FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] AMENDED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended............................... March 31, 1999
--------------
[ ] 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)
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, 1999:
Common Stock - $224,478,399
The number of shares outstanding of the issuer's classes of common stock as of
May 31, 1999:
Common Stock, $.01 par value - 11,330,440 shares
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
None
The registrant hereby amends Part I, item 1 of its Annual Report for the
fiscal year ended March 31, 1999 as follows: (see attached)
2
<PAGE>
PART 1
Item 1 - Business General
First Washington Bancorp, Inc. (the Company or 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. Effective January 1, 1999, FWWB completed the
acquisition of Whatcom State Bancorp whose wholly owned subsidiary, Whatcom
State Bank (WSB), was merged with FSBW and operates as Whatcom State Bank, a
Division of First Savings Bank of Washington. WSB, which is based in
Bellingham, operates five full service branches and a loan office in northwest
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 six full service branches in the
Seattle, Washington, metropolitan area. The Company's main office is located
at 10 S. First Avenue, Walla Walla, Washington 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 and has expanded its
consumer lending activities. 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 also has a wholly-owned subsidiary, Northwest Financial
Corporation, which serves as the trustee under FSBW's mortgage loan documents
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.
3
<PAGE>
TB is a community oriented commercial bank chartered in the State of
Washington. TB's lending activities consist of granting commercial loans,
including commercial real estate, land development and construction loans, and
consumer loans to customers throughout King and Snohomish counties in western
Washington. TB is a "Preferred Lender" with the Small Business Administration
(SBA) and generates SBA guaranteed loans for portfolio and for resale.
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 and the State of Idaho, Department of
Finance.
The Board of Directors of the company passed a resolution on October 22, 1998
authorizing a changing its fiscal year end from March 31st to December 31st.
The change will be effective for the year ending 1999.
Acquisitions and Mergers
Towne Bank
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 Bancorp, Inc. net assets acquired (goodwill).
Goodwill assets are being amortized over a 14-year period resulting 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, before recording
of goodwill, 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 six full service branches in the Seattle,
Washington, metropolitan area in Woodinville, Kirkland, Redmond, Bellevue,
Renton and Bothell.
Whatcom State Bancorp, Inc.
On January 1, 1999 FWWB completed the acquisition of Whatcom State Bancorp,
Inc. FWWB paid $12.1 million in common stock for all the outstanding common
shares and stock options of Whatcom State Bancorp, Inc., which was the holding
company for Whatcom State Bank (WSB), headquartered in Bellingham, Washington.
As a result of the merger of Whatcom State Bancorp, Inc. into FWWB, WSB became
a division of FSBW. The acquisition was accounted for as a purchase and
resulted in the recording of approximately $6.3 million of costs in excess of
the fair value of Whatcom State Bancorp, Inc. net assets acquired (goodwill).
Goodwill assets are being amortized over a 14-year period resulting in a
current charge to earnings of approximately $114,300 per quarter or $457,000
per year. Founded in 1980, WSB is a community commercial bank which had,
before recording of goodwill, approximately $99 million in total assets, $85
million in deposits, $79 million in loans, and $5.4 million in shareholders'
equity at December 31, 1998. WSB operates five full service branches in the
Bellingham, Washington, area Bellingham, Ferndale, Lynden, Blaine and Point
Roberts.
Seaport Citizens Bank
Subsequent to year end, on April 1, 1999 FWWB and FSBW completed the
acquisition of Seaport Citizens Bank (SCB). FSBW paid $10.1 million in cash
for all the outstanding common shares of SCB, which is headquartered in
Lewiston, Idaho. As a result of the merger of SCB into FSBW, SCB became a
division of FSBW. The acquisition will be accounted for as a purchase and
result in the recording of approximately $6.2 million of costs in excess of
the fair value of SCB's net assets acquired (goodwill). Goodwill assets will
be amortized over a 14-year period and will result in a current charge to
earnings of approximately $107,200 per quarter, beginning in the first quarter
of fiscal 2000, or $429,000 per year. Founded in 1979, SCB is a commercial
bank which had, before recording of goodwill, approximately $45 million in
total assets, $41 million in deposits, $27 million in loans, and $4.1 million
in shareholders' equity at March 31, 1999. SCB operates two full service
branches in the Lewiston, Idaho, area.
4
<PAGE>
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 interest rate 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 interest rate products that correlate closer with the Banks cost of
funds. In response to customer demand, however, the Banks continue to
originate fixed-rate loans including fixed interest 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, 1999, FSBW's net loan
portfolio totaled $773.5 million. Over 68% of FSBW's first mortgage loans are
secured by properties located in the State of Washington.
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 20% of unimpaired capital and surplus or $500,000. At March 31,
1999, the maximum amount which FSBW could have lent to any one borrower and
the borrower's related entities was $21.6 million. At March 31, 1999, FSBW
had no loans to one borrower with an aggregate outstanding balance in excess
of this amount. FSBW had 47 borrowers with total loans outstanding in excess
of $2.0 million at March 31, 1999. At that date, the largest amount
outstanding to any one borrower and the borrower's related entities totaled
$12.0 million, which consisted of 39 single family, land development and lot
loans in the Tacoma, Bellevue and Tri-Cities, Washington; and Portland, Oregon
areas. At March 31, 1999, all except $2.8 million of these loans were
performing in accordance with their terms. The $2.8 million is a series of
loans on multiple four-plex developments (and 1 five-plex) in Hermiston,
Oregon. The loans have been classified as impaired and loan loss reserves of
$551,000 have been allocated to absorb potential losses.
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, 1999, IEB's net loan portfolio totaled $142.2 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,
1999, the maximum amount IEB could have lent to any one borrower and the
borrower's related entities was $2.9 million ($4.7 million if secured by real
estate). At that date, the largest amount outstanding to any one borrower of
IEB totaled $3.3 million and was made to an alfalfa feed processor and
exporter.
Lending activities at Towne Bank have included origination of consumer,
commercial, commercial real estate and construction loans. In particular, TB
has developed significant expertise and growing market share with respect to
small business loans within its local markets.
5
<PAGE>
At March 31, 1999, TB's net loan portfolio totaled $187.0 million. The
aggregate amount of loans TB is permitted to make under applicable state and
federal regulations to any one borrower, including related entities, is 20% of
the aggregate paid-up and unimpaired capital and surplus. At March 31, 1999,
the maximum amount TB could have lend to any one borrower and the borrower's
related entities was $3.3 million. At that date, the largest amount
outstanding to any one borrower of TB totaled $2.5 million which is a two
motel operation in the Seattle area.
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, Oak
Harbor 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, 1999, $407.7 million, or 34.2% 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 1997 and 1998 in response to the capital deployment and growth
objectives of the Company. For the past year FSBW has been selling a larger
portion of its newly originated fixed rate loans as a part of its interest
rate risk management strategy. Both before and after their acquisition by the
Company, WSB and SCB engaged in residential lending, including secondary
market activities, in a fashion very similar to FSBW.
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.
Generally, Towne Bank has not engaged in one- to four-family residential
lending.
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 sold a significant portion
of its conventional fixed-rate mortgage originations and all of its government
insured loans into the secondary market. IEB has continued to sell most of
its residential loan originations.
6
<PAGE>
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 very 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' normal 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 and on a recently introduced limited program strictly
underwritten and insured by United Guaranty Insurance Corporation. The Banks
generally require private mortgage insurance on residential loans with a loan-
to-value ratio at origination exceeding 80%.
Construction and Land Lending: FSBW and TB invest a significant proportion of
their 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 and TB also originates
land loans. IEB also originates construction and land loans although to a much
smaller degree than FSBW and TB. At March 31, 1999, construction and land
loans totaled $217.1 million, or 18.2% of total loans of the Company.
Construction loans made by the 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.
7
<PAGE>
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.
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, 1999, the Company's
speculative construction portfolio included loans to 221 individual builders
in 90 separate communities. At March 31, 1999, the Company had 29 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, 1999, the
Company's loan portfolio included $57.5 million in multifamily and $267.4
million in commercial real estate loans (including commercial real estate
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.
In all multi-family and commercial real estate lending, the Banks consider the
location, marketability and overall attractiveness of the properties. The
Banks current underwriting guidelines for commercial real estate loans require
an appraisal from a qualified independent appraiser and an economic analysis
of each property with regard to the annual revenue and expenses, debt service
coverage and fair value to determine the maximum loan amount. In the approval
process the Banks assess the borrowers willingness and ability to repay and
the adequacy of the collateral.
8
<PAGE>
Multifamily and commercial real estate loans originated by the Banks are
predominately fixed rate loans with intermediate terms of 10 years. More
recently originated multifamily and commercial loans are linked to various
constant maturity U.S. Treasury indices or certain prime rates. Rates on these
ARM loans generally adjust annually after an initial period ranging from one
to ten years. Rate adjustments for the more seasoned ARM loans in the
portfolio predominantly reflect changes in the Federal Home Loan Bank (FHLB)
National Monthly Median Cost of Funds index. 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.
At March 31, 1999, the Banks' loan portfolio included 136 multifamily loans,
the average loan balance of which was $407,000. At March 31, 1999, the Banks
had 59 multifamily or commercial real estate loans with balances over $1.0
million, the largest of which was $3.3 million. Most of the properties
securing these multifamily and commercial real estate loans are located in the
Northwest however the Company has acquired some participation loans on
properties located in California.
Agriculture/commercial Lending. Inland Empire Bank has been very active in
small business and agricultural lending, Towne Bank has also been very active
in commercial lending, however TB generally has not engaged in agricultural
lending. IEB and TB's management have 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 and TB's
success. IEB and TB will continue to emphasize this segment of lending in
their market areas. Management intends to leverage their past success and
local decision making ability to continue to expand this market niche.
Historically, Towne Bank has sold most of its small business administration
loans into the secondary market, servicing retained, and has continued to so
do subsequent to its acquisition by the Company.
First Savings Bank has recently begun making non-mortgage agricultural and
commercial loans. FSBW has staffed its Walla Walla, Tri-Cities, Clarkston,
Yakima and Wenatchee 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. Similar to IEB and TB, WSB and SCB have been active in
commercial lending.
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, 1999,
agribusiness/commercial loans totaled $196.7 million, or 16.5% of total loans
of the Company.
In all agricultural and commercial lending, the Banks consider the borrowers
credit worthiness and ability to repay and the adequacy of the offered
collateral. Current underwriting guidelines for agricultural/commercial loans
require an economic analysis with regard to annual revenue and expenses, debt
service coverage, collateral and fair value to determine the maximum loan
amount. Before the Banks make a commercial loan, the borrower must obtain the
approval of various levels of Bank personnel, depending on the size and
characteristics of the loan.
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 and TB'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, 1999, the Company had $44.4
million, or 3.7% of its loans receivable, in outstanding consumer and other
loans.
9
<PAGE>
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, 1999, 1998 and 1997, the Banks originated $734.1
million, $513.5 million and $330.3 million of loans, respectively. The
Company's net loan portfolio grew $345.8 million or 45.7% in fiscal 1999
($146.4 million excluding acquisitions) compared to $111.0 million of growth
in fiscal 1998 and $230.6 million of growth in fiscal 1997 ($90.5 million
excluding acquisitions).
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. Beginning 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 management
strategy. Sales of loans by the Company for the years ended March 31, 1999,
1998 and 1997 totaled $125.7 million, $80.6 million and $36.6 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, 1999, 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. During the years ended March 31, 1999, 1998 and 1997, the
Company purchased $86.2 million, $51.1 million and $74.1 million,
respectively, of loans and loan participation interests.
10
<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
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
-------------
One- to four-family
real estate $ 407,673 34.24% $423,850 51.53% $395,418 55.86% $311,472 68.24% $199,585 59.81%
Commercial and
multifamily
properties 324,858 27.28 167,859 20.41 129,198 18.25 77,613 16.99 73,443 22.01
Construction and
land 217,094 18.23 132,409 16.10 110,262 15.58 62,177 13.62 57,913 17.36
Agriculture/
commercial 196,743 16.52 67,611 8.22 47,846 6.76 871 .19 902 .27
Consumer and other 44,346 3.73 30,842 3.74 25,092 3.55 4,333 .96 1,842 .55
--------- ------ ------- ------ -------- ------ ------- ------ -------- ------
Total loans 1,190,714 100.00% 822,571 100.00% 707,816 100.00% 456,466 100.00% 333,685 100.00%
--------- ====== ------- ====== -------- ====== ------- ====== ------- ======
Undisbursed funds
for loans in
progress 71,638 54,500 52,412 35,244 28,507
Deferred loan fees
and discounts 4,146 3,297 2,775 1,876 2,226
Allowance for loan
losses 12,261 7,857 6,748 4,051 3,549
Total loans ---------- -------- -------- -------- --------
receivable, net $1,102,669 $756,917 $645,881 $415,295 $299,403
========== ======== ======== ======== ========
11
</TABLE>
<PAGE>
Loan Maturity and Repricing
The following table sets forth certain information at March 31, 1999 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
-------- -------- --------- --------- -------- ----------
One-to four-
family real
estate $ 3,549 $ 3,645 $ 6,098 $ 15,774 $360,418 $ 389,484
Commercial and
multifamily
properties 24,235 50,053 60,833 116,501 67,823 319,445
Construction
and land 141,881 13,313 1,955 3,968 4,138 165,255
Agriculture/
commercial 96,955 20,000 36,009 35,213 8,189 196,366
Consumer and
other 16,555 9,239 11,421 2,549 4,616 44,380
--------- -------- --------- --------- -------- ----------
Total loans $ 283,175 $ 96,250 $ 116,316 $ 174,005 $445,184 $1,114,930
========= ======== ========= ========= ======== ==========
Contractual maturities of loans do not reflect the actual life of such assets.
The average life of loans is substantially less than their contractual
maturities because of scheduled principal repayments and 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, 2000, which have fixed interest rates and floating or adjustable interest
rates (in thousands).
Fixed Floating or
Rates Adjustable Rates Total
----- ---------------- -----
One-to four-family real estate $315,081 $ 70,854 $385,935
Commercial and
multifamily properties 190,606 104,604 295,210
Construction and land 7,965 15,409 23,374
Agriculture/commercial 42,759 56,652 99,411
Consumer and other 21,238 6,587 27,825
-------- -------- --------
Total $577,649 $254,106 $831,755
======== ======== ========
12
<PAGE>
Loan Servicing
General: The Banks receive fees from a variety of institutional owners in
return for performing the traditional services of collecting individual
payments and managing portfolios of sold loans. At March 31, 1999, the Banks
were servicing $268.8 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 loan payment from
individual borrowers, they remit to the investor a predetermined net amount
based on the yield on that loan. The difference between the coupon on the
underlying loan 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,
1999, the Banks held $4.1 million in escrow for their portfolios of loans
serviced for others.
Loan Servicing Portfolio: The loan servicing portfolio at March 31, 1999 was
composed primarily of $32.8 million of Fannie Mae mortgage loans and $198.0
million of Freddie Mac mortgage loans. The balance of the loan servicing
portfolio at March 31, 1999, consisted of loans serviced for a variety of
private investors. At March 31, 1999, the portfolio included loans secured by
property located primarily in the states of Washington or Oregon. For the
year ended March 31, 1999, $798,000 of loan servicing fees, net of $278,000 of
servicing rights amortization, were recognized in operations.
Mortgage Servicing Rights: In addition to the origination of mortgage
servicing rights (MSRs) on the loans that FWWB originates and sells in the
secondary market on a servicing retained basis, FWWB 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, 1999 and 1998 FWWB capitalized $981,000
and $442,000, respectively, of mortgage servicing rights relating to loans
sold with servicing retained, in addition, $270,000 of MSR's were obtained in
the acquisition of WSB. No MSRs were purchased in fiscal years 1999, 1998 and
1997. Amortization of MSR's for the year ended March 31, 1999 was $278,000
compared to $100,000 for the year ended March 31, 1998. 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, 1999, MSRs were carried by FWWB at a value, net of amortization, of
$1,671,000, 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.
State and 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, state and 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 significant 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.
13
<PAGE>
At March 31, 1999, 1998 and 1997, the aggregate amounts of the Banks'
classified assets (as determined by the Banks) were as follows (in thousands):
At March 31
---------------------------------------
1999 1998 1997
---- ---- ----
Loss $ 60 $ - - $ - -
Doubtful 58 - - - -
Substandard assets 8,302 2,776 4,175
Special mention 3,008 - - - -
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, for residential loans 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 initiated 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.
14
<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
---------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Loans accounted for on a nonaccrual basis:
Real estate
One- to four-family $3,564 $ 448 $1,644 $ 526 $336
Commercial and multifamily 351 -- 187 -- --
Construction and land 767 367 -- -- --
Agriculture/commercial 1,439 414 206 -- --
Consumer and other 17 41 45 -- 5
------ ------ ------ ------ ----
Total 6,138 1,270 2,082 526 341
Accruing loans which are contractually ------ ------ ------ ------ ----
past due 90 days or more:
Real estate
One-to four family 20 52 -- -- --
Commercial and multifamily 384 33 -- -
Construction and land -- 32 -- - --
Agriculture/commercial 1,052 -- -- -- --
Consumer and other 82 33 30 12 -
------ ------ ------ ------ ----
Total 1,538 150 30 12 -
------ ------ ------ ------ ----
Total non-performing loans 7,676 1,420 2,112 538 341
Real estate/repossessed assets
held for sale 1,644 882 1,057 712 588
------ ------ ------ ------ ----
Total non-performing assets $9,320 $2,302 $3,169 $1,250 $929
====== ====== ====== ====== ====
Restructured loans (1) $ 380 $ 305 $ 238 $ 156 $165
Total non-performing loans to net loans 0.69% 0.19% 0.33% 0.13% 0.11%
Total non-performing loans to total
assets 0.47% 0.20% 0.21% 0.07% 0.07%
Total non-performing assets to total
assets 0.57% 0.20% 0.31% 0.17% 0.19%
(1) These loans are performing under their restructured terms but are
classified substandard.
For the year ended March 31, 1999, $269,000 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.
15
<PAGE>
Allowance for Loan Losses
General: 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. As a result, the Banks maintain an
allowance for loan losses consistent with the generally acceptable accounting
principles (GAAP) guidelines outlined in SFAS No. 5, Accounting for
Contingencies. The Banks have established systematic methodologies for the
determination of the adequacy of their allowance 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. The Banks increase their allowance
for loan losses by charging provisions for possible loan losses against the
Banks' income.
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, 1999,
the Company and its subsidiary Banks had identified $3.7 million of impaired
loans as defined by the statement and had established $739,000 of specific
reserves for these loans. 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, 1999, the Company had $380,000
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, delinquency rates, actual loan
loss experience, current 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. Realized
losses and charge-offs that are related to specific loans are applied as a
reduction of the carrying value of the assets and charged immediately against
the allowance for losses. Recoveries on previously charged off loans are
credited to the allowance. The reserve is based upon factors and trends
identified by management at the time financial statements are prepared. The
Company's methodology for assessing the appropriateness of the allowance
consists of several key elements, which include specific allowances, an
allocated formula allowance, and an unallocated allowance. Losses on specific
loans are provided for when the losses are probable and estimable. The formula
allowance is calculated by applying loss factors to outstanding loans,
excluding loans with specific allowances. Loss factors are based on the
Company's historical loss experience adjusted for significant factors
including the experience of other banking organizations that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation
date. The unallocated allowance is based upon management's evaluation of
various factors that are not directly measured in the determination of the
formula and specific allowances. 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.
16
<PAGE>
At March 31, 1999, the Company had an allowance for loan losses of $12.3
million which represented 1.10% of net loans and 160% of non-performing loans
compared to 1.03% and 533%, respectively, at March 31, 1998. The provision for
loan losses for the year ended March 31, 1999, increased by $1.2 million to
$2.8 million compared to $1.6 million for fiscal 1998. This increase is
reflective of the growth in loans receivable which, excluding loans acquired
through business combination, increased by $165.7 million for the 1999 fiscal
year compared to an increase of $111.0 million in the 1998 period. The
increase also is reflective of changes in the portfolio mix which resulted in
the need for a higher level of loss allowance as well as the impact of a
greater amount of non-performing loans and net charge-offs for the year.
Specifically, excluding loans acquired through acquisitions, changes in the
loan mix included increases of $119.8 million in commercial and multifamily
real estate loans, $59.3 million in construction and land loans, and $27.9
million in commercial and agricultural loans, while one- to four-family loans
declined by $40.3 million and consumer loans declined by $1 million. Income
producing real estate loans, construction and land loans, commercial and
agricultural loans are generally riskier than one- to four-family residential
loans resulting in a higher provision for losses. Adding to the need for the
increased provision for loan losses for the year ended March 31, 1999 was an
increase in the amount of non-performing loans which grew to $7.7 million
compared to $1.4 million a year earlier. Further adding to the increase in
the provision for loan losses was an increase in the level of net charge-offs
which increased from $519,000 for the year ended March 31, 1998, to $1.1
million for the year ended March 31, 1999 (see Notes 7 and 8 to the
Consolidated Financial Statements for further analysis of the loan portfolio
mix and allowance for loan losses).
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, Repossessed Assets: 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 net realizable value.
Subsequent to foreclosure, the property is carried at the lower of the
foreclosed amount or net realizable 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, 1999, the Company had $1.4 million of
real estate owned and $205,000 of other repossessed assets.
17
<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
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at beginning of period $ 7,857 $6,748 $4,051 $3,549 $3,429
------- ------ ------ ------ ------
Acquisitions 2,693 -- 1,416 -- --
------- ------ ------ ------ ------
Provision for loan losses 2,841 1,628 1,423 524 391
Recoveries: ------- ------ ------ ------ ------
Secured by real estate
One - to four-family -- 6 38 -- --
Commercial and multifamily 60 -- -- -- --
Construction and land -- -- -- -- --
Agriculture/commercial 144 29 -- -- --
Consumer and other 21 16 16 -- --
------- ------ ------ ------ ------
Total recoveries 225 51 54 -- --
------- ------ ------ ------ ------
Charge-offs:
Secured by real estate
One - to four-family 25 359 127 -- --
Commercial and multifamily 35 -- -- -- 271
Construction and land 69 11 -- -- --
Agriculture/commercial 916 19 3 -- --
Consumer and other 310 181 66 22 --
------- ------ ------ ------ ------
Total charge-offs 1,355 570 196 22 271
------- ------ ------ ------ ------
Net charge-offs 1,130 519 142 22 271
------- ------ ------ ------ ------
Balance at end of period $12,261 $7,857 $6,748 $4,051 $3,549
======= ====== ====== ====== ======
Ratio of allowance to net
loans outstanding at the
end of the period 1.10% 1.03% 0.94% 0.97% 1.17%
Ratio of net loan charge-offs
to the average net book value
of loans outstanding during
the period 0.14% 0.08% 0.04% 0.01% 0.10%
18
<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
---------------------------------------------------------------------------------------
1999 1998 (2) 1997 1996 1995
--------------- ----------------- --------------- -------------- -----------------
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
to to to to to
Total Total Total Total Total
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 $ 2,757 34.24% $ 1,059 51.53% $ 1,098 55.86% $ -- 68.24% $ 11 59.81%
Commercial and
multifamily 3,567 27.28 849 20.41 547 18.25 -- 16.99 46 22.01
Construction and
land 1,597 18.23 856 16.10 844 15.58 -- 13.62 -- 17.36
Agriculture/
commercial 2,522 16.52 835 8.22 422 6.76 -- .19 -- .27
Consumer and other 841 3.73 307 3.74 237 3.55 -- .96 -- .55
Unallocated general
loss allowance(1)(2) 977 N/A 3,951 N/A 3,600 N/A 4,051 N/A 3,492 N/A
Total allowance ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
for loan losses $12,261 100.00% $ 7,857 100.00% $ 6,748 100.00% $ 4,051 100.00% $ 3,549 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
- -------------
(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.
19
</TABLE>
<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, 1999, the Company's consolidated investment portfolio totaled
$364.2 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 1999 investments and securities increased by $61.6
million (including $45.7 million obtained in the acquisitions of TB and WSB).
Holdings of mortgage-backed securities increased $45.7 million and U.S.
Treasury and agency obligations decreased $9.1 million. Ownership of
corporate and other securities increased $20.0 million. Municipal bonds
increased $5.0 million primarily from acquisitions.
Mortgage-Backed and Mortgage-Related Securities: The Company 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 or credit enhancements provided other entities or the
structure of the securities; (iii) enable the Company to use mortgage-backed
securities as collateral for financing; and (iv) increase liquidity. The
Company invests primarily in federal agency issued or guaranteed mortgage-
backed and mortgage-related securities, principally FNMA, FHLMC and GNMA. The
Company also invests in privately issued collateralized mortgage obligations
(CMOs) and real estate mortgage investment conduits (REMICs). At March 31,
1999, net mortgage-backed securities totaled $242.8 million, or 14.9% of total
assets. At March 31, 1999, 47.6% of the mortgage-backed securities were
adjustable-rate and 52.5% were fixed-rate. The estimated fair value of the
Company's mortgage-backed securities at March 31, 1999, was $242.8 million,
which is $607,000 less than the amortized cost of $243.4 million. At March
31, 1999, the Company's portfolio of mortgage-backed securities had a weighted
average coupon rate of 6.53%. The estimated weighted average remaining life
of the portfolio was 3.2 years based on the last 3 months "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
generally represent a participation interest in a pool of single-family
mortgage loans. The principal and interest payments on these loans 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.
20
<PAGE>
CMOs and REMICs are mortgage-related obligations and may be considered as
derivative financial instruments because they are created by redirecting the
cash flows from the pool of mortgage loans 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; however, the complex structure of certain CMOs increases the
difficulty in assessing the portfolio's risk and its fair value. Yields on
privately issued CMOs generally exceed the yield on similarly structured
agency CMOs because they expose the Company to certain risks not inherent in
agency CMOs, such as credit risk and liquidity risk. Neither the U.S.
government nor any of its agencies guarantees these assets generally because
the loan size, credit underwriting or underlying collateral do not meet
certain industry standards. Consequently, the potential for loss of principal
is higher for privately issued securities. In addition, because the universe
of potential investors for privately issued CMOs is smaller, these securities
are somewhat less liquid than are agency issued or guaranteed securities. At
March 31, 1999 the Company held CMOs and REMICs with a net carrying value of
$209.9 million, including $59.3 million of privately issued CMOs.
Of the Company's $242.8 million mortgage-backed securities portfolio at March
31, 1999, $120.0 million with a weighted average yield of 5.52% had
contractual maturities or period to repricing within ten years and $122.8
million with a weighted average yield of 6.85% 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 mortgage loans exceeds
the prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgage
loans 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 mortgage loans 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, 1999, totaled $34.3 million at estimated fair value ($33.0 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,
Oregon and Idaho. At March 31, 1999, general obligation bonds and revenue
bonds had total estimated fair values of $19.9 million and $14.4 million,
respectively. The company also acquired taxable revenue bonds in fiscal year
1999 totaling $2.8 million at estimated fair value ($2.7 million at amortized
cost). Many bank qualifying municipal bonds are not rated by a nationally
recognized credit rating agency (e.g., Moody's or Standard and Poor's) due to
their smaller size. At March 31, 1999, the Company's municipal bond portfolio
had a weighted average maturity of approximately 10.2 years and an average
coupon rate of 6.38%. The largest security in the portfolio was an industrial
revenue bond issued by the City of Kent, Washington, with an amortized cost of
$3.6 million and a fair value of $3.6 million.
Corporate Bonds: The Company's corporate bond portfolio, which totaled $24.3
million at fair value ($24.7 million at amortized cost) at March 31, 1999, was
composed of short and long-term fixed-rate and adjustable-rate securities. At
March 31, 1999, the portfolio had a weighted average maturity of 18.8 years
and a weighted average coupon rate of 6.58%. The longest term security, has
an amortized cost of $3.2 million and a term to maturity of 28.0 years.
21
<PAGE>
U.S. Government and Agency Obligations: The Company's portfolio of U.S.
Government and agency obligations had a fair value of $56.5 million ($56.5
million at amortized cost) at March 31, 1999. 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 or prepayments based on various indices and
formulae. At March 31, 1999, structured notes, which totaled $4.0 million at
fair value ($4.0 million at amortized cost), consisted of a U.S. Government
agency obligation which matured in 2004 and 2005. In addition, most of the
U.S. Government agency obligations owned by the Company include call features
which allow the issuing agency the right to call the securities at various
dates prior to the final maturity.
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, 1999 the Company had no off balance sheet
derivatives and no outstanding commitments to purchase or sell securities.
22
<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: 1999 1998 1997
- ------------------- ------------------ ------------------ -----------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Total Value Total Value Total
-------- ----- -------- ------ -------- ------
U.S. Government
Treasury and
agency obligations $ 56,518 15.61% $ 65,594 21.69% $ 67,417 24.45%
Municipal bonds
(tax exempt) 32,259 8.91 32,093 10.61 33,969 11.81
Municipal bonds
(taxable) 2,833 0.78 -- .-- -- .--
Corporate bonds 24,335 6.72 4,304 1.42 7,997 2.78
Other 3,441 0.95 3,298 1.09 3,758 1.31
Mortgage-backed or
related securities
Mortgage-backed
securities:
GNMA 22,508 6.22 16,862 5.58 20,273 7.05
FHLMC 3,502 0.97 3,361 1.11 3,868 1.35
FNMA 6,841 1.89 6,048 2.00 7,281 2.53
-------- ------ -------- ------ -------- ------
Total mortgage-
backed securities 32,851 9.08 26,271 8.69 31,422 10.93
Mortgage-related
securities
CMOs-agency
backed 150,438 41.56 146,300 48.38 117,212 40.77
CMOs-Non-agency 59,346 16.39 24,559 8.12 25,741 8.95
-------- ------ -------- ------ -------- ------
Total mortgage-
related securities 209,784 57.95 170,859 56.50 142,953 49.72
-------- ------ -------- ------ -------- ------
Total 242,635 67.03 197,130 65.19 174,375 60.65
-------- ------ -------- ------ -------- ------
Total securities
available for sale $362,021 100.00% $302,419 100.00% $287,516 100.00%
======== ====== ======== ====== ======== ======
Held to Maturity:
Municipal bonds
(tax exempt) $ 1,991 92.39% $ -- --% -- --%
CMOs - agency backed 164 7.61 -- -- -- --
Certificates of
deposit -- -- 194 100.00% 987 100.00
-------- ------ -------- ------ -------- ------
Total $ 2,155 100.00% $ 194 100.00% $ 987 100.00%
======== ====== ======== ====== ======== ======
Estimated market
value $ 2,235 $ 194 $ 987
======== ======== ========
23
<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 1999
-------------------------------------------------------------------------------------------------
Over One to Over Five to Over Ten to Over
One Year or Less Five Years Ten Years Twenty Years Twenty Years Total
---------------- --------------- --------------- --------------- ---------------- ----------------
Weight- Weight- Weight- Weight- Weight- Weight-
Carry- ed Carry- ed Carry- ed Carry- ed Carry- ed Carry- ed
ing Average ing Average ing Average ing Average ing 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 $ 5,519 5.59% $43,836 5.86% $ 2,999 6.14% $ -- --% $ -- -- % $ 52,354 5.93%
Adjustable-
rate 4,164 5.69 -- -- -- -- -- -- -- -- 4,164 5.69
-------- ------- ------- ------- -------- --------
9,683 5.63 43,836 5.86 2,999 6.14 -- -- -- -- 56,518 5.91
Municipal
bonds-
taxable - -- -- -- 1,029 6.68 1,555 8.08 249 5.05 2,833 7.29
Municipal
bonds-
exempt 1,878 5.29 4,875 5.59 12,854 6.32 9,230 6.94 3,422 5.52 32,259 6.23
-------- ------- ------- ------- -------- --------
1,878 5.29 4,875 5.59 13,883 6.35 10,785 7.10 3,671 5.49 35,092 6.32
Corporate
bonds
Fixed-
rate 11,380 5.90 4,021 5.81 3,005 6.49 -- -- 5,929 7.26 24,335 5.51
Mortgage-
backed
obligations:
Fixed-rate -- -- 406 6.12 371 9.04 1,466 10.12 23,841 6.70 26,084 6.92
Adjustable-
rate 6,135 6.71 632 6.54 -- -- -- -- -- -- 6,767 6.70
-------- ------- ------- ------- -------- --------
6,135 6.71 1,038 6.38 371 9.04 1,466 10.12 23,841 6.70 32,851 6.87
Mortgage-
related
obligations:
Fixed-
rate 422 10.55 -- -- 3,535 6.89 5,525 6.09 91,800 6.89 101,282 6.86
Adjustable-
rate 108,502 5.37 -- -- -- -- -- -- -- -- 108,502 5.37
-------- ------- ------- ------- -------- --------
108,924 5.39 -- -- 3,535 6.89 5,525 6.09 91,800 6.89 209,784 6.09
-------- ------- ------- ------- -------- --------
Total
mortgage-
backed
or
related
obliga-
tions 115,059 5.46 1,038 6.38 3,906 7.09 6,991 6.94 115,641 6.85 242,635 6.20
Other stock 37 6.25 3,404 8.80 -- -- -- -- -- -- 3,441 8.77
-------- ------- ------- ------- -------- --------
Total
securities
available
for sale
carrying
value $138,037 5.54% $57,174 6.02% $23,793 6.17% $17,776 6.33% $125,241 6.82% $362,021 6.08%
======== ======= ======= ======= ======== ========
Total
securities
available
for sale
amortized
cost $139,494 $53,725 $23,227 $17,101 $124,993 $358,540
======== ======= ======= ======= ======== ========
Held to
Maturity
Mortgage-
related
obligation
fixed rate -- -- -- -- -- -- -- 164 5.73 164 5.73
Municipal
bonds-exempt 285 6.54 1,172 7.45 434 7.80 100 10.00 -- -- 1,991 7.52
-------- ------- ------- ------- -------- --------
Fixed-
rate $ 285 6.54% $ 1,172 7.45% $ 434 7.80% $ 100 10.00% $ 164 5.73% $ 2,155 7.39%
======== ======= ======= ======= ======== ========
24
</TABLE>
<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, 1999, the Banks had a total of
$580.0 million in retail time deposits, of which $276.7 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, 1999, 1998 and 1997, the acquisitions of IEB, TB and WSB have added
significantly to demand, NOW and Money Market accounts for the Company.
25
<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
------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- ------------------
% 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 $179,609 18.89% 67,420 $112,189 18.62% $ 7,820 $104,369 18.78%
Regular savings accounts 59,133 6.22 17,049 42,084 6.99 (2,047) 44,131 7.94
Money market accounts 132,077 13.89 55,435 76,642 12.72 (227) 76,869 13.83
Certificates which mature:
Within 1 year 405,306 42.63 165,232 240,074 39.84 27,221 212,853 38.31
After 1 year, but
within 2 years 93,343 9.82 18,824 74,519 12.37 20,966 53,553 9.64
After 2 years, but
within 5 years 71,832 7.55 28,327 43,505 7.22 2,542 40,963 7.37
Certificates maturing
thereafter 9,548 1.00 (3,961) 13,509 2.24 (9,459) 22,968 4.13
-------- ------ -------- -------- ------ ------- -------- ------
Total $950,848 100.00% 348,326 $602,522 100.00% $46,816 $555,706 100.00%
======== ====== ======= ======== ====== ======= ======== ======
</TABLE>
The following table sets forth the deposit activities of the Banks for the
periods indicated (in thousands).
Year Ended March 31,
----------------------------
1999 1998 1997
------ ------ ------
Beginning balance $602,522 $555,706 $383,070
Acquisitions 218,368 - - 134,610
Net increase (decrease)
before interest credited 95,939 21,527 16,290
Interest credited 34,019 25,289 21,736
-------- -------- --------
Net increase in savings deposits 348,326 46,816 172,636
-------- -------- --------
Ending balance $950,848 $602,522 $555,706
======== ======== ========
The following table indicates the amount of the Banks' jumbo certificates of
deposit by time remaining until maturity as of March 31, 1999. 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
-----------
Six months or less $ 90,248
Six through twelve months 51,946
Over twelve months 43,895
---------
Total $ 186,089
=========
26
<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, 1999, FSBW had $408.3 million of borrowings from the FHLB-Seattle at a
weighted average rate of 5.74%. 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 $537.1 million at March
31, 1999. 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, 1999, retail repurchase agreements totaling
$5.8 million with interest rates from 4.90% 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, 1999, under wholesale
repurchase agreements, totaled $72.7 million and were collateralized by
mortgage-backed securities with a fair value of $75.2 million.
(See "Management's Discussion and Analysis of Financial Position and Results
of Operations - Liquidity and Capital Resources." And Notes 11 and 12 of the
consolidated Financial Statements)
Personnel
As of March 31, 1999, the Company had 429 full-time and 72 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.
27
<PAGE>
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 million
post-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, 1999.
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 1999 budget proposal,
the corporate environmental income tax would be reinstated for taxable years
beginning after December 31, 1996 and before January 1, 2008.
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.
28
<PAGE>
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.
29
<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, TB 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 and TB'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.
30
<PAGE>
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.
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, 1999, 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.
31
<PAGE>
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.
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.
32
<PAGE>
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,
1999, 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.
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.
33
<PAGE>
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.
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, 1999 the Company's total risk based capital was 15.15% of
risk-weighted assets and its risk based capital of Tier 1 (core) capital was
13.99% of risk-weighted assets.
34
<PAGE>
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 55 Chief Executive Officer, FSBW - Chief Executive
President and Director Officer, President and
Director, IEB, TB -
Director
D. Allan Roth 62 Secretary/Treasurer FSBW - Executive Vice
Executive Vice President President and Chief
Financial Officer
Michael K. Larsen 56 Executive Vice President FSBW - Executive Vice
President and Chief
Lending Officer
Jesse G. Foster 60 Director IEB - Chief Executive
Officer, President and
Director
Lloyd Baker 50 Senior Vice President FSBW - Senior Vice
President
S. Rick Meikle 51 Director TB - Chief Executive
Officer, President and
Director
- ---------------
(1) As of March 31, 1999.
Biographical Information
Set forth is certain information regarding the executive officers of the
Company, directors or executive officers. 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 and TB. 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 and an Executive Vice President of the Company. He
joined FSBW in 1965.
Michael K. Larsen is Executive Vice President and Chief Lending Officer of
FSBW and is an Executive Vice President of the Company. He joined FSBW in
1981.
Jesse G. Foster is the Chief Executive Officer, President and a Director of
IEB and a Director of the Company. He joined IEB in 1962.
Lloyd Baker is a Senior Vice President with FSBW and is an Senior Vice
President of the Company. He joined FSBW in 1995 as a Vice President.
S. Rick Meikle is Chief Executive Officer, President and a Director of TB and
a Director of the Company. He helped form TB in 1991.
35
<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 July 2, 1999.
FIRST WASHINGTON BANCORP, INC.
/s/ Gary Sirmon
--------------------------------------
Gary Sirmon
President and Chief Executive Officer
/s/ D. Allan Roth
--------------------------------------
D. Allan Roth
Executive Vice President and Chief
Financial Officer
(Principle Financial and Accounting
Officer)
36
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000946673
<NAME> FIRST WASHINGTON BANCORP EXHIBIT 27
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 72503
<INT-BEARING-DEPOSITS> 2562
<FED-FUNDS-SOLD> 18815
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 362201
<INVESTMENTS-CARRYING> 2155
<INVESTMENTS-MARKET> 2235
<LOANS> 1102669
<ALLOWANCE> 12261
<TOTAL-ASSETS> 1631900
<DEPOSITS> 950848
<SHORT-TERM> 199220
<LIABILITIES-OTHER> 10725
<LONG-TERM> 287499
0
0
<COMMON> 130770
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1631900
<INTEREST-LOAN> 89615
<INTEREST-INVEST> 21357
<INTEREST-OTHER> 1320
<INTEREST-TOTAL> 112292
<INTEREST-DEPOSIT> 34019
<INTEREST-EXPENSE> 60442
<INTEREST-INCOME-NET> 51850
<LOAN-LOSSES> 2841
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 31745
<INCOME-PRETAX> 24717
<INCOME-PRE-EXTRAORDINARY> 15440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15440
<EPS-BASIC> 1.46
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 3.83
<LOANS-NON> 6138
<LOANS-PAST> 1538
<LOANS-TROUBLED> 380
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7857
<CHARGE-OFFS> 1355
<RECOVERIES> 225
<ALLOWANCE-CLOSE> 12261
<ALLOWANCE-DOMESTIC> 11284
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 977
</TABLE>
