SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 30, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number
InterWest Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
(State or other jurisdiction of incorporation or organization)
91-1691216
(I.R.S. Employer Identification No.)
1259 West Pioneer Way
Oak Harbor, Washington
(Address of principal executive offices)
98277
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of June 30, 1996 6,450,308 shares of common stock were outstanding with a
par value of $.20.
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INTERWEST BANCORP, INC
INDEX PAGE
- ----- ----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 1
Consolidated Statements of Operations 2-3
Consolidated Statements of Stockholder's Equity 4
Consolidated Statements of Cash Flow 5-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share amounts)
June 30, September 30,
1996 1995
-------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 22,322 $ 34,907
Mortgage-backed and related securities
available for sale, at fair value 336,660 114,936
Investment securities held to maturity 1,757 20,902
Mortgage-backed and related securities
held to maturity 180,337 293,356
Loans receivable, net 801,653 737,410
Loans held for sale, fair value 0 9,581
Accrued interest receivable 8,907 7,716
Real estate held for sale and for development 10,448 7,147
Federal Home Loan Bank (FHLB) stock, at cost 19,588 13,600
Premises and equipment, net 28,049 23,543
Intangible assets 2,676 1,517
Other assets 1,529 2,410
-------- ------------
Total Assets $1,413,926 $1,267,025
LIABILITIES
Customer deposits $887,385 $860,397
Federal Home Loan Bank advances 356,193 267,756
Securities sold under agreements to repurchase 63,610 40,000
Accrued expenses and other liabilities 9,121 6,812
Advance payments by borrowers
for taxes and insurance 450 948
Other borrowings 828 1,225
-------- ------------
Total liabilities 1,317,587 1,177,138
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share
Authorized 20,000,000 shares, Issued and
outstanding 6,450,308 and 6,398,398 1,299 1,295
Paid-in-capital 14,690 14,505
Treasury stock <289> <289>
Retained earnings 83,312 74,325
Debt related to ESOP <312> <712>
Net Unrealized gain (loss)
on securities available for sale <2,361> 763
-------- ------------
Total stockholders' equity 96,339 89,887
-------- ------------
Total $1,413,926 $1,267,025
Stockholders' equity/total assets 6.81% 7.09%
Book value per share $14.94 $14.05
1
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Quarter ended Nine months ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
INTEREST INCOME
Loans receivable $17,451 $14,559 51,579 42,188
Mortgage-backed and related securities 7,915 5,517 22,385 16,482
Interest-earning deposits 618 229 1,655 565
Investment securities 411 550 1,102 1,884
------ ------ ------ ------
26,395 20,855 76,721 61,119
INTEREST EXPENSE
Customer deposits 10,295 10,554 31,495 29,380
FHLB advances and other borrowings 5,037 2,471 14,305 7,617
------ ------ ------ ------
15,332 13,025 45,800 36,997
Net interest income before provision
for losses on loans 11,063 7,830 30,921 24,122
Provision for losses on loans 210 150 760 450
------ ------ ------ ------
Net interest income after provision
for losses on loans 10,853 7,680 30,161 23,672
OTHER OPERATING INCOME
Gain on sale of loans 44 23 962 417
Gain on sale of loan servicing 0 177 0 1,834
Service fees 1,278 557 3,177 1,719
Insurance commissions 767 632 1,569 1,372
Other 348 120 1,056 395
Gain (loss) on real estate held for sale
and for development 212 <40> 213 <40>
Gain (loss) on sale of investment
securities and mortgage-backed and
related securities (28) 290 531 290
------ ------ ------ ------
2,621 1,759 7,508 5,987
OTHER OPERATING EXPENSE
Compensation and employee benefits 4,102 2,706 10,873 8,045
General and administrative 1,794 965 4,890 3,533
Loss (gain) from real estate
write-downs and operations (301) 51 <499> 637
Occupancy 846 720 2,368 1,938
Data Processing 482 326 1,408 1,147
FDIC Premium Assessment 494 453 1,457 1,327
------ ------ ------ ------
7,417 5,221 20,497 16,627
------ ------ ------ ------
Income before federal income taxes 6,057 4,218 17,172 13,032
FEDERAL INCOME TAX EXPENSE 2,118 1,456 5,913 4,450
------ ------ ------ ------
NET INCOME $ 3,939 $ 2,762 $ 11,259 $ 8,582
2
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended Nine months ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
Net income per share $.60 $.43 $1.72 $1.32
Cash Dividend declared $.13 $.08 $.35 $.23
Weighted average shares outstanding 6,566,461 6,488,381 6,553,433 6,480,822
Return on average equity 16.51% 12.80% 16.08% 13.65%
Return on average assets 1.14% 0.99% 1.13% 1.04%
3
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<TABLE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
Unrealized
Gain (Loss)
Common Stock on securities Debt
# of Shares Amount Paid-in Retained available for Related to Treasury
Capital Earnings sale ESOP Stock Total
----------- ------ ------- -------- ------------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Sept. 30, 1994 6,449,639 $1,290 $14,331 $64,588 $<29> ---- ---- $80,180
Net Income 8,581 8,581
Cash Dividends <1,486> <1,486>
Proceeds from sale of
Common Stock 19,160 4 135 139
ESOP Loan Transaction <712>
Unrealized loss on securities
available for sale 445 445
----------- ------ ------- -------- ------------- ---------- -------- -----
Balance June 30, 1995 6,468,799 $1,294 $14,466 $71,683 $416 <712> ---- $87,147
Balance, Sept. 30, 1995 6,398,398 $1,295 $14,505 $74,325 $763 $<712> $<289> $89,887
Net Income 11,259 11,259
Cash Dividends <2,272> <2,272>
Proceeds from sale of
Common Stock 19,762 4 185 189
ESOP loan transaction 32,148 400 400
Unrealized loss on Securities
available for sale <3,241> <3,241>
----------- ------ ------- -------- ------------- ---------- -------- -----
Balance June 30, 1996 6,450,308 $1,299 $14,690 $83,312 $<2,361> $<312> $<289> $96,339
</TABLE>
4
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended June 30,
1996 1995
-------- --------
OPERATING ACTIVITIES
Net Income $11,259 $ 8,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,126 1,004
Provision for losses on loans 760 450
Provision for loss on real estate held for sale (625) 500
Accretion of premiums and discounts, net 1,534 792
Gain on sale of loans (962) (417)
Gain on sale of investment securities and
mortgage-backed and related securities (531) (290)
Gain on sale of real estate held for sale and
for development and premises and equipment (215) 41
Amortization of deferred loan fees (2,884) (3,156)
FHLB stock dividends (943) (446)
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (1,191) (1,389)
Other assets 882 (912)
Accrued expenses and other liabilities 3,730 1,416
Advance payments by borrowers for
taxes and insurance (498) (348)
-------- --------
BALANCE, net cash provided by operating
activities, carried forward $11,442 $5,827
5
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Nine months ended June 30,
1996 1995
-------- --------
BALANCE, net cash provided by
operating activities, brought forward $11,442 $ 5,827
INVESTING ACTIVITIES
Proceeds from maturing investment securities 20,300 10,250
held to maturity
Purchase of investment securities held
to maturity (1,136) (691)
Principal repayments from mortgage-backed
and related securities available for sale 44,855 12,448
Principal repayments from mortgage-backed
and related securities held to maturity 9,298 ---
Purchase of mortgage-backed
and related securities held to maturity (94,903) (2,321)
Purchase of mortgage-backed and related
securities available for sale (232,296) (157,474)
Proceeds from sale of mortgage-backed and
related securities available for sale 158,513 79,206
Proceeds from sale of loans 56,049 68,955
Loan originations, net of repayments (106,719) (131,585)
Loan fees deferred (1,943) 2,332
Proceeds from sale of real estate held for
sale and for development 764 928
Purchases of premises and equipment (5,500) (5,222)
Proceeds from sale of premises and equipment 2 6
Purchase of FHLB stock (5,046) (437)
Redemption of FHLB stock ---- 646
Capital additions to real estate held for sale (2,190) (418)
Acquisition of intangible asset (1,291) ----
-------- --------
Net cash used by investing activities (161,243) (123,377)
FINANCING ACTIVITIES
Net increase (decrease) in customer deposits 16,077 (13,831)
Net increase in certificates of deposit 10,911 60,550
Proceeds from FHLB advances and other
borrowings 435,610 418,929
Repayment of FHLB advances and other
borrowings (323,560) (359,663)
Dividends paid (2,010) (1,486)
Issuance of common stock 188 139
-------- --------
Net cash provided (used) by financing activities 137,216 104,638
-------- --------
Net increase(decrease) in cash & cash equivalents (12,585) (12,912)
CASH AND CASH EQUIVALENTS
Beginning of quarter 34,907 30,193
-------- --------
End of quarter $22,322 $17,281
6
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $16,483 $ 9,707
Income taxes 5,150 3,800
Noncash transactions:
Loans transferred to real estate held for
sale, net 1,037 115
Transfer of premises to real estate held for sale ---- 617
Transfer of securities held to maturity
to available for sale 198,523 ----
7
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INTERWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 1996
(unaudited)
NOTE A - Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements. The results
of operations for the quarter and nine months ended June 30, 1996 and 1995 are
not necessarily indicative of the operating results for the full year. The
September 30, 1995 consolidated statement of financial condition presented
with the interim financial statements was audited and received an unqualified
opinion. For further information, refer to the consolidated financial
statements and footnotes thereto included in the InterWest's annual report for
the year ended September 30, 1995.
NOTE B - Net Income per Share
The weighted average shares outstanding during the quarter and nine months
ended June 30, 1996 and 1995 include the effect of shares held by the Employee
Stock Ownership Plan (ESOP) and stock options granted. Earnings per share for
the quarter ended June 30, 1996 and 1995 are calculated on the basis of
6,566,461 and 6,488,381 weighted average shares outstanding, respectively.
Earnings per share for the nine months ended June 30, 1996 and 1995 are
calculated on the basis of 6,553,433 and 6,480,822 weighted average shares
outstanding, respectively.
NOTE C - Reclassification
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
NOTE D- Impaired Loans
On October 1, 1995, InterWest adopted Statement of Financial Accounting
Standards ( SFAS ) No. 114, Accounting by Creditors for Impairment of a Loan.
It is applicable to all loans except large groups of smaller-balance
homogenous loans that are collectively evaluated for impairment, loans
measured at fair value or at the lower of cost or fair value, leases, and debt
securities (as defined by SFAS No. 115). InterWest considers all single-family
residential (including construction), mobile home and consumer loans to be
smaller balance homogenous loans. SFAS No. 114 also applies to all loans that
are restructured in a troubled debt restructuring. A troubled debt
restructuring is a restructuring in which the creditor grants a concession to
the borrower that it would not otherwise consider. However, such loans
restructured prior to the effective date of SFAS No.114 that are performing in
accordance with their restructured terms are accounted for in accordance with
SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. SFAS No. 114 requires that the valuation of impaired loans be
based on the present value of expected future cash flows discounted at the
loan s effective interest rate or, as a practical expedient, at the loan s
observable market price or the fair value of the collateral if the loan is
collateral dependent. The amount of the impairment and any subsequent changes
are recorded through the provision loan losses as an adjustment to the
allowance for loan losses.
8
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Generally, InterWest evaluates a loan for impairment in accordance with SFAS
No. 114 when it is placed on nonaccrual status or if a loan is internally risk
rated as substandard or doubtful. The detailed analysis includes techniques
to estimate the fair value of the loan collateral and the existence of
potential alternative sources of repayment. While an impaired loan will
always be a classified asset, it may or may not be nonaccrual. Adopting SFAS
No. 114 did not affect InterWest s charge-off policy.
InterWest normally recognizes interest income on the accrual basis, however,
if the impaired loan is 90 days delinquent or management doubts the
collectibility of the unpaid interest, then interest income is recorded on the
receipt of cash.
The adoption of SFAS No. 114 had no material impact on the results of
operations or financial condition of InterWest.
The following is a summary of loans considered to be impaired in accordance
with SFAS No. 114 and the related interest income:
June 30, 1996
(In thousands)
-------------
Recorded investment in impaired loans not requiring an
allowance for loan losses in accordance with SFAS No. 114 $ 4,587
Recorded investment in impaired loans requiring an allowance
for loan losses in accordance with SFAS No. 114 0
-------------
Total recorded investment in impaired loans $ 4,587
Average recorded investment in impaired loans for the
three months ended $ 4,903
Interest income recognized for the three months ended 116
Average recorded investment in impaired loans for the
nine months ended 5,089
Interest income recognized for the nine months ended 296
All impaired loans were evaluated for impairment based on the fair value of
the loan s collateral as all impaired loans are collateral dependent. The
allowance for loan losses on impaired loans as measured in accordance with
SFAS No. 114 was $0 at June 30, 1996.
9
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INTERWEST BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On January 10, 1996, InterWest and InterWest Savings Bank entered into an
Agreement and Plan of Mergers ("Agreement") with Central Bancorporation
("Central"), and its two-wholly owned subsidiaries, Central Washington Bank
and North Central Washington Bank, pursuant to which Central will be merged
into InterWest. During the quarter ended June 30, 1996, the stockholders of
InterWest Bancorp and Central approved InterWest's acquisition of Central. At
June 30, 1996, Central had 10 offices located in central Washington and assets
of $203.3 million, total loans of $132.8 million, total customer deposits of
$181 million, and stockholder equity of $16.5 million. For the six months
ended June 30, 1996, Central's return on average assets was 1.44% and return
on average equity was 18.32%. The Agreement provides that Central's common
stock will be exchanged for shares of InterWest common stock pursuant to a
specified exchange ratio. The aggregate value of the consideration is
approximately $34.5 million, subject to certain adjustments. Consummation of
the acquisition is subject to several conditions, including receipt of
applicable regulatory approval. It is anticipated that the merger will be
completed during September of 1996 and will be treated as a pooling-of-
interests.
Total assets increased $146.9 million from September 30, 1995 to $1.414
billion at June 30, 1996. This increase was primarily due to an increase in
mortgage-backed and related securities of $108.7 million, and an increase in
loans of $54.7 million. These increases were partially offset by a decrease in
investment securities of $19.1 million.
During December 1995, InterWest Bancorp took advantage of the one-time amnesty
provided by the Financial Accounting Standards Board under SFAS 115, to
transfer $198.5 million mortgage-backed and related securities classified as
held to maturity to available for sale. Many of those securities transferred
were fixed rate securities. This transfer allowed InterWest to sell $89.4
million of securities which had been previously classified as held to maturity
at a net gain of $211,000. At June 30, 1996, InterWest has $336.7 million or
65% of its mortgage backed securities classified as available for sale. The
available for sale portfolio is required to be carried at fair value, thus its
carrying value fluctuates with changes in market conditions. At June 30, 1996,
InterWest has an unrealized loss on securities available for sale of $3.6
million as compared to an unrealized gain of $1.2 million at September 30,
1995.
Loans receivable increased $54.7 million from September 30, 1995. Loans
originated totaled $110.2 and $299.9 million for the quarter and nine months
ended June 30, 1996. Payoffs of existing loans for the quarter and nine
months ended June 30, 1996 were $57.5 and $161.8 million. Sales of loans for
the quarter and nine months were $1.8 million and $56.9 million, respectively.
Total liabilities increased a total of $140.4 million for the nine month
period ended June 30, 1996. This was primarily due to an increase in
customer deposits of $27.0 million, an increase in Federal Home Loan Bank
advances of $88.4 million and an increase in securities sold under agreements
to repurchase of $23.6 million. The increase in customer deposits, Federal
Home Loan Bank advances and repurchase agreements was principally used to
fund growth in mortgage-backed and related securities and loans receivable.
Stockholders' equity increased by $6.4 million from $89.9 million at September
30, 1995, to $96.3 million at June 30, 1996. The increase in stockholders
equity resulted from after-tax earnings of $11.3 million for the nine month
period, a $400,000 paydown on the Employee Stock Ownership Plan ( ESOP ) loan
and $189,000 from the issuance of common stock which was partially offset by
a $3.2 million decrease in the unrealized gain (loss) on securities available
for sale and a decrease of $2.3 million representing $.10, $.12 and $.13 per
share cash dividends declared by the Board of Directors for the quarters ended
December 31, 1995, March 31, 1996, and June 30, 1996, respectively.
10
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Loans Receivable, Net and Loans Held For Sale
InterWest originates mortgage loans through its 30 full-service offices and
one loan office. The following table indicates the loan portfolio mix as of
June 30, 1996, and September 30, 1995:
June 30, 1996 September 30, 1995
(in thousands)
------------- ------------------
Single-family residential $ 540,481 $ 506,903
Multi-family residential 52,442 49,275
Commercial 100,151 92,888
Residential construction 150,302 118,401
Mobile home 7,564 6,071
Other 25,899 22,030
------------- ------------------
876,839 795,568
Less:
Undisbursed loan proceeds 62,140 36,272
Allowance for losses on loans 4,876 4,283
Deferred loan fees and discounts 8,170 8,022
------------- ------------------
$ 801,653 $746,991
Residential construction loans consist of single-family custom construction
loans or loans to builders for resale purposes.
The following table compares loan originations, sales and principal repayments
for the: (in thousands)
Quarter Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
(in thousands)
Single-family residential $ 39,743 $ 31,527 $138,469 $ 89,049
Multi-family residential/
Commercial 16,444 14,714 43,211 45,004
Residential construction 44,643 27,373 99,884 77,565
Consumer 3,755 3,197 8,495 7,948
Equity line of credit 5,618 9,875
Total loans originated $110,203 $ 76,811 $299,934 $219,566
Loans sold $ 1,819 $ 11,065 $ 56,906 $ 68,538
Principal repayments $ 57,517 $ 28,192 $161,757 $ 87,981
InterWest currently has $187.2 million in loans serviced for others.
Interest is accrued on loans receivable until the loan is 90 days delinquent
or management doubts the collectibility of the loan or the unpaid interest, at
which time InterWest establishes a reserve for any accrued interest. All
loans on which interest is not being accrued are referred to as non-accrual
loans. At June 30, 1996, non-accrual loans totaled $2.1 million, consistent
with $2.1 million at September 30, 1995. Total non-performing assets,
including real estate owned through foreclosure, increased to $8.3 million or
0.59 percent of assets at June 30, 1996, compared to $6.3 million or 0.50
percent of assets at September 30, 1995.
11
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Results of Operations
Net Income
The Bank's net income after taxes for the quarter and the nine months ended
June 30, 1996 was $3.9 and $11.3 million compared to $2.8 and $8.6 million for
the like periods a year ago.
Interest Income and Expense
Net interest income increased $3.2 million to $10.9 million for the quarter
ended June 30, 1996, compared to $7.7 million for the same period a year ago.
For the nine months ended June 30, 1996 net interest income increased $6.5
million to $30.2 million, compared to $23.7 million for the nine months ended
June 30, 1995. During fiscal 1995, InterWest experienced a decrease in its
net interest margin which was a result of rising short-term rates and falling
long-term rates. During 1996, InterWest's focus on originating adjustable rate
mortgages and investing in adjustable rate securities has had a positive
impact on earnings and net interest margin as those adjustable rate assets
began to reprice. The net interest margin for the quarter and nine months
ended June 30, 1996 was 3.38% and 3.27% as compared to 2.96% and 3.08% for
the quarter and nine months ended June 30, 1995.
Interest income for the quarter and nine months ended June 30,1996 was $26.4
and $76.7 million compared to $20.9 and $61.1 million for the same periods a
year ago. The increase in interest income was after mortgage-backed and
related security premium amortization of $400,000 and $1.5 million for the
quarter and nine months ended June 30, 1996, respectively. Premium
amortization was $950,000 for the quarter ended June 30, 1995 and $800,000 for
the nine month period ended June 30, 1995. Premium and discount amortization
are affected by prepayments of mortgages. The yield on earning assets
increased 18 basis points for the quarter ended June 30, 1996 to 8.06% as
compared to 7.88% for the quarter ended June 30, 1995. For the nine months
ended June 30, 1996 the yield on earning assets increased 31 basis points to
8.12% as compared to 7.81% for the nine months ended June 30, 1995. These
increases were primarily due to an increase in the loan yield from 8.56% to
9.00% for the quarter and from 8.38% to 9.01% for the nine months as
adjustable rate loans began to reprice upwards.
Interest expense increased 18% or $2.3 million from $13.0 million a year ago
to $15.3 million for the current quarter. For the nine months ended June 30,
1996 interest expense was $45.8 million , a $8.8 million increase from $37.0
million for the nine months ended June 30, 1995. The cost of funds was 4.79%
for the quarter ended June 30, 1996 which was a 30 basis point decrease from
the cost of funds of 5.09% for the quarter ended June 30, 1995. InterWest's
cost of funds increased 3 basis points from 4.95% for the nine months ended
June 30, 1995 compared to 4.98% for the nine months ended June 30, 1996.
12
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Average Rates and Balances
The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread, net interest margin and the ratio of
average interest earning assets to average interest bearing liabilities for
the quarter and nine months ended June 30, 1996 and 1995.
Quarter Ended
June 30
1996 1995
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Weighted average yield: (in thousands, except percentages)
Loans receivable $ 775,645 9.00% $ 680,210 8.56%
Mortgage-backed and 488,024 6.49 338,069 6.53
related securities
Interest-earning deposits 25,003 9.89 7,898 11.60
Investment securities 20,934 7.85 32,936 6.68
------- ---- ------- ----
Total Interest Earnings
Assets $1,309,606 8.06% $1,059,113 7.88%
Weighted average cost:
Customer deposits $ 897,235 4.59% $ 832,786 5.07%
FHLB advances and other 383,454 5.25 190,786 5.18
borrowings
------- ---- ------- ----
Total Interest-Bearing
Liabilities $ 1,280,689 4.79% $1,023,572 5.09%
Net Interest Spread $ 28,917 3.27% $ 35,978 2.79%
Net Interest Margin 3.38% 2.96%
13
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Nine Months Ended
June 30
1996 1995
Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Weighted average yield: (in thousands, except percentages)
Loans receivable $ 763,340 9.01% $ 671,673 8.38%
Mortgage-backed and 448,624 6.65 328,010 6.70
related securities
Interest-earning deposits 26,649 8.28 7,175 10.50
Investment securities 21,079 6.97 37,223 6.74
------- ---- ------- ----
Total Interest Earnings Assets $1,259,692 8.12% $1,044,081 7.81%
Weighted average cost:
Customer deposits $ 875,510 4.80% $804,425 4.87%
FHLB advances and other 350,283 5.45 192,050 5.29
borrowings ------- ---- ------- ----
Total Interest-Bearing $1,225,793 4.98% $996,475 4.95%
Liabilities
Net Interest Spread $ 33,899 3.14% $ 35,282 2.86%
Net Interest Margin 3.27% 3.08%
14
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<PAGE>
Net interest income is influenced by changes in both interest income rates and
changes in interest-earning assets and interest-bearing liabilities. The
table presented below is an analysis of these changes for the quarter and nine
month periods ended June 30, 1996 as compared to the same periods a year ago.
Quarter Ended
June 30, 1996
(in thousands)
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $ 885 $(1,386) $2,271
Volume 4,655 3,693 962
------ ------- ------
Total $5,540 $2,307 $3,233
Nine Months Ended
June 30, 1996
(in thousands)
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $3,357 $(202) $3,559
Volume 12,245 9,005 3,240
------ ------- ------
Total $15,602 $8,803 $6,799
15
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<PAGE>
Provision and Allowance for Losses on Loans
The allowance for losses on loans totaled $4.9 million (0.61 percent of loans)
at June 30, 1996 compared to $4.3 million (0.57 percent of loans) at September
30, 1995. The provision for losses on loans increased to $210,000 for
the current quarter as compared to $150,000 for the like quarter a year ago.
The provision for loan losses also increased for the nine months ended June
30, 1996 to $760,000 as compared to $450,000 for the nine months ended June
30, 1995. The increased provision reflect s InterWest s anticipated entrance
into commercial banking. The provision for loan losses reflects management's
quarterly evaluation of the adequacy of the allowance for losses on loans. In
determining adequacy, management considers changes in the size and composition
of the loan portfolio, actual loan loss experience, current and anticipated
economic conditions and other factors. The provision for loan losses on
impaired loans is measured in accordance with SFAS No. 114. The allowance for
loan losses on impaired loans was $0 at June 30, 1996.
The following tables summarize the activity in allowance for losses on loans
during the periods presented: (in thousands)
Quarter ended Nine months ended
June 30, 1996 June 30, 1996
(in thousands)
------------- -------------
Balance at beginning of period $4,748 $4,283
Provisions 210 $760
Charge-offs, net <82> <167>
------------- -------------
Balance at end of period $4,876 $4,876
Other Income
Other income increased 5.3 percent or $800,000 from $1.8 million for the
quarter ended June 30, 1995, to $2.6 million for the quarter ended June 30,
1996. Other income also increased for the nine months ended June 30, 1996
to $7.5 million as compared to $6.0 million for the nine months ended June 30,
1995. The quarter increase was primarily due to increases in service fees of
$700,000, an increase in brokered loan rebate and discount income of $200,000
and an increase in gain on sale of real estate owned and held for development
of $250,000. The nine month period increase was primarily due to increases on
the sale of securities of $250,000, an increase in service fees of $1.5
million, an increase in discount and rebate income of $500,000 and an increase
in the gain on sale of loans of $550,000. The quarterly increase was
partially offset by a decrease in the gain on sale of securities of $300,000.
These quarterly and six month increases were offset by a decrease in the gain
on the sale of servicing of $150,000 and $1.8 million from the similar periods
of 1995.
Other Expense
Other expense increased 42 percent to $7.4 million for the quarter ended June
30, 1996, from $5.2 million for the same quarter last year. For the nine
months ended June 30, 1996, other expense increased to $20.5 million from
$16.6 million a year ago. These increase are largely attributable to the
acquisition of Cornerstone Northwest Mortgage. Cornerstone has approximately
70 employees and had expenses of $850,000 for the quarter and $1.7 million for
the nine month period ended June 30, 1996. The remaining increase is
primarily due to the addition of two branch offices and $250,000 in expenses
associated with the proposed acquisition of Central Bancorporation.
InterWest has consistently endeavored to become more efficient in its
operation. One commonly accepted
16
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<PAGE>
measure of a bank's operating efficiency is the ratio of total operating
expenses to total revenue (net interest income and other income). For the
quarter ended June 30, 1996, this ratio was 55.1% as compared to 55.3% for the
quarter a year ago. For the nine months ended June 30, 1996, this ratio was
54.4% as compared to 56.1% for the nine
months ended June 30, 1995.
Federal Income Tax
The federal income tax expense for the quarter and nine months ended June 30,
1996, was $2.1 million and $5.9 million, compared to $1.5 million and $4.5
million for the same periods last year. The effective tax rates for the
three and nine months ended June 30, 1996 were 35.0% and 34.4% compared to
34.5% and 34.1% for the three and nine months ended June 30, 1995.
Liquidity and Capital Resources
InterWest must maintain adequate liquidity to meet demands for deposits
outflow, loan originations, and normal operating costs. The primary sources of
liquidity are deposit generations, loan principal and interest payments, sales
of mortgage loans, principal payments on loans and mortgage-backed and related
securities, Federal Home Loan Bank advances and reverse repurchase agreements.
InterWest has a credit line available with the Federal Home Loan Bank of 40
percent of total assets. Prepayments on loans and mortgage-backed and related
securities, deposit inflows and outflows are affected significantly by
interest rates, general economic conditions and other factors.
At June 30, 1996, InterWest had commitments to originate mortgage loans
totaling $60.1 million and undisbursed funds on mortgage loans totaling $62.1
million. It is expected that these commitments and undisbursed funds will
be funded and disbursed in the normal course of operations from InterWest's
regular sources of funds and liquidity as of June 30, 1996.
InterWest Bancorp, Inc's wholly-owned subsidiary, InterWest Savings Bank is a
state chartered savings bank. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) placed additional emphasis on the importance
of a financial institution's capital levels. During 1992, the FDIC
implemented new regulations that establish the amount of capital for each of
the FDICIA-established categories of institutions. Depending on the Bank's
FDICIA category classification, the FDIC may restrict certain activities of
the Bank, including acceptance of brokered deposits or offering interest rates
on deposits that are significantly higher than the prevailing rates.
Management believes that the Bank will continue to maintain its minimum
capital requirements in the foreseeable future. However, events beyond the
control of the Bank, such as a downturn in the economy in areas were the
Bank has most of its loans, could adversely affect future earnings and,
consequently, the ability of the bank to meet its future minimum capital
requirements. The capital requirements under FDICIA are defined as follows:
Total Tier I
Risk-Based Risk-Based
Capital Capital Leverage
FDICIA Category Ratio Ratio Ratio
----- ----- -----
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized 2% or less
At June 30, 1996, the Bank was in compliance with the well-capitalized
requirements as follows:
Required Actual
Tier I capital to risk-based assets 6% 13.12%
Total capital to risk-based assets 10% 13.79%
Leverage ratio 5% 6.56%
The above ratios do not include unrealized gains and losses on securities
available for sale which are excluded from the ratios by the federal
regulatory agencies.
17
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
InterWest Bancorp, Inc. or its subsidiaries are also involved as
parties to certain legal proceedings incidental to their businesses.
InterWest believes that the outcome of such proceedings will not
have a material effect upon InterWest Bancorp's business or
financial condition.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At InterWest s Special Meeting of Shareholders held on June 10, 1996
the proposal for the acquisition of Central Bancorp was approved as
follows:
Affirmative Votes: 4,386,493
Negative Votes: 16,119
Votes Abstained: 18,971
Votes Withheld 2,071,003
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERWEST BANCORP, INC.
By: /s/ Stephen M. Walden
----------------------
Stephen M. Walden
President and
Chief Executive Officer
Date: August 13, 1996
<PAGE>
<PAGE>
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