Allowances for loan losses (7,857) (6,748)
---------- ---------
$ 756,917 $ 645,881
========== =========
Loans serviced for others totaled $211,662,000 and $208,359,000 at March 31,
1998 and 1997, respectively. Custodial accounts maintained in connection with
this servicing totaled $4,169,000 and $2,963,000 at March 31, 1998 and 1997,
respectively.
The Banks' outstanding mortgage loan commitments totaled $74,087,000 and
$36,779,000 at March 31, 1998 and 1997, respectively. In addition, the Banks
had outstanding commitments to sell loans of $6,037,000 at March 31, 1998.
Nonaccrual loans totaled $1,270,000 and $2,082,000 at March 31, 1998 and 1997,
respectively. Nonaccrual loans at year end are composed of residential real
estate and consumer loans and on a collective basis they are not considered
"Impaired" under SFAS No. 114.
Loans held for sale at March 31, 1998, of $12,436,000 are stated net of any
unrealized losses, undisbursed loans in process and deferred loan fees.
Loans held for sale at March 31, 1997, of $2,940,000 are stated net of any
unrealized losses, undisbursed loans in process and deferred loan fees.
The Banks originate both adjustable- and fixed-rate loans. At March 31, 1998,
the maturity and repricing composition of those loans, less undisbursed
amounts and deferred fees, were as follows (in thousands):
Fixed-rate (term to maturity):
One month to one year $ 29,023
One to three years 23,892
Three to five years 57,925
Five to ten years 35,560
Over ten years 309,519
---------
$ 455,919
=========
Adjustable-rate (term to rate adjustment):
One month to one year $ 250,491
One to three years 32,236
Three to five years 23,083
Five to ten years 215
Over ten years 2,830
---------
$ 308,855
=========
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The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the Banks' internal cost of funds, FHLB National Cost of
Funds Index, One Year Constant Maturity Treasury Index, Prime Rate (Wall
Street Journal) or the FHLB 11th District Cost of Funds. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Banks pay on the short-term deposits that primarily have been
utilized to fund these loans.
A summary of changes in the Banks' loans to their directors, officers, and
employees and their affiliated companies for the years ended March 31 is as
follows:
1998 1997
---- ----
Loans outstanding, April 1 $ 6,389,190 $ 5,081,363
Acquired with purchase of IEB -- 1,982,264
Loan disbursements 2,727,497 955,061
Loan repayments (2,034,524) (1,629,498)
----------- -----------
Loans outstanding, March 31 $ 7,082,163 $ 6,389,190
=========== ===========
Note 8: ALLOWANCES FOR LOAN AND REAL ESTATE HELD FOR SALE LOSSES
An analysis of the changes in the allowances for loan and real estate held for
sale losses is as follows for the three years ended March 31, 1998 (in
thousands):
Real estate
Loans held
receivable for sale
---------- ---------
Balance, April 1, 1995 $ 3,549 $ 774
Provision (recoveries) 524 (70)
Net charge-offs (22) (704)
---------- ---------
Balance, March 31, 1996 4,051 --
Acquired with IEB 1,416 --
Provision 1,423 --
Net charge-offs (142) --
---------- ---------
Balance, March 31, 1997 6,748 --
Provision 1,628 --
Net charge-offs (519) --
---------- ---------
Balance, March 31, 1998 $ 7,857 $ --
========== =========
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Note 9: PROPERTY AND EQUIPMENT
Land, buildings and equipment owned by the Company and its subsidiaries at
March 31 are summarized as follows (in thousands):
1998 1997
---- ----
Land $ 2,199 $ 2,199
Buildings and improvements 11,458 11,308
Furniture and equipment 7,508 5,835
-------- --------
21,165 19,342
Accumulated depreciation (9,786) (8,808)
-------- --------
$ 11,379 $ 10,534
======== ========
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement
establishes accounting standards for the impairment of long-lived assets that
either will be held and used in operations or that will be disposed of.
Effective January 1, 1996, the Company adopted SFAS No. 121. The Company
periodically evaluates long-lived assets for impairment.
Note 10: DEPOSITS
Customer deposits consist of the following at March 31 (in thousands):
1998 1997
---- ----
Demand, NOW and Money Market accounts,
including non-interest-bearing deposits
in 1998 and 1997 of $45,740 and $36,709,
respectively, 0% to 6% $ 177,880 $ 170,499
Regular savings, 2% to 6% 42,084 44,131
Certificate accounts:
2.01% to 4% 1,338 1,220
4.01% to 6% 299,463 265,473
6.01% to 8% 68,214 60,069
8.01% to 10% 2,587 3,571
10.01% to 12% 5 4
---------- ----------
371,607 330,337
---------- ----------
$ 591,571 $ 544,967
========== ==========
Deposits at March 31, 1998 and 1997 include public funds of $14,576,000 and
$13,217,000, respectively. Securities with a carrying value of $9,137,000 and
$4,940,000 were pledged as collateral on these deposits at March 31, 1998 and
1997, respectively, which exceeds the minimum collateral requirements
established by the state regulations.
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Scheduled maturities of certificate accounts at March 31 are as follows (in
thousands):
1998 1997
---- ----
Due in less than one year $ 240,074 $ 212,853
One to two years 74,519 53,553
Two to three years 13,565 26,049
Three to four years 11,288 6,998
Four to five years 18,652 7,916
After five years 13,509 22,968
---------- ----------
$ 371,607 $ 330,337
========== ==========
Included in deposits are certificates of deposit in excess of $100,000 of
$80,608,000 and $58,423,000 at March 31, 1998 and 1997, respectively.
Interest on certificates in excess of $100,000 totaled $3,901,000, $2,945,000
and $2,102,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
Deposit interest expense by type for the years ended March 31 is as follows
(in thousands):
1998 1997 1996
---- ---- ----
Certificates $ 20,069 $ 17,314 $ 15,768
Demand, NOW and Money Market accounts 3,972 3,239 1,650
Regular savings 1,248 1,183 1,558
--------- --------- ---------
$ 25,289 $ 21,736 $ 18,976
========= ========= =========
Note 11: ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
FSBW has entered into borrowing arrangements with the Federal Home Loan Bank
of Seattle (FHLB) to borrow funds under a short-term cash management advance
program and long-term loan agreements. All borrowings are secured by stock
of, and cash held by the FHLB. Additionally, mortgage loans receivable and
securities issued, insured, or guaranteed by the U. S. Government or agencies
thereof are pledged as security for the loans. At March 31, 1998, FHLB
advances were scheduled to mature as follows (in thousands):
Adjustable- Fixed-
rate rate Total
advances advances advances
-------------- --------------- --------------
Rate* Amount Rate* Amount Rate* Amount
----- ------ ----- ------ ----- ------
Due in less than
one year 5.69% $2,400 5.89% $ 99,796 5.88% $102,196
One to two years -- -- 6.30 74,350 6.30 74,350
Two to three years -- -- 6.21 18,813 6.21 18,813
Three to four years -- -- 6.77 27,000 6.77 27,000
Four to five years -- -- 5.81 57,190 5.81 57,190
Over five years -- -- 5.35 18,000 5.35 18,000
------ -------- --------
5.69% $2,400 6.04% $295,149 6.04% $297,549
====== ======== ========
* Weighted average interest rate
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The maximum and average outstanding balances and average interest rates on
advances from the FHLB were as follows for the year ended March 31 (in
thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 299,377 $ 235,098 $ 179,419
Average outstanding 276,328 214,563 66,252
Weighted average interest rates:
Annual 6.07% 5.83% 5.80%
End of year 6.04 5.96 5.43
Interest expense during the year $ 16,782 $ 12,504 $ 3,842
Note 12: OTHER BORROWINGS
Retail Repurchase Agreements included in other borrowings are due generally
within 90 days with interest. At March 31, 1998, they carry interest rates
ranging from 4.25% to 7.18%, payable at maturity, and are secured by the
pledge of certain FNMA, GNMA and FHLMC mortgage-backed securities with a fair
value of $9,757,000 as of March 31, 1998.
A summary of retail repurchase agreements at March 31 by the period remaining
to maturity is as follows (in thousands):
1998 1997
------------------ --------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ------- ---- -------
Due in less than one year 5.39% $ 4,466 5.55% $ 8,215
Two to three years 6.10 738 -- --
Three to four years -- -- 6.10 695
Four to five years 7.18 1,066 -- --
After five years -- -- 7.18 1,060
------- -------
5.78% $ 6,270 5.76% $ 9,970
======= =======
The maximum and average outstanding balances and average interest rates on
retail repurchase agreements were as follows for the year ended March 31 (in
thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 10,206 $ 11,119 $ 9,789
Average outstanding 6,934 11,322 7,620
Weighted average interest rates:
Annual 5.77% 4.80% 6.15%
End of year 5.78 5.76 5.35
Interest expense during the year $ 400 $ 543 $ 462
Wholesale Repurchase Agreements: The table below outlines the wholesale
repurchase agreements as of March 31, 1998 and 1997. The agreements to
repurchase are secured by mortgage-backed securities with a fair value of
$91,336,000 at March 31, 1998. The Broker holds the security while FSBW
continues to receive the principal and interest payments from the security.
Upon maturity of the agreement the pledged securities will be returned to
FSBW.
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A summary of wholesale repurchase agreements at March 31 by the period
remaining to maturity is as follows (in thousands):
1998 1997
------------------- -------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ------- ---- -------
Due in less than one year 5.64% $ 60,430 5.40 $ 27,174
One to two years 5.68 25,000 5.68 25,000
-------- --------
5.65% $ 85,430 5.53 $ 52,174
======== ========
The maximum and average outstanding balances and average interest rates on
wholesale repurchase agreements were as follows for the year ended March 31
(in thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 85,430 $ 52,174 $ 9,863
Average outstanding 72,276 26,649 162
Weighted average interest rates:
Annual 5.78% 5.96% 5.41%
End of year 5.65 5.53 5.41
Interest expense during the year $ 4,180 $ 1,589 $ 7
Note 13: INCOME TAXES
The recently enacted Small Business Job Protection Act of 1996 (the "Job
Protection Act") requires that a qualified thrift institution, such as FSBW,
recapture, for federal income tax purposes, that portion of the balance of its
tax basis bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts are to be generally taken into
ordinary income ratably over a six-year period beginning in 1998. In
addition, the Job Protection Act also repeals the reserve method of accounting
for tax basis bad debt deductions and, thus, requires thrifts to calculate the
tax basis bad debt deduction based on actual current loan losses. FSBW will
be required to recapture its post-1987 additions to its tax basis bad debt
reserves, whether such additions were made pursuant to the percentage of
taxable income method or the experience method. As of March 31, 1998, these
additions were $1.5 million which, pursuant to the Job Protection Act, will be
included in taxable income ratably over a six-taxable-year period beginning
with the year ending March 31, 1999. The recapture of the post-1987 additions
to tax basis bad debt reserves will require FSBW to pay approximately $85,000
a year in federal income taxes (based upon current federal income tax rates).
This will not result in a charge to earnings as these amounts are included in
the deferred tax liability at March 31, 1998.
Retained earnings at March 31, 1998, include $5,318,000 of earnings which
represent federal income tax basis bad debt reserve deductions taken by FSBW,
pre 1987, for which no provisions for federal income taxes have been made.
If the accumulated amount that qualified as deductions for federal income
taxes is later used for purposes other than to absorb bad debt losses or FSBW
no longer qualifies as a bank, the accumulated reserve will be subject to
federal income tax at the then current tax rates.
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The provision for income taxes for the years ended March 31 differs from that
computed at the statutory corporate tax rate as follows (in thousands):
1998 1997 1996
---- ---- ----
Taxes at statutory rate $ 7,199 $ 4,501 $ 3,020
Increase (decrease) in taxes:
Tax-exempt interest (620) (608) (553)
Amortization of cost in excess of
assets acquired 315 201 --
Difference in fair market value
versus basis of released ESOP
shares 328 184 40
State income taxes net of federal
tax benefit 271 148 --
Other (47) (503) 124
------- ------- -------
$ 7,446 $ 3,923 $ 2,631
======= ======= =======
The provision for income tax expense for the year ended March 31 is composed
of the following (in thousands):
1998 1997 1996
---- ---- ----
Current $ 7,303 $ 4,238 $ 2,871
Deferred 34 (286) (181)
Change in valuation allowance 109 (29) (59)
------- ------- -------
$ 7,446 $ 3,923 $ 2,631
======= ======= =======
Income taxes are provided for the temporary differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
Components of the Company's net deferred tax assets (liabilities) at March 31
consisted of the following (in thousands):
1998 1997
---- ----
Deferred tax assets:
Loan loss reserves per books $ 2,675 $ 2,278
Deferred compensation 1,168 1,061
Timing of deductibility of ESOP contributions 86 93
Nondeductible write-down of investment
securities 1 28
Other 149 163
------- -------
4,079 3,623
------- -------
Deferred tax liabilities:
Change in method of accounting for
amortization of premium and discount
on investments 116 142
Tax basis bad debt reserves-post 1987 509 509
FHLB stock dividends 1,599 1,196
Depreciation 638 631
Deferred loan fees 146 99
Other 83 24
------- -------
3,091 2,601
------- -------
988 1,022
Valuation allowance (136) (27)
------- -------
852 995
Income taxes related to valuation reserve on
securities available for sale (1,393) 225
------- -------
Deferred tax asset (liability), net $ (541) $ 1,220
======= =======
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Note 14: EMPLOYEE BENEFIT PLANS
The Banks have their own profit sharing plans for all eligible employees. The
plans are funded annually at the discretion of the individual Banks' Boards of
Directors. Contributions charged to operations for the years ended March 31,
1998, 1997 and 1996 were $269,000, $253,000 and $208,700, respectively.
FSBW has entered into a salary continuation agreement with certain of its
senior management. This program was funded by purchasing single premium life
insurance contracts. The program provides for aggregate continued annual
compensation for all participants totaling $240,000 for life with a 15-year
guarantee. Participants vest ratably each plan year until retirement,
termination, death or disability. FSBW is recording the salary obligation
over the estimated remaining service lives of the participants. Expenses
related to this program were $129,000, $119,300 and $108,700 for the years
ended March 31, 1998, 1997 and 1996, respectively. The plan's projected
benefit obligation is $2,031,000, of which $438,000 was vested at March 31,
1998. The assumed discount rate was 7% for 1998 and 1997. At March 31, 1998,
an obligation of $504,600 and cash value of life insurance of $2,144,500 were
recorded. At March 31, 1997, an obligation of $375,600 and cash value of life
insurance of $2,036,400 were recorded. Increases in cash surrender value and
related net earnings from the life insurance contracts partially offset the
expenses of this program resulting in a net cost of $21,000, $15,000 and
$34,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
IEB also has a non-qualified, non-contributory retirement compensation plan
for certain bank employees whose benefits are based upon a percentage of
defined participant compensation. Expenses related to this plan included in
fiscal 1998 and 1997 operations were $54,000 and $27,000, respectively.
The Company and FSBW also offer non-qualified deferred compensation plans to
members of their Boards of Directors and certain bank employees. The plans
permit each director or certain bank employees to defer a portion of director
fees, non-qualified retirement contributions or bonuses until the future.
Compensation is charged to expense in the period earned. In order to fund a
portion of the plans' future obligations the Company has purchased life
insurance policies, contributed to money market investments and purchased
common stock of the Company. As the Company is the owner of the investments
and beneficiary of life insurance contracts, and in order to reflect the
Company's policy to pay benefits equal to accumulations, the assets and
liabilities under the plans are reflected in the consolidated balance sheets
of the Company. Common stock of the Company held for such plans is reported as
a contra-equity account and was valued at $2,449,000 and $1,677,000 for March
31, 1998 and 1997, respectively. The money market investments and cash
surrender value of the life insurance policies are included in other assets.
Note 15: EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
FSBW established for eligible employees an employee stock ownership plan
(ESOP) and related trust that became effective upon the former mutual holding
company's conversion to a stock-based holding company. Eligible employees of
FSBW as of January 1, 1995 and eligible employees of the Company or FSBW
employed after such date who have been credited with at least 1,000 hours
during a 12-month period will become participants.
The ESOP borrowed $8,728,500 from the Company in order to purchase the common
stock. The loan will be repaid principally from the Company's or FSBW's
contributions to the ESOP over a period not to exceed thirty years, and the
collateral for the loan will be the unreleased, restricted common stock
purchased by the ESOP. Contributions to the ESOP will be discretionary;
however, FSBW intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirements of the debt.
The interest rate for the loan is 8.75%.
77
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<PAGE>
Participants generally become 100% vested in their ESOP account after seven
years of credited service or if their service was terminated due to death,
early retirement, permanent disability or a change in control. Prior to the
completion of one year of credited service, a participant who terminates
employment for reasons other than death, retirement, disability, or change in
control of FSBW or the Company will not receive any benefit. Forfeitures will
be reallocated among remaining participating employees, in the same proportion
as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
ESOP compensation expense for March 31, 1998, 1997 and 1996 (first plan year)
were $1,427,000, $997,000 and $515,000, respectively.
As of March 31, 1998, the Company has allocated or committed to be released to
the ESOP 156,580 earned shares and has 716,270 unearned, restricted shares
remaining to be released. The fair value of unearned, restricted shares held
by the ESOP trust was $18,847,000 at March 31, 1998.
Note 16: STOCK BASED COMPENSATION PLANS
At the Company's annual stockholders meeting held on July 26, 1996, the
shareholders approved adoption of the Management Recognition and Development
Plan (MRP) and Stock Option Plan (SOP).
MRP: Under the MRP the Company is authorized to grant up to 436,425 shares of
restricted stock to directors, officers and employees of FSBW. The initial
grant of 404,282 shares with a total cost of $6.0 million vests over a five
year period starting from the July 26, 1996, MRP approval date. The
consolidated statements of income for the years ended March 31, 1998 and 1997
reflect an accrual of $1,308,000 and $971,000 respectively in compensation
expense for the MRP including $95,800 and $69,000, respectively, of expense
for dividends on the allocated, restricted stock. A summary of the changes in
the granted, but not vested, MRP shares for the years ended March 31 follows:
1998 1997 1996
---- ---- ----
Shares granted-not vested, beginning of year 403,882 --
Shares granted- July 26, 1996 404,282 N/A
Shares vested (81,514) --
Shares forfeited (2,160) (400)
------- -------
Shares granted - not vested, end of year 320,208 403,882 N/A
======= ======= ======
78
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Note 16: STOCK BASED COMPENSATION (continued)
SOP: Under the SOP the Company has reserved 1,091,063 shares for issuance
pursuant to the exercise of stock options which may be granted to directors
and employees. The exercise price of the stock options are set at 100% of the
fair market value of the stock price at date of grant. Such options will vest
ratably over a five year period and any unexercised options will expire 10
years after vesting or 90 days after employment or service ends.
Details of stock options granted, vested, exercised, forfeited or terminated
are as follows:
Number of option shares
-----------------------
Granted Exercisable
--------- -----------
For the year ended March 31, 1996 N/A N/A
--------- -----------
For the year ended March 31, 1997
Options granted 913,445 --
Options vested -- --
Options forfeited -- --
Options exercised -- --
Options terminated -- --
-------- --------
Number of option shares at March 31, 1997 913,445 --
For the year ended March 31, 1998
Options granted 18,000 --
Options vested (183,589) 183,589
Options forfeited (4,700) --
Options exercised -- (2,995)
Options terminated -- --
-------- --------
Number of option shares at March 31, 1998 743,156 180,594
======== ========
Financial data pertaining to outstanding stock options granted at March 31,
1998 were as follows:
Weighted average Number of
fair value Number of option shares Remaining
Exercise of option shares option shares vested and Contractual
price granted granted exercisable life
--------- ----------------- ------------- ------------- ---------
$ 14.8750 $ 3.49 to 5.29 613,144 152,591 9.3 yrs
15.3750 5.40 to 5.58 70,412 17,603 9.3 yrs
16.7500 6.08 33,600 8,400 9.5 yrs
18.5000 6.72 8,000 2,000 9.8 yrs
21.1875 8.91 5,000 -- N/A
24.3125 10.71 10,000 -- N/A
25.0625 11.07 3,000 -- N/A
------- -------
15.217* 4.98 743,156 180,594
======= =======
* Weighted average exercise price of options granted
79
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Note 16: STOCK BASED COMPENSATION (continued)
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based
Compensation. The statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
No. 123 does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue following those
rules to recognize and measure compensation as outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but they are now required to disclose the pro forma amounts of net
income and earnings per share that would have been reported had the company
elected to follow the fair value recognition provisions of SFAS No. 123.
Effective April 1, 1996, the Company has determined that it will continue to
measure its employee stock-based compensation arrangements under the
provisions of APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
compensation plan been determined consistent with SFAS No. 123, the Company's
net income available to fully diluted common stock and fully diluted earnings
per share would have been reduced to the pro forma amounts indicated below:
Years ended March 31
--------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands,
except per share amounts)
Net income attributable to common stock:
Basic:
As reported $ 13,122 $ 9,314 $ N/A
Pro forma 12,088 8,429
Diluted:
As reported $ 13,122 $ 9,314
Pro forma 12,088 8,429
Net income per common share:
Basic:
As reported $ 1.43 $ 0.97
Pro forma 1.31 0.88
Diluted:
As reported $ 1.37 $ 0.96
Pro forma 1.26 0.87
The compensation expense included in the pro forma net income attributable to
diluted common stock and diluted earnings per share is not likely to be
representative of the effect on reported net income for future years because
options vest over several years and additional awards generally are made each
year.
The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants in fiscal
1998: annual dividend yield of 1.20% to 1.50%, expected volatility of 23.9%
to 26.4%, risk-free interest rates of 6.16% to 6.79% and expected lives of
8.5 to 12.5 years.
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks as state
chartered federally insured institutions are subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of total capital and Tier 1
capital to risk-weighted assets as well as Tier 1 leverage capital to average
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
created a statutory framework that increased the importance of meeting
applicable capital requirements. For FSBW and IEB, FDICIA established five
capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-
based capital measure, a leverage ratio capital measure, and certain other
factors. The federal banking agencies (including the FDIC) have adopted
regulations that implement this statutory framework. Under these regulations,
an institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted
total assets is 5.00% or more and it is not subject to any federal supervisory
order or directive to meet a specific capital level. In order to be
adequately capitalized, an institution must have a total risk-based capital
ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less
than 4.00%, and leverage ratio of not less that 4.00%. Any institution which
is neither well-capitalized nor adequately capitalized will be considered
undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action
requirements, regulatory controls and restrictions which become more extensive
as an institution becomes more severely undercapitalized. Failure by the
Banks, individually, to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against FSBW or IEB by the FDIC, including, but not limited to, the
issuance of a capital directive to ensure the maintenance of required capital
levels. FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, FDIC approval of any regulatory
application filed for its review may be dependent on compliance with capital
requirements.
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS (continued)
The actual regulatory capital ratios calculated for the Company and the Banks,
along with the minimum capital amounts and ratios for capital adequacy
purposes and to be categorized as well-capitalized under the regulatory
framework for prompt corrective action were as follows:
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1998:
The Company- consolidated
Total capital to risk-
weighted assets $144,284 22.64% $ 50,987 8.00% N/A
Tier 1 capital to risk-
weighted assets 136,427 21.41 25,493 4.00 N/A
Tier 1 leverage capital
to average assets 136,427 12.17 44,850 4.00 N/A
FSBW
Total capital to risk-
weighted assets 93,324 18.67 40,003 8.00 $50,003 10.00%
Tier 1 capital to risk-
weighted assets 87,073 17.42 20,001 4.00 30,002 6.00
Tier 1 leverage capital
to average assets 87,073 9.30 37,459 4.00 46,824 5.00
IEB
Total capital to risk-
weighted assets 17,545 13.14 10,685 8.00 13,357 10.00
Tier 1 capital to risk-
weighted assets 16,118 12.07 5,343 4.00 8,014 6.00
Tier 1 leverage capital
to average assets 16,118 8.97 7,187 4.00 8,984 5.00
82
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS (continued)
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1997:
The Company-consolidated
Total capital to risk-
weighted assets $143,811 26.77% $42,977 8.00% N/A
Tier 1 capital to risk-
weighted assets 137,095 25.52 21,488 4.00 N/A
Tier 1 leverage capital
to average assets 137,102 13.68 39,465 4.00 N/A
FSBW
Total capital to risk-
weighted assets 96,826 23.68 32,692 8.00 $40,864 10.00%
Tier 1 capital to risk-
weighted assets 91,715 22.44 16,346 4.00 24,519 6.00
Tier 1 leverage capital
to average assets 91,714 11.56 31,746 4.00 39,682 5.00
IEB
Total capital to risk-
weighted assets 23,229 19.08 9,738 8.00 12,173 10.00
Tier 1 capital to risk-
weighted assets 21,806 17.91 4,869 4.00 7,304 6.00
Tier 1 leverage capital
to average assets 21,814 12.08 7,226 4.00 9,033 5.00
Company management believes, as of March 31, 1998, the Company, FSBW and IEB
individually met all capital adequacy requirements to which they were subject.
Additionally, as of March 31, 1998, the most recent notification from the FDIC
individually categorized the Banks as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized," a bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table above. There
are no conditions or events since that notification that management believes
have changed their individual category.
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<PAGE>
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multifamily mortgages.
In 1994, the federal banking agencies jointly revised their capital standards
to specify that concentration of credit and nontraditional activities are
among the factors that the agencies will consider in evaluating capital
adequacy. In that year, the FDIC amended its risk-based capital standards
with respect to the risk weighting of loans made to finance the purchase or
construction of multifamily residences. Management believes that the effect
of including such an interest rate risk component in the calculation of
risk-adjusted capital will not cause the Company and the Banks to cease to be
well-capitalized. In June 1996, the FDIC and certain other federal banking
agencies issued a joint policy statement providing guidance on prudent
interest rate risk management principles. The agencies stated that they would
determine banks' interest rate risk on a case-by-case basis, and would not
adopt a standardized measure or establish an explicit minimum capital charge
for interest rate risk.
Note 18: CONTINGENCIES
In the normal course of business, the Company and/or its subsidiaries have
various legal claims and other contingent matters outstanding. The Company
believes that any liability ultimately arising from these actions would not
have a material adverse effect on the results of operations or consolidated
financial position at March 31, 1998.
Note 19: INTEREST RATE RISK
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), product caps and floors, and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company.
The Company's primary monitoring tool for assessing interest rate risk is
"asset/liability simulation modeling," which is designed to capture the
dynamics of balance sheet, interest rate and spread movements, and to quantify
variations in net interest income and net market value resulting from those
movements under different rate environments. Another monitoring tool used by
the Company to assess interest rate risk is "gap analysis." The matching of
repricing characteristics of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Company's interest sensitivity "gap."
Management is aware of the sources of interest rate risk and in its opinion
actively monitors and manages it to the extent possible, and considers that
the Company's current level of interest rate risk is reasonable.
84
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Note 20: COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of net assets acquired (goodwill) consisted of the following
(in thousands):
March 31
-----------------
1998 1997
---- ----
Inland Empire Bank, net of accumulated
amortization of $1,491,000 and $592,000, respectively. $11,007 11,906
======= ======
Costs in excess of net assets acquired result from business combinations
accounted for as a purchase of assets and an assumption of liabilities.
Goodwill is amortized using the straight-line method over the period that is
expected to be benefited of 14 years. The Company periodically evaluates
goodwill for impairment.
Note 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March 31
(in thousands):
1998 1997
---------------------- -----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------- ---------- --------- ----------
Assets:
Cash $ 42,529 $ 42,529 $ 24,488 $ 24,488
Securities available
for sale 302,419 302,419 287,516 287,516
Securities held to
maturity 194 194 987 987
Loans receivable held
for sale 12,436 12,436 2,940 2,940
Loans receivable 744,481 752,420 642,941 651,813
Accrued interest
receivable 7,569 7,569 6,950 6,950
FHLB stock 16,050 16,050 12,807 12,807
Mortgage servicing
rights 698 836 354 360
Liabilities:
Demand, NOW and Money
Market accounts 177,880 177,880 170,499 170,499
Regular savings 42,084 42,084 44,131 44,131
Certificates of deposit 371,607 373,635 330,337 330,887
Advance payments by
borrowers for taxes
and insurance 4,153 4,153 4,112 4,112
FHLB advances 297,549 299,153 231,515 228,966
Other borrowings 91,723 91,709 62,185 61,628
Off-balance-sheet financial
instruments:
Commitments to sell
loans $ 0 $ 0 $ 0 $ 0
Commitments to
originate loans 0 0 0 0
Commitments to purchase
securities 0 0 0 0
Commitments to sell
securities 0 0 0 0
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<PAGE>
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial and off-balance-sheet instruments:
Cash: The carrying amount of these items is a reasonable estimate of their
fair value.
Securities: The estimated fair values of investment securities and
mortgaged-backed securities available for sale and held to maturity are based
on quoted market prices or dealer quotes.
Loans Receivable: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
multifamily real estate, residential mortgage, nonresidential,
agriculture/commercial, consumer and other. Each loan category is further
segmented into fixed- and adjustable-rate interest terms and by performing and
nonperforming categories.
The fair value of performing residential mortgages held for sale is estimated
based upon secondary market sources by type of loan and terms such as fixed or
variable interest rates. For performing loans held in portfolio, the fair
value is based on discounted cash flows using as a discount rate the current
rate offered on similar products.
Fair value for significant nonperforming loans is based on recent appraisals
or estimated cash flows discounted using rates commensurate with risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
FHLB Stock: The fair value is based upon the redemption value of the stock
which equates to its carrying value.
Deposit Liabilities: Under SFAS No. 107, the fair value of deposits with no
stated maturity, such as savings, checking and NOW accounts, is equal to the
amount payable on demand. The market value of certificates of deposit is
based upon the discounted value of contractual cash flows. The discount rate
is determined using the rates currently offered on comparable instruments.
FHLB Advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is estimated based on discounting the estimated future cash flows
using rates currently available to the Company for debt with similar remaining
maturities.
Commitments: Commitments to sell loans with a notational balance of $6,037,000
and $2,951,000 at March 31, 1998 and 1997, respectively, have a carrying value
of zero, representing the cost of such commitments. Commitments to originate
loans, $74,087,000 and $36,779,000 at March 31, 1998 and 1997, respectively,
also have a carrying value of zero. There were no commitments to purchase or
sell securities at March 31, 1998. The fair value of such commitments is
also estimated to be zero based upon current market rates for similar loans
and any fees received to enter into similar agreements.
Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1998. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business. The fair value has not been estimated for assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not financial instruments include the mortgage banking
operations; deferred tax assets/liabilities; land, building and equipment;
costs in excess of net assets acquired; and real estate held for sale.
86
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Note 22: FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. (FWWB)
(PARENT COMPANY ONLY)
Summary financial information as of March 31 (in thousands):
FWWB
Balance Sheets
March 31, 1998 and 1997
1998 1997
--------- --------
ASSETS
Cash $ 13,177 $ 893
Investments available for sale 11,978 14,020
Loan receivable, ESOP 7,414 7,956
Investment in subsidiaries 116,946 125,187
Deferred tax asset 194 230
Other assets 2,120 1,779
--------- --------
$ 151,829 $150,065
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities 1,645 1,429
Stockholders' equity 150,184 148,636
--------- --------
$ 151,829 $150,065
========= ========
FWWB
Statements of Income
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Certificates and time deposits $ 107 $ 62 $ 26
Investments 553 1,403 1,054
ESOP loan 678 724 313
OTHER INCOME:
Equity in undistributed income of
subsidiaries 13,201 8,719 5,612
Miscellaneous -- 25 --
-------- ------- --------
14,539 10,933 7,005
OTHER EXPENSE:
Compensation, payroll taxes and
fringe benefits 489 409 64
Other expense 971 888 345
-------- ------- --------
13,079 9,636 6,596
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (43) 322 344
-------- ------- --------
NET INCOME $ 13,122 $ 9,314 $ 6,252
======== ======= ========
87
<PAGE>
<PAGE>
FWWB
Statements of Cash Flows
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 13,122 $ 9,314 $ 6,252
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries (13,201) (8,719) (5,612)
Net amortization of investment
discounts (553) (1,403) --
Amortization of MRP liability 339 254 --
(Increase) decrease in deferred
taxes 101 (230) --
(Increase) decrease in other assets (327) (486) (1,285)
Increase (decrease) in other
liabilities 22 199 543
-------- ------- --------
Net cash used by operating
activities (497) (1,071) (102)
-------- ------- --------
INVESTING ACTIVITIES:
Purchase of securities available
for sale (164,686) (446,308) (440,626)
Principal repayments and
maturities of securities
available for sale 167,290 486,739 387,572
Funds transferred to deferred
compensation trust (80) (75) --
Acquisition of wholly owned
subsidiary: 1997-IEB, 1996-FSBW -- (32,833) (53,681)
Dividends received from subsidiaries 26,545 4,515 8,560
Loan provided to FSBW's ESOP for
purchase of common stock -- -- (8,728)
Principal repayments - FSBW's
ESOP loan 542 475 297
Additional investment in subsidiaries (216) (166) (41)
-------- ------- --------
Net cash provided (used) by
investing activities 29,395 12,347 (106,647)
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of underwriting costs -- -- 107,361
Purchases of treasury stock (13,993) (12,905) --
Repurchase of forfeited MRP shares (38) -- --
Proceeds from sale of treasury
stock to FSBW -- 4,320 --
Cash dividends paid (2,583) (1,907) (504)
Contribution from (reimbursement to)
wholly owned subsidiary -- -- (62)
-------- ------- --------
Net cash provided (used) by
financing activities (16,614) (10,492) 106,795
-------- ------- --------
NET INCREASE (DECREASE) IN CASH 12,284 784 46
CASH, BEGINNING OF PERIOD 893 109 63
-------- ------- --------
CASH, END OF PERIOD $ 13,177 $ 893 $ 109
======== ======= ========
88
<PAGE>
<PAGE>
FWWB
Statements of Cash Flows
For the years ended March 31, 1998, 1997 and 1996
(continued)
1998 1997 1996
-------- ------- --------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ -- $ -- $ --
Taxes paid $ 16 $ 505 $ --
Non-cash transactions:
Net change in accrued dividends
payable $ 149 $ 178 $ 504
Reduction of initial investment in
subsidiary for loan advanced
to ESOP $ -- $ -- $ 8,728
Increase of investment in
subsidiary for shares released
to ESOP participants as
compensation $ 1,642 $ 417 $ 515
Net change in unrealized gain
(loss) in deferred compensation
trust & related liability,
including subsidiaries $ 1,536 $ 493 $ --
Treasury stock forfeited by MRP,
including subsidiaries $ 6 $ 6 $ --
Recognize tax benefit of vested
MRP shares, including
subsidiaries $ 231 $ -- $ --
Note 23: CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
In October 1995, the Company converted from the mutual holding company to the
stock holding company form of organization. At the time, the Company
established a liquidation account in an amount equal to its equity, as
reflected in the latest statement of financial condition used in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts at
FSBW after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event
of a complete liquidation of the Company, each FSBW eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
Subsequent to the conversion, the Company may not declare or pay cash
dividends on, or repurchase, any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Note 24: STOCK REPURCHASE
On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of 545,525 shares of
its outstanding common stock. On November 20, 1996, the Company's Board of
Directors approved continuance of the stock repurchase program authorizing the
purchase of up to 10% of total shares outstanding over the next 12 months, and
in November 1997 the Board of Directors authorized a continuance of the stock
repurchase program with no specific repurchase target. As of March 31, 1998,
the Company has repurchased a total of 1,359,394 shares at an average price of
$19.79 per share. The Company has reserved 436,425 shares for its MRP of
which 401,722 shares were awarded as of March 31, 1998 (see Note 16 to
financial statements). The remaining 34,703 unallocated shares are held as
treasury stock reserved for the MRP. Management reissued 775,884 treasury
shares subsequent to year end in connection with the acquisition of Towne
Bancorp, Inc. (see Note 2).
89
<PAGE>
<PAGE>
Note 25: EARNINGS PER SHARE
Earnings per share information is not meaningful for any periods prior to
December 31, 1995, since the Company's stock was issued on October 31, 1995.
Earnings per share are not presented for periods prior to conversion to stock
form as FSBW was a wholly-owned subsidiary of a mutual holding company.
Years ended March 31
(in thousands)
---------------------------
1998* 1997* 1996
---- ---- ----
Total shares issued 10,911 10,911 N/A
Less treasury stock
including shares allocated to MRP (963) (488)
Less unallocated shares held by the ESOP (749) (811)
------ ------ ------
Basic weighted average shares outstanding 9,199 9,612 N/A
------ ------ ------
Plus MRP and stock option incremental
shares considered outstanding for diluted
EPS calculations 374 127
------ ------
Diluted weighted average shares outstanding 9,573 9,739 N/A
====== ====== ======
* Weighted average shares, restated under provisions of SFAS No. 128 (see
Note 1)
Note 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis were as follows (in thousands):
Year ended March 31, 1998
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 20,062 $ 21,311 $ 21,837 $ 21,937
Interest expense 10,721 11,754 12,038 12,138
-------- -------- -------- --------
Net interest income 9,341 9,557 9,799 9,799
Provision for loan losses 355 400 375 498
-------- -------- -------- --------
Net interest income after
provision for loan losses 8,986 9,157 9,424 9,301
Non-interest income 955 1,114 1,249 1,402
Non-interest expense 4,911 5,137 5,517 5,455
-------- -------- -------- --------
Income before provision for
income taxes 5,030 5,134 5,156 5,248
Provision for income taxes 1,785 1,837 1,951 1,873
-------- -------- -------- --------
Net operating income $ 3,245 $ 3,297 $ 3,205 $ 3,375
======== ======== ======== ========
Basic earnings per share $ 0.35 $ 0.36 $ 0.35 $ 0.38
Diluted earnings per share $ 0.34 $ 0.34 $ 0.34 $ 0.36
Cash dividends declared $ 0.07 $ 0.07 $ 0.07 $ 0.09
90
<PAGE>
<PAGE>
Note 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED), continued
Results of operations on a quarterly basis were as follows (in thousands):
Year ended March 31, 1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 13,785 $ 16,648 $ 18,264 $ 18,595
Interest expense 7,566 9,007 9,791 10,008
-------- -------- -------- --------
Net interest income 6,219 7,641 8,473 8,587
Provision for loan losses 513 407 231 272
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,706 7,234 8,242 8,315
Non-interest income 435 575 1,173 887
Non-interest expense 2,864 6,842 4,865 4,759
-------- -------- -------- --------
Income before provision for
income taxes 3,277 967 4,550 4,443
Provision for income taxes 884 164 1,444 1,431
-------- -------- -------- --------
Net operating income $ 2,393 $ 803 $ 3,106 $ 3,012
======== ======== ======== ========
Basic earnings per share $ 0.24 $ 0.08 $ 0.32 $ 0.32
Diluted earnings per share $ 0.24 $ 0.08 $ 0.32 $ 0.31
Cash dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.07
Year ended March 31, 1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 9,170 $ 9,310 $ 10,733 $ 12,196
Interest expense 5,566 5,710 5,622 6,389
-------- -------- -------- --------
Net interest income 3,604 3,600 5,111 5,807
Provision for loan losses 37 75 156 256
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,567 3,525 4,955 5,551
Non-interest income 526 451 153 459
Non-interest expense 2,649 2,381 2,460 2,814
-------- -------- -------- --------
Income before provision for
income taxes 1,444 1,595 2,648 3,196
Provision for income taxes 369 442 830 990
-------- -------- -------- --------
Net operating income $ 1,075 $ 1,153 $ 1,818 $ 2,206
======== ======== ======== ========
Basic earnings per share $ (*) $ (*) $ (*) $ 0.22
Diluted earnings per share $ (*) $ (*) $ (*) $ 0.22
Cash dividends declared $ N/A $ N/A $ 0.05 $ 0.05
(*)The Company converted from mutual to stock ownership on October 31, 1995;
therefore earnings per share information is meaningful only for the fourth
quarter of fiscal year 1996.
91
<PAGE>
<PAGE>
First Savings Bank of Washington Bancorp, Inc.
Index of Exhibits
Exhibit
- ------------------------------------------------------------------------------
3{a} Certificate of Incorporation of Registrant [incorporated by reference
to Registration Statement on Form S-1, as amended (File No. 33-93386).]
3{b} Bylaws of Registrant [incorporated by reference to exhibits filed with
the Quarterly Report on Form 10-Q for the quarter ended December 31,
1997 (File No. 0-26584)]
10{a} Employment Agreement with Gary L. Sirmon. [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584).]
10{b} Executive Salary Continuation Agreement with Gary L. Sirmon
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{c} Employment Agreement with D. Allan Roth. [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584).]
10{d} Executive Salary Continuation Agreement with D. Allan Roth.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{e} Employment Agreement with Michael K. Larsen [incorporated by reference
to exhibits filed with the Annual Report on Form 10-k dated March 31,
1996 (File No. 0-26584).]
10{f} Executive Salary Continuation Agreement with Michael K. Larsen.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{g} 1996 Stock Option Plan [(incorporated by reference to Exhibit A to the
Proxy Statement for the Annual Meeting of Stockholders held on July 26,
1996).
10{h} 1996 Management Recognition and Development Plan (incorporated by
reference to Exhibit B to the Proxy Statement for the Annual Meeting of
Stockholders held on July 26, 1996).
10{i} Employment and Non-competition Agreement with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (File No. 0-26584)].
10{j} Supplemental Retirement Plan as Amended with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (File No. 0-26584)]
10{k} Towne Bank of Woodinville 1992 Stock Option Plan [incorporated by
reference to exhibits filed with the Registration Statement on Form S-8
dated April 2, 1998 (File No. 333-49193)]
21 Subsidiaries of the Registrant.
23 Independent Auditors Consent.
27 Financial Data Schedule.
92
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Savings Bank of Washington Bancorp, Inc.
Percentage of Jurisdiction of
Subsidiaries ownership State of Incorporation
- ------------ ------------- ----------------------
First Savings Bank of
Washington (1) 100% Washington
Inland Empire Bank (1) 100% Oregon
Towne Bank of Woodinville (1) 100% Washington
Northwest Financial
Corporation (2) 100% Washington
- ------------
(1) Wholly-owned by the First Savings Bank of Washington Bancorp, Inc.
(2) Wholly-owned by the First Savings Bank of Washington
<PAGE>
<PAGE>
EXHIBIT 23
[Deloitte & Touche LLP Letterhead]
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
333-10819 and 333-49193 of First Savings Bank of Washington Bancorp, Inc. on
Form S-8 of our report dated May 22, 1998, appearing in the Annual Report on
Form 10-K of First Savings Bank of Washington Bancorp, Inc. for the year ended
March 31, 1998.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
June 26, 1998
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended......................... March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ------------
Commission File Number 0-26584
-----------
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1691604
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 S. First Avenue Walla Walla, Washington 99362
--------------------------------------------------------
(Address of principal executive offices and zip code)
(509) 527-3636
---------------
(Registrant's telephone number, including area code)
N/A
-----------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock $.01 par value per share
-------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to
this form 10-K. x
-----
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of May 31, 1998:
Common Stock - $282,954,432
The number of shares outstanding of the issuer's classes of common stock as of
May 31, 1998:
Common Stock, $.01 par value - 10,635,437 shares
<PAGE>
<PAGE>
DOCUMENT INCORPORATED BY REFERENCE
Portions of Proxy Statement for Annual Meeting of Shareholders to be held July
24, 1998 are incorporated by reference into Part III.
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC., AND SUBSIDIARIES
Table of Contents
PART I Page #
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Acquisition and Mergers . . . . . . . . . . . . . . . . . . . 4
Adoption of Dividend Reinvestment and Stock Purchase Plan . . 4
Lending Activities. . . . . . . . . . . . . . . . . . . . . . 4
Asset Quality . . . . . . . . . . . . . . . . . . . . . . . . 12
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . 14
Investment Activities . . . . . . . . . . . . . . . . . . . . 18
Deposit Activities and Other Sources of Funds . . . . . . . . 22
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Environmental Regulation. . . . . . . . . . . . . . . . . . . 26
Competition . . . . . . . . . . . . . . . . . . . . . . . . . 26
Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . 27
Management Personnel. . . . . . . . . . . . . . . . . . . . . 32
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 33
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 33
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 35
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation . . . . . . . . . . . . . 37
Comparison of Results of Operations
March 31, 1998 vs. 1997 . . . . . . . . . . . . . . . . 39
March 31, 1997 vs. 1996 . . . . . . . . . . . . . . . . 41
Market Risk and Asset/ Liability Management. . . . . . . . 46
Liquidity and Capital Resources. . . . . . . . . . . . . . 49
Capital Requirements . . . . . . . . . . . . . . . . . . . 50
Effect of Inflation and Changing Prices. . . . . . . . . . 50
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 50
Item 9. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure . . . . . . . . . . . 50
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . 51
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . 51
Item 13. Certain Relationships and Related Transactions. . . . . . . . 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 52
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . 53
2
<PAGE>
<PAGE>
PART 1
Item 1 - Business General
First Savings Bank of Washington Bancorp, Inc. (the Company), a Delaware
corporation, is primarily engaged in the business of planning, directing, and
coordinating the business activities of its wholly owned subsidiaries, First
Savings Bank of Washington (FSBW) and Inland Empire Bank (IEB) (together, the
Banks). FSBW is a Washington-chartered savings bank the deposits of which are
insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings
Association Insurance Fund (SAIF). FSBW conducts business from its main office
in Walla Walla, Washington and its sixteen branch offices and three loan
production offices located in southeast, central, north central and western
Washington. IEB is an Oregon-chartered commercial bank whose deposits are
insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts
business from its main office in Hermiston, Oregon and its five branch offices
and two loan production offices located in northeast Oregon. The Company's
main office is located at 10 S. First Avenue, Walla Walla, WA 99362 and its
telephone number is (509) 527-3636.
The operating results of the Company depend substantially on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of loans and securities, and interest expense on interest-
bearing liabilities, composed primarily of deposits and borrowings. Net
interest income is a function of the Company's interest rate spread, which is
the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities. The Company's net income also is affected by
provisions for loan losses and the level of its other income, including
deposit service charges, loan and servicing fees, and gains and losses on the
sale of loans and securities, as well as its non-interest operating expenses
and income tax provisions.
First Savings Bank of Washington is a community oriented savings bank which
has traditionally offered a wide variety of deposit products to its retail
customers while concentrating its lending activities on real estate loans.
Lending activities have been focused primarily on the origination of loans
secured by one- to four-family residential dwellings, including emphasis on
loans for construction of residential dwellings. To a lesser extent, lending
activities also have included the origination of multi-family, commercial real
estate and consumer loans. FSBW's primary business has been that of a
traditional thrift institution, originating loans for portfolio in its primary
market area. FSBW has also been an active participant in the secondary
market, originating residential loans for sale and on occasion acquiring loans
for portfolio. More recently, FSBW has begun making non-mortgage commercial
and agribusiness loans to small businesses and farmers. In addition to loans,
FSBW has maintained a significant portion of its assets in marketable
securities. The securities portfolio has been weighted toward mortgage-backed
securities secured by one- to four-family residential properties. This
portfolio also has included a significant amount of tax exempt municipal
securities, primarily issued by entities located in the State of Washington.
In addition to interest income on loans and investment securities, FSBW
receives other income from deposit service charges, loan servicing fees and
from the sale of loans and investments. FSBW has sought to increase its other
income by retaining loan servicing rights on some of the loans that it has
sold. FSBW also has a wholly-owned subsidiary, Northwest Financial
Corporation, which serves as the trustee under FSBW's mortgage loan documents,
is engaged in real estate sales, and receives commissions from the sale of
annuities.
Inland Empire Bank is a community oriented commercial bank which historically
has offered a wide variety of deposits and loan products to its consumer and
commercial customers. Lending activities have included origination of
consumer, commercial, agribusiness and real estate loans. IEB also has
engaged in mortgage banking activity with respect to residential lending
within its local markets, originating loans for sale generally on a servicing
released basis. Additionally, IEB has maintained a significant portion of its
assets in marketable securities, particularly U.S. Treasury and government
agency securities as well as tax exempt municipal securities issued primarily
by entities located in the State of Oregon. IEB operates a division, Inland
Financial Services, which offers insurance and brokerage services to its
customers. IEB has two wholly owned subsidiaries: Pioneer American Property
Company, which owns a building that is leased to IEB, and Inland Securities
Corporation, which previously made a market for IEB's stock but is currently
inactive.
The Company and the Banks are subject to regulation by the Federal Reserve
Board (FRB) and the FDIC, the State of Washington Department of Financial
Institutions, Division of Banks (Division), and the State of Oregon Department
of Consumer and Business Services.
3
<PAGE>
<PAGE>
Acquisitions and Mergers
Towne Bank
On April 1, 1998 the Company completed the acquisition of Towne Bancorp, Inc.
(TB). The Company paid approximately $28.1 million in cash and common stock
for all of the outstanding common shares and stock options of TB. The Company
issued 775,884 shares of stock and paid out $7.65 million in cash to TB
shareholders in connection with the completion of the acquisition. TB is the
holding company for Towne Bank, headquartered in Woodinville, Washington, a
Seattle suburb. The acquisition will be accounted for as a purchase and will
result in the recording of approximately $19.2 million of costs in excess of
the fair value of Towne Bank net assets acquired (goodwill). Goodwill assets
will be amortized over a 14 year period and will result in a charge to
earnings to approximately $1,375,000 per year. Founded in 1991, Towne Bank is
a community business bank with approximately $146 million in total assets,
$134 million in deposits, $120 million in loans and $9.3 million in
shareholders' equity at March 31, 1998. Towne Bank operates four full service
branches in the Seattle, Washington metropolitan area in Woodinville, Redmond,
Bellevue and Renton and plans to open its Bothell branch in June 1998.
Whatcom State Bancorp, Inc.
On June 15, 1998 the Company announced the signing of a definitive agreement
to acquire Whatcom State Bancorp, Inc., in an all stock offer valued at
approximately $12.5 million, including the assumption of outstanding Whatcom
State Bancorp stock options. Whatcom State Bancorp, Inc., the holding company
for Whatcom State Bank in Bellingham, Washington, is not a publicly traded
institution. This valuation represents 2.10 times book value and 19.6 times
earnings for the twelve months ended March 31, 1998 for Whatcom State Bancorp,
Inc. According to the terms of the definitive agreement, the Company will
exchange 0.697 shares of its common stock for each Whatcom State Bancorp
share. The acquisition, which has been approved by the Boards of Directors of
each company, is subject to, among other contingencies, approval by regulators
and Whatcom State Bancorp shareholders. The transaction is expected to close
by the end of the third quarter of fiscal 1999.
Founded in 1980, Whatcom State Bank is a commercial community bank with
approximately $89.4 million in assets, $76.5 million in deposits, $67.6
million in loans and $5.9 million in shareholders' equity at March 31, 1998.
Whatcom State Bank operates five full service branches serving the communities
of Bellingham, Ferndale, Lynden, Blaine and Point Roberts. It also operates
the Mt. Baker Home Loan Center in Oak Harbor. Whatcom State Bank has focused
its lending operations on small business and consumer loans within Whatcom
County, although it has recently expanded its real estate lending activities
to include areas of Island County serviced by the Mt. Baker Home Loan Center.
Adoption of Dividend Reinvestment and Stock Purchase Plan
In October 1997, the Company adopted a dividend reinvestment and stock
purchase plan. Under the terms of the plan all registered stockholders with
100 or more shares of stock may automatically reinvest all or a portion of
their cash dividends in additional shares of the Company's common stock. In
addition, qualifying participants may also make optional monthly cash payments
of $50 to $1,500 to purchase additional shares of Company stock.
Lending Activities
General: Historically, the Banks have offered a wide range of loan products
to meet the demands of their customers. The Banks originate loans for both
their own loan portfolios and for sale in the secondary market. Management's
strategy has been to maintain a significant percentage of assets in these loan
portfolios in loans with more frequent repricing terms or shorter maturities
than traditional long term fixed-rate mortgage loans. As part of this effort,
the Banks have developed a variety of floating or adjustable-rate products.
In response to customer demand, however, both Banks continue to originate
fixed-rate loans including fixed-rate mortgage loans with terms up to 30
years. The relative amount of fixed-rate loans and adjustable-rate loans that
can be originated at any time is largely determined by the demand for each in
a competitive environment.
FSBW's primary lending focus is on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences and loans for the
construction of one- to four-family residences. FSBW also originates, to a
lesser degree, consumer, commercial real estate, multi-family real estate and
land loans. More recently, FSBW has begun marketing non-mortgage commercial
and agribusiness loans to small businesses and farmers. Management expects
this type of lending to increase at FSBW. At March 31, 1998, FSBW's net loan
portfolio totaled $601.8 million. Over 73% of the FSBW's first mortgage loans
are secured by properties located in the State of Washington.
4
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The aggregate amount of loans that FSBW is permitted to make under applicable
federal regulations to any one borrower, including related entities, is the
greater of 15% of unimpaired capital and surplus or $500,000. At March 31,
1998, the maximum amount which FSBW could have lent to any one borrower and
the borrower's related entities was $13.5 million. At March 31, 1998, FSBW
had no loans to one borrower with an aggregate outstanding balance in excess
of this amount. FSBW had 38 borrowers with total loans outstanding in excess
of $2.0 million at March 31, 1998. At that date, the largest amount
outstanding to any one borrower and the borrower's related entities totaled
$9.6 million, which consisted of 35 single family, land development and lot
loans in the Tacoma, Bellevue and Tri-Cities, Washington; and Portland, Oregon
areas. At March 31, 1998, these loans were performing in accordance with
their terms.
Lending activities at Inland Empire Bank have included origination of
consumer, commercial, agribusiness and commercial real estate loans. In
particular, IEB has developed significant expertise and market share with
respect to small business and agricultural loans within its local markets. In
addition, IEB has originated one- to four-family residential real estate loans
for sale in the secondary market.
At March 31, 1998, IEB's net loan portfolio totaled $122.6 million. The
aggregate amount of loans that IEB is permitted to make under applicable state
and federal regulations to any one borrower, including related entities, is
15% of the aggregate paid-up and unimpaired capital and surplus. At March 31,
1998, the maximum amount IEB could have lent to any one borrower and the
borrower's related entities was $4.1 million. At that date, the largest
amount outstanding to any one borrower of IEB totaled $3.0 million.
One- to Four-Family Residential Real Estate Lending: The Banks originate
loans secured by first mortgages on owner-occupied, one- to four-family
residences and loans for the construction of one- to four-family residences in
the communities where they have established full service branches. In
addition, the Banks operate loan production offices in Bellevue, Puyallup, and
Spokane, Washington and LaGrande and Condon, Oregon. FSBW also has a
significant relationship with a mortgage loan broker in the greater Portland,
Oregon market. At March 31, 1998, $423.8 million, or 51.5% of the Company's
loan portfolio, consisted of permanent loans on one- to four-family
residences.
Historically, FSBW has originated both fixed-rate loans and adjustable-rate
residential loans for its portfolio. Since the early 1980s, FSBW has
restructured its loan portfolio to reflect a larger percentage of
adjustable-rate loans. Fifteen and 30-year fixed-rate residential loans
generally have been sold into the secondary market; however, a portion of the
fixed-rate loans originated by FSBW have been retained in the loan portfolio
to meet asset/liability management objectives. The number of fixed-rate loans
retained by FSBW increased substantially during 1996 and remained high in
fiscal years 1998 and 1997 in response to the capital deployment and growth
objectives of the Company. For the past six months FSBW has been selling a
larger portion of its newly originated fixed rate loans as a part of its
interest rate risk management strategy.
Historically, Inland Empire Bank has sold most of its residential loans into
the secondary market and has continued to so do subsequent to its acquisition
by the Company. Generally IEB has sold loans on a servicing-released basis
such that no revenue is realized by IEB after the sale.
In the loan approval process, the Banks assess the borrower's ability to repay
the loan, the adequacy of the proposed security, the employment stability of
the borrower and the creditworthiness of the borrower. As part of the loan
application process, qualified independent appraisers inspect and appraise the
security property. All appraisals are subsequently reviewed by a loan
underwriter and, if necessary, by the Banks' chief appraiser.
The Banks' residential loans are generally underwritten and documented in
accordance with the guidelines established by Freddie Mac and Fannie Mae.
Government insured loans are generally underwritten and documented in
accordance with the guidelines established by the Department of Housing and
Urban Development (HUD) and the Veterans Administration (VA). The Banks' loan
underwriters are approved as underwriters under HUD's delegated underwriter
program.
The Banks sell whole loans on either a servicing-retained or servicing-
released basis. All loans are sold without recourse. Occasionally, the Banks
will sell a participation interest in a loan or pool of loans to an investor.
In these instances, the Banks retain a small percentage of the loan(s) and
pass through a net yield to the investor on the percentage sold. The decision
to hold or sell loans is based on asset/liability management goals and
policies and market conditions. Recently, FSBW has retained a portion of its
conventional fixed-rate and adjustable-rate mortgage originations and sold all
of its government insured loans into the secondary market. IEB has continued
to sell most of its residential loan originations.
5
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The Banks offer adjustable-rate mortgages (ARMs) at rates and terms
competitive with market conditions. The Banks offer several ARM products which
adjust annually after an initial period ranging from one to five years subject
to a limitation on the annual increase of 1.0% to 2.0% and an overall
limitation of 5.0% to 6.0%. Certain ARM loans are originated with an option
to convert the loan to a 30-year fixed-rate loan at the then prevailing market
interest rate. Generally these ARM products utilize the weekly average yield
on one-year U.S. Treasury securities adjusted to a constant maturity of one
year plus a margin of 2.75% to 3.25%. ARM loans held in the Banks' portfolios
do not permit negative amortization of principal and carry no prepayment
restrictions. Borrower demand for ARM loans versus fixed-rate mortgage loans
is a function of the level of interest rates, the expectations of changes in
the level of interest rates and the difference between the initial interest
rates and fees charged for each type of loan. In recent years borrower demand
for ARM loans has been limited and the Banks have chosen not to aggressively
pursue ARM loans by offering minimally profitable deeply discounted teaser
rates. As a result ARM loans have represented only a small portion of loans
originated during this period.
The retention of ARM loans in the Banks' loan portfolios can help reduce the
Company's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased interest
to be paid by the customer due to increases in interest rates. It is possible
that, during periods of rising interest rates, the risk of default on ARM
loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, because the ARM loans originated by the Banks
generally provide, as a marketing incentive, for initial rates of interest
below the rates which would apply were the adjustment index plus the margin
used for pricing initially, these loans are subject to increased risks of
default or delinquency. The Banks attempt to reduce the potential for
delinquencies and defaults on ARM loans by qualifying the borrower based on
the borrower's ability to repay the ARM loan assuming that the maximum
interest rate that could be charged at the first adjustment period remains
constant during the loan term. Another consideration is that although ARM
loans allow the Banks to increase the sensitivity of their asset bases to
changes in the interest rates, the extent of this interest sensitivity is
limited by the periodic and lifetime interest rate adjustment limits (caps).
Because of these considerations, the Company has no assurance that yields on
ARM loans will be sufficient to offset increases in its cost of funds.
It is the Banks' present policy to lend up to 95% of the lesser of the
appraised value of the property or purchase price of the property on
conventional loans, although ARM loans are normally restricted to not more
than 90%. Higher loan-to-value ratios are available on certain government
insured programs. The Banks generally require private mortgage insurance on
residential loans with a loan-to-value ratio at origination exceeding 80%.
Construction and Land Lending: Since 1988, FSBW has invested a significant
proportion of its loan portfolio in residential construction loans to
professional home builders. This activity has been prompted by favorable
economic conditions in the Northwest, lower long-term interest rates and an
increased demand for housing units as a result of the migration of people from
other parts of the country to the Northwest. To a lesser extent, FSBW also
originates land loans. IEB also originates construction and land loans
although to a much smaller degree than FSBW. At March 31, 1998, construction
and land loans totaled $108.5 million, or 15.3% of total loans of the Company.
Construction loans made by both Banks include both those with a sale contract
or permanent loan in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period. The Banks monitor the number of unsold homes in
their construction loan portfolios, and generally maintain the portfolios so
that no more than 60-70% of their construction loans are secured by homes for
which there is not a sale contract in place.
Construction and land lending affords the Banks the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than
single-family permanent mortgage lending because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. The nature of these loans is such that they
are generally more difficult to evaluate and monitor. If the estimate of
construction cost proves to be inaccurate, the Banks may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves to be
inaccurate, the Banks may be confronted at, or prior to, the maturity of the
loan with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and
builders and by the failure of builders to pay subcontractors. Loans to
builders to construct homes for which no purchaser has been identified carry
more risk because the payoff for the loan is dependent on the builder's
ability to sell the property prior to the time that the construction loan is
due. The Banks have sought to address these risks by adhering to strict
underwriting policies, disbursement procedures, and monitoring practices.
The maximum number of speculative loans approved for each builder is based on
a combination of factors, including the financial capacity of the builder, the
market demand for the finished product, and the ratio of sold to unsold
inventory the builder maintains. The Banks have chosen to diversify the risk
associated with speculative construction lending by doing business with a
large number of smaller builders spread over a relatively large geographic
area.
6
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Loans for the construction of one- to four-family residences are generally
made for a term of 12 months. The Banks' loan policies include maximum
loan-to-value ratios of up to 80% for speculative loans. Each individual
speculative loan request is supported by an independent appraisal of the
property and the loan file includes a set of plans, a cost breakdown and a
completed specifications form. All speculative construction loans must be
approved by senior loan officers. At March 31, 1998, the Company's
speculative construction portfolio included loans to 138 individual builders
in 71 separate communities. At March 31, 1998, the Company had 18 home
builders, who individually in the aggregate, had construction loans
outstanding with balances exceeding $1.0 million.
The Company regularly monitors the construction loan portfolio and the
economic conditions and housing inventory in each of its markets and will
decrease construction lending if it perceives there are unfavorable market
conditions. The Company believes that the internal monitoring system in place
mitigates many of the risks inherent in its construction lending.
To a much lesser extent, the Banks make land loans to developers, builders and
individuals to finance the acquisition and/or development of improved lots or
unimproved land. In making land loans the Banks follow underwriting policies
and disbursement procedures similar to those for construction loans. The
initial term on land loans is typically one to three years with interest only
payments, payable monthly, and provisions for principal reduction as lots are
sold and released.
Multifamily and Commercial Real Estate Lending: The Banks also originate loans
secured by multifamily and commercial real estate. At March 31, 1998, the
Company's loan portfolio included $74.1 million in multifamily and $112.0
million in commercial real estate loans (including construction lending).
Multifamily and commercial real estate lending affords the Banks an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. However, loans secured by such
properties are generally greater in amount, more difficult to evaluate and
monitor and, therefore, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
multifamily and commercial properties are often dependent on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy.
Multifamily and commercial real estate loans originated by the Banks are
predominately fixed rate loans with intermediate terms of 10 years. Rates on
these ARM loans generally adjust annually after an initial period ranging from
one to ten years. Rate adjustments for the more seasoned loans in the
portfolio predominantly reflect changes in the Federal Home Loan Bank (FHLB)
National Monthly Median Cost of Funds index. More recently originated
multifamily and commercial loans are linked to various constant maturity U.S.
Treasury indices or certain prime rates. The Banks' commercial real estate
portfolios consist of loans on a variety of property types including motels,
nursing homes, office buildings, and mini-warehouses. Multifamily loans
generally are secured by small to medium sized projects.
Many of the Banks' multifamily and commercial real estate loans are considered
by management to be older or seasoned loans although $50.4 million of these
loans were originated in 1998. At March 31, 1998, the Banks' loan portfolio
included 125 multifamily loans, the average loan balance of which was
$478,000. At March 31, 1998, the Banks had 33 multifamily and commercial
real estate loans with balances over $1.0 million, the largest of which was
$5.3 million. All of the properties securing the multifamily and commercial
real estate loans are located in the Northwest with the exception of three
seasoned participation loans on properties located in the greater Stockton,
California area.
Agriculture/commercial Lending. Inland Empire Bank has been very active in
small business and agricultural lending, with over 40% of presently
outstanding loans being made to finance businesses and farmers. IEB's
management has devoted a great deal of effort to developing customer
relationships and the ability to serve this type of borrower. It is
management's belief that many very large banks have in the past neglected
small business lending, thus contributing to IEB's success. IEB will continue
to emphasize this segment of lending in its market areas. Management intends
to leverage its past success and local decision making ability to continue to
expand this market niche.
First Savings Bank has recently begun making non-mortgage agricultural and
commercial loans. FSBW has staffed its Walla Walla, Tri-Cities, Clarkston
and Yakima offices with experienced commercial bankers and anticipates a
steady growth in the origination of small business and agricultural loans.
It is expected the growth will come primarily from FSBW's existing customer
base and referrals from officers and Directors. In addition to providing
higher yielding assets, it is anticipated that this type of lending will
increase the deposit base of these branches. Expanding non mortgage
agricultural/commercial lending is currently an area of significant effort at
FSBW.
7
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Similar to consumer loans, agricultural and commercial loans may entail
greater risk than do residential mortgage loans. Agricultural and commercial
loans may be unsecured or secured by special purpose or rapidly depreciating
assets, such as equipment, crops, live stock, inventory and receivables which
may not provide an adequate source of repayment on defaulted loans. In
addition, agricultural and commercial loans are dependent on the borrower's
continuing financial stability and management ability as well as market
conditions for various products, services and commodities. For these reasons,
agricultural and commercial loans generally provide higher yields than
residential loans but also require more administrative and management
attention. Interest rates on agricultural and commercial loans may be either
fixed or adjustable. Loan terms including the fixed or adjustable interest
rate, the loan maturity and the collateral considerations vary significantly
and are negotiated on an individual loan basis. At March 31, 1998, the Banks
had 3 agribusiness/commercial loans with balances greater than $1.0 million
totaling $5.1 million, the largest of which was $1.8 million.
Consumer and Other Lending: The Banks originate a variety of consumer loans,
including secured second mortgage loans, automobile loans, credit card loans
and loans secured by deposit accounts. Consumer and other lending has
traditionally been a small part of FSBW's business. However, recent efforts
at FSBW have led to a substantial increase in credit card loans to its
existing customer base. Inland Empire Bank, on the other hand, has been an
active originator of consumer loans. At March 31, 1998, the Company had $30.8
million, or 3.8% of its loans receivable, in outstanding consumer and other
loans.
Consumer loans often entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Banks, and a borrower
may be able to assert against such assignee claims and defenses that it has
against the seller of the underlying collateral.
Loan Solicitation and Processing: The Banks originate real estate loans by
direct solicitation of real estate brokers, builders, depositors, and walk-in
customers. Loan applications are taken by the Banks' loan officers and are
processed in each branch location. Most underwriting and all audit functions
are performed by loan administration personnel at each Bank's main office.
Applications for fixed-rate and adjustable-rate mortgages on one- to
four-family properties are generally underwritten and closed based on Freddie
Mac/Fannie Mae standards, and other loan applications are underwritten and
closed based on the Banks' own written guidelines.
Consumer loans are originated through various marketing efforts directed
primarily toward existing deposit and loan customers of the Banks. Consumer
loan applications may be processed at branch locations or by administrative
personnel at the Banks', main offices.
Commercial and agricultural loans are solicited by loan officers of each Bank
by means of call programs focused on local businesses and farmers. Credit
decisions on significant commercial and agricultural loans are made by senior
loan officers or in certain instances by the Board of Directors of each Bank
or the Company.
Loan Originations, Sales and Purchases
While the Banks originate a variety of loans, their ability to originate loans
and their ability to originate each type of loan is dependent upon the
relative customer demand and competition for loans in each market. For the
years ended March 31, 1998, 1997 and 1996, the Banks originated $513.5
million, $330.3 million and $219.5 million of loans, respectively. The
Company's net loan portfolio grew $111.0 million or 17.2% in fiscal 1998
compared to $230.6 million of growth in fiscal 1997 ($90.5 million excluding
acquisition of IEB) and $115.9 million of growth in fiscal 1996.
8
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In recent years prior to 1996 the Company generally sold most of its 30-year
fixed-rate one- to four-family residential mortgage loans to secondary market
purchasers. For the years ended March 31, 1996 and 1997 the Company sold a
smaller portion of its fixed-rate loan originations choosing to retain loans
in response to its capital deployment and growth objectives. In the second
half of fiscal year 1998 the Company increased the amount of new fixed-rate
residential loan sold as part of its interest rate risk managerial strategy.
Sales of loans by the Company for the years ended March 31, 1998, 1997 and
1996 totaled $80.6 million, $36.6 million and $44.9 million, respectively.
Sales of whole loans generally are beneficial to the Company since these sales
may generate income at the time of sale, provide funds for additional lending
and other investments and increase liquidity. The Company sells loans on both
a servicing-retained and a servicing-released basis. See "Loan Servicing-Loan
Servicing Portfolio." At March 31, 1998, the Company had $12.4 million in
loans held for sale.
The Banks, especially FSBW, purchase whole loans and loan participation
interests primarily during periods of reduced loan demand in their primary
market. Any such purchases are made consistent with the Banks' underwriting
standards; however, the loans may be located outside of the Banks' normal
lending area. For the years ended March 31, 1997 and 1996 the Banks
substantially increased their loan purchases acquiring primarily whole loan
and participation interests in pools of seasoned one- to four-family
residential ARM and 15-year fixed-rate loans and seasoned multifamily and
commercial real estate loans. The properties securing these seasoned loans for
the most part are located outside of the Banks' normal lending territory.
During the years ended March 31, 1998, 1997 and 1996, the Company purchased
$51.1 million, $74.1 million and $65.9 million, respectively, of loans and
loan participation interests. In recent years, the Company's primary source
of loan participation interests (exclusive of the whole loan and participation
interests in seasoned loans purchased) has been with a commercial bank in
Reno, Nevada. The participation interests are in short-term construction
loans secured by residential properties located in the Reno and Las Vegas,
Nevada markets. FSBW normally requires the lead lender to maintain a large
interest in the loans and typically the loans have been funded one-half by the
subsidiary bank and one- half by the lead lender or other participants.
The following table shows total loans originated, purchased, sold and repaid
during the periods indicated (in thousands):
Years Ended March 31,
-----------------------------------
1998 1997 1996
---- ---- ----
Total loans at beginning of period $ 707,816 $ 456,466 $ 333,685
--------- --------- ---------
Acquisition of IEB -- 91,860 --
--------- --------- ---------
Loan originations:
One- to four-family real estate 200,942 161,189 129,703
Commercial and multifamily properties 50,442 17,285 9,810
Construction and land loans 119,941 100,169 73,420
Agriculture/commercial 107,502 26,938 --
Consumer and other loans 34,657 24,717 6,607
--------- --------- ---------
Total loans originated 513,484 330,298 219,540
--------- --------- ---------
Loans purchased:
One- to four-family real estate 7,846 34,294 57,323
Commercial and multifamily properties 34,279 21,155 1,636
Construction and land loans 7,625 18,642 6,970
Agriculture/commercial 1,300 -- --
--------- --------- ---------
Total loans purchased 51,050 74,091 65,929
--------- --------- ---------
Loans sold:
One- to four-family whole loans 80,589 36,623 44,329
One- to four-family participation loans -- -- 588
--------- --------- ---------
Total loans sold 80,589 36,623 44,917
--------- --------- ---------
Principal repayments 369,190 208,276 117,771
--------- --------- ---------
Net increase in loans 114,755 251,350 122,781
--------- --------- ---------
Total loans at end of period $ 822,571 $ 707,816 $ 456,466
========= ========= =========
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Loan Portfolio Analysis. The following table sets forth the composition of the Company's loan portfolio
(including loans held for sale) by type of loan as of the dates indicated.
March 31
-----------------------------------------------------------------------------------
- --
1998 1997 1996 1995 1994
---------------- --------------- --------------- --------------- --------------
- --
Amount Percent Amount Percent Amount Percent Amount Percent Amount
Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -----
- --
(Dollars in thousands)
Type of Loan:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
real estate $423,850 51.53% $395,418 55.86% $311,472 68.24% $199,585 59.81% $134,401
46.84%
Commercial and
multifamily
properties1 67,859 20.41 129,198 18.25 77,613 16.99 73,443 22.01 69,962
24.38
Construction and
land 132,409 16.10 110,262 15.58 62,177 13.62 57,913 17.36 79,458
27.69
Agriculture/commercial 67,611 8.22 47,846 6.76 871 .19 902 .27 1,152
.68
Consumer and other 30,842 3.74 25,092 3.55 4,333 .96 1,842 .55 1,963
.41
-------- ------ -------- ------ -------- ------ -------- ------ -------- -----
- -
Total loans 822,571 100.00% 707,816 100.00% 456,466 100.00% 333,685 100.00% 286,936
100.00%
-------- ====== -------- ====== -------- ====== -------- ====== --------
======
Undisbursed funds
for loans in
progress 54,500 52,412 35,244 28,507 35,069
Deferred loan fees
and discounts 3,297 2,775 1,876 2,226 2,174
Allowance for loan
losses 7,857 6,748 4,051 3,549 3,429
Total loans -------- -------- -------- -------- --------
receivable, net $756,917 $645,881 $415,295 $299,403 $246,264
======== ======== ======== ======== ========
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Loan Maturity and Repricing
The following table sets forth certain information at March 31, 1998 regarding the dollar amount of loans
maturing in the Company's portfolio based on their contractual terms to maturity, but does not include
scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances are net of
undisbursed loan proceeds, unamortized premiums and discounts, and exclude the allowance for loan losses
(in thousands):
Maturing Maturing Maturing
Maturing within within within Maturing
Within 1 to 3 to 5 to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One-to four-family real estate $ 4,091 $ 2,722 $ 4,519 $ 11,567 $ 385,867 $ 408,766
Commercial and
multifamily properties 9,528 13,284 44,025 39,834 60,050 166,721
Construction and land 79,129 7,990 255 718 2,683 90,775
Agriculture/commercial 36,304 8,115 11,501 6,493 5,231 67,644
Consumer and other 12,010 7,118 6,929 2,400 2,411 30,868
--------- -------- -------- -------- --------- ---------
Total loans $ 141,062 $ 39,229 $ 67,229 $ 61,012 $ 456,242 $ 764,774
========= ======== ======== ======== ========= =========
Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The
average life of loans is substantially less than their contractual terms because of prepayments. In
addition, due-on-sale clauses on loans generally give the Company the right to declare loans immediately
due and payable in the event that the borrower sells the real property subject to the mortgage and the
loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage
loan market rates are substantially higher than rates on existing mortgage loans and, conversely,
decreases when rates on existing mortgage loans are substantially higher than current mortgage loan
market rates. The following table sets forth the dollar amount of all loans due after March 31, 1999,
which have fixed interest rates and floating or adjustable interest rates (in thousands).
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
<S> <C> <C> <C>
One-to four-family real estate $ 310,720 $ 93,955 $ 404,675
Commercial and
multifamily properties 78,743 78,450 157,193
Construction and land 3,443 8,203 11,646
Agriculture/commercial 11,426 19,914 31,340
Consumer and other 11,964 6,894 18,858
--------- --------- ---------
Total $ 416,296 $207,416 $ 623,712
========= ======== =========
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Loan Servicing
General: The Banks receive fees from a variety of institutional mortgage
owners in return for performing the traditional services of collecting
individual payments and managing the loan portfolio. At March 31, 1998, the
Banks were servicing $208.4 million of loans for others. Loan servicing
includes processing payments, accounting for loan funds and collecting and
paying real estate taxes, hazard insurance and other loan-related items such
as private mortgage insurance. When the Banks receive the gross mortgage
payment from individual borrowers, they remit to the investor in the mortgage
a predetermined net amount based on the yield on that mortgage. The
difference between the coupon on the underlying mortgage and the predetermined
net amount paid to the investor is the gross loan servicing fee. In addition,
the Banks retain certain amounts in escrow for the benefit of the lender for
which the Banks incur no interest expense but are able to invest the funds
into earning assets. At March 31, 1998, the Banks held $4.2 million in escrow
for their portfolios of loans serviced for others.
Loan Servicing Portfolio: The loan servicing portfolio at March 31, 1998 was
composed primarily of $46.0 million of Fannie Mae mortgage loans and $140.4
million of Freddie Mac mortgage loans. The balance of the loan servicing
portfolio at March 31, 1998, consisted of loans serviced for a variety of
private investors. At March 31, 1998, the portfolio included loans secured by
property located primarily in the states of Washington or Oregon. For the
year ended March 31, 1998, $813,000 of loan servicing fees, net of $100,000 of
servicing rights amortization, were recorded.
Mortgage Servicing Rights: In addition to the origination of mortgage
servicing rights (MSRs) on the loans that FSBW originates and sells in the
secondary market on a servicing retained basis, FSBW has also purchased
mortgage servicing rights. The cost of MSRs is capitalized and amortized in
proportion to, and over the period of, the estimated future net servicing
income. For the years ending March 31, 1998 and 1997 FSBW capitalized $442,000
and none, respectively, of mortgage servicing rights relating to loans sold
with servicing retained and no MSRs were purchased in fiscal years 1998 and
1997. Management periodically evaluates the estimates and assumptions used to
determine the carrying values of MSRs and the amortization of MSRs. These
carrying values are adjusted when the valuation indicates the carrying value
is impaired. At March 31, 1998, MSRs were carried by FSBW at a value net of
amortization of $697,000, and no valuation allowance for impairment was
considered necessary. MSRs generally are adversely affected by current and
anticipated prepayments resulting from decreasing interest rates.
Asset Quality
Each Bank's asset classification committee meets at least monthly to review
all classified assets, to approve action plans developed to resolve the
problems associated with the assets and to review recommendations for new
classifications, any changes in classifications and recommendations for
reserves. The committee reports to the Board of Directors quarterly as to the
current status of classified assets and action taken in the preceding quarter.
Federal regulations require that the Banks review and classify their problem
assets on a regular basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss.
Substandard assets must have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations have also created a special
mention category, described as assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. If an asset or portion thereof is classified loss, the
insured institution establishes specific allowances for loan losses for the
full amount of the portion of the asset classified loss. A portion of general
loan loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
12
<PAGE>
<PAGE>
At March 31, 1998, 1997 and 1996, the aggregate amounts of the Banks'
classified assets (as determined by the Banks) were as follows (in thousands):
At March 31
--------------------------------
1998 1997 1996
---- ---- ----
Loss $ -- $ -- $ --
Doubtful -- -- --
Substandard assets 2,776 4,175 2,078
Special mention -- -- --
Non-performing Assets and Delinquencies.
Real Estate Loans: When a borrower fails to make a required payment when due,
the Banks follow established collection procedures. The first notice is mailed
to the borrower within 10 to 17 days after the payment due date and attempts
to contact the borrower by telephone begin within five to ten days after the
late notice is mailed to the borrower. If the loan is not brought current by
30 days after the payment due date, the Banks will mail a second written
notice to the borrower. If a satisfactory response is not obtained,
continuous follow-up contacts are attempted until the loan has been brought
current. Generally, within 30 to 45 days into the delinquency procedure, the
Banks notify the borrower that home ownership counseling is available. In
most cases, delinquencies are cured promptly; however, if after 90 days of
delinquency no response has been received nor an approved reinstatement plan
established, foreclosure according to the terms of the security instrument and
applicable law is initiated. Interest income on loans after 90 days of
delinquency is no longer accrued and the full amount of accrued and
uncollected interest is reversed.
Agriculture/commercial and Consumer Loans: When a borrower fails to make
payments as required, a late notice is sent to the borrower. If payment is
still not made the responsible loan officer is advised and contact is made my
telephone or letter. Continuous follow-up contacts are attempted until the
loan has been brought current. Generally, if the loan is not current within
45 to 60 days, action is taken to take possession of the security. A small
claims or lawsuit is normally filed on unsecured loans or deficiency balances
at 90 to 120 days. Loans over 90 days delinquent, repossessions, loans in
foreclosure and bankruptcy no longer accrue interest unless a satisfactory
repayment plan has been agreed upon, the loan is a full recourse contract or
fully secured by a deposit account.
13
<PAGE>
<PAGE>
The following table sets forth information with respect to the Banks'
non-performing assets and restructured loans within the meaning of SFAS No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructuring, at
the dates indicated (dollars in thousands).
At March 31
----------------------------------------------
1998 1997 1996 1995 1994
Loans accounted for on a ---- ---- ---- ---- ----
nonaccrual basis:
Real estate
One- to four-family $ 367 $1,644 $ 526 $ 336 $ 391
Commercial and multifamily 448 187 -- -- 280
Construction and land -- -- -- -- --
Agriculture/commercial 414 206 -- -- --
Consumer and other 41 45 -- 5 13
------ ------ ------ ----- ------
Total 1,270 2,082 526 341 684
Accruing loans which are ------ ------ ------ ----- ------
contractually past due 90
days or more:
Real estate
One-to four family 52 -- -- -- --
Commercial and multifamily 33 -- -- -- --
Construction and land 32 -- -- -- --
Agriculture/commercial -- -- -- -- --
Consumer and other 33 30 12 -- --
------ ------ ------ ----- ------
Total 150 30 12 -- --
------ ------ ------ ----- ------
Total non-performing loans 1,420 2,112 538 341 684
Real estate held for sale 882 1,057 712 588 750
Total non-performing ------ ------ ------ ----- ------
assets $2,302 $3,169 $1,250 $ 929 $1,434
====== ====== ====== ===== ======
Restructured loans (1) $ 305 $ 238 $ 156 $ 165 $ --
Total non-performing loans
to net loans 0.19% 0.33% 0.13% 0.11% 0.28%
Total non-performing loans
to total assets 0.20% 0.21% 0.07% 0.07% 0.16%
Total non-performing assets
to total assets 0.20% 0.31% 0.17% 0.19% 0.34%
(1) These loans are performing under their restructured terms but are
classified substandard.
For the year ended March 31, 1998, $125,000 in interest income would have been
recorded had nonaccrual loans been current, and no interest income on such
loans was included in net income for such period.
Allowance for Loan Losses
General: The Banks have established systematic methodologies for the
determination of provisions for loan losses. The methodologies are set forth
in a formal policy and take into consideration the need for an overall general
valuation allowance as well as specific allowances that are tied to individual
problem loans.
In originating loans, the Banks recognize that losses will be experienced and
that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Banks increase their allowance for loan losses
by charging provisions for possible loan losses against the Banks' income.
14
<PAGE>
<PAGE>
On April 1, 1995, the Company and its subsidiary Banks adopted SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures, an
amendment of SFAS No. 114. These statements require that impaired loans that
are within their scope be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value
of collateral if the loan is collateral dependent. Subsequent changes in the
measurement of impaired loans shall be included within the provision for loan
losses in the same manner in which impairment initially was recognized or as a
reduction in the provision that would otherwise be reported. The adoption of
these statements had no material impact on the Company's or Banks' financial
condition or results of operations. Prior to the adoption of these statements
a reserve for specific losses was provided for loans when any significant,
permanent decline in value was deemed to have occurred. As of March 31, 1998,
the Company and its subsidiary Banks had no impaired loans as defined by the
statement. The statements also apply to all loans that are restructured in a
troubled debt restructuring, subsequent to the adoption of SFAS No. 114, as
defined by SFAS No. 15. A troubled debt restructuring is a restructuring in
which the creditor grants a concession to the borrower that it would not
otherwise consider. At March 31, 1998, the Company had $305,000 of
restructured loans that, though performing, were classified substandard.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, actual loan loss
experience, current and anticipated economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Additions to these allowances are charged to
earnings. Provisions for losses that are related to specific assets are
usually applied as a reduction of the carrying value of the assets and charged
immediately against the income of the period. The reserve is based upon
factors and trends identified by management at the time financial statements
are prepared.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation. At March 31, 1998, the
Company had no specific loss allowances.
A provision for losses is charged against income on a monthly basis to
maintain an adequate allowance. At March 31, 1998, the Company had an
allowance for loan losses of $7.9 million which represented .96% of total
loans. Fiscal 1998 loan growth included $22.1 million of growth in higher risk
construction and land loans and the addition of new lines of lending business,
including $19.8 million of growth in agriculture/commercial loans and $5.7
million of growth in consumer lending. These loans, based on historical
industry statistics, have a higher percentage of losses than the Company has
previously experienced in its prior mortgage related lending and for this
reason management anticipates that future losses will be higher than
historical levels Management believes that the amount maintained in the
allowance will be adequate to absorb possible losses in the portfolio.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be significantly and
adversely affected if circumstances differ substantially from the assumptions
used in making the determinations.
While the Company believes that the Banks have established their existing
allowance for loan losses in accordance with Generally Accepted Accounting
Principles (GAAP), there can be no assurance that regulators, in reviewing the
Banks' loan portfolio, will not request the Banks to increase significantly
their allowance for loan losses. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for loan losses may adversely affect the Company's financial
condition and results of operations.
Real Estate Held for Sale: Real estate acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
held for sale until it is sold. When property is acquired it is recorded at
the lower of its cost (the unpaid principal balance of the related loan plus
foreclosure costs), or fair value. Subsequent to foreclosure, the property is
carried at the lower of the foreclosed amount or fair value. Upon receipt of
a new appraisal and market analysis, the carrying value is written down
through the establishment of a specific reserve to the anticipated sales price
less selling and holding costs. At March 31, 1998, the Company had $882,000
of real estate owned.
15
<PAGE>
<PAGE>
The following table sets forth an analysis of the Company's gross allowance
for possible loan losses for the periods indicated.
Years Ended March 31
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period $ 6,748 $ 4,051 $ 3,549 $ 3,429 $ 3,105
------- ------- ------- ------- -------
Acquired with IEB -- 1,416 -- -- --
------- ------- ------- ------- -------
Provision for loan losses 1,628 1,423 524 391 440
Recoveries: ------- ------- ------- ------- -------
Secured by real estate
One - to four-family 6 38 -- -- --
Commercial and multifamily -- -- -- -- --
Construction and land -- -- -- -- --
Agriculture/commercial 29 -- -- -- --
Consumer and other 16 16 -- -- 2
------- ------- ------- ------- -------
Total recoveries 51 54 -- -- 2
------- ------- ------- ------- -------
Charge-offs:
Secured by real estate
One - to four-family 359 127 -- -- 15
Commercial and multifamily -- -- -- 271 101
Construction and land 11 -- -- -- --
Agriculture/commercial 19 3 -- -- --
Consumer and other 181 66 22 -- 2
------- ------- ------- ------- -------
Total charge-offs 570 196 22 271 118
------- ------- ------- ------- -------
Net charge-offs 519 142 22 271 116
------- ------- ------- ------- -------
Balance at end of period $ 7,857 $ 6,748 $ 4,051 $ 3,549 $ 3,429
======= ======= ======= ======= =======
Ratio of allowance to total
loans outstanding at the
end of the period 0.96% 0.95% 0.89% 1.06% 1.20%
Ratio of net loan charge-
offs to the average net
book value of loans
outstanding during the
period 0.01% 0.04% 0.01% 0.10% 0.05%
16
<PAGE>
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses by loan category for the
periods indicated.
At March 31
----------------------------------------------------------------------------------
1998 1997 (2) 1996 1995 1994
---------------- ---------------- --------------- ---------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
Total Total Total Total Total
to to to to to
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ----- ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specific or allocated
loss allowances:
Secured by real estate
One- to four-family $1,059 51.53% $1,098 55.86% $ -- 68.24% $ 11 59.81% $ 11 46.84%
Commercial and
multifamily 849 20.41 547 18.25 -- 16.99 46 22.01 317 24.38
Construction and land 856 16.10 844 15.58 -- 13.62 -- 17.36 -- 27.69
Agriculture/commercial 835 8.22 422 6.76 -- .19 -- .27 -- .68
Consumer and other 307 3.74 237 3.55 -- .96 -- .55 -- .41
Unallocated general
loss allowance(1) (2) 3,951 N/A 3,600 N/A 4,051 N/A 3,492 N/A 3,101 N/A
Total allowance for ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
loan losses $7,857 100.00% $6,748 100.00% $4,051 100.00% $3,549 100.00% $3,429 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
_________
(1) The Company establishes specific loss allowances when individual loans are identified that present a
possibility of loss (i.e., that full collectibility is not reasonably assured). The remainder of the
allowance for loan losses is established for the purpose of providing for estimated losses which are
inherent in the loan portfolio.
(2) For 1997 the Company has not changed how it determines the adequacy of its allowance for loan losses
other than to allocate the non-specific loan loss reserves to loan categories that were the basis for
its accrual. In the periods prior to 1997, it was not the Company's practice to allocate general
loan loss allowances to specific loan categories.
17
<PAGE>
<PAGE>
Investment Activities
Under Washington and Oregon state law, banks are permitted to invest in
various types of marketable securities. Authorized securities include but are
not limited to U.S. Treasury obligations, securities of various federal
agencies, mortgage-backed securities, certain certificates of deposit of
insured banks and savings institutions, banker's acceptances, repurchase
agreements, federal funds, commercial paper, corporate debt and equity
securities and obligations of states and their political sub-divisions. The
investment policies of the Banks are designed to provide and maintain adequate
liquidity and to generate favorable rates of return without incurring undue
interest rate or credit risk. The Banks' policies generally limit investments
to U.S. Government and agency securities, municipal bonds, certificates of
deposit, marketable corporate debt obligations and mortgage-backed securities.
Investment in mortgage-backed securities includes those issued or guaranteed
by Freddie Mac (FHLMC), Fannie Mae (FNMA), Government National Mortgage
Association (GNMA) and privately-issued collateralized mortgage-backed
securities that have an AA credit rating or higher. A high credit rating
indicates only that the rating agency believes there is a low risk of loss or
default. However, all of the Banks' investment securities, including those
that have high credit ratings, are subject to market risk in so far as a
change in market rates of interest or other conditions may cause a change in
an investment's market value.
At March 31, 1998, the Company's consolidated investment portfolio totaled
$302.6 million and consisted principally of U.S. Government and agency
obligations, mortgage-backed securities, municipal bonds, corporate debt
obligations, and stock of FNMA and FHLMC. From time to time, investment
levels may be increased or decreased depending upon yields available on
investment alternatives, and management's projections as to the demand for
funds to be used in the Banks' loan originations, deposits and other
activities. During fiscal 1998 investments and securities increased by $14.1
million. Holdings of mortgage-backed securities increased $22.8 million and
U.S. Treasury and agency obligations decreased $1.8 million. Ownership of
corporate and other securities decreased $5.0 million as a result of sales,
maturities and bond calls. Municipal bonds decreased $1.9 million primarily
as a result of maturities and bond calls.
Mortgage-Backed and Mortgage-Related Securities: The Company's subsidiary,
FSBW, purchases mortgage-backed securities in order to: (i) generate positive
interest rate spreads on large principal balances with minimal administrative
expense; (ii) lower the credit risk of the Company as a result of the
guarantees provided by FHLMC, FMNA, and GNMA; (iii) enable the Company to use
mortgage-backed securities as collateral for financing; and (iv) increase
liquidity. The Company invests primarily in federal agency mortgage-backed
securities, principally FNMA, FHLMC and GNMA. The Company also invests in
agency sponsored and corporate collateralized mortgage obligations (CMOs) and
real estate mortgage investment conduits (REMICs). At March 31, 1998, net
mortgage-backed securities totaled $197.1 million, or 17.1% of total assets.
At March 31, 1998, 81.3% of the mortgage-backed securities were
adjustable-rate and 18.9% were fixed-rate. The estimated fair value of the
Company's mortgage-backed securities at March 31, 1998, was $197.1 million,
which is $54,000 less than the amortized cost of $197.2 million. At March 31,
1998, the Company's portfolio of mortgage-backed securities had a weighted
average coupon rate of 7.02% and a weighted average maturity on period to
repricing of 22.12 years. The estimated weighted average remaining life of the
portfolio was 6.4 years based on the 3 month "constant prepayment rate" (CPR)
or the most recent CPR if less than 3 months history is available.
Mortgage-backed securities known as PC's or mortgage pass-through certificates
represent a participation interest in a pool of single-family or multifamily
mortgages. The principal and interest payments on these mortgages are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies and government sponsored enterprises) that pool and resell
the participation interests in the form of securities, to investors such as
the Company. Mortgage participation certificates generally yield less than
the loans that underlie such securities because of the cost of payment
guarantees and credit enhancements. In addition, PC's are usually more liquid
than individual mortgage loans and may be used to collateralized certain
liabilities and obligations of the Company. These types of securities also
permit the Company to optimize its regulatory capital because of their low
risk weighting.
CMOs and REMICs are mortgage-related obligations and are often considered as
derivative financial instruments because they are created by redirecting the
cash flows from the pool of mortgages or mortgage-backed securities underlying
these securities into two or more classes (or tranches) with different
maturity or risk characteristics. Management believes these securities may
represent attractive alternatives relative to other investments due to the
wide variety of maturity, repayment and interest rate options available.
Current investment practices of the Bank does not provide for the purchase of
CMOs and REMICs classified as high risk by the Federal Financial Institutions
Examination Council (FFIEC). At March 31, 1998 the Company held CMOs and
REMICs with a net carrying value of $170.9 million. At that date, two CMO's
with a carrying value of $429,000 were identified as a high risk security
under the FFIEC standards and are included in the Company's available for sale
portfolio.
18
<PAGE>
<PAGE>
Of the Company's $197.1 million mortgage-backed securities portfolio at March
31, 1998, $168.5 million with a weighted average yield of 6.17% had
contractual maturities or period to repricing within ten years and $28.6
million with a weighted average yield of 7.08% had contractual maturities or
period to repricing over ten years. However, the actual maturity of a
mortgage-backed security is usually less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in rapid
amortization of premiums or discounts and thereby affect the net yield on such
securities. Although prepayments of underlying mortgages depend on many
factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of declining mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be
subject to reinvestment risk because, to the extent that the Company's
mortgage-backed securities amortize or prepay faster than anticipated, the
Company may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. In contrast to mortgage-backed securities
in which cash flow is received (and hence, prepayment risk is shared) pro rata
by all securities holders, the cash flow from the mortgages or mortgage-backed
securities underlying REMICs or CMOs is segmented and paid in accordance with
a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of REMICs and CMOs may
therefore carry prepayment risk that differs from that of both the underlying
collateral and other tranches.
Municipal Bonds: The Company's tax exempt municipal bond portfolio, which at
March 31, 1998, totaled $32.1 million at estimated fair value ($30.6 million
at amortized cost), was comprised of general obligation bonds (i.e., backed by
the general credit of the issuer) and revenue bonds (i.e., backed by revenues
from the specific project being financed) issued by various authorities,
hospitals, water and sanitation districts located in the states of Washington
and Oregon. At March 31, 1998, general obligation bonds and revenue bonds had
total estimated fair values of $19.9 million and $12.2 million, respectively.
Most of the municipal bonds are not rated by a nationally recognized credit
rating agency (e.g., Moody's or Standard and Poor's). At March 31, 1998, the
Company's municipal bond portfolio had a weighted average maturity of
approximately 7.6 years and an average coupon rate of 6.37%. The largest
security in the portfolio was an industrial revenue bond issued by the City of
Kent, Washington, with an amortized cost of $3.67 million and a fair value of
$3.67 million.
Corporate Bonds: The Company's corporate bond portfolio, which totaled $4.3
million at fair value ($4.3 million at amortized cost) at March 31, 1998, was
composed of short to intermediate-term fixed-rate securities. At March 31,
1998, the portfolio had a weighted average maturity of 5.6 years and a
weighted average coupon rate of 6.52%. The longest term bond, which had an
amortized cost of $2.0 million and a term to maturity of 10.4 years, is
subject to put options in favor of the Company exercisable in August 1998.
U.S. Government and Agency Obligations: The Company's portfolio of U.S.
Government and agency obligations had a fair value of $65.6 million ($65.4
million at amortized cost) at March 31, 1998. The Company's subsidiary,
FSBW, has invested a small portion of its securities portfolio in structured
notes. The structured notes in which FSBW has invested provide for periodic
adjustments in coupon rates on specified dates based on various indices and
formulae. At March 31, 1998, structured notes, which totaled $2.0 million at
fair value ($2.0 million at amortized cost), consisted of a U.S. Government
agency obligation which matured in April 1998.
Off Balance Sheet Derivatives: Derivatives include "off balance sheet"
financial products whose value is dependent on the value of an underlying
financial asset, such as a stock, bond, foreign currency, or a reference rate
or index. Such derivatives include "forwards," "futures," "options" or
"swaps." The Company generally has not invested in "off balance sheet"
derivative instruments, although investment policies authorize such
investments. On March 31, 1998 the Company had no off balance sheet
derivatives and no outstanding commitments to purchase or sell securities.
19
<PAGE>
<PAGE>
The following tables sets forth certain information regarding carrying values
and percentage of total carrying values, which is estimated market value, of
the Company's consolidated portfolio of securities classified as available
for sale and held to maturity (in thousands).
At March 31
-------------------------------------------------------
Available for Sale: 1998 1997 1996
- ------------------ ----------------- ------------------ -----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
value Total value Total value Total
----- ----- ----- ----- ----- -----
U.S. Government
Treasury and
agency obligations $ 65,594 21.69% $ 67,417 23.45% $ 70,389 24.13%
Municipal bonds 32,093 10.61 33,969 11.81 29,365 10.07
Corporate bonds 4,304 1.42 7,997 2.78 11,632 3.99
Other 3,298 1.09 3,758 1.31 3,116 1.07
Mortgage-backed or related
securities
Mortgage-backed
securities:
GNMA 16,862 5.58 20,273 7.05 22,181 7.60
FHLMC 3,361 1.11 3,868 1.35 5,010 1.72
FNMA 6,048 2.00 7,281 2.53 8,413 2.88
Private issue -- --. -- --. 10,760 3.69
-------- ------ -------- ------ -------- ------
Total mortgage-backed
securities 26,271 8.69 31,422 10.93 46,364 15.89
Mortgage-related
securities
CMOs-agency backed 146,300 48.38 117,212 40.77 104,771 35.92
CMOs-Non-agency 24,559 8.12 25,741 8.95 26,050 8.93
Total mortgage- -------- ------ -------- ------ -------- ------
related securities 170,859 56.50 142,953 49.72 130,821 44.85
-------- ------ -------- ------ -------- ------
Total 197,130 65.19 174,375 60.65 177,185 60.74
-------- ------ -------- ------ -------- ------
Total securities
available for sale $302,419 100.00% $287,516 100.00% $291,687 100.00%
======== ====== ======== ====== ======== ======
Held to Maturity:
- ----------------
Certificates of deposit
Carrying value $ 194 100.00% $ 987 100.00% $ 2,059 100.00%
======== ====== ======== ====== ======== ======
Estimated market
value $ 194 $ 987 $ 2,059
======== ======== ========
20
<PAGE>
<PAGE>
The following table shows the maturity or period to repricing of the Company's consolidated portfolio of
securities (dollars in thousands):
At March 31 1998
------------------------------------------------------------------------------------------------
Over One to Over Five to Over Ten to Over
One Year or Less Five Years Ten Years Twenty Years Twenty Years Total
---------------- ---------------- --------------- -------------- ---------------- ------------
Weigh- Weigh- Weigh- Weigh- Weigh- Weigh-
Carry- ted Carry- ted Carry- ted Carry- ted ted Carry- ted
ing Average ing Average ing Average ing Average Average ing Average
Value Yield Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available
for Sale
U. S.
Government
Treasury
and agency
obligations
Fixed-
rate $ 28,554 5.59% $23,361 6.26% $ 7,999 6.61% $ 3,681 7.16% $ -- --% $ 63,595 6.05%
Adjustable-
rate 1,999 5.66 -- -- -- -- -- -- -- -- 1,999 5.66
-------- ------- ------- ------- ------- --------
30,553 5.59 23,361 6.26 7,999 6.61 3,681 7.16 -- -- 65,594 6.04
Municipal
bonds 3,494 6.18 9,495 6.33 9,595 6.21 8,191 6.70 1,318 6.45 32,093 6.37
Corporate
bonds
Fixed-
rate -- -- 2,311 7.05 -- -- 1,993 3.77 -- -- 4,304 5.51
Mortgage-backed
obligations:
Fixed-rate 13 11.55 643 6.11 104 9.63 2,024 9.46 16,046 6.38 18,830 6.65
Adjustable-
rate 7,075 6.99 366 7.09 -- -- -- -- -- -- 7,441 6.97
-------- ------- ------- ------- ------- --------
7,088 6.98 1,009 6.47 104 9.63 2,024 9.46 16,046 6.38 26,271 6.74
Mortgage-
related
obligations:
Fixed-rate -- -- -- -- 7,503 6.76 3,410 7.00 7,152 8.02 18,065 7.30
Adjustable-
rate 152,794 6.10 -- -- -- -- -- -- -- -- 152,794 6.10
-------- ------- ------- ------- ------- --------
152,794 6.10 -- -- 7,503 6.76 3,410 7.00 7,152 8.02 170,859 6.23
-------- ------- ------- ------- ------- --------
Total
mortgage-
backed or
related
obliga-
tions 159,882 6.14 1,009 6.47 7,607 6.80 5,434 7.92 23,198 6.89 197,130 6.30
Other
stock 542 6.72 2,755 8.80 -- -- -- -- -- -- 3,298 8.46
-------- ------- ------- ------- ------- --------
Total
securities
available
for sale
carrying
value $194,471 6.06% $38,931 6.51% $25,201 6.51% $19,299 6.83% $24,516 6.86% $302,419 6.26%
======== ======= ======= ======= ======= ========
Total
securities
available
for sale
amortized
cost $194,654 $35,833 $24,888 $18,472 $24,499 $298,346
======== ======= ======= ======= ======= ========
Held to
Maturity
Certifi-
cates of
deposit-
Fixed-
rate $ 194 5.00% $ -- -- $ -- -- $ -- -- $ -- -- $ 194 5.00%
======== ======= ======= ======= ======= ========
21
<PAGE>
<PAGE>
Deposit Activities and Other Sources of Funds
General: Deposits, FHLB advances (or borrowings) and loan repayments are the
major sources of the Banks' funds for lending and other investment purposes.
Scheduled loan repayments are a relatively stable source of funds, while
deposit inflows and outflows and loan prepayments are influenced significantly
by general interest rates and money market conditions. Borrowings may be used
on a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer-term basis for
general business purposes. The Banks do not currently solicit brokered
deposits.
Deposit Accounts: Deposits are attracted from within the Banks' primary
market areas through the offering of a broad selection of deposit instruments,
including demand checking accounts, NOW accounts, money market deposit
accounts, regular savings accounts, certificates of deposit and retirement
savings plans. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. In determining the terms of their deposit
accounts, the Banks consider current market interest rates, profitability to
the Banks, matching deposit and loan products and their customer preferences
and concerns. The Banks generally review their deposit mix and pricing
weekly.
The Banks compete with other financial institutions and financial
intermediaries in attracting deposits. Competition from mutual funds has been
particularly strong in recent years due to the performance of the stock
market. In addition, there is strong competition for savings dollars from
commercial banks, credit unions, and nonbank corporations, such as securities
brokerage companies and other diversified companies, some of which have
nationwide networks of offices.
The Banks, especially FSBW, have been most successful in attracting a broad
range of retail time deposits and, at March 31, 1998, the Banks had a total of
$371.6 million in retail time deposits, of which $295.8 million had original
maturities of one year or longer.
As illustrated in the following table, certificates of deposit have accounted
for a larger percentage of the deposit portfolio than have other transaction
accounts. However, as reflected in the balances and percentages for March
31, 1998 and 1997, the acquisition of IEB has added significantly to demand,
NOW and Money Market accounts for the Company.
22
<PAGE>
<PAGE>
The following table sets forth the balances of deposits in the various types of accounts offered by the
Banks at the dates indicated (in thousands).
At March 31
---------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------------- -----------------
% of Increase % of Increase % of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW checking $101,238 17.11% 7,608 $ 93,630 17.18% $ 54,635 $ 38,995 10.42%
Regular savings accounts 42,084 7.11 (2,047) 44,131 8.10 11,632 32,499 8.69
Money market accounts 76,642 12.96 (227) 76,869 14.11 47,282 29,587 7.91
Certificates which mature:
Within 1 year 240,074 40.59 27,221 212,853 39.05 34,431 178,422 47.70
After 1 year, but within
2 years 74,519 12.60 20,966 53,553 9.83 21,903 31,650 8.46
After 2 years, but
within 5 years 43,505 7.35 2,542 40,963 7.52 (3,129) 44,092 11.79
Certificates maturing
thereafter 13,509 2.28 (9,459) 22,968 4.21 4,149 18,819 5.03
-------- ------ ------ -------- ------ -------- -------- ------
Total $591,571 100.00% 46,604 $544,967 100.00% $170,903 $374,064 100.00%
======== ====== ====== ======== ====== ======== ======== ======
The following table sets forth the deposit activities of the Banks for the periods indicated (in
thousands).
Year Ended March 31,
------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 544,967 $ 374,064 $ 360,352
Acquisition of subsidiary IEB -- 134,610 --
Net increase (decrease)
before interest credited 21,315 14,557 (5,264)
Interest credited 25,289 21,736 18,976
--------- --------- ---------
Net increase in savings deposits 46,604 170,903 13,712
--------- --------- ---------
Ending balance $ 591,571 $ 544,967 $ 374,064
========= ========= =========
The following table indicates the amount of the Banks' jumbo certificates of deposit by time remaining
until maturity as of March 31, 1998. Jumbo certificates of deposit require a minimum deposit of $100,000
and rates paid on such accounts are negotiable (in thousands).
Jumbo
Maturity Period Certificates
- --------------- of deposits
-----------
<S> <C>
Six months or less $ 34,140
Six through twelve months 18,081
Over twelve months 28,387
--------
Total $ 80,608
========
23
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<PAGE>
Borrowings: Deposits are the primary source of funds for the Banks' lending
and investment activities and for their general business purposes. FSBW also
uses borrowings to supplement its supply of lendable funds, to meet deposit
withdrawal requirements and to more effectively leverage its capital position.
The FHLB-Seattle serves as FSBW's primary borrowing source. Advances from the
FHLB-Seattle are typically secured by FSBW's first mortgage loans. At March
31, 1998, FSBW had $297.2 million of borrowings from the FHLB-Seattle at a
weighted average rate of 6.04%. FSBW has been authorized by the FHLB-Seattle
to borrow up to 45% of it's total assets under a blanket floating lien
security agreement, permitting a borrowing capacity of $428.7 million at March
31, 1998. Additional funds may be obtained through commercial banking credit
lines.
The FHLB-Seattle functions as a central reserve bank providing credit for
member financial institutions. As a member, FSBW is required to own capital
stock in the FHLB-Seattle and is authorized to apply for advances on the
security of such stock and certain of its mortgage loans and other assets
(principally securities which are obligations of, or guaranteed by, the U.S.
Government) provided certain creditworthiness standards have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based on the financial
condition of the member institution and the adequacy of collateral pledged to
secure the credit.
FSBW also uses retail repurchase agreements due generally within 90 days as a
source of funds. At March 31, 1998, retail repurchase agreements totaling
$6.3 million with interest rates from 5.39% to 7.18% were secured by a pledge
of certain FNMA, GNMA and FHLMC mortgage-backed securities with a market value
of $9.8 million.
FSBW also borrows funds through the use of secured wholesale repurchase
agreements with securities brokers. The broker holds FSBW's securities while
FSBW continues to receive the principal and interest payments from the
security. FSBW's outstanding borrowings at March 31, 1998, under wholesale
repurchase agreements, totaled $85.4 million and were collateralized by
mortgage-backed securities with a fair value of $91.3 million.
(See "Management's Discussion and Analysis of Financial Position and Results
of Operations - Liquidity and Capital Resources.")
The following table sets forth certain information regarding material
borrowings by the Company at the dates and for the periods indicated (dollars
in thousands):
At March 31
----------------------------------
1998 1997 1996
---- ---- ----
Weighted average rate at year end on:
FHLB advances 6.04% 5.96% 5.43%
Retail repurchase agreements 5.78 5.76 5.35
Wholesale repurchase agreements 5.65 5.53 5.41
At March 31
----------------------------------
1998 1997 1996
Maximum amount of borrowings outstanding ---- ---- ----
at any month end for:
FHLB advances $ 299,377 $ 235,098 $ 179,419
Retail repurchase agreements 10,206 11,119 9,789
Wholesale repurchase agreements 85,430 52,174 9,863
Annual average borrowings outstanding for:
FHLB advances 276,328 214,563 66,252
Retail repurchase agreements 6,934 11,322 7,620
Wholesale repurchase agreements 72,276 26,649 162
Annual weighted average rate paid on:
FHLB advances 6.07% 5.83% 5.80%
Retail repurchase agreements 5.77 4.80 6.15
Wholesale repurchase agreements 5.78 5.96 5.41
24
<PAGE>
<PAGE>
Personnel
As of March 31, 1998, the Company had 281 full-time and 45 part-time
employees. The employees are not represented by a collective bargaining unit.
The Company believes its relationship with its employees is good.
Taxation
Federal Taxation
General. For tax reporting purposes, the Company and the Banks report their
income on a calendar year basis using the accrual method of accounting. The
Company and the Banks are subject to federal income taxation in the same
manner as other corporations with some exceptions including particularly the
reserve for bad debts discussed below. The following discussion of tax
matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company and the
Banks.
Bad Debt Reserve. Historically, savings institutions such as FSBW which met
certain definitional tests primarily related to their assets and the nature of
their business ("qualifying thrift") were permitted to establish a reserve for
bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. FSBW's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interests in real property, were computed using an amount based on FSBW's
actual loss experience, or a percentage equal to 8% of FSBW's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the non-qualifying reserve. Due to FSBW's loss experience, it
generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, provisions repealing the current thrift bad debt rules were
enacted by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). FSBW has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, because FSBW is
a "large" bank (i.e., assets in excess of $500 million), FSBW's bad debt
deduction will be determined on the basis of net charge-offs during the
taxable year. The new rules also require FSBW to recapture its $1.5
millionpost-1987 additions to tax basis bad debt reserves ratably over a six
taxable year period beginning with fiscal year March 1999. The recapture of
the post-1987 additions to tax basis bad debt reserves will require FSBW to
pay approximately $85,000 a year in federal income taxes (based upon current
federal income tax rates). This will not result in a charge to earnings as
these amounts are included in the deferred tax liability at March 31, 1998.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution qualifies as a bank as defined by the statute. In
addition, the balance of the pre-1988 bad debt reserves continues to be
subject to provisions of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that FSBW makes "nondividend distributions" to
the Company, such distributions will be considered to result in distributions
from the balance of their bad debt reserves as of December 31, 1987 (or a
lesser amount if FSBW's loan portfolio decreased since December 31, 1987) and
then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in FSBW's taxable income. Nondividend distributions include
distributions in excess of FSBW's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of FSBW's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from FSBW's bad
debt reserves.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate. FSBW does not
intend to pay dividends that would result in a recapture of any portion of
their tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the corporation's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Banks, whether or not an Alternative
Minimum Tax ("AMT") is paid. Under President Clinton's 1998 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.
25
<PAGE>
<PAGE>
Dividends-Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Banks as a member of the same
affiliated group of corporations. The corporate dividends-received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Banks will not file a consolidated
tax return, except that if the Company or the Banks own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.
There have not been any IRS audits of the Company's or the Banks' federal
income tax returns during the past five years.
Environmental Regulation
The business of the Company is affected from time to time by federal and state
laws and regulations relating to hazardous substances. Under the federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
owners and operators of properties containing hazardous substances may be
liable for the costs of cleaning up the substances. CERCLA and similar state
laws can affect the Company both as an owner of branches and other properties
used in its business and as a lender holding a security interest in property
which is found to contain hazardous substances. While CERCLA contains an
exemption for holders of security interests, the exemption is not available if
the holder participates in the management of a property, and some courts have
broadly defined what constitutes participation in management of property.
Moreover, CERCLA and similar state statutes can affect the Company's decision
of whether or not to foreclose on a property. Before foreclosing on
commercial real estate, it is the Company's general policy to obtain an
environmental report, thereby increasing the costs of foreclosure. In
addition, the existence of hazardous substances on a property securing a
troubled loan may cause the Company to elect not to foreclose on the property,
thereby reducing the Company's flexibility in handling the loan.
Competition
The Banks encounter significant competition both in attracting deposits and in
originating real estate loans. Their most direct competition for deposits has
come historically from other commercial and savings banks, savings
associations and credit unions in their market areas. More recently, the
Banks have experienced an increased level of competition from securities
firms, insurance companies, money market and mutual funds, and other
investment vehicles. The Banks expect continued strong competition from such
financial institutions and investment vehicles in the foreseeable future. The
ability of the Banks to attract and retain deposits depends on their ability
to provide investment opportunities that satisfy the requirements of investors
as to rate of return, liquidity, risk of loss of principal, convenience of
locations and other factors. The Banks compete for deposits by offering
depositors a variety of deposit accounts and financial services at competitive
rates, convenient business hours, and a high level of personal service and
expertise.
The competition for loans comes principally from commercial banks, loan
brokers, mortgage banking companies, other savings banks and credit unions.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Banks' market
areas as well as the increased efforts by commercial banks and credit unions
to expand mortgage loan originations.
The Banks compete for loans primarily through offering competitive rates and
fees and providing excellent services to borrowers and home builders. Factors
that affect competition include general and local economic conditions, current
interest rate levels and the volatility of the mortgage markets.
26
<PAGE>
<PAGE>
Regulation
The Banks
General: As state-chartered, federally insured financial institutions, the
Banks are subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Banks are regularly
examined by the FDIC and their state banking regulators and file periodic
reports concerning their activities and financial condition with their
regulators. The Banks' relationship with depositors and borrowers also is
regulated to a great extent by both federal and state law, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Banks, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Company and the Banks have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision: As a state-chartered savings bank, FSBW is
subject to applicable provisions of Washington law and regulations. As a
state-chartered commercial bank, IEB is subject to applicable provisions of
Oregon law and regulations. State law and regulations govern the Banks'
ability to take deposits and pay interest thereon, to make loans on or invest
in residential and other real estate, to make consumer loans, to invest in
securities, to offer various banking services to its customers, and to
establish branch offices. Under state law, savings banks in Washington also
generally have all of the powers that federal mutual savings banks have under
federal laws and regulations. The Banks are subject to periodic examination
and reporting requirements by and of their state banking regulators.
Deposit Insurance: The FDIC is an independent federal agency that insures the
deposits, up to prescribed statutory limits, of depository institutions. The
FDIC currently maintains two separate insurance funds: the BIF and the SAIF.
As insurer of the Banks' deposits, the FDIC has examination, supervisory and
enforcement authority over the Banks.
FSBW's accounts are insured by the SAIF and IEB's accounts are insured by the
BIF to the maximum extent permitted by law. The Banks pay deposit insurance
premiums based on a risk-based assessment system established by the FDIC.
Under applicable regulations, institutions are assigned to one of three
capital groups that are based solely on the level of an institution's capital
"well capitalized," "adequately capitalized," and "undercapitalized" which are
defined in the same manner as the regulations establishing the prompt
corrective action system, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications.
Pursuant to the Deposit Insurance Funds Act of 1996 (the "DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including FSBW,
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of .065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier
of December 31, 1999 or the date upon which the last savings association
ceases to exist, after which time the assessment will be the same for all
insured deposits. The DIF Act provides for the merger of the BIF and the SAIF
into the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Banks.
27
<PAGE>
<PAGE>
Prompt Corrective Action: Under Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), each federal banking agency is required to
implement a system of prompt corrective action for institutions which it
regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action.
Under the regulations, an institution shall be deemed to be: (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, has a Tier I risk-based capital ratio of 4.0% or more, has a Tier I
leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8.0%, has a Tier
I risk-based capital ratio that is less than 4.0% or has a Tier I leverage
capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6.0%, has a Tier I risk-based capital ratio that is less
than 3.0% or has a Tier I leverage capital ratio that is less than 3.0%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan which
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At March 31, 1998, the Banks were categorized as "well capitalized" under the
prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness: The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings and (viii) compensation, fees and benefits (Guidelines). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the FDIC determines that
either Bank fails to meet any standard prescribed by the Guidelines, the
agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard. FDIC regulations establish deadlines
for the submission and review of such safety and soundness compliance plans.
Capital Requirements: The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of
purchased mortgage servicing rights and certain other accounting adjustments.
All other banks must have a Tier 1 leverage ratio of at least 100-200 basis
points above the 3% minimum. The FDIC capital regulations establish a minimum
leverage ratio of not less than 4% for banks that are not highly rated or are
anticipating or experiencing significant growth.
Any insured bank with a Tier 1 capital to total assets ratio of less than 2%
is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action. Insured banks operating with lower
than the prescribed minimum capital levels generally will not receive approval
of applications submitted to the FDIC. Also, inadequately capitalized state
nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
28
<PAGE>
<PAGE>
FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital
(which is defined as Tier 1 capital and Tier 2 or supplementary capital) to
risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based
on the risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted
assets. Overall, the amount of capital counted toward supplementary capital
cannot exceed 100% of Tier 1 capital.
FDIC capital requirements are designated as the minimum acceptable standards
for banks whose overall financial condition is fundamentally sound, which are
well-managed and have no material or significant financial weaknesses. The
FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate
and/or a bank has a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established in the regulation.
The Company believes that, under the current regulations, the Banks will
continue to meet their minimum capital requirements in the foreseeable future.
However, events beyond the control of the Banks, such as a downturn in the
economy in areas where the Banks have most of their loans, could adversely
affect future earnings and, consequently, the ability of the Banks to meet
their capital requirements.
Activities and Investments of Insured State-Chartered Banks: Federal law
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the
voting stock of a company that solely provides or reinsures directors',
trustees' and officers' liability insurance coverage or bankers' blanket bond
group insurance coverage for insured depository institutions, and (iv)
acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
Federal law provides that an insured state-chartered bank may not, directly,
or indirectly through a subsidiary, engage as "principal" in any activity that
is not permissible for a national bank unless the FDIC has determined that
such activities would pose no risk to the insurance fund of which it is a
member and the bank is in compliance with applicable regulatory capital
requirements. Any insured state-chartered bank directly or indirectly engaged
in any activity that is not permitted for a national bank must cease the
impermissible activity.
Federal Reserve System: In 1980, Congress enacted legislation which imposed
Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits
with the regional Federal Reserve Bank. NOW accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any nonpersonal time deposits at a bank. Under
Regulation D, a bank must establish reserves equal to 3% of the first $47.8
million of transaction accounts, of which the first $4.4 million is exempt,
and 10% on the remainder. The reserve requirement on nonpersonal time deposits
with original maturities of less than 1-1/2 years is 0%. As of March 31,
1998, the Banks met their reserve requirements.
Affiliate Transactions: The Company and the Banks are legal entities separate
and distinct. Various legal limitations restrict the Banks from lending or
otherwise supplying funds to the Company (an "affiliate"), generally limiting
such transactions with the affiliate to 10% of the Bank's capital and surplus
and limiting all such transactions to 20% of the Bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions
consistent with safe and sound banking practices, including credit standards,
that are substantially the same or at least as favorable to the Banks as those
prevailing at the time for transactions with unaffiliated companies.
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Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
Community Reinvestment Act: Banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank,
to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept
deposits, relocate an existing office or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution.
Dividends: Dividends from the Banks will constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends
payable by the Banks to the Company will depend upon the Banks' earnings and
capital position, and is limited by federal and state laws, regulations and
policies.
Federal law further provides that no insured depository institution may make
any capital distribution (which would include a cash dividend) if, after
making the distribution, the institution would be "undercapitalized," as
defined in the prompt corrective action regulations. Moreover, the federal
bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice.
The Company
General: The Company is a bank holding company registered with the Federal
Reserve. Bank holding companies are subject to comprehensive regulation by
the Federal Reserve under the Bank Holding Company Act of 1956, as amended
(BHCA) and the regulations of the Federal Reserve. The Company is required to
file with the Federal Reserve annual reports and such additional information
as the Federal Reserve may require and is subject to regular examinations by
the Federal Reserve. The Federal Reserve also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including
its bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
nonbank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve includes, among other things: operating a savings
institution, mortgage company, finance company, credit card company or
factoring company; performing certain data processing operations; providing
certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing
property on a full-payout, non-operating basis; selling money orders,
travelers' checks and U.S. Savings Bonds; real estate and personal property
appraising; providing tax planning and preparation services; and, subject to
certain limitations, providing securities brokerage services for customers.
30
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Interstate Banking and Branching. The Federal Reserve must approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The Federal Reserve may not approve the acquisition of a bank that
has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. Nor may the Federal
Reserve approve an application if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Federal law does not affect the authority of states to limit the percentage of
total insured deposits in the state which may be held or controlled by a bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may also
waive the 30% state-wide concentration limit contained in the federal law.
The Federal banking agencies are authorized to approve interstate merger
transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks adopted a law
prior to June 1, 1997 which applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
Dividends: The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to
the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is
consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends.
Bank holding companies, except for certain "well-capitalized" bank holding
companies, are required to give the Federal Reserve prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The
Federal Reserve may disapprove such a purchase or redemption of it determines
that the proposal would constitute an unsafe or unsound practice or would
violate any law, regulation, Federal Reserve order, or any condition imposed
by, or written agreement with, the Federal Reserve.
Capital Requirements: The Federal Reserve has established capital adequacy
guidelines for bank holding companies that generally parallel the capital
requirements of the FDIC for the Banks. The Federal Reserve regulations
provide that capital standards will be applied on a consolidated basis in the
case of a bank holding company with $150 million or more in total consolidated
assets.
The Company's total risk based capital must equal 8% of risk-weighted assets
and one half of the 8% (4%) must consist of Tier 1 (core) capital. As of
March 31, 1998 the Company's total risk based capital was 22.64% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
21.41% of risk-weighted assets.
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MANAGEMENT PERSONNEL
Executive Officers
The following table sets forth information with respect to the executive
officers of the Company.
Name Age (1) Position with Company Position with Banks
- ---- ------- --------------------- -------------------
Gary Sirmon 54 Chief Executive Officer, FSBW - Chief Executive
President and Director Officer, President and
Director, IEB - Director
D. Allan Roth 61 Secretary/Treasurer FSBW - Executive Vice
President and Chief
Financial Officer
Michael K. Larsen 55 Vice President FSBW - Executive Vice
President and Chief
Lending Officer
Jesse G. Foster 59 Director IEB-Chief Executive
Officer, President and
Director
Lloyd Baker 49 None FSBW-Vice President
- -----------------
(1) As of March 31, 1998.
Biographical Information
Set forth below is certain information regarding the executive officers of the
Company. Each resides in Walla Walla and has held his current occupation for
the last five years. There are no family relationships among or between the
directors or executive officers.
Gary Sirmon is Chief Executive Officer, President and a director of the
Company and FSBW; and a Director of IEB. He joined FSBW in 1980 as an
executive vice president and assumed his current position in 1982.
D. Allan Roth is Executive Vice President and Chief Financial Officer of FSBW
and is Secretary/Treasurer of the Company. He joined FSBW in 1965.
Michael K. Larsen is Executive Vice President and Chief Lending Officer of
FSBW and is Vice President of the Company. He joined FSBW in 1981.
Jesse G. Foster is the Chief Executive Officer, President and a Director of
IEB. He joined IEB in 1962.
Lloyd Baker is a Vice President with FSBW. He joined FSBW in 1995 as a Vice
President.
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Item 2 - Properties
The Company's home office, which is owned by the Company, is located in Walla
Walla, Washington. First Savings has, in total, 16 branch offices, all of
which are located in the State of Washington. These offices are located in
the cities of Walla Walla (4), Kennewick (2), Richland, Clarkston, Sunnyside,
Yakima (4), Selah, Wenatchee and Dayton. Of these offices, 13 are owned by
the Company and 3 are leased. The leases expire from 1998 through 2001. In
addition to these, First Savings has three leased loan production offices in
Bellevue, Spokane and Puyallup, Washington. The leases expire from 1998
through 2000. IEB's main office is located in Hermiston, Oregon and is owned
by the Company. IEB has, in total, four branch offices and a drive-up
facility, all of which are located in the State of Oregon. These offices,
which are owned by the Company, are located in Pendleton, Umatilla, Boardman
and Stanfield. IEB also has a remote drive-up facility in Hermiston, which is
owned, and two loan production offices in Condon and La Grande, which are on
month-to-month leases. IEB also leases two facilities in Hermiston for its
mortgage division and for its information systems. The Company's net
investment in its offices, premises, equipment and leaseholds was $11.4
million at March 31, 1998.
Item 3 - Legal Proceedings
Periodically, there have been various claims and lawsuits involving the Banks,
mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Banks hold security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Banks' business. The Company and the Banks are not a party to
any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
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Part II
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Stock Listing
First Savings Bank of Washington Bancorp, Inc. common stock is traded
over-the-counter on the Nasdaq National Market under the symbol "FWWB."
Newspaper stock tables list the company as "FSBWA." Stockholders of record at
March 31, 1998 totaled 781. This total does not reflect the number of persons
or entitles who hold stock in nominee or "street" name through various
brokerage firms. The following tables show the reported high and low sale
prices of the Company's common stock for the three year period ended March 31,
1998.
Cash
Dividends
Fiscal 1998 High Low Declared
----------- ---- --- --------
First quarter $22.25 $18.75 $0.07
Second quarter 24.88 21.63 0.07
Third quarter 28.56 23.25 0.07
Fourth quarter 27.63 23.50 0.09
Cash
Dividends
Fiscal 1997 High Low Declared
----------- ---- --- --------
First quarter $15.63 $13.38 $0.05
Second quarter 17.25 14.50 0.05
Third quarter 19.00 16.56 0.05
Fourth quarter 22.13 18.00 0.07
Cash
Dividends
Fiscal 1996 * High Low Declared
----------- ---- --- --------
Third quarter $13.25 $12.44 $0.05
Fourth quarter 13.50 12.38 0.05
* Year of Conversion
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Item 6 - Selected Consolidated Financial and other Data
These tables set forth selected consolidated financial and other data of the
Company at the dates and for the periods indicated. This information is
derived from and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and Notes thereto presented
elsewhere in this filing. Information for fiscal years prior to March 31,
1996, is for First Savings Bank's former mutual holding company.
FINANCIAL CONDITION DATA: At March 31
--------------------------------------------------
(In thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $1,154,072 $1,007,633 $743,176 $491,368 $425,936
Loans receivable, net 756,917 645,881 415,295 299,403 246,264
Cash
and securities (1) 345,142 312,991 302,772 175,505 165,065
Deposits 591,571 544,967 374,064 360,352 352,547
Borrowings 389,272 293,700 199,071 70,338 17,655
Equity 150,184 148,636 154,142 50,251 44,931
Shares outstanding
excluding unearned,
restricted shares
held in ESOP 9,237 9,744 10,077 N/A N/A
OPERATING DATA: At or for the Years Ended March 31 (2)
--------------------------------------------------
(In thousands, except 1998 1997 1996 1995 1994
per share data) ---- ---- ---- ---- ----
Interest income $85,147 $67,292 $41,409 $33,652 $31,342
Interest expense 46,651 36,372 23,287 18,230 15,707
------- ------ ------ ------ ------
Net interest income 38,496 30,920 18,122 15,422 15,635
Provision for loan losses 1,628 1,423 524 391 440
Net interest income ------- ------ ------ ------ ------
after provision for
loan losses 36,868 29,497 17,598 15,031 15,195
Gains (losses) from sale
of loans and securities 1,377 676 387 (121) 3,390
Other operating income 3,343 2,394 1,202 1,180 2,045
Other operating expense 21,020 19,330 10,304 9,983 8,610
------- ------ ------ ------ ------
Income before provision
for income taxes and
cumulative effect of
change in accounting 20,568 13,237 8,883 6,107 12,020
Provision for income taxes 7,446 3,923 2,631 1,335 2,635
------- ------ ------ ------ ------
Income before cumulative
effect of change in
accounting 13,122 9,314 6,252 4,772 9,385
Cumulative effect of
change in accounting
(3) -- -- -- 396 --
------- ------ ------ ------ ------
Net income $13,122 $9,314 $6,252 $5,168 $9,385
======= ====== ====== ====== ======
PER SHARE DATA: (4)
Net income: Basic $ 1.43 $ 0.97 N/A N/A N/A
Diluted 1.37 0.96
Stockholders' equity (5) 16.26 15.25 15.30
Cash dividends 0.30 0.22 0.10
Dividend payout ratio 21.90% 22.92% N/A
(footnotes on following page)
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KEY FINANCIAL RATIOS:
At or for the Years Ended March 31 (2)
--------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Performance Ratios:
Return on average
assets (6) 1.21% 1.04% 1.11% 1.12% 2.32%
Return on average
equity (7) 8.70 6.30 6.62 10.85 23.73
Average equity to
average assets 13.86 16.58 16.75 10.34 9.77
Interest rate spread (8) 3.09 2.83 2.49 3.05 3.63
Net interest margin (9) 3.68 3.59 3.33 3.47 4.02
Non-interest expense
to average assets 1.93 2.17 1.83 2.16 2.13
Average interest-earning
assets to interest-
bearing liabilities 113.41 118.11 119.80 110.31 109.72
Asset Quality Ratios:
Allowance for loan
losses as a percent
of total loans at
end of period 0.96 0.95 0.89 1.06 1.20
Net charge-offs as a
percent of average
outstanding loans
during the period 0.08 0.04 0.01 0.10 0.05
Non-performing assets
as a percent of total
assets 0.20 0.31 0.17 0.19 0.34
Ratio of allowance for
loan losses to non-
performing loans (10) 5.39 3.20 7.53 10.41 5.01
Consolidated Capital
Ratio:
Tier 1 leverage capital
ratio 12.17 13.68 20.78 10.19 10.55
- -----------------
Note:
(1) Includes securities available for sale and held to maturity.
(2) Certain amounts in the prior periods' financial statements have been
reclassified to conform to the current period's presentation. These
reclassifications have affected certain ratios for the prior periods.
The effect of such reclassifications is immaterial.
(3) Adjustment net of taxes of $204,000 due to the adoption of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities
(4) First Savings Bank converted from mutual to stock ownership on 10/31/95,
therefore data is not meaningful for fiscal years prior to March 31,
1996.
(5) Calculated using shares outstanding excluding unearned restricted shares
held in ESOP.
(6) Net income divided by average assets.
(7) Net income divided by average equity.
(8) Difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities.
(9) Net interest income before provision for loan losses as a percent of
average interest-earning assets.
(10) Non-performing loans consist of nonaccrual and 90 days past due loans.
36
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ITEM 7 - Management's Discussion & Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of First Savings Bank of Washington Bancorp, Inc. Management desires to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing the Company of the protections of such safe harbor with respect to
all "forward-looking statements" contained in our Annual Report. We have used
"forward-looking statements" to describe future plans and strategies,
including our expectations of the Company's future financial results.
Management's ability to predict results or the effect of future plans or
strategies is inherently uncertain. Factors which could affect actual results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, competitive products and pricing, loan delinquency rates,
and changes in federal and state regulation. These factors should be
considered in evaluating the "forward-looking statements", and undue reliance
should not be placed on such statements.
General
First Savings Bank of Washington Bancorp, Inc. (FWWB or the Company), a
Delaware corporation, is primarily engaged in the business of planning,
directing and coordinating the business activities of its wholly owned
subsidiaries, First Savings Bank of Washington (FSBW) and Inland Empire Bank
(IEB) (together, the Banks). FSBW is a Washington-chartered savings bank the
deposits of which are insured by the Federal Deposit Insurance Corporation
(FDIC) under the Savings Association Insurance Fund (SAIF). FSBW conducts
business from its main office in Walla Walla, Washington and its 16 branch
offices and three loan production offices located in southeast, central, north
central and western Washington. IEB is an Oregon-chartered commercial bank
whose deposits are insured by the FDIC under the Bank Insurance Fund (BIF).
IEB conducts business from its main office in Hermiston, Oregon and its five
branch offices and two loan production offices located in northeast Oregon.
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, consisting of cash, loans and investment securities, and interest
expense on interest-bearing liabilities, composed primarily of savings
deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements.
Net interest income is primarily a function of the Company's interest rate
spread, which is the difference between the yield earned on interest-earning
assets and the rate paid on interest-bearing liabilities, as well as a
function of the average balance of interest-earning assets as compared to the
average balance of interest-bearing liabilities. As more fully explained
below, the Company's net interest income significantly increased for both the
most recent quarter and year ended March 31, 1998, when compared to the same
periods for the prior year. This increase in net interest income was largely
due to the substantial growth in average asset and liability balances. The
Company's net income also is affected by provisions for loan losses and the
level of its other income, including deposit service charges, loan origination
and servicing fees, and gains and losses on the sale of loans and securities,
as well as its non-interest operating expenses and income tax provisions. As
further explained below, net income for both the most recent quarter and
fiscal year increased $363,000 and $3.8 million respectively, from the
comparable periods ended March 31, 1997. After adjusting for the special SAIF
assessment of $2.4 million ($1.6 million after tax) that occurred in the
second quarter of fiscal year 1997 (quarter ended September 30, 1996), the
increase in net income was $2.2 million for fiscal 1998 when compared to
fiscal 1997. These increases reflected a rise in net interest income and an
increase in other operating income which were partially offset by increases in
operating expenses and the provision for income taxes. Operating results for
the fiscal year ended March 31, 1997, included only eight months of activity
at Inland Empire Bank, while those for the fiscal year ended March 31, 1998,
included a full twelve months' impact.
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
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Recent Developments and Significant Events Since March 31, 1997
Acquisition of Towne Bank
The Company completed the acquisition of Towne Bancorp, Inc. (TB) effective
April 1, 1998. The Company paid approximately $28.1 million in cash and
common stock for the outstanding common shares and stock options of Towne
Bancorp. Shares of FWWB account for 70% of the transaction payment to Towne
Bank shareholders. Towne Bancorp is the holding company for Towne Bank,
headquartered in Woodinville, Washington, a Seattle suburb.
Founded in 1991, TB is a community business bank with approximately $146
million in total assets, $134 million in deposits, $120 million in loans and
$9.3 million in stockholders' equity at March 31, 1998. TB operates four full
service branches in the Seattle, Washington metropolitan area in Woodinville,
Redmond, Bellevue and Renton and plans to open its Bothell branch in June
1998.
Adoption of Dividend Reinvestment and Stock Purchase Plan
In October 1997, the Company adopted a dividend reinvestment and stock
purchase plan. Under the terms of the plan all registered stockholders with
100 or more shares of stock may automatically reinvest all or a portion of
their cash dividends in additional shares of the Company's common stock. In
addition, qualifying participants may also make optional monthly cash payments
of $50 to $1,500 to purchase additional shares of Company stock.
Year 2000 Compliance
The "Year 2000" (Y2K) issue is the result of older computer programs being
written using two digits rather than four to define the applicable year. A
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruption of operations including,
among other things, a temporary inability to process transactions, send
statements, or engage in similar normal business activities.
Based on an assessment of computer hardware, software and other equipment
operated by the Company and its subsidiary Banks, the Company presently
believes that all equipment and programs should be Y2K compliant by December
31, 1998. A program for addressing the Y2K issue through awareness,
assessment, renovation and testing has been developed and implemented. The
costs of implementing and completing the program's phases have not been of a
material nature and should continue to be minimal through program completion.
The Company and its subsidiary Banks have initiated formal communications with
all significant suppliers to determine the extent to which they are vulnerable
to those third parties' failures to remedy their own Y2K impact issues. Third
party responses have indicated satisfactory progress in addressing any needs
for equipment or software renovation. The Banks' large customers are also
being contacted to build Y2K awareness and encourage early solutions regarding
potential business disruption due to processing failures. There can be no
guarantee that the systems of other companies on which the Banks' systems rely
will be timely converted, or that a failure to convert by another company, or
a conversion that is incompatible with the Banks' systems, would not have a
material adverse effect on the Banks. However, the Banks will test for the
Y2K preparedness of all internal functions and external functions provided by
third parties whenever possible.
Comparison of Financial Condition at March 31, 1998 and March 31, 1997
Total assets increased $146.0 million, or 14.5%, from $1.01 billion at March
31, 1997, to $1.15 billion at March 31, 1998. The increase reflected, in
general, growth in net loans receivable and was funded primarily with deposit
growth, advances from the FHLB and other borrowings. This growth represented
a continuation of management's plans to further leverage the Company's capital
and reflects the solid economic conditions in the markets where the Company
operates.
38
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Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $111.0 million, or 17.2%, from
$645.9 million at March 31, 1997, to $756.9 million at March 31, 1998. The
increase in gross loans of $114.8 million from $707.8 million at March 31,
1997, to $822.6 million at March 31, 1998, consists of $38.7 million of
mortgages secured by commercial and multifamily real estate, $28.4 million of
residential mortgages, $22.2 million of construction and land loans and $25.5
million of non-mortgage loans such as commercial, agricultural and consumer
loans. A little more than half of the increase in assets was funded by a net
increase of $66.0 million, or 28.5%, in FHLB advances from $231.5 million at
March 31, 1997, to $297.5 million on March 31, 1998. Asset growth was also
funded by increased deposits, other borrowings and net income from operations.
Deposits grew $46.6 million, or 8.6%, from 545.0 million at March 31, 1997, to
$591.6 million at March 31, 1998. Other borrowings, primarily repurchase
agreements with investment banking firms, grew $29.5 million, or 47.5%, from
$62.2 million at March 31, 1997, to $91.7 million at March 31, 1998. Funds
also were used to purchase $14.2 million of treasury stock during the year.
Securities available for sale and held to maturity increased $14.1 million, or
4.9%, from $288.5 million at March 31, 1997, to $302.6 million at March 31,
1998. Federal Home Loan Bank Stock increased $3.2 million as the Company was
required to purchase more stock as a result of its increased use of FHLB
advances. Real estate held for sale decreased $175,000, primarily as a result
of completed sales.
Comparison of Results of Operations for the Years Ended March 31, 1998 and
March 31, 1997
General. Net income for fiscal 1998 was $13.1 million, or $1.37 per share
(diluted), compared to net income of $9.3 million, or $.96 per share
(diluted), recorded in fiscal 1997. Net income for fiscal 1997 was
significantly affected by the $2.4 million ($1.6 million after tax) SAIF
assessment. In addition, fiscal 1998 included $3.0 million of net income from
a full year of operations at IEB, which the Company acquired on August 1,
1996, compared to $1.5 million for eight months in the comparable fiscal 1997
period.
The Company's improved operating results reflect the significant growth of
assets and liabilities. The substantial increase in these balances during the
year since March 31, 1997, resulted from the continued deployment and
leveraging of the $98.6 million in net proceeds raised in the Company's
conversion from mutual to stock ownership on October 31, 1995. This growth
helped to increase the Company's return on average equity from 7.36%
(excluding the SAIF assessment of $1.6 million after tax, 6.30% when the SAIF
assessment is included) for fiscal 1997 to 8.56% for fiscal 1998.
Interest Income. Interest income for the year ended March 31, 1998, was $85.1
million compared to $67.3 million for the year ended March 31, 1997, an
increase of $17.8 million, or 26.5%. The increase in interest income was a
result of a $183.2 million, or 21.3%, growth in average balances of
interest-earning assets combined with a 34 basis point increase in the average
yield on those assets. The yield on average assets rose to 8.15% in fiscal
1998 compared to 7.81% in fiscal 1997. Average loans receivable for fiscal
1998 increased by $185.3 million, or 34.0%, when compared to fiscal 1997.
Interest income on loans increased by $18.1 million, or 39.0%, compared to the
prior year, reflecting the impact of the increase in average loan balances and
a 32 basis point increase in the average yield largely resulting from the
addition of higher yielding loans held by IEB but also reflecting higher
yields on the expanding balances of commercial and multifamily real estate,
construction and land, and non-mortgage loans at First Savings Bank. Loans
yielded 8.86% for fiscal 1998 compared to 8.54% for fiscal 1997. The average
balance of mortgage-backed securities, investment securities, daily
interest-bearing deposits and FHLB stock decreased by $2.1 million in fiscal
1998, causing the interest and dividend income from those investments to
decrease a modest $291,000 for fiscal 1998 compared to fiscal 1997. The
average yield on mortgage-backed securities decreased from 6.86% for the year
ended March 31, 1997, to 6.61% in 1998 reflecting both paydowns in certain
higher yielding securities and lower yields on most adjustable rate securities
as market rates generally declined. The average yield on investment securities
and deposits increased from 5.98% for fiscal 1997 to 6.13% in 1998. Earnings
on FHLB stock increased by $279,000, reflecting an increase of $3.4 million in
the average balance of FHLB stock for the year ended March 31, 1998, and a 9
basis point increase in the dividend yield on that stock.
39
<PAGE>
<PAGE>
Interest Expense. Interest expense for the year ended March 31, 1998, was
$46.7 million compared to $36.4 million for the comparable period in 1997, an
increase of $10.3 million, or 28.3%. The increase in interest expense was due
to the $191.8 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1998 was largely
due to a $61.8 million increase in the average balance of FHLB advances and
other borrowings. Average FHLB advances totaled $276.3 million during the year
ended March 31, 1998, as compared to $214.6 million during the year ended
March 31, 1997, resulting in a $4.3 million increase in related interest
expense. The average rate paid on those advances increased to 6.07% for
fiscal 1998 from 5.83% for fiscal 1997. Other borrowings consist of retail
repurchase agreements with customers and repurchase agreements with investment
banking firms secured by certain investment securities. The average balance
for other borrowings increased $41.2 million from $38.0 million for the year
ended March 31, 1997, to $79.2 million for the same period in 1998, and the
related interest expense increased $2.5 million from $2.1 million to $4.6
million for the respective periods. The bulk of this growth in other
borrowings reflects a $45.6 million increase in repurchase agreements with
investment banking firms that are being used to finance a portion of the
Company's assets. The repurchase agreements with investment banking firms
generally carry higher rates than retail agreements; therefore, as they
constitute a greater portion of other borrowings, the weighted average rate
has increased. Deposit interest expense increased $3.6 million for the year
ended March 31, 1998. Average deposit balances increased from $477.4 million
for the year ended March 31, 1997, to $566.2 million for the year ended March
31, 1998, while, at the same time, the average rate paid on deposit balances
decreased 8 basis points. The decline in the rate paid on deposits primarily
reflects the acquisition of IEB's $32.1 million of non-interest-bearing
deposits as well as generally lower rates paid on interest-bearing accounts of
IEB, which impacted the full twelve month period in 1998 in contrast to only
eight months in 1997.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1998, increased by $205,000 to $1.6 million compared to $1.4 million
for fiscal 1997. This increase is primarily reflective of the need to provide
a higher allowance level for the $114.8 million growth in gross loans
receivable for the fiscal year. The allowance for losses on loans is
maintained at a level sufficient to provide for estimated losses based on
evaluating known and inherent risks in the loan portfolio and upon
management's continuing analysis of the factors underlying the quality of the
loan portfolio. These factors include changes in the size and composition of
the loan portfolio, actual loan loss experience, current and anticipated
economic conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and guarantees securing the loans.
Additions to these allowances are charged to earnings. Provisions for losses
that are related to specific assets are usually applied as a reduction of the
carrying value of the assets and charged immediately against the income of the
period. The reserve is based upon factors and trends identified by management
at the time financial statements are prepared. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to provide additions to the allowance based upon judgments
different from management. Although management uses the best information
available, future adjustments to the allowance may be necessary due to
economic, operating, regulatory and other conditions beyond the Banks'
control.
Other Operating Income. Other operating income increased from $3.1 million
for the year ended March 31, 1997, to $4.7 million for the year ended March
31, 1998. Part of the increase was due to a $921,000 increase in other fees
and service charges due largely to IEB operations earning higher fees as a
commercial bank combined with increased fee income at FSBW reflecting deposit
growth and pricing adjustments. In addition there was a $701,000 increase in
net gains on securities and loans sold in fiscal 1998 as compared to 1997.
This increase primarily reflects inclusion of a full year of activity from
IEB's residential mortgage banking operations and increased sales of loans,
with servicing retained, by FSBW which increased the volume of loans sold in
the secondary market over the prior year. Increased sales of loans at FSBW
were designed to curtail the rate of growth in relatively low yielding fixed
rate residential mortgages during this period of low market rates and to
reduce its exposure to the risk of rising interest rates.
40
<PAGE>
<PAGE>
Other Operating Expenses. Other operating expenses for the year ended March
31, 1998 increased $1.7 million from the prior period in fiscal 1997. The
decrease in the $2.4 million special SAIF assessment for the year ended March
31, 1998 was more than offset by a $4.3 million increase in other operating
expenses, which among other increases included a full year of IEB's operations
in the fiscal 1998 period compared to eight months in the comparable period in
fiscal 1997. In addition to the full year impact of IEB, increases in other
operating expenses reflect overall growth in assets and liabilities, customer
relationships and complexity of operations as the Company continues to expand.
The Company's efficiency ratio, excluding the amortization of goodwill and the
$2.4 million SAIF assessment, improved to 46.56% for the year ended March 31,
1998, from 48.11% for fiscal 1997. Other operating expenses as a percentage of
average assets declined to 1.93% (1.85% excluding the amortization of
goodwill) for the year ended March 31, 1998, compared to 2.17% (1.90%
excluding the SAIF assessment) (1.83% excluding the amortization of goodwill)
for the year ended March 31, 1997.
Income Taxes. Income tax expense was $7.4 million for the year ended March
31, 1998, compared to $3.9 million for fiscal 1997. The $3.5 million increase
in the provision for income taxes reflects the higher level of income being
taxed at higher effective rates due to the phase-out of the 34% surtax
exemption; the net effect of IEB's state taxes and non-deductible goodwill
expense and part of the expense recorded in the release of the Employees Stock
Ownership Plan (ESOP) shares are not deductible for tax purposes. Management
is anticipating that the Company's effective tax rate for fiscal 1999 will
increase from the fiscal 1998 rate of 36% to approximately 38%. This increase
is expected as the result of the effects of non-deductible expenses associated
with goodwill amortization combined with expected increases in state taxes
related to filing consolidated returns. In addition, if the Company's average
market price continues to hold or rise above recent fourth quarter levels of
$23 to $25 per share, the non-deductible expense related to recording the
difference between the cost and the fair market value of released ESOP shares
will be greater in fiscal 1999, resulting in an increased tax provision and
effective tax rate for future periods. The Company's effective tax rates for
the years ended March 31, 1998 and 1997, were 36% and 30%, respectively.
Comparison of Results of Operations for the Years Ended March 31, 1997 and
March 31, 1996
General. Net income for fiscal 1997 was $9.3 million, or $.96 per share
(diluted), compared to net income of $6.3 million recorded in fiscal 1996. Net
income for the year ended March 31, 1997 was significantly affected by the
$2.4 million ($1.6 million after tax) non-interest expense representing the
Company's share of an industry-wide special assessment in the second quarter
to recapitalize the SAIF. In addition, the year ended March 31, 1997, included
eight months of combined operations with IEB which the Company acquired on
August 1, 1996. The acquisition significantly affected the Company's operating
results for the year ended March 31, 1997.
The Company's return on average equity for the year ended March 31, 1997,
decreased to 6.30% as compared to 6.62% for the year ended March 31, 1996,
which was due to the large increase in average equity resulting from the
October 31, 1995 stock offering that was present for a full year in fiscal
1997 versus five months in fiscal 1996 and due to the adverse effect of the
SAIF assessment on 1997 results.
Interest Income. Interest income for the year ended March 31, 1997, was $67.3
million compared to $41.4 million for the year ended March 31, 1996, an
increase of $25.9 million, or 62.5%. The increase in interest income was a
result of a $317.7 million, or 58.3%, growth in average balances of
interest-earning assets combined with a 20 basis point increase in the average
yield on those assets. The yield on average assets rose to 7.81% in fiscal
1997 compared to 7.61% in fiscal 1996. Average loans receivable for fiscal
1997 increased by $217.2 million, or 66.2%, when compared to fiscal 1996.
Interest income on loans increased by $19.1 million, or 69.5%, compared to the
prior year, reflecting the impact of the increase in average loan balances and
a 17 basis point increase in the average yield primarily resulting from the
addition of $90.5 million of higher yielding loans held by IEB. Loans yielded
8.54% for fiscal 1997 compared to 8.37% for fiscal 1996. The average balance
of mortgage-backed securities, investment securities, daily interest-bearing
deposits and FHLB stock increased by $100.5 million in fiscal 1997, and
interest and dividend income from those investments rose by $6.8 million for
fiscal 1997 compared to fiscal 1996. The average yield on mortgage-backed
securities rose from 6.65% for the year ended March 31, 1996, to 6.86% in
1997. The average yield on investment securities and deposits decreased from
6.23% for fiscal 1996 to 6.13% in 1997. Earnings on FHLB stock increased by
$561,000 reflecting an increase of $6.9 million in the average balance of FHLB
stock for the year ended March 31, 1997, and a 70 basis point increase in the
dividend yield on that stock.
41
<PAGE>
<PAGE>
Interest Expense. Interest expense for the year ended March 31, 1997, was
$36.4 million compared to $23.3 million for the comparable period in 1996, an
increase of $13.1 million, or 56.2%. The increase in interest expense was due
to the $275.4 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in fiscal 1997 was largely
due to a $178.7 million increase in the average balance of FHLB advances and
other borrowings combined with a $96.8 million growth in average deposits
coming primarily from the acquisition of IEB. Average FHLB advances totaled
$214.6 million during the year ended March 31, 1997, as compared to $66.3
million during the year ended March 31, 1996, resulting in an $8.7 million
increase in related interest expense. The average rate paid on those advances
increased to 5.83% for fiscal 1997 from 5.80% for fiscal 1996. Other
borrowings consist of retail repurchase agreements with customers and
repurchase agreements with investment banking firms secured by certain
investment securities. The average balance for other borrowings increased
$30.4 million from $7.6 million for the year ended March 31, 1996, to $38.0
million for the same period in 1997, and the related interest expense
increased $1.7 million from $469,000 to $2.1 million for the respective
periods. The bulk of this growth in other borrowings reflects an increase in
repurchase agreements with investment banking firms that are being used to
finance a portion of the Company's assets. Deposit interest expense increased
$2.8 million for the year ended March 31, 1997. Average deposit balances
increased from $380.6 million for the year ended March 31, 1996, to $477.4
million for the year ended March 31, 1997, while, at the same time, the
average rate paid on deposit balances decreased 44 basis points. The decline
in the rate paid on deposits primarily reflects the acquisition of IEB's $30.8
million of non-interest-bearing deposits.
Provision for Loan Losses. The provision for loan losses for the year ended
March 31, 1997, increased by $899,000 to $1.4 million compared to $524,000 for
fiscal 1996. This increase was primarily reflective of the need to provide a
higher allowance level for the $140.1 million growth in loans receivable for
the fiscal year (excluding the acquisition of IEB's $90.5 million loan
portfolio).
Other Operating Income. Other operating income increased from $1.6 million
for the year ended March 31, 1996, to $3.1 million for the year ended March
31, 1997. The increase was primarily due to a $1.0 million increase in other
fees and service charges due largely to IEB operations earning higher fees as
a commercial bank combined with increased fee income at FSBW reflecting
deposit growth and pricing adjustments. In addition, there was a $289,000
increase in net gains on securities and loans sold in fiscal 1997 as compared
to 1996.
Other Operating Expenses. Other operating expenses increased $9.0 million
from $10.3 million for the year ended March 31, 1996, to $19.3 million for the
year ended March 31, 1997. The increase in non-interest operating expenses for
fiscal 1997 was primarily due to the addition of $4.2 million of IEB operating
expenses during the eight month period subsequent to acquisition. Included in
these IEB operating expenses is $592,000 of amortization of goodwill. In
addition, fiscal 1997 expenses include the $2.4 million SAIF assessment. The
increase also reflects growth of the Company including increased personnel
costs and increases in legal, accounting and insurance costs relating to
operating as a public company. This aggregate increase was marginally reduced
by a $395,000 increase in capitalized loan origination costs reflecting a
$67.9 million increase in loan origination volume for fiscal 1997 compared to
the same period in 1996.
Income Taxes. Income tax expense for the year ended March 31, 1997, increased
$1.3 million from fiscal 1996. The Company's effective tax rate increased
slightly to 29.64% for fiscal 1997, from 29.62% for fiscal 1996. The
existence of substantial non-taxable interest income from municipal securities
and loans primarily accounts for the reduction in tax rates from statutory
levels. The expected increase in income taxes was due to the $4.4 million
increase in before-tax income during fiscal 1997 as compared to fiscal 1996.
42
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<PAGE>
Yields Earned and Rates Paid
The earnings of the Company depend largely on the spread between the yield on
interest-earning assets (primarily loans and investment securities) and the
cost of interest-bearing liabilities (primarily deposit accounts and FHLB
advances), as well as the relative size of the Company's interest-earning
assets and interest-bearing liability portfolio.
Table I, Analysis of Net Interest Spread, sets forth, for the periods
indicated, information regarding average balances of assets and liabilities as
well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-earning assets to average interest-bearing
liabilities. Average balances for a period have been calculated using the
daily average during such period.
Changes in the economic and interest rate environment, competition in the
marketplace and changes in asset and liability mix can cause the Company's
average interest rate spread to increase or decrease. While strong competition
and a generally unfavorable interest rate environment (a relatively flat yield
curve brought about largely by declining intermediate and long term interest
rates) have had negative effects on the Company's interest rate spread in
recent periods, for the past two years the most significant impact on the
Company's interest rate spread has come from changes in its asset and
liability mix. On balance, those changes in mix have resulted in an expanding
interest rate spread which has increased from 2.49% in 1996 to 2.83% in 1997
and again to 3.09% in 1998. Contributing to this increased spread has been a
decline in the relative portion of the Company's assets invested in securities
which was 39.8% of average earning assets in 1996, 36.8% in 1997, and 30.1% in
1998. In addition to the relative decline in investment securities and
commensurate increase in loans, the mix of the loan portfolio has changed to
include more higher yielding loans. Changes in the portfolio mix are evident
in the higher yields on mortgage loans which increased from 8.35% in 1996 to
8.38% in 1997 and to 8.69% in 1998. Changes in the portfolio mix are also
reflected in the increased portion of non-mortgage loans which increased from
0.7% of earning assets in 1996 to 5.4% of earning assets in 1997 and to 8.1%
in 1998. Also, contributing to an improved interest rate spread has been a
decline in the cost of deposits primarily brought about by the substantial
increase in the amount of checking and NOW account balances. Deposit costs
declined from 4.99% in 1996 to 4.55% in 1997 and to 4.47% in 1998.
Substantially offsetting the decline in deposit costs has been an increase in
the use of more expensive FHLB advances and other borrowings. As a result,
the cost of total interest-bearing liabilities, which declined from 5.12% in
1996 to 4.98% in 1997, increased to 5.06% in 1998. The acquisition of IEB, a
commercial community bank, on August 1, 1996, significantly contributed to the
changes in loan and deposit portfolio mix. Improvement in the Company's net
interest margin over this same period mostly reflects the same changes
associated with the increased net interest rate spread. However,
counterbalancing to a degree this increased spread is the somewhat adverse
impact on net interest margin resulting from the increased use of leverage
which can be seen in the declining ratio of average interest-earning assets to
average interest-bearing liabilities. Nonetheless, net interest margin
increased from 3.33% in 1996 to 3.59% in 1997 and to 3.68% in 1998. Management
believes that in the future increased net interest income will come primarily
from increased volumes, although continued changes in asset and liability mix
and a slightly more favorable interest rate environment may also add to net
interest income.
43
<PAGE>
<PAGE>
Table I: Analysis of Net Interest Spread
Years Ended March 31, (dollars in thousands)
1998 1997 1996
----------------------------- -------------------------- --------------------------
Average Interest & Yield/ Average Interest & Yield/ Average Interest & Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets(1):
Mortgage loans $ 645,577 $56,111 8.69% $498,578 $41,797 8.38% $324,400 $27,094 8.35%
Agriculture/commercial
loans 57,516 5,587 9.71 30,120 2,829 9.39 886 76 8.58
Consumer and other
loans 27,412 2,997 10.93 16,494 1,923 11.66 2,714 299 11.02
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 730,505 64,695 8.86 545,192 46,549 8.54 328,000 27,469 8.37
Mortgage-backed
securities 189,572 12,522 6.61 181,148 12,420 6.86 107,847 7,170 6.65
Securities and
deposits 110,625 6,783 6.13 124,592 7,455 5.98 104,281 6,463 6.20
FHLB stock 14,661 1,147 7.82 11,222 868 7.73 4,365 307 7.03
Total investment ---------- ------- ----- -------- ------- ----- -------- ------- -----
securities 314,858 20,452 6.50 316,962 20,743 6.54 216,493 13,940 6.44
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
earning assets 1,045,363 85,147 8.15 862,154 67,292 7.81 544,493 41,409 7.61
Non-interest-earning ------- ----- ------- ----- ------- -----
assets 43,256 30,217 19,706
---------- -------- --------
Total assets $1,088,619 $892,371 $564,199
========== ======== ========
Interest-bearing
liabilities:
Savings accounts 42,937 1,248 2.91 41,114 1,183 2.88 48,581 1,557 3.20
Checking and NOW
accounts(2) 96,166 899 0.93 69,525 864 1.24 32,831 636 1.94
Money market accounts 76,048 3,073 4.04 61,42 62,077 3.38 31,760 1,014 3.19
Certificates of
deposit 351,042 20,069 5.72 305,336 17,612 5.77 267,458 15,769 5.90
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total deposits 566,193 25,289 4.47 477,401 21,736 4.55 380,630 18,976 4.99
Other interest-bearing
liabilities:
FHLB advances 276,328 16,782 6.07 214,563 12,504 5.83 66,252 3,842 5.80
Other borrowings 79,210 4,580 5.78 37,971 2,132 5.61 7,620 469 6.15
---------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-
bearing liabi-
lities 921,731 46,651 5.06 729,935 36,372 4.98 454,502 23,287 5.12
Non-interest-bearing ---------- ------- ----- -------- ------- ----- -------- ------- -----
liabilities 16,044 14,507 15,213
---------- -------- --------
Total liabilities 937,775 744,442 469,715
---------- -------- --------
Equity 150,844 147,929 94,484
---------- -------- --------
Total liabilities
and equity $1,088,619 $892,371 $564,199
========== ======== ========
Net interest income $38,496 $30,920 $18,122
======= ======= =======
Interest rate spread 3.09% 2.83% 2.49%
==== ==== ====
Net interest margin 3.68% 3.59% 3.33%
Ratio of average ==== ==== ====
interest-earning
assets to average
interest-bearing
liabilities 113.41% 118.11% 119.80%
====== ====== ======
- -------------------
(1) Average balances include loans accounted for on a nonaccrual basis and loans 90 days or more past
due.
(2) Average balances include non-interest-bearing deposits.
44
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<PAGE>
Table II, Rate / Volume Analysis, sets forth the effects of changing rates and volumes on net interest
income of the Company. Information is provided with respect to (i) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate); (ii) effects on interest
income attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) effects on
interest income attributable to changes in rate and volume (change in rate multiplied by change in
volume).
Table II: Rate/Volume Analysis
Year Ended March 31, 1998 Year Ended March 31, 1997
Compared to March 31, 1997 Compared to March 31, 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- --------------------------------
(dollars in thousands)
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) $1,539 $12,319 $456 $14,314 $ 107 $14,544 $ 52 $14,703
Agriculture/commercial loans(1) 98 2,572 88 2,758 8 2,508 237 2,753
Consumer and other loans(1) (119) 1,273 (80) 1,074 17 1,519 88 1,624
------ ------- ---- ------- ------ ------- ------ -------
Total loans(1) 1,518 16,164 464 18,146 132 18,571 377 19,080
Mortgage-backed securities (455) 578 (21) 102 221 4,875 154 5,250
Securities and deposits 184 (835) (21) (672) (223) 1,259 (45) 991
FHLB stock 10 266 3 279 32 481 49 562
------ ------- ---- ------- ------ ------- ------ -------
Total net change in interest income
on interest-earning assets 1,257 16,173 425 17,855 162 25,186 535 25,883
------ ------- ---- ------- ------ ------- ------ -------
Interest-bearing liabilities:
Deposits (416) 4,040 (71) 3,553 (1,643) 4,829 (426) 2,760
FHLB advances 529 3,601 148 4,278 16 8,602 44 8,662
Other borrowings 7 2,373 68 2,448 (40) 1,867 (164) 1,663
Total net change in interest expense ------ ------- ---- ------- ------ ------- ------ -------
on interest-bearing liabilities 120 10,014 145 10,279 (1,667) 15,298 (546) 13,085
------ ------- ---- ------- ------ ------- ------ -------
Net change in net interest income $1,137 $ 6,159 $280 $ 7,576 $1,829 $ 9,889 $1,080 $12,798
====== ======= ==== ======= ====== ======= ====== =======
(1) Does not include interest on loans 90 days or more past due.
45
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<PAGE>
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), and product caps and floors and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company.
The principal objectives of asset/liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to
reduce the vulnerability of its earnings and capital position to changes in
the level of interest rates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee, which is
comprised of members of the Company's senior management. The committee
closely monitors the Company's interest sensitivity exposure, asset and
liability allocation decisions, liquidity and capital positions, and local and
national economic conditions and attempts to structure the loan and investment
portfolios and funding sources of the Company to maximize earnings within
acceptable risk tolerances.
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer simulation
model. The Company updates and prepares simulation modeling at least
quarterly for review by senior management and the directors. The Company
believes the data and assumptions are realistic representations of its
portfolio and possible outcomes under the various interest rate scenarios.
Nonetheless, the interest rate sensitivity of the Company's net interest
income and net market value of equity could vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used.
46
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<PAGE>
Sensitivity Analysis
Table III, Interest Rate Risk Indicators, sets forth as of March 31, 1998, the
estimated changes in the Company's net interest income over a one year time
horizon and the estimated changes in market value of equity based on the
indicated interest rate environments.
Table III: Interest Rate Risk Indicators
Estimated Change in
------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- ---------------------
(Dollars in thousands)
+400 $ (570) (1.5%) $ (51,291) (32.2%)
+300 355 0.9% (38,352) (24.1%)
+200 902 2.4% (22,884) (14.4%)
+100 728 1.9% (8,715) (5.5%)
0 0 0 0 0
-100 (1,129) (3.0%) (311) (0.2%)
-200 (2,748) (7.3%) (2,791) (1.8%)
-300 (4,747) (12.5%) (9,102) (5.7%)
-400 (7,057) (18.6%) (17,535) (11.0%)
- ---------------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of some borrowers to service their debt may decrease in the event
of a severe interest rate increase.
Table IV, Interest Sensitivity Gap, presents the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at March 31, 1998. The table sets forth the amounts of
interest-earning assets and interest-bearing liabilities which are anticipated
by the Company, based upon certain assumptions, to reprice or mature in each
of the future periods shown. At March 31, 1998, total interest-earning assets
maturing or repricing within one year exceeded total interest-bearing
liabilities maturing or repricing in the same time period by $82.5 million,
representing a one-year gap to total assets ratio of 7.15%.
47
<PAGE>
<PAGE>
Table IV: Interest Sensitivity Gap
6 Months
Within to 1-3 3-5 5-10 Over 10
6 Months One Year Years Years Years Years Total
-------- -------- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $ 40,697 $ 29,262 $ -- $ -- $ -- $ -- $ 69,959
Fixed-rate mortgage loans 38,603 32,601 105,036 80,656 94,440 61,203 412,539
Adjustable-rate mortgage loans 108,398 56,386 12,791 10,072 -- -- 187,647
Fixed-rate mortgage-backed
securities 4,364 4,331 15,540 7,197 4,860 829 37,121
Adjustable-rate mortgage-backed
securities 153,107 4,832 1,062 -- -- -- 159,001
Fixed-rate agriculture/commercial
loans 4,497 3,539 7,981 4,319 1,668 277 22,281
Adjustable-rate agriculture/
commercial loans 45,198 -- -- -- -- -- 45,198
Consumer and other loans 16,190 2,610 7,086 3,918 1,039 -- 30,843
Investment securities and
interest-bearing deposits 61,749 9,895 18,770 6,385 13,370 24,460 134,629
-------- -------- -------- -------- -------- -------- ----------
Total rate-sensitive assets 472,803 143,456 168,266 112,547 115,377 86,769 1,099,218
-------- -------- -------- -------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW accounts 14,672 14,673 34,236 34,236 -- -- 97,817
Money market deposit accounts 38,204 22,922 15,281 -- -- -- 76,407
Certificates of deposit 154,260 92,171 81,725 29,691 13,760 -- 371,607
FHLB advances 108,946 23,250 103,163 61,190 1,000 -- 297,549
Other borrowings 60,451 -- 25,000 -- -- -- 85,451
Retail repurchase agreements 3,403 810 739 1,318 -- -- 6,270
-------- -------- -------- -------- -------- -------- ----------
Total rate-sensitive
liabilities 379,936 153,826 260,144 126,435 14,760 -- 935,101
Excess (deficiency) of interest- -------- -------- -------- -------- -------- -------- ----------
sensitive assets over interest-
sensitive liabilities $ 92,867 $(10,370) $(91,878) $(13,888) $100,617 $ 86,769 $ 164,117
Cumulative excess (deficiency) of ======== ======== ========= ======== ======== ======== ==========
interest-sensitive assets $ 92,867 $ 82,497 $ (9,381) $(23,269) $ 77,348 $164,117 $ 164,117
======== ======== ========= ======== ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 124.44% 115.46% 98.82% 97.47% 108.27% 117.55%
117.55%
======== ======== ========= ======== ======== ======== ========
Interest sensitivity gap to
total assets 8.05% (0.90%) (7.96%) (1.20%) 8.72% 7.52% 14.22%
====== ======== ======= ====== ======= ======= =======
Ratio of cumulative gap to total
assets 8.05% 7.15% (0.81%) (2.02%) 6.70% 14.22% 14.22%
====== ======== ======= ====== ======= ======= ======
(footnotes on following page)
48
<PAGE>
<PAGE>
Footnotes for Table IV: Interest Sensitivity Gap
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$1.3 million or (0.11%) of total assets. Interest-bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Table I, Analysis of Net
Interest Spread.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.
The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of mortgage loans and, since the acquisition of
IEB, agriculture/commercial and consumer loans. During the years ended March
31, 1998, 1997 and 1996, the Company closed or purchased loans in the amounts
of $562.4 million, $387.8 million and $274.2 million, respectively. This
activity was funded primarily by principal repayments on loans and securities,
sales of loans, increases in FHLB advances, other borrowings, and deposit
growth. During 1996 additional funding was provided from the $98.6 million of
net proceeds from the Company's initial stock offering. For the years ended
March 31, 1998, 1997 and 1996, principal repayments on loans totaled $375.9
million, $207.5 million and $111.5 million respectively. During the three
years ended March 31, 1998, 1997 and 1996, the Company sold $82.0 million,
$36.9 million and $45.5 million, respectively, of mortgage loans. FHLB
advances increased $66.0 million, $52.1 million and $116.7 million,
respectively, for the same three years. During the three years ended March
31, 1998, 1997 and 1996, other borrowings increased $29.5 million, $41.9
million and $12.0 million. Net deposit growth was $46.6 million, $36.3
million excluding $134.6 million of deposits acquired with IEB, and $13.7
million for the years ended March 31, 1998, 1997 and 1996, respectively.
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage
of investment opportunities. During fiscal years 1998, 1997 and 1996, the
Banks used their sources of funds primarily to fund loan commitments, to
purchase securities, and to pay maturing savings certificates and deposit
withdrawals. At March 31, 1998, the Banks had outstanding loan commitments
totaling $74.1 million and undisbursed loans in process totaling $54.5
million. The Banks generally maintain sufficient cash and readily marketable
securities to meet short term liquidity needs. FSBW maintains a credit
facility with the FHLB-Seattle, which provides for advances which in aggregate
may equal up to 45% of FSBW's assets, which as of March 31, 1998, could give a
total credit line of $428.7 million. Advances under this credit facility
totaled $297.2 million, or 31.2% of FSBW's assets at March 31, 1998. IEB also
maintains credit lines with various institutions that would allow it to borrow
up to $7.9 million.
At March 31, 1998, savings certificates amounted to $371.6 million, or 62.8%,
of the Banks' total deposits, including $240.1 million which were scheduled to
mature by March 31, 1999. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it
has adequate resources to fund all loan commitments from savings deposits and
FHLB-Seattle advances and sale of mortgage loans and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
49
<PAGE>
<PAGE>
Capital Requirements
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks, as state
chartered federally insured institutions, is subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of Tier 1 total capital to
risk-weighted assets as well as Tier 1 leverage capital to average assets (see
further discussion in note 17 to financial statements).
At March 31, 1998 the Company and its banking subsidiaries, FSBW and IEB,
exceeded all current regulatory capital requirements and the Banks were
categorized at the highest regulatory standard, "well-capitalized."
Table V, Regulatory Capital Ratios, shows the regulatory capital ratios of the
Company, FSBW and IEB and minimum regulatory requirements for the Banks to be
categorized as "well-capitalized."
Table V: Regulatory Capital Ratios
"Well-
capitalized"
The Minimum
Capital Ratios Company FSBW IEB Ratio
-------------- ------- ---- --- -----
Total capital to risk-
weighted assets 22.64% 18.67% 13.14% 10.00%
Tier 1 capital to risk-
weighted assets 21.41 17.42 12.07 6.00
Tier 1 leverage capital
to average assets 12.17 9.30 8.97 5.00
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering the changes in
relative purchasing power of money over time due to inflation. The primary
impact of inflation on operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk
See pages 46-49 of MD&A
ITEM 8 - Financial Statements and Supplementary Data
For financial statements, see index on page 54.
ITEM 9 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
50
<PAGE>
<PAGE>
Part III
ITEM 10 - Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal I - Election
of Directors" in the Registrant's Proxy Statement is incorporated herein by
reference.
Information regarding the executive officers of the Registrant is provided
herein in Part I, Item 1 hereof.
Reference is made to the cover page of this Annual Report and the section
captioned "Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement for the Annual Meeting of the Stockholders regarding compliance with
Section 16(a) of the Securities Exchange Act of 1934.
ITEM 11- Executive Compensation
Information regarding management compensation and transactions with management
and others is incorporated by reference to the section captioned "Proposal I -
Election of Directors" in the Proxy Statement for the Annual Meeting of
Stockholders.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
{a} Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement for the Annual Meeting of Stockholders.
{b} Security Ownership of Management
Information required by this item is incorporated herein by reference to the
section captioned "Securities Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement for the Annual Meeting of Stockholders.
{c} Changes in Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 13 - Certain Relationships and Related Transactions
The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement for the Annual Meeting of Stockholders is
incorporated herein by reference.
51
<PAGE>
<PAGE>
Part IV
ITEM 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
{a} {1} Financial Statements
See Index to Consolidated Financial Statements on page 54.
{2} Financial Statement Schedules
All financial statement schedules are omitted because that are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes thereto
or in Part 1, Item 1.
{b} Reports on 8-K:
Reports on form 8-k filed during the quarter ended March 31, 1998 are
as follows:
Date Filed Purpose
---------- -------
None
{c} Exhibits
See Index of Exhibits on page 92.
52
<PAGE>
<PAGE>
Signatures of Registrant
Pursuant to the requirements of the Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on June 26, 1998.
FIRST SAVINGS BANK OF WASHINGTON
BANCORP, INC.
/s/ Gary Sirmon
--------------------------------------
Gary Sirmon
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on June 26, 1998.
/s/ Gary Sirmon /s/ D. Allan Roth
- ---------------------------------- ----------------------------------
Gary Sirmon D. Allan Roth
President and Chief Executive Executive Vice President and Chief
Officer; Director (Principle Financial Officer (Principle
Executive Officer) Financial and Accounting Officer)
/s/ Wilber Pribilsky /s/ Robert D. Adams
- ---------------------------------- ----------------------------------
Wilber Pribilsky Robert D. Adams
Director Chairman of the Board
/s/ David Casper /s/ Morris Ganguet
- ---------------------------------- ----------------------------------
David Casper Morris Ganguet
Director Director
/s/ R. R. "Pete" Reid /s/ Marvin Sundquist
- ---------------------------------- ----------------------------------
R. R. "Pete" Reid Marvin Sundquist
Director Director
/s/ Dean W. Mitchell /s/Jesse G. Foster
- ---------------------------------- ----------------------------------
Dean W. Mitchell Jesse G. Foster
Director Director
53
<PAGE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
(Item 8 and Item 14 (a) (1))
Page
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . .56
Consolidated Statements of Financial Condition as of
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . .57
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . .58
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996 . . . . . . . . . . . . .59
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . .61
Notes to the Consolidated Financial Statements. . . . . . . . . . . .63
54
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Savings Bank of Washington Bancorp, Inc. and Subsidiaries
Walla Walla, Washington
We have audited the accompanying consolidated statements of financial
condition of First Savings Bank of Washington Bancorp, Inc. and subsidiaries
(the Company) as of March 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended March 31, 1998. These consolidated
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, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of March 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998 in conformity with generally
accepted accounting principles.
/s/Deloitte and Touche LLP
DELOITTE & TOUCHE LLP
May 22, 1998
Seattle, Washington
55
<PAGE>
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands)
March 31, 1998 and 1997
1998 1997
---- ----
ASSETS
Cash and due from banks $ 42,529 $ 24,488
Securities available for sale, cost
$298,346 and $288,142 302,419 287,516
Securities held to maturity, fair value $194
and $987 194 987
Loans receivable:
Held for sale, fair value $12,436 and $2,940 12,436 2,940
Held for portfolio 752,338 649,689
Allowances for loan losses (7,857) (6,748)
---------- ----------
756,917 645,881
Accrued interest receivable 7,569 6,950
Real estate held for sale, net 882 1,057
Federal Home Loan Bank stock 16,050 12,807
Property and equipment, net 11,379 10,534
Costs in excess of net assets acquired 11,007 11,906
Deferred income tax asset, net -- 1,220
Other assets 5,126 4,287
---------- ----------
$1,154,072 $1,007,633
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing $ 45,740 $ 36,709
Interest-bearing 545,831 508,258
---------- ----------
591,571 544,967
Advances from Federal Home Loan Bank 297,549 231,515
Other borrowings 91,723 62,185
Advances by borrowers for taxes and insurance 4,153 4,112
Accrued expenses and other liabilities 12,273 11,086
Deferred compensation 3,798 2,814
Deferred income taxes payable, net 541 --
Income taxes payable 2,280 2,318
---------- ----------
1,003,888 858,997
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000 shares
authorized, no shares issued -- --
Common stock - $0.01 par value, 25,000,000 shares
authorized, 10,910,625 shares issued:
9,952,953 shares and 10,518,982 shares
outstanding at March 31, 1998 and March
31, 1997, respectively 109 109
Additional paid-in capital 108,885 107,844
Retained earnings 72,962 62,572
Valuation reserve for securities available for
sale 2,680 (401)
Treasury stock, at cost: 957,672 shares and 391,643
shares at March 31, 1998 and March 31, 1997,
respectively (20,979) (6,954)
Unearned shares of common stock issued to employee
stock ownership plan trust (ESOP):
716,270 and 775,105 restricted shares
outstanding at March 31, 1998 and March 31,
1997, respectively, at cost (7,163) (7,751)
Carrying value of shares held in trust for stock-
related compensation plans (6,310) (6,783)
---------- ----------
150,184 148,636
---------- ----------
$1,154,072 $1,007,633
========== ==========
See notes to consolidated financial statements
56
<PAGE>
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except for per share data)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Loans receivable $ 64,695 $ 46,549 $ 27,469
Mortgage-backed securities 12,522 12,420 7,170
Securities and cash equivalents 7,930 8,323 6,770
--------- --------- ---------
85,147 67,292 41,409
--------- --------- ---------
INTEREST EXPENSE:
Deposits 25,289 21,736 18,976
Federal Home Loan Bank advances 16,782 12,504 3,842
Other borrowings 4,580 2,132 469
--------- --------- ---------
46,651 36,372 23,287
--------- --------- ---------
Net interest income before provision
for loan losses 38,496 30,920 18,122
PROVISION FOR LOAN LOSSES 1,628 1,423 524
--------- --------- ---------
Net interest income 36,868 29,497 17,598
OTHER OPERATING INCOME:
Loan servicing fees 813 746 723
Other fees and service charges 2,411 1,490 450
Gain on sale of loans 1,375 674 606
Gain (loss) on sale of securities 2 2 (219)
Miscellaneous 119 158 29
--------- --------- ---------
Total other operating income 4,720 3,070 1,589
OTHER OPERATING EXPENSES:
Salary and employee benefits 13,960 11,230 6,143
Less capitalized loan origination costs (2,069) (1,666) (1,272)
Occupancy and equipment 2,881 2,368 1,590
Information and computer data services 1,322 1,012 718
Advertising 502 448 346
Savings Association Insurance Fund
(SAIF) special assessment -- 2,387 --
Deposit insurance 280 497 844
Amortization of costs in excess of net
assets acquired 899 592 --
Miscellaneous 3,245 2,462 1,935
--------- --------- ---------
Total other operating expenses 21,020 19,330 10,304
--------- --------- ---------
Income before provision for income
taxes 20,568 13,237 8,883
PROVISION FOR INCOME TAXES 7,446 3,923 2,631
--------- --------- ---------
NET INCOME $ 13,122 $ 9,314 $ 6,252
========= ========= =========
Earnings per common share:
Basic $ 1.43 $ 0.97 N/A
Diluted $ 1.37 $ 0.96
Cumulative dividends declared per
common share $ 0.30 $ 0.22
See notes to consolidated financial statements
57
<PAGE>
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
COMMON STOCK:
Balance, beginning of year $ 109 $ 109 $ --
Proceeds from sale of stock in
initial offering 100
Sale of stock to ESOP 9
--------- --------- ---------
Balance, end of year 109 109 109
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year 107,844 107,370 --
Proceeds from sale of stock in
initial offering net of
underwriting costs 98,533
Sale of stock to ESOP 8,719
Release of earned ESOP shares 839 417 118
Reissuance of treasury stock for
stock-related compensation plans (29) 57
Recognition of tax benefit related
to release of MRP shares 231
--------- --------- ---------
Balance, end of year 108,885 107,844 107,370
RETAINED EARNINGS:
Balance, beginning of year 62,572 55,343 50,099
Net income 13,122 9,314 6,252
Cash dividends (2,732) (2,085) (1,008)
--------- --------- ---------
Balance, end of year 72,962 62,572 55,343
VALUATION RESERVE FOR SECURITIES
AVAILABLE FOR SALE:
Balance, beginning of year (401) 774 152
Change in valuation reserve 3,081 (1,175) 622
--------- --------- ---------
Balance, end of year 2,680 (401) 774
TREASURY STOCK:
Balance, beginning of year (6,954) -- --
Purchases of treasury stock (13,993) (12,905)
Purchases of treasury stock for
exercised stock options (74)
Reissuance of treasury stock for MRP
and/or exercised stock options 74 5,957
Repurchase of forfeited shares from MRP (32) (6)
--------- --------- ---------
Balance, end of year (20,979) (6,954) --
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of year (7,751) (8,331) --
Sales of stock to ESOP (8,728)
Release of earned ESOP shares 588 580 397
--------- --------- ---------
Balance, end of year (7,163) (7,751) (8,331)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS:
Balance, beginning of year (6,783) (1,123) --
Net change in number and/or valuation
of shares held in trust (740) (548) (1,123)
Reissuance of treasury stock for MRP (6,014)
Amortization of compensation related
to MRP 1213 902
--------- --------- ---------
Balance, end of year (6,310) (6,783) (1,123)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 150,184 $ 148,636 $ 154,142
========= ========= =========
58
<PAGE>
<PAGE>
FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
( in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Common stock , shares issued:
Number of shares, beginning of year 10,911 10,911 --
Shares issued in initial offering 10,038
Sale of stock to ESOP 873
--------- --------- ---------
Number of shares, end of year 10,911 10,911 10,911
--------- --------- ---------
TREASURY STOCK, SHARES HELD:
Number of shares, beginning of year (392) -- --
Purchase of treasury stock (564) (795)
Purchase of treasury stock for
exercised stock options (3)
Reissuance of treasury stock to
deferred compensation plan and/
or exercised stock options 3 404
Repurchase of shares forfeited from MRP (2) (1)
--------- --------- ---------
Number of shares, end of year (958) (392) --
--------- --------- ---------
Shares outstanding, end of year 9,953 10,519 10,911
========= ========= =========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of year (775) (833) --
Sale of stock to ESOP (873)
Release of earned shares 59 58 40
--------- --------- ---------
Number of shares, end of year (716) (775) (833)
========= ========= =========
59
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 13,122 $ 9,314 $ 6,252
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred taxes 374 (315) (240)
Depreciation 1,135 744 477
Loss (gain) on sale of securities (2) (2) 220
Net amortization of premiums and
discounts on investments 287 (595) 152
Amortization of costs in excess of
net assets acquired 899 592 --
Amortization of MRP compensation
liability 1,213 902 --
Loss (gain) on disposal of equipment (7) -- --
Loss (gain) on sale of loans (1,375) (699) (607)
Net change in deferred loan fees,
premiums and discounts 523 792 (347)
Loss (gain) on disposal of real
estate held for sale 30 62 --
Amortization of mortgage servicing
rights 100 72 76
Capitalization of mortgage servicing
rights from sale of mortgages
with servicing retained (442) -- --
Provision for losses on loan and real
estate held for sale 1,628 1,423 454
FHLB stock dividend (1,146) (868) (306)
Cash provided (used) in operating
assets and liabilities:
Loans held for sale (9,496) 665 1,022
Accrued interest receivable (619) (335) (1,316)
Other assets (482) 90 (759)
Deferred compensation 288 258 510
Accrued expenses and other
liabilities 1,038 546 2,243
Income taxes payable (38) (256) 1,379
--------- --------- ---------
Net cash provided by
operating activities 7,030 12,390 9,210
--------- --------- ---------
INVESTING ACTIVITIES:
Purchases of securities available
for sale (233,660) (485,548) (554,799)
Principal repayments and maturities of
securities available for sale 221,766 534,177 408,063
Sales of securities available for sale 1,405 769 21,183
Purchases of securities held to maturity -- -- (2,215)
Principal repayments and maturities
of securities held to maturity 793 1,092 4,600
Purchases of mortgage servicing rights -- -- (176)
Loans originated and closed, net (511,398) (270,240) (208,303)
Purchases of loans and participating
interest in loans (51,049) (117,584) (65,929)
Sales of loans and participating
interest in loans 82,017 36,942 45,523
Principal repayments on loans 375,868 207,526 111,547
Purchases of FHLB stock (2,097) (2,909) (4,990)
Proceeds from sale of property,
equipment and real estate acquired
for development 13 5 --
Purchases of property and equipment (1,986) (1,463) (1,272)
Additional investment in real estate
held for sale, net of insurance
proceeds (26) -- (34)
Basis of real estate held for sale
acquired in settlement of loans
and disposed of during the year 2,417 652 658
Funds transferred to deferred
compensation plans (91) (94) (858)
Acquisition of IEB, net of cash acquired -- (17,289) --
--------- --------- ---------
Net cash used by investing
activities $(116,028) $(113,964) $(247,002)
--------- --------- ---------
Continued on next page
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended March 31, 1998, 1997 and 1996
(Continued from prior page)
1998 1997 1996
---- ---- ----
FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ -- $ -- $ 107,361
Funding provided to ESOP for purchase
of common stock -- -- (8,728)
Compensation expense recognized for
shares released for allocation to
participants of the ESOP:
Original basis of shares 588 580 397
Excess of fair value of released
shares over basis 839 417 118
Increase (decrease) in deposits 46,604 36,293 13,712
Proceeds from FHLB advances 640,025 600,327 480,152
Repayment of FHLB advances (573,991) (548,231) (363,444)
Proceeds from repurchase agreement
borrowings 33,687 42,444 9,863
Repayment of repurchase agreement
borrowings (431) (133) --
Cash dividends paid (2,583) (1,907) (504)
Increase (decrease) in other borrowings (3,718) (398) 2,162
Increase (decrease) in borrowers'
advances for taxes and insurance 41 549 232
Net cost of exercised stock options (29) -- --
Purchases of treasury stock (13,993) (12,905) --
--------- --------- ---------
Net cash provided by financing
activities 127,039 117,036 241,321
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 18,041 15,462 3,529
CASH AND DUE FROM BANKS, BEGINNING
OF PERIOD 24,488 9,026 5,497
--------- --------- ---------
CASH AND DUE FROM BANKS, END OF PERIOD $ 42,529 $ 24,488 $ 9,026
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 46,311 $ 35,744 $ 22,701
Taxes paid $ 7,108 $ 4,494 $ 1,496
Non-cash transactions:
Loans, net of discounts, specific
loss allowances and unearned
income transferred to real estate
held for sale $ 2,246 $ 1,059 $ 678
Securities transferred from held to
maturity to available for sale $ -- $ -- $ 142,519
Net change in accrued dividends
payable $ 149 $ 178 $ 504
Net change in unrealized gain (loss)
in deferred compensation
trust and related liability $ 707 $ 475 $ 284
Treasury stock reissued to MRP $ -- $ 6,014 $ --
Treasury stock forfeited by MRP $ 32 $ 6 $ --
Recognize tax benefit of vested
MRP shares $ 231 $ -- $ --
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FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1998, 1997 and 1996
Note 1: SUMMARY OF ACCOUNTING POLICIES
Basis for Presentation: First Savings Bank of Washington Bancorp, Inc. (the
Company) is a bank holding company incorporated in the state of Delaware. The
Company was organized for the purpose of acquiring all of the capital stock of
First Savings Bank of Washington (FSBW) upon its reorganization from the
mutual holding company form of organization to the stock holding company form
of organization.
First Savings Bank of Washington Bancorp, Inc. is primarily engaged in the
business of planning, directing and coordinating the business activities of
its wholly owned subsidiaries, First Savings Bank of Washington and Inland
Empire Bank (IEB) (together, the Banks). FSBW is a Washington-chartered
savings bank the deposits of which are insured by the Federal Deposit
Insurance Corporation (FDIC) under the Savings Association Insurance Fund
(SAIF). FSBW conducts business from its main office in Walla Walla,
Washington and its sixteen branch offices and three loan production offices
located in southeast, central, north central and western Washington. IEB is
an Oregon-chartered commercial bank whose deposits are insured by the FDIC
under the Bank Insurance Fund (BIF). IEB conducts business from its main
office in Hermiston, Oregon and its five branch offices and two loan
production offices located in northeast Oregon. The Company's only significant
assets are the capital stock of its subsidiaries, its loan to FSBW's ESOP (see
Note 15) and the portion of the net proceeds retained from the offering. The
Company has no significant liabilities.
The Company and its Bank subsidiaries are subject to regulation by the Federal
Reserve Board (FRB) and the FDIC. In addition FSBW and IEB are subject to the
state banking regulations of Washington and Oregon, respectively.
During the year ended March 31, 1996 the Company completed the sale of
10,910,625 shares of its common stock at $10.00 per share through subscription
and community offerings to the FSBW depositors, Board of Directors,
management, employees and the public and used approximately 50% of the net
proceeds from such sales to purchase all of the FSBW common stock issued in
the FSBW conversion to stock form. Such business combination was accounted
for at historical cost in a manner similar to a pooling of interests.
Nature of Business: The operating results of the Company depend primarily on
its net interest income, which is the difference between interest income on
interest-earning assets, consisting of loans and securities, and interest
expense on interest-bearing liabilities, composed primarily of savings
deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements.
Net interest income is a function of the Company's interest rate spread, which
is the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the
average balance of interest-earning assets as compared to the average balance
of interest-bearing liabilities.
FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. FSBW's primary business is originating loans for
portfolio in its primary market area, which consists of southeast, central,
north central, and western Washington state. FSBW's wholly owned subsidiary,
Northwest Financial Corporation, provides trustee services for FSBW, is
engaged in real estate sales and receives commissions from the sale of
annuities.
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IEB is a community oriented commercial bank, chartered in the state of Oregon.
IEB's lending activities consist of granting agribusiness, commercial and
consumer loans to customers throughout the northeastern Oregon region. IEB
has two wholly owned subsidiaries: Pioneer American Property Company, which
owns a building that is leased to IEB, and Inland Securities Corporation,
which previously made a market for IEB's stock but is currently inactive.
In addition to interest income on loans and securities, the Banks receive
other income from deposit service charges, loan origination and servicing fees
and from the sale of loans and investments. FSBW has sought to increase its
other income by retaining loan servicing rights on some of the loans that it
has sold and by purchasing mortgage servicing rights.
Principles of Consolidation: The consolidated financial statements include
the accounts of First Savings Bank of Washington Bancorp, Inc. and its
wholly-owned subsidiaries First Savings Bank of Washington and Inland Empire
Bank. All material intercompany transactions, profits and balances have been
eliminated.
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles (GAAP) requires management to
make estimates and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the financial
statements. The Company has used significant estimates in determining
reported reserves and allowances for loan losses, tax liabilities, and other
contingencies.
Securities: Securities are classified as held to maturity when the Company has
the ability and positive intent to hold them to maturity. Securities
classified as available for sale are available for future liquidity
requirements and may be sold prior to maturity.
Securities held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts to maturity. Unrealized losses on
securities held to maturity due to fluctuations in fair value are recognized
when it is determined that an other than temporary decline in value has
occurred. Securities available for sale are carried at fair value. Unrealized
gains and losses on securities available for sale are excluded from earnings
and are reported net of tax as a separate component of stockholders' equity
until realized. Realized gains and losses on sale are computed on the
specific identification method and are included in operations on the trade
date sold.
Loans Receivable: The Banks originate mortgage loans for both portfolio
investment and sale in the secondary market. At the time of origination,
mortgage loans are designated as held for sale or held for investment. Loans
held for sale are stated at lower of cost or estimated fair value determined
on an aggregate basis. The Banks also originate commercial, financial,
agribusiness and installment credit loans for portfolio investment. Loans
receivable not designated as held for sale are recorded at the principal
amount outstanding, net of allowance for loan losses, deferred fees,
discounts, and premiums. Premiums, discounts and deferred loan fees are
amortized to maturity using the level yield methodology.
Interest is accrued as earned unless management doubts the collectibility of
the loan or the unpaid interest. Interest accruals are generally discontinued
when loans become 90 days past due for interest. All previously accrued but
uncollected interest is deducted from interest income upon transfer to
nonaccrual status. Future collection of interest is included in interest
income based upon an assessment of the likelihood that the loans will be
repaid or recovered. A loan may be put in nonaccrual status sooner than this
policy would dictate if, in management's judgment, the loan may be
uncollectible. Such interest is then recognized as income only if it is
ultimately collected.
Costs in Excess of Net Assets Acquired: Costs in excess of net assets
acquired (goodwill) is an intangible asset arising from the purchase of IEB.
It is being amortized on a straight line basis over the 14 year period of
expected benefit. The Company periodically evaluates goodwill for impairment.
Mortgage Servicing Rights: Purchased servicing rights represent the cost of
acquiring the right to service mortgage loans. Originated servicing rights
are recorded when mortgage loans are originated and subsequently sold or
securitized with the servicing rights retained. The total cost of the
mortgage loans is allocated to the servicing rights and the loans (without the
servicing rights) based on relative fair values. The cost relating to
purchased and originated servicing is capitalized and amortized in proportion
to, and over the period of, estimated future net servicing income.
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The Banks assess the fair value of unamortized remaining servicing rights for
impairment on a stratum by stratum basis every quarter by using secondary
market quotes for comparable packages of serviced loans and a valuation model
that calculates the present value of future cash flows using market discount
rates and market based assumptions for prepayment speeds, servicing costs and
ancillary income for those pools of serviced mortgages for which secondary
market quotes are not readily available. For purposes of measuring
impairment, the servicing rights are stratified based on their original and
remaining term to maturity and balance outstanding.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, effective
for transactions occurring after December 31, 1996. SFAS No. 125 superseded
SFAS No. 122 Accounting for Mortgage Servicing Rights and amended SFAS No. 65,
Accounting for Certain Mortgage Banking Activities to eliminate the
distinction between normal and excess servicing rights. The Banks adopted
SFAS No. 125 on January 1, 1997, and account for their mortgage servicing
rights accordingly. The adoption did not have a material impact.
Allowances for Loan Losses: The adequacy of general and specific reserves is
based on management's continuing evaluation of the pertinent factors
underlying the quality of the loan portfolio, including actual loan loss
experience and current and anticipated economic conditions. This policy is
applicable to all loans except large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. Loans that are
collectively evaluated for impairment by the Banks include residential real
estate and consumer loans. Residential construction and land, commercial real
estate and commercial business loans greater than $150,000 and unsecured loans
greater than $25,000 are individually evaluated for impairment. Loans secured
by real estate with balances less than $150,000 and unsecured loans less than
$25,000 may be evaluated collectively for impairment. Loans are considered
impaired if the present value of expected future cash flows discounted at the
loan's effective interest rate (or, alternatively, the observable market price
of the loan or the fire value of the collateral) is less than the recorded
investment in the impaired loan. Factors involved in determining impairment
include, but are not limited to, the financial condition of the borrower,
value of the underlying collateral and current status of the economy. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or the fair value of collateral if the
loan is collateral dependent. Subsequent changes in the value of impaired
loans shall be included within the provision for loan losses in the same
manner in which impairment initially was recognized or as a reduction in the
provision that would otherwise be reported.
General loan loss reserves are established to provide for inherent loan
portfolio risks not specifically provided for. The level of general reserves
is based on analysis of potential exposures existing in the Banks' loan
portfolios including evaluation of historical trends, current market
conditions and other relevant factors identified by management at the time the
financial statements are prepared. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
Real Estate Held for Sale: Property acquired by foreclosure or deed in lieu of
foreclosure is recorded at the lower of estimated fair value, less cost to
sell, or the principal balance of the defaulted loan. Development,
improvement, and direct holding costs relating to the property are
capitalized. The carrying value of such property is periodically evaluated by
management and, if necessary, allowances are established to reduce the
carrying value to net realizable value. Gains or losses at the time the
property is sold are charged or credited to operations in the period in which
they are realized. The amounts the Banks will ultimately recover from real
estate held for sale may differ substantially from the carrying value of the
assets because of future market factors beyond the Banks' control or because
of changes in the Banks' strategy for recovering the investment.
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Depreciation: The provision for depreciation is based upon the straight-line
method applied to individual assets and groups of assets acquired in the same
year at rates adequate to charge off the related costs over their estimated
useful lives.
Buildings and improvements. . . . . . . . . . . . . . . . . .10-30 years
Furniture and equipment . . . . . . . . . . . . . . . . . . . 3-10 years
Routine maintenance, repairs, and replacement costs are expensed as incurred.
Expenditures which materially increase values or extend useful lives are
capitalized.
Loan Origination and Commitment Fees: Loan origination fees, net of certain
specifically defined direct loan origination costs, are deferred and
recognized as an adjustment of the loans' interest yield using the level
yield method over the contractual term of each loan adjusted for actual loan
prepayment experience. Net deferred fees or costs related to loans held for
sale are recognized in income at the time the loans are sold. Loan commitment
fees are deferred until the expiration of the commitment period unless
management believes there is a remote likelihood that the underlying
commitment will be exercised, in which case the fees are amortized to fee
income using the straight-line method over the commitment period. If a loan
commitment is exercised, the deferred commitment fee is accounted for in the
same manner as a loan origination fee. Deferred commitment fees associated
with expired commitments are recognized as fee income.
Income Taxes: The Company files a consolidated income tax return including all
of its wholly owned subsidiaries on a calendar year basis. Income taxes are
accounted for using the asset and liability method. Under this method, a
deferred tax asset or liability is determined based on the enacted tax rates
which will be in effect when the differences between the financial statement
carrying amounts and tax bases of existing assets and liabilities are expected
to be reported in the Company's income tax returns. The effect on deferred
taxes of a change in tax rates is recognized in income in the period of
change. Where state income tax laws do not permit consolidated income tax
returns, applicable state income tax returns are filed.
Employee Stock Ownership Plan: FSBW sponsors an Employee Stock Ownership Plan
(ESOP). The ESOP purchased 8% of the shares of common stock issued in the
reorganization and initial public stock offering pursuant to the subscription
rights granted under the ESOP plan. The ESOP borrowed $8,728,500 from the
Company in order to fund the purchase of common stock. The loan to the ESOP
will be repaid principally from the Company's contribution to the ESOP, and
the collateral for the loan is the Company's common stock purchased by the
ESOP. As the debt is repaid shares are released from collateral based on the
proportion of debt service paid in the year and allocated to participants'
accounts. As shares are released from collateral, compensation expense is
recorded equal to the then current market price of the shares, and the shares
become outstanding for earnings-per-share calculations. Stock and cash
dividends on allocated shares are recorded as a reduction of retained earnings
and paid or distributed directly to participants' accounts. Stock and cash
dividends on unallocated shares are recorded as a reduction of debt and
accrued interest (see additional discussion in Note 15).
New Accounting Standards: In June 1997, FASB issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 131 establishes standards
of reporting by publicly held business enterprises and disclosure of
information about operating segments in annual financial statements and, to a
lesser extent, in interim financial reports issued to shareholders. SFAS Nos.
130 and 131 are effective for fiscal years beginning after December 15, 1997.
As both SFAS Nos. 130 and 131 deal with financial statement disclosure
matters, the Company does not anticipate the adoption of these new standards
will have a material impact on its financial position or results of
operations.
Earnings Per Share: In February 1997, the FASB issued SFAS No. 128, Earnings
Per Share. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock such as options,
warrants, convertible securities or contingent stock agreements if those
securities trade in a public market. This standard specifies computation and
presentation requirements for both basic EPS and, for entities with complex
capital structures, diluted EPS. SFAS No. 128 is effective for reporting
periods ending after December 15, 1997. The Company has adopted the
provisions of SFAS No. 128 and has restated all periods. Earnings per share
are not presented for periods beginning prior to conversion to stock form,
October 31, 1995, as FSBW was a wholly-owned subsidiary of a mutual holding
company.
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Reclassification: Certain amounts in the prior years' financial statements
have been reclassified to conform to the current year's presentation.
Note 2: ACQUISITIONS
Inland Empire Bank:
The Company completed the acquisition of IEB effective August 1, 1996. The
Company paid the former shareholders of IEB $60.8951 per share, in cash, for a
total acquisition price of $32.8 million. The acquisition of IEB was treated
as a purchase for accounting purposes. Accordingly, under GAAP, the assets
and liabilities of IEB have been recorded on the books of the Company at their
respective fair market values at the effective date the acquisition was
consummated. Goodwill, the excess of the purchase price (cost) over the net
fair value of the assets and liabilities acquired, was recorded at $12.5
million. Amortization of goodwill over a 14 year period will result in a
charge to earnings of approximately $893,000 per year. Because of the amount
of assets of IEB acquired by the Company, the financial results for March 31,
1997, are not generally comparable to those of the year before. The combined
organization at March 31, 1997, was significantly larger than it was the year
before.
The financial statements for the year ended, March 31, 1997 include the
operations of the two institutions from August 1, 1996, to March 31, 1997.
The following information presents the actual results of operations for the
year ended March 31, 1998 and the pro forma results of operations for the
years ended March 31, 1997 and 1996, as though the acquisition had occurred on
April 1, 1995. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies.
(in thousands except per share amounts)
Year ended March 31,
--------------------------------------
Actual Unaudited pro forma
--------- ----------------------
1998 1997 1996
---- ---- ----
Net interest income before
provision for loan loss $ 38,496 $ 33,727 $ 26,117
Net income 13,122 9,885 7,983
Net income per share:
Basic $ 1.43 $ 1.03 N/A
Diluted $ 1.37 $ 1.02 N/A
Subsequent acquisition of Towne Bancorp, Inc.:
Subsequent to year end on April 1, 1998 the Company completed the acquisition
of Towne Bancorp, Inc. (TB). The Company paid approximately $28.1 million in
cash and common stock for all of the outstanding common shares and stock
options of TB. TB is the holding company for Towne Bank, headquartered in
Woodinville, Washington, a Seattle suburb. The acquisition will be accounted
for as a purchase and will result in the recording of approximately $19.2
million of costs in excess of the fair value of Towne Bank net assets acquired
(goodwill). Goodwill assets will be amortized over a 14 year period and will
result in a charge to earnings of approximately $1,375,000 per year. Founded
in 1991, Towne Bank is a community business bank with approximately $146
million in total assets, $134 million in deposits, $120 million in loans and
$9.3 million in shareholders' equity at March 31, 1998. Towne Bank operates
four full service branches in the Seattle, Washington metropolitan area in
Woodinville, Redmond, Bellevue and Renton and plans to open its Bothell branch
in June 1998.
TB shareholders overwhelmingly approved the merger on March 10, 1998. TB's
shareholders, who were given the opportunity to make an election, received
either 3.355 shares of the Company's common stock plus $11.78, or $91.62 per
share in cash for each share of TB they owned. The Company issued 775,884
shares of stock and paid out $7.65 million in cash to TB shareholders in
connection with the completion of the acquisition.
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Note 3: CASH AND DUE FROM BANKS
Cash and due from banks consisted of the following (in thousands):
March 31
---------------------------
1998 1997
---- ----
Cash on hand and demand deposits $ 26,942 $ 15,639
Cash equivalents:
Short-term interest-bearing deposits 10,342 1,866
Federal funds sold 5,245 6,983
--------- ---------
$ 42,529 $ 24,488
========= =========
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, overnight investments and short-term
deposits with original maturities less than 90 days.
FRB regulations require depository institutions to maintain certain minimum
reserve balances. Included in cash and demand deposits were reserves required
by the FRB of $2.8 million and $2.5 million at March 31, 1998 and 1997,
respectively.
Note 4: SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale
are summarized as follows (in thousands):
March 31, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
U. S. Government and agency
obligations $ 65,414 $ 232 $ (52) $ 65,594
Municipal bonds 30,607 1,489 (3) 32,093
Corporate bonds 4,279 43 (18) 4,304
Mortgage-backed securities:
FHLMC certificates 3,308 74 (21) 3,361
GNMA certificates 16,499 363 -- 16,862
FNMA certificates 6,010 82 (44) 6,048
Collateralized mortgage
obligations 171,367 1,074 (1,582) 170,859
FHLMC stock 549 2,335 -- 2,884
FARMERMAC stock 10 28 -- 38
FNMA stock 303 73 -- 376
--------- ---------- ---------- ---------
$ 298,346 $ 5,793 $ (1,720) $ 302,419
========= ========== ========== =========
Proceeds from sales of securities during fiscal 1998 were $1,405,000. Gross
gains of $1,800 and gross losses of $0 were realized on those sales.
At March 31, 1998, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
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March 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
U. S. Government and agency
obligations $ 67,986 $ 18 $ (587) $ 67,417
Municipal bonds 32,884 1,186 (101) 33,969
Corporate bonds 8,031 11 (45) 7,997
Mortgage-backed securities:
FHLMC certificates 3,827 66 (25) 3,868
GNMA certificates 20,698 60 (485) 20,273
FNMA certificates 7,286 63 (68) 7,281
Collateralized mortgage
obligations 145,068 607 (2,722) 142,953
FHLMC stock 2,049 1,342 -- 3,391
FARMERMAC stock 10 14 -- 24
FNMA stock 303 40 -- 343
--------- --------- ---------- ---------
$ 288,142 $ 3,407 $ (4,033) $ 287,516
========= ========= ========== =========
Proceeds from sales of securities during fiscal 1997 were $769,000. Gross
gains of $2,000 and gross losses of $0 were realized on those sales.
At March 31, 1997, the Company's investment portfolio did not contain any
securities of an issuer (other than the U.S. Government and agencies thereof)
which had an aggregate book value in excess of 10% of the Company's
stockholders' equity at that date.
The amortized cost and estimated fair value of securities available for sale
at March 31, 1998, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
March 31, 1998
-----------------------
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 34,508 $ 34,604
Due after one year through five years 35,918 39,019
Due after five years through ten years 40,739 41,610
Due after ten years 187,181 187,186
--------- ---------
$ 298,346 $ 302,419
========= =========
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Note 5: SECURITIES HELD TO MATURITY
The amortized cost and estimated fair value of securities held to maturity are
summarized as follows (in thousands):
March 31, 1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Certificates of deposit $ 194 $ -- $ -- $ 194
========= ========== ========== =========
March 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
Certificates of deposit $ 987 $ -- $ -- $ 987
========= ========== ========== =========
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1998, by contractual maturity, are shown below (in thousands):
Amortized Estimated
cost fair value
--------- ----------
Due in one year or less $ 194 $ 194
========= ==========
Note 6: ADDITIONAL INFORMATION REGARDING COMPOSITION OF SECURITIES AND CASH
EQUIVALENT INTEREST INCOME
The following table sets forth the composition of income from securities and
deposits for the periods indicated (in thousands):
Years ended
March 31
------------------------------
1998 1997 1996
-------- -------- --------
Taxable interest income $ 4,647 $ 5,227 $ 4,438
Tax-exempt interest income 2,031 2,033 1,855
Other stock-dividend income 105 195 170
Federal Home Loan Bank stock-dividend income 1,147 868 307
-------- -------- --------
Total securities and cash equivalent
interest income $ 7,930 $ 8,323 $ 6,770
======== ======== ========
69
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Note 7: LOANS RECEIVABLE
Loans receivable at March 31 are summarized as follows (in thousands)
(Includes loans held for sale):
1998 1997
---- ----
One- to four-family real estate loans $ 423,850 $ 395,418
Commercial and multifamily real estate loans 167,859 129,198
Construction and land 132,409 110,262
Agriculture/commercial 67,611 47,846
Credit card, consumer and other 30,842 25,092
---------- ----------
822,571 707,816
Less:
Loans in process (54,500) (52,412)
Deferred loan fees, discounts and premiums (3,297) (2,775)
Allowances for loan losses (7,857) (6,748)
---------- ---------
$ 756,917 $ 645,881
========== =========
Loans serviced for others totaled $211,662,000 and $208,359,000 at March 31,
1998 and 1997, respectively. Custodial accounts maintained in connection with
this servicing totaled $4,169,000 and $2,963,000 at March 31, 1998 and 1997,
respectively.
The Banks' outstanding mortgage loan commitments totaled $74,087,000 and
$36,779,000 at March 31, 1998 and 1997, respectively. In addition, the Banks
had outstanding commitments to sell loans of $6,037,000 at March 31, 1998.
Nonaccrual loans totaled $1,270,000 and $2,082,000 at March 31, 1998 and 1997,
respectively. Nonaccrual loans at year end are composed of residential real
estate and consumer loans and on a collective basis they are not considered
"Impaired" under SFAS No. 114.
Loans held for sale at March 31, 1998, of $12,436,000 are stated net of any
unrealized losses, undisbursed loans in process and deferred loan fees.
Loans held for sale at March 31, 1997, of $2,940,000 are stated net of any
unrealized losses, undisbursed loans in process and deferred loan fees.
The Banks originate both adjustable- and fixed-rate loans. At March 31, 1998,
the maturity and repricing composition of those loans, less undisbursed
amounts and deferred fees, were as follows (in thousands):
Fixed-rate (term to maturity):
One month to one year $ 29,023
One to three years 23,892
Three to five years 57,925
Five to ten years 35,560
Over ten years 309,519
---------
$ 455,919
=========
Adjustable-rate (term to rate adjustment):
One month to one year $ 250,491
One to three years 32,236
Three to five years 23,083
Five to ten years 215
Over ten years 2,830
---------
$ 308,855
=========
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<PAGE>
The adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the Banks' internal cost of funds, FHLB National Cost of
Funds Index, One Year Constant Maturity Treasury Index, Prime Rate (Wall
Street Journal) or the FHLB 11th District Cost of Funds. Future market
factors may affect the correlation of the interest rate adjustment with the
rates the Banks pay on the short-term deposits that primarily have been
utilized to fund these loans.
A summary of changes in the Banks' loans to their directors, officers, and
employees and their affiliated companies for the years ended March 31 is as
follows:
1998 1997
---- ----
Loans outstanding, April 1 $ 6,389,190 $ 5,081,363
Acquired with purchase of IEB -- 1,982,264
Loan disbursements 2,727,497 955,061
Loan repayments (2,034,524) (1,629,498)
----------- -----------
Loans outstanding, March 31 $ 7,082,163 $ 6,389,190
=========== ===========
Note 8: ALLOWANCES FOR LOAN AND REAL ESTATE HELD FOR SALE LOSSES
An analysis of the changes in the allowances for loan and real estate held for
sale losses is as follows for the three years ended March 31, 1998 (in
thousands):
Real estate
Loans held
receivable for sale
---------- ---------
Balance, April 1, 1995 $ 3,549 $ 774
Provision (recoveries) 524 (70)
Net charge-offs (22) (704)
---------- ---------
Balance, March 31, 1996 4,051 --
Acquired with IEB 1,416 --
Provision 1,423 --
Net charge-offs (142) --
---------- ---------
Balance, March 31, 1997 6,748 --
Provision 1,628 --
Net charge-offs (519) --
---------- ---------
Balance, March 31, 1998 $ 7,857 $ --
========== =========
71
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Note 9: PROPERTY AND EQUIPMENT
Land, buildings and equipment owned by the Company and its subsidiaries at
March 31 are summarized as follows (in thousands):
1998 1997
---- ----
Land $ 2,199 $ 2,199
Buildings and improvements 11,458 11,308
Furniture and equipment 7,508 5,835
-------- --------
21,165 19,342
Accumulated depreciation (9,786) (8,808)
-------- --------
$ 11,379 $ 10,534
======== ========
In March 1995, the FASB issued SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The statement
establishes accounting standards for the impairment of long-lived assets that
either will be held and used in operations or that will be disposed of.
Effective January 1, 1996, the Company adopted SFAS No. 121. The Company
periodically evaluates long-lived assets for impairment.
Note 10: DEPOSITS
Customer deposits consist of the following at March 31 (in thousands):
1998 1997
---- ----
Demand, NOW and Money Market accounts,
including non-interest-bearing deposits
in 1998 and 1997 of $45,740 and $36,709,
respectively, 0% to 6% $ 177,880 $ 170,499
Regular savings, 2% to 6% 42,084 44,131
Certificate accounts:
2.01% to 4% 1,338 1,220
4.01% to 6% 299,463 265,473
6.01% to 8% 68,214 60,069
8.01% to 10% 2,587 3,571
10.01% to 12% 5 4
---------- ----------
371,607 330,337
---------- ----------
$ 591,571 $ 544,967
========== ==========
Deposits at March 31, 1998 and 1997 include public funds of $14,576,000 and
$13,217,000, respectively. Securities with a carrying value of $9,137,000 and
$4,940,000 were pledged as collateral on these deposits at March 31, 1998 and
1997, respectively, which exceeds the minimum collateral requirements
established by the state regulations.
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Scheduled maturities of certificate accounts at March 31 are as follows (in
thousands):
1998 1997
---- ----
Due in less than one year $ 240,074 $ 212,853
One to two years 74,519 53,553
Two to three years 13,565 26,049
Three to four years 11,288 6,998
Four to five years 18,652 7,916
After five years 13,509 22,968
---------- ----------
$ 371,607 $ 330,337
========== ==========
Included in deposits are certificates of deposit in excess of $100,000 of
$80,608,000 and $58,423,000 at March 31, 1998 and 1997, respectively.
Interest on certificates in excess of $100,000 totaled $3,901,000, $2,945,000
and $2,102,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
Deposit interest expense by type for the years ended March 31 is as follows
(in thousands):
1998 1997 1996
---- ---- ----
Certificates $ 20,069 $ 17,314 $ 15,768
Demand, NOW and Money Market accounts 3,972 3,239 1,650
Regular savings 1,248 1,183 1,558
--------- --------- ---------
$ 25,289 $ 21,736 $ 18,976
========= ========= =========
Note 11: ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE
FSBW has entered into borrowing arrangements with the Federal Home Loan Bank
of Seattle (FHLB) to borrow funds under a short-term cash management advance
program and long-term loan agreements. All borrowings are secured by stock
of, and cash held by the FHLB. Additionally, mortgage loans receivable and
securities issued, insured, or guaranteed by the U. S. Government or agencies
thereof are pledged as security for the loans. At March 31, 1998, FHLB
advances were scheduled to mature as follows (in thousands):
Adjustable- Fixed-
rate rate Total
advances advances advances
-------------- --------------- --------------
Rate* Amount Rate* Amount Rate* Amount
----- ------ ----- ------ ----- ------
Due in less than
one year 5.69% $2,400 5.89% $ 99,796 5.88% $102,196
One to two years -- -- 6.30 74,350 6.30 74,350
Two to three years -- -- 6.21 18,813 6.21 18,813
Three to four years -- -- 6.77 27,000 6.77 27,000
Four to five years -- -- 5.81 57,190 5.81 57,190
Over five years -- -- 5.35 18,000 5.35 18,000
------ -------- --------
5.69% $2,400 6.04% $295,149 6.04% $297,549
====== ======== ========
* Weighted average interest rate
73
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<PAGE>
The maximum and average outstanding balances and average interest rates on
advances from the FHLB were as follows for the year ended March 31 (in
thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 299,377 $ 235,098 $ 179,419
Average outstanding 276,328 214,563 66,252
Weighted average interest rates:
Annual 6.07% 5.83% 5.80%
End of year 6.04 5.96 5.43
Interest expense during the year $ 16,782 $ 12,504 $ 3,842
Note 12: OTHER BORROWINGS
Retail Repurchase Agreements included in other borrowings are due generally
within 90 days with interest. At March 31, 1998, they carry interest rates
ranging from 4.25% to 7.18%, payable at maturity, and are secured by the
pledge of certain FNMA, GNMA and FHLMC mortgage-backed securities with a fair
value of $9,757,000 as of March 31, 1998.
A summary of retail repurchase agreements at March 31 by the period remaining
to maturity is as follows (in thousands):
1998 1997
------------------ --------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ------- ---- -------
Due in less than one year 5.39% $ 4,466 5.55% $ 8,215
Two to three years 6.10 738 -- --
Three to four years -- -- 6.10 695
Four to five years 7.18 1,066 -- --
After five years -- -- 7.18 1,060
------- -------
5.78% $ 6,270 5.76% $ 9,970
======= =======
The maximum and average outstanding balances and average interest rates on
retail repurchase agreements were as follows for the year ended March 31 (in
thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 10,206 $ 11,119 $ 9,789
Average outstanding 6,934 11,322 7,620
Weighted average interest rates:
Annual 5.77% 4.80% 6.15%
End of year 5.78 5.76 5.35
Interest expense during the year $ 400 $ 543 $ 462
Wholesale Repurchase Agreements: The table below outlines the wholesale
repurchase agreements as of March 31, 1998 and 1997. The agreements to
repurchase are secured by mortgage-backed securities with a fair value of
$91,336,000 at March 31, 1998. The Broker holds the security while FSBW
continues to receive the principal and interest payments from the security.
Upon maturity of the agreement the pledged securities will be returned to
FSBW.
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<PAGE>
<PAGE>
A summary of wholesale repurchase agreements at March 31 by the period
remaining to maturity is as follows (in thousands):
1998 1997
------------------- -------------------
Weighted Weighted
average average
rate Balance rate Balance
---- ------- ---- -------
Due in less than one year 5.64% $ 60,430 5.40 $ 27,174
One to two years 5.68 25,000 5.68 25,000
-------- --------
5.65% $ 85,430 5.53 $ 52,174
======== ========
The maximum and average outstanding balances and average interest rates on
wholesale repurchase agreements were as follows for the year ended March 31
(in thousands):
1998 1997 1996
---- ---- ----
Maximum outstanding at any month end $ 85,430 $ 52,174 $ 9,863
Average outstanding 72,276 26,649 162
Weighted average interest rates:
Annual 5.78% 5.96% 5.41%
End of year 5.65 5.53 5.41
Interest expense during the year $ 4,180 $ 1,589 $ 7
Note 13: INCOME TAXES
The recently enacted Small Business Job Protection Act of 1996 (the "Job
Protection Act") requires that a qualified thrift institution, such as FSBW,
recapture, for federal income tax purposes, that portion of the balance of its
tax basis bad debt reserves that exceeds the December 31, 1987 balance, with
certain adjustments. Such recaptured amounts are to be generally taken into
ordinary income ratably over a six-year period beginning in 1998. In
addition, the Job Protection Act also repeals the reserve method of accounting
for tax basis bad debt deductions and, thus, requires thrifts to calculate the
tax basis bad debt deduction based on actual current loan losses. FSBW will
be required to recapture its post-1987 additions to its tax basis bad debt
reserves, whether such additions were made pursuant to the percentage of
taxable income method or the experience method. As of March 31, 1998, these
additions were $1.5 million which, pursuant to the Job Protection Act, will be
included in taxable income ratably over a six-taxable-year period beginning
with the year ending March 31, 1999. The recapture of the post-1987 additions
to tax basis bad debt reserves will require FSBW to pay approximately $85,000
a year in federal income taxes (based upon current federal income tax rates).
This will not result in a charge to earnings as these amounts are included in
the deferred tax liability at March 31, 1998.
Retained earnings at March 31, 1998, include $5,318,000 of earnings which
represent federal income tax basis bad debt reserve deductions taken by FSBW,
pre 1987, for which no provisions for federal income taxes have been made.
If the accumulated amount that qualified as deductions for federal income
taxes is later used for purposes other than to absorb bad debt losses or FSBW
no longer qualifies as a bank, the accumulated reserve will be subject to
federal income tax at the then current tax rates.
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<PAGE>
The provision for income taxes for the years ended March 31 differs from that
computed at the statutory corporate tax rate as follows (in thousands):
1998 1997 1996
---- ---- ----
Taxes at statutory rate $ 7,199 $ 4,501 $ 3,020
Increase (decrease) in taxes:
Tax-exempt interest (620) (608) (553)
Amortization of cost in excess of
assets acquired 315 201 --
Difference in fair market value
versus basis of released ESOP
shares 328 184 40
State income taxes net of federal
tax benefit 271 148 --
Other (47) (503) 124
------- ------- -------
$ 7,446 $ 3,923 $ 2,631
======= ======= =======
The provision for income tax expense for the year ended March 31 is composed
of the following (in thousands):
1998 1997 1996
---- ---- ----
Current $ 7,303 $ 4,238 $ 2,871
Deferred 34 (286) (181)
Change in valuation allowance 109 (29) (59)
------- ------- -------
$ 7,446 $ 3,923 $ 2,631
======= ======= =======
Income taxes are provided for the temporary differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
Components of the Company's net deferred tax assets (liabilities) at March 31
consisted of the following (in thousands):
1998 1997
---- ----
Deferred tax assets:
Loan loss reserves per books $ 2,675 $ 2,278
Deferred compensation 1,168 1,061
Timing of deductibility of ESOP contributions 86 93
Nondeductible write-down of investment
securities 1 28
Other 149 163
------- -------
4,079 3,623
------- -------
Deferred tax liabilities:
Change in method of accounting for
amortization of premium and discount
on investments 116 142
Tax basis bad debt reserves-post 1987 509 509
FHLB stock dividends 1,599 1,196
Depreciation 638 631
Deferred loan fees 146 99
Other 83 24
------- -------
3,091 2,601
------- -------
988 1,022
Valuation allowance (136) (27)
------- -------
852 995
Income taxes related to valuation reserve on
securities available for sale (1,393) 225
------- -------
Deferred tax asset (liability), net $ (541) $ 1,220
======= =======
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<PAGE>
Note 14: EMPLOYEE BENEFIT PLANS
The Banks have their own profit sharing plans for all eligible employees. The
plans are funded annually at the discretion of the individual Banks' Boards of
Directors. Contributions charged to operations for the years ended March 31,
1998, 1997 and 1996 were $269,000, $253,000 and $208,700, respectively.
FSBW has entered into a salary continuation agreement with certain of its
senior management. This program was funded by purchasing single premium life
insurance contracts. The program provides for aggregate continued annual
compensation for all participants totaling $240,000 for life with a 15-year
guarantee. Participants vest ratably each plan year until retirement,
termination, death or disability. FSBW is recording the salary obligation
over the estimated remaining service lives of the participants. Expenses
related to this program were $129,000, $119,300 and $108,700 for the years
ended March 31, 1998, 1997 and 1996, respectively. The plan's projected
benefit obligation is $2,031,000, of which $438,000 was vested at March 31,
1998. The assumed discount rate was 7% for 1998 and 1997. At March 31, 1998,
an obligation of $504,600 and cash value of life insurance of $2,144,500 were
recorded. At March 31, 1997, an obligation of $375,600 and cash value of life
insurance of $2,036,400 were recorded. Increases in cash surrender value and
related net earnings from the life insurance contracts partially offset the
expenses of this program resulting in a net cost of $21,000, $15,000 and
$34,000 for the years ended March 31, 1998, 1997 and 1996, respectively.
IEB also has a non-qualified, non-contributory retirement compensation plan
for certain bank employees whose benefits are based upon a percentage of
defined participant compensation. Expenses related to this plan included in
fiscal 1998 and 1997 operations were $54,000 and $27,000, respectively.
The Company and FSBW also offer non-qualified deferred compensation plans to
members of their Boards of Directors and certain bank employees. The plans
permit each director or certain bank employees to defer a portion of director
fees, non-qualified retirement contributions or bonuses until the future.
Compensation is charged to expense in the period earned. In order to fund a
portion of the plans' future obligations the Company has purchased life
insurance policies, contributed to money market investments and purchased
common stock of the Company. As the Company is the owner of the investments
and beneficiary of life insurance contracts, and in order to reflect the
Company's policy to pay benefits equal to accumulations, the assets and
liabilities under the plans are reflected in the consolidated balance sheets
of the Company. Common stock of the Company held for such plans is reported as
a contra-equity account and was valued at $2,449,000 and $1,677,000 for March
31, 1998 and 1997, respectively. The money market investments and cash
surrender value of the life insurance policies are included in other assets.
Note 15: EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
FSBW established for eligible employees an employee stock ownership plan
(ESOP) and related trust that became effective upon the former mutual holding
company's conversion to a stock-based holding company. Eligible employees of
FSBW as of January 1, 1995 and eligible employees of the Company or FSBW
employed after such date who have been credited with at least 1,000 hours
during a 12-month period will become participants.
The ESOP borrowed $8,728,500 from the Company in order to purchase the common
stock. The loan will be repaid principally from the Company's or FSBW's
contributions to the ESOP over a period not to exceed thirty years, and the
collateral for the loan will be the unreleased, restricted common stock
purchased by the ESOP. Contributions to the ESOP will be discretionary;
however, FSBW intends to make annual contributions to the ESOP in an aggregate
amount at least equal to the principal and interest requirements of the debt.
The interest rate for the loan is 8.75%.
77
<PAGE>
<PAGE>
Participants generally become 100% vested in their ESOP account after seven
years of credited service or if their service was terminated due to death,
early retirement, permanent disability or a change in control. Prior to the
completion of one year of credited service, a participant who terminates
employment for reasons other than death, retirement, disability, or change in
control of FSBW or the Company will not receive any benefit. Forfeitures will
be reallocated among remaining participating employees, in the same proportion
as contributions. Benefits are payable upon death, retirement, early
retirement, disability or separation from service. The contributions to the
ESOP are not fixed, so benefits payable under the ESOP cannot be estimated.
ESOP compensation expense for March 31, 1998, 1997 and 1996 (first plan year)
were $1,427,000, $997,000 and $515,000, respectively.
As of March 31, 1998, the Company has allocated or committed to be released to
the ESOP 156,580 earned shares and has 716,270 unearned, restricted shares
remaining to be released. The fair value of unearned, restricted shares held
by the ESOP trust was $18,847,000 at March 31, 1998.
Note 16: STOCK BASED COMPENSATION PLANS
At the Company's annual stockholders meeting held on July 26, 1996, the
shareholders approved adoption of the Management Recognition and Development
Plan (MRP) and Stock Option Plan (SOP).
MRP: Under the MRP the Company is authorized to grant up to 436,425 shares of
restricted stock to directors, officers and employees of FSBW. The initial
grant of 404,282 shares with a total cost of $6.0 million vests over a five
year period starting from the July 26, 1996, MRP approval date. The
consolidated statements of income for the years ended March 31, 1998 and 1997
reflect an accrual of $1,308,000 and $971,000 respectively in compensation
expense for the MRP including $95,800 and $69,000, respectively, of expense
for dividends on the allocated, restricted stock. A summary of the changes in
the granted, but not vested, MRP shares for the years ended March 31 follows:
1998 1997 1996
---- ---- ----
Shares granted-not vested, beginning of year 403,882 --
Shares granted- July 26, 1996 404,282 N/A
Shares vested (81,514) --
Shares forfeited (2,160) (400)
------- -------
Shares granted - not vested, end of year 320,208 403,882 N/A
======= ======= ======
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<PAGE>
Note 16: STOCK BASED COMPENSATION (continued)
SOP: Under the SOP the Company has reserved 1,091,063 shares for issuance
pursuant to the exercise of stock options which may be granted to directors
and employees. The exercise price of the stock options are set at 100% of the
fair market value of the stock price at date of grant. Such options will vest
ratably over a five year period and any unexercised options will expire 10
years after vesting or 90 days after employment or service ends.
Details of stock options granted, vested, exercised, forfeited or terminated
are as follows:
Number of option shares
-----------------------
Granted Exercisable
--------- -----------
For the year ended March 31, 1996 N/A N/A
--------- -----------
For the year ended March 31, 1997
Options granted 913,445 --
Options vested -- --
Options forfeited -- --
Options exercised -- --
Options terminated -- --
-------- --------
Number of option shares at March 31, 1997 913,445 --
For the year ended March 31, 1998
Options granted 18,000 --
Options vested (183,589) 183,589
Options forfeited (4,700) --
Options exercised -- (2,995)
Options terminated -- --
-------- --------
Number of option shares at March 31, 1998 743,156 180,594
======== ========
Financial data pertaining to outstanding stock options granted at March 31,
1998 were as follows:
Weighted average Number of
fair value Number of option shares Remaining
Exercise of option shares option shares vested and Contractual
price granted granted exercisable life
--------- ----------------- ------------- ------------- ---------
$ 14.8750 $ 3.49 to 5.29 613,144 152,591 9.3 yrs
15.3750 5.40 to 5.58 70,412 17,603 9.3 yrs
16.7500 6.08 33,600 8,400 9.5 yrs
18.5000 6.72 8,000 2,000 9.8 yrs
21.1875 8.91 5,000 -- N/A
24.3125 10.71 10,000 -- N/A
25.0625 11.07 3,000 -- N/A
------- -------
15.217* 4.98 743,156 180,594
======= =======
* Weighted average exercise price of options granted
79
<PAGE>
Note 16: STOCK BASED COMPENSATION (continued)
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-based
Compensation. The statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
No. 123 does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue following those
rules to recognize and measure compensation as outlined in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but they are now required to disclose the pro forma amounts of net
income and earnings per share that would have been reported had the company
elected to follow the fair value recognition provisions of SFAS No. 123.
Effective April 1, 1996, the Company has determined that it will continue to
measure its employee stock-based compensation arrangements under the
provisions of APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
compensation plan been determined consistent with SFAS No. 123, the Company's
net income available to fully diluted common stock and fully diluted earnings
per share would have been reduced to the pro forma amounts indicated below:
Years ended March 31
--------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands,
except per share amounts)
Net income attributable to common stock:
Basic:
As reported $ 13,122 $ 9,314 $ N/A
Pro forma 12,088 8,429
Diluted:
As reported $ 13,122 $ 9,314
Pro forma 12,088 8,429
Net income per common share:
Basic:
As reported $ 1.43 $ 0.97
Pro forma 1.31 0.88
Diluted:
As reported $ 1.37 $ 0.96
Pro forma 1.26 0.87
The compensation expense included in the pro forma net income attributable to
diluted common stock and diluted earnings per share is not likely to be
representative of the effect on reported net income for future years because
options vest over several years and additional awards generally are made each
year.
The fair value of options granted under the Company's stock option plan is
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants in fiscal
1998: annual dividend yield of 1.20% to 1.50%, expected volatility of 23.9%
to 26.4%, risk-free interest rates of 6.16% to 6.79% and expected lives of
8.5 to 12.5 years.
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS
The Company is a bank holding company registered with the Federal Reserve.
Bank holding companies are subject to capital adequacy requirements of the
Federal Reserve under the Bank Holding Company Act of 1956, as amended (BHCA),
and the regulations of the Federal Reserve. Each of the Banks as state
chartered federally insured institutions are subject to the capital
requirements established by the FDIC.
The capital adequacy requirements are quantitative measures established by
regulation that require the Company and FSBW and IEB to maintain minimum
amounts and ratios of capital. The Federal Reserve requires the Company to
maintain capital adequacy that generally parallels the FDIC requirements. The
FDIC requires the Banks to maintain minimum ratios of total capital and Tier 1
capital to risk-weighted assets as well as Tier 1 leverage capital to average
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
created a statutory framework that increased the importance of meeting
applicable capital requirements. For FSBW and IEB, FDICIA established five
capital categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. An institution's category depends upon where its capital
levels are in relation to relevant capital measures, which include a risk-
based capital measure, a leverage ratio capital measure, and certain other
factors. The federal banking agencies (including the FDIC) have adopted
regulations that implement this statutory framework. Under these regulations,
an institution is treated as well-capitalized if its ratio of total capital to
risk-weighted assets is 10.00% or more, its ratio of core capital to
risk-weighted assets is 6.00% or more, its ratio of core capital to adjusted
total assets is 5.00% or more and it is not subject to any federal supervisory
order or directive to meet a specific capital level. In order to be
adequately capitalized, an institution must have a total risk-based capital
ratio of not less than 8.00%, a Tier 1 risk-based capital ratio of not less
than 4.00%, and leverage ratio of not less that 4.00%. Any institution which
is neither well-capitalized nor adequately capitalized will be considered
undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective action
requirements, regulatory controls and restrictions which become more extensive
as an institution becomes more severely undercapitalized. Failure by the
Banks, individually, to comply with applicable capital requirements would, if
unremedied, result in restrictions on their activities and lead to enforcement
actions against FSBW or IEB by the FDIC, including, but not limited to, the
issuance of a capital directive to ensure the maintenance of required capital
levels. FDICIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, FDIC approval of any regulatory
application filed for its review may be dependent on compliance with capital
requirements.
81
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS (continued)
The actual regulatory capital ratios calculated for the Company and the Banks,
along with the minimum capital amounts and ratios for capital adequacy
purposes and to be categorized as well-capitalized under the regulatory
framework for prompt corrective action were as follows:
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1998:
The Company- consolidated
Total capital to risk-
weighted assets $144,284 22.64% $ 50,987 8.00% N/A
Tier 1 capital to risk-
weighted assets 136,427 21.41 25,493 4.00 N/A
Tier 1 leverage capital
to average assets 136,427 12.17 44,850 4.00 N/A
FSBW
Total capital to risk-
weighted assets 93,324 18.67 40,003 8.00 $50,003 10.00%
Tier 1 capital to risk-
weighted assets 87,073 17.42 20,001 4.00 30,002 6.00
Tier 1 leverage capital
to average assets 87,073 9.30 37,459 4.00 46,824 5.00
IEB
Total capital to risk-
weighted assets 17,545 13.14 10,685 8.00 13,357 10.00
Tier 1 capital to risk-
weighted assets 16,118 12.07 5,343 4.00 8,014 6.00
Tier 1 leverage capital
to average assets 16,118 8.97 7,187 4.00 8,984 5.00
82
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<PAGE>
Note 17: REGULATORY CAPITAL REQUIREMENTS (continued)
Minimum to be
categorized as
Minimum "well-capitalized"
for capital under prompt
adequacy corrective action
Actual purposes provisions
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
March 31, 1997:
The Company-consolidated
Total capital to risk-
weighted assets $143,811 26.77% $42,977 8.00% N/A
Tier 1 capital to risk-
weighted assets 137,095 25.52 21,488 4.00 N/A
Tier 1 leverage capital
to average assets 137,102 13.68 39,465 4.00 N/A
FSBW
Total capital to risk-
weighted assets 96,826 23.68 32,692 8.00 $40,864 10.00%
Tier 1 capital to risk-
weighted assets 91,715 22.44 16,346 4.00 24,519 6.00
Tier 1 leverage capital
to average assets 91,714 11.56 31,746 4.00 39,682 5.00
IEB
Total capital to risk-
weighted assets 23,229 19.08 9,738 8.00 12,173 10.00
Tier 1 capital to risk-
weighted assets 21,806 17.91 4,869 4.00 7,304 6.00
Tier 1 leverage capital
to average assets 21,814 12.08 7,226 4.00 9,033 5.00
Company management believes, as of March 31, 1998, the Company, FSBW and IEB
individually met all capital adequacy requirements to which they were subject.
Additionally, as of March 31, 1998, the most recent notification from the FDIC
individually categorized the Banks as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as
"well-capitalized," a bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table above. There
are no conditions or events since that notification that management believes
have changed their individual category.
83
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<PAGE>
Federal law requires that the federal banking agencies' risk-based capital
guidelines take into account various factors including interest rate risk,
concentration of credit risk, risks associated with nontraditional activities,
and the actual performance and expected risk of loss of multifamily mortgages.
In 1994, the federal banking agencies jointly revised their capital standards
to specify that concentration of credit and nontraditional activities are
among the factors that the agencies will consider in evaluating capital
adequacy. In that year, the FDIC amended its risk-based capital standards
with respect to the risk weighting of loans made to finance the purchase or
construction of multifamily residences. Management believes that the effect
of including such an interest rate risk component in the calculation of
risk-adjusted capital will not cause the Company and the Banks to cease to be
well-capitalized. In June 1996, the FDIC and certain other federal banking
agencies issued a joint policy statement providing guidance on prudent
interest rate risk management principles. The agencies stated that they would
determine banks' interest rate risk on a case-by-case basis, and would not
adopt a standardized measure or establish an explicit minimum capital charge
for interest rate risk.
Note 18: CONTINGENCIES
In the normal course of business, the Company and/or its subsidiaries have
various legal claims and other contingent matters outstanding. The Company
believes that any liability ultimately arising from these actions would not
have a material adverse effect on the results of operations or consolidated
financial position at March 31, 1998.
Note 19: INTEREST RATE RISK
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its
interest-bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), product caps and floors, and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company.
The Company's primary monitoring tool for assessing interest rate risk is
"asset/liability simulation modeling," which is designed to capture the
dynamics of balance sheet, interest rate and spread movements, and to quantify
variations in net interest income and net market value resulting from those
movements under different rate environments. Another monitoring tool used by
the Company to assess interest rate risk is "gap analysis." The matching of
repricing characteristics of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Company's interest sensitivity "gap."
Management is aware of the sources of interest rate risk and in its opinion
actively monitors and manages it to the extent possible, and considers that
the Company's current level of interest rate risk is reasonable.
84
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Note 20: COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of net assets acquired (goodwill) consisted of the following
(in thousands):
March 31
-----------------
1998 1997
---- ----
Inland Empire Bank, net of accumulated
amortization of $1,491,000 and $592,000, respectively. $11,007 11,906
======= ======
Costs in excess of net assets acquired result from business combinations
accounted for as a purchase of assets and an assumption of liabilities.
Goodwill is amortized using the straight-line method over the period that is
expected to be benefited of 14 years. The Company periodically evaluates
goodwill for impairment.
Note 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The estimated fair value of financial instruments is as follows at March 31
(in thousands):
1998 1997
---------------------- -----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
-------- ---------- --------- ----------
Assets:
Cash $ 42,529 $ 42,529 $ 24,488 $ 24,488
Securities available
for sale 302,419 302,419 287,516 287,516
Securities held to
maturity 194 194 987 987
Loans receivable held
for sale 12,436 12,436 2,940 2,940
Loans receivable 744,481 752,420 642,941 651,813
Accrued interest
receivable 7,569 7,569 6,950 6,950
FHLB stock 16,050 16,050 12,807 12,807
Mortgage servicing
rights 698 836 354 360
Liabilities:
Demand, NOW and Money
Market accounts 177,880 177,880 170,499 170,499
Regular savings 42,084 42,084 44,131 44,131
Certificates of deposit 371,607 373,635 330,337 330,887
Advance payments by
borrowers for taxes
and insurance 4,153 4,153 4,112 4,112
FHLB advances 297,549 299,153 231,515 228,966
Other borrowings 91,723 91,709 62,185 61,628
Off-balance-sheet financial
instruments:
Commitments to sell
loans $ 0 $ 0 $ 0 $ 0
Commitments to
originate loans 0 0 0 0
Commitments to purchase
securities 0 0 0 0
Commitments to sell
securities 0 0 0 0
85
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<PAGE>
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial and off-balance-sheet instruments:
Cash: The carrying amount of these items is a reasonable estimate of their
fair value.
Securities: The estimated fair values of investment securities and
mortgaged-backed securities available for sale and held to maturity are based
on quoted market prices or dealer quotes.
Loans Receivable: Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type such as
multifamily real estate, residential mortgage, nonresidential,
agriculture/commercial, consumer and other. Each loan category is further
segmented into fixed- and adjustable-rate interest terms and by performing and
nonperforming categories.
The fair value of performing residential mortgages held for sale is estimated
based upon secondary market sources by type of loan and terms such as fixed or
variable interest rates. For performing loans held in portfolio, the fair
value is based on discounted cash flows using as a discount rate the current
rate offered on similar products.
Fair value for significant nonperforming loans is based on recent appraisals
or estimated cash flows discounted using rates commensurate with risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
FHLB Stock: The fair value is based upon the redemption value of the stock
which equates to its carrying value.
Deposit Liabilities: Under SFAS No. 107, the fair value of deposits with no
stated maturity, such as savings, checking and NOW accounts, is equal to the
amount payable on demand. The market value of certificates of deposit is
based upon the discounted value of contractual cash flows. The discount rate
is determined using the rates currently offered on comparable instruments.
FHLB Advances and Other Borrowings: The fair value of FHLB advances and other
borrowings is estimated based on discounting the estimated future cash flows
using rates currently available to the Company for debt with similar remaining
maturities.
Commitments: Commitments to sell loans with a notational balance of $6,037,000
and $2,951,000 at March 31, 1998 and 1997, respectively, have a carrying value
of zero, representing the cost of such commitments. Commitments to originate
loans, $74,087,000 and $36,779,000 at March 31, 1998 and 1997, respectively,
also have a carrying value of zero. There were no commitments to purchase or
sell securities at March 31, 1998. The fair value of such commitments is
also estimated to be zero based upon current market rates for similar loans
and any fees received to enter into similar agreements.
Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of March 31, 1998. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since that date and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
Fair value estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business. The fair value has not been estimated for assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not financial instruments include the mortgage banking
operations; deferred tax assets/liabilities; land, building and equipment;
costs in excess of net assets acquired; and real estate held for sale.
86
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<PAGE>
Note 22: FIRST SAVINGS BANK OF WASHINGTON BANCORP, INC. (FWWB)
(PARENT COMPANY ONLY)
Summary financial information as of March 31 (in thousands):
FWWB
Balance Sheets
March 31, 1998 and 1997
1998 1997
--------- --------
ASSETS
Cash $ 13,177 $ 893
Investments available for sale 11,978 14,020
Loan receivable, ESOP 7,414 7,956
Investment in subsidiaries 116,946 125,187
Deferred tax asset 194 230
Other assets 2,120 1,779
--------- --------
$ 151,829 $150,065
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities 1,645 1,429
Stockholders' equity 150,184 148,636
--------- --------
$ 151,829 $150,065
========= ========
FWWB
Statements of Income
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Certificates and time deposits $ 107 $ 62 $ 26
Investments 553 1,403 1,054
ESOP loan 678 724 313
OTHER INCOME:
Equity in undistributed income of
subsidiaries 13,201 8,719 5,612
Miscellaneous -- 25 --
-------- ------- --------
14,539 10,933 7,005
OTHER EXPENSE:
Compensation, payroll taxes and
fringe benefits 489 409 64
Other expense 971 888 345
-------- ------- --------
13,079 9,636 6,596
PROVISION FOR (BENEFIT FROM) INCOME
TAXES (43) 322 344
-------- ------- --------
NET INCOME $ 13,122 $ 9,314 $ 6,252
======== ======= ========
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<PAGE>
FWWB
Statements of Cash Flows
For the years ended March 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 13,122 $ 9,314 $ 6,252
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of subsidiaries (13,201) (8,719) (5,612)
Net amortization of investment
discounts (553) (1,403) --
Amortization of MRP liability 339 254 --
(Increase) decrease in deferred
taxes 101 (230) --
(Increase) decrease in other assets (327) (486) (1,285)
Increase (decrease) in other
liabilities 22 199 543
-------- ------- --------
Net cash used by operating
activities (497) (1,071) (102)
-------- ------- --------
INVESTING ACTIVITIES:
Purchase of securities available
for sale (164,686) (446,308) (440,626)
Principal repayments and
maturities of securities
available for sale 167,290 486,739 387,572
Funds transferred to deferred
compensation trust (80) (75) --
Acquisition of wholly owned
subsidiary: 1997-IEB, 1996-FSBW -- (32,833) (53,681)
Dividends received from subsidiaries 26,545 4,515 8,560
Loan provided to FSBW's ESOP for
purchase of common stock -- -- (8,728)
Principal repayments - FSBW's
ESOP loan 542 475 297
Additional investment in subsidiaries (216) (166) (41)
-------- ------- --------
Net cash provided (used) by
investing activities 29,395 12,347 (106,647)
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of underwriting costs -- -- 107,361
Purchases of treasury stock (13,993) (12,905) --
Repurchase of forfeited MRP shares (38) -- --
Proceeds from sale of treasury
stock to FSBW -- 4,320 --
Cash dividends paid (2,583) (1,907) (504)
Contribution from (reimbursement to)
wholly owned subsidiary -- -- (62)
-------- ------- --------
Net cash provided (used) by
financing activities (16,614) (10,492) 106,795
-------- ------- --------
NET INCREASE (DECREASE) IN CASH 12,284 784 46
CASH, BEGINNING OF PERIOD 893 109 63
-------- ------- --------
CASH, END OF PERIOD $ 13,177 $ 893 $ 109
======== ======= ========
88
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<PAGE>
FWWB
Statements of Cash Flows
For the years ended March 31, 1998, 1997 and 1996
(continued)
1998 1997 1996
-------- ------- --------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ -- $ -- $ --
Taxes paid $ 16 $ 505 $ --
Non-cash transactions:
Net change in accrued dividends
payable $ 149 $ 178 $ 504
Reduction of initial investment in
subsidiary for loan advanced
to ESOP $ -- $ -- $ 8,728
Increase of investment in
subsidiary for shares released
to ESOP participants as
compensation $ 1,642 $ 417 $ 515
Net change in unrealized gain
(loss) in deferred compensation
trust & related liability,
including subsidiaries $ 1,536 $ 493 $ --
Treasury stock forfeited by MRP,
including subsidiaries $ 6 $ 6 $ --
Recognize tax benefit of vested
MRP shares, including
subsidiaries $ 231 $ -- $ --
Note 23: CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
In October 1995, the Company converted from the mutual holding company to the
stock holding company form of organization. At the time, the Company
established a liquidation account in an amount equal to its equity, as
reflected in the latest statement of financial condition used in the final
conversion prospectus. The liquidation account will be maintained for the
benefit of eligible account holders who continue to maintain their accounts at
FSBW after the conversion. The liquidation account will be reduced annually
to the extent that eligible account holders have reduced their qualifying
deposits as of each anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event
of a complete liquidation of the Company, each FSBW eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for accounts
then held.
Subsequent to the conversion, the Company may not declare or pay cash
dividends on, or repurchase, any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Note 24: STOCK REPURCHASE
On November 19, 1996, the Company completed its stock repurchase program
initiated in April 1996 which authorized the repurchase of 545,525 shares of
its outstanding common stock. On November 20, 1996, the Company's Board of
Directors approved continuance of the stock repurchase program authorizing the
purchase of up to 10% of total shares outstanding over the next 12 months, and
in November 1997 the Board of Directors authorized a continuance of the stock
repurchase program with no specific repurchase target. As of March 31, 1998,
the Company has repurchased a total of 1,359,394 shares at an average price of
$19.79 per share. The Company has reserved 436,425 shares for its MRP of
which 401,722 shares were awarded as of March 31, 1998 (see Note 16 to
financial statements). The remaining 34,703 unallocated shares are held as
treasury stock reserved for the MRP. Management reissued 775,884 treasury
shares subsequent to year end in connection with the acquisition of Towne
Bancorp, Inc. (see Note 2).
89
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Note 25: EARNINGS PER SHARE
Earnings per share information is not meaningful for any periods prior to
December 31, 1995, since the Company's stock was issued on October 31, 1995.
Earnings per share are not presented for periods prior to conversion to stock
form as FSBW was a wholly-owned subsidiary of a mutual holding company.
Years ended March 31
(in thousands)
---------------------------
1998* 1997* 1996
---- ---- ----
Total shares issued 10,911 10,911 N/A
Less treasury stock
including shares allocated to MRP (963) (488)
Less unallocated shares held by the ESOP (749) (811)
------ ------ ------
Basic weighted average shares outstanding 9,199 9,612 N/A
------ ------ ------
Plus MRP and stock option incremental
shares considered outstanding for diluted
EPS calculations 374 127
------ ------
Diluted weighted average shares outstanding 9,573 9,739 N/A
====== ====== ======
* Weighted average shares, restated under provisions of SFAS No. 128 (see
Note 1)
Note 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Results of operations on a quarterly basis were as follows (in thousands):
Year ended March 31, 1998
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 20,062 $ 21,311 $ 21,837 $ 21,937
Interest expense 10,721 11,754 12,038 12,138
-------- -------- -------- --------
Net interest income 9,341 9,557 9,799 9,799
Provision for loan losses 355 400 375 498
-------- -------- -------- --------
Net interest income after
provision for loan losses 8,986 9,157 9,424 9,301
Non-interest income 955 1,114 1,249 1,402
Non-interest expense 4,911 5,137 5,517 5,455
-------- -------- -------- --------
Income before provision for
income taxes 5,030 5,134 5,156 5,248
Provision for income taxes 1,785 1,837 1,951 1,873
-------- -------- -------- --------
Net operating income $ 3,245 $ 3,297 $ 3,205 $ 3,375
======== ======== ======== ========
Basic earnings per share $ 0.35 $ 0.36 $ 0.35 $ 0.38
Diluted earnings per share $ 0.34 $ 0.34 $ 0.34 $ 0.36
Cash dividends declared $ 0.07 $ 0.07 $ 0.07 $ 0.09
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Note 26: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED), continued
Results of operations on a quarterly basis were as follows (in thousands):
Year ended March 31, 1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 13,785 $ 16,648 $ 18,264 $ 18,595
Interest expense 7,566 9,007 9,791 10,008
-------- -------- -------- --------
Net interest income 6,219 7,641 8,473 8,587
Provision for loan losses 513 407 231 272
-------- -------- -------- --------
Net interest income after
provision for loan losses 5,706 7,234 8,242 8,315
Non-interest income 435 575 1,173 887
Non-interest expense 2,864 6,842 4,865 4,759
-------- -------- -------- --------
Income before provision for
income taxes 3,277 967 4,550 4,443
Provision for income taxes 884 164 1,444 1,431
-------- -------- -------- --------
Net operating income $ 2,393 $ 803 $ 3,106 $ 3,012
======== ======== ======== ========
Basic earnings per share $ 0.24 $ 0.08 $ 0.32 $ 0.32
Diluted earnings per share $ 0.24 $ 0.08 $ 0.32 $ 0.31
Cash dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.07
Year ended March 31, 1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Interest income $ 9,170 $ 9,310 $ 10,733 $ 12,196
Interest expense 5,566 5,710 5,622 6,389
-------- -------- -------- --------
Net interest income 3,604 3,600 5,111 5,807
Provision for loan losses 37 75 156 256
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,567 3,525 4,955 5,551
Non-interest income 526 451 153 459
Non-interest expense 2,649 2,381 2,460 2,814
-------- -------- -------- --------
Income before provision for
income taxes 1,444 1,595 2,648 3,196
Provision for income taxes 369 442 830 990
-------- -------- -------- --------
Net operating income $ 1,075 $ 1,153 $ 1,818 $ 2,206
======== ======== ======== ========
Basic earnings per share $ (*) $ (*) $ (*) $ 0.22
Diluted earnings per share $ (*) $ (*) $ (*) $ 0.22
Cash dividends declared $ N/A $ N/A $ 0.05 $ 0.05
(*)The Company converted from mutual to stock ownership on October 31, 1995;
therefore earnings per share information is meaningful only for the fourth
quarter of fiscal year 1996.
91
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<PAGE>
First Savings Bank of Washington Bancorp, Inc.
Index of Exhibits
Exhibit
- ------------------------------------------------------------------------------
3{a} Certificate of Incorporation of Registrant [incorporated by reference
to Registration Statement on Form S-1, as amended (File No. 33-93386).]
3{b} Bylaws of Registrant [incorporated by reference to exhibits filed with
the Quarterly Report on Form 10-Q for the quarter ended December 31,
1997 (File No. 0-26584)]
10{a} Employment Agreement with Gary L. Sirmon. [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584).]
10{b} Executive Salary Continuation Agreement with Gary L. Sirmon
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{c} Employment Agreement with D. Allan Roth. [incorporated by reference to
exhibits filed with the Annual Report on Form 10-k dated March 31, 1996
(File No. 0-26584).]
10{d} Executive Salary Continuation Agreement with D. Allan Roth.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{e} Employment Agreement with Michael K. Larsen [incorporated by reference
to exhibits filed with the Annual Report on Form 10-k dated March 31,
1996 (File No. 0-26584).]
10{f} Executive Salary Continuation Agreement with Michael K. Larsen.
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-k dated March 31, 1996 (File No. 0-26584).]
10{g} 1996 Stock Option Plan [(incorporated by reference to Exhibit A to the
Proxy Statement for the Annual Meeting of Stockholders held on July 26,
1996).
10{h} 1996 Management Recognition and Development Plan (incorporated by
reference to Exhibit B to the Proxy Statement for the Annual Meeting of
Stockholders held on July 26, 1996).
10{i} Employment and Non-competition Agreement with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (File No. 0-26584)].
10{j} Supplemental Retirement Plan as Amended with Jesse G. Foster
[incorporated by reference to exhibits filed with the Annual Report on
Form 10-K dated March 31, 1997 (File No. 0-26584)]
10{k} Towne Bank of Woodinville 1992 Stock Option Plan [incorporated by
reference to exhibits filed with the Registration Statement on Form S-8
dated April 2, 1998 (File No. 333-49193)]
21 Subsidiaries of the Registrant.
23 Independent Auditors Consent.
27 Financial Data Schedule.
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Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
First Savings Bank of Washington Bancorp, Inc.
Percentage of Jurisdiction of
Subsidiaries ownership State of Incorporation
- ------------ ------------- ----------------------
First Savings Bank of
Washington (1) 100% Washington
Inland Empire Bank (1) 100% Oregon
Towne Bank of Woodinville (1) 100% Washington
Northwest Financial
Corporation (2) 100% Washington
- ------------
(1) Wholly-owned by the First Savings Bank of Washington Bancorp, Inc.
(2) Wholly-owned by the First Savings Bank of Washington
<PAGE>
<PAGE>
EXHIBIT 23
[Deloitte & Touche LLP Letterhead]
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
333-10819 and 333-49193 of First Savings Bank of Washington Bancorp, Inc. on
Form S-8 of our report dated May 22, 1998, appearing in the Annual Report on
Form 10-K of First Savings Bank of Washington Bancorp, Inc. for the year ended
March 31, 1998.
/s/Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
June 26, 1998
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