FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended . . . . . . . . . . . . June 30, 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 WASHINGTON BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Washington 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)
First Savings Bank of Washington Bancorp, Inc.
----------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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.
(1) Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of July 31, 1998
-------------- -------------------
Common stock, $.01 par value 11,646,885 shares *
* Reflects 10% stock dividend to shareholders of record on August 10,
1998 (10,588,078 shares before 10% stock dividend) and includes
781,526 shares held by employee stock ownership plan (ESOP) that have
not been released, committed to be released, or allocated to
participant accounts.
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First Washington Bancorp, Inc. and Subsidiaries
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of First
Washington Bancorp, Inc. and Subsidiaries filed as a part of the report are as
follows:
Consolidated Statements of Financial Condition
as of June 30, 1998 and March 31, 1998 . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income
for the Quarters ended June 30, 1998 and 1997. . . . . . . . . . . . . . . 3
Consolidated Statements of Changes in Stockholders' Equity
for the Quarters ended June 30, 1998 and 1997 . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows
for the Quarters ended June 30, 1998 and 1997 . . . . . . . . . . . . . . 6
Selected Notes to Consolidated Financial Statements. . . . . . . . . . . . 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Recent Developments and Significant Events . . . . . . . . . . . . . . . . 11
Comparison of Financial Condition at June 30, 1998 and March 31, 1998. . . 13
Comparison of Results of Operations for the Quarters ended June 30,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Asset Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . 18
Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Stockholders. . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
June 30, 1998 and March 31, 1998
(Unaudited)
ASSETS June 30 March 31
1998 1998
------- --------
Cash and due from banks $ 34,131 $ 42,529
Securities available for sale, cost $314,355 and
$298,346 318,327 302,419
Securities held to maturity, fair value $2,820
and $194 2,768 194
Federal Home Loan Bank stock 18,510 16,050
Loans receivable:
Held for sale, fair value $16,285 and $12,436 16,285 12,436
Held for portfolio 924,355 752,338
Allowances for loan losses (9,717) (7,857)
---------- ----------
930,923 756,917
Accrued interest receivable 8,864 7,569
Real estate held for sale, net 805 882
Property and equipment, net 12,493 11,379
Costs in excess of net assets acquired 29,676 11,007
Deferred income tax asset, net -- --
Other assets 5,566 5,126
---------- ----------
$1,362,063 $1,154,072
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing $ 81,931 $ 56,691
Interest-bearing 663,194 545,831
---------- ----------
745,125 602,522
Advances from Federal Home Loan Bank 344,569 297,549
Other borrowings 90,026 91,723
Accrued expenses and other liabilities 6,922 5,475
Deferred compensation 3,769 3,798
Deferred income taxes payable, net 126 541
Income taxes payable 404 2,280
---------- ----------
1,190,941 1,003,888
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000
shares authorized, no shares issued -- --
Common stock - $0.01 par value, 27,500,000
shares authorized, 12,001,687 shares issued: *
11,698,980 shares and 10,948,248 shares
outstanding * at June 30, 1998 and March 31,
1998, respectively 109 109
Additional paid-in capital 112,012 108,885
Retained earnings 75,646 72,962
Valuation reserve for securities available for sale 2,614 2,680
Treasury stock, at cost: 302,706 shares and 1,053,437
shares * at June 30, 1998 and March 31, 1997,
respectively (6,220) (20,979)
Unearned shares of common stock issued to employee
stock ownership plan trust (ESOP):
781,526 and 787,897 restricted shares outstanding *
at June 30, 1998 and March 31, 1997, respectively,
at cost (7,105) (7,163)
Carrying value of shares held in trust for stock-
related compensation plans (5,934) (6,310)
---------- ----------
171,122 150,184
---------- ----------
$1,362,063 $1,154,072
========== ==========
* - Adjusted for stock dividend see Note 2:
2
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
Quarters Ended
June 30
----------------------
1998 1997
---- ----
INTEREST INCOME:
Loans receivable $ 20,877 $ 14,922
Mortgage-backed securities 2,761 3,142
Securities and deposits 2,161 1,998
---------- ----------
25,799 20,062
INTEREST EXPENSE:
Deposits 8,036 6,059
Federal Home Loan Bank advances 4,587 3,691
Other borrowings 1,317 971
---------- ----------
13,940 10,721
Net interest income before ---------- ----------
provision for loan losses 11,859 9,341
PROVISION FOR LOAN LOSSES 667 355
---------- ----------
Net interest income 11,192 8,986
OTHER OPERATING INCOME:
Loan servicing fees 225 184
Other fees and service charges 836 580
Gain on sale of loans 523 191
Gain (loss) on sale of securities 5 1
Miscellaneous 4 --
---------- ----------
Total other operating income 1,593 956
OTHER OPERATING EXPENSES:
Salary and employee benefits 4,198 3,096
Less capitalized loan origination costs (676) (506)
Occupancy and equipment 1,049 725
Information/computer data services 372 248
Advertising 134 109
Deposit insurance 85 70
Amortization of costs in excess
of net assets acquired 569 224
Miscellaneous 1,342 946
---------- ----------
Total other operating expenses 7,073 4,912
---------- ----------
Income before provision for income taxes 5,712 5,030
PROVISION FOR INCOME TAXES 2,164 1,785
---------- ----------
NET INCOME $ 3,548 $ 3,245
========== ==========
Net income per common share, see Notes 2 & 5:
after stock dividend:
Basic $ .33 $ .32
Diluted $ .32 $ .30
Net income per common share
before stock dividend:
Basic $ .37 $ .35
Diluted $ .35 $ .34
Cumulative dividends declared per common share: $ .08 $ .06
3
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
( in thousands)
For the Quarters ended June 30, 1998 and 1997
1998 1997
---- ----
Common stock:
Balance, beginning of period $ 109 $ 109
---------- ----------
Balance, end of period 109 109
Additional paid-in capital:
Balance, beginning of period 108,885 107,844
Acquisition of Towne Bank:
Issuance of stock-fair market value in
excess of basis 1,261 --
Assumption of options 2,018 --
Release of earned ESOP shares 90 176
Excess of basis over proceeds of treasury stock
reissued for exercised stock options (242) --
---------- ----------
Balance, end of period 112,012 108,020
Retained earnings:
Balance, beginning of period 72,962 62,572
Net income 3,548 3,245
Cash dividends (864) (709)
---------- ----------
Balance, end of period 75,646 65,108
Valuation reserve for securities available for sale:
Balance, beginning of period 2,680 (401)
Change in valuation reserve (66) 1,470
---------- ----------
Balance, end of period 2,614 1,069
Treasury stock:
Balance, beginning of period (20,979) (6,954)
Basis of stock reissued in acquisition of
Towne Bank 17,206 --
Purchases of treasury stock (2,447) --
Purchases of treasury stock for exercised
stock options (305)
Reissuance of treasury stock for MRP
and/or exercised stock options 305 --
Repurchase of forfeited shares from MRP -- (5)
---------- ----------
Balance, end of period (6,220) (6,959)
Unearned, restricted ESOP shares at cost:
Balance, beginning of period (7,163) (7,751)
Release of earned ESOP shares 58 112
---------- ----------
Balance, end of period (7,105) (7,639)
Carrying value of shares held in trust for
stock-related compensation plans:
Balance, beginning of period (6,310) (6,783)
Net change in number and/or valuation of
shares held in trust 75 (319)
Amortization of compensation related to MRP 301 301
---------- ----------
Balance, end of period (5,934) (6,801)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $ 171,122 $ 152,907
========== ==========
4
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(continued) ( in thousands)
For the Quarters ended June 30, 1998 and 1997
1998 1997
---- ----
Common stock , shares issued: *
Number of shares, beginning of period 12,002 12,002
------- -------
Number of shares, end of period 12,002 12,002
------- -------
Treasury stock, shares held: *
Number of shares, beginning of period (1,053) (432)
Purchase of treasury stock (103) --
Purchase of treasury stock for exercised
stock options (13)
Reissuance of treasury stock to deferred
compensation plan and/or exercised stock
options 13 --
Shares reissued in acquisition of Towne Bank 853 --
Repurchase of shares forfeited from MRP -- --
------- -------
Number of shares, end of period (303) (432)
------- -------
Shares outstanding, end of period 11,699 11,570
======= =======
Unearned, restricted ESOP shares: *
Number of shares, beginning of period (788) (852)
Release of earned shares 6 12
------- -------
Number of shares, end of period (782) (840)
======= =======
* - Adjusted for stock dividend see Note 2:
5
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarters ended June 30, 1998 and 1997
1998 1997
---- ----
OPERATING ACTIVITIES
Net income $ 3,548 $ 3,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes -- --
Depreciation 383 268
Loss (gain) on sale of securities (5) (1)
Net amortization of premiums and discounts on
investments 374 (15)
Amortization of costs in excess of net assets acquired 569 224
Amortization of MRP compensation liability 301 301
Loss (gain) on sale of loans (523) (202)
Net changes in deferred loan fees, premiums and
discounts 125 252
Loss (gain) on disposal of real estate held for sale -- 9
Loss (gain) on disposal of equipment -- (5)
Capitalization of mortgage servicing rights from
sale of mortgages with servicing retained (212) --
Amortization of mortgage servicing rights 69 17
Provision for losses on loans and real estate
held for sale 667 355
FHLB stock dividend (333) (246)
Cash provided (used) in operating assets and
liabilities:
Loans held for sale (3,849) (284)
Accrued interest receivable (575) (623)
Other assets 10 (34)
Deferred compensation 65 65
Accrued expenses and other liabilities 668 15
Income taxes payable (2,251) (1,299)
---------- ----------
Net cash provided by operating activities (969) 2,042
---------- ----------
INVESTING ACTIVITIES:
Purchase of securities available for sale (99,445) (56,400)
Principal payments and maturities of securities
available for sale 85,087 45,779
Sales of securities available for sale 504 999
Purchase of securities held to maturity -- --
Principal payments and maturities of securities
held to maturity 20 199
Purchase of FHLB stock (1,217) (833)
Loans originated and closed - net (163,285) (120,230)
Purchase of loans and participating interest in loans (37,452) (26,982)
Sales of loans and participating interest in loans 36,521 10,156
Principal repayments on loans 113,556 74,116
Purchase of property and equipment (411) (588)
Proceeds from sale of property and equipment -- 9
Insurance proceeds on real estate held for sale-net -- 103
Basis of real estate held for sale acquired in
settlement of loans and disposed of during the
period 385 393
Funds transferred to deferred compensation plan
trusts (20) (19)
Acquisition of Towne Bank, net cash acquired 9,328 --
---------- ----------
Net cash used by investing activities (56,429) (73,298)
---------- ----------
(Continued on next page)
6
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Quarters ended June 30, 1998 and 1997
(Continued from prior page)
1998 1997
---- ----
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 9,019 $ 2,817
Proceeds from FHLB advances 82,654 267,230
Repayment of FHLB advances (37,634) (219,019)
Proceeds from reverse repurchase borrowings (1,034) 15,545
Repayments of reverse repurchase borrowings -- (21)
Decrease-net in other borrowings (663) (3,375)
Compensation expense recognized for shares released
for allocation to participants of the ESOP:
Original basis of shares 58 112
Excess of fair value of released shares over
basis 90 176
Cash dividend paid (802) (708)
Net cost of exercised stock options (241) --
Purchase of treasury stock (2,447) --
---------- ----------
Net cash provided by financing activities 49,000 62,757
---------- ----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (8,398) (8,499)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 42,529 24,488
---------- ----------
CASH AND DUE FROM BANKS, END OF PERIOD $ 34,131 $ 15,989
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 15,310 $ 10,820
Taxes paid $ 4,415 $ 3,085
Non-cash transactions:
Loans, net of discounts, specific loss
allowances and unearned income transferred
to real estate owned $ 308 $ 640
Net change in accrued dividends payable $ 62 $ 1
Net change in unrealized gain (loss) in
deferred compensation trust and related
liability $ 91 $ 309
Treasury stock forfeited by MRP $ -- $ 5
Fair value of stock issued and options
assumed in connection with the acquisition
of Towne Bank $ 20,484 $ --
7
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and March 31, 1998
Note 1: Reincorporation and Basis of Presentation
Reincorporation:
- ---------------
The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware
corporation and herein referred to as "FSBWB," approved the reincorporation of
FSBWB from Delaware to Washington on July 24, 1998. The reincorporation was
effected July 24, 1998 by merging FSBWB into a wholly owned subsidiary which
was recently formed solely for the purpose of effecting the reincorporation.
The surviving corporation is known as First Washington Bancorp, Inc., a
Washington corporation, and is hereafter referred to as "FWWB." Upon
consummation of the merger, each share of Common Stock of FSBWB, par value
$.01 per share, was automatically converted into one share of Common Stock of
FWWB, par value $.01 per share.
The merger was consummated under the terms and conditions of a Plan of Merger
pursuant to which FSBWB ceased to exist as a Delaware corporation, the
stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the
assets, liabilities, subsidiaries and other properties of FSBWB to the full
extent provided by law, and the rights of the shareholders and internal
affairs of FWWB are governed by the articles of incorporation and bylaws of
FWWB and the Washington Business Corporation Act, as amended. As a result of
the merger, FWWB has the same business, management, benefit plans, location,
assets, liabilities and net worth as did FSBWB.
Basis of Presentation:
- ---------------------
The unaudited consolidated financial statements of FWWB included herein
reflect all adjustments which are, in the opinion of management, necessary to
present fairly the statement of financial position and the results of
operations for the interim periods presented. All such adjustments are of a
normal recurring nature. The consolidated financial statements include FWWB's
wholly owned subsidiaries, First Savings Bank of Washington (FSBW), Inland
Empire Bank (IEB) and Towne Bank (TB) (together, the Banks). The balance
sheet data at March 31, 1998, is derived from FWWB's audited financial
statements. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended March 31, 1998 (File No. 0-26584), of FWWB.
Certain amounts in the prior periods' financial statements and/or schedules
have been reclassified to conform to the current period's presentation. These
reclassifications affected certain ratios for the prior periods. The effect
of such reclassifications is immaterial.
Note 2: Recent Developments
Acquisition of Towne Bancorp, Inc.:
- ----------------------------------
On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB
paid $28.2 million in cash and common stock for all of the outstanding common
shares and stock options of Towne Bancorp, Inc., which was the holding company
for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle
suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB become
a wholly owned subsidiary of FWWB. The acquisition was accounted for as a
purchase and resulted in the recording of $19.2 million of costs in excess of
the fair value of Towne Bancorp, Inc. net assets acquired (goodwill).
Goodwill assets are being amortized over a 14 year period and result in a
current charge to earnings of $343,800 per quarter or $1,375,000 per year.
Founded in 1991, TB is a community business bank which had 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. TB operates five full
service branches in the Seattle, Washington metropolitan area in Woodinville,
Redmond, Bellevue, Renton and Bothell.
8
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Agreement to Acquire Whatcom State Bancorp, Inc.:
- ------------------------------------------------
FWWB has signed 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
approximately 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, FWWB will exchange 0.7671 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 year.
Declaration of 10% Stock Dividend:
- ---------------------------------
On July 24, 1998 FWWB's Board of Directors declared a 10% stock dividend
payable August 17, 1998 to shareholders of record August 10, 1998. All
earnings per share and share data have been adjusted to reflect the 10% stock
dividend.
New Accounting Pronouncements:
- -----------------------------
In July 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on the accounting treatment for
deferred compensation arrangements where amounts earned are held in a Rabbi
Trust and invested. The consensus of the EITF should be applied as of
September 30, 1998, for awards granted prior to March 19, 1998, and existing
plans may be amended prior to September 30, 1998. FWWB has not yet determined
the impact of the consensus or whether existing plans may be amended.
Note 3: Adoption of New Accounting Standards
FWWB adopted Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, effective April 1, 1998. The standard
requires that comprehensive income and its components be disclosed in the
financial statements. FWWB's comprehensive income includes all items which
comprise net income plus the unrealized holding gains on available-for-sale
securities. For the quarters ended June 30, 1998 and 1997, FWWB's
comprehensive income was as follows:
Quarters Ended
June 30
----------------------
1998 1997
---- ----
Net income $ 3,548 $ 3,245
Other comprehensive income (66) 1,470
--------- ---------
Total comprehensive income $ 3,482 $ 4,715
========= =========
Note 4: Additional Information Regarding Interest-Bearing Deposits and
Securities
The following table sets forth additional detail on the FWWB's
interest-bearing deposits and securities at the dates indicated (at carrying
value) (in thousands):
June 30 March 31
1998 1998
---- ----
Interest-bearing deposits included
in cash and due from banks $ 10,469 $ 15,587
--------- ---------
Mortgage-backed securities 210,273 197,130
Other securities-taxable 74,520 70,092
Other securities-tax exempt 33,117 32,093
Other stocks with dividends 3,185 3,298
--------- ---------
Total securities 321,095 302,613
--------- ---------
Federal Home Loan Bank Stock 18,510 16,050
--------- ---------
$ 350,074 $ 334,250
========= =========
9
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The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters Ended
June 30
----------------------
1998 1997
---- ----
Mortgage-backed securities $ 2,761 $ 3,142
========= =========
Taxable interest and dividends 1,328 1,233
Tax-exempt interest 500 519
Federal Home Loan Bank stock-dividends 333 246
--------- ---------
2,161 1,998
--------- ---------
$ 4,922 $ 5,140
========= =========
Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per
Share (EPS) and Calculation of Outstanding Shares
Calculation of
Weighted Average Shares Outstanding
for Earnings Per Share
----------------------
(in thousands)
Quarters ended
June 30
1998 1997
---- ----
Total shares originally issued 10,911 10,911
Less treasury stock including
shares allocated to MRP (560) (795)
Less unallocated shares held by
the ESOP (714) (770)
------- -------
Basic weighted average shares
outstanding 9,637 9,346
Plus MRP and stock option incremental
shares considered outstanding for
diluted EPS calculations 498 332
Diluted weighted average shares ------- -------
outstanding 10,135 9,678
======= =======
Calculation of
Outstanding Shares at
----------------------
(in thousands)
June 30 March 31
1998 1998
---- ----
Total shares issued 10,911 10,911
Less treasury stock (276) (958)
------- -------
Outstanding shares 10,635 9,953
======= =======
10
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ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
First Washington Bancorp, Inc. (FWWB), a Washington 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), Inland Empire Bank (IEB) and Towne Bank (TB) (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. TB is a
Washington-chartered commercial bank whose deposits are insured by the FDIC
under BIF. TB conducts business from five full service branches in the
Seattle, Washington metropolitan area.
The operating results of FWWB depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on
interest-bearing liabilities, composed primarily of savings deposits and
Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a
function of FWWB'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, FWWB's net interest income significantly increased
for the quarter ended June 30, 1998, when compared to the same period for the
prior year. This increase in net interest income was largely due to the
substantial growth in average asset and liability balances from the
acquisition of TB on April 1, 1998. FWWB'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.
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
FWWB. The information contained in this section should be read in conjunction
with the Consolidated Financial Statements and accompanying Selected Notes to
Consolidated Financial Statements.
Recent Developments and Significant Events
Recent Developments
Reincorporation:
- ---------------
The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware
corporation and herein referred to as "FSBWB," approved the reincorporation of
FSBWB from Delaware to Washington on July 24, 1998. The reincorporation was
effected July 24, 1998 by merging FSBWB into a wholly owned subsidiary which
was recently formed solely for the purpose of effecting the reincorporation.
The surviving corporation is known as First Washington Bancorp, Inc., a
Washington corporation, and is hereafter referred to as "FWWB." Upon
consummation of the merger, each share of Common Stock of FSBWB, par value
$.01 per share, was automatically converted into one share of common stock of
FWWB, par value $.01 per share.
The merger was consummated under the terms and conditions of a Plan of Merger
pursuant to which FSBWB ceased to exist as a Delaware corporation, the
stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the
assets, liabilities, subsidiaries and other properties of FSBWB to the full
extent provided by law, and the rights of the shareholders and internal
affairs of FWWB are governed by the articles of incorporation and bylaws of
FWWB and the Washington Business Corporation Act, as amended. As a result of
the merger, FWWB has the same business, management, benefit plans, location,
assets, liabilities and net worth as did FSBWB.
11
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Acquisition of Towne Bancorp, Inc.:
- ----------------------------------
On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB
paid $28.2 million in cash and common stock for all of the outstanding common
shares and stock options of Towne Bancorp, Inc., which was the holding company
for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle
suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB became
a wholly owned subsidiary of FWWB. The acquisition was accounted for as a
purchase and resulted in the recording of $19.2 million of costs in excess of
the fair value of Towne Bank net assets acquired (goodwill). Goodwill assets
are being amortized over a 14 year period and result in a current charge to
earnings of $343,800 per quarter or $1,375,000 per year. Founded in 1991, TB
is a community business bank which had 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. TB operates five full service branches
in the Seattle, Washington metropolitan area in Woodinville, Redmond,
Bellevue, Renton and Bothell.
Agreement to Acquire Whatcom State Bancorp, Inc.:
- ------------------------------------------------
FWWB has signed 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, First Washington Bancorp will exchange 0.7671 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 year.
Declaration of 10% Stock Dividend:
- ---------------------------------
On July 24, 1998 the Company's Board of Directors declared a 10% stock
dividend payable August 17, 1998 to shareholders of record August 10, 1998.
All earnings per share and share data have been adjusted to reflect the 10%
stock dividend.
New Accounting Pronouncements:
- -----------------------------
In July 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board reached a consensus on the accounting treatment for
deferred compensation arrangements where amounts earned are held in a Rabbi
Trust and invested. The consensus of the EITF should be applied as of
September 30, 1998, for awards granted prior to March 19, 1998, and existing
plans may be amended prior to September 30, 1998. FWWB has not yet determined
the impact of the consensus or whether existing plans may be amended.
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 FWWB and its subsidiary Banks, FWWB 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. Only the testing phase
remains. Testing has started and will continue through December, 1998. 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 three bank subsidiaries have budgeted close to $150,000 to cover soft and
hard costs such as upgrading ATM's, contacting and monitoring vendors,
contacting customers and providing information regarding our preparations and
testing the systems we have identified as critical and non-critical. FWWB and
its Bank subsidiaries have incurred and expensed approximately $8,000 of Y2K
related costs in the current fiscal year to date period ended June 30, 1998.
Costs incurred and expensed in prior fiscal years were not significant.
12
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FWWB and its subsidiary Banks are continuing to contact and monitor 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. Loan and deposit
customers are being updated regularly about our preparations and information
is being provided to create a much greater awareness of the issue with some
ideas about how to assess and prepare for their own Y2K vulnerability. 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. In addition, contingency or
alternate sources of support have been identified for each critical function
and many of the non-critical functions.
In the event that the Banks' data processing providers do not make their
systems Y2K compliant and FWWB is not able to switch to an alternative
provider or an in-house system in a timely manner, resulting computer
malfunctions could interrupt the operations of the Banks and have a
significant adverse effect on FWWB's financial condition and results of
operations.
Comparison of Financial Condition at June 30 and March 31, 1998
Total assets increased $208 million, or 18.0%, from $1.154 billion at March
31, 1998, to $1.362 billion at June 30, 1998. The majority of the increase,
$164.9 million including goodwill resulting from the use of purchase
accounting, was from the acquisition of Towne Bank and the remaining growth of
$62.1 million was spread among all three subsidiary Banks 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 FWWB's capital and reflects the solid economic conditions in the
markets where FWWB operates.
Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $174.0 million, or 23.0%, from
$756.9 million at March 31, 1998, to $930.9 million at June 30, 1998. The
increase in gross loans of $186.8 million from $822.6 million at March 31,
1998, to $1.009 million at June 30, 1998, consists of $64.8 million of
mortgages secured by commercial and multi-family real estate, $26.7 million of
construction and land loans, $4.8 million of residential mortgages and $90.5
million of non-mortgage loans such as commercial, agricultural and consumer
loans. The acquisition of TB provided $133.7 million of gross loans consisting
of $26.2 million of commercial and multi-family mortgages, $22.1 million of
construction and land loans, $7.4 million of residential mortgages and $78
million of commercial and consumer loans. A little more than three quarters
of the increase in assets, excluding the TB acquisition, was funded by a net
increase of $47.1 million, or 15.8%, in FHLB advances from $297.5 million at
March 31, 1998, to $344.6 million on June 30, 1998. Asset growth was also
funded by increased deposits and net income from operations. Deposits grew
$142.6 million, or 23.7%, from $602.5 million at March 31, 1998, to $745.1
million at June 30, 1998. Other borrowings, primarily reverse repurchase
agreements with securities dealers, decreased $1.7 million, or 1.9%, from
$91.7 million at March 31, 1998, to $90.0 million at June 30, 1998. The Towne
Bank acquisition provided $133.6 million of deposits and $2.0 million of FHLB
advances. Securities available for sale and held to maturity increased $18.5
million, or 6.1%, from $302.6 million at March 31, 1998, to $321.1 million at
June 30, 1998. Federal Home Loan Bank Stock increased $2.5 million ($1.0
million from TB acquisition), as FWWB was required to purchase more stock as a
result of its increased use of FHLB advances. Real estate held for sale
decreased $77,000, primarily as a result of completed sales.
Comparison of Operating Results for the Quarters Ended June 30, 1998 and 1997
General. Net income for the first quarter of fiscal 1999 was $3.5 million,
an increase of $303,000 from the comparable quarter in fiscal 1998. FWWB's
improved operating results reflect the significant growth of assets and
liabilities as well as improvements in net interest margin and non-interest
revenues which were offset somewhat by increased operating expenses. Compared
to year ago levels, total assets increased 18.0% to $1.36 billion at June 30,
1998, total loans rose 23.0% to $930.9 million, deposits grew 23.7% to $745.1
million and borrowings increased 11.6% to $434.6 million. Net interest margin
improved despite the adverse affects of a flattening yield curve and declining
market rates and loan pricing spreads, reflecting the acquisition of Towne
Bank and continuing changes in the asset and liability mix.
13
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Interest Income. Interest income for the quarter ended June 30, 1998, was
$25.8 million compared to $20.1 million for the quarter ended June 30, 1997,
an increase of $5.7 million, or 28.6%. The increase in interest income was a
result of a $251.5 million, or 25.5%, growth in the average balance of
interest-earning assets combined with a 20 basis point increase in the average
yield on those assets, which rose from 8.16% in the quarter ended June 1997,
to 8.36% in June 1998. Average loans receivable for the first quarter of
fiscal 1999 increased by $228.1 million, or 33.7%, when compared to the same
quarter in fiscal 1998. Interest income on loans increased by $6.0 million,
or 39.9%, compared to the same quarter a year earlier, reflecting the impact
of the increase in average loan balances and a 41 basis point increase in the
yield on those balances. Average loans receivable represented 73.1% of average
earning assets for the quarter ended June 30, 1998, compared to 68.6% for the
same period a year earlier. The combined average balance of mortgage-backed
and investment securities and FHLB stock for the first quarter of fiscal 1999
increased $23.4 million compared to the first quarter of fiscal 1998, although
interest and dividend income from those investments decreased by $218,000 for
the June 1998 quarter compared to June 1997. The decrease of interest income
on this portfolio largely reflects that while the average balance of
mortgage-backed obligations increased by $12.5 million over the same quarter a
year earlier, the yield on those securities declined 123 basis points. The
decline in the yield on this portfolio primarily reflects a decline in market
rates which resulted in decreased yields on many adjustable rate securities
which comprise the largest portion of this portfolio and from accelerated
amortization of net premiums as a result of increased prepayments on the
underlying mortgage loans. Average balances for other investment securities
and deposits increased modestly although the yield on those balances declined
10 basis points also reflecting declining market rates. Holdings of FHLB
stock (excluding the TB acquisition) increased commensurate with the growth in
FHLB advances and the yield on that stock increased 28 basis points.
Interest Expense. Interest expense for the quarter ended June 30, 1998, was
$13.9 million compared to $10.7 million for the comparable period in 1997, an
increase of $3.7 million, or 30.0%. The increase in interest expense was due
to the $262.9 million growth in average interest-bearing liabilities. The
increase in average interest-bearing liabilities in the quarter ended June
1998 was largely due to a $182.4 million increase in the average balance of
deposits combined with a $80.5 million growth in average FHLB advances and
other borrowings. The acquisition of Towne Bank on April 1, 1998 increased
deposits $133.6 million. This addition plus $53.0 million of deposit growth
resulted in a $2.0 million increase in related interest expense. The average
rate on those deposits decreased slightly from 4.40% for the quarter ended
June 30, 1997, to 4.39% for the quarter ended June 30, 1998. Average FHLB
advances totaled $303.7 million during the quarter ended June 30, 1998, as
compared to $248.0 million during the quarter ended June 30, 1997, resulting
in a $896,000 increase in related interest expense. The average rate paid on
those advances increased from 5.97% for the quarter ended June 30, 1997, to
6.06% for the comparable period in 1997, adding to the increase in interest
expense. 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 $24.7 million from $67.7 million for the quarter ended June 30,
1997, to $92.4 million for the same period in 1998, and the related interest
expense increased $346,000, from $971,000 to $1.3 million for the respective
periods. The majority of this growth in other borrowings reflects an increase
in repurchase agreements with investment banking firms which totaled $84.4
million at June 30, 1998. The cost of other borrowings declined from 5.76%
for the quarter ended June 30, 1997, to 5.72% for the quarter ended June 30,
1998.
14
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The following tables provide additional comparative data on the Company's
operating performance:
Quarters ended
Average Balances June 30
---------------- -----------------------
(in thousands) 1998 1997
---- ----
Investment securities and deposits $ 120,952 $ 114,055
FHLB stock 17,155 13,142
Mortgage-backed obligations 194,957 182,451
Loans 904,996 676,891
---------- ----------
Total average interest-earning asset 1,238,060 986,539
Non-interest-earning assets 75,933 39,592
---------- ----------
Total average assets $1,313,993 $1,026,131
========== ==========
Deposits $ 734,480 $ 552,082
Advances from FHLB 303,672 247,950
Other borrowings 92,418 67,663
---------- ----------
Total average interest-bearing liabilities 1,130,570 867,695
Non-interest-bearing liabilities 11,055 8,120
---------- ----------
Total average liabilities 1,141,625 875,815
Equity 172,368 150,316
---------- ----------
Total average liabilities and equity $1,313,993 $1,026,131
========== ==========
Interest Rate Yield/Expense (rates are annualized)
--------------------------------------------------
Interest Rate Yield:
Investment securities and deposits 6.06% 6.16%
Mortgage-backed obligations 5.68% 6.91%
Loans 9.25% 8.84%
FHLB stock 7.79% 7.51%
---------- ----------
Total interest rate yield on interest-earning assets 8.36% 8.16%
---------- ----------
Interest Rate Expense:
Deposits 4.39% 4.40%
Advances from FHLB 6.06% 5.97%
Other borrowings 5.72% 5.76%
---------- ----------
Total interest rate expense on interest-bearing
liabilities 4.95% 4.96%
---------- ----------
Interest spread 3.41% 3.20%
========== ==========
Net interest margin on interest earning assets 3.84% 3.80%
---------- ----------
Additional Key Financial Ratios (ratios are
- -------------------------------------------
annualized)
-----------
Return on average assets 1.08% 1.27%
Return on average equity 8.26% 8.66%
Average equity / average assets 13.12% 14.65%
Average interest-earning assets/interest-bearing
liabilities 109.51% 113.70%
Non-interest [other operating] expenses/average assets
Excluding amortization of costs in excess of net
assets acquired (goodwill) 1.99% 1.83%
Including amortization of costs in excess of net
assets acquired (goodwill) 2.16% 1.92%
Efficiency ratio [non-interest (other operating)
expenses/revenues]
Excluding amortization of costs in excess of net
assets acquired (goodwill) 48.35% 45.53%
Including amortization of costs in excess of net
assets acquired (goodwill) 52.58% 47.70%
15
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Provision for Loan Losses. During the quarter ended June 30, 1998, the
provision for loan losses was $667,000, compared to $355,000 for the quarter
ended June 30, 1997, an increase of $312,000. This increase in the provision
for losses reflects the higher level of net charge-offs for the period as well
as changes in the portfolio composition. Management believes the higher level
of charge-offs represents isolated events and is not indicative of changes in
the credit quality of the loan portfolio. The allowance for loan losses net
of charge-offs (recoveries) increased by $1.8 million, to $9.7 million at June
30, 1998, compared to $7.9 million at March 31, 1998. 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.
The following tables are provided to disclose additional detail on the Banks'
loans and allowance for loan losses (in thousands):
June 30 March 31
1998 1998
---------- ----------
Loans (including loans held for sale):
Secured by real estate
One to four single family dwellings (SFD) $ 428,687 $ 423,850
Commercial & multifamily 232,630 167,859
Construction & land-secured 159,126 132,409
Commercial & agribusiness 148,386 67,611
Consumer, including credit cards 40,600 30,842
---------- ----------
$1,009,429 $ 822,571
Less loans in process 65,332 54,500
Less deferred fees and discounts 3,457 3,297
Less allowance for loan losses 9,717 7,857
---------- ----------
Total net loans at end of period $ 930,923 $ 756,917
========== ==========
Allowance for loan losses as a percentage of
gross principal of loans outstanding 0.96% 0.96%
Quarters ended
June 30
1997 1996
---------- ----------
Change in allowance for loan losses:
Balance at beginning of the period $ 7,857 $ 6,748
Acquisition of TB 1,616 --
Provision for loan losses 667 355
Recoveries 69 7
Charge-offs (492) (155)
---------- ----------
Balance at end of the period $ 9,717 $ 6,955
========== ==========
Charge-offs as a percentage of average net
book value of loans outstanding for the period. 0.05% 0.02%
16
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Other Operating Income. Other operating income increased $637,000 from
$956,000 for the quarter ended June 30, 1997, to $1.6 million for the quarter
ended June 30, 1998. The increase included a $256,000 increase in other fees
and service charges due largely to the addition of TB operations, combined
with increases in fee income at FSBW and IEB reflecting deposit growth and
pricing adjustments. There also was a $332,000 increase in net gains on loans
sold in the quarter ended June 30, 1998, as compared to the same period in
1997. This increase primarily reflects increases in 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 comparable period in the prior year. The volume of loan sales
and related net gain on sale of loans increased from $10.2 million and
$191,000, respectively, for the quarter ended June 30, 1997, to $36.5 million
and $523,000, respectively, for the quarter ended June 30, 1998. 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.
Other Operating Expenses. Other operating expenses increased $2.2 million
from $4.9 million for the quarter ended June 30, 1997, to $7.1 million for the
quarter ended June 30, 1998. The increase in expenses was largely due to the
inclusion of $1.7 million of TB's operating expenses in the first quarter of
fiscal 1999 that were not present in fiscal 1998. The increase in other
operating expenses was partially offset by a $170,000 increase in capitalized
loan origination costs resulting from increased volume in loan origination.
In addition to the acquisition of Towne Bank, increases in other operating
expenses reflect the overall growth in assets and liabilities, customer
relationships and complexity of operations as FWWB continues to expand.
Despite the high operating expenses associated with transitioning FWWB to more
of a commercial bank profile, FWWB's efficiency ratio, excluding the
amortization of goodwill, increased only 2.82 percentage points, to 48.35%,
for the first quarter of fiscal 1999 from 45.53% for the same period in 1997.
Other operating expenses as a percentage of average assets were 2.16% (1.99%
excluding the amortization of goodwill) for the quarter ended June 30, 1998,
compared to 1.92% (1.83% excluding the amortization of goodwill) for the
quarter ended June 30, 1997.
Income Taxes. Income tax expense was $2.16 million for the quarter ended June
30, 1998, compared to $1.79 million for the comparable quarter in 1997. The
$379,000 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 paying Oregon state income taxes;
and the fact that the expenses from the amortization of costs in excess of net
assets acquired in purchasing IEB and TB and part of the expense recorded in
the release of ESOP shares are not deductible for tax purposes. The Company's
effective tax rates for the quarters ended June 30, 1998 and 1997, were 38%
and 35%, respectively.
Asset Quality
The following tables are provided to disclose additional details on asset
quality (in thousands):
June 30 March 31
1998 1998
---------- ----------
Non-performing assets at end of the period:
Non-performing loans:
Delinquent loans on non-accrual status $ 4,663 $ 1,270
Delinquent loans on accrual statu 168 150
---------- ----------
Total non-performing loans 4,831 1,420
Real estate owned ( REO) 805 882
---------- ----------
Total non-performing assets at end of the
period $ 5,636 $ 2,302
========== ==========
Non-performing loans as a percentage of total
net loans at end of the period 0.52% 0.19%
Ratio of allowance for loan losses to non-performing
loans at end of the period 201% 553%
Non-performing assets as a percentage of total
assets at end of the period. 0.41% 0.20%
Troubled debt restructuring [TDR's]
at end of the period $ 255 $ 305
---------- ----------
Troubled debt restructuring as a percentage of:
Total gross principal of loans outstanding at
end of the period 0.03% 0.04%
Total assets at end of the period 0.02% 0.03%
17
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Liquidity and Capital Resources
FWWB's primary sources of funds are deposits, FHLB advances, 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 and
investment securities are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, general
economic conditions and competition.
The primary investing activity of FWWB is the origination and purchase of
mortgage, consumer, and commercial loans through its subsidiary Banks, FSBW,
IEB and TB. During the quarter ended June 30, 1998, the Banks closed or
purchased loans in the amount of $204.6 million. In addition, during this
quarter, funds were used to purchase $2.4 million of treasury stock and pay
out $7.7 million for the acquisition of Towne Bancorp, Inc. These activities
were funded primarily by principal repayments on loans and securities, sales
of loans, increases in FHLB advances, and deposit growth. For the quarter
ended June 30, 1998, principal repayments on loans totaled $113.6 million and
the Banks' proceeds from the sale of mortgage loans totaled $37.5 million.
FHLB advances and other borrowings increased $43.3 million (net of TB
acquisition) for the same period, and net deposit growth was $9.0 million (net
of TB acquisition).
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. At June 30, 1998, the Banks had undisbursed loans
in process totaling $65.3 million. The Banks generally maintain sufficient
cash and readily marketable securities to meet short term liquidity needs.
FSBW also maintains a credit facility with the FHLB of Seattle, which provides
for advances which in aggregate may equal up to 45% of FSBW's total assets,
which as of June 30, 1998, would give FSBW a total credit line of $446.8
million. Advances under this credit facility totaled $339.5 million, or 34.2%
of FSBW's assets at June 30, 1998. IEB and TB also maintain credit facilities
with various financial institutions, including the FHLB of Seattle, that would
allow them to borrow up to $20.6 million.
At June 30, 1998, savings certificates amounted to $461.6 million, or 62%, of
the Banks' total deposits, including $320.7 million which were scheduled to
mature within one year. Historically, the Banks have been able to retain a
significant amount of their deposits as they mature. Management believes it
has adequate ability to fund all loan commitments by using deposits, FHLB of
Seattle advances, other borrowings and the sale of mortgage loans or
securities, and that it can adjust the offering rates of savings certificates
to retain deposits in changing interest rate environments.
Capital Requirements
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At June 30, 1998, FWWB's banking subsidiaries exceeded all
current regulatory capital requirements to be classified as well capitalized
institutions, the highest regulatory standard. In order to be categorized as
a well capitalized institution, the FDIC requires banks it regulates to
maintain a leverage ratio, defined as Tier 1 capital divided by total
regulatory assets, of at least 5.00%; Tier 1 (or core) capital of at least
6.00% of risk-weighted assets; and total capital of at least 10.00% of
risk-weighted assets.
18
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FWWB, as a bank holding company, is regulated by the Federal Reserve Board
(FRB). The FRB has established capital requirements for bank holding
companies that generally parallel the capital requirements of the FDIC for
banks with $150 million or more in total consolidated assets. FWWB's total
regulatory capital must equal 8% of risk-weighted assets and one half of the
8% (4%) must consist of Tier 1 (core) capital.
The actual regulatory capital ratios calculated for FWWB along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum for capital
Actual adequacy purposes
-------------------- -------------------
Amount Ratio Amount Ratio
June 30, 1998: ------ ----- ------ -----
FWWB-consolidated
Total capital to risk-
weighted assets $148,465 17.37% $68,394 8.00%
Tier 1 capital to risk-
weighted assets 138,748 16.23 34,197 4.00
Tier 1 leverage capital to
average assets 138,748 10.84 51,185 4.00
19
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time FWWB or its subsidiaries are engaged in legal proceedings in
the ordinary course of business, none of which is considered to have a
material impact on the FWWB's financial position or results of operations.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial data schedule
Report (s) on Form 8-K filed during the quarter ended June 30, 1998, are as
follows:
Date Filed Purpose
- ---------- -------
April 6, 1998 Announcement of consummation of acquisition of
Towne Bancorp, Inc.
June 25, 1998 Announcement of entering into an agreement and
plan of mergers with Whatcom State Bancorp, Inc.
and Whatcom State Bank.
20
<PAGE>
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Washington Bancorp, Inc.
August 13, 1998 /s/ Gary Sirmon
------------------------------------
Gary Sirmon
President and Chief Executive Officer
August 13, 1998 /s/ D. Allan Roth
------------------------------------
D. Allan Roth
Secretary and Treasurer
21
<PAGE>
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