-----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, E+F+36rNIaF575psbshcpYGxVCnPm54G2UOkGiCiQFJTDZqSRiEro0fdkt7Q+ubO bf2qNYBXV6F5+SGyQcW1fw== 0000939057-98-000147.txt : 19980817 0000939057-98-000147.hdr.sgml : 19980817 ACCESSION NUMBER: 0000939057-98-000147 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 911632900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26584 FILM NUMBER: 98689936 BUSINESS ADDRESS: STREET 1: 10 S FIRST AVE CITY: WALLA WALLA STATE: WA ZIP: 99362 BUSINESS PHONE: 5095273636 MAIL ADDRESS: STREET 1: PO BOX 907 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 SAVINGS BANK OF WASHINGTON BANCORP, INC. 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the quarterly period ended . . . . . . . . . . . . June 30, 1998 ------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ----- EXCHANGE ACT OF 1934 For the transition period from to ---------------------- -------------------- Commission File Number 0-26584 --------------- FIRST WASHINGTON BANCORP, INC. ------------------------------ (Exact name of registrant as specified in its charter) Washington 91-1691604 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 S. First Avenue Walla Walla, Washington 99362 -------------------------------------------------------- (Address of principal executive offices and zip code) (509) 527-3636 ------------------- (Registrant's telephone number, including area code) First Savings Bank of Washington Bancorp, Inc. ---------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of class: As of July 31, 1998 -------------- ------------------- Common stock, $.01 par value 11,646,885 shares * * Reflects 10% stock dividend to shareholders of record on August 10, 1998 (10,588,078 shares before 10% stock dividend) and includes 781,526 shares held by employee stock ownership plan (ESOP) that have not been released, committed to be released, or allocated to participant accounts. First Washington Bancorp, Inc. and Subsidiaries Table of Contents PART I - FINANCIAL INFORMATION ITEM 1 - Financial Statements. The Consolidated Financial Statements of First Washington Bancorp, Inc. and Subsidiaries filed as a part of the report are as follows: Consolidated Statements of Financial Condition as of June 30, 1998 and March 31, 1998 . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Income for the Quarters ended June 30, 1998 and 1997. . . . . . . . . . . . . . . 3 Consolidated Statements of Changes in Stockholders' Equity for the Quarters ended June 30, 1998 and 1997 . . . . . . . . . . . . . . .4 Consolidated Statements of Cash Flows for the Quarters ended June 30, 1998 and 1997 . . . . . . . . . . . . . . 6 Selected Notes to Consolidated Financial Statements. . . . . . . . . . . . 8 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Recent Developments and Significant Events . . . . . . . . . . . . . . . . 11 Comparison of Financial Condition at June 30, 1998 and March 31, 1998. . . 13 Comparison of Results of Operations for the Quarters ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Asset Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . 18 Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 20 Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 20 Item 4. Submission of Matters to a Vote of Stockholders. . . . . . . . . . 20 Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 20 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares) June 30, 1998 and March 31, 1998 (Unaudited) ASSETS June 30 March 31 1998 1998 ------- -------- Cash and due from banks $ 34,131 $ 42,529 Securities available for sale, cost $314,355 and $298,346 318,327 302,419 Securities held to maturity, fair value $2,820 and $194 2,768 194 Federal Home Loan Bank stock 18,510 16,050 Loans receivable: Held for sale, fair value $16,285 and $12,436 16,285 12,436 Held for portfolio 924,355 752,338 Allowances for loan losses (9,717) (7,857) ---------- ---------- 930,923 756,917 Accrued interest receivable 8,864 7,569 Real estate held for sale, net 805 882 Property and equipment, net 12,493 11,379 Costs in excess of net assets acquired 29,676 11,007 Deferred income tax asset, net -- -- Other assets 5,566 5,126 ---------- ---------- $1,362,063 $1,154,072 ========== ========== LIABILITIES Deposits: Non-interest-bearing $ 81,931 $ 56,691 Interest-bearing 663,194 545,831 ---------- ---------- 745,125 602,522 Advances from Federal Home Loan Bank 344,569 297,549 Other borrowings 90,026 91,723 Accrued expenses and other liabilities 6,922 5,475 Deferred compensation 3,769 3,798 Deferred income taxes payable, net 126 541 Income taxes payable 404 2,280 ---------- ---------- 1,190,941 1,003,888 STOCKHOLDERS' EQUITY Preferred stock - $0.01 par value, 500,000 shares authorized, no shares issued -- -- Common stock - $0.01 par value, 27,500,000 shares authorized, 12,001,687 shares issued: * 11,698,980 shares and 10,948,248 shares outstanding * at June 30, 1998 and March 31, 1998, respectively 109 109 Additional paid-in capital 112,012 108,885 Retained earnings 75,646 72,962 Valuation reserve for securities available for sale 2,614 2,680 Treasury stock, at cost: 302,706 shares and 1,053,437 shares * at June 30, 1998 and March 31, 1997, respectively (6,220) (20,979) Unearned shares of common stock issued to employee stock ownership plan trust (ESOP): 781,526 and 787,897 restricted shares outstanding * at June 30, 1998 and March 31, 1997, respectively, at cost (7,105) (7,163) Carrying value of shares held in trust for stock- related compensation plans (5,934) (6,310) ---------- ---------- 171,122 150,184 ---------- ---------- $1,362,063 $1,154,072 ========== ========== * - Adjusted for stock dividend see Note 2: 2 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands except for per share amounts) Quarters Ended June 30 ---------------------- 1998 1997 ---- ---- INTEREST INCOME: Loans receivable $ 20,877 $ 14,922 Mortgage-backed securities 2,761 3,142 Securities and deposits 2,161 1,998 ---------- ---------- 25,799 20,062 INTEREST EXPENSE: Deposits 8,036 6,059 Federal Home Loan Bank advances 4,587 3,691 Other borrowings 1,317 971 ---------- ---------- 13,940 10,721 Net interest income before ---------- ---------- provision for loan losses 11,859 9,341 PROVISION FOR LOAN LOSSES 667 355 ---------- ---------- Net interest income 11,192 8,986 OTHER OPERATING INCOME: Loan servicing fees 225 184 Other fees and service charges 836 580 Gain on sale of loans 523 191 Gain (loss) on sale of securities 5 1 Miscellaneous 4 -- ---------- ---------- Total other operating income 1,593 956 OTHER OPERATING EXPENSES: Salary and employee benefits 4,198 3,096 Less capitalized loan origination costs (676) (506) Occupancy and equipment 1,049 725 Information/computer data services 372 248 Advertising 134 109 Deposit insurance 85 70 Amortization of costs in excess of net assets acquired 569 224 Miscellaneous 1,342 946 ---------- ---------- Total other operating expenses 7,073 4,912 ---------- ---------- Income before provision for income taxes 5,712 5,030 PROVISION FOR INCOME TAXES 2,164 1,785 ---------- ---------- NET INCOME $ 3,548 $ 3,245 ========== ========== Net income per common share, see Notes 2 & 5: after stock dividend: Basic $ .33 $ .32 Diluted $ .32 $ .30 Net income per common share before stock dividend: Basic $ .37 $ .35 Diluted $ .35 $ .34 Cumulative dividends declared per common share: $ .08 $ .06 3 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( in thousands) For the Quarters ended June 30, 1998 and 1997 1998 1997 ---- ---- Common stock: Balance, beginning of period $ 109 $ 109 ---------- ---------- Balance, end of period 109 109 Additional paid-in capital: Balance, beginning of period 108,885 107,844 Acquisition of Towne Bank: Issuance of stock-fair market value in excess of basis 1,261 -- Assumption of options 2,018 -- Release of earned ESOP shares 90 176 Excess of basis over proceeds of treasury stock reissued for exercised stock options (242) -- ---------- ---------- Balance, end of period 112,012 108,020 Retained earnings: Balance, beginning of period 72,962 62,572 Net income 3,548 3,245 Cash dividends (864) (709) ---------- ---------- Balance, end of period 75,646 65,108 Valuation reserve for securities available for sale: Balance, beginning of period 2,680 (401) Change in valuation reserve (66) 1,470 ---------- ---------- Balance, end of period 2,614 1,069 Treasury stock: Balance, beginning of period (20,979) (6,954) Basis of stock reissued in acquisition of Towne Bank 17,206 -- Purchases of treasury stock (2,447) -- Purchases of treasury stock for exercised stock options (305) Reissuance of treasury stock for MRP and/or exercised stock options 305 -- Repurchase of forfeited shares from MRP -- (5) ---------- ---------- Balance, end of period (6,220) (6,959) Unearned, restricted ESOP shares at cost: Balance, beginning of period (7,163) (7,751) Release of earned ESOP shares 58 112 ---------- ---------- Balance, end of period (7,105) (7,639) Carrying value of shares held in trust for stock-related compensation plans: Balance, beginning of period (6,310) (6,783) Net change in number and/or valuation of shares held in trust 75 (319) Amortization of compensation related to MRP 301 301 ---------- ---------- Balance, end of period (5,934) (6,801) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $ 171,122 $ 152,907 ========== ========== 4 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) ( in thousands) For the Quarters ended June 30, 1998 and 1997 1998 1997 ---- ---- Common stock , shares issued: * Number of shares, beginning of period 12,002 12,002 ------- ------- Number of shares, end of period 12,002 12,002 ------- ------- Treasury stock, shares held: * Number of shares, beginning of period (1,053) (432) Purchase of treasury stock (103) -- Purchase of treasury stock for exercised stock options (13) Reissuance of treasury stock to deferred compensation plan and/or exercised stock options 13 -- Shares reissued in acquisition of Towne Bank 853 -- Repurchase of shares forfeited from MRP -- -- ------- ------- Number of shares, end of period (303) (432) ------- ------- Shares outstanding, end of period 11,699 11,570 ======= ======= Unearned, restricted ESOP shares: * Number of shares, beginning of period (788) (852) Release of earned shares 6 12 ------- ------- Number of shares, end of period (782) (840) ======= ======= * - Adjusted for stock dividend see Note 2: 5 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Quarters ended June 30, 1998 and 1997 1998 1997 ---- ---- OPERATING ACTIVITIES Net income $ 3,548 $ 3,245 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes -- -- Depreciation 383 268 Loss (gain) on sale of securities (5) (1) Net amortization of premiums and discounts on investments 374 (15) Amortization of costs in excess of net assets acquired 569 224 Amortization of MRP compensation liability 301 301 Loss (gain) on sale of loans (523) (202) Net changes in deferred loan fees, premiums and discounts 125 252 Loss (gain) on disposal of real estate held for sale -- 9 Loss (gain) on disposal of equipment -- (5) Capitalization of mortgage servicing rights from sale of mortgages with servicing retained (212) -- Amortization of mortgage servicing rights 69 17 Provision for losses on loans and real estate held for sale 667 355 FHLB stock dividend (333) (246) Cash provided (used) in operating assets and liabilities: Loans held for sale (3,849) (284) Accrued interest receivable (575) (623) Other assets 10 (34) Deferred compensation 65 65 Accrued expenses and other liabilities 668 15 Income taxes payable (2,251) (1,299) ---------- ---------- Net cash provided by operating activities (969) 2,042 ---------- ---------- INVESTING ACTIVITIES: Purchase of securities available for sale (99,445) (56,400) Principal payments and maturities of securities available for sale 85,087 45,779 Sales of securities available for sale 504 999 Purchase of securities held to maturity -- -- Principal payments and maturities of securities held to maturity 20 199 Purchase of FHLB stock (1,217) (833) Loans originated and closed - net (163,285) (120,230) Purchase of loans and participating interest in loans (37,452) (26,982) Sales of loans and participating interest in loans 36,521 10,156 Principal repayments on loans 113,556 74,116 Purchase of property and equipment (411) (588) Proceeds from sale of property and equipment -- 9 Insurance proceeds on real estate held for sale-net -- 103 Basis of real estate held for sale acquired in settlement of loans and disposed of during the period 385 393 Funds transferred to deferred compensation plan trusts (20) (19) Acquisition of Towne Bank, net cash acquired 9,328 -- ---------- ---------- Net cash used by investing activities (56,429) (73,298) ---------- ---------- (Continued on next page) 6 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Quarters ended June 30, 1998 and 1997 (Continued from prior page) 1998 1997 ---- ---- FINANCING ACTIVITIES Increase (decrease) in deposits $ 9,019 $ 2,817 Proceeds from FHLB advances 82,654 267,230 Repayment of FHLB advances (37,634) (219,019) Proceeds from reverse repurchase borrowings (1,034) 15,545 Repayments of reverse repurchase borrowings -- (21) Decrease-net in other borrowings (663) (3,375) Compensation expense recognized for shares released for allocation to participants of the ESOP: Original basis of shares 58 112 Excess of fair value of released shares over basis 90 176 Cash dividend paid (802) (708) Net cost of exercised stock options (241) -- Purchase of treasury stock (2,447) -- ---------- ---------- Net cash provided by financing activities 49,000 62,757 ---------- ---------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (8,398) (8,499) CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 42,529 24,488 ---------- ---------- CASH AND DUE FROM BANKS, END OF PERIOD $ 34,131 $ 15,989 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 15,310 $ 10,820 Taxes paid $ 4,415 $ 3,085 Non-cash transactions: Loans, net of discounts, specific loss allowances and unearned income transferred to real estate owned $ 308 $ 640 Net change in accrued dividends payable $ 62 $ 1 Net change in unrealized gain (loss) in deferred compensation trust and related liability $ 91 $ 309 Treasury stock forfeited by MRP $ -- $ 5 Fair value of stock issued and options assumed in connection with the acquisition of Towne Bank $ 20,484 $ -- 7 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 and March 31, 1998 Note 1: Reincorporation and Basis of Presentation Reincorporation: - --------------- The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware corporation and herein referred to as "FSBWB," approved the reincorporation of FSBWB from Delaware to Washington on July 24, 1998. The reincorporation was effected July 24, 1998 by merging FSBWB into a wholly owned subsidiary which was recently formed solely for the purpose of effecting the reincorporation. The surviving corporation is known as First Washington Bancorp, Inc., a Washington corporation, and is hereafter referred to as "FWWB." Upon consummation of the merger, each share of Common Stock of FSBWB, par value $.01 per share, was automatically converted into one share of Common Stock of FWWB, par value $.01 per share. The merger was consummated under the terms and conditions of a Plan of Merger pursuant to which FSBWB ceased to exist as a Delaware corporation, the stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the assets, liabilities, subsidiaries and other properties of FSBWB to the full extent provided by law, and the rights of the shareholders and internal affairs of FWWB are governed by the articles of incorporation and bylaws of FWWB and the Washington Business Corporation Act, as amended. As a result of the merger, FWWB has the same business, management, benefit plans, location, assets, liabilities and net worth as did FSBWB. Basis of Presentation: - --------------------- The unaudited consolidated financial statements of FWWB included herein reflect all adjustments which are, in the opinion of management, necessary to present fairly the statement of financial position and the results of operations for the interim periods presented. All such adjustments are of a normal recurring nature. The consolidated financial statements include FWWB's wholly owned subsidiaries, First Savings Bank of Washington (FSBW), Inland Empire Bank (IEB) and Towne Bank (TB) (together, the Banks). The balance sheet data at March 31, 1998, is derived from FWWB's audited financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended March 31, 1998 (File No. 0-26584), of FWWB. Certain amounts in the prior periods' financial statements and/or schedules have been reclassified to conform to the current period's presentation. These reclassifications affected certain ratios for the prior periods. The effect of such reclassifications is immaterial. Note 2: Recent Developments Acquisition of Towne Bancorp, Inc.: - ---------------------------------- On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB paid $28.2 million in cash and common stock for all of the outstanding common shares and stock options of Towne Bancorp, Inc., which was the holding company for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB become a wholly owned subsidiary of FWWB. The acquisition was accounted for as a purchase and resulted in the recording of $19.2 million of costs in excess of the fair value of Towne Bancorp, Inc. net assets acquired (goodwill). Goodwill assets are being amortized over a 14 year period and result in a current charge to earnings of $343,800 per quarter or $1,375,000 per year. Founded in 1991, TB is a community business bank which had approximately $146 million in total assets, $134 million in deposits, $120 million in loans and $9.3 million in shareholders' equity at March 31, 1998. TB operates five full service branches in the Seattle, Washington metropolitan area in Woodinville, Redmond, Bellevue, Renton and Bothell. 8 Agreement to Acquire Whatcom State Bancorp, Inc.: - ------------------------------------------------ FWWB has signed a definitive agreement to acquire Whatcom State Bancorp, Inc., in an all stock offer valued at approximately $12.5 million, including the assumption of outstanding Whatcom State Bancorp stock options. Whatcom State Bancorp, Inc., the holding company for Whatcom State Bank in Bellingham, Washington, is not a publicly traded institution. This valuation represents approximately 2.10 times book value and 19.6 times earnings for the twelve months ended March 31, 1998 for Whatcom State Bancorp, Inc. According to the terms of the definitive agreement, FWWB will exchange 0.7671 shares of its common stock for each Whatcom State Bancorp share. The acquisition, which has been approved by the Boards of Directors of each company, is subject to, among other contingencies, approval by regulators and Whatcom State Bancorp shareholders. The transaction is expected to close by the end of the year. Declaration of 10% Stock Dividend: - --------------------------------- On July 24, 1998 FWWB's Board of Directors declared a 10% stock dividend payable August 17, 1998 to shareholders of record August 10, 1998. All earnings per share and share data have been adjusted to reflect the 10% stock dividend. New Accounting Pronouncements: - ----------------------------- In July 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on the accounting treatment for deferred compensation arrangements where amounts earned are held in a Rabbi Trust and invested. The consensus of the EITF should be applied as of September 30, 1998, for awards granted prior to March 19, 1998, and existing plans may be amended prior to September 30, 1998. FWWB has not yet determined the impact of the consensus or whether existing plans may be amended. Note 3: Adoption of New Accounting Standards FWWB adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, effective April 1, 1998. The standard requires that comprehensive income and its components be disclosed in the financial statements. FWWB's comprehensive income includes all items which comprise net income plus the unrealized holding gains on available-for-sale securities. For the quarters ended June 30, 1998 and 1997, FWWB's comprehensive income was as follows: Quarters Ended June 30 ---------------------- 1998 1997 ---- ---- Net income $ 3,548 $ 3,245 Other comprehensive income (66) 1,470 --------- --------- Total comprehensive income $ 3,482 $ 4,715 ========= ========= Note 4: Additional Information Regarding Interest-Bearing Deposits and Securities The following table sets forth additional detail on the FWWB's interest-bearing deposits and securities at the dates indicated (at carrying value) (in thousands): June 30 March 31 1998 1998 ---- ---- Interest-bearing deposits included in cash and due from banks $ 10,469 $ 15,587 --------- --------- Mortgage-backed securities 210,273 197,130 Other securities-taxable 74,520 70,092 Other securities-tax exempt 33,117 32,093 Other stocks with dividends 3,185 3,298 --------- --------- Total securities 321,095 302,613 --------- --------- Federal Home Loan Bank Stock 18,510 16,050 --------- --------- $ 350,074 $ 334,250 ========= ========= 9 The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands): Quarters Ended June 30 ---------------------- 1998 1997 ---- ---- Mortgage-backed securities $ 2,761 $ 3,142 ========= ========= Taxable interest and dividends 1,328 1,233 Tax-exempt interest 500 519 Federal Home Loan Bank stock-dividends 333 246 --------- --------- 2,161 1,998 --------- --------- $ 4,922 $ 5,140 ========= ========= Note 5: Calculation of Weighted Average Shares Outstanding for Earnings Per Share (EPS) and Calculation of Outstanding Shares Calculation of Weighted Average Shares Outstanding for Earnings Per Share ---------------------- (in thousands) Quarters ended June 30 1998 1997 ---- ---- Total shares originally issued 10,911 10,911 Less treasury stock including shares allocated to MRP (560) (795) Less unallocated shares held by the ESOP (714) (770) ------- ------- Basic weighted average shares outstanding 9,637 9,346 Plus MRP and stock option incremental shares considered outstanding for diluted EPS calculations 498 332 Diluted weighted average shares ------- ------- outstanding 10,135 9,678 ======= ======= Calculation of Outstanding Shares at ---------------------- (in thousands) June 30 March 31 1998 1998 ---- ---- Total shares issued 10,911 10,911 Less treasury stock (276) (958) ------- ------- Outstanding shares 10,635 9,953 ======= ======= 10 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations General First Washington Bancorp, Inc. (FWWB), a Washington corporation, is primarily engaged in the business of planning, directing and coordinating the business activities of its wholly owned subsidiaries, First Savings Bank of Washington (FSBW), Inland Empire Bank (IEB) and Towne Bank (TB) (together, the Banks). FSBW is a Washington-chartered savings bank the deposits of which are insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings Association Insurance Fund (SAIF). FSBW conducts business from its main office in Walla Walla, Washington and its 16 branch offices and three loan production offices located in southeast, central, north central and western Washington. IEB is an Oregon-chartered commercial bank whose deposits are insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts business from its main office in Hermiston, Oregon and its five branch offices and two loan production offices located in northeast Oregon. TB is a Washington-chartered commercial bank whose deposits are insured by the FDIC under BIF. TB conducts business from five full service branches in the Seattle, Washington metropolitan area. The operating results of FWWB depend primarily on its net interest income, which is the difference between interest income on interest-earning assets, consisting of loans and investment securities, and interest expense on interest-bearing liabilities, composed primarily of savings deposits and Federal Home Loan Bank (FHLB) advances. Net interest income is primarily a function of FWWB's interest rate spread, which is the difference between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities, as well as a function of the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. As more fully explained below, FWWB's net interest income significantly increased for the quarter ended June 30, 1998, when compared to the same period for the prior year. This increase in net interest income was largely due to the substantial growth in average asset and liability balances from the acquisition of TB on April 1, 1998. FWWB's net income also is affected by provisions for loan losses and the level of its other income, including deposit service charges, loan origination and servicing fees, and gains and losses on the sale of loans and securities, as well as its non-interest operating expenses and income tax provisions. Management's discussion and analysis of results of operations is intended to assist in understanding the financial condition and results of operations of FWWB. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Selected Notes to Consolidated Financial Statements. Recent Developments and Significant Events Recent Developments Reincorporation: - --------------- The stockholders of First Savings Bank of Washington Bancorp, Inc., a Delaware corporation and herein referred to as "FSBWB," approved the reincorporation of FSBWB from Delaware to Washington on July 24, 1998. The reincorporation was effected July 24, 1998 by merging FSBWB into a wholly owned subsidiary which was recently formed solely for the purpose of effecting the reincorporation. The surviving corporation is known as First Washington Bancorp, Inc., a Washington corporation, and is hereafter referred to as "FWWB." Upon consummation of the merger, each share of Common Stock of FSBWB, par value $.01 per share, was automatically converted into one share of common stock of FWWB, par value $.01 per share. The merger was consummated under the terms and conditions of a Plan of Merger pursuant to which FSBWB ceased to exist as a Delaware corporation, the stockholders of FSBWB became shareholders of FWWB, FWWB succeeded to all the assets, liabilities, subsidiaries and other properties of FSBWB to the full extent provided by law, and the rights of the shareholders and internal affairs of FWWB are governed by the articles of incorporation and bylaws of FWWB and the Washington Business Corporation Act, as amended. As a result of the merger, FWWB has the same business, management, benefit plans, location, assets, liabilities and net worth as did FSBWB. 11 Acquisition of Towne Bancorp, Inc.: - ---------------------------------- On April 1, 1998 FWWB completed the acquisition of Towne Bancorp, Inc. FWWB paid $28.2 million in cash and common stock for all of the outstanding common shares and stock options of Towne Bancorp, Inc., which was the holding company for Towne Bank (TB), headquartered in Woodinville, Washington, a Seattle suburb. As a result of the merger of Towne Bancorp, Inc. into FWWB, TB became a wholly owned subsidiary of FWWB. The acquisition was accounted for as a purchase and resulted in the recording of $19.2 million of costs in excess of the fair value of Towne Bank net assets acquired (goodwill). Goodwill assets are being amortized over a 14 year period and result in a current charge to earnings of $343,800 per quarter or $1,375,000 per year. Founded in 1991, TB is a community business bank which had approximately $146 million in total assets, $134 million in deposits, $120 million in loans and $9.3 million in shareholders' equity at March 31, 1998. TB operates five full service branches in the Seattle, Washington metropolitan area in Woodinville, Redmond, Bellevue, Renton and Bothell. Agreement to Acquire Whatcom State Bancorp, Inc.: - ------------------------------------------------ FWWB has signed a definitive agreement to acquire Whatcom State Bancorp, Inc., in an all stock offer valued at approximately $12.5 million, including the assumption of outstanding Whatcom State Bancorp stock options. Whatcom State Bancorp, Inc., the holding company for Whatcom State Bank in Bellingham, Washington, is not a publicly traded institution. This valuation represents 2.10 times book value and 19.6 times earnings for the twelve months ended March 31, 1998 for Whatcom State Bancorp, Inc. According to the terms of the definitive agreement, First Washington Bancorp will exchange 0.7671 shares of its common stock for each Whatcom State Bancorp share. The acquisition, which has been approved by the Boards of Directors of each company, is subject to, among other contingencies, approval by regulators and Whatcom State Bancorp shareholders. The transaction is expected to close by the end of the year. Declaration of 10% Stock Dividend: - --------------------------------- On July 24, 1998 the Company's Board of Directors declared a 10% stock dividend payable August 17, 1998 to shareholders of record August 10, 1998. All earnings per share and share data have been adjusted to reflect the 10% stock dividend. New Accounting Pronouncements: - ----------------------------- In July 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on the accounting treatment for deferred compensation arrangements where amounts earned are held in a Rabbi Trust and invested. The consensus of the EITF should be applied as of September 30, 1998, for awards granted prior to March 19, 1998, and existing plans may be amended prior to September 30, 1998. FWWB has not yet determined the impact of the consensus or whether existing plans may be amended. Year 2000 Compliance The "Year 2000" (Y2K) issue is the result of older computer programs being written using two digits rather than four to define the applicable year. A computer program that has date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruption of operations, including, among other things, a temporary inability to process transactions, send statements, or engage in similar normal business activities. Based on an assessment of computer hardware, software and other equipment operated by FWWB and its subsidiary Banks, FWWB presently believes that all equipment and programs should be Y2K compliant by December 31, 1998. A program for addressing the Y2K issue through awareness, assessment, renovation and testing has been developed and implemented. Only the testing phase remains. Testing has started and will continue through December, 1998. The costs of implementing and completing the program's phases have not been of a material nature and should continue to be minimal through program completion. The three bank subsidiaries have budgeted close to $150,000 to cover soft and hard costs such as upgrading ATM's, contacting and monitoring vendors, contacting customers and providing information regarding our preparations and testing the systems we have identified as critical and non-critical. FWWB and its Bank subsidiaries have incurred and expensed approximately $8,000 of Y2K related costs in the current fiscal year to date period ended June 30, 1998. Costs incurred and expensed in prior fiscal years were not significant. 12 FWWB and its subsidiary Banks are continuing to contact and monitor all significant suppliers to determine the extent to which they are vulnerable to those third parties' failures to remedy their own Y2K impact issues. Third party responses have indicated satisfactory progress in addressing any needs for equipment or software renovation. The Banks' large customers are also being contacted to build Y2K awareness and encourage early solutions regarding potential business disruption due to processing failures. Loan and deposit customers are being updated regularly about our preparations and information is being provided to create a much greater awareness of the issue with some ideas about how to assess and prepare for their own Y2K vulnerability. There can be no guarantee that the systems of other companies on which the Banks' systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Banks' systems would not have a material adverse effect on the Banks. However, the Banks will test for the Y2K preparedness of all internal functions and external functions provided by third parties whenever possible. In addition, contingency or alternate sources of support have been identified for each critical function and many of the non-critical functions. In the event that the Banks' data processing providers do not make their systems Y2K compliant and FWWB is not able to switch to an alternative provider or an in-house system in a timely manner, resulting computer malfunctions could interrupt the operations of the Banks and have a significant adverse effect on FWWB's financial condition and results of operations. Comparison of Financial Condition at June 30 and March 31, 1998 Total assets increased $208 million, or 18.0%, from $1.154 billion at March 31, 1998, to $1.362 billion at June 30, 1998. The majority of the increase, $164.9 million including goodwill resulting from the use of purchase accounting, was from the acquisition of Towne Bank and the remaining growth of $62.1 million was spread among all three subsidiary Banks and was funded primarily with deposit growth, advances from the FHLB and other borrowings. This growth represented a continuation of management's plans to further leverage FWWB's capital and reflects the solid economic conditions in the markets where FWWB operates. Loans receivable (gross loans less loans in process, deferred fees and discounts, and allowance for loan losses) grew $174.0 million, or 23.0%, from $756.9 million at March 31, 1998, to $930.9 million at June 30, 1998. The increase in gross loans of $186.8 million from $822.6 million at March 31, 1998, to $1.009 million at June 30, 1998, consists of $64.8 million of mortgages secured by commercial and multi-family real estate, $26.7 million of construction and land loans, $4.8 million of residential mortgages and $90.5 million of non-mortgage loans such as commercial, agricultural and consumer loans. The acquisition of TB provided $133.7 million of gross loans consisting of $26.2 million of commercial and multi-family mortgages, $22.1 million of construction and land loans, $7.4 million of residential mortgages and $78 million of commercial and consumer loans. A little more than three quarters of the increase in assets, excluding the TB acquisition, was funded by a net increase of $47.1 million, or 15.8%, in FHLB advances from $297.5 million at March 31, 1998, to $344.6 million on June 30, 1998. Asset growth was also funded by increased deposits and net income from operations. Deposits grew $142.6 million, or 23.7%, from $602.5 million at March 31, 1998, to $745.1 million at June 30, 1998. Other borrowings, primarily reverse repurchase agreements with securities dealers, decreased $1.7 million, or 1.9%, from $91.7 million at March 31, 1998, to $90.0 million at June 30, 1998. The Towne Bank acquisition provided $133.6 million of deposits and $2.0 million of FHLB advances. Securities available for sale and held to maturity increased $18.5 million, or 6.1%, from $302.6 million at March 31, 1998, to $321.1 million at June 30, 1998. Federal Home Loan Bank Stock increased $2.5 million ($1.0 million from TB acquisition), as FWWB was required to purchase more stock as a result of its increased use of FHLB advances. Real estate held for sale decreased $77,000, primarily as a result of completed sales. Comparison of Operating Results for the Quarters Ended June 30, 1998 and 1997 General. Net income for the first quarter of fiscal 1999 was $3.5 million, an increase of $303,000 from the comparable quarter in fiscal 1998. FWWB's improved operating results reflect the significant growth of assets and liabilities as well as improvements in net interest margin and non-interest revenues which were offset somewhat by increased operating expenses. Compared to year ago levels, total assets increased 18.0% to $1.36 billion at June 30, 1998, total loans rose 23.0% to $930.9 million, deposits grew 23.7% to $745.1 million and borrowings increased 11.6% to $434.6 million. Net interest margin improved despite the adverse affects of a flattening yield curve and declining market rates and loan pricing spreads, reflecting the acquisition of Towne Bank and continuing changes in the asset and liability mix. 13 Interest Income. Interest income for the quarter ended June 30, 1998, was $25.8 million compared to $20.1 million for the quarter ended June 30, 1997, an increase of $5.7 million, or 28.6%. The increase in interest income was a result of a $251.5 million, or 25.5%, growth in the average balance of interest-earning assets combined with a 20 basis point increase in the average yield on those assets, which rose from 8.16% in the quarter ended June 1997, to 8.36% in June 1998. Average loans receivable for the first quarter of fiscal 1999 increased by $228.1 million, or 33.7%, when compared to the same quarter in fiscal 1998. Interest income on loans increased by $6.0 million, or 39.9%, compared to the same quarter a year earlier, reflecting the impact of the increase in average loan balances and a 41 basis point increase in the yield on those balances. Average loans receivable represented 73.1% of average earning assets for the quarter ended June 30, 1998, compared to 68.6% for the same period a year earlier. The combined average balance of mortgage-backed and investment securities and FHLB stock for the first quarter of fiscal 1999 increased $23.4 million compared to the first quarter of fiscal 1998, although interest and dividend income from those investments decreased by $218,000 for the June 1998 quarter compared to June 1997. The decrease of interest income on this portfolio largely reflects that while the average balance of mortgage-backed obligations increased by $12.5 million over the same quarter a year earlier, the yield on those securities declined 123 basis points. The decline in the yield on this portfolio primarily reflects a decline in market rates which resulted in decreased yields on many adjustable rate securities which comprise the largest portion of this portfolio and from accelerated amortization of net premiums as a result of increased prepayments on the underlying mortgage loans. Average balances for other investment securities and deposits increased modestly although the yield on those balances declined 10 basis points also reflecting declining market rates. Holdings of FHLB stock (excluding the TB acquisition) increased commensurate with the growth in FHLB advances and the yield on that stock increased 28 basis points. Interest Expense. Interest expense for the quarter ended June 30, 1998, was $13.9 million compared to $10.7 million for the comparable period in 1997, an increase of $3.7 million, or 30.0%. The increase in interest expense was due to the $262.9 million growth in average interest-bearing liabilities. The increase in average interest-bearing liabilities in the quarter ended June 1998 was largely due to a $182.4 million increase in the average balance of deposits combined with a $80.5 million growth in average FHLB advances and other borrowings. The acquisition of Towne Bank on April 1, 1998 increased deposits $133.6 million. This addition plus $53.0 million of deposit growth resulted in a $2.0 million increase in related interest expense. The average rate on those deposits decreased slightly from 4.40% for the quarter ended June 30, 1997, to 4.39% for the quarter ended June 30, 1998. Average FHLB advances totaled $303.7 million during the quarter ended June 30, 1998, as compared to $248.0 million during the quarter ended June 30, 1997, resulting in a $896,000 increase in related interest expense. The average rate paid on those advances increased from 5.97% for the quarter ended June 30, 1997, to 6.06% for the comparable period in 1997, adding to the increase in interest expense. Other borrowings consist of retail repurchase agreements with customers and repurchase agreements with investment banking firms secured by certain investment securities. The average balance for other borrowings increased $24.7 million from $67.7 million for the quarter ended June 30, 1997, to $92.4 million for the same period in 1998, and the related interest expense increased $346,000, from $971,000 to $1.3 million for the respective periods. The majority of this growth in other borrowings reflects an increase in repurchase agreements with investment banking firms which totaled $84.4 million at June 30, 1998. The cost of other borrowings declined from 5.76% for the quarter ended June 30, 1997, to 5.72% for the quarter ended June 30, 1998. 14 The following tables provide additional comparative data on the Company's operating performance: Quarters ended Average Balances June 30 ---------------- ----------------------- (in thousands) 1998 1997 ---- ---- Investment securities and deposits $ 120,952 $ 114,055 FHLB stock 17,155 13,142 Mortgage-backed obligations 194,957 182,451 Loans 904,996 676,891 ---------- ---------- Total average interest-earning asset 1,238,060 986,539 Non-interest-earning assets 75,933 39,592 ---------- ---------- Total average assets $1,313,993 $1,026,131 ========== ========== Deposits $ 734,480 $ 552,082 Advances from FHLB 303,672 247,950 Other borrowings 92,418 67,663 ---------- ---------- Total average interest-bearing liabilities 1,130,570 867,695 Non-interest-bearing liabilities 11,055 8,120 ---------- ---------- Total average liabilities 1,141,625 875,815 Equity 172,368 150,316 ---------- ---------- Total average liabilities and equity $1,313,993 $1,026,131 ========== ========== Interest Rate Yield/Expense (rates are annualized) -------------------------------------------------- Interest Rate Yield: Investment securities and deposits 6.06% 6.16% Mortgage-backed obligations 5.68% 6.91% Loans 9.25% 8.84% FHLB stock 7.79% 7.51% ---------- ---------- Total interest rate yield on interest-earning assets 8.36% 8.16% ---------- ---------- Interest Rate Expense: Deposits 4.39% 4.40% Advances from FHLB 6.06% 5.97% Other borrowings 5.72% 5.76% ---------- ---------- Total interest rate expense on interest-bearing liabilities 4.95% 4.96% ---------- ---------- Interest spread 3.41% 3.20% ========== ========== Net interest margin on interest earning assets 3.84% 3.80% ---------- ---------- Additional Key Financial Ratios (ratios are - ------------------------------------------- annualized) ----------- Return on average assets 1.08% 1.27% Return on average equity 8.26% 8.66% Average equity / average assets 13.12% 14.65% Average interest-earning assets/interest-bearing liabilities 109.51% 113.70% Non-interest [other operating] expenses/average assets Excluding amortization of costs in excess of net assets acquired (goodwill) 1.99% 1.83% Including amortization of costs in excess of net assets acquired (goodwill) 2.16% 1.92% Efficiency ratio [non-interest (other operating) expenses/revenues] Excluding amortization of costs in excess of net assets acquired (goodwill) 48.35% 45.53% Including amortization of costs in excess of net assets acquired (goodwill) 52.58% 47.70% 15 Provision for Loan Losses. During the quarter ended June 30, 1998, the provision for loan losses was $667,000, compared to $355,000 for the quarter ended June 30, 1997, an increase of $312,000. This increase in the provision for losses reflects the higher level of net charge-offs for the period as well as changes in the portfolio composition. Management believes the higher level of charge-offs represents isolated events and is not indicative of changes in the credit quality of the loan portfolio. The allowance for loan losses net of charge-offs (recoveries) increased by $1.8 million, to $9.7 million at June 30, 1998, compared to $7.9 million at March 31, 1998. The allowance for losses on loans is maintained at a level sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current and anticipated economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. Additions to these allowances are charged to earnings. Provisions for losses that are related to specific assets are usually applied as a reduction of the carrying value of the assets and charged immediately against the income of the period. The reserve is based upon factors and trends identified by management at the time financial statements are prepared. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks' allowance for loan losses. Such agencies may require the Banks to provide additions to the allowance based upon judgments different from management. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Banks' control. The following tables are provided to disclose additional detail on the Banks' loans and allowance for loan losses (in thousands): June 30 March 31 1998 1998 ---------- ---------- Loans (including loans held for sale): Secured by real estate One to four single family dwellings (SFD) $ 428,687 $ 423,850 Commercial & multifamily 232,630 167,859 Construction & land-secured 159,126 132,409 Commercial & agribusiness 148,386 67,611 Consumer, including credit cards 40,600 30,842 ---------- ---------- $1,009,429 $ 822,571 Less loans in process 65,332 54,500 Less deferred fees and discounts 3,457 3,297 Less allowance for loan losses 9,717 7,857 ---------- ---------- Total net loans at end of period $ 930,923 $ 756,917 ========== ========== Allowance for loan losses as a percentage of gross principal of loans outstanding 0.96% 0.96% Quarters ended June 30 1997 1996 ---------- ---------- Change in allowance for loan losses: Balance at beginning of the period $ 7,857 $ 6,748 Acquisition of TB 1,616 -- Provision for loan losses 667 355 Recoveries 69 7 Charge-offs (492) (155) ---------- ---------- Balance at end of the period $ 9,717 $ 6,955 ========== ========== Charge-offs as a percentage of average net book value of loans outstanding for the period. 0.05% 0.02% 16 Other Operating Income. Other operating income increased $637,000 from $956,000 for the quarter ended June 30, 1997, to $1.6 million for the quarter ended June 30, 1998. The increase included a $256,000 increase in other fees and service charges due largely to the addition of TB operations, combined with increases in fee income at FSBW and IEB reflecting deposit growth and pricing adjustments. There also was a $332,000 increase in net gains on loans sold in the quarter ended June 30, 1998, as compared to the same period in 1997. This increase primarily reflects increases in IEB's residential mortgage banking operations, and increased sales of loans, with servicing retained, by FSBW which increased the volume of loans sold in the secondary market over the comparable period in the prior year. The volume of loan sales and related net gain on sale of loans increased from $10.2 million and $191,000, respectively, for the quarter ended June 30, 1997, to $36.5 million and $523,000, respectively, for the quarter ended June 30, 1998. Increased sales of loans at FSBW were designed to curtail the rate of growth in relatively low yielding fixed rate residential mortgages during this period of low market rates and to reduce its exposure to the risk of rising interest rates. Other Operating Expenses. Other operating expenses increased $2.2 million from $4.9 million for the quarter ended June 30, 1997, to $7.1 million for the quarter ended June 30, 1998. The increase in expenses was largely due to the inclusion of $1.7 million of TB's operating expenses in the first quarter of fiscal 1999 that were not present in fiscal 1998. The increase in other operating expenses was partially offset by a $170,000 increase in capitalized loan origination costs resulting from increased volume in loan origination. In addition to the acquisition of Towne Bank, increases in other operating expenses reflect the overall growth in assets and liabilities, customer relationships and complexity of operations as FWWB continues to expand. Despite the high operating expenses associated with transitioning FWWB to more of a commercial bank profile, FWWB's efficiency ratio, excluding the amortization of goodwill, increased only 2.82 percentage points, to 48.35%, for the first quarter of fiscal 1999 from 45.53% for the same period in 1997. Other operating expenses as a percentage of average assets were 2.16% (1.99% excluding the amortization of goodwill) for the quarter ended June 30, 1998, compared to 1.92% (1.83% excluding the amortization of goodwill) for the quarter ended June 30, 1997. Income Taxes. Income tax expense was $2.16 million for the quarter ended June 30, 1998, compared to $1.79 million for the comparable quarter in 1997. The $379,000 increase in the provision for income taxes reflects the higher level of income being taxed at higher effective rates due to the phase out of the 34% surtax exemption; the net effect of IEB paying Oregon state income taxes; and the fact that the expenses from the amortization of costs in excess of net assets acquired in purchasing IEB and TB and part of the expense recorded in the release of ESOP shares are not deductible for tax purposes. The Company's effective tax rates for the quarters ended June 30, 1998 and 1997, were 38% and 35%, respectively. Asset Quality The following tables are provided to disclose additional details on asset quality (in thousands): June 30 March 31 1998 1998 ---------- ---------- Non-performing assets at end of the period: Non-performing loans: Delinquent loans on non-accrual status $ 4,663 $ 1,270 Delinquent loans on accrual statu 168 150 ---------- ---------- Total non-performing loans 4,831 1,420 Real estate owned ( REO) 805 882 ---------- ---------- Total non-performing assets at end of the period $ 5,636 $ 2,302 ========== ========== Non-performing loans as a percentage of total net loans at end of the period 0.52% 0.19% Ratio of allowance for loan losses to non-performing loans at end of the period 201% 553% Non-performing assets as a percentage of total assets at end of the period. 0.41% 0.20% Troubled debt restructuring [TDR's] at end of the period $ 255 $ 305 ---------- ---------- Troubled debt restructuring as a percentage of: Total gross principal of loans outstanding at end of the period 0.03% 0.04% Total assets at end of the period 0.02% 0.03% 17 Liquidity and Capital Resources FWWB's primary sources of funds are deposits, FHLB advances, proceeds from loan principal and interest payments and sales of loans, and the maturity of, and interest income on mortgage-backed and investment securities. While maturities and scheduled amortization of loans and mortgage-backed and investment securities are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, general economic conditions and competition. The primary investing activity of FWWB is the origination and purchase of mortgage, consumer, and commercial loans through its subsidiary Banks, FSBW, IEB and TB. During the quarter ended June 30, 1998, the Banks closed or purchased loans in the amount of $204.6 million. In addition, during this quarter, funds were used to purchase $2.4 million of treasury stock and pay out $7.7 million for the acquisition of Towne Bancorp, Inc. These activities were funded primarily by principal repayments on loans and securities, sales of loans, increases in FHLB advances, and deposit growth. For the quarter ended June 30, 1998, principal repayments on loans totaled $113.6 million and the Banks' proceeds from the sale of mortgage loans totaled $37.5 million. FHLB advances and other borrowings increased $43.3 million (net of TB acquisition) for the same period, and net deposit growth was $9.0 million (net of TB acquisition). The Banks must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. At June 30, 1998, the Banks had undisbursed loans in process totaling $65.3 million. The Banks generally maintain sufficient cash and readily marketable securities to meet short term liquidity needs. FSBW also maintains a credit facility with the FHLB of Seattle, which provides for advances which in aggregate may equal up to 45% of FSBW's total assets, which as of June 30, 1998, would give FSBW a total credit line of $446.8 million. Advances under this credit facility totaled $339.5 million, or 34.2% of FSBW's assets at June 30, 1998. IEB and TB also maintain credit facilities with various financial institutions, including the FHLB of Seattle, that would allow them to borrow up to $20.6 million. At June 30, 1998, savings certificates amounted to $461.6 million, or 62%, of the Banks' total deposits, including $320.7 million which were scheduled to mature within one year. Historically, the Banks have been able to retain a significant amount of their deposits as they mature. Management believes it has adequate ability to fund all loan commitments by using deposits, FHLB of Seattle advances, other borrowings and the sale of mortgage loans or securities, and that it can adjust the offering rates of savings certificates to retain deposits in changing interest rate environments. Capital Requirements Federally-insured state-chartered banks are required to maintain minimum levels of regulatory capital. Under current FDIC regulations, insured state-chartered banks generally must maintain (i) a ratio of Tier 1 leverage capital to total assets of at least 3.0% (4.0% to 5.0% for all but the most highly rated banks), (ii) a ratio of Tier 1 capital to risk weighted assets of at least 4.0% and (iii) a ratio of total capital to risk weighted assets of at least 8.0%. At June 30, 1998, FWWB's banking subsidiaries exceeded all current regulatory capital requirements to be classified as well capitalized institutions, the highest regulatory standard. In order to be categorized as a well capitalized institution, the FDIC requires banks it regulates to maintain a leverage ratio, defined as Tier 1 capital divided by total regulatory assets, of at least 5.00%; Tier 1 (or core) capital of at least 6.00% of risk-weighted assets; and total capital of at least 10.00% of risk-weighted assets. 18 FWWB, as a bank holding company, is regulated by the Federal Reserve Board (FRB). The FRB has established capital requirements for bank holding companies that generally parallel the capital requirements of the FDIC for banks with $150 million or more in total consolidated assets. FWWB's total regulatory capital must equal 8% of risk-weighted assets and one half of the 8% (4%) must consist of Tier 1 (core) capital. The actual regulatory capital ratios calculated for FWWB along with the minimum capital amounts and ratios for capital adequacy purposes were as follows (dollars in thousands): Minimum for capital Actual adequacy purposes -------------------- ------------------- Amount Ratio Amount Ratio June 30, 1998: ------ ----- ------ ----- FWWB-consolidated Total capital to risk- weighted assets $148,465 17.37% $68,394 8.00% Tier 1 capital to risk- weighted assets 138,748 16.23 34,197 4.00 Tier 1 leverage capital to average assets 138,748 10.84 51,185 4.00 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings From time to time FWWB or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which is considered to have a material impact on the FWWB's financial position or results of operations. Item 2. Changes in Securities Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Stockholders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K Exhibit 27 - Financial data schedule Report (s) on Form 8-K filed during the quarter ended June 30, 1998, are as follows: Date Filed Purpose - ---------- ------- April 6, 1998 Announcement of consummation of acquisition of Towne Bancorp, Inc. June 25, 1998 Announcement of entering into an agreement and plan of mergers with Whatcom State Bancorp, Inc. and Whatcom State Bank. 20 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Washington Bancorp, Inc. August 13, 1998 /s/ Gary Sirmon ------------------------------------ Gary Sirmon President and Chief Executive Officer August 13, 1998 /s/ D. Allan Roth ------------------------------------ D. Allan Roth Secretary and Treasurer 21 EX-27 2
9 1,000 3-MOS MAR-31-1998 JUN-30-1998 23662 3649 6820 0 318327 2768 2820 930923 9717 1362063 745125 91723 23045 297549 0 0 109 150075 1362063 20877 4716 206 25799 8036 13940 11859 667 4 7073 5712 3548 0 0 3548 0.33 0.32 3.84 4663 168 805 0 7857 492 69 9717 4204 0 5513
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