FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended........................ June 30, 2000
--------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-26584
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FIRST 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)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(1) Yes X No
-----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of class: As of July 31, 2000
--------------- -------------------
Common stock, $.01 par value 11,068,889 shares *
* Includes 677,846 shares held by employee stock ownership plan (ESOP)
that have not been released, committed to be released, or allocated to
participant accounts.
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
Table of Contents
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements. The Consolidated Financial Statements of
First Washington Bancorp, Inc. and Subsidiaries filed as a part of the
report are as follows:
Consolidated Statements of Financial Condition
as of June 30, 2000 and December 31, 1999.............................. 2
Consolidated Statements of Income
for the Quarters and Six Months Ended June 30, 2000 and 1999........... 3
Consolidated Statements of Comprehensive Income
for the Quarters and Six Months Ended June 30, 2000 and 1999........... 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000 and 1999........................ 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999........................ 7
Selected Notes to Consolidated Financial Statements.................... 9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
General................................................................ 15
Recent Developments and Significant Events............................. 16
Comparison of Financial Condition at June 30, 2000 and
December 31, 1999..................................................... 16
Comparison of Results of Operations for the Quarters and Six
Months Ended June 30, 2000 and 1999.................................... 16
Asset Quality.......................................................... 23
Market Risk and Asset/Liability Management............................. 24
Liquidity and Capital Resources........................................ 27
Capital Requirements................................................... 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 29
Item 2. Changes in Securities.......................................... 29
Item 3. Defaults upon Senior Securities................................ 29
Item 4. Submission of Matters to a Vote of Stockholders................ 29
Item 5. Other Information.............................................. 29
Item 6. Exhibits and Reports on Form 8-K............................... 29
SIGNATURES................................................................ 30
1
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares)
June 30, 2000 and December 31, 1999
(Unaudited)
June 30 December 31
ASSETS 2000 1999
---------- -----------
Cash and due from banks $ 62,285 $ 44,769
Securities available for sale, cost $349,367
and $356,617 340,918 348,347
Securities held to maturity, fair value
$17,150 and $13,716 16,913 13,770
Federal Home Loan Bank stock 27,007 24,543
Loans receivable:
Held for sale, fair value $9,819 and $9,519 9,819 9,519
Held for portfolio 1,424,151 1,312,186
Allowance for loan losses (14,491) (13,541)
---------- -----------
1,419,479 1,308,164
Accrued interest receivable 12,550 10,732
Real estate held for sale, net 3,731 3,293
Property and equipment, net 17,425 16,637
Costs in excess of net assets acquired
(goodwill), net 36,204 37,733
Deferred income tax asset, net 4,634 5,338
Other assets 6,437 6,784
---------- -----------
$1,947,583 $ 1,820,110
========== ===========
LIABILITIES
Deposits:
Non-interest-bearing $ 120,064 $ 114,252
Interest-bearing 1,033,218 963,900
---------- -----------
1,153,282 1,078,152
Advances from Federal Home Loan Bank 520,998 466,524
Other borrowings 74,848 81,655
Accrued expenses and other liabilities 11,228 10,524
Deferred compensation 2,087 1,944
Income taxes payable 1,679 2,138
---------- -----------
1,764,122 1,640,937
STOCKHOLDERS' EQUITY
Preferred stock - $0.01 par value, 500,000
shares authorized, no shares issued -- --
Common stock - $0.01 par value, 27,500,000
shares authorized, 12,001,562 shares issued:
11,083,546 shares and 11,215,756 shares
outstanding at June 30, 2000 and
December 31, 1999, respectively. 121,153 123,204
Retained earnings 75,074 69,170
Accumulated other comprehensive income:
Unrealized gain (loss) on securities
available for sale (5,438) (5,331)
Unearned shares of common stock issued to
Employee Stock Ownership Plan (ESOP) trust:
677,846 and 677,846 restricted shares
outstanding at June 30, 2000 and
December 31, 1999, respectively, at cost (6,162) (6,162)
Carrying value of shares held in trust for
stock related compensation plans (3,629) (4,041)
Liability for common stock issued to deferred,
stock related, compensation plan 2,463 2,333
---------- -----------
(1,166) (1,708)
---------- -----------
183,461 179,173
---------- -----------
$1,947,583 $1,820,110
========== ===========
See notes to consolidated financial statements
2
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands except for per share amounts)
Quarters Ended Six Months Ended
June 30 June 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
INTEREST INCOME:
Loans receivable $ 32,214 $ 26,128 $ 62,146 $ 50,489
Mortgage-backed securities 3,951 3,621 7,906 6,944
Securities and deposits 2,943 2,424 5,686 5,210
-------- -------- -------- --------
39,108 32,173 75,738 62,643
INTEREST EXPENSE:
Deposits 12,928 10,048 24,690 19,374
Federal Home Loan Bank advances 7,694 5,866 14,730 11,645
Other borrowings 1,155 1,012 2,342 2,066
-------- -------- -------- --------
21,777 16,926 41,762 33,085
Net interest income before -------- -------- -------- --------
provision for loan losses 17,331 15,247 33,976 29,558
PROVISION FOR LOAN LOSSES 819 710 1,364 1,341
-------- -------- -------- --------
Net interest income 16,512 14,537 32,612 28,217
OTHER OPERATING INCOME:
Loan servicing fees 248 258 480 470
Other fees and service charges 1,222 1,086 2,379 2,117
Gain on sale of loans 282 459 469 1,291
Gain (loss) on sale of
securities 15 2 15 6
Miscellaneous 55 56 110 74
-------- -------- -------- --------
Total other operating income 1,822 1,861 3,453 3,958
OTHER OPERATING EXPENSES:
Salary and employee benefits 6,526 5,768 12,782 11,386
Less capitalized loan
origination costs (901) (991) (1,692) (1,681)
Occupancy and equipment 1,767 1,550 3,444 2,941
Information/computer data
services 626 553 1,201 1,026
Advertising 169 193 329 367
Deposit insurance 55 83 109 163
Amortization of goodwill 792 788 1,584 1,471
Miscellaneous 2,251 1,839 4,338 3,461
-------- -------- -------- --------
Total other operating
expenses 11,285 9,783 22,095 19,134
-------- -------- -------- --------
Income before provision
for income taxes 7,049 6,615 13,970 13,041
PROVISION FOR INCOME TAXES 2,506 2,558 5,002 4,955
-------- -------- -------- --------
NET INCOME $ 4,543 $ 4,057 $ 8,968 $ 8,086
======== ======== ======== ========
Net income per common share,
see Note 5:
Basic $ .44 $ .39 $ .87 $ .76
Diluted $ .43 $ .37 $ .86 $ .73
Cumulative dividends declared
per common share: $ .14 $ .12 $ .28 $ .24
3
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (in thousands)
Quarters Ended Six Months Ended
June 30 June 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET INCOME: $ 4,543 $ 4,057 $ 8,968 $ 8,086
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF INCOME TAXES:
Unrealized holding gain (loss)
during the period, net of
deferred income tax (benefit)
of $(68), $(945), (117) (1,731) (97) (1,872)
$(67) and $(1,024); respectively.
Less adjustment for gains
included in net income, net
of income tax of $5, $1, $5
and $2; (10) (1) (10) (4)
-------- -------- -------- --------
Other comprehensive income (loss) (127) (1,732) (107) (1,876)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 4,416 $ 2,325 $ 8,861 $ 6,210
======== ======== ======== ========
4
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (in thousands)
For the Six Months Ended June 30, 2000 and 1999
2000 1999
----------- -----------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period $ 123,204 $ 122,049
Adjustment of and/or issuance of stock in
connection with acquisitions 53 11,516
Assumption of options in connection with
acquisitions -- 527
Release of earned ESOP shares -- --
Recognition of tax benefit due to vesting
of MRP shares -- --
Issuance of shares to MRP 43 --
Repurchase of forfeited shares from MRP (23) (29)
Net proceeds (cost) of treasury stock
reissued for exercised stock options 130 64
Purchase and retirement of treasury stock (2,254) (10,486)
Net issuance of stock through the employees'
stock plan -- 601
----------- -----------
Balance, end of period 121,153 124,242
RETAINED EARNINGS:
Balance, beginning of period 69,170 57,273
Net income 8,968 8,086
Cash dividends (3,057) (2,672)
Adjustment of stock issued and related stock
dividend in connection with acquisitions (7) --
----------- -----------
Balance, end of period 75,074 62,687
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of period (5,331) 2,440
Other comprehensive income (loss), net of
related income taxes (107) (1,876)
----------- -----------
Balance, end of period (5,438) 564
UNEARNED, RESTRICTED ESOP SHARES AT COST:
Balance, beginning of period (6,162) (6,781)
Release of earned ESOP shares -- --
----------- -----------
Balance, end of period (6,162) (6,781)
CARRYING VALUE OF SHARES HELD IN TRUST FOR
STOCK-RELATED COMPENSATION PLANS, NET OF LIABILITY:
Balance, beginning of period (1,708) (4,098)
Issuance of treasury stock for MRP grant (43) --
Cumulative effect of change in accounting for
Rabbi Trust, see Note 2 -- 1,095
Net change in number and/or valuation of
shares held in trust 23 67
Amortization of compensation related to MRP 562 601
----------- -----------
Balance, end of period (1,166) (2,335)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 183,461 $ 178,377
=========== ===========
5
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited) (continued) ( in thousands)
For the Six Months Ended June 30, 2000 and 1999
2000 1999
----------- -----------
COMMON STOCK, SHARES ISSUED:
Number of shares, beginning of period 12,002 12,002
----------- -----------
Number of shares, end of period 12,002 12,002
----------- -----------
LESS TREASURY STOCK RETIRED/REPURCHASED:
Number of shares, beginning of period (786) (700)
Purchase of treasury stock (158) (494)
Purchase of treasury stock used for exercised
stock options -- --
Reissuance of treasury stock to deferred
compensation plan and/or exercised stock
options 26 16
Shares reissued in connection with
acquisitions 2 508
Repurchase of shares forfeited from MRP (2) (2)
Number of shares retired/repurchased, end ----------- -----------
of period (918) (672)
----------- -----------
Shares issued and outstanding, end of period 11,084 11,330
=========== ===========
UNEARNED, RESTRICTED ESOP SHARES:
Number of shares, beginning of period (678) (746)
Release of earned shares -- --
----------- -----------
Number of shares, end of period (678) (746)
=========== ===========
6
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended June 30, 2000 and 1999
2000 1999
----------- -----------
OPERATING ACTIVITIES
Net income $ 8,968 $ 8,086
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes 776 (134)
Depreciation 1,289 1,217
Loss (gain) on sale of securities (15) (6)
Net amortization of premiums and discounts on
investments 69 577
Amortization of costs in excess of net assets
acquired 1,584 1,471
Amortization of MRP compensation liability 562 601
Loss (gain) on sale of loans (446) (980)
Net changes in deferred loan fees, premiums
and discounts 752 335
Loss (gain) on disposal of real estate held
for sale 3 23
Loss (gain) on disposal of property and
equipment 8 (6)
Capitalization of mortgage servicing rights
from sale of mortgages with servicing retained (23) (311)
Amortization of mortgage servicing rights 125 156
Provision for losses on loans and real estate
held for sale 1,373 1,341
FHLB stock dividend (810) (853)
Cash provided (used) in operating assets and
liabilities:
Loans held for sale (300) (4,067)
Accrued interest receivable (1,818) (729)
Other assets 227 616
Deferred compensation 99 240
Accrued expenses and other liabilities 627 20
Income taxes payable (459) 397
----------- -----------
Net cash provided by operating activities 12,591 7,994
----------- -----------
INVESTING ACTIVITIES:
Purchase of securities available for sale (11,351) (85,748)
Principal payments and maturities of securities
available for sale 18,536 78,425
Proceeds from sales of securities available
for sale -- 6,228
Purchase of securities held to maturity (3,249) --
Principal payments and maturities of securities
held to maturity 117 240
Sale (purchase) of FHLB stock (1,654) 388
Loans originated and closed - net (415,250) (482,335)
Purchase of loans and participating interest
in loans (8,435) (28,559)
Proceeds from sales of loans and participating
interest in loans 38,682 74,781
Principal repayments on loans 271,353 330,324
Purchase of property and equipment (2,095) (1,183)
Proceeds from sale of property and equipment 10 9
Additional capitalized costs of real estate
held for sale net of insurance proceeds (47) (133)
Proceeds from sale of real estate held for sale 562 1,989
Funds transferred to deferred compensation
plan trusts (61) (431)
Acquisitions, net cash (used) acquired (7) (794)
----------- -----------
Net cash used by investing activities (112,889) (106,799)
----------- -----------
(Continued on next page)
7
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
For the Six Months Ended June 30, 2000 and 1999
(Continued from prior page)
2000 1999
----------- -----------
FINANCING ACTIVITIES
Increase (decrease) in deposits $ 75,130 $ 76,293
Proceeds from FHLB advances 456,579 178,753
Repayment of FHLB advances (402,105) (152,505)
Proceeds from reverse repurchase borrowings 234 --
Repayments of reverse repurchase borrowings (1,561) (5,322)
Increase (decrease) in other borrowings (5,480) (4,053)
Compensation expense recognized for shares
released for allocation to participants of
the ESOP:
Original basis of shares -- --
Excess of fair value of released shares
over basis -- (1)
Cash dividends paid (2,859) (2,351)
Net (cost) proceeds of exercised stock options 131 64
Purchase of treasury stock (2,255) (10,486)
----------- -----------
Net cash provided by financing activities 117,814 80,392
----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 17,516 (18,413)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 44,769 74,233
----------- -----------
CASH AND DUE FROM BANKS, END OF PERIOD $ 62,285 $ 55,820
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 40,788 $ 32,965
Taxes paid $ 4,685 $ 4,112
Non-cash transactions:
Loans, net of discounts, specific loss
allowances and unearned income transferred
to real estate owned $ 965 $ 468
Net change in accrued dividends payable $ 200 $ 396
Net change in unrealized gain (loss) in
deferred compensation trust and related
liability $ 7 $ 2,155
Treasury stock forfeited by MRP $ 14 $ 29
Treasury stock issued to MRP $ 6 $ 601
Fair value of stock issued and options
assumed in connection with acquisitions $ 48 $ 12,043
8
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FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
Basis of Presentation:
----------------------
The unaudited consolidated financial statements of First Washington Bancorp,
Inc. (FWWB or the Company) included herein reflect all adjustments which are,
in the opinion of management, necessary to present fairly the statement of
financial position and the results of operations for the interim periods
presented. All such adjustments are of a normal, recurring nature. The
consolidated financial statements include FWWB's wholly owned subsidiaries,
First Savings Bank of Washington (FSBW), Inland Empire Bank (IEB) and Towne
Bank (TB) (together, the Banks). The balance sheet data at December 31, 1999,
is derived from FWWB's audited financial statements. Certain information and
note disclosures normally included in financial statements have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and notes thereto included in FWWB's Annual Report on Form 10-K for the nine
months ended December 31, 1999 (File No. 0-26584).
Changes in Fiscal Year End:
---------------------------
During May of 1999, the Company announced its decision to change its fiscal
year from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the quarter and six months ended June 30,
2000 is compared to the unaudited quarter and six months ended June 30, 1999.
Certain amounts in the prior periods' financial statements and/or schedules
have been reclassified to conform to the current period's presentation. These
reclassifications affected certain ratios for the prior periods. The effect
of such reclassifications is immaterial.
Note 2: Recent Developments and Significant Events
New Mortgage Lending Subsidiary:
--------------------------------
On April 1, 2000 FSBW opened a new mortgage lending subsidiary, Community
Financial Corporation (CFC), located in the Lake Oswego area of Portland,
Oregon, with John Satterberg as President. Primary lending activities for CFC
are in the area of construction and permanent financing for one-to four-family
residential dwellings. CFC, an Oregon corporation, functions as a wholly
owned subsidiary of First Savings Bank of Washington. FSBW has capitalized
CFC with $2 million of equity capital and will provide funding support for
CFC's lending operations.
Consolidation of Banking Operations:
------------------------------------
On July 22, 1999 the Company announced its plans to combine its three separate
banking subsidiaries into a single community banking franchise. The
combination was designed to strengthen the Company's commitment to community
banking by more effectively sharing the resources of the existing
subsidiaries, improving operating efficiency and developing a broader regional
brand identity. The consolidation was intended to be done in stages. The
first phase, which was expected to be completed by January 1, 2000, included
the merger of TB and FSBW and the selection of a single name and charter to be
used by TB, FSBW and its divisions, Whatcom State Bank (WSB) and Seaport
Citizens Bank (SCB). Final integration of all data processing into a common
system and the merger of Inland Empire Bank was scheduled for completion by
December 31, 2000.
On December 23, 1999, the Company announced its decision to temporarily
postpone the previously announced consolidation of its subsidiaries, TB and
IEB, into FSBW in light of the new Gramm-Leach-Bliley financial modernization
legislation. That recent legislation enacts Federal Home Loan Bank System
reforms that impact community financial institutions. A community financial
institution (CFI) is defined as a "member of the Federal Home Loan Bank (FHLB)
System, the deposits of which are insured by the Federal Deposit Insurance
Corporation (FDIC) and that has average total assets (over the preceding three
years) of less than $500 million." One provision of the reforms provides
community financial institutions with the ability to obtain long-term FHLB
advances to fund small business, small farm and small agribusiness loans. In
addition, community financial institutions will be able to offer these loans
as collateral for such borrowings. This provision, which represents a change
in policy from the previous requirement that these funds be securitized
primarily by residential mortgage loans, will be available only to community
financial institutions. As independent subsidiaries, TB and IEB currently
qualify as community financial institutions. Merging either of these two
subsidiaries into FSBW could disqualify them and remove this favorable status.
Based on the information available at that time, the Company believed that TB
and IEB could derive significant benefits from this legislation. Rather than
complete the proposed bank mergers as previously announced, the Company chose
to allow adequate time for an in-depth review and interpretation of the
regulations as they pertain to future plans. One the other hand, consolidation
of support operations continues
9
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and First Washington expects to receive long-term benefits from the proposed
efficiencies. Postponement of the mergers will have minimal impact on the
operational changes. The previously announced name and charter changes
scheduled for fall 2000 are expected to proceed for FSBW, including its WSB
and SCB divisions. The Company will continue to review its options with
respect to merging TB and IEB.
Stock Compensation Plan:
------------------------
In July 1998, the Emerging Issues Task Force (EITF) of the Financial
Accounting Standards Board (FASB) reached a consensus on the accounting
treatment for deferred compensation arrangements where amounts earned are held
in a Rabbi Trust and invested. The consensus position (EITF 97-14) was
applied as of September 30, 1998 for all awards granted, and existing plans
were required to be amended prior to September 30, 1998. Application of the
consensus is reflected as a change in accounting principle under which the
Company stock purchased for a Rabbi Trust obligation and the related liability
for deferred compensation are recorded at acquisition cost. Prior to this
change the stock was recorded at fair market value. The effect of this change
in accounting increased equity by $1.1 million and reduced the related
liability for deferred compensation by the same amount.
Seaport Citizens Bank
---------------------
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 was headquartered in Lewiston, Idaho. As a result of the
merger of SCB into FSBW, SCB became a division of FSBW. The acquisition was
accounted for as a purchase in the current period and resulted in the
recording of $6.1 million of costs in excess of the fair value of SCB's net
assets acquired (goodwill). Goodwill assets are being amortized over a 14-
year period and resulted in a current charge to earnings of $108,100 per
quarter, beginning in the first quarter of the current period, or $433,000 per
year. Founded in 1979, SCB is a commercial bank which had, before recording of
purchase accounting adjustments, 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 Lewiston, Idaho. SCB's results of operations are included in the
Company's consolidated results of operations (or financial statements) for the
quarter and six months ended June 30, 1999 and June 30, 2000.
Recent Accounting Standard Not Yet Adopted
------------------------------------------
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities; was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. FWWB will implement this statement on January 1, 2001.
The impact of the adoption of the provisions for this statement on the results
of operations or financial condition of FWWB has not yet been determined.
Note 3: BUSINESS SEGMENTS
The Company presently is managed by legal entity or Bank, not by lines of
business. Each Bank is managed by its executive management team that is
responsible for its own lending, deposit operations, information systems and
administration. Marketing support, sales training assistance, credit card
administration and human resource services are provided from a central source
at FSBW, and costs are allocated to the individual Banks using appropriate
methods based on usage. In addition, corporate overhead and centralized
administrative costs are allocated to each Bank.
FSBW is a community oriented savings bank which has traditionally offered a
wide variety of deposit products to its retail customers while concentrating
its lending activities on real estate loans. Lending activities have been
focused primarily on the origination of loans secured by one- to four-family
residential dwellings, including an emphasis on loans for construction of
residential dwellings. To a lesser extent, lending activities also have
included the origination of multi-family, commercial real estate and consumer
loans. More recently, FSBW has increased its non-residential lending, has
begun making non-mortgage commercial and agribusiness loans to small
businesses and farmers and has expanded its consumer lending activities.
FSBW's primary business is originating loans for portfolio in its primary
market areas, which consists of southeast, central, north central, and western
Washington state and northwest Idaho and providing deposit services to
customers in the areas of eastern Washington and western Idaho where it has
full service branch offices. FSBW's wholly owned subsidiary, Northwest
Financial Corporation, (NWFC), provides trustee services for FSBW, is engaged
in real estate sales and receives commissions from the sale of annuities.
FSBW's wholly owned subsidiary, CFC, is engaged primarily in origination of
construction loans in the Portland metropolitan and surrounding areas.
IEB is a community oriented commercial bank chartered in the State of Oregon
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
10
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Note 3: Business Segments, continued:
markets, originating loans for sale generally on a servicing released basis.
IEB operates a division, Inland Financial Services, which offers insurance and
brokerage services to its customers. 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 performance of each Bank is reviewed by the
Company's executive management team and the Board of Directors on a monthly
basis.
Financial highlights by legal entity were as follows:
June 30, 2000
--------------------------------------------------------
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Total Assets $1,376,835 $230,143 $ 339,787 $ 818 $ 1,947,583
========== ======== ========= ======= ===========
Quarter Ended June 30, 2000
--------------------------------------------------------
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
(dollars in thousands)
Net interest
income (loss) $ 10,274 $ 2,738 $ 4,309 $ 10 $ 17,331
Provision for
loan losses 399 70 350 -- 819
Other income 970 502 370 (20) 1,822
Other expenses 6,287 1,780 2,712 506 11,285
---------- -------- --------- -------- ----------
Income (loss)
before income
taxes 4,558 1,390 1,617 (516) 7,049
Income taxes
(benefit) 1,360 630 691 (175) 2,506
---------- -------- --------- -------- ----------
Net income (loss) $ 3,198 $ 760 $ 926 $ (341) $ 4,543
========== ======== ========= ======== ==========
June 30, 1999
--------------------------------------------------------
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Total Assets $1,252,263 $203,002 $ 247,681 $ 847 $ 1,703,793
========== ======== ========= ======== ==========
Quarter Ended June 30, 1999
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest
income (loss) $ 9,305 $ 2,695 $ 3,219 $ 28 $ 15,247
Provision for
loan losses 300 45 365 -- 710
Other income 1,042 592 244 (17) 1,861
Other expenses 5,502 1,761 2,138 382 9,783
Income (loss) ---------- -------- --------- -------- ----------
before income
taxes 4,545 1,481 960 (371) 6,615
Income taxes
(benefit) 1,559 674 455 (130) 2,558
---------- -------- --------- -------- ----------
Net income (loss) $ 2,986 $ 807 $ 505 $ (241) $ 4,057
========== ======== ========= ======== ==========
* Includes intercompany eliminations and holding company amounts.
11
<PAGE>
Note 3: Business Segments, continued:
Six Months Ended June 30, 2000
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 20,257 $ 5,343 $ 8,349 $ 27 $ 33,976
Provision for loan
losses 674 140 550 -- 1,364
Other income 1,786 938 763 (34) 3,453
Other expenses 12,197 3,545 5,387 966 22,095
Income (loss) ---------- -------- --------- -------- ----------
before income
taxes 9,172 2,596 3,175 (973) 13,970
Income taxes
(benefit) 2,789 1,188 1,360 (335) 5,002
---------- -------- --------- -------- ----------
Net income (loss) $ 6,383 $ 1,408 $ 1,815 $ (638) $ 8,968
========== ======== ========= ======== ==========
Six Months Ended June 30, 1999
--------------------------------------------------------
(dollars in thousands)
Condensed Income
Statement
FSBW IEB TB Other* Total
---------- -------- --------- -------- ----------
Net interest income
(loss) $ 18,231 $ 5,189 $ 6,058 $ 80 $ 29,558
Provision for loan
losses 617 79 645 -- 1,341
Other income 2,283 1,176 537 (38) 3,958
Other expenses 10,517 3,615 4,222 780 19,134
Income (loss) ---------- -------- --------- -------- ----------
before income
taxes 9,380 2,671 1,728 (738) 13,041
Income taxes
(benefit) 3,152 1,216 845 (258) 4,955
---------- -------- --------- -------- ----------
Net income (loss) $ 6,228 $ 1,455 $ 883 $ (480) $ 8,086
========== ======== ========= ======== ==========
* Includes intercompany eliminations and holding company amounts.
12
<PAGE>
Note 4: Additional Information Regarding Interest-Bearing Deposits and
Securities
The following table sets forth additional detail on FWWB's interest-bearing
deposits and securities at the dates indicated (at carrying value) (in
thousands):
June 30 December 31
2000 1999
--------- -----------
Interest-bearing deposits included
in cash and due from banks $ 14,656 $ 2,960
Mortgage-backed securities 219,283 230,006
Other securities-taxable 104,013 95,992
Other securities-tax exempt 31,105 32,350
Other stocks with dividends 3,430 3,769
--------- -----------
Total securities 357,831 362,117
Federal Home Loan Bank (FHLB) stock 27,007 24,543
--------- -----------
$ 399,494 $ 389,620
========= ===========
The following table provides additional detail on income from deposits and
securities for the periods indicated (in thousands):
Quarters Ended Six Months Ended
June 30 June 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Mortgage-backed securities $ 3,951 $ 3,621 $ 7,906 $ 6,944
-------- -------- -------- --------
Taxable interest and dividends 2,044 1,468 3,909 3,320
Tax-exempt interest 477 538 953 1,037
Federal Home Loan Bank stock-
dividends 422 418 824 853
-------- -------- -------- --------
2,943 2,424 5,686 5,210
-------- -------- -------- --------
$ 6,894 $ 6,045 $ 13,592 $ 12,154
======= ======== ======== ========
13
<PAGE>
Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per
Share (EPS) and Calculation of Outstanding Shares
Calculation of
Weighted Average Shares Outstanding
for Earnings Per Share
----------------------
(in thousands)
Quarters Ended Six Months Ended
June 30 June 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Total shares originally issued 12,002 12,002 12,002 12,002
Less retired shares and
treasury stock plus unvested
shares allocated to MRP (1,062) (719) (1,018) (607)
Less unallocated shares held
by the ESOP (678) (746) (678) (746)
-------- -------- -------- --------
Basic weighted average shares
outstanding 10,262 10,537 10,306 10,649
Plus unvested MRP and stock
option incremental shares
considered outstanding for
diluted EPS calculations 184 436 179 450
Diluted weighted average shares -------- -------- -------- --------
outstanding 10,446 10,973 10,485 11,099
======== ======== ======== ========
Calculation of
Outstanding Shares at
---------------------
(in thousands)
June 30 December 31
2000 1999
-------- --------
Total shares issued 12,002 12,002
Less retired shares and
treasury stock (918) (786)
-------- --------
Outstanding shares issued 11,084 11,216
======== ========
14
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Management's Discussion and Analysis (MD&A) and other portions of this report
contain certain "forward-looking statements" concerning the future operations
of First Washington Bancorp, Inc. Management desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this statement for the express purpose of availing the
Company of the protections of such safe harbor with respect to all "forward-
looking statements" contained in our Annual Report. We have used "forward-
looking statements" to describe future plans and strategies, including our
expectations of the Company's future financial results. Management's ability
to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate
trends, the general economic climate in the Company's market area and the
country as a whole, the ability of the Company to control costs and expenses,
the ability of the Company to efficiently incorporate acquisitions into its
operations, competitive products and pricing, loan delinquency rates, and
changes in federal and state regulation. These factors should be considered
in evaluating the "forward-looking statements," and undue reliance should not
be placed on such statements.
General
First 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 24 branch
offices and three loan production offices located in Washington, Idaho and
Oregon. Effective April 1, 1999 FSBW completed the acquisition of Seaport
Citizens Bank (SCB). SCB was merged with FSBW and its two branches in
Lewiston, Idaho, together with FSBW's Clarkston, Washington, branch operate as
a division of FSBW. 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.
Effective April 1, 2000 FSBW opened a new lending subsidiary, Community
Financial Corporation, located in the Lake Oswego area of Portland, Oregon
(see Note 2: Recent Developments and Significant Events). 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 six 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
seven full service branches in the Seattle, Washington, metropolitan area. TB
has approval for an eighth location in Seattle, Washington which is scheduled
to open in September 2000.
During May 1999, the Company announced its decision to change its fiscal year
from April 1 through March 31 to January 1 through December 31. For
discussion and analysis purposes, the quarter and six months ended June 30,
2000 is compared to the unaudited quarter and six months ended June 30, 1999.
The operating results of FWWB depend primarily on its net interest income,
which is the difference between interest income on interest-earning assets,
consisting of loans and investment securities, and interest expense on
interest-bearing liabilities, composed primarily of savings deposits and
Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a
function of FWWB's interest rate spread, which is the difference between the
yield earned on interest-earning assets and the rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to the average balance of interest-bearing liabilities. As
more fully explained below, FWWB's net interest income significantly increased
for the quarter and six months ended June 30, 2000, when compared to the same
periods for the prior year. This increase in net interest income was due to
the significant asset and liability growth which occurred at FWWB. The
increase in net interest income occurred despite small 6 basis point and 2
basis point reductions of the interest rate spreads for these periods, which
resulted from changes in the mix of assets and liabilities and changes in the
levels of various market interest rates. The net interest margins also
declined (6 basis points for the quarter and 4 basis points for the six month
period) reflecting the reduced spreads and the increased use of interest-
bearing liabilities relative to interest-earnings assets as the Company
continued to leverage its equity capital. FWWB's net income also is affected
by provisions for loan losses and the level of its other income, including
deposit service charges, loan origination and servicing fees, and gains and
losses on the sale of loans and securities, as well as its non-interest
operating expenses and income tax provisions.
15
<PAGE>
Management's discussion and analysis of results of operations is intended to
assist in understanding the financial condition and results of operations of
the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and accompanying
Selected Notes to Consolidated Financial Statements.
Recent Developments and Significant Events
See Note 2 to Financial Statements
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets increased $127.5 million, or 7.0%, from $1.820 billion at
December 31, 1999, to $1.948 billion at June 30, 2000. The growth of $127.5
million was spread among all three subsidiary Banks and was funded primarily
with deposit growth and advances from the FHLB. This growth represented a
continuation of management's plans to further leverage FWWB's capital and
reflects the solid economic conditions in the markets where FWWB operates.
Loans receivable (gross loans less loans in process, deferred fees and
discounts, and allowance for loan losses) grew $111.3 million, or 8.5%, from
$1.308 billion at December 31, 1999, to $1..419 billion at June 30, 2000. The
increase in gross loans of $133.6 million from $1.412 billion at December 31,
1999, to $1.546 billion at June 30, 2000, consisted of $13.3 million of
residential mortgages, $37.3 million of mortgages secured by commercial and
multifamily real estate, $44.9 million of construction and land loans and
$38.1 million of non-mortgage loans such as commercial, agricultural and
consumer loans. These balances reflect the Company's continuing effort to
increase the portion of its assets invested in loans and more specifically the
portion of loans invested in commercial real estate and non-mortgage loans.
The majority of the increase in assets was funded by a net increase of $122.8
million in deposits and borrowings. Asset growth was also funded by net
income from operations. Deposits grew $75.0 million, or 7.0%, from $1.078
billion at December 31, 1999, to $1.153 billion at June 30, 2000. FHLB
advances increased $54.5 million from $466.5 million at December 31, 1999, to
$521.0 million at June 30, 2000. Other borrowings, primarily reverse
repurchase agreements with securities dealers, decreased $6.8 million, from
$81.7 million at December 31, 1999, to $74.8 million at June 30, 2000.
Securities available for sale and held to maturity decreased $4.3 million, or
1.2%, from $362.1 million at December 31, 1999, to $357.8 million at June 30,
2000. FHLB stock increased $2.5 million, as FWWB was required to purchase
more stock as a result of its increased use of FHLB advances.
Comparison of Results of Operations for the Quarters and Six Months Ended June
30, 2000 and 1999
General. Net income for the quarter ended June 30, 2000 was $4.5 million, or
$.43 per share (diluted), compared to net income of $4.1 million, or $.37 per
share (diluted), for the quarter ended June 30, 1999. Net income for the
quarter ended June 30, 2000 increased $486,000 from the comparable quarter
ended June 30, 1999. Net income for the first six months of the current
period was $9.0 million, an increase of $882,000 from the six months ended
June 30, 1999. FWWB's improved operating results reflect the significant
growth of assets and liabilities which was offset somewhat by the decline in
net interest margin, decreased non-interest revenues, and increased operating
expenses and amortization of goodwill. Compared to levels a year ago, total
assets increased 14.3% to $1.948 billion at June 30, 2000, total loans rose
19.2% to $1.419 billion, deposits grew 14.1% to $1.153 billion and borrowings
increased 18.7% to $595.8 million. Net interest margin declined 6 basis
points for the quarter and 4 basis points for the six month period reflecting
changes in the level of market rates and the increased use of interest-bearing
liabilities relative to interest-earning assets as the Company continued to
leverage its equity capital. Average equity was 9.51% of average assets for
the quarter ended June 30, 2000, compared to 10.93% of average assets for the
quarter ended June 30, 1999. The modest changes in net interest spread and
net interest margin are notable in light of the significant changes in the
level of market interest rates over the past twelve months.
Interest Income. Interest income for the quarter ended June 30, 2000 was
$39.1 million compared to $32.2 million for the quarter ended June 30, 1999,
an increase of $6.9 million, or 21.6%. The increase in interest income was a
result of a $245.9 million, or 15.7%, growth in average balances of interest-
earning assets, and a 44 basis point increase in the average yield on those
assets. The yield on average interest-earning assets increased to 8.67% for
the quarter ended June 30, 2000 compared to 8.23% for the same period a year
earlier. Average loans receivable for the quarter ended June 30, 2000
increased by $227.9 million, or 19.4%, when compared to the quarter ended June
30, 1999, reflecting the Banks' significant internal growth. Interest income
on loans increased by $6.1 million, or 23.3%, compared to the prior year,
reflecting the impact of the increase in average loan balances and a 32 basis
point increase in the average yield. The increase in average loan yield
largely resulted from the significant increase in market interest rates,
including a 175 basis point increase in the prime rate from the second
calendar quarter of 1999 to the end of the most recent period. Adding to this
effect were changes in the mix of the loan portfolio and the impact on
adjustable and floating rate loans and new loan origination's of significantly
rising levels of market interest rates over the past eighteen months.
Although certain market rates declined modestly in the most recent quarter
they remain significantly higher than twelve to eighteen months
16
<PAGE>
earlier. Loans yielded 9.23% for the quarter ended June 30, 2000 compared to
8.91% for the quarter ended June 30, 1999. The average balance of
mortgage-backed securities, investment securities, daily interest-bearing
deposits and FHLB stock increased by $18.0 million for the quarter ended June
30, 2000, while the interest and dividend income from those investments
increased $849,000 for the quarter ended June 30, 2000 compared to the quarter
ended June 30, 1999. The average yield on mortgage-backed securities
increased from 6.10% for the quarter ended June 30, 1999, to 6.89% for the
comparable period in 2000. Yields on mortgage-backed securities were
particularly low in the 1999 period reflecting the adverse impact of
accelerated prepayments on the amortization of purchase premiums on those
securities as well as the impact of low market rates on the interest rates
paid on the significant portion of those securities that have adjustable
interest rates. In the quarter ended June 30, 2000 the accelerated
prepayments had diminished and market rates had increased reversing both of
those effects on mortgage-backed securities yields. The average yield on
investment securities and short term cash investments increased from 6.12% for
the quarter ended June 30, 1999 to 6.59% for the comparable quarter in 2000,
also reflecting the rise in interest rates during 1999 and 2000. Earnings on
FHLB stock increased by $4,000, resulting from an increase of $2.9 million in
the average balance of FHLB stock for the quarter ended June 30, 2000, and
despite a 74 basis point decrease in the dividend yield on that stock.
Dividends on FHLB stock are established on a quarterly basis by vote of the
Directors of the FHLB.
Interest income for the six months ended June 30, 2000 increased $13.1
million, or 20.1%, from the comparable period in 1999. Interest income from
loans increased $11.7 million, or 23.1%, from the comparable period in 1999.
The majority of the increase from loan interest income reflected the impact of
a $239.2 million growth in average loans receivable balances and a 12 basis
point increase in the yield on the loan balances. Interest income from
mortgage-backed and investment securities and FHLB stock for the six months
ended June 30, 2000, increased $1.4 million, from $12.2 million in 1999, to
$13.6 million in the current period, reflecting a $5.7 million increase in
average balances and a 61 basis point increase in yield. The yield on average
earning assets increased from 8.23% for the six months ended June 30, 1999, to
8.56% for the six months ended June 30, 2000. Yield increases for the six
month period were somewhat less than those reported for the most recent
quarter, however, they generally reflect the same balance sheet and interest
rate market dynamics explained above.
Interest Expense. Interest expense for the quarter ended June 30, 2000 was
$21.8 million compared to $16.9 million for the comparable period in 1999, an
increase of $4.9 million, or 28.7%. The increase in interest expense was due
to the $242.2 million growth in average interest-bearing liabilities and the
increase in the average cost of all interest-bearing liabilities from 4.60% to
5.10%. The $147.1 million increase in average interest-bearing deposits for
the quarter ended June 30, 2000 reflects the solid deposit growth throughout
the Company over the past twelve months. Deposit interest expense increased
$2.9 million for the quarter ended June 30, 2000. Average deposit balances
increased from $990.1 million for the quarter ended June 30, 1999, to $1.137
billion for the quarter ended June 30, 2000, while, at the same time, the
average rate paid on deposit balances increased 50 basis points. The increase
in the rate paid on deposits reflects the significant increase in market
interest rates over the level that prevailed a year earlier. Average FHLB
advances totaled $505..9 million during the quarter ended June 30, 2000,
compared to $407.7 million during the quarter ended June 30, 1999, an increase
of $98.2 million that resulted in a $1.8 million increase in related interest
expense. The average rate paid on those advances increased to 6.12% for the
quarter ended June 30, 2000 from 5.77% for the quarter ended June 30, 1999.
Other borrowings consist of retail repurchase agreements with customers and
repurchase agreements with investment banking firms secured by certain
investment securities. The average balance for other borrowings decreased
$3.2 million from $76.7 million for the quarter ended June 30, 1999, to $73.5
million for the same period in 2000, while the related interest expense
increased $143,000 from $1.0 million to $1.2 million for the respective
periods. The average rate paid on other borrowings was 6.32% in the quarter
ended June 30, 2000 compared to 5.29% for the same quarter in 1999 also
reflecting the increase in market interest rates.
A comparison of total interest expense for the six months ended June 30, 2000,
shows an increase of $3.0 million, or 15.5%, from the comparable period in
June 1999. The increase in interest expense reflects an increase in average
deposits of $163.4 million combined with a $81.5 million increase in FHLB
advances and other borrowings. The effect on interest expense of the $245.0
million increase in average interest-bearing liabilities was augmented by a 35
basis point increase in the interest rate paid on those liabilities.
17
<PAGE>
The following tables provide additional comparative data on the Company's
operating performance:
Quarters Ended Six Months Ended
Average Balances June 30 June 30
---------------- ----------------------- ----------------------
(in thousands) 2000 1999 2000 1999
---------- ---------- ---------- ----------
Investment securities and
deposits $ 153,793 $ 131,486 $ 147,646 $ 143,694
Mortgage-backed obligations 230,791 238,092 233,389 234,182
Loans 1,403,569 1,175,625 1,372,757 1,133,539
FHLB stock 26,085 23,141 25,479 22,943
Total average interest- ---------- ---------- ---------- ----------
earning asset 1,814,238 1,568,344 1,779,271 1,534,358
Non-interest-earning assets 95,942 99,315 94,998 95,404
---------- ---------- ---------- ----------
Total average assets $1,910,180 $1,667,659 $1,874,269 $1,629,762
========== ========== ========== ==========
Deposits $1,137,251 $ 990,137 1,115,348 $ 951,904
Advances from FHLB 505,924 407,705 491,170 407,206
Other borrowings 73,524 76,689 75,968 78,409
---------- ---------- ---------- ----------
Total average interest-
bearing liabilities 1,716,699 1,474,531 1,682,486 1,437,519
Non-interest-bearing
liabilities 11,865 10,804 10,862 10,777
---------- ---------- ---------- ----------
Total average liabilities 1,728,564 1,485,335 1,693,348 1,448,296
Equity 181,616 182,324 180,921 181,466
---------- ---------- ---------- ----------
Total average
liabilities and
equity $1,910,180 $1,667,659 $1,874,269 $1,629,762
========== ========== ========== ==========
Interest Rate Yield/Expense (rates are annualized)
--------------------------------------------------
Interest Rate Yield:
Investment securities
and deposits 6.59% 6.12% 6.62% 6.11%
Mortgage-backed obligations 6.89% 6.10% 6.81% 5.98%
Loans 9.23% 8.91% 9.10% 8.98%
FHLB stock 6.51% 7.25% 6.50% 7.50%
Total interest rate yield on ---------- ---------- ---------- ----------
interest-earning assets 8.67% 8.23% 8.56% 8.23%
---------- ---------- ---------- ----------
Interest Rate Expense:
Deposits 4.57% 4.07% 4.45% 4.10%
Advances from FHLB 6.12% 5.77% 6.03% 5.77%
Other borrowings 6.32% 5.29% 6.20% 5.31%
---------- ---------- ---------- ----------
Total interest rate
expense on interest-
bearing liabilities 5.10% 4.60% 4.99% 4.64%
---------- ---------- ---------- ----------
Interest spread 3.57% 3.63% 3.57% 3.59%
========== ========== ========== ==========
Net interest margin on
interest earning assets 3.84% 3.90% 3.84% 3.88%
---------- ---------- ---------- ----------
Additional Key Financial Ratios (ratios are annualized)
-------------------------------------------------------
Return on average assets 0.96% 0.98% 0.96% 1.00%
Return on average equity 10.06% 8.93% 9.97% 8.99%
Average equity/average assets 9.51% 10.93% 9.65% 11.13%
Average interest-earning
assets/interest-bearing
liabilities 105.68% 106.36% 105.75% 106.74%
Non-interest [other operating]
expenses/average assets
Excluding amortization of
costs in excess of net
assets acquired
(goodwill) 2.21% 2.16% 2.20% 2.19%
Including amortization of
costs in excess of net
assets acquired (goodwill) 2.38% 2.35% 2.37% 2.37%
Efficiency ratio [non-
interest (other
operating) expenses/
revenues]
Excluding amortization
of costs in excess of
net assets acquired
(goodwill) 54.79% 52.58% 54.80% 52.70%
Including amortization
of costs in excess of
net assets acquired
(goodwill) 58.92% 57.18% 59.03% 57.09%
18
<PAGE>
Provision for Loan Losses. During the quarter ended June 30, 2000, the
provision for loan losses was $819,000, compared to $710,000 for the quarter
ended June 30, 1999, an increase of $109,000. A comparison of the provision
for loan losses for the six month periods ended June 30, 2000 and 1999 shows
an increase of $23,000 from $1.34 million to $1.36 million. The increase in
the provision for losses reflects the amount required to maintain the
allowance for losses at an appropriate level based upon management's
evaluation of the adequacy of general and specific loss reserves as more fully
explained in the following paragraphs. The higher provision in the current
quarter reflects more significant changes in the portfolio mix and non-
performing loans and a higher level of net charge-offs during that period than
occurred in the prior year's quarter. A comparison of the allowance for loan
losses at June 30, 2000 and 1999 shows an increase of $1.2 million from $13.3
million at June 30, 1999 to $14.5 million at June 30, 2000. The allowance for
loan losses increased by $950,000, to $14.5 million at June 30, 2000, compared
to $13.5 million at December 31, 1999. The allowance for loan losses as a
percentage of net loans (loans receivable excluding allowance for losses) was
1.01% and 1.10% at June 30, 2000 and June 30, 1999, respectively. The
allowance for loan losses equaled 290% of non-performing loans at June 30,
2000 compared to 192% of non-performing loans at June 30, 1999.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, actual loan loss
experience, current and anticipated economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loans. Additions to the allowance are charged to
earnings. Provisions for losses that are related to specific assets are
usually applied as a reduction of the carrying value of the assets and charged
immediately against the allowance for loan loss reserve. 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. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Banks'
allowance for loan losses. Such agencies may require the Banks to provide
additions to the allowance based upon judgments different from management.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to economic, operating, regulatory and
other conditions beyond the Banks' control. The adequacy of general and
specific reserves is based on management's continuing evaluation of the
pertinent factors underlying the quality of the loan portfolio, including
changes in the size and composition of the loan portfolio, delinquency rates,
actual loan loss experience and current economic conditions. Large groups of
smaller-balance homogeneous loans are collectively evaluated for impairment.
Loans that are collectively evaluated for impairment by the Banks include
residential real estate and consumer loans. Smaller balance non-homogeneous
loans also may be evaluated collectively for impairment. Larger balance
non-homogeneous residential construction and land, commercial real estate,
commercial business loans and unsecured loans are individually evaluated for
impairment. Loans are considered impaired when, based on current information
and events, management determines that it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Factors involved in determining impairment include, but are
not limited to, the financial condition of the borrower, value of the
underlying collateral and current status of the economy. Impaired loans are
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of collateral if the loan is
collateral dependent. Subsequent changes in the value of impaired loans are
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 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. General
loan loss reserves are established to provide for inherent loan portfolio
risks not specifically provided for. The level of general reserves is based
on analysis of potential exposures existing in the Banks' loan portfolios
including evaluation of historical trends, current market conditions and other
relevant factors identified by management at the time the financial statements
are prepared. 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. This methodology may
result in losses or recoveries differing significantly from those provided in
the financial statements.
19
<PAGE>
The following tables are provided to disclose additional detail on the Banks'
loans and allowance for loan losses (in thousands):
June 30 December 31
2000 1999
---------- -----------
Loans (including loans held for sale):
Secured by real estate
One- to four-family real estate loans $ 450,001 $ 436,679
Commercial 358,725 332,505
Multifamily 78,558 67,487
Construction and land 307,991 263,093
Commercial 216,308 195,566
Agribusiness 64,399 55,000
Consumer, including credit cards 69,577 61,580
---------- ----------
$1,545,559 $1,411,910
Less loans in process 105,565 84,894
Less deferred fees and discounts 6,024 5,311
---------- ----------
Net loans outstanding before allowance for
loan losses $1,433,970 $1,321,705
Less allowance for loan losses 14,491 13,541
---------- ----------
Total net loans at end of period $1,419,479 $1,308,164
========== ==========
Allowance for loan losses as a percentage of
net loans outstanding 1.01% 1.02%
Quarters Ended Six Months Ended
June 30 June 30
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Balance, beginning of the period $ 13,951 $ 12,261 $ 13,541 $ 10,718
Allowances added through business
combinations -- 477 -- 1,554
Provision 819 710 1,364 1,341
Recoveries of loans previously
charged off:
One- to four-family real
estate loans -- -- -- --
Commercial/multifamily real estate -- -- 1 --
Construction and land -- -- -- --
Commercial business 11 22 27 31
Agribusiness -- -- -- --
Consumer finance 1 2 2 10
Credit cards 98 2 99 4
-------- -------- -------- --------
110 26 129 45
Loans charged off:
One- to four-family real
estate loans (54) -- (60) --
Commercial/multifamily real estate -- -- -- (30)
Construction and land (12) -- (12) (9)
Commercial business (114) (134) (173) (148)
Agribusiness -- -- -- --
Consumer finance (17) (3) (23) (79)
Credit cards (192) (32) (275) (87)
-------- -------- -------- --------
(389) (169) (543) (353)
-------- -------- -------- --------
Net charge offs (279) (143) (414) (308)
-------- -------- -------- --------
Balance, end of period $ 14,491 $ 13,305 $ 14,491 $ 13,305
======== ======== ======== ========
Net charge-offs as a percentage
of average net book value of
loans outstanding for the period 0.02% 0.01% 0.03% 0.03%
-------- -------- -------- --------
20
<PAGE>
The following is a schedule of the Company's allocation of the allowance for
loan losses:
June 30 December 31
2000 1999
---------- -----------
Specific or allocated loss allowances:
Secured by real estate:
One- to four-family real estate loans $ 2,463 $ 2,334
Commercial and multifamily 4,684 4,273
Construction and land 2,089 1,638
Commercial/agricultural 3,219 2,830
Consumer, credit card and other 1,011 1,023
---------- -----------
Total allocated 13,466 12,098
Unallocated 1,025 1,443
---------- -----------
Total allowance for loan losses $ 14,491 $ 13,541
========== ===========
Ratio of allowance for loan losses to
non-performing loans 2.90 2.67
Allowance for loan losses as a percent of net
loans (loans receivable excluding allowance
for losses) 1.01% 1.02%
Other Operating Income. Other operating income at $1.8 million for the
quarter ended June 30, 2000, was nearly unchanged from the quarter ended June
30, 1999. This included, however, a $177,000 decrease in the gain on sale of
loans. This decrease primarily reflected decreased sales of loans by FSBW and
IEB and the adverse impact of rising interest rates on the profitability of
loan sales when compared to the comparable period in the prior year. The
volume of loan sales and related net gain on sale of loans decreased from
$30.3 million and $459,000, respectively, for the quarter ended June 30, 1999,
to $22.8 million and $282,000, respectively, for the quarter ended June 30,
2000. On the other hand, other fee and service charge income increased at
FSBW, TB and IEB, reflecting deposit growth and pricing adjustments.
Other operating income for the six months ended June 30, 2000, decreased
$505,000 from the comparable period in 1999. The $822,000 decrease in gains
from the sale of loans and securities for the six months ended June 30, 2000
also reflects the rising rate environment during the six months ended June 30,
2000. Loan sales declined from $74.8 million for the six months ended June
30, 1999 to $38.7 million for the six months ended June 30, 2000.
Other Operating Expenses. Other operating expenses increased $1.5 million
from $9.8 million for the quarter ended June 30, 1999, compared to $11.3
million for the quarter ended June 30, 2000. Increases in other operating
expenses reflect the overall growth in assets and liabilities, customer
relationships and complexity of operations as FWWB continues to expand. The
increase in expenses reflects the inclusion of two new bank branches opened
subsequent to June 30, 1999. The increase also reflects expenses associated
with the new lending subsidiary, CFC. The increase in other operating
expenses was partially offset by a $90,000 increase in capitalized loan
origination costs. The higher operating expenses associated with FWWB's
transition to more of a commercial bank profile caused FWWB's efficiency
ratio, excluding the amortization of goodwill, to increase to 54.79% (58.92%
including goodwill), for the quarter ended June 30, 2000, from 52.58% (57.18%
including goodwill) for the comparable period ended June 30, 1999. Other
operating expenses as a percentage of average assets were 2.38% (2.21%
excluding the amortization of goodwill) for the quarter ended June 30, 2000,
compared to 2.35% (2.16% excluding the amortization of goodwill) for the
quarter ended June 30, 1999.
Other operating expenses for the six months ended June 30, 2000 increased $3.0
million from $19.1 million for the first six months of 1999 to $22.1 million
in the current period. As explained earlier, the increase is largely due to
the previously noted growth in FWWB's operations for the current six months
period.
21
<PAGE>
Income Taxes. Income tax expense was $2.5 million for the quarter ended June
30, 2000, compared to $2.6 million for the comparable period in 1999. The
$52,000 decrease in the provision for income taxes reflects the higher level
of income being taxed at slightly lower effective rates due to the declining
relative contribution of IEB which is subject to Oregon state income taxes;
and the fact that a declining relative portion of the expense recorded in the
release of the Employee Stock Ownership Plan (ESOP) shares is not deductible
for tax purposes. The Company's effective tax rates for the quarter ended June
30, 2000 and 1999, were 36% and 39%, respectively.
Income tax expense for the six months ended June 30, 2000 remained at $5.0
million, which is the same amount as the comparable period in 1999. The
Company's effective tax rates for the six months ended June 30, 2000 and 1999,
were 36% and 38%, respectively.
22
<PAGE>
Asset Quality
The following tables are provided to disclose additional details on asset
quality (in thousands):
June 30 December 31
2000 1999
---------- -----------
Non-performing assets at end of the period:
Nonaccrual Loans:
One- to four-family real estate loans $ 970 $ 623
Commercial real estate 323 129
Multifamily real estate -- --
Construction and land 1,842 2,514
Commercial business 882 1,203
Agricultural business 344 --
Consumer, credit card and other 114 9
---------- -----------
4,475 4,478
Loans more than 90 days delinquent, still on accrual:
One- to four-family real estate loans 27 155
Commercial real estate 400 --
Multifamily real estate -- --
Construction and land -- --
Commercial business 8 25
Agricultural business 14 334
Consumer, credit card and other 79 79
---------- -----------
528 593
---------- -----------
Total non-performing loans 5,003 5,071
Real estate owned (REO) and repossessed assets 3,873 3,576
---------- -----------
Total non-performing assets at the end of the
period $ 8,876 $ 8,647
========== ===========
Non-performing loans as a percentage of total
net loans before allowance for loan losses at
end of the period 0.35% 0.38%
Ratio of allowance for loan losses to non-performing
loans at end of the period 290% 267%
Non-performing assets as a percentage of total
assets at end of the period 0.46% 0.48%
Troubled debt restructuring [TDR's]
at end of the period $ 316 $ 369
---------- -----------
Troubled debt restructuring as a percentage of:
Total gross principal of loans outstanding
at end of the period 0.02% 0.03%
Total assets at end of the period 0.02% 0.02%
23
<PAGE>
Market Risk and Asset/Liability Management
The financial condition and operation of the Company are influenced
significantly by general economic conditions, including the absolute level of
interest rates as well as changes in interest rates and the slope of the yield
curve. The Company's profitability is dependent to a large extent on its net
interest income, which is the difference between the interest received from
its interest-earning assets and the interest expense incurred on its interest-
bearing liabilities.
The activities of the Company, like all financial institutions, inherently
involve the assumption of interest rate risk. Interest rate risk is the risk
that changes in market interest rates will have an adverse impact on the
institution's earnings and underlying economic value. Interest rate risk is
determined by the maturity and repricing characteristics of an institution's
assets, liabilities, and off-balance-sheet contracts. Interest rate risk is
measured by the variability of financial performance and economic value
resulting from changes in interest rates. Interest rate risk is the primary
market risk impacting the Company's financial performance.
The greatest source of interest rate risk to the Company results from the
mismatch of maturities or repricing intervals for rate sensitive assets,
liabilities and off-balance-sheet contracts. This mismatch or gap is
generally characterized by a substantially shorter maturity structure for
interest-bearing liabilities than interest-earning assets. Additional
interest rate risk results from mismatched repricing indices and formulae
(basis risk and yield curve risk), and product caps and floors and early
repayment or withdrawal provisions (option risk), which may be contractual or
market driven, that are generally more favorable to customers than to the
Company.
The principal objectives of asset/liability management are to evaluate the
interest-rate risk exposure of the Company; to determine the level of risk
appropriate given the Company's operating environment, business plan
strategies, performance objectives, capital and liquidity constraints, and
asset and liability allocation alternatives; and to manage the Company's
interest rate risk consistent with regulatory guidelines and approved policies
of the Board of Directors. Through such management the Company seeks to
reduce the vulnerability of its earnings and capital position to changes in
the level of interest rates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee, which is
comprised of members of the Company's senior management. The committee
closely monitors the Company's interest sensitivity exposure, asset and
liability allocation decisions, liquidity and capital positions, and local and
national economic conditions and attempts to structure the loan and investment
portfolios and funding sources of the Company to maximize earnings within
acceptable risk tolerances.
The Company's primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify
variations in net interest income resulting from those movements under
different rate environments. The sensitivity of net interest income to changes
in the modeled interest rate environments provides a measurement of interest
rate risk. The Company also utilizes market value analysis, which addresses
changes in estimated net market value of equity arising from changes in the
level of interest rates. The net market value of equity is estimated by
separately valuing the Company's assets and liabilities under varying interest
rate environments. The extent to which assets gain or lose value in relation
to the gains or losses of liability values under the various interest rate
assumptions determines the sensitivity of net equity value to changes in
interest rates and provides an additional measure of interest rate risk.
The interest rate sensitivity analysis performed by the Company incorporates
beginning of the period rate, balance and maturity data, using various levels
of aggregation of that data, as well as certain assumptions concerning the
maturity, repricing, amortization and prepayment characteristics of loans and
other interest-earning assets and the repricing and withdrawal of deposits and
other interest-bearing liabilities into an asset/liability computer
simulation model. The Company updates and prepares simulation modeling at
least quarterly for review by senior management and the directors. The Company
believes the data and assumptions are realistic representations of its
portfolio and possible outcomes under the various interest rate scenarios.
Nonetheless, the interest rate sensitivity of the Company's net interest
income and net market value of equity could vary substantially if different
assumptions were used or if actual experience differs from the assumptions
used.
24
<PAGE>
Sensitivity Analysis
The table of Interest Rate Risk Indicators sets forth, as of June 30, 2000,
the estimated changes in the Company's net interest income over a one year
time horizon and the estimated changes in market value of equity based on the
indicated interest rate environments.
Table of Interest Rate Risk Indicators
As of June 30, 2000
Estimated Change in
----------------------------------------------
Change (In Basis Points) Net Interest Income
in Interest Rates (1) Next 12 Months Net Market Value
------------------------ ------------------- ----------------
(Dollars in thousands)
+400 $ (1,955) (2.9%) $ (90,038) (53.5%)
+300 (1,273) (1.9%) (71,195) (42.3%)
+200 (588) (0.9%) (49,890) (29.6%)
+100 (105) (0.2%) (26,258) (15.6%)
0 0 0 0 0
-100 (478) (0.7%) 26,362 15.6%
-200 (1,848) (2.7%) 37,702 22.4%
-300 (4,001) (5.8%) 37,635 22.3%
-400 (7,030) (10.3%) 27,870 16.5%
---------------
(1) Assumes an instantaneous and sustained uniform change in market interest
rates at all maturities.
Another although less reliable monitoring tool for assessing interest rate
risk is "gap analysis." The matching of the repricing characteristics of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest sensitive" and by monitoring an
institution's interest sensitivity "gap." An asset or liability is said to be
interest sensitive within a specific time period if it will mature or reprice
within that time period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets anticipated, based
upon certain assumptions, to mature or reprice within a specific time period
and the amount of interest-bearing liabilities anticipated to mature or
reprice, based upon certain assumptions, within that same time period. A gap
is considered positive when the amount of interest sensitive assets exceeds
the amount of interest sensitive liabilities. A gap is considered negative
when the amount of interest sensitive liabilities exceeds the amount of
interest sensitive assets. Generally, during a period of rising rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income.
During a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgage (ARM) loans, have features that restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed
in calculating the table. Finally, the ability of some borrowers to service
their debt may decrease in the event of a severe interest rate increase.
The table of Interest Sensitivity Gap presents the Company's interest
sensitivity gap between interest-earning assets and interest-bearing
liabilities at June 30, 2000. The table sets forth the amounts of interest-
earning assets and interest-bearing liabilities which are anticipated by the
Company, based upon certain assumptions, to reprice or mature in each of the
future periods shown. At June 30, 2000, total interest-bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same time period by $161.5 million, representing
a one-year gap to total assets ratio of (8.29%).
25
<PAGE>
<TABLE>
Table of Interest Sensitivity Gap
As of June 30, 2000 6 Months
Within to One 1-3 3-5 5-10 Over 10
6 Months Year Years Years Years Years Total
-------- ---- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Construction loans $121,445 $ 45,953 $ 2,057 $ 1,123 $ -- $ -- $ 170,578
Fixed-rate mortgage loans 42,598 32,400 129,289 109,821 181,292 143,892 639,292
Adjustable-rate mortgage
loans 129,762 53,257 58,364 38,485 -- -- 279,868
Fixed-rate mortgage-backed
securities 9,584 9,435 38,877 37,230 37,618 6,699 139,443
Adjustable-rate mortgage-
backed securities 92,321 1,078 -- -- -- -- 93,399
Fixed-rate commercial/
agriculture loans 12,473 6,005 16,549 29,362 12,049 5,108 81,546
Adjustable-rate commercial/
agriculture loans 201,125 -- -- -- -- -- 201,125
Consumer and other loans 20,205 4,161 16,358 14,782 1,256 9,838 66,600
Investment securities and
interest-bearing deposits 28,536 4,810 28,745 39,916 9,655 60,817 172,479
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive
assets 658,049 157,099 290,239 270,719 241,870 226,354 1,844,330
-------- --------- --------- --------- -------- -------- ----------
Interest-bearing liabilities(2):
Regular savings and NOW
accounts 18,812 18,812 43,896 43,896 -- -- 125,416
Money market deposit accounts 67,659 40,595 27,064 -- -- -- 135,318
Certificates of deposit 365,857 192,903 186,625 17,549 9,699 21 772,654
FHLB advances 158,500 42,780 244,790 39,500 31,600 3,828 520,998
Other borrowings 65,371 -- -- -- -- -- 65,371
Retail repurchase agreements 4,965 373 1,282 2,074 784 -- 9,478
-------- --------- --------- --------- -------- -------- ----------
Total rate-sensitive
liabilities 681,164 295,463 503,657 103,019 42,083 3,849 1,629,235
-------- --------- --------- --------- -------- -------- ----------
Excess (deficiency) of
interest-sensitive assets
over interest-sensitive
liabilities $(23,115) $(138,364) $(213,418) $ 167,700 $199,787 $222,505 $ 215,095
======== ========= ========= ========= ======== ======== ==========
Cumulative excess (deficiency)
of interest-sensitive assets $(23,115) $(161,479) $(374,897) $(207,197) $ (7,410) $215,095 $ 215,095
======== ========= ========= ========= ======== ======== ==========
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities 96.61% 83.47% 74.67% 86.91% 99.54% 113.20% 113.20%
======== ========= ========= ========= ======== ======== ==========
Interest sensitivity gap to
total assets (1.19%) (7.10%) (10.96%) 8.61% 10.26% 11.42% 11.04%
======== ========= ========= ========= ======== ======== ==========
Ratio of cumulative gap to
total assets (1.19%) (8.29%) (19.25%) (10.64%) (0.38%) 11.04% 11.04%
======== ========= ========= ========= ======== ======== ==========
(footnotes on following page)
26
</TABLE>
<PAGE>
Footnotes for Table of Interest Sensitivity Gap
-----------------------------------------------
(1) Adjustable-rate assets are included in the period in which interest rates
are next scheduled to adjust rather than in the period in which they are due
to mature, and fixed-rate assets are included in the periods in which they are
scheduled to be repaid based upon scheduled amortization, in each case
adjusted to take into account estimated prepayments. Mortgage loans and other
loans are not reduced for allowances for loan losses and non-performing loans.
Mortgage loans, mortgage-backed securities, other loans, and investment
securities are not adjusted for deferred fees and unamortized acquisition
premiums and discounts.
(2) Adjustable- and variable-rate liabilities are included in the period in
which interest rates are next scheduled to adjust rather than in the period
they are due to mature. Although the Banks' regular savings, demand, NOW, and
money market deposit accounts are subject to immediate withdrawal, management
considers a substantial amount of such accounts to be core deposits having
significantly longer maturities. For the purpose of the gap analysis, these
accounts have been assigned decay rates to reflect their longer effective
maturities. If all of these accounts had been assumed to be short-term, the
one year cumulative gap of interest-sensitive assets would have been negative
$276.3 million or (14.19%) of total assets. Interest-bearing liabilities for
this table exclude certain non-interest bearing deposits which are included in
the average balance calculations in the earlier Table I, Analysis of Net
Interest Spread.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
loan principal and interest payments and sales of loans, and the maturity of
and interest income on mortgage-backed and investment securities. While
maturities and scheduled amortization of loans and mortgage-backed securities
are a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by market interest rates, economic conditions and
competition.
The primary investing activity of the Company, through its subsidiaries, is
the origination and purchase of loans. During the six months ended June 30,
2000, the Company closed or purchased loans in the amount of $423.7 million.
This activity was funded primarily by principal repayments on loans and
securities, sales of loans, increases in FHLB advances, other borrowings, and
deposit growth. For the six months ended June 30, 2000, principal repayments
on loans totaled $271.4 million. During the six months ended June 30, 2000,
the Company sold $38.7 million of loans. FHLB advances increased $54.5
million for the six months ended June 30, 2000. Other borrowings decreased
$6.8 million for the six months ended June 30, 2000. Net deposit growth was
$75.1 million for the six months ended June 30, 2000.
The Banks must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to accommodate deposit withdrawals, to
support loan growth, to satisfy financial commitments and to take advantage of
investment opportunities. During the six months ended June 30, 2000, the
Banks used their sources of funds primarily to fund loan commitments, to
purchase securities, and to pay maturing savings certificates and deposit
withdrawals. At June 30, 2000, the Banks had outstanding loan commitments
totaling $148.6 million and undisbursed loans in process totaling $105.7
million. The Banks generally maintain sufficient cash and readily marketable
securities to meet short-term liquidity needs. FSBW maintains a credit
facility with the FHLB-Seattle, which provides for advances which, in
aggregate, may equal the lesser of 45% of FSBW's assets or unencumbered
qualifying collateral, which as of June 30, 2000 could give a total credit
line of $585.8 million. Advances under this credit facility totaled $487.9
million, or 35.0% of FSBW's assets at June 30, 2000. IEB and TB also maintain
credit lines with various institutions, including the FHLB-Seattle, that would
allow them to borrow up to $22.7 million.
At June 30, 2000, savings certificates amounted to $772.7 million, or 67.0%,
of the Banks' total deposits, including $557.1 million which were scheduled
to mature by June 30, 2001. Historically, the Banks have been able to retain
a significant amount of their deposits as they mature. Management believes it
has adequate resources to fund all loan commitments from savings deposits and
FHLB-Seattle advances and sale of mortgage loans and that it can adjust the
offering rates of savings certificates to retain deposits in changing interest
rate environments.
27
<PAGE>
Capital Requirements
Federally-insured state-chartered banks are required to maintain minimum
levels of regulatory capital. Under current FDIC regulations, insured
state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage
capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most
highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of
at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at
least 8.0%. At June 30, 2000, FWWB's banking subsidiaries exceeded all
current regulatory capital requirements to be classified as well capitalized
institutions, the highest regulatory standard. In order to be categorized as
a well capitalized institution, the FDIC requires banks it regulates to
maintain a leverage ratio, defined as Tier 1 capital divided by total
regulatory assets, of at least 5.00%; Tier 1 (or core) capital of at least
6.00% of risk-weighted assets; and total capital of at least 10.00% of
risk-weighted assets.
FWWB, as a bank holding company, is regulated by the Federal Reserve Board
(FRB). The FRB has established capital requirements for bank holding
companies that generally parallel the capital requirements of the FDIC for
banks with $150 million or more in total consolidated assets. FWWB's total
regulatory capital must equal 8% of risk-weighted assets and one half of the
8% (4%) must consist of Tier 1 (core) capital.
The actual regulatory capital ratios calculated for FWWB along with the
minimum capital amounts and ratios for capital adequacy purposes were as
follows (dollars in thousands):
Minimum for capital
Actual adequacy purposes
------------------- ---------------------
Amount Ratio Amount Ratio
June 30, 2000: ------ ----- ------ -----
FWWB-consolidated
Total capital to risk-
weighted assets $167,031 12.47% $109,017 8.00%
Tier 1 capital to risk-
weighted assets 152,540 11.19 54,509 4.00
Tier 1 leverage capital
average assets 152,540 8.12 75,184 4.00
28
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time FWWB or its subsidiaries are engaged in legal proceedings in
the ordinary course of business, none of which is considered to have a
material impact on the FWWB's financial position or results of operations.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
The Annual meeting of stockholders of the Company (Meeting) was held on April
21, 2000. The results of the vote on the election of directors, the first
proposal presented at the Meeting, is as follows:
The following individuals were elected as directors, each for a three-
year term:
FOR WITHHELD
----------------------- ----------------------
# of # of
Votes Percentage Votes Percentage
----- ---------- ----- ----------
David B. Casper 9,527,311 85% 302,000 2.7%
Marvin Sundquist 9,526,749 85% 302,562 2.7%
Margaret C. Langlie 9,603,635 86% 225,676 2.1%
The terms of Directors Robert D. Adams, Jess Foster, S. Rick Meikle,
Dean Mitchell, Brent Orrico, Wilber Pribilsky and Gary Sirmon continued.
The results of the vote on the approval of the appointment of Deloitte &
Touche LLP as independent auditors for the fiscal year ending December
31, 2000, the second proposal presented at the meeting, is as follows:
FOR 9,747,054 Shares 87.00%
--------- ------
AGAINST 26,022 Shares 0.23%
--------- ------
ABSTAIN 56,235 Shares 0.50%
--------- ------
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8K
Report (s) on Form 8-K filed during the quarter ended June 30, 2000, are as
follows:
Date Filed Purpose
---------- -------
NONE
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
First Washington Bancorp, Inc.
August 11, 2000 /s/ Gary Sirmon
--------------------------------------
Gary Sirmon
President and Chief Executive Officer
August 11, 2000 /s/ D. Allan Roth
--------------------------------------
D. Allan Roth
Secretary and Treasurer and Executive Vice
President
30
<PAGE>
