-----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, QbADPDEFVZf3AT37tee3iTl5CyKHUdtgeQHI6fBAaQnDeCVFT8XOkz1ol341fRc/ JX6iIZ07tapT6t3M2IT8ww== 0000939057-99-000087.txt : 19990816 0000939057-99-000087.hdr.sgml : 19990816 ACCESSION NUMBER: 0000939057-99-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687399 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........................ June 30, 1999 ------------- [X] 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 July 31, 1999 -------------- ------------------- Common stock, $.01 par value 11,321,785 shares * * Includes 745,918 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, 1999 and March 31, 1999............................ 2 Consolidated Statements of Income for the Quarters Ended June 30, 1999 and 1998..................... 3 Consolidated Statements of Comprehensive Income for the Quarters ended June 30, 1999 and 1998............................. 4 Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended June 30, 1999 and 1998................. 5 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1999 and 1998................. 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........................ 14 Comparison of Financial Condition at June 30, 1999 and March 31, 1999.......................................................... 16 Comparison of Results of Operations for the Three Months Ended June 30, 1999 and 1998............................................ 16 Asset Quality..................................................... 22 Market Risk and Asset/Liability Management........................ 23 Liquidity and Capital Resources................................... 26 Capital Requirements.............................................. 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................ 28 Item 2. Changes in Securities.................................... 28 Item 3. Defaults upon Senior Securities.......................... 28 Item 4. Submission of Matters to a Vote of Stockholders.......... 28 Item 5. Other Information........................................ 28 Item 6. Exhibits and Reports on Form 8-K......................... 28 SIGNATURES............................................................... 29 1 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except shares) June 30, 1998 and March 31, 1999 (Unaudited) June 30 March 31 ASSETS 1999 1999 ---------- ---------- Cash and due from banks $ 55,820 $ 72,503 Securities available for sale, cost $354,414 and $358,540 355,215 362,021 Securities held to maturity, fair value $2,091 and $2,235 2,054 2,155 Federal Home Loan Bank stock 23,555 23,137 Loans receivable: Held for sale, fair value $18,773 and $11,256 18,773 11,256 Held for portfolio 1,185,575 1,103,674 Allowance for loan losses (13,305) (12,261) ---------- ---------- 1,191,043 1,102,669 Accrued interest receivable 10,116 9,898 Real estate held for sale, net 911 1,439 Property and equipment, net 16,301 15,960 Costs in excess of net assets acquired (goodwill), net 39,305 34,182 Deferred income tax asset, net 2,009 758 Other assets 7,464 7,178 ---------- ---------- $1,703,793 $1,631,900 ========== ========== LIABILITIES Deposits: Non-interest-bearing $ 110,553 $ 97,062 Interest-bearing 900,650 853,786 ---------- ---------- 1,011,203 950,848 Advances from Federal Home Loan Bank 427,099 408,252 Other borrowings 74,997 78,467 Accrued expenses and other liabilities 8,965 7,928 Deferred compensation 1,755 1,691 Deferred income tax liability, net -- -- Income taxes payable 1,397 1,106 ---------- ---------- 1,525,416 1,448,292 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: * 11,330,140 shares and 11,647,615 shares outstanding * at June 30, 1999 and March 31, 1999, respectively. 124,242 130,770 Retained earnings 62,687 59,958 Accumulated other comprehensive income: Unrealized gain (loss) on securities available for sale 564 2,296 Unearned shares of common stock issued to Employee Stock Ownership Plan (ESOP) trust: 745,918 and 745,918 restricted shares outstanding * at June 30, 1999 and March 31, 1999, respectively, at cost (6,781) (6,781) Carrying value of shares held in trust for stock related compensation plans (4,547) (4,785) Liability for common stock issued to deferred, stock related, compensation plan 2,212 2,150 ---------- ---------- (2,335) (2,635) ---------- ---------- 178,377 183,608 ---------- ---------- $1,703,793 $1,631,900 ========== ========== *Adjusted for stock dividend: see Note 2. 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 June 30 --------------------------- 1999 1998 INTEREST INCOME: --------- --------- Loans receivable $ 26,128 $ 20,877 Mortgage-backed securities 3,621 2,761 Securities and deposits 2,424 2,161 --------- --------- 32,173 25,799 INTEREST EXPENSE: Deposits 10,048 8,036 Federal Home Loan Bank advances 5,866 4,587 Other borrowings 1,012 1,317 --------- --------- 16,926 13,940 Net interest income before --------- --------- provision for loan losses 15,247 11,859 PROVISION FOR LOAN LOSSES 710 667 --------- --------- Net interest income 14,537 11,192 OTHER OPERATING INCOME: Loan servicing fees 258 225 Other fees and service charges 1,086 836 Gain on sale of loans 459 523 Gain (loss) on sale of securities 2 5 Miscellaneous 56 4 --------- --------- Total other operating income 1,861 1,593 OTHER OPERATING EXPENSES: Salary and employee benefits 5,768 4,198 Less capitalized loan origination costs (991) (676) Occupancy and equipment 1,550 1,049 Information/computer data services 553 372 Advertising 193 134 Deposit insurance 83 85 Amortization of goodwill 788 569 Miscellaneous 1,839 1,342 --------- --------- Total other operating expenses 9,783 7,073 --------- --------- Income before provision for income taxes 6,615 5,712 PROVISION FOR INCOME TAXES 2,558 2,164 --------- --------- NET INCOME $ 4,057 $ 3,548 ========= ========= Net income per common share, see Note 5: Basic $ .39 $ .33 Diluted $ .37 $ .32 Cumulative dividends declared per common share: $ .12 $ .08 3 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (in thousands) Quarters Ended June 30 --------------------------- 1999 1998 -------- -------- NET INCOME: $ 4,057 $ 3,548 OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: Unrealized holding gain (loss) during the period, net of deferred income tax (benefit) of $(893) and $(37) (1,731) (63) Less adjustment for gains included in net income, net of income tax of $1 and $2 (1) (3) -------- -------- Other comprehensive income (loss) (1732) (66) -------- -------- COMPREHENSIVE INCOME $ 2,325 $ 3,482 ======== ======== 4 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) For the Three Months Ended June 30, 1999 and 1998 1999 1998 ---------- ---------- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL: Balance, beginning of period $ 130,770 $ 108,994 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 Recognition of tax benefit due to vesting of MRP shares -- -- Net proceeds (cost) of treasury stock reissued for exercised stock options 44 (242) Purchase and retirement of treasury stock subsequent to reincorporation (6,572) -- ---------- ---------- Balance, end of period 124,242 112,121 RETAINED EARNINGS: Balance, beginning of period 59,958 72,962 Net income 4,057 3,548 Cash dividends (1,328) (864) ---------- ---------- Balance, end of period 62,687 75,646 ACCUMULATED OTHER COMPREHENSIVE INCOME: Balance, beginning of period 2,296 2,680 Other comprehensive income (loss), net of related income taxes (1,732) (66) ---------- ---------- Balance, end of period 564 2,614 TREASURY STOCK, SEE NOTE 1: Balance, beginning of period -- (20,979) 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 ---------- ---------- Balance, end of period -- (6,220) UNEARNED, RESTRICTED ESOP SHARES AT COST: Balance, beginning of period (6,781) (7,163) Release of earned ESOP shares -- 58 ---------- ---------- Balance, end of period (6,781) (7,105) CARRYING VALUE OF SHARES HELD IN TRUST FOR STOCK-RELATED COMPENSATION PLANS: Balance, beginning of period (2,635) (6,310) Net change in number and/or valuation of shares held in trust -- 75 Amortization of compensation related to MRP 300 301 ---------- ---------- Balance, end of period (2,335) (5,934) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY $ 178,377 $ 171,122 ========== ========== 5 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued) (in thousands) For the Three Months Ended June 30, 1999 and 1998 1999 1998 ------- ------- 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 (354) (1,053) Purchase of treasury stock (324) (103) Purchase of treasury stock used for exercised stock options -- (13) Reissuance of treasury stock to deferred compensation plan and/or exercised stock options 6 13 Shares reissued in acquisition of Towne Bank -- 853 Repurchase of shares forfeited from MRP -- -- Number of shares retired/repurchased, end ------- ------- of period (672) (303) ------- ------- Shares issued and outstanding, end of period 11,330 11,699 ======= ======= UNEARNED, RESTRICTED ESOP SHARES: Number of shares, beginning of period (746) (788) Release of earned shares -- 6 ------- ------- Number of shares, end of period (746) (782) ======= ======= 6 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Three Months Ended June 30, 1999 and 1998 1999 1998 ---------- --------- OPERATING ACTIVITIES Net income $ 44,057 $ 3,548 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes (133) -- Depreciation 612 383 Loss (gain) on sale of securities (2) (5) Net amortization of premiums and discounts on investments 247 374 Amortization of costs in excess of net assets acquired 788 569 Amortization of MRP compensation liability 300 301 Loss (gain) on sale of loans (390) (311) Net changes in deferred loan fees, premiums and discounts 338 125 Loss (gain) on disposal of real estate held for sale 12 -- Loss (gain) on disposal of property and equipment (6) -- Capitalization of mortgage servicing rights from sale of mortgages with servicing retained (69) (212) Amortization of mortgage servicing rights 75 69 Provision for losses on loans and real estate held for sale 710 667 FHLB stock dividend (418) (333) Cash provided (used) in operating assets and liabilities: Loans held for sale (7,517) (3,849) Accrued interest receivable 162 (575) Other assets (290) 10 Deferred compensation 102 65 Accrued expenses and other liabilities 933 668 Income taxes payable 228 (2,251) ---------- --------- Net cash provided (used) by operating activities (261) (757) ---------- --------- INVESTING ACTIVITIES: Purchase of securities available for sale (14,744) (99,445) Principal payments and maturities of securities available for sale 25,161 85,087 Proceeds from sales of securities available for sale 5,797 504 Purchase of securities held to maturity -- -- Principal payments and maturities of securities held to maturity 103 20 Purchase of FHLB stock -- (1,217) Loans originated and closed - net (277,521) (163,285) Purchase of loans and participating interest in loans (1,494) (37,452) Proceeds from sales of loans and participating interest in loans 30,298 36,309 Principal repayments on loans 193,722 113,556 Purchase of property and equipment (510) (411) Proceeds from sale of property and equipment 9 -- Additional capitalized costs of real estate held for sale net of insurance proceeds (53) -- Basis of real estate held for sale acquired in settlement of loans and disposed of during the period 1,001 385 Funds transferred to deferred compensation plan trusts (41) (20) Acquisitions, net cash (used) acquired (5,343) 9,328 ---------- --------- Net cash used by investing activities (43,615) (56,641) ---------- --------- (Continued on next page) 7 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) For the Three Months Ended June 30, 1999 and 1998 (Continued from prior page) 1999 1998 ---------- --------- FINANCING ACTIVITIES Increase (decrease) in deposits $ 19,710 $ 9,019 Proceeds from FHLB advances 122,500 82,654 Repayment of FHLB advances (103,653) (37,634) Proceeds from reverse repurchase borrowings -- (1,034) Repayments of reverse repurchase borrowings (3,568) -- Decrease-net in other borrowings 98 (663) Compensation expense recognized for shares released for allocation to participants of the ESOP: Original basis of shares -- 58 Excess of fair value of released shares over basis -- 90 Cash dividends paid (1,366) (802) Net (cost) proceeds of exercised stock options 44 (241) Purchase of treasury stock (6,572) (2,447) ---------- --------- Net cash provided by financing activities 27,193 49,000 ---------- --------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (16,683) (8,398) CASH AND DUE FROM BANKS, BEGINNING OF PERIOD 72,503 42,529 ---------- --------- CASH AND DUE FROM BANKS, END OF PERIOD $ 55,820 $ 34,131 ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 17,038 $ 15,310 Taxes paid $ 2,373 $ 4,415 Non-cash transactions: Loans, net of discounts, specific loss allowances and unearned income transferred to real estate owned $ 432 $ 308 Net change in accrued dividends payable $ 38 $ 62 Net change in unrealized gain (loss) in deferred compensation trust and related liability $ 44 $ 91 Fair value of stock issued and options assumed in connection with acquisitions $ -- $ 20,484 8 FIRST WASHINGTON BANCORP, INC. AND SUBSIDIARIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 and March 31, 1999 Note 1: Basis of Presentation and Reincorporation 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, 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 year ended March 31, 1999 (File No. 0-26584). 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. 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 purpose of the reincorporation was to save higher costs incurred as a result of being a Delaware corporation. The reincorporation was effected July 24, 1998 by merging FSBWB into a wholly-owned subsidiary which had been 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" or "the Company." 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 to be 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 recorded basis, business, management, benefit plans, location, assets, liabilities and net worth as did FSBWB. However, because the State of Washington treats all treasury stock as retired upon purchase, all purchases of treasury stock reduce stock issued and the cost of treasury stock acquired is charged to par value and paid-in capital. Note 2: Recent Developments Acquisition of 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 $5.9 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 $107,200 per quarter, beginning in the first quarter of the current period, or $429,000 per year. Founded in 1979, SCB was a commercial bank which had, before recording of goodwill, approximately $45 million in total assets, $41 million in deposits, $27 million in loans, and $4.1 million in shareholders' equity at March 31, 1999. SCB operated two full service branches in Lewiston, Idaho. 9 Change in Fiscal End: - -------------------- On May 21, 1999 the Company announced its decision to change its fiscal year end from March 31 to December 31 beginning with the current period which will end on December 31, 1999. 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 is 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 identify. The consolidation will be done in stages. The first phase, which is expected to be completed by January 1, 2000, will include the merger of Towne Bank and First Savings Bank of Washington and the selection of a single name and charter to be used by Towne Bank, First Savings Bank, Whatcom State Bank and Seaport Citizens Bank. Final integration of all data processing into a common system and the merger of Inland Empire Bank are scheduled for completion by December 31, 2000. Note 2: 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 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 area, which consists of southeast, central, north central, and western Washington state 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 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 June 30, 1999 ------------------------------------------------------ (dollars in thousands) Condensed Income Statement FSBW IEB TB Other * Total ---------- -------- -------- ------ ---------- Net interest income (loss) $ 9,305 $ 2,695 $ 3,219 $ 28 $ 15,247 Provision for loan losses 300 45 365 -- 710 Other income 1,042 592 244 (17) 1,861 Other expenses 5,502 1,761 2,138 382 9,783 Income (loss) before ---------- -------- -------- ------ ---------- income taxes 4,545 1,481 960 (371) 6,615 Income taxes (benefit) 1,559 674 455 (130) 2,558 ---------- -------- -------- ------ ---------- Net income (loss) $ 2,986 $ 807 $ 505 $ (241) $ 4,057 ========== ======== ======== ====== ========== June 30, 1999 ------------------------------------------------------ Total Assets $1,252,263 $203,002 $247,681 $ 847 $1,703,793 ========== ======== ======== ====== ========== Quarter Ended June 30, 1998 ------------------------------------------------------ (dollars in thousands) Condensed Income Statement FSBW IEB TB Other * Total ---------- -------- -------- ------ ---------- Net interest income (loss) $ 6,771 $ 2,421 $ 2,324 $ 343 $ 11,859 Provision for loan losses 483 44 140 -- 667 Other income 825 573 196 (1) 1,593 Other expenses 3,409 1,613 1,648 403 7,073 Income (loss) before ---------- -------- -------- ------ ---------- income taxes 3,704 1,337 732 (61) 5,712 Income taxes (benefit) 1,211 601 369 (17) 2,164 ---------- -------- -------- ------ ---------- Net income (loss) $ 2,493 $ 736 $ 363 $ (44) $ 3,548 ========== ======== ======== ====== ========== June 30, 1998 ------------------------------------------------------ Total Assets $ 992,663 $188,405 $170,512 $10,483 $1,362,063 ========== ======== ======== ======= ========== * 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): June 30 March 31 1999 1999 --------- --------- Interest-bearing deposits included in cash and due from banks $ 5,504 $ 21,377 --------- --------- Mortgage-backed securities 237,978 242,799 Other securities-taxable 80,828 83,686 Other securities-tax exempt 34,997 34,250 Other stocks with dividends 3,466 3,441 --------- --------- Total securities 357,269 364,176 Federal Home Loan Bank (FHLB) stock 23,555 23,137 --------- --------- $ 386,328 $ 408,690 ========= ========= The following table provides additional detail on income from deposits and securities for the periods indicated (in thousands): Quarters Ended June 30 ----------------------------- 1999 1998 --------- --------- Mortgage-backed securities $ 3,621 $ 2,761 --------- --------- Taxable interest and dividends 1,468 1,328 Tax-exempt interest 538 500 Federal Home Loan Bank stock- dividends 418 333 --------- --------- 2,424 2,161 --------- --------- $ 6,045 $ 4,922 ========= ========= 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 June 30 -------------------------- 1999 1998* -------- -------- Total shares originally issued 12,002 12,002 Less retired shares and treasury stock plus unvested shares allocated to MRP (719) (616) Less unallocated shares held by the ESOP (746) (785) -------- -------- Basic weighted average shares outstanding 10,537 10,601 Plus unvested MRP and stock option incremental shares considered outstanding for diluted EPS calculations 436 548 -------- -------- Diluted weighted average shares outstanding 10,973 11,149 ======== ======== Calculation of Outstanding Shares at --------------------- (in thousands) June 30 March 31 1999 1999 -------- -------- Total shares issued 12,002 12,002 Less retired shares and treasury stock (672) (354) -------- -------- Outstanding shares issued 11,330 11,648 ======== ======== * Adjusted for 10% stock dividend granted August 10, 1998 13 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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 three loan production offices located in southeast, central, north central and western Washington. Effective January 1, 1999, FWWB completed the acquisition of Whatcom State Bancorp whose wholly owned subsidiary, Whatcom State Bank (WSB), was merged with FSBW and operates as Whatcom State Bank, a Division of First Savings Bank of Washington. WSB, which is based in Bellingham, operates five full service branches and a loan office in northwest Washington. Effective April 1, 1999 FSBW completed the acquisition of Seaport Citizens Bank (SCB). SCB was merged with FSBW and its two branches in Lewiston, ID, together with FSBW's Clarkston, WA branch operate as a division of FSBW. IEB is an Oregon-chartered commercial bank whose deposits are insured by the FDIC under the Bank Insurance Fund (BIF). IEB conducts business from its main office in Hermiston, Oregon and its five branch offices and two loan production offices located in northeast Oregon. TB is a Washington-chartered commercial bank whose deposits are insured by the FDIC under BIF. TB conducts business from six full service branches in the Seattle, Washington, metropolitan area. The 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 current quarter ended June 30, 1999, 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 WSB and SCB on January 1, 1999 and April 1, 1999, respectively, although significant asset and liability growth also occurred at IEB and TB. 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 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 Recent Developments See Note 2 to Financial Statements 14 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 are Y2K compliant. A program for addressing the Y2K issue through awareness, assessment, renovation and testing has been developed and implemented. The testing phase has been completed on all internal operations and mission critical outside vendors. The results of the testing disclosed only insignificant items that needed to be resolved, all of which have since been corrected. The program also provided for awareness and assessment of customer Y2K issues which is ongoing. The Banks have adopted business contingency plans for the computer systems and facilities that they have determined to be most critical. These plans conform to guidance from the FFIEC on business contingency planning for Year 2000 readiness. Contingency plans include, among other actions, manual workarounds and identification of resource requirements and alternative solutions for resuming critical business processes in the event of a Year 2000-related failure. The three Bank subsidiaries have budgeted approximately $900,000, including $550,000 to cover soft and hard costs such as upgrading ATMs, contacting and monitoring vendors, contacting customers, providing information regarding preparations and testing the systems identified as critical and non-critical, and $350,000 for unidentified contingencies. FWWB and its Bank subsidiaries have incurred and expensed approximately $321,000 of Y2K-related costs in the fifteen month period ended June 30, 1999. Costs incurred and expensed in prior fiscal years were not significant. 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 are contacting their large loan and deposit customers to build Y2K awareness and encourage early development of contingency plans and solutions in an effort to prevent potential business disruption due to Y2K processing failures. Loan and deposit customers are being updated regularly about the Banks' 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 fully functional, or 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 have tested for the Y2K preparedness of all internal functions and external functions provided by third parties whenever possible and do not expect to experience any significant failures. In addition, contingency or alternate sources of support have been identified for each critical function and many non-critical functions. In the event that the Banks' data processing providers' systems prove not to be 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. 15 Comparison of Financial Condition at June 30 and March 31, 1999 Total assets increased $72.0 million, or 4.4%, from $1.632 billion at March 31, 1999, to $1.704 billion at June 30, 1999. The majority of the increase, $51.0 million, was from the acquisition of Seaport Citizens Bank including $6.2 million of goodwill resulting from the use of purchase accounting. The remaining growth of $20.9 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 $88.0 million, or 8.0%, from $1.103 billion at March 31, 1999, to $1.191 billion at June 30, 1999. The increase in gross loans of $95.0 million from $1.191 billion at March 31, 1999, to $1.286 billion at June 30, 1999, consists of $18.6 million of residential mortgages, $28.2 million of mortgages secured by commercial and multi-family real estate, $10.7 million of construction and land loans and $37.5 million of non-mortgage loans such as commercial, agricultural and consumer loans. These balances reflect the acquisition of SCB on April 1, 1999, which provided $27.4 million of gross loans consisting of $5.7 million of commercial and multi-family mortgages, $1.6 million of construction and land loans, $3.6 million of residential mortgages and $16.5 million of commercial and consumer loans. The majority of the increase in assets, excluding the SCB acquisition, was funded by a net increase of $35.1 million in deposits and FHLB advances. Asset growth was also funded by increased deposits and net income from operations. Deposits grew $60.4 million, or 6.3%, from $950.8 million at March 31, 1999, to $1.011 billion at June 30, 1999. The SCB acquisition provided $41.0 million of deposits. Other borrowings, primarily reverse repurchase agreements with securities dealers, decreased $3.5 million, from $78.5 million at March 31, 1999, to $75.0 million at June 30, 1999. Securities available for sale and held to maturity decreased $6.9 million, or 2.0%, from $364.2 million at March 31, 1998, to $357.3 million at June 30, 1999. Federal Home Loan Bank Stock increased $418,000 as FWWB was required to purchase more stock as a result of its increased use of FHLB advances. Real estate held for sale decreased $528,000. Comparison of Operating Results for the Quarters Ended June 30, 1999 and 1998 General. Net income for the first quarter of the current period was $4.1 million, an increase of $509,000 from the comparable quarter in fiscal 1999. 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 25.1% to $1.70 billion at June 30, 1999, total loans rose 27.2% to $1.286 billion, deposits grew 35.7% to $1.011 billion and borrowings increased 15.5% to $502.1 million. Net interest margin improved reflecting the acquisitions of WSB and SCB and continuing changes in the asset and liability mix. 16 Interest Income. Interest income for the quarter ended June 30, 1999, was $32.2 million compared to $25.8 million for the quarter ended June 30, 1998, an increase of $6.4 million, or 24.7%. The increase in interest income was a result of a $330.3 million, or 26.7%, growth in the average balance of interest-earning assets combined with a 13 basis point decrease in the average yield on those assets, which fell from 8.36% in the quarter ended June 1998, to 8.23% in June 1999. Average loans receivable for the first quarter of the current period increased by $270.6 million, or 29.9%, when compared to the same quarter in fiscal 1999. The increase in average loan balances reflect the acquisitions of WSB and SCB which added $80.3 million and $27.4 million of loans on the respective acquisition dates of January 1, 1999 and April 1, 1999. Interest income on loans increased by $5.3 million, or 20.5%, compared to the same quarter a year earlier, reflecting the impact of the increase in average loan balances and a 34 basis point decrease in the yield on those balances. A portion of the decreased yield on the loan portfolio is attributable to the decline in the prime rate of interest which averaged 8.00% for the most recent quarter compared to 8.50% for the same period a year earlier. Lower market yields in recent quarters also resulted in a significant amount of prepayment activity with higher yielding loans being refinanced into lower rates adding to the decline in loan yields for the quarter ended June 30, 1999. Average loans receivable represented 74.9% of average earning assets for the quarter ended June 30, 1999, compared to 73.1% 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 the current period increased $59.7 million compared to the first quarter of fiscal 1999, and interest and dividend income from those investments increased by $1.1 million for the June 1999 quarter compared to June 1998. The increase of interest income on this portfolio largely reflects that, while the average balance of mortgage-backed obligations increased by $43.1 million over the same quarter a year earlier, the yield on those securities increased 42 basis points. The increase in the yield on this portfolio primarily reflects an increase in market rates which resulted in increased yields on many adjustable rate securities which comprise a large portion of this portfolio. In addition, declining market rates during the June 30, 1998 quarter let to accelerated amortization of net premiums as a result of increased prepayments on the mortgage loans underlying the mortgage backed securities adversely effecting the yield reported for that period. Average balances for other investment securities and deposits increased $10.5 million, and the yield on those balances increased 6 basis points also reflecting rising market rates. Holdings of FHLB stock (excluding the SCB and WSB acquisitions) increased commensurate with the growth in FHLB advances and the yield on that stock decreased 54 basis points. Interest Expense. Interest expense for the quarter ended June 30, 1999, was $16.9 million compared to $13.9 million for the comparable period in 1998, an increase of $3.0 million, or 21.6%. The increase in interest expense was due to the $344.0 million growth in average interest-bearing liabilities. The increase in average interest-bearing liabilities in the quarter ended June 1999 was largely due to a $255.7 million increase in the average balance of deposits combined with an $104.0 million growth in average FHLB advances and other borrowings. The increased average deposit balances reflect the acquisitions of WSB and SCB which added $84.8 million and $40.6 million of deposits on the respective acquisition dates of January 1, 1999 and April 1, 1999. These increased balances resulted in a $2.0 million increase in deposit related interest expense, despite a 32 basis point decline in the average rate paid during the period. The average rate on deposits decreased from 4.39% for the quarter ended June 30, 1998, to 4.07% for the quarter ended June 30, 1999, reflecting the $28.6 million growth in non-interest bearing deposits, of which $21.2 million is from acquisitions. Average FHLB advances totaled $407.7 million during the quarter ended June 30, 1999, as compared to $303.7 million during the quarter ended June 30, 1998, resulting in a $1.3 million increase in related interest expense. The average rate paid on those advances decreased from 6.06% for the quarter ended June 30, 1998, to 5.77% for the comparable period in 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 $15.7 million from $92.4 million for the quarter ended June 30, 1998, to $76.7 million for the same period in 1999, and the related interest expense decreased $305,000, from $1.32 million to $1.01 million for the respective periods. The cost of other borrowings decreased 43 basis points from 5.72% for the quarter ended June 30, 1998 to 5.29% for the June 1999 quarter. The cost of total interest-bearing liabilities declined 35 basis points from 4.95% for the three months ended June 30, 1998 to 4.60% for the three months ended June 30, 1999. 17 The following tables provide additional comparative data on the Company's operating performance: Quarters Ended Average Balances June 30 ---------------- ---------------------------- (in thousands) 1999 1998 ----------- ----------- Investment securities and deposits $ 131,486 $ 120,952 Mortgage-backed obligations 238,092 194,957 Loans 1,175,625 904,996 FHLB stock 23,141 17,155 ----------- ----------- Total average interest-earning asset 1,568,344 1,238,060 Non-interest-earning assets 99,315 75,933 ----------- ----------- Total average assets $ 1,667,659 $ 1,313,993 =========== =========== Deposits $ 990,137 $ 734,480 Advances from FHLB 407,705 303,672 Other borrowings 76,689 92,418 Total average interest-bearing ----------- ----------- liabilities 1,474,531 1,130,570 Non-interest-bearing liabilities 10,804 11,055 ----------- ----------- Total average liabilities 1,485,335 1,141,625 Equity 182,324 172,368 ----------- ----------- Total average liabilities and equity $ 1,667,659 $ 1,313,993 =========== =========== Interest Rate Yield/Expense (rates are annualized) -------------------------------------------------- Interest Rate Yield: Investment securities and deposits 6.12% 6.06% Mortgage-backed obligations 6.10% 5.68% Loans 8.91% 9.25% FHLB stock 7.25% 7.79% Total interest rate yield on interest-earning ----------- ----------- assets 8.23% 8.36% ----------- ----------- Interest Rate Expense: Deposits 4.07% 4.39% Advances from FHLB 5.77% 6.06% Other borrowings 5.29% 5.72% Total interest rate expense on interest- ----------- ----------- bearing liabilities 4.60% 4.95% ----------- ----------- Interest spread 3.63% 3.41% =========== =========== Net interest margin on interest earning assets 3.90% 3.84% ----------- ----------- Additional Key Financial Ratios (ratios are annualized) ------------------------------------------------------- Return on average assets 0.98% 1.08% Return on average equity 8.93% 8.26% Average equity/average assets 10.93% 13.12% Average interest-earning assets/interest-bearing liabilities 106.36% 109.51% Non-interest [other operating] expenses/average assets Excluding amortization of costs in excess of net assets acquired (goodwill) 2.16% 1.99% Including amortization of costs in excess of net assets acquired (goodwill) 2.35% 2.16% Efficiency ratio [non-interest (other operating) expenses/revenues] Excluding amortization of costs in excess of net assets acquired (goodwill) 52.58% 48.35% Including amortization of costs in excess of net assets acquired (goodwill) 57.18% 52.58% 18 Provision for Loan Losses. During the quarter ended June 30, 1999, the provision for loan losses was $710,000, compared to $667,000 for the quarter ended June 30, 1998, an increase of $43,000. The increase in the provision for losses reflects loan portfolio growth as well as changes in the portfolio composition which were generally offset by lower net charge offs in the most recent quarter. A comparison of the allowance for loan losses at June 30, 1999 and 1998 shows an increase of $3.6 million from $9.7 million in fiscal 1999 to $13.3 million in the current year. The allowance for loan losses increased by $1.0 million, to $13.3 million at June 30, 1999, compared to $12.3 million at March 31, 1999. The allowance for loan losses as a percentage of net loans (loans receivable excluding allowance for losses) was 1.10% at both June 30, 1999 and 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. 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 shall be included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, an allocated formula allowance, and an unallocated allowance. Losses on specific loans are provided for when the losses are probable and estimable. General loan loss reserves are established to provide for inherent loan portfolio risks not specifically provided for. The level of general reserves is based on analysis of potential exposures existing in the Banks' loan portfolios including evaluation of historical trends, current market conditions and other relevant factors identified by management at the time the financial statements are prepared. The formula allowance is calculated by applying loss factors to outstanding loans, excluding loans with specific allowances. Loss factors are based on the Company's historical loss experience adjusted for significant factors including the experience of other banking organizations that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. The unallocated allowance is based upon management's evaluation of various factors that are not directly measured in the determination of the formula and specific allowances. This methodology may result in losses or recoveries differing significantly from those provided in the financial statements. 19 The following tables are provided to disclose additional detail on the Banks' loans and allowance for loan losses (in thousands): June 30 March 31 1999 1999 ---------- ---------- Loans (including loans held for sale): Secured by real estate One to four single family dwellings (SFD) $ 426,305 $ 407,673 Commercial and multifamily 353,036 324,858 Construction and land-secured 227,817 217,094 Commercial 173,123 149,943 Agribusiness 52,189 46,800 Consumer, including credit cards 53,873 44,346 ---------- ---------- $1,286,343 $1,190,714 Less loans in process 77,457 71,638 Less deferred fees and discounts 4,538 4,146 ---------- ---------- Net loans outstanding before allowance for loan losses $1,204,348 $1,114,930 Less allowance for loan losses 13,305 12,261 ---------- ---------- Total net loans at end of period $1,191,043 $1,102,669 ========== ========== Allowance for loan losses as a percentage of net loans outstanding 1.10% 1.10% Quarters Ended June 30 ------------------------ 1999 1998 --------- -------- Balance, beginning of the year $ 12,261 $ 7,857 Allowances added through business combinations 477 1,616 Provision 710 667 Recoveries of loans previously charged off: Residential real estate -- -- Commercial/multifamily real estate -- -- Construction/land -- -- Commercial business 22 66 Agribusiness -- -- Consumer finance 2 2 Credit cards 2 1 ------- -------- 26 69 Loans charged off: Residential real estate -- (25) Commercial/multifamily real estate -- -- Construction/land -- (13) Commercial business (134) (402) Agribusiness -- -- Consumer finance (3) (17) Credit cards (32) (35) ------- ------- (169) (492) ------- ------- Net charge offs (143) (423) ------- ------- Balance, end of year $ 13,305 $ 9,717 ========= ======== Charge-offs as a percentage of average net book value of loans outstanding for the period. 0.01% 0.05% 20 The following is a schedule of the Company's allocation of the allowance for loan losses: June 30 March 31 1999 1999 ------- -------- Specific or allocated loss allowances: Secured by real estate: One- to four-family real estate loans $ 2,794 $ 2,757 Multifamily and commercial 4,080 3,567 Construction 1,676 1,597 Commercial/agricultural 2,569 2,522 Consumer, credit card and other 1,044 841 ------- -------- Total allocated 12,163 11,284 Unallocated 1,142 977 ------- -------- Total allowance for loan losses $13,305 $ 12,261 ======= ======== Ratio of allowance for loan losses to non-performing loans 1.92 1.60 Allowance for loan losses as a percent of net loans (loans receivable excluding allowance for losses) 1.10% 1.10% Other Operating Income. Other operating income increased $268,000 from $1.6 million for the quarter ended June 30, 1998, to $1.9 million for the quarter ended June 30, 1999. The increase included a $250,000 increase in other fees and service charges due largely to the addition of WSB and SCB's operations, combined with increases in fee income at FSBW, IEB and TB reflecting deposit growth and pricing adjustments. The volume of loan sales decreased from $36.3 million, for the quarter ended June 30, 1998, to $30.3 million, for the quarter ended June 30, 1999 resulting in a decrease of gain on loan sales from $523,000 for the June 1998 quarter to $459,000 for the most recent quarter. Gains on loan sales were adversely impacted by the rising interest rate environment during the June 1999 quarter and by a lower amount of sales of SBA loans which often result in greater gains than comparable volumes of non-SBA loan sales. 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 to reduce the Bank's exposure to the risk of rising interest rates. Other Operating Expenses. Other operating expenses increased $2.7 million from $7.1 million for the quarter ended June 30, 1998, to $9.8 million for the quarter ended June 30, 1999. The increase in expenses was largely due to the inclusion of WSB and SCB's operating expenses in the first quarter of the current year that were not present in fiscal 1999. The increase in other operating expenses was partially offset by a $315,000 increase in capitalized loan origination costs resulting from an increased volume in loan origination. In addition to the acquisitions of WSB and SCB, increases in other operating expenses reflect the overall growth in assets and liabilities, customer relationships, branch location and complexity of operations as FWWB continues to expand. Because of 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 to 52.58%, for the first quarter of the current year, from 48.35% for the same period in fiscal 1999. Other operating expenses as a percentage of average assets were 2.35% (2.16% excluding the amortization of goodwill) for the quarter ended June 30, 1999,compared to 2.16% (1.99% excluding the amortization of goodwill) for the quarter ended June 30, 1998. Goodwill amortization increased by $219,000 compared to the same quarter a year earlier as a result of the acquisitions of WSB and SCB. Income Taxes.. Income tax expense was $2.6 million for the quarter ended June 30, 1999, compared to $2.2 million for the comparable quarter in 1998. The $394,000 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 paying state income taxes; and that the expenses from the amortization of costs in excess of net assets acquired in purchases (Goodwill) 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, 1999 and 1998, were 39% and 38%, respectively. 21 Asset Quality The following tables are provided to disclose additional details on asset quality (in thousands): June 30 March 31 1999 1999 --------- -------- Non-performing assets at end of the period: Nonaccrual Loans: One- to four-family real estate loans $ 3,013 $ 3,564 Multifamily real estate 147 351 Commercial real estate 351 -- Construction 1,393 767 Commercial business 961 1,392 Agricultural business 47 47 Consumer, credit card and other 12 17 --------- -------- 5,924 6,138 Loans more than 90 days delinquent, still on accrual: One- to four-family real estate loans 2 20 Multifamily real estate 410 -- Commercial real estate -- 384 Construction -- -- Commercial business 41 -- Agricultural business 473 1,052 Consumer, credit card and other 80 82 --------- -------- 1,006 1,538 --------- -------- Total non-performing loans $ 6,930 $ 7,676 ========= ======== Non-performing loans to net loans 0.58% 0.69% Non-performing loans as a percentage of total net loans at end of the period 0.58% 0.69% Ratio of allowance for loan losses to non-performing loans at end of the period 192% 160% Non-performing assets as a percentage of total assets at end of the period 0.47% 0.57% Troubled debt restructuring [TDR's] at end of the period $ 376 $ 380 --------- -------- Troubled debt restructuring as a percentage of: Total gross principal of loans outstanding at end of the period 0.03% 0.03% Total assets at end of the period 0.02% 0.02% 22 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. 23 Sensitivity Analysis The table of Interest Rate Risk Indicators sets forth, as of June 30, 1999, 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 $ (2,762) (4.5%) $(80,479) (43.9%) +300 (1,639) (2.7%) (63,771) (34.8%) +200 (813) (1.3%) (44,192) (24.1%) +100 (261) (0.4%) (22,463) (12.3%) 0 0 0 0 0 -100 (713) (1.2%) 9,496 5.2% -200 (2,015) (3.3%) 6,815 3.7% -300 (4,526) (7.4%) ( 4,403) (2.4%) -400 (7,828) (12.9%) (21,240) (11.6%) - ------------- (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 June 30, 1999. The table sets forth the amounts of interest- earning assets and interest-bearing liabilities which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future periods shown. At June 30, 1999, total interest-bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same time period by $147.2 million, representing a one-year gap to total assets ratio of (8.64%). 24 Table of Interest Sensitivity Gap 6 Months 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 $ 105,565 $ 34,857 $ 832 $ 417 $ -- $ -- $ 141,671 Fixed-rate mortgage loans 40,914 38,106 131,063 111,457 151,865 94,160 567,565 Adjustable-rate mortgage loans 101,154 54,710 46,926 17,683 -- -- 220,473 Fixed-rate mortgage-backed securities 11,230 10,760 55,908 32,942 20,803 2,666 134,309 Adjustable-rate mortgage- backed securities 101,642 3,525 -- -- -- -- 105,167 Fixed-rate agriculture/ commercial loans 11,174 5,404 13,724 20,498 11,375 1,076 63,251 Adjustable-rate agriculture/ commercial loans 162,039 -- -- -- -- -- 162,039 Consumer and other loans 17,454 3,472 11,798 8,889 1,647 10,173 53,433 Investment securities and interest-bearing deposits 28,309 3,008 17,775 33,710 16,430 49,368 148,600 --------- --------- -------- --------- -------- -------- ---------- Total rate-sensitive assets 579,481 153,842 278,026 225,596 202,120 157,443 1,596,508 --------- --------- -------- --------- -------- -------- ---------- Interest-bearing liabilities(2): Regular savings and NOW accounts 20,780 20,779 48,485 48,485 -- -- 138,529 Money market deposit accounts 73,831 44,299 29,533 -- -- -- 147,663 Certificates of deposit 280,043 159,719 132,157 33,807 8,711 21 614,458 FHLB advances 156,631 50,548 103,280 102,290 13,500 849 427,098 Other borrowings 69,122 -- -- -- -- -- 69,122 Retail repurchase agreements 2,619 2,192 -- 1,065 -- -- 5,876 --------- --------- --------- --------- -------- -------- ---------- Total rate-sensitive liabilities 603,026 277,537 313,455 185,647 22,211 870 1,402,746 --------- --------- --------- --------- -------- -------- ---------- Excess (deficiency) of interest- sensitive assets over interest- sensitive liabilities $ (23,545) $(123,695) $ (35,429) $ 39,949 $179,909 $156,573 $ 193,762 ========= ========= ========= ========= ======== ======== ========== Cumulative excess (deficiency) of interest-sensitive assets $ (23,545) $(147,240) $(184,669) $(142,720) $ 37,189 $193,762 $ 193,762 ========= ========== ========= ========= ======== ======== ========== Cumulative ratio of interest- earning assets to interest- bearing liabilities 96.10% 83.28% 84.70% 89.66% 102.65% 113.81% 113.81% ========= ========== ========= ========= ======== ======== ========== Interest sensitivity gap to total assets (1.38%) (7.26%) (2.08%) 2.34% 10.56% 9.19% 11.37% ========== ========== ========= ========= ======== ======== ========== Ratio of cumulative gap to total assets (1.38%) (8.64%) (10.72%) (8.38%) 2.18% 11.37% 11.37% ========== ========== ========= ========= ======= ======== =========== (footnotes on following page) 25
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 $273.8 million or (16.07%) 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 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 three months ended June 30, 1999, the Banks originated $277.5 million of loans and purchased $1.5 million of loans. In addition, during this three month period, funds were used to purchase $6.6 million of treasury stock and pay out $10.1 million for the acquisition of SCB. These activities were funded primarily by principal repayments on loans and securities, sales of loans, increases in FHLB advances, and deposit growth. For the three months ended June 30, 1999, principal repayments on loans totaled $193.7 million and the Banks' proceeds from the sale of mortgage loans totaled $30.3 million. FHLB advances and other borrowings increased $15.4 million (net of the SCB acquisition) for the same period, and net deposit growth was $19.7 million (net of the SCB 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, 1999, the Banks had undisbursed loans in process totaling $77.5 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, 1999, would give FSBW a total credit line of $563.7 million. Advances under this credit facility totaled $421.5 million, or 33.7% of FSBW's assets at June 30, 1999. IEB and TB also maintain credit facilities with various financial institutions, including the FHLB of Seattle, that would allow them to borrow up to $20.8 million. At June 30, 1999, savings certificates amounted to $614.5 million, or 61%, of the Banks' total deposits, including $438.8 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. 26 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, 1999, FWWB's banking subsidiaries exceeded all current regulatory capital requirements to be classified as well capitalized institutions, the highest regulatory standard. In order to be categorized as a well capitalized institution, the FDIC requires banks it regulates to maintain a leverage ratio, defined as Tier 1 capital divided by total regulatory assets, of at least 5.00%; Tier 1 (or core) capital of at least 6.00% of risk-weighted assets; and total capital of at least 10.00% of risk-weighted assets. FWWB, as a bank holding company, is regulated by the Federal Reserve Board (FRB). The FRB has established capital requirements for bank holding companies that generally parallel the capital requirements of the FDIC for banks with $150 million or more in total consolidated assets. FWWB's total regulatory capital must equal 8% of risk-weighted assets and one half of the 8% (4%) must consist of Tier 1 (core) capital. The actual regulatory capital ratios calculated for FWWB along with the minimum capital amounts and ratios for capital adequacy purposes were as follows (dollars in thousands): Minimum for capital Actual adequacy purposes ------------------- ------------------- Amount Ratio Amount Ratio -------- ------ ------- ------- June 30, 1999: FWWB-consolidated Total capital to risk- weighted assets $ 151,647 13.45% $90,176 8.00% Tier 1 capital to risk- weighted assets 138,342 12.27 45,088 4.00 Tier 1 leverage capital average assets 138,342 8.51 65,035 4.00 27 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 8K Report (s) on Form 8-K filed during the quarter ended June 30, 1999, are as follows: Date Filed Purpose ---------- ------- May 21, 1999 Announcement of change in fiscal year end from March 31 to December 31 beginning with the period ended on December 31,1999. 28 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, 1999 /s/ Gary Sirmon ------------------------------------- Gary Sirmon President and Chief Executive Officer August 13, 1999 /s/ D. Allan Roth ------------------------------------- D. Allan Roth Secretary and Treasurer and Executive Vice President 29 EX-27 2
9 1000 3-MOS MAR-31-2000 JUN-30-1999 55820 3554 1950 0 355215 2054 2091 1191043 13305 1703793 1011203 74997 12117 427099 0 0 113 178264 1703793 26128 5851 194 32173 10048 16926 14537 710 2 9783 6615 4057 0 0 4057 0.39 0.37 3.63 5924 1006 376 0 12261 169 26 13305 12163 0 1142
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