SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________________ to ___________________
Commission File Number 0-25076
WASHINGTON BANCORP
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(Exact Name of Small Business Issuer in its Charter)
Iowa 42-1446740
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
102 East Main Street
Washington, Iowa 52353
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (319) 653-7256
Securities Registered under Section 12(b) of the Exchange Act:
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None
Securities Registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES X . NO ___.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The Issuer had $9,557,000 in revenues for the fiscal year ended June 30, 2001.
As of September 4, 2001, there were issued and outstanding 517,803 shares of the
Issuer's Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the Issuer, computed by reference to the last known sale price
of such stock as of August 28, 2001, was $6.9 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the Issuer that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report to Stockholders for the
Fiscal Year Ended June 30, 200l.
Part III of Form 10-KSB - Portions of the Proxy Statement for the 2001 Annual
Meeting of Shareholders.
Transitional Small Business Disclosure Format YES [ ] NO [ X ]
PART I
Item 1. Description of Business
General
Washington Bancorp ("Washington," and with its subsidiaries, the "Company") is
an Iowa corporation which was organized in October 1995 by Washington Federal
Savings Bank ("Washington Federal") for the purpose of becoming a savings and
loan holding company. Washington Federal is a federally chartered savings bank
headquartered in Washington, Iowa. Originally chartered in 1934, Washington
Federal converted to a federal savings bank in 1994.
In March 1996, Washington Federal converted to the stock form of organization
through the sale and issuance of its common stock to Washington. Washington, on
June 24, 1997, entered into a merger agreement to acquire Rubio Savings Bank of
Brighton, Brighton, Iowa ("Rubio") for an aggregate merger consideration of
approximately $4.6 million. Rubio is held as a separate subsidiary of
Washington. In January 1998, Washington became a bank holding company upon its
acquisition of Rubio. In December 1998, Wellman Federal Savings, a full-service
branch of Washington Federal, was opened in Wellman, Iowa. In September 2000,
Richland Federal Savings, a full-service branch of Washington Federal, was
opened in Richland, Iowa. The principal assets of Washington are Washington
Federal and Rubio (collectively, the "Banks"). Washington presently has no
separate operations and its business consists of the business of the Banks.
Deposits of both institutions are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the fullest extent permitted by law and regulation.
Washington Federal attracts deposits from the general public in its local market
areas and uses such deposits primarily to invest in one- to four-family
residential loans secured by owner occupied properties and non-residential
properties, as well as construction loans on such properties. Washington Federal
also makes commercial loans, consumer loans, automobile loans, and has
occasionally been a purchaser of fixed-rate mortgage-backed securities.
Rubio attracts deposits from the general public and businesses in its local
market area. The deposits are primarily invested in U.S. government agencies,
agricultural operating loans, commercial loans, one- to four-family residential
real estate loans, and farm real estate loans. Rubio also makes commercial real
estate loans, automobile loans, and other consumer loans.
At June 30, 2001, the Company had assets of approximately $119.7 million,
deposits of approximately $72.9 million and stockholders' equity of
approximately $11.6 million.
The executive office of the Company is located at 102 East Main Street,
Washington, Iowa 52353, telephone (319) 653-7256.
Forward-Looking Statements
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," "believe" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any such
forward- looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligations, to
revise any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
Lending Activities
General. The Company's loan portfolio predominantly consists of mortgage loans
secured by one- to four-family residences. The Company also makes home equity
and second mortgage loans, multi-family and commercial real estate loans,
construction loans, commercial business loans and consumer loans.
At June 30, 2001, the Company's net loan portfolio totaled $84.1 million. Loans
secured by first mortgages on one- to four-family residences totaled $48.8
million, or 57.6% of the Company's total loan portfolio at June 30, 2001. The
Company originates and retains substantially all of its mortgage loan portfolio,
but recently has experienced an increase in the number of mortgage loans
originated for sale to the secondary market.
Loan Approval Authority. Loans for the purchase of real estate, construction
loans, first mortgage refinances, second mortgages, and commercial loans to
existing customers for more than $125,000, secured consumer loans for more than
$35,000, unsecured consumer loans for more than $20,000 and commercial loans to
new customers for more than $50,000 require loan committee approval. All other
loans require the approval of two loan officers. The Board of Directors is
provided a listing of all loans granted on a monthly basis for ratification.
Loans to One Borrower. Washington Federal, a savings bank, is subject to the
same limits as those applicable to national banks which, under current
regulations, limit loans-to-one borrower to an amount equal to the greater of
$500,000 or 15% of unimpaired capital and surplus (except for loans fully
secured by certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). Washington Federal's
maximum loan-to-one borrower limit was approximately $1.1 million as of June 30,
2001. Washington Federal's largest amount outstanding to one borrower or group
of related borrowers, as of that date, was a group of loans secured by real
estate and commercial operating loans in the aggregate amount of $703,000. All
of the loans to this borrower have performed in accordance with their terms
since their origination.
Rubio, a state bank, is subject to current regulations which limit loans-to-one
borrower to an amount equal to 15% of the aggregate capital (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of aggregate capital.) Rubio's maximum loan-to-one borrower
limit was approximately $574,000 as of June 30, 2001. Rubio's largest amount
outstanding to one borrower or group of related borrowers was a group of loans
secured by agricultural real estate and agricultural operating loans in the
aggregate amount of $371,000. All of the loans to this borrower have performed
in accordance with their terms since their origination.
Loan Portfolio Composition. The following information sets forth the composition
of the Company's loan portfolio in dollar amounts and in percentages at the
dates indicated. All of the loans in the table have fixed interest rates, except
for the commercial business loans which have adjustable rates, and certain
adjustable rate one- to four-family real estate loans offered beginning in March
1996. The amount of adjustable rate one- to four-family loans totaled $10.0
million at June 30, 2001.
At June 30,
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2001 2000 1999 1998 1997
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Real Estate Loans:
-----------------
One- to four-family ................... $48,771 57.6% $50,766 60.0% $49,464 67.5% $45,303 68.4% $40,696 77.1%
Home equity and second mortgage ....... 2,523 2.9 2,431 2.9 1,258 1.7 1,164 1.7 1,233 2.3
Multi-family and commercial real estate 13,936 16.5 13,727 16.2 8,612 11.8 7,411 11.2 4,775 9.1
Other ................................. -- -- -- -- -- -- -- -- 99 0.2
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Total mortgages .................... 65,230 77.0 66,924 79.1 59,334 81.0 53,878 81.3 46,803 88.7
Construction loans .................... 1,174 1.4 1,782 2.1 796 1.1 152 0.2 694 1.3
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Total real estate loans ............ 66,404 78.4 68,706 81.2 60,130 82.1 54,030 81.5 47,497 90.0
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Commercial business loans ............... 12,498 14.8 10,963 12.9 8,714 11.9 8,164 12.3 2,715 5.2
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Consumer Loans:
Automobile ............................ 4,936 5.8 4,142 4.9 3,161 4.3 3,065 4.6 1,899 3.6
Deposit account ....................... 865 1.0 825 1.0 1,245 1.7 1,014 1.6 645 1.2
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Total consumer loans ............... 5,801 6.8 4,967 5.9 4,407 6.0 4,079 6.2 2,544 4.8
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Total loans ............................. 84,703 100.0% 84,636 100.0% 73,251 100.0% 66,273 100.0% 52,756 100.0%
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Less:
Allowance for loan losses ............. 608 648 472 388 226
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Total loans receivable, net ........ $84,095 $83,988 $72,779 $65,885 $52,530
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There are no foreign loans outstanding for any of the years presented.
Loan Maturities. The following schedule illustrates the contractual maturity and
weighted average rates of the Company's loan portfolio at June 30, 2001. Loans
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate
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Mortgage Construction Commercial Business Consumer Total
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Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
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(In Thousands)
Due during
period ending
June 30,
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2002................. $13,279 8.58% $1,174 8.59% $ 6,549 9.43% $1,453 10.14% $22,455 8.93%
2003................. 13,188 8.49 --- --- 2,314 8.78 985 10.50 16,487 8.66
2004................. 12,878 8.79 --- --- 1,015 9.69 1,142 10.22 15,035 8.96
2005 and 2006........ 8,170 8.38 --- --- 1,996 9.46 2,196 10.30 12,362 8.89
2007 to 2011......... 2,757 8.13 --- --- 321 9.20 19 9.25 3,097 8.25
2012 to 2016......... 5,960 8.02 --- --- 303 9.09 6 9.24 6,269 8.07
2017 and thereafter.. 8,998 8.24 --- --- --- --- --- --- 8,998 8.24
------- ------ ------- ------ -------
$65,230 $1,174 $12,498 $5,801 $84,703
======= ====== ======= ====== =======
As of June 30, 2001, the total amount of loans due after June 30, 2002 which
have predetermined interest rates was $52.3 million, while the total amount of
loans due after such date which have floating or adjustable interest rates was
$10.0 million.
Loan Originations, Purchases and Sales. Real estate loans are originated by the
Company's staff of salaried loan officers who receive applications from existing
customers, walk-in customers from the local community, advertising, and
referrals from realtors and contractors.
While the Company originates predominately fixed-rate loans, its ability to
originate loans is dependent upon the relative customer demand for loans in its
market area. Demand is affected by the interest rate environment.
The Company originates loans for its own portfolio and originates a limited
number of loans for sale on the secondary market. Washington Federal originated
26 one- to four-family real estate loans for the secondary market during fiscal
2001, up from two during fiscal 2000. Washington Federal originated one 90% Farm
Service Agency, Guaranteed Farm Ownership, and Guaranteed Operation Loan
totaling $300,000 during fiscal year 2001. Rubio originated five 90% Farm
Service Agency, Guaranteed Farm Ownership, and Guaranteed Operation Loans
totaling $731,000 during fiscal year 2001. The loans are backed by 90%
guarantees of the U.S. government.
In periods of rising interest rates, the Company's ability to originate large
dollar volumes of real estate loans may be substantially reduced or restricted,
with a resultant decrease in related fee income and operating earnings.
The following table shows the loan origination, purchase, sale and repayment
activities of the Company for the periods indicated.
Year Ended June 30,
--------------------------------
2001 2000 1999
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(Dollars in Thousands)
Originations by type:
--------------------
Real estate
One- to four-family .......................... $ 11,404 $ 12,869 $ 22,118
Home equity and second mortgage ............. 885 1,072 992
Multi-family and commercial real estate ..... 5,888 9,070 5,860
Construction ................................ 1,877 3,914 1,623
Non real estate
Commercial business ......................... 13,855 10,906 6,827
Consumer .................................... 5,259 4,748 4,728
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Total loans originated ................... 39,168 42,579 42,148
Loans sold to secondary market ................. (2,660) (157) (522)
Principal (repayments) ......................... (36,441) (31,037) (34,648)
(Increase) decrease in allowance for loan losses 40 (175) (84)
--------------------------------
Net increase (decrease) ........................ $ 107 $ 11,210 $ 6,894
================================
One- to Four-Family Residential Mortgage Lending. The Company's primary lending
activity consists of the origination of residential mortgage loans secured by
property located in the Company's market area of Washington County, Iowa and
adjoining counties. The Company will not generally originate a loan which
exceeds 85% of the lesser of the appraised value or selling price of the
mortgaged property.
The Company primarily originates three year balloon mortgage loans with an
amortization of up to 25 years. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Company's cost of funds.
The Company generally does not charge origination fees for loans. The Company
originates its loans for its own portfolio and originates a limited number of
loans for sale to the secondary market. Accordingly, the Company's portfolio
lending may not conform to secondary market guidelines, such as Freddie Mac's
guidelines, primarily as they relate to appraisal requirements. It is the
current policy of the Company to remain primarily a portfolio lender.
Loan originations are generally obtained from existing customers, members of the
local community, advertisements, and referrals from realtors and contractors
within the Company's market area. Mortgage loans originated and held by the
Company in its portfolio generally include due-on-sale clauses which provide the
Company with the contractual right to deem the loan immediately due and payable
in the event that the borrower transfers ownership of the property without the
Company's consent.
The Company also has a limited amount of non-owner-occupied permanent
residential one- to four-family mortgage loans in its portfolio. These loans are
underwritten using generally the same criteria as owner-occupied permanent
residential one- to four-family mortgage loans.
Home Equity and Second Mortgage Lending. The Company originates home equity and
second mortgage improvement loans. Home equity and second mortgage loans,
together with loans secured by all prior liens, are generally limited to 90% or
less of the appraised value of the property. Generally, such loans have a
maximum term of up to three years with an amortization of up to 15 years. As of
June 30, 2001, home equity and second mortgage loans amounted to $2.5 million
which represented 2.9% of the Company's total loan portfolio.
Multi-Family and Commercial Real Estate Loans. The Company has historically
engaged in a limited amount of multi-family and commercial real estate lending.
Generally such loans have a term of three years and an amortization of up to 25
years, and have loan-to-value ratios of up to 80%. At June 30, 2001, $13.9
million or 16.5% of the Company's total loan portfolio consisted of loans
secured by existing multi-family residential real estate and commercial real
estate, including primarily farm real estate and one- to four-family housing
developments. All of the Company's multi-family and commercial real estate loans
are secured by properties located in its market area. The largest multi-family
and commercial real estate loan as of June 30, 2001 totaled $312,000, and was
secured by farm land and buildings. The loan has performed in accordance with
its terms since origination.
Multi-family residential and commercial real estate lending is generally
considered to involve a higher degree of risk than permanent residential one- to
four-family lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the economy generally. The Company generally attempts
to mitigate the risks associated with multi-family residential and commercial
real estate lending by, among other things, lending on collateral located in its
market area and generally to individuals who reside in its market.
The Company requires appraisals on all properties securing non-residential and
multi-family residential real estate loans. Such appraisals are completed by the
Company's staff. If these loans exceed $250,000 a certified appraisal is
completed by a fee appraiser not employed by the Company. In originating
multi-family residential and non-residential real estate loans, the Company
considers the quality of the property, the credit of the borrower, cash flow
projections, location of real estate and the quality of management involved with
the property.
Construction Loans. The Company makes construction loans primarily to
individuals for the construction of single-family residences. At June 30, 2001,
construction loans amounted to $1.2 million, or 1.4% of the Company's total loan
portfolio. Construction loan rates are fixed at prime- based rates during the
construction period. The terms of these loans are generally six months with an
option to renew for an additional six months, at which time the loans are due.
During the construction period, only interest payments are due, and on a
case-by-case basis, the Company may allow the payment of interest from loan
proceeds. The Company construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Company
periodically reviews the progress of the underlying construction project.
Construction loans are underwritten pursuant to the same general guidelines used
for originating permanent one- to four-family loans. Construction lending is
generally limited to the Company's market area.
Construction lending is generally considered to involve a higher degree of
credit risk than long- term financing of residential properties. The Company's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, the Company may be compelled to advance additional funds to complete
the construction. Furthermore, if the estimate of value proves to be inaccurate,
the Company may be confronted, at or prior to the maturity of the loan, with a
property having a value that is insufficient to assure full repayment. For the
small number of speculative loans originated to builders, the ability of the
builder to sell completed dwelling units will depend, among other things, on
demand, pricing and availability of comparable properties, and economic
conditions. As of June 30, 2001, the Company had three speculative loans to
builders secured by the property being constructed totaling $555,000.
Commercial Business Lending. At June 30, 2001, $12.5 million or 14.8% of the
Company's total loans were comprised of commercial business loans. The Company's
current commercial business lending portfolio is predominantly secured by
accounts receivable, inventory, and equipment. The Company's agricultural loan
portfolio, totaling $6.5 million at June 30, 2001, is primarily secured by
livestock, growing crops, machinery and equipment. The largest commercial
business loan totaled $335,000 at June 30, 2001.
Unlike residential mortgage loans, which generally are made on the basis of the
borrower's ability to repay the loan from his or her employment and other income
and which are secured by real property, the value of which is usually easily
ascertainable, commercial business loans typically are made on the basis of the
borrower's ability to repay the loan from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). The Company's commercial business loans are sometimes, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Consumer Lending. The Company offers a variety of consumer loans, including
automobile loans and loans secured by deposits. The Company currently originates
substantially all of its consumer loans in its market area, generally to its
existing customers. At June 30, 2001, the Company's consumer loan portfolio
totaled $5.8 million or 6.8% of its total loan portfolio.
The largest component of the Company's consumer loan portfolio consists of
automobile loans. The Company originates new and used automobile loans on a
direct basis, where the Company extends credit directly to the borrower. These
loans generally have terms that do not exceed five years and carry a fixed rate
of interest. Generally, loans on new vehicles are made in amounts up to 90% of
dealer cost and loans on used vehicles are made in amounts up to 90% of the
purchase price or the vehicle's published value, whichever is less. At June 30,
2001, the Company's automobile loans totaled $4.9 million or 5.8% of the
Company's total loan portfolio.
Consumer loan terms vary according to the type and value of collateral, length
of contract and creditworthiness of the borrower. The underwriting standards
employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 2001, $53,000 of the Company's consumer loans were
non-performing. See "-- Non-Performing Assets" and "-- Classified Assets." There
can be no assurances, however, that delinquencies will not increase in the
future.
Asset Quality
Loan Delinquencies. The Company's collection procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 30 days, the customer will receive letters and/or
telephone calls from a representative of the Company. If the loan continues in a
delinquent status for 90 days and no repayment plan is in effect, a notice of
right to cure default is mailed to the customer giving 30 additional days to
bring the account current before foreclosure is commenced. The loan committee
meets regularly to determine when foreclosure proceedings should be initiated
and the customer is notified when foreclosure has been commenced.
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of category at June 30, 2001. The amounts presented
represent the total remaining principal balances of the elapsed loans, rather
than the actual payment amounts which are overdue.
Loans Delinquent at June 30,
2001 for:
Loans Delinquent at June 30, 2001 for:
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30-59 Days 60-89 Days 90 Days & Over Total
---------------------- ------------------- -------------------- -------------------------
No. Amt. Percent No. Amt. Percent No. Amt. Percent No. Amt. Percent
---------------------- ------------------- -------------------- -------------------------
(Dollars in Thousands)
Real Estate:
Mortgage Loans... 31 $ 845 61.2% 7 $ 422 52.6% 6 $ 165 29.0% 44 $ 1,432 52.1%
Consumer........... 34 138 10.0 11 87 10.8 17 53 9.3 62 278 10.1
Commercial Business 17 398 28.8 8 293 36.5 7 350 61.6 32 1,041 37.8
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Total.............. 82 $1,381 100.0% 26 $ 802 100.0% 30 $ 568 100.0% 138 $ 2,751 100.0%
==============================================================================================
Non-Performing Assets. The following table sets forth information regarding
accruing loans delinquent more than 90 days and foreclosed assets. Loans are
reviewed on a monthly basis and are generally placed on a non-accrual status
when the loan becomes more than 90 days delinquent and, in the opinion of
management, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
in the opinion of management, the collection of additional interest on all loans
delinquent more than 90 days is not doubtful. Therefore, there are no
nonaccruing loans. For all years presented, the Company had no troubled debt
restructurings (which involved forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
At June 30
-------------------------
2001 2000 1999
-------------------------
(Dollars in Thousands)
Accruing loans delinquent more than 90 days:
Mortgage ..................................... $165 $164 $144
Consumer ..................................... 53 29 7
Commercial business .......................... 350 183 4
Foreclosed assets:
One- to four-family .......................... 146 -- 39
Nonresidential real estate ................... -- 271 132
-------------------------
Total non-performing assets ...................... $714 $647 $326
=========================
Total as a percentage of total assets ............ 0.60% 0.56% 0.32%
=========================
Other Loans of Concern. In addition to the non-performing loans set forth in the
table above, as of June 30, 2001, there was $1.9 million of loans designated as
special mention for which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories. The largest loan classified
as special mention had an outstanding balance of $158,000 on June 30, 2001, and
was secured by land for development of one- to four-family residences.
Foreclosed Real Estate. Real estate acquired by the Company as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
The Company records loans as in-substance foreclosures if the borrower has
little or no equity in the property based upon its documented current fair
value, if the Company can only expect repayment of the loan to come from the
sale of the property and if the borrower has effectively abandoned control of
the collateral or has continued to retain control of the collateral, but because
of the current financial status of the borrower, it is doubtful the borrower
will be able to repay the loan in the foreseeable future. In-substance
foreclosures are accounted for as real estate acquired through foreclosure.
There may be other significant expenses incurred such as attorney and other
extraordinary servicing costs involved with in-substance foreclosures. The
Company had three foreclosed real estate properties at June 30, 2001. One
property has a pending purchase agreement and the other two are currently being
rented.
Classified Assets. Office of Thrift Supervision ("OTS") regulations provide for
a classification system for problem assets of insured institutions which covers
all problem assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses presented make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as a loss are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is unwarranted. Assets may also be
designated "special mention" because of potential weakness that do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as a loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS,
which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
June 30, 2001, the Company had classified $337,000 of its assets as substandard,
and $5,000 as doubtful as compared to $830,000 and $10,000 at June 30, 2000
classified as substandard and doubtful, respectively.
Allowances for Loan Losses
It is management's policy to provide for losses on unidentified loans in the
Company's loan portfolio. A provision for loan losses is charged to operations
based on management's evaluation of the potential losses that may be incurred in
the Company's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions. The amount of provisions recorded in future periods
may be significantly greater or less than the provisions taken in the past. At
June 30, 2001, the allowance for loan losses was $608,000, or 0.72% of total
loans.
The Company's reserve for loan loss requirement is calculated as a percentage of
the total loans outstanding and total delinquent loans as of a particular
quarter end. The Banks anticipate continuing with the current schedule of
provisions to keep up with expected increases in loans outstanding during the
next fiscal year.
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the Company's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses that may occur
within the loan category because the total loan loss allowance is a valuation
reserve applicable to the entire loan portfolio.
At June 30,
----------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
----------------------------------------------------------------
(Dollars in Thousands)
Mortgage Loans .............. $350 78.4% $403 81.2% $205 82.1%
Commercial Business Loans ... 154 14.8 152 12.9 155 11.9
Consumer Loans .............. 104 6.8 86 5.9 74 6.0
Unallocated ................. -- -- 7 -- 38 --
---------------------------------------------------------------
$608 100.0% $648 100.0% $472 100.0%
===============================================================
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Company's allowance for loan losses at the dates
and for the periods indicated:
Year Ended June 30,
-------------------------
2001 2000 1999
-------------------------
(Dollars in Thousands)
Balance at beginning of period ........................................ $ 648 $ 472 $ 388
Charge offs:
Mortgage .......................................................... -- -- --
Consumer .......................................................... (197) (44) (47)
-------------------------
Total charge offs .............................................. (197) (44) (47)
Recoveries ............................................................ 20 33 18
-------------------------
Net charge offs ....................................................... (177) (11) (29)
-------------------------
Provisions charged to operations ...................................... 137 187 113
------------------------
Balance at end of period .............................................. $ 608 $ 648 $ 472
=========================
Ratio of net charge offs during the period to average loans outstanding
during the period .................................................... 0.23% 0.01% 0.04%
=========================
Ratio of net charge offs during the period to average nonperforming
assets ............................................................... 24.0% 2.16% 14.8%
=========================
Investment Activities
The Company is required under federal regulations to maintain a minimum amount
of liquid assets which may be invested in specified short-term securities and
certain other investments. See "Regulation -- Regulation of Savings Associations
and Savings Banks" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" in the
Annual Report to Stockholders attached hereto as Exhibit 13. The Company has
continuously maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the short-term demand for funds to be used in the Company's loan
origination and other activities. At June 30, 2001, the Company had an
investment portfolio of approximately $25.0 million, consisting primarily of
U.S. government agency obligations and corporate securities. To a lesser extent,
the portfolio also includes U.S. Treasury Securities, mortgage-backed and
related securities, municipal bonds, and FHLB stock, as permitted by federal
banking regulations. The Company classifies its investments as held to maturity
or available for sale.
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including U.S. treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company, as established by the Board of
Directors, is to invest funds among various categories of investments and
maturities based upon the Company's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Investment Portfolio. The following table sets forth the carrying value of the
Company's investment securities portfolio, short-term investments, FHLB stock,
and mortgage-backed and related securities at the dates indicated. For
additional information concerning the Company's investments, see Note 3 of the
Notes to Consolidated Financial Statements in the Annual Report to Stockholders
attached hereto as Exhibit 13.
At June 30,
------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
-----------------------------------------------------------
(Dollars in Thousands)
Investment Securities:
Available for sale (1):
U.S. treasury securities ....... $ 1,995 7.98% $ 300 1.24% $ 1,708 7.65%
U.S. government agencies ....... 11,276 45.13 16,056 66.60 13,623 61.05
State and political subdivisions 460 1.84 326 1.35 439 1.97
Mortgage-backed securities ..... 2,470 9.88 -- -- -- --
Corporations ................... 5,890 23.57 4,920 20.41 4,925 22.07
---------------------------------------------------------
Total Available for Sale . 22,091 88.40 21,602 89.61 20,695 92.74
---------------------------------------------------------
Held to maturity(1):
State and political subdivisions 1,143 4.57 775 3.21 761 3.41
Mortgage-backed securities ..... -- -- -- -- -- --
---------------------------------------------------------
Total held to maturity ... 1,143 4.57 775 3.21 761 3.41
---------------------------------------------------------
Total Investment Securities .. 23,234 92.97 22,377 92.82 21,456 96.15
---------------------------------------------------------
FHLB Stock ............................ 1,756 7.03 1,730 7.18 860 3.85
---------------------------------------------------------
Total Investment Securities ...
and FHLB Stock .............. $24,990 100.00% $22,316 100.00% $24,107 100.00%
=========================================================
Average remaining life of investment
securities (excluding FHLB Stock) ... 3.7 Years 4.3 years 3.9 Years
Interest-Earning Assets:
Interest-bearing deposits with
banks ............................ $ 2,462 100.00% $ 1,859 100.00% $ 901 100.00%
=========================================================
(1) Securities classified as available for sale were carried at fair value
at June 30, 2001, 2000 and 1999. Securities classified as held to
maturity were carried at historical cost at all respective dates.
The fair value of the available for sale investment portfolio at June 30, 2001
was $22.1 million resulting in an unrealized loss, net of income tax, at that
date of approximately $30,000.
The category of investment securities entitled "corporations" is comprised of
investments in corporate bonds. The corporate bonds are considered investment
grade bonds, but carry additional credit risk compared to bonds guaranteed by
the U.S. government or agencies thereof. The Company evaluates the benefit of
higher yields on these bonds versus increased credit risk as compared to U.S.
Treasury or agency securities. The quality of these bonds is monitored primarily
by reviewing the investment ratings assigned to the bonds by independent sources
such as Standard & Poors, etc. Maturities and sales of U.S. treasury securities
have been reinvested primarily in U.S. agency securities to realize a higher
interest yield.
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Company's investment securities portfolio at June 30, 2001.
At June 30, 2001
---------------------------------------------------------
Book Value of Investment Securities Maturing In
---------------------------------------------------------
Total
Less Than Over Investment
1 Year 1- 5 Years 5-10 Years 10 Years Securities
---------------------------------------------------------
(Dollars in Thousands)
U.S. treasury securities ....... $ 1,995 $ -- $ -- $ -- $ 1,995
U.S. government agencies ....... 116 10,664 496 -- 11,276
Mortgage-backed securities ..... 28 131 220 2,091 2,470
State and political subdivisions 305 548 549 201 1,603
Corporations ................... 405 4,637 848 -- 5,890
-------------------------------------------------------
Total ..................... $ 2,849 $15,980 $ 2,113 $ 2,292 $23,234
=======================================================
Weighted average yield ......... 4.06% 5.86% 6.22% 6.40% 5.73%
=======================================================
Sources of Funds
General. Deposits are the major external source of the Company's funds for
lending and other investment purposes. The Company derives funds from
amortization and prepayment of loans and, to a much lesser extent, maturities of
investment securities, borrowings, mortgage-backed securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. The Company had
$32.3 million in FHLB advances outstanding at June 30, 2001.
Deposits. Consumer and commercial deposits are attracted principally from within
the Banks' market area through the offering of a broad selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. The Banks also offer individual retirement accounts
("IRA"), NOW accounts, checking accounts and money market deposit accounts
("MMDA"). Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit, and the interest rate, among
other factors.
The interest rates paid by the Banks on deposits are set bi-weekly at the
direction of management. The Banks determine the interest rate to offer the
public on new and maturing accounts by reviewing the current Treasury rate for
the term and the market interest rates offered by competitors. The Banks review,
weekly, the interest rates being offered by the other principal financial
institutions within its market area.
Savings accounts constituted $5.6 million, or 7.6% of the Company's deposit
portfolio at June 30, 2001. Certificates of deposit constituted $47.0 million or
64.1% of the deposit portfolio of which $3.2 million or 4.3% of the deposit
portfolio were certificates of deposit with balances of $100,000 or more. MMDA
accounts constituted $10.9 million or 14.8% of the Company's deposit portfolio
at June 30, 2001. As of June 30, 2001, the Banks had one brokered deposit for a
total of $99,000. At June 30, 2001, transaction deposits were $9.4 million or
12.8% of total deposits.
Savings Deposit Activities. The following table sets forth the savings activity
at the Banks during the period indicated.
Year Ended June 30,
----------------------------------
2001 2000 1999
----------------------------------
(Dollars in Thousands)
Opening balance ................................ $ 73,297 $ 75,689 $ 66,595
Net increase (decrease) before interest credited (2,589) (4,576) 6,647
Interest credited .............................. 2,196 2,184 2,447
----------------------------------
Ending balance ................................. $ 72,904 $ 73,297 $ 75,689
==================================
Net increase (decrease) ........................ $ (393) $ (2,932) $ 9,094
==================================
Percent increase (decrease) .................... (0.54)% (3.16)% 13.66%
==================================
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Banks for the periods
indicated.
June 30,
------------------------------------------------------
2001 2000 1999
------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------------------------------------------------
(Dollars in Thousands)
Transaction and Savings Deposits(1)
--------------------------------
Demand and NOW Accounts (0.00%-2.40%) ... $ 9,382 12.78% $9,4569 12.83% $8,536 11.22%
Money Market Accounts (1.75% - 4.00%) ... 10,879 14.82 11,580 15.71 11,471 15.08
Passbook Savings Accounts (1.75% - 2.40%) 5,604 7.64 5,531 7.50 5,728 7.53
----------------------------------------------------
Total Non-Certificates .................. 25,865 35.25 26,570 36.04 25,735 33.83
----------------------------------------------------
Certificates
1.00% - 2.00% ........................... 132 0.18
2.01% - 3.00% ........................... 124 0.17 260 0.35 361 0.47
3.01% - 4.00% ........................... 154 0.21 185 0.25 -- --
4.01% - 5.00% ........................... 10,275 14.00 9,843 13.35 11,423 15.01
5.01% - 6.00% ........................... 20,468 27.89 21,965 29.80 31,959 42.01
6.01% - 7.00% ........................... 15,886 21.65 14,473 19.63 6,211 8.17
----------------------------------------------------
Total Certificates ...................... 47,039 64.10 46,726 63.39 49,954 65.66
----------------------------------------------------
Accrued Interest ........................ 482 0.66 421 0.57 388 0.51
----------------------------------------------------
Total Deposits and Accrued Interest ..... $73,386 100.00% $73,717 100.00% $76,077 100.00%
====================================================
(1) Rates shown are at June 30, 2001.
The following table shows rate and maturity information for the Company's
certificates of deposit as of June 30, 2001.
0.00- 4.01- 5.01- 6.01- Percent of
4.00% 5.00% 6.00% 7.00% Total Total
-----------------------------------------------------------------------
(Dollars in Thousands)
Certificate accounts maturing in quarter ending:
September 30, 2001.................. $ 36 $ 1,803 $ 9,353 $ 1,936 $13,128 27.91%
December 31, 2001................... 118 2,583 3,101 1,494 7,296 15.51
March 31, 2002...................... 257 1,310 1,685 4,999 8,251 17.54
June 30, 2002....................... --- 1,367 601 1,412 3,380 7.19
September 30, 2002.................. --- 214 761 2,056 3,031 6.44
December 31, 2002................... --- 763 1,247 1,231 3,241 6.89
March 31, 2003...................... --- 193 295 1,252 1,740 3.70
June 30, 2003....................... --- 696 227 139 1,062 2.26
September 30, 2003.................. --- 47 241 133 421 0.90
December 31, 2003................... --- 503 669 245 1,417 3.01
March 31, 2004...................... --- 480 260 228 968 2.06
June 30, 2004....................... --- 316 726 675 1,717 3.65
Thereafter.......................... --- --- 1,301 86 1,387 2.95
-----------------------------------------------------------------------
Total............................... $ 411 $10,275 $20,467 $15,886 $47,039 100.00%
======================================================================
Percent of Total................. 0.87% 21.84% 43.51% 33.77% 100.00%
==========================================================
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of June 30, 2001.
MATURITY
----------------------------------------------------------
3 Months Over 3- 6 Over 6-12 Over 12
or Less Months Months Months Total
----------------------------------------------------------
(Dollars in Thousands)
Certificates of Deposit less than
$100,000............................. $12,781 $6,746 $10,059 $14,302 $43,888
Certificates of Deposit of
$100,000 or More..................... 347 550 1,572 682 3,151
---------------------------------------------------------
Total Certificates of Deposit........ $13,128 $7,296 $11,631 $14,984 $47,039
=========================================================
Borrowings
Deposits are the primary source of funds of the Company's lending and investment
activities and for its general business purposes. In addition, the Company may
obtain advances from the FHLB of Des Moines to supplement its supply of lendable
funds. Advances from the FHLB of Des Moines are typically secured by a pledge of
the Company's stock in the FHLB of Des Moines and a portion of the Company's
first mortgage loans and certain other assets. The Company, if the need arises,
may also access the Federal Reserve discount window to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. At June 30, 2001,
the Company had $32.3 million of borrowings.
The following table sets forth the maximum month-end balance and average balance
of FHLB advances for the dates indicated.
For the Year Ended June 30,
---------------------------------------
2001 2000 1999
---------------------------------------
(Dollars in Thousands)
Maximum Balance ................ $32,335 $30,193 $16,628
Average Balance ................ $29,832 $23,441 $15,537
The following table sets forth certain information as to Washington Federal's
FHLB advances at the dates indicated.
June 30,
--------------------------------------
2001 2000 1999
--------------------------------------
(Dollars in Thousands)
FHLB Advances .................................... $ 32,335 $ 30,193 $ 15,706
Weighted average interest rate during the period
of FHLB advances ................................. 6.01% 5.89% 5.68%
Weighted average interest rate at end of period of
FHLB advances .................................... 5.35% 6.38% 5.66%
Competition
Washington Federal is one of five financial institutions serving its immediate
market area of Washington, Iowa. The competition for deposit products comes from
two banks owned by multi-bank holding companies, a local independent community
bank and a credit union. Deposit competition also includes a number of insurance
products sold by local agents, and investment products such as mutual funds and
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions.
Rubio is located in Brighton, Iowa, a small rural community of 800 people. The
competition for deposits comes from financial institutions in outlying
communities. The closest community with another financial institution is
approximately ten miles away. Deposit competition also includes insurance and
investment products such as annuities, mutual funds, and other securities sold
by local and regional brokers. Loan competition varies depending on market
conditions.
Wellman Federal Savings, a division of Washington Federal, is one of two
financial institutions serving its immediate market area of Wellman, Iowa. The
competition for deposits comes from a branch owned by a multi-bank holding
company as well as financial institutions in outlying communities. The closest
community is approximately seven miles away and has two banks owned by
multi-bank holding companies. Loan competition varies depending upon market
conditions.
Richland Federal Savings, a division of Washington Federal, is one of two
financial institutions serving its immediate market area of Richland, Iowa. The
competition for deposits comes from a branch owned by a large multi-bank holding
company as well as financial institutions in outlying communities. The closest
community is approximately ten miles away and has three banks owned by
multi-bank holding companies, a local independent bank and three credit unions.
Loan competition varies depending upon market conditions.
Washington Federal has traditionally maintained a competitive position in
mortgage loan originations and market share throughout its service area by
virtue of its local presence and its involvement in the community. Rubio has
traditionally maintained a competitive position in commercial and agricultural
loan originations and market share throughout its services area by virtue of its
local presence and its involvement in the community. The Company believes that
it has been able to effectively market its loans and other financial products
and services when compared to other local-based institutions and it has superior
customer service when compared to other institutions and mortgage bankers based
outside of the Company's market area.
The Company believes that it is one of the few area lenders that has
consistently offered a variety of loans throughout all types of economic
conditions. The Company believes that it has been able to effectively market its
loans and other financial products and services when compared to other
local-based institutions, and it has superior customer service when compared to
the branch of a larger institution based outside of the Company's market area.
Subsidiary Activity
Washington Federal is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of June 30, 2001, Washington Federal was authorized to invest up to
approximately $1.9 million in the stock of, or loans to, service corporations
(based upon the 2% limitation).
Washington Federal has one wholly owned subsidiary. The subsidiary conducts
business under the name of Washington Financial Services, Inc. ("Washington
Financial"). Washington Federal's investment in its subsidiary totaled $70,000
at June 30, 2001. The subsidiary's source of income is brokerage fees, and it
had net income of $52,000, $18,000 and $23,000 for the years ended June 30,
2001, 2000 and 1999, respectively. The primary activity of the subsidiary is the
brokering of credit life and disability insurance products. In addition,
Washington Federal has an arrangement with Eagle One Investment Group ("Eagle
One") to provide support for Washington Financial's investment services office.
Washington Financial began offering non-insured investment products to meet the
needs of current customers and the community on July 1, 1999. Eagle One is a
locally-owned investment firm with offices in banks throughout the Midwest.
Eagle One offers investment options to include stocks, bonds, mutual funds,
tax-advantaged investments and insurance. Washington Financial is the only Eagle
One retail office in Washington Federal's market area.
Regulation
General. Washington Federal is a federally chartered savings bank, the deposits
of which are federally insured by the FDIC and backed by the full faith and
credit of the U.S. government. Accordingly, Washington Federal is subject to
broad federal regulation and oversight extending to all its operations by the
OTS. Washington Federal is a member of the FHLB of Des Moines and is subject to
certain limited regulation by the Federal Reserve Board (the "FRB"). Washington
Federal is a member of the Savings Association Insurance Fund ("SAIF"), which
together with the Bank Insurance Fund ("BIF") are the two deposit insurance
funds administered by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Washington Federal.
Rubio is an Iowa chartered savings bank and, as such, is subject to extensive
regulation, supervision and examination by the Iowa Superintendent of Banking
(the "ISB") and the FDIC, which are its state and primary federal regulators,
respectively. As with Washington Federal, such regulation and supervision
governs the activities in which Rubio can engage in and the manner in which such
activities are conducted and is intended primarily for the protection of the
insurance fund and depositors.
Washington is regulated as a bank holding company by the FRB. Bank holding
companies are subject to comprehensive regulation and supervision by the FRB
under the Bank Holding Company Act of 1956, as amended (the "BHCA") and the
regulations of the FRB. As a bank holding company, Washington must file reports
with the FRB and such additional information as the FRB may require, and is
subject to regular inspections by the FRB. Washington is subject to the activity
limitations imposed under the BHCA and in general may engage in only those
activities that the FRB has determined to be closely related to banking.
Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.
Regulation of Savings Associations and Savings Banks. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, Washington Federal is required to file periodic reports with the OTS
and is subject to periodic examinations by the OTS and the FDIC. Under agency
scheduling guidelines, it is likely that another examination will be initiated
within 18 months. When these examinations are conducted by the OTS and the FDIC,
the examiners may require Washington Federal to provide for higher general or
specific loan loss reserves. All savings associations are subject to a
semi-annual assessment, based upon the savings association's total assets, to
fund the operations of the OTS. The Bank's OTS assessment for the fiscal year
ended June 30, 2001 was $29,000. Rubio is subject to similar regulation and
oversight by the ISB and the FRB.
Each federal banking regulator has extensive enforcement authority over its
regulated institutions. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease-and-desist or
removal orders and to initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports. Except under
certain circumstances, public disclosure of final enforcement actions by the
regulator is required.
In addition, the investment, lending and branching authority of Washington
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. Rubio is subject to similar restrictions
under state law and federal law. Federal savings associations are also generally
authorized to branch nationwide regardless of state law whereas Iowa chartered
banks, such as Rubio, are subject to certain state law restrictions. At June 30,
2001 Washington Federal and Rubio were in compliance with the noted
restrictions.
Washington Federal's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
Rubio's general permissible lending limit for loans-to-one borrower is an amount
equal to 15% of the aggregate capital (except for loans fully secured by certain
readily marketable collateral, in which case this limit is increased to 25% of
aggregate capital). At June 30, 2001, Washington Federal's and Rubio's lending
limit under these restrictions were $1.1 million and $574,000, respectively.
Washington Federal and Rubio are in compliance with the loans-to-one- borrower
limitation.
The federal banking agencies have adopted guidelines establishing safety and
soundness standards on such matters as loan underwriting and documentation,
asset quality earnings standards, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC. Washington Federal is a member
of the SAIF and Rubio is a member of BIF, each of which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the SAIF or
the BIF. The FDIC also has the authority to initiate enforcement actions against
savings associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that an institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based upon their level of capital and
supervisory evaluation. Under the system, institutions classified as
"well-capitalized" (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than "adequately
capitalized" (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual basis, if
it determines that the reserve ratio of the SAIF or the BIF will be less than
the designated reserve ratio of 1.25% of SAIF or the BIF insured deposits,
respectively. In setting these increased assessments, the FDIC must seek to
restore the reserve ratio to that designated reserve level, or such higher
reserve ratio as established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the U.S. Treasury or
for any other reason deemed necessary by the FDIC.
For fiscal 2001, the SAIF insurance premium range was 0 to 27 basis points per
$100 of domestic deposits. Washington Federal qualified for the minimum SAIF
assessment.
In addition, insured institutions are required to pay a Financing Corporation
(FICO) assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s, equal to 1.88 basis points for each $100 in
domestic deposits for both BIF and SAIF-insured deposits. These assessments,
which may be revised based upon the level of BIF and SAIF deposits will continue
until the bonds mature in the years 2017 through 2019.
Regulatory Capital Requirements. Federally insured depository institutions, such
as Washington Federal and Rubio, are required to maintain a minimum level of
regulatory capital. For savings associations, the OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. The OTS is also authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case basis.
The OTS capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital. At June 30, 2001, Washington
Federal did not have any intangible assets and accumulated losses on available
for sale securities, net of tax of $12,000.
The OTS regulations establish special capitalization requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as agent for its
customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At June 30, 2001, Washington Federal had one excludable
subsidiary.
At June 30, 2001, Washington Federal had tangible capital of $7.8 million, or
8.25% of adjusted total assets, which is approximately $6.4 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The OTS capital standards also require core capital equal to at least 4% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered "adequately capitalized" unless its supervisory
condition allows it to maintain a 3% ratio. At June 30, 2001, Washington Federal
had no intangibles which were subject to these tests.
At June 30, 2001, Washington Federal had core capital equal to $7.8 million, or
8.25% of adjusted total assets, which is $4.0 million above the minimum leverage
ratio requirement of 4% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a saving association to maintain an additional
amount of total capital to account for concentration of credit risk and the risk
of non-traditional activities. At June 30, 2001, Washington Federal had no
capital instruments that qualify as supplementary capital and $460,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to- value ratio and
reciprocal holdings of qualifying capital instruments. Washington Federal had
$21,000 of such exclusions from capital and assets at June 30, 2001.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten permanent one- to
four-family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings association with
more than normal interest rate risk exposure to deduct from its total capital,
for purposes of determining compliance with such requirement, an amount equal to
50% of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule provides for a two-quarter lag between
calculating interest rate risk and recognizing any deduction from capital. The
rule will not become effective until the OTS evaluates the process by which
savings associations may appeal an interest rate risk deduction determination.
It is also uncertain as to when this evaluation may be completed. Any savings
association with less than $300 million in assets and a total capital ratio in
excess of 12% is exempt from this requirement unless the OTS determines
otherwise.
On June 30, 2001, Washington Federal had total capital of $8.3 million and
risk-weighted assets of $64.9 million or total capital of 12.77% of
risk-weighted assets. This amount was $3.1 million above the 8% requirement in
effect on that date.
Rubio is subject to capital requirements similar to those required of Washington
Federal. At June 30, 2001, Rubio had Tier 1 or leverage capital of $2.6 million,
or 11.69% of average total assets, which is approximately $1.9 million above the
minimum requirement of 3% of average total assets in effect on that date.
At June 30, 2001, Rubio had Tier 1 risk-based capital of $2.6 million, or 17.83%
of total risk- based assets, which is approximately $2.0 million above the
minimum requirement of 4% of total risk-based assets in effect on that date.
At June 30, 2001, Rubio had risk-based capital of $2.7 million, or 18.85% of
total risk-based assets, which is approximately $1.6 million above the minimum
requirement of 8% of total risk- based assets in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against institutions that fail to meet their capital
requirements. They are generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such institution must submit a
capital restoration plan and until such plan is approved by its primary federal
regulator may not increase its assets, acquire another institution, establish a
branch or engage in any new activities, and generally may not make capital
distributions. The OTS and the FDIC are authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any institution that fails to comply with its capital plan or is "significantly
undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than
3% or a risk-based capital ratio of less than 6%) must be made subject to one or
more of additional specified actions and operating restrictions which may cover
all aspects of its operations and include a forced merger or acquisition of the
association. An institution that becomes "critically undercapitalized" (i.e., a
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized institutions. In addition, the institutions must be placed in
receivership or conservatorship, with certain limited exceptions, within 90 days
after it becomes critically undercapitalized.
Any undercapitalized institution is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
The OTS and the FDIC are also generally authorized to reclassify an association
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Washington
Federal or Rubio may have a substantial adverse effect on their operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of common stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS regulations impose
various restrictions on savings associations with respect to their ability to
make distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. OTS regulations also prohibit a savings association from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
regulatory capital of the association would be reduced below the amount required
to be maintained for the liquidation account established in connection with its
mutual to stock conversion.
Generally, savings associations, such as Washington Federal, that before and
after the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Washington Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "-- Regulatory Capital Requirements."
Rubio may pay dividends, in cash or property, only out of its undivided profits.
In addition, FRB regulations prohibit the payment of dividends by a state member
bank if losses have at any time been sustained by such bank that equal or exceed
its undivided profits then on hand, unless (i) the prior approval of the FRB has
been obtained and (ii) at least two-thirds of the shares of each class of stock
outstanding have approved the dividend payment. FRB regulations also prohibit
the payment of any dividend by a state member bank without the prior approval of
the FRB if the total of all dividends declared by the bank in any calendar year
exceeds the total of its net profits for that year combined with its retained
net profits of the previous two calendar years (minus any required transfers to
a surplus or to a fund for the retirement of any preferred stock).
Liquidity. All savings associations, including Washington Federal, are required
to maintain sufficient liquidity to ensure its safe and sound operation. For a
discussion of what Washington Federal includes in liquid assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" in the Annual Report to
Stockholders filed as Exhibit 13 hereto. Rubio has no liquidity requirement. At
June 30, 2001, Washington Federal had a liquidity ratio of 14.1%, which is
believed to be sufficient to satisfy present and foreseeable financial
obligations.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Washington Federal is in compliance
with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which the OTS
may make more stringent than GAAP, to require that transactions be reported in a
manner that best reflects their underlying economic substance and inherent risk
and that financial reports must incorporate any other accounting regulations or
orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including Washington
Federal, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Code. Under either test, such assets primarily consist of residential
housing related loans and investments. At June 30, 2001, Washington Federal met
the test and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS and the FDIC, in
connection with the examination of Washington Federal and Rubio, respectively,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by Washington Federal. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS and the FDIC.
The federal banking agencies, including the OTS and the FDIC, have recently
revised the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Washington Federal and Rubio may be required to devote
additional funds for investment and lending in its local community. Washington
Federal was examined for CRA compliance in July 1998 and received a rating of
satisfactory. Rubio was examined for CRA compliance in August 1999 and received
a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between an FDIC-insured
institution or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the institution's capital. Affiliates of
Washington Federal and Rubio include the Company and any company which is under
common control with Washington Federal and Rubio. Directors, officers or
controlling persons are also subject to regulations that restrict loans to such
persons and their related interests. Among other things, such loans must be made
on terms substantially the same as for loans to unaffiliated individuals, except
if the loans are made pursuant to an employee benefit plan. At June 30, 2001,
Washington Federal and Rubio were in compliance with the above restrictions.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS and the FDIC.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation. Bank holding companies such as Washington are
subject to comprehensive regulation by the FRB under the BHCA and the
regulations of the FRB. As a bank holding company, Washington is required to
file reports with the FRB and such additional information as the FRB may
require, and is subject to regular inspections by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary banks. Under this policy the FRB may require, and has required in
the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution (such as Washington Federal), mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; real estate and personal property appraising; and, subject to certain
limitations, providing securities brokerage services for customers. The scope of
permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Riegle-Neal Act") was enacted to ease restrictions on interstate banking.
Effective September 29, 1995, the Riegle-Neal Act allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of a bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state or if the applicant (and its depository
institution affiliates) controls or would control more than 10% of the insured
deposits in the United States or 30% or more of the deposits in the target
bank's home state or in any state in which the target bank maintains a branch.
Iowa has adopted a five year minimum existence requirement. The Riegle-Neal Act
does not affect the authority of states to limit the percentage of total insured
deposits in the state which may be held or controlled by a bank or bank holding
company to the extent such limitation does not discriminate against out-of-state
banks or bank holding companies. Individual states may also waive the 30%
state-wide concentration limit.
Additionally, since June 1, 1997, the federal banking agencies have been
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opts out of the Riegle-Neal Act by adopting a law after the
date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. States were also permitted to allow such
transactions before such time by enacting authorizing legislation. Interstate
acquisitions of branches or the establishment of a new branch is permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions are also subject to the
nationwide and statewide insured deposit concentration amounts described above.
Iowa permits interstate branching only by merger.
The FRB has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the FRB's view that a bank holding company
should pay cash dividends only to the extent that its net income for the past
year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the holding company's capital needs, asset
quality and overall financial condition. The FRB also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the "well-capitalized" standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
The FRB has established capital requirements for bank holding companies that
generally parallel the capital requirements for commercial banks and federal
thrift institutions such as Washington Federal and Rubio. Washington is in
compliance with these requirements.
Federal Securities Law. The stock of the Company is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers, directors
and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The FRB requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
2001, Washington was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the FRB may be used to
satisfy liquidity requirements that may be imposed by the OTS. See "--
Liquidity."
Depository institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require such institutions to exhaust
other reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. Washington Federal and Rubio are members of the
FHLB of Des Moines, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Washington Federal and Rubio are required to purchase and maintain
stock in the FHLB of Des Moines. At June 30, 2001, Washington Federal had an
aggregate of $1.7 million and Rubio had an aggregate of $74,000 in FHLB stock,
which was in compliance with this requirement. In past years, Washington Federal
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 6.58% and were 6.07% for fiscal year 2001.
Under federal law, the FHLBs are required to provide funds for the resolution of
troubled savings associations and to contribute to low and moderately priced
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have affected adversely the level of FHLB dividends paid and could
continue to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value of
Washington Federal's FHLB stock may result in a corresponding reduction to its
capital.
Federal and State Taxation
Federal Taxation. Prior to the enactment of legislation in August 1996
(discussed below), savings associations such as Washington Federal that met
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which could, within specified formula limits, be taken
as a deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" was computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) is computed under the experience method.
In August 1996, legislation was enacted that repealed the percentage of taxable
income method of accounting used by many thrifts, including Washington Federal,
to calculate their bad debt reserve for federal income tax purposes. As a
result, large thrifts must recapture that portion of the reserve that exceeds
the amount that could have been taken under the experience method for post-1987
tax years. The legislation also requires thrifts to account for bad debts for
federal income tax purposes on the same basis as commercial banks for tax years
beginning after December 31, 1995. The recapture will occur over a six-year
period, the commencement of which was delayed until the first taxable year
beginning after December 31, 1997, for institutions which met certain
residential lending requirements. The management of the Company and Washington
Federal do not believe that the legislation will have a material impact on the
Company or Washington Federal.
In addition to the regular income tax, corporations, including savings
associations such as Washington Federal, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income.
To the extent earnings appropriated to a savings association's bad debt reserves
for "qualifying real property loans" and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 2001 Washington Federal's Excess for tax purposes
totaled approximately $174,000.
The Company files consolidated federal income tax returns with the Banks on a
calendar year basis using the accrual method of accounting. Savings
associations, such as Washington Federal, that file federal income tax returns
as part of a consolidated group are required by applicable Treasury regulations
to reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
The Company has not been audited by the IRS for the last five years. With
respect to years examined by the IRS, either all deficiencies have been
satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Company.
Iowa Taxation. Washington Federal and Rubio are subject to a franchise tax by
the state of Iowa. The franchise tax is imposed annually in an amount equal to
5% of the Banks' adjusted federal taxable income, computed before any net
operating loss deduction. An alternative minimum tax is imposed on the Banks to
the extent such tax exceeds the Banks' regular tax liability. The franchise tax
is in lieu of Iowa income tax imposed on corporations doing business within the
State. The Company is not subject to the Iowa franchise tax, but is subject to
Iowa's regular corporate income tax.
Executive Officers
Set forth below are the names, ages and positions of each of the executive
officers of the Company. Except as otherwise indicated, the persons named have
served as officers of the Company since it became the holding company of
Washington Federal, and all offices and positions described below are with the
Company and the Banks. There are no arrangements or understandings between the
persons named and any other person pursuant to which such officers were
selected.
Stan Carlson, age 44, was appointed President and Chief Executive Officer of
Washington Federal in 1993 and President of Rubio in 2000. Prior to joining
Washington Federal, he was Executive Vice President of Northwoods State Bank,
Northwoods, Iowa.
Gary J. Collier, age 29, became Executive Vice President and Chief Executive
Officer of Rubio Savings Bank of Brighton in 2000. Prior to that, he was Vice
President and Cashier of Rubio. From 1994 to 1999 he was a loan officer.
Leisha A. Linge, age 37, was appointed Executive Vice President of Washington
Federal in 1999 and has acted as the financial and accounting officer since
1995. From 1992 to 1995 she was a loan officer for Washington Federal.
Employees
As of June 30, 2001, the Company had 27 full time and 13 part-time and seasonal
employees. None of the Company's employees are represented by a collective
bargaining group. The Company believes that its relationship with its employees
is satisfactory.
Item 2. Description of Property
The Company conducts its business at its main offices. The Company's total
investment in offices, office property and equipment is $1.9 million with a net
book value of $987,000 at June 30, 2001. The following table sets forth
information regarding the Company's properties:
Net Book Value
of Real Property
Leased/ or Leasehold Improvements Year
Owned at June 30, 2001 Opened
----------------------------------------------
Washington Federal Locations:
Main Office
102 East Main Street
Washington, Iowa ......................... Owned $193,000 1976
Drive-thru
220 East Washington Street
Washington, Iowa ......................... Owned $206,000 1994
Wellman Branch Office
801 6th Street
Wellman, Iowa ............................ Owned $ 92,000 1999
Richland Branch Office
107 Richland Street
Richland, Iowa ........................... Owned $ 82,000 2000
Rubio Location:
Main Office .............................. Owned $198,000 1984
122 East Washington
Rubio, Iowa
Item 3. Legal Proceedings
The Company, from time to time, is a party to ordinary routine litigation, which
arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Company holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the business of the Banks. The resolution of these
proceedings should not have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended June 30, 2001.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Pages 54 and 55 of the attached 2001 Annual Report to Stockholder are herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 6 to 19 of the attached 2001 Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
Pages 20 to 52 of the Company's 2001 Annual Report to Stockholders are herein
incorporated by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers of the
Company and the Banks, who are not also directors contained in Part I of this
Form 10-KSB, is incorporated herein by reference.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors and executive
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file with the SEC initial reports of ownership
and reports of changes in ownership of Company common stock and other equity
securities of the Company by the tenth of the month following a change.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended June 30, 2001, all Section
16(a) filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with by such persons.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
------------------------------------------------------------------------------------------------------------------------------------
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession None
3 (i) Articles of Incorporation and amendments thereto *
(ii) Bylaws *
4 Instruments defining the rights of holders None
9 Voting Trust Agreement None
10 Material Contracts
Employment Agreement with Stan Carlson *
Employee Stock Ownership Plan *
Stock Option Plan *
Recognition and Retention Plan *
11 Statement: re computation of per share earnings 11
13 Annual Report to Security Holders 13
16 Letter: re change in certifying accountant None
18 Letter: re change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matter submitted to vote None
23 Consent of Accountants None
24 Power of Attorney Not Required
99 Additional Exhibits None
---------------------
* Filed on January 3, 1996, as exhibits to the Company's Form S-1
registration statement (File number 33-98778). All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company during the
three months ended June 30, 2001.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WASHINGTON BANCORP
Date: September 27, 2001 By: /s/ Stan Carlson
-------------------- -----------------------------------------------
Stan Carlson
President, Chief Executive Officer and Director
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Stan Carlson /s/ Rick R. Hofer
--------------------------------- -------------------------------------
Stan Carlson, President, Chief Rick R. Hofer, Director
Excutive Officer and Director
(Principal Executive Officer)
Date: September 27, 2001 Date: September 27, 2001
---------------------------- --------------------------------
/s/ Myron L. Graber /s/ Richard L. Weeks
--------------------------------- -------------------------------------
Myron L. Graber, Director Richard L. Weeks, Director
Date: September 27, 2001 Date: September 27, 2001
--------------------------- --------------------------------
/s/ Mary Levy /s/ James D. Gorham
-------------------------------- -------------------------------------
Mary Levy, Chairman of the Board James D. Gorham, Director
Date: September 27, 2001 Date: September 27, 2001
--------------------------- --------------------------------
/s/ Ja. Richard Wiley /s/ Leisha A. Ling
-------------------------------- -------------------------------------
J. Richard Wiley, Director Leisha A. Linge, Executive Vice
President and Treasurer
(Principal Financial and Accounting
Officer)
Date: September 27, 2001 Date: September 27, 2001
--------------------------- --------------------------------
/s/ Dean Edwards
--------------------------------
Dean Edwards, Director
Date: September 27, 2001
---------------------------