-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ADY4jvwJVENzLARjukXIF+rju8qnSz9RO8ebpCemdglZS1LiiDyDwbp/GUAzVdXu aGJSOPku3qRCpPNkOnPaEA== 0000939057-00-000036.txt : 20000516 0000939057-00-000036.hdr.sgml : 20000516 ACCESSION NUMBER: 0000939057-00-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST WASHINGTON BANCORP INC /WA/ CENTRAL INDEX KEY: 0000946673 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 911691604 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26584 FILM NUMBER: 631681 BUSINESS ADDRESS: STREET 1: 10 S FIRST AVENUE CITY: WALLA WALLA STATE: WA ZIP: 99362 BUSINESS PHONE: 5095273636 MAIL ADDRESS: STREET 1: 10 S FIRST AVENUE CITY: WALLA WALLA STATE: WA ZIP: 99362 FORMER COMPANY: FORMER CONFORMED NAME: FIRST SAVINGS BANK OF WASHINGTON BANCORP INC DATE OF NAME CHANGE: 19950614 10-Q 1 FIRST WASHINGTON BANCORP, INC. FORM 10-Q 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....................... March 31, 2000 -------------- [ ] 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) (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 April 30, 2000 --------------- -------------------- Common stock, $.01 par value 11,128,942 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. 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 March 31, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . 2 Consolidated Statements of Income for the Quarters Ended March 31, 2000 and 1999 . . . . . . . . . . . . . . 3 Consolidated Statements of Comprehensive Income for the Quarters ended March 31, 2000 and 1999 . . . . . . . . . . . . . . 4 Consolidated Statements of Changes in Stockholders' Equity for the Quarters Ended March 31, 2000 and 1999 . . . . . . . . . . . . . . .5 Consolidated Statements of Cash Flows for the Quarters Ended March 31, 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Recent Developments and Significant Events . . . . . . . . . . . . . . . . 15 Comparison of Financial Condition at March 31, 2000 and March 31, 1999 . . 15 Comparison of Results of Operations for the Quarters Ended March 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Asset Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Market Risk and Asset/Liability Management . . . . . . . . . . . . . . . . 22 Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . 25 Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART II - OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 27 Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 27 Item 4. Submission of Matters to a Vote of Stockholders. . . . . . . . . . 27 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 27 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares) March 31, 2000 and December 31, 1999 (Unaudited) March 31 December 31 ASSETS 2000 1999 ---------- ----------- Cash and due from banks $ 62,630 $ 44,769 Securities available for sale, cost $358,744 and $356,617 350,495 348,347 Securities held to maturity, fair value $17,011 and $13,716 16,915 13,770 Federal Home Loan Bank stock 25,812 24,543 Loans receivable: Held for sale, fair value $11,892 and $9,519 11,892 9,519 Held for portfolio 1,361,389 1,312,186 Allowance for loan losses (13,951) (13,541) ---------- ---------- 1,359,330 1,308,164 Accrued interest receivable 12,136 10,732 Real estate held for sale, net 3,551 3,293 Property and equipment, net 17,025 16,637 Costs in excess of net assets acquired (goodwill), net 36,941 37,733 Deferred income tax asset, net 5,337 5,338 Other assets 6,179 6,784 ---------- ---------- $1,896,351 $1,820,110 ========== ========== LIABILITIES Deposits: Non-interest-bearing $ 118,904 $ 114,252 Interest-bearing 1,004,818 963,900 ---------- ---------- 1,123,722 1,078,152 Advances from Federal Home Loan Bank 496,352 466,524 Other borrowings 73,521 81,655 Accrued expenses and other liabilities 15,374 10,524 Deferred compensation 2,018 1,944 Deferred income tax liability, net -- -- Income taxes payable 4,481 2,138 ---------- ---------- 1,715,468 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: 11,124,470 shares and 11,215,756 shares outstanding at March 31, 2000 and December 31, 1999, respectively. 121,707 123,204 Retained earnings 72,066 69,170 Accumulated other comprehensive income: Unrealized gain (loss) on securities available for sale (5,311) (5,331) Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust: 677,846 and 677,846 restricted shares outstanding at March 31, 2000 and December 31, 1999, respectively, at cost (6,162) (6,162) Carrying value of shares held in trust for stock related compensation plans (3,835) (4,041) Liability for common stock issued to deferred, stock related, compensation plan 2,418 2,333 ---------- ---------- (1,417) (1,708) ---------- ---------- 180,883 179,173 ---------- ---------- $1,896,351 $1,820,110 ========== ========== See notes to consolidated financial statements 2 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) Quarters Ended March 31 ------------------------- 2000 1999 INTEREST INCOME: -------- -------- Loans receivable $ 29,932 $ 24,361 Mortgage-backed securities 3,955 3,323 Securities and deposits 2,743 2,786 -------- -------- 36,630 30,470 INTEREST EXPENSE: Deposits 11,762 9,326 Federal Home Loan Bank advances 7,036 5,779 Other borrowings 1,187 1,054 -------- -------- 19,985 16,159 -------- -------- Net interest income before provision for loan losses 16,645 14,311 PROVISION FOR LOAN LOSSES 545 631 -------- -------- Net interest income 16,100 13,680 OTHER OPERATING INCOME: Loan servicing fees 232 212 Other fees and service charges 1,157 1,031 Gain on sale of loans 187 832 Gain (loss) on sale of securities -- 4 Miscellaneous 55 18 -------- -------- Total other operating income 1,631 2,097 OTHER OPERATING EXPENSES: Salary and employee benefits 6,256 5,618 Less capitalized loan origination costs (791) (690) Occupancy and equipment 1,677 1,391 Information/computer data services 575 473 Advertising 160 174 Deposit insurance 54 80 Amortization of goodwill 792 683 Miscellaneous 2,087 1,622 -------- -------- Total other operating expenses 10,810 9,351 -------- -------- Income before provision for income taxes 6,921 6,426 PROVISION FOR INCOME TAXES 2,496 2,397 -------- -------- NET INCOME $ 4,425 $ 4,029 ======== ======== Net income per common share, see Note 5: Basic $ .43 $ .37 Diluted $ .42 $ .36 Cumulative dividends declared per common share: $ .14 $ .12 3 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands) Quarters Ended March 31 ------------------------- 2000 1999 -------- -------- NET INCOME: $ 4,425 $ 4,029 OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: Unrealized holding gain (loss) during the period, net of deferred income tax (benefit) of $1 and (79); 20 (141) respectively. Less adjustment for gains included in net income net of income tax of $0 and $1; -- (3) -------- -------- Other comprehensive income (loss) 20 (144) -------- -------- COMPREHENSIVE INCOME $ 4,445 $ 3,885 ======== ======== 4 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (in thousands) For the Quarters Ended March 31, 2000 and 1999 2000 1999 --------- --------- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL: Balance, beginning of period $ 123,204 $ 122,049 Issuance of stock in connection with acquisitions -- 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 -- -- Repurchase of forfeited shares from MRP (11) (29) Net proceeds (cost) of treasury stock reissued for exercised stock options 113 20 Purchase and retirement of treasury stock (1,599) (3,914) Net issuance of stock throughout employees' stock plan -- 601 --------- --------- Balance, end of period 121,707 130,770 RETAINED EARNINGS: Balance, beginning of period 69,170 57,273 Net income 4,425 4,029 Cash dividends (1,529) (1,344) --------- --------- Balance, end of period 72,066 59,958 ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance, beginning of period (5,331) 2,440 Other comprehensive income (loss), net of related income taxes 20 (144) --------- --------- Balance, end of period (5,311) 2,296 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: Balance, beginning of period (1,708) (4,098) 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 11 17 Amortization of compensation related to MRP 280 301 --------- --------- Balance, end of period (1,417) (2,635) --------- --------- TOTAL STOCKHOLDERS' EQUITY $ 180,883 $ 183,608 ========= ========= 5 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (continued) (in thousands) For the Quarter Ended March 31, 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 (113) (170) Purchase of treasury stock used for exercised stock options -- -- Reissuance of treasury stock to deferred compensation plan and/or exercised stock options 22 10 Shares reissued in acquisition of Towne Bank -- 508 Repurchase of shares forfeited from MRP (1) (2) Number of shares retired/repurchased, end of --------- --------- period (878) (354) --------- --------- Shares issued and outstanding, end of period 11,124 11,648 ========= ========= 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 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Quarters Ended March 31, 2000 and 1999 2000 1999 --------- --------- OPERATING ACTIVITIES Net income $ 4,425 $ 4,029 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes -- (1) Depreciation 628 605 Loss (gain) on sale of securities -- (4) Net amortization of premiums and discounts on investments 37 330 Amortization of costs in excess of net assets acquired 792 682 Amortization of MRP compensation liability 280 301 Loss (gain) on sale of loans (173) (590) Net changes in deferred loan fees, premiums and discounts 245 (3) Loss (gain) on disposal of real estate held for sale 2 11 Loss (gain) on disposal of property and equipment 8 -- Capitalization of mortgage servicing rights from sale of mortgages with servicing retained (14) (242) Amortization of mortgage servicing rights 68 81 Provision for losses on loans and real estate held for sale 554 631 FHLB stock dividend (403) (435) Cash provided (used) in operating assets and liabilities: Loans held for sale (2,373) 3,450 Accrued interest receivable (1,404) (891) Other assets 545 907 Deferred compensation 141 138 Accrued expenses and other liabilities 4,644 (913) Income taxes payable 2,343 169 --------- --------- Net cash provided (used) by operating activities 10,345 8,255 --------- --------- INVESTING ACTIVITIES: Purchase of securities available for sale (10,751) (71,004) Principal payments and maturities of securities available for sale 8,577 53,264 Proceeds from sales of securities available for sale -- 431 Purchase of securities held to maturity (3,249) -- Principal payments and maturities of securities held to maturity 114 137 (Sale) purchase of FHLB stock (866) 388 Loans originated and closed - net (193,230) (204,814) Purchase of loans and participating interest in loans (4,665) (27,065) Proceeds from sales of loans and participating interest in loans 15,896 44,483 Principal repayments on loans 131,984 136,602 Purchase of property and equipment (1,034) (673) Proceeds from sale of property and equipment 10 -- Additional capitalized costs of real estate held for sale net of insurance proceeds (33) (80) Proceeds from sale of real estate held for sale 369 988 Funds transferred to deferred compensation plan trusts (61) (390) Acquisitions, net cash (used) acquired -- 4,549 --------- --------- Net cash used by investing activities (56,939) (63,184) --------- --------- (Continued on next page) 7 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Quarters Ended March 31, 2000 and 1999 (Continued from prior page) 2000 1999 --------- --------- FINANCING ACTIVITIES Increase (decrease) in deposits $ 45,570 $ 56,583 Proceeds from FHLB advances 236,000 56,253 Repayment of FHLB advances (206,172) (48,852) Proceeds from reverse repurchase borrowings -- -- Repayments of reverse repurchase borrowings (1,561) (1,754) Increase (decrease) in other borrowings (6,573) (4,151) 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 (1,323) (985) Net (cost) proceeds of exercised stock options 113 20 Purchase of treasury stock (1,599) (3,914) --------- --------- Net cash provided by financing activities 64,455 53,199 --------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 17,861 (1,730) CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 44,769 74,233 --------- --------- CASH AND DUE FROM BANKS, END OF PERIOD $ 62,630 $ 72,503 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 19,251 $ 15,927 Taxes paid $ 150 $ 1,739 Non-cash transactions: Loans, net of discounts, specific loss allowances and unearned income transferred to real estate owned $ 605 $ 36 Net change in accrued dividends payable $ 206 $ 358 Net change in unrealized gain (loss) in deferred compensation trust and related liability $ 59 $ 2,111 Treasury stock forfeited by MRP $ 11 $ 29 Treasury stock issued to MRP $ -- $ 601 Fair value of stock issued and options assumed in connection with acquisitions $ -- $ 12,043 8 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 ended March 31, 2000 is compared to the unaudited quarter ended March 31, 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 will be in the area of construction and permanent financing for one-to -four single family residential dwellings. CFC, an Oregon corporation, will function 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 Division, 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. The 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 System, the deposits of which are insured by the FDIC and that has average total assets (over the preceding 3 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 this time, the Company believes that TB and IEB could derive significant benefits from this legislation. Rather than complete the proposed bank mergers as previously announced, the Company has chosen to allow adequate time for an in-depth review and interpretation of the regulations as they pertain to future plans. Consolidation of support operations continues on schedule and budget and First Washington expects to receive long-term 9 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 spring 2000 are expected to proceed for FSBW, including its WSB and SCB divisions. 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 ended March 31, 2000. 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 resources 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, provides trustee services for FSBW, is engaged in real estate sales and receives commissions from the sale of annuities. 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 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. 10 Financial highlights by legal entity were as follows: Quarter Ended March 31, 2000 -------------------------------------------------------- (dollars in thousands) Condensed Income Statement FSBW IEB TB Other* Total ---------- -------- --------- -------- ---------- Net interest income (loss) $ 9,983 $ 2,605 $ 4,040 $ 17 $ 16,645 Provision for loan losses 275 70 200 -- 545 Other income 816 436 393 (14) 1,631 Other expenses 5,910 1,765 2,675 460 10,810 Income (loss) ---------- -------- --------- -------- ---------- before income taxes 4,614 1,206 1,558 (457) 6,921 Income taxes (benefit) 1,429 558 669 (160) 2,496 ---------- -------- --------- -------- ---------- Net income (loss) $ 3,185 $ 648 $ 889 $ (297) $ 4,425 ========== ======== ========= ======== ========== March 31, 2000 -------------------------------------------------------- Total Assets $1,350,352 $221,412 $ 324,113 $ 474 $1,896,351 ========== ======== ========= ======== ========== Quarter Ended March 31, 1999 -------------------------------------------------------- (dollars in thousands) Condensed Income Statement FSBW IEB TB Other* Total ---------- -------- --------- -------- ---------- Net interest income (loss) $ 8,926 $ 2,494 $ 2,839 $ 52 $ 14,311 Provision for loan losses 317 34 280 -- 631 Other income 1,241 584 293 (21) 2,097 Other expenses 5,015 1,854 2,084 398 9,351 Income (loss) ---------- -------- --------- -------- ---------- before income taxes 4,835 1,190 768 (367) 6,426 Income taxes (benefit) 1,593 542 390 (128) 2,397 ---------- -------- --------- -------- ---------- Net income (loss) $ 3,242 $ 648 $ 378 $ (239) $ 4,029 ========== ======== ========= ======== ========== March 31, 1999 -------------------------------------------------------- Total Assets $1,193,269 $204,539 $ 233,485 $ 607 $1,631,900 ========== ======== ========= ======== ========== * Includes intercompany eliminations and holding company amounts. 11 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): March 31 December 31 2000 1999 --------- ----------- Interest-bearing deposits included in cash and due from banks $ 17,020 $ 2,960 --------- ----------- Mortgage-backed securities 225,852 230,006 Other securities-taxable 106,116 95,992 Other securities-tax exempt 31,895 32,350 Other stocks with dividends 3,547 3,769 --------- ----------- Total securities 367,410 362,117 Federal Home Loan Bank (FHLB) stock 25,812 24,543 --------- ----------- $ 410,242 $ 389,620 ========= =========== The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands): Quarters Ended March 31 2000 1999 --------- ----------- Mortgage-backed securities $ 3,955 $ 3,323 --------- ----------- Taxable interest and dividends 1,865 1,852 Tax-exempt interest 476 499 Federal Home Loan Bank stock-dividends 402 435 --------- ----------- 2,743 2,786 --------- ----------- $ 6,698 $ 6,109 ========= =========== 12 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 March 31 ----------------- 2000 1999 ------- ------- Total shares originally issued 12,002 12,002 Less retired shares and treasury stock plus unvested shares allocated to MRP (975) (493) Less unallocated shares held by the ESOP (678) (746) ------- ------- Basic weighted average shares outstanding 10,349 10,763 Plus unvested MRP and stock option incremental shares considered outstanding for diluted EPS calculations 175 464 ------- ------- Diluted weighted average shares outstanding 10,524 11,227 ======= ======= Calculation of Outstanding Shares at --------------------- (in thousands) March 31 December 31 2000 1999 -------- ----------- Total shares issued 12,002 12,002 Less retired shares and treasury stock (878) (786) -------- ----------- Outstanding shares issued 11,124 11,216 ======== =========== 13 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 23 branch offices and four loan production offices located in Washington and Idaho. 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. 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. 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 ended March 31, 2000 is compared to the unaudited quarter ended March 31, 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 ended March 31, 2000, when compared to the same period for the prior year. This increase in net interest income was due in part to the growth in average asset and liability balances from the acquisition of SCB on April 1, 1999, although significant asset and liability growth also occurred at FSBW, IEB and TB. The increase in net interest income also reflects a small 1 basis point, expansion of the interest rate spread resulting from changes in the mix of assets and liabilities and changes in the levels of various market interest rates. The net interest margin, on the other hand, declined 3 basis points reflecting 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. 14 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 March 31, 2000 and December 31, 1999 Total assets increased $76.0 million, or 4.2%, from $1.820 billion at December 31, 1999, to $1.896 billion at March 31, 2000. The growth of $76.0 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 $51.2 million, or 3.9%, from $1.308 billion at December 31, 1999, to $1.359 billion at March 31, 2000. The increase in gross loans of $65.2 million from $1.412 billion at December 31, 1999, to $1.477 billion at March 31, 2000, consisted of $5.8 million of residential mortgages, $27.0 million of mortgages secured by commercial and multifamily real estate, $19.3 million of construction and land loans and $12.9 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 $75.4 million in deposits and FHLB advances. Asset growth was also funded by net income from operations. Deposits grew $45.6 million, or 4.2%, from $1.078 billion at December 31, 1999, to $1.124 billion at March 31, 2000. FHLB advances increased $29.8 million from $466.5 million at December 31, 1999, to $496.4 million at March 31, 2000. Other borrowings, primarily reverse repurchase agreements with securities dealers, decreased $8.1 million, from $81.7 million at December 31, 1999, to $73.5 million at March 31, 2000. Securities available for sale and held to maturity increased $5.3 million, or 1.5%, from $362.1 million at December 31, 1999, to $367.4 million at March 31, 2000. FHLB stock increased $1.3 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 Ended March 31, 2000 and 1999 General. Net income for the quarter ended March 31, 2000 was $4.4 million, or $.42 per share (diluted), compared to net income of $4.0 million, or $.36 per share (diluted), for the quarter ended March 31, 1999. Net income for the quarter ended March 31, 2000 increased $400,000 from the comparable quarter ended March 31, 1999. FWWB's improved operating results reflect the significant growth of assets and liabilities which was offset somewhat by the 3 basis point 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 16.2% to $1.896 billion at March 31, 2000, total loans rose 23.3% to $1.359 billion, deposits grew 18.2% to $1.124 billion and borrowings increased 17.1% to $569.9 million. Net interest margin declined, despite a 1 basis point increase in net interest spread, reflecting the increased use of interest-bearing liabilities relative to interest-earning assets as the Company continued to leverage its equity capital. Average equity was 9.80% of average assets for the quarter ended March 31, 2000, compared to 11.35% of average assets for the quarter ended March 31, 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 March 31, 2000 was $36.6 million compared to $30.5 million for the quarter ended March 31, 1999, an increase of $6.1 million, or 20.2%. The increase in interest income was a result of a $243.9 million, or 16.3%, growth in average balances of interest-earning assets, and a 21 basis point increase in the average yield on those assets. The yield on average assets increased to 8.45% for the quarter ended March 31, 2000 compared to 8.24% for the same period a year earlier. Average loans receivable for the quarter ended March 31, 2000 increased by $250.5 million, or 23.0%, when compared to the quarter ended March 31, 1999, reflecting the acquisition of SCB and significant internal growth. Interest income on loans increased by $5.6 million, or 22.9%, compared to the prior year, reflecting the impact of the increase in average loan balances and despite 8 basis point decrease in the average yield. The decline in average loan yield largely resulted from the significant decline in market interest rates, including a 75 basis point decline in the prime rate, in the third and fourth calendar quarters of 1998, and the subsequent prepayment and refinancing of many higher yielding loans in the lower interest rate environment that prevailed in the first two calendar quarters of 1999. In particular the higher level of loan prepayments in the quarter ended March 31, 1999, led to accelerated recognition of previously deferred loan fees as interest income when the underlying loans prepaid. This accelerated recognition of fee income reflecting the shorter than anticipated average life of the underlying loans increased the yield on those loans in the March 31, 1999 quarter and to the extent that those loans were replaced 15 by lower yielding loans, particularly lower yielding fixed rate loans, yields in subsequent periods including the March 31, 2000 quarter were adversely impacted. Counterbalancing 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 twelve months. Loans yielded 8.97% for the quarter ended March 31, 2000 compared to 9.05% for the quarter ended March 31, 1999. The average balance of mortgage-backed securities, investment securities, daily interest-bearing deposits and FHLB stock increased by $6.6 million for the quarter ended March 31, 2000, while the interest and dividend income from those investments increased $589,000 for the quarter ended March 31, 2000 compared to the quarter ended March 31, 1999. The average yield on mortgage-backed securities increased from 5.85% for the quarter ended March 31, 1999, to 6.74% 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 March 31, 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 March 31, 1999 to 6.65% for the comparable quarter in 2000, also reflecting the rise in interest rates during 1999 and 2000. Earnings on FHLB stock decreased by $33,000, this resulted despite an increase of $2.1 million in the average balance of FHLB stock for the quarter ended March 31, 2000, because of a 126 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 Expense. Interest expense for the quarter ended March 31, 2000 was $20.0 million compared to $16.2 million for the comparable period in 1999, an increase of $3.8 million, or 23.7%. The increase in interest expense was due to the $247.8 million growth in average interest-bearing liabilities and the increase in the average cost of all interest-bearing liabilities increasing to 4.88% from 4.68%. The $179.8 million increase in average interest-bearing deposits for the quarter ended March 31, 2000 reflects the acquisition of SCB which had $41 million of deposit at the time of acquisition and the solid deposit growth throughout the Company over the past twelve months. Deposit interest expense increased $2.4 million for the quarter ended March 31, 2000. Average deposit balances increased from $913.7 million for the quarter ended March 31, 1999, to $1.093 billion for the quarter ended March 31, 2000, while, at the same time, the average rate paid on deposit balances increased 19 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 $476.4 million during the quarter ended March 31, 2000, as compared to $406.7 million during the quarter ended March 31, 1999, an increase of $69.7 million that resulted in a $2.4 million increase in related interest expense. The average rate paid on those advances increased to 5.94% for the quarter ended March 31, 2000 from 5.76% for the quarter ended March 31, 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 $1.7 million from $80.1 million for the quarter ended March 31, 1999, to $78.4 million for the same period in 2000, while the related interest expense increased $133,000 from $1.1 million to $1.2 million for the respective periods. The average rate paid on other borrowings was 6.09% in the quarter ended March 31, 2000 compared to 5.33% for the same quarter in 1999 also reflecting the increase in market interest rates. 16 The following tables provide additional comparative data on the Company's operating performance: Quarters Ended Average Balances March 31 ---------------- -------------------------- (in thousands) 2000 1999 ----------- ----------- Investment securities and deposits $ 141,498 $ 155,902 Mortgage-backed obligations 235,986 230,271 Loans 1,341,942 1,091,451 FHLB stock 24,873 22,745 ----------- ----------- Total average interest-earning asset 1,744,299 1,500,369 Non-interest-earning assets 94,054 91,493 ----------- ----------- Total average assets $ 1,838,353 $ 1,591,862 =========== =========== Deposits $ 1,093,444 $ 913,670 Advances from FHLB 476,415 406,707 Other borrowings 78,411 80,127 Total average interest-bearing ----------- ----------- liabilities 1,648,270 1,400,504 Non-interest-bearing liabilities 9,858 10,750 ----------- ----------- Total average liabilities 1,658,128 1,411,254 Equity 180,225 180,608 ----------- ----------- Total average liabilities and equity $ 1,838,353 $ 1,591,862 =========== =========== Interest Rate Yield/Expense (rates are annualized) -------------------------------------------------- Interest Rate Yield: Investment securities and deposits 6.65% 6.12% Mortgage-backed obligations 6.74% 5.85% Loans 8.97% 9.05% FHLB stock 6.50% 7.76% ----------- ----------- Total interest rate yield on interest-earning assets 8.45% 8.24% Interest Rate Expense: ----------- ----------- Deposits 4.33% 4.14% Advances from FHLB 5.94% 5.76% Other borrowings 6.09% 5.33% ----------- ----------- Total interest rate expense on interest- bearing liabilities 4.88% 4.68% Interest spread 3.57% 3.56% =========== =========== Net interest margin on interest earning assets 3.84% 3.87% ----------- ----------- Additional Key Financial Ratios (ratios are annualized) - ------------------------------------------------------- Return on average assets 0.97% 1.03% Return on average equity 9.88% 9.05% Average equity / average assets 9.80% 11.35% Average interest-earning assets / interest- bearing liabilities 105.83% 107.13% Non-interest [other operating] expenses / average assets Excluding amortization of costs in excess of net assets acquired (goodwill) 2.19% 2.21% Including amortization of costs in excess of net assets acquired (goodwill) 2.37% 2.38% Efficiency ratio [non-interest (other operating) expenses / revenues] Excluding amortization of costs in excess of net assets acquired (goodwill) 54.82% 52.83% Including amortization of costs in excess of net assets acquired (goodwill) 59.15% 56.99% 17 Provision for Loan Losses. During the quarter ended March 31, 2000, the provision for loan losses was $545,000, compared to $631,000 for the quarter ended March 31, 1999, a decrease of $86,000. The decrease 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 prior quarter reflected 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 most recent quarter. A comparison of the allowance for loan losses at March 31, 2000 and 1999 shows an increase of $1.7 million from $12.3 million at March 31, 1999 to $14.0 million at March 31, 2000. The allowance for loan losses increased by $410,000, to $14.0 million at March 31, 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 1.02% and 1.10% at March 31, 2000 and March 31, 1999, respectively. The allowance for loan losses equaled 259% of non-performing loans at March 31, 2000 compared to 160% of non-performing loans at March 31, 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 these allowances are charged to earnings. Provisions for losses that are related to specific assets are usually applied as a reduction of the carrying value of the assets and charged immediately against the 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. 18 The following tables are provided to disclose additional detail on the Banks' loans and allowance for loan losses (in thousands): March 31 December 31 2000 1999 ----------- ----------- Loans (including loans held for sale): Secured by real estate One to four single family dwellings (SFD) $ 442,497 $ 436,679 Commercial and multifamily 426,970 399,992 Construction and land-secured 282,440 263,093 Commercial 206,322 195,566 Agribusiness 53,468 55,000 Consumer, including credit cards 65,375 61,580 ----------- ----------- $ 1,477,072 $ 1,411,910 Less loans in process 98,220 84,894 Less deferred fees and discounts 5,571 5,311 Net loans outstanding before ----------- ----------- allowance for loan losses $ 1,373,281 $ 1,321,705 Less allowance for loan losses 13,951 13,541 ----------- ----------- Total net loans at end of period $ 1,359,330 $ 1,308,164 =========== =========== Allowance for loan losses as a percentage of net loans outstanding 1.02% 1.02% Quarters Ended March 31 ------------------------------- 2000 1999 ----------- ----------- Balance, beginning of the year $ 13,541 $ 10,718 Allowances added through business combinations -- 1,077 Provision 545 631 Recoveries of loans previously charged off: Residential real estate -- -- Commercial/multifamily real estate 1 -- Construction/land 4 -- Commercial business 11 9 Agribusiness -- -- Consumer finance 1 8 Credit cards 2 2 ----------- ----------- 19 19 Residential real estate (6) -- Commercial/multifamily real estate -- (30) Construction/land -- (9) Commercial business (59) (14) Agribusiness -- -- Consumer finance (6) (76) Credit cards (83) (55) ----------- ----------- (154) (184) ----------- ----------- Net charge offs (135) (165) ----------- ----------- Balance, end of period $ 13,951 $ 12,261 =========== =========== Net charge-offs as a percentage of average net book value of loans outstanding for the period 0.01% 0.06% ----------- ----------- 19 The following is a schedule of the Company's allocation of the allowance for loan losses: March 31 December 31 2000 1999 ----------- ----------- Specific or allocated loss allowances: Secured by real estate: One- to four-family real estate loans $ 2,435 $ 2,334 Multifamily and commercial 4,512 4,273 Construction 1,769 1,638 Commercial/agricultural 2,957 2,830 Consumer, credit card and other 968 1,023 ----------- ----------- Total allocated 12,641 12,098 Unallocated 1,310 1,443 ----------- ----------- Total allowance for loan losses $ 13,951 $ 13,541 =========== =========== Ratio of allowance for loan losses to non-performing loans 2.59 2.67 Allowance for loan losses as a percent of net loans (loans receivable excluding allowance for losses) 1.02% 1.02% Other Operating Income. Other operating income decreased $466,000 from $2.1 million for the quarter ended March 31, 1999, to $1.6 million for the quarter ended March 31, 2000. The decrease included a $645,000 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 $44.5 million and $832,000, respectively, for the quarter ended March 31, 1999, to $15.9 million and $187,000, respectively, for the quarter ended March 31, 2000. Other fee and service charge income increased at FSBW, TB and IEB, reflecting deposit growth and pricing adjustments. Other Operating Expenses. Other operating expenses increased $1.5 million from $9.4 million for the quarter ended March 31, 1999, compared to $10.8 million for the quarter ended March 31, 2000. The increase in expenses was largely due to the inclusion of SCB's operating expenses in the quarter ended March 31, 2000 that were not present in the quarter ended March 31, 1999 and the additional expenses of two new branches opened subsequent to March 31, 1999. The increase in other operating expenses was partially offset by a $101,000 increase in capitalized loan origination costs. In addition to the acquisition of SCB, 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 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 54.82% (59.15% including goodwill), for the quarter ended March 31, 2000, from 52.83% (56.99% including goodwill) for the comparable period ended March 31, 1999. Other operating expenses as a percentage of average assets were 2.37% (2.19% excluding the amortization of goodwill) for the quarter ended March 31, 2000, compared to 2.38% (2.21% excluding the amortization of goodwill) for the quarter ended March 31, 1999. Income Taxes. Income tax expense was $2.5 million for the quarter ended March 31, 2000, compared to $2.4 million for the comparable period in 1999. The $99,000 increase 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 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 March 31, 2000 and 1999, were 36% and 37%, respectively. 20 Asset Quality The following tables are provided to disclose additional details on asset quality (in thousands): March 31 December 31 2000 1999 ----------- ----------- Non-performing assets at end of the period: Nonaccrual Loans: One- to four-family real estate loans $ 1,108 $ 623 Multifamily real estate -- -- Commercial real estate 4 129 Construction/land 2,436 2,514 Commercial business 933 1,203 Agricultural business 320 -- Consumer, credit card and other 49 9 ----------- ----------- 4,850 4,478 Loans more than 90 days delinquent, still on accrual: One- to four-family real estate loans -- 155 Multifamily real estate -- -- Commercial real estate 44 -- Construction 296 -- Commercial business 31 25 Agricultural business 50 334 Consumer, credit card and other 109 79 ----------- ----------- 530 593 ----------- ----------- Total non-performing loans 5,380 5,071 Real estate owned (REO) 3,755 3,576 ----------- ----------- Total non-performing assets at the end of the period $ 9,135 $ 8,647 =========== =========== Non-performing loans as a percentage of total net loans before allowance for loan losses at end of the period 0.39% 0.38% Ratio of allowance for loan losses to non-performing loans at end of the period 259% 267% Non-performing assets as a percentage of total assets at end of the period. 0.48% 0.48% Troubled debt restructuring [TDR's] at end of the period $ 350 $ 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% 21 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. 22 Sensitivity Analysis The table of Interest Rate Risk Indicators sets forth, as of March 31, 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 Estimated Change in ---------------------------------------------- Change (In Basis Points) Net Interest Income in Interest Rates (1) Next 12 Months Net Market Value ------------------------ ------------------- ---------------- (Dollars in thousands) +400 $ (3,373 ) (5.1%) $ (89,576 ) (50.7%) +300 (2,306 ) (3.5%) (70,859 ) (40.1%) +200 (1,250 ) (1.9%) (49,163 ) (27.8%) +100 (524 ) (0.8%) (25,461 ) (14.4%) 0 0 0 0 0 -100 (129 ) (0.2%) 20,609 11.7% -200 (1,129 ) (1.7%) 30,020 17.0% -300 (2,998 ) (4.5%) 28,292 16.0% -400 (5,648 ) (8.5%) 18,704 10.6% - ------------------ (1) Assumes an instantaneous and sustained uniform change in market interest rates at all maturities. Another although less reliable monitoring tool for assessing interest rate risk is "gap analysis." The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest sensitive" and by monitoring an institution's interest sensitivity "gap." An asset or liability is said to be interest sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets anticipated, based upon certain assumptions, to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice, based upon certain assumptions, within that same time period. A gap is considered positive when the amount of interest sensitive assets exceeds the amount of interest sensitive liabilities. A gap is considered negative when the amount of interest sensitive liabilities exceeds the amount of interest sensitive assets. Generally, during a period of rising rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of some borrowers to service their debt may decrease in the event of a severe interest rate increase. The table of Interest Sensitivity Gap presents the Company's interest sensitivity gap between interest-earning assets and interest-bearing liabilities at March 31, 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 March 31, 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 $188.6 million, representing a one-year gap to total assets ratio of (9.95%). 23 Table of Interest Sensitivity Gap 6 Months As of March 31 Within to One 1-3 3-5 5-10 Over 10 6 Months Year Years Years Years Years Total -------- ---- ----- ----- ----- ----- ----- (dollars in thousands) Interest-earning assets(1): Construction loans $112,514 $ 39,216 $ 1,882 $ 709 $ -- $ -- $ 154,321 Fixed-rate mortgage loans 41,894 35,396 124,863 113,115 176,179 142,755 634,202 Adjustable-rate mortgage loans 121,463 45,633 60,168 38,211 -- -- 265,475 Fixed-rate mortgage-backed securities 10,127 9,936 40,555 38,406 38,388 4,910 142,322 Adjustable-rate mortgage- backed securities 95,775 1,114 -- -- -- -- 96,889 Fixed-rate commercial/ agriculture loans 11,294 5,776 14,960 25,227 10,784 3,824 71,865 Adjustable-rate commercial/ agriculture loans 189,239 -- -- -- -- -- 189,239 Consumer and other loans 17,940 4,037 15,060 13,544 1,231 9,949 61,761 Investment securities and interest-bearing deposits 32,558 4,155 24,435 43,677 12,400 60,702 177,927 -------- --------- --------- --------- -------- -------- ---------- Total rate-sensitive assets 632,804 145,263 281,923 272,889 238,982 222,140 1,794,001 -------- --------- --------- --------- -------- -------- ---------- Interest-bearing liabilities(2): Regular savings and NOW accounts 20,006 20,007 46,683 46,683 -- -- 133,379 Money market deposit accounts 70,899 42,540 28,360 -- -- -- 141,799 Certificates of deposit 389,971 148,492 161,096 20,682 9,552 21 729,814 FHLB advances 164,333 38,280 208,790 40,500 43,600 849 496,352 Other borrowings 65,137 -- -- -- -- -- 65,137 Retail repurchase agreements 6,597 442 1,326 -- 20 -- 8,385 -------- --------- --------- --------- -------- -------- ---------- Total rate-sensitive liabilities 716,943 249,761 446,255 107,865 53,172 870 1,574,866 -------- --------- --------- --------- -------- -------- ---------- Excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities $(84,139) $(104,498) $(164,332) $ 165,024 $185,810 $221,270 $ 219,135 ======== ========= ========= ========= ======== ======== ========== Cumulative excess (deficiency) of interest-sensitive assets $(84,139) $(188,637) $(352,969) $(187,945) $ (2,135) $219,135 $ 219,135 ======== ========= ========= ========= ======== ======== ========== Cumulative ratio of interest- earning assets to interest- bearing liabilities 88.26% 80.49% 75.02% 87.64% 99.86% 113.91% 113.91% ======== ========= ========= ========= ======== ======== ========== Interest sensitivity gap to total assets (4.44%) (5.51%) (8.67%) 8.70% 9.80% 11.67% 11.56% ======== ========= ========= ========= ======== ======== ========== Ratio of cumulative gap to total assets (4.44%) (9.95%) (18.61%) (9.91%) (0.11%) 11.56% 11.56% ======== ========= ========= ========= ======== ======== ========== (footnotes on following page) 24
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 $310.4 million or (16.37%) 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 quarter ended March 31, 2000, the Company closed or purchased loans in the amount of $197.9 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 quarter ended March 31, 2000, principal repayments on loans totaled $132.0 million. During the quarter ended March 31, 2000, the Company sold $15.9 million of loans. FHLB advances increased $29.8 million for the quarter ended March 31, 2000. Other borrowings decreased $8.1 million for the quarter ended March 31, 2000. Net deposit growth was $45.6 million for the quarter ended March 31, 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 quarter ended March 31, 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 March 31, 2000, the Banks had outstanding loan commitments totaling $161.2 million and undisbursed loans in process totaling $98.2 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 March 31, 2000 could give a total credit line of $521.4 million. Advances under this credit facility totaled $477.3 million, or 35.0% of FSBW's assets at March 31, 2000. IEB and TB also maintain credit lines with various institutions, including the FHLB-Seattle, that would allow them to borrow up to $23.0 million. At March 31, 2000, savings certificates amounted to $729.8 million, or 65.0%, of the Banks' total deposits, including $536.7 million which were scheduled to mature by March 31, 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. 25 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 March 31, 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 March 31, 2000: ------ ----- ------ ----- FWWB-consolidated Total capital to risk- weighted assets $163,051 12.47% $104,612 8.00% Tier 1 capital to risk- weighted assets 149,101 11.40 52,306 4.00 Tier 1 leverage capital average assets 149,101 8.25 72,271 4.00 26 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 None 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 March 31, 2000, are as follows: Date Filed Purpose - ---------- ------- NONE 27 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. May 12, 2000 /s/ Gary Sirmon ------------------------------------- Gary Sirmon President and Chief Executive Officer May 12, 2000 /s/ D. Allan Roth ------------------------------------- D. Allan Roth Secretary and Treasurer and Executive Vice President 28 EX-27 2
9 1000 3-MOS DEC-31-2000 MAR-31-2000 62630 4075 12945 0 350495 16915 17011 1359330 13951 1896351 1123722 73521 21873 496352 0 0 121707 59176 1896351 29932 6628 70 36630 11762 19985 16645 545 0 10810 6921 6921 0 0 4425 0.43 0.42 3.84 4850 530 350 0 13541 154 19 13951 12641 0 1310
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