FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 31, 1996
InterWest Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Washington 0-26632 91-1691216
State or other jurisdiction Commission (I.R.S. Employer
of incorporation File Number Identification No.)
1259 West Pioneer Way, Oak Harbor, Washington 98277
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (including area code) (360) 679-4181
Not Applicable
(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets
Effective August 31, 1996, InterWest Bancorp, Inc. ("InterWest")
consummated the previously announced acquisition of Central Bancorporation
("Central") and its wholly-owned subsidiary, Central Washington Bank.
Central's other banking subsidiary, North Central Washington Bank, was
previously merged into Central Washington Bank. The acquisition was
accomplished by the merger of Central into InterWest, with InterWest as the
surviving corporation (the "Merger"). Each share of Central common stock was
converted into the right to receive 1.41 shares of InterWest common stock.
InterWest will issue approximately 1,431,600 shares in exchange for all of the
outstanding shares of Central common stock. The assets of Central consist
primarily of real estate, commercial, installment and agricultural loans and
U.S. Government and agency securities.
Additional information concerning the acquisition is contained in the press
release issued by InterWest on September 3, 1996, attached hereto as Exhibit
99 and incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
Central's audited Consolidated Balance Sheets as of December 31, 1995 and
1994 and audited Consolidated Statements of Operations, Stockholders' Equity
and Cash Flows for the years ended December 31, 1995 and 1994 are attached
hereto as Appendix A.
Central's unaudited Consolidated Balance Sheet of June 30, 1996, and
Consolidated Statements of Operations, Stockholders' Equity and Cash Flows for
the six months ended June 30, 1996 and 1995 are attached hereto as Appendix B.
(b) Pro Forma Financial Information
Unaudited pro forma condensed combined financial statements reflecting
consummation of the Merger are attached hereto as Appendix C. The unaudited
pro forma condensed combined statement of financial condition as of June 30,
1996 combines the historical consolidated statements of financial condition of
InterWest and Central as if the Merger had occurred on such date after giving
effect to certain pro forma adjustments described in the accompanying notes.
The unaudited pro forma condensed combined statements of income are presented
as if the Merger had been consummated at the beginning of each period
presented. InterWest's fiscal year ends September 30 and Central's fiscal
year ends December 31. The unaudited pro forma condensed combined statements
of income for the three years ended September 30, 1995, 1994 and 1993 present
the results of operations of InterWest for the fiscal years ended September
30, 1995, 1994 and 1993 combined with the results for operations of Central
with the fiscal years
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ended December 31, 1995, 1994 and 1993, respectively. The historical
consolidated financial statement data for InterWest and Central as of and for
the nine months ended June 30, 1996 have been prepared on the same basis as
the historical information derived from audited financial statements, and in
the opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of results of
operations for such periods.
The unaudited pro forma condensed combined financial statements and notes
thereto reflect the application of the pooling of interests method of
accounting. The unaudited pro forma condensed combined financial statements
included herein are not necessarily indicative of the future results of
operations or the future financial position of the combined entities or the
results of operations and financial position of the combined entities that
would have actually occurred had the transactions been in effect as of the
dates or for the periods presented.
InterWest and Central estimate that they will incur direct transaction
costs of approximately $900,000 associated with the Merger which will be
charged to operations during the fiscal quarter in which the Merger is
consummated. There can be no assurance that InterWest will not incur charges
in subsequent quarters to reflect costs associated with the Merger or that
management will be successful in their efforts to integrate the operations of
the two companies.
(c) Exhibits:
2 Agreement and Plan of Mergers dated as of January 10, 1996
between Central Bancorporation, Central Washington Bank and North
Central Washington Bank and InterWest Bancorp, Inc. and InterWest
Savings Bank (incorporated by reference to Exhibit 2 to the
Registrant's Form 8-K dated January 16, 1996)
99 Press Release dated September 3, 1996
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Appendix A
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Bancorporation
Wenatchee, Washington
We have audited the accompanying consolidated balance sheet of Central
Bancorporation (Bancorp) and subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of Bancorp's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated balance sheet of Bancorp as of December 31, 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended were audited by other auditors whose report, dated
January 20, 1995, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Central Bancorporation and subsidiaries as of December 31, 1995, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
- ---------------------------
January 19, 1996
1
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CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------
ASSETS 1995 1994
- ------ -------- --------
CASH AND DUE FROM BANKS $ 10,507 $ 14,236
INTEREST-BEARING DEPOSITS IN OTHER BANKS 9,387 5,070
-------- --------
Cash and cash equivalents 19,894 19,306
SECURITIES AVAILABLE FOR SALE, cost of
$26,299 and $26,878 26,336 26,289
SECURITIES HELD TO MATURITY, fair value of
$16,744 and $19,677 16,719 20,216
LOANS 132,894 122,150
Less allowance for loan losses 1,795 1,667
-------- --------
Loans, net 131,099 120,483
ACCRUED INTEREST RECEIVABLE 1,628 1,407
FEDERAL HOME LOAN BANK STOCK 910 853
PREMISES AND EQUIPMENT, net 6,074 6,437
OTHER ASSETS, net 752 669
-------- --------
TOTAL $203,412 $195,660
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
DEPOSITS:
Interest bearing $152,550 $147,945
Noninterest bearing 27,363 27,245
-------- --------
179,913 175,190
SHORT-TERM BORROWINGS 2,895 2,200
NOTES PAYABLE 2,295 3,194
ACCRUED INTEREST AND OTHER LIABILITIES 2,456 1,678
-------- --------
Total liabilities 187,559 182,262
COMMITMENTS AND CONTINGENCIES (Note 19)
STOCKHOLDERS' EQUITY:
Common stock, $1.67 par value -
Authorized 3,000,000 shares;
issued and outstanding, 1,014,565
shares in 1995 and 999,243 shares in 1994 1,691 1,666
Capital surplus 2,678 2,616
Retained earnings 11,459 9,506
Unrealized gain (loss) on securities available
for sale 25 (390)
-------- --------
Total Stockholders' Equity 15,853 13,398
-------- --------
TOTAL $203,412 $195,660
======== ========
See notes to consolidated financial statements.
2
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CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------
1995 1994
-------- --------
INTEREST INCOME:
Interest and fees on loans $ 12,689 $ 9,831
Interest on securities available for sale 1,273 1,322
Interest and dividends on investment securities:
Taxable 847 619
Exempt from federal income tax 219 246
Interest income on interest-bearing deposits 561 431
-------- --------
Total interest income 15,589 12,449
INTEREST EXPENSE:
Interest on deposits 5,799 4,080
Interest on short-term borrowing 145 87
Interest on note payable 236 167
-------- --------
Total interest expense 6,180 4,334
-------- --------
Net interest income before provision for
loan losses 9,409 8,115
PROVISION FOR LOAN LOSSES 120 -
-------- --------
Net interest income 9,289 8,115
OTHER INCOME:
Mortgage loan servicing fees 213 200
Service charges on deposit accounts 1,019 855
Gain on sales of loans, net 478 43
Loss on sales of securities, net - (244)
Other service charges and fees 585 603
-------- --------
Total other income 2,295 1,457
OTHER EXPENSES:
Salaries and employee benefits 4,208 3,597
Occupancy expense of premises 518 477
Printing, stationery, and supplies 361 265
Equipment and data processing 711 710
Legal and professional 307 215
Business and occupation taxes 212 162
Deposit insurance assessment 201 336
Other 1,251 1,181
-------- --------
Total other expenses 7,769 6,943
-------- --------
INCOME BEFORE INCOME TAX $ 3,815 $ 2,629
INCOME TAX EXPENSE 1,260 864
-------- --------
NET INCOME $ 2,555 $ 1,765
======== ========
NET INCOME PER SHARE $ 2.46 $ 1.70
See notes to consolidated financial statements.
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<TABLE>
CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------
Net unrealized
gain (loss)
on securities
Common Common Capital Retained available
Shares Stock Surplus Earnings for sale Total
--------- ------- ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 987,316 $ 1,646 $ 2,536 $ 8,437 $ - $12,619
Common stock issued for
options exercised, net
of stock redeemed 6,927 12 (12)
Common stock donated 5,000 8 92 (100)
Net income 1,765 1,765
Cash dividends, $.60 per share (596) (596)
Change in net unrealized
gain (loss) (390) (390)
--------- ------- ------- -------- ------ -------
BALANCE, December 31, 1994 999,243 1,666 2,616 9,506 (390) 13,398
Common stock issued for
options exercised, net
of stock redeemed 15,322 25 62 87
Net income 2,555 2,555
Cash dividends, $.60 per share (602) (602)
Change in net unrealized
gain (loss) 415 415
--------- -------- ------- ------- ----- -------
BALANCE, December 31, 1995 1,014,565 $ 1,691 $ 2,678 $11,459 $ 25 $15,853
========= ======= ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
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CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------
1995 1994
-------- --------
OPERATING ACTIVITIES:
Net income $ 2,555 $ 1,765
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 547 578
Provision for loan losses 120 -
Cash provided (used) by changes in operating
assets and liabilities:
Origination of loans held for sale (13,247) (12,818)
Proceeds from sale of loans 12,000 13,900
Loss on securities available for sale 244
Loan fees deferred, net of amortization 74 164
Dividends on FHLB stock (51) (50)
Deferred compensation expense 92 163
Other (375) 325
-------- --------
Net cash provided by operating activities 1,715 4,271
INVESTING ACTIVITIES:
Proceeds from maturing securities held to maturity 6,842 4,535
Purchases of securities held to maturity (3,377) (11,483)
Proceeds from sales of securities available for sale 7,224
Proceeds from maturing securities available
for sale 11,895 15,407
Purchases of securities available for sale (11,162) (10,587)
Cash received in acquisition, net of cash paid 7,281
Loan originations, net of principal repayments (9,563) (17,856)
Acquisition of premises and equipment (191) (277)
-------- --------
Net cash used by investing activities (5,556) (5,756)
FINANCING ACTIVITIES:
Net increase in deposits 4,700 9,699
Net increase in short-term borrowings 1,144 236
Proceeds from borrowings 2,993
Proceeds from stock options 87
Principal payments on note payable (900) (3,299)
Cash dividends (602) (596)
-------- --------
Net cash provided by financing activities 4,429 9,033
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 588 7,548
CASH AND CASH EQUIVALENTS:
Beginning of year 19,306 11,758
-------- --------
End of year $ 19,894 $ 19,306
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 6,359 $ 4,289
Income taxes 1,042 757
See notes to consolidated financial statements.
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CENTRAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 1995 AND 1994
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------
1995 1994
------ ------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
In 1994, Bancorp purchased all the capital stock of First Bank Washington
for $4,119. In connection with the acquisition, liabilities were assumed
as follows:
Fair value of assets $52,709
Cash paid for capital stock (4,119)
-------
Liabilities assumed $48,590
=======
See notes to consolidated financial statements.
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CENTRAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- ------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Central Bancorporation (Bancorp), through its wholly owned subsidiaries,
Central Washington Bank and North Central Washington Bank, provides a wide
range of banking products and services principally throughout Chelan and
Okanogan Counties, and to a lesser degree in Douglas and Grant Counties. This
North Central Washington region is predominately agricultural based, and its
economic stability is dependent on the strength of the apple industry.
Although the subsidiaries have a diversified loan portfolio, a substantial
portion of their debtors' ability to pay is dependent on the local economy.
Summarized below are the significant accounting and reporting policies.
CONSOLIDATION: The consolidated financial statements include the accounts
of Bancorp and subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS: For purposes of reporting cash flows, cash equivalents
consist of highly liquid investments with an original maturity of 90 days
or less.
SECURITIES: Securities available for sale are carried at fair value.
Significant unrealized holding gains and losses are excluded from
earnings and reported net, as a separate component of stockholders'
equity until realized. Gains and losses on the sale of investment
securities are computed under the specific identification method.
Securities held to maturity are stated as cost and are adjusted for
amortization of premiums and accretion of discounts using a method that
approximates the interest method. Securities held to maturity are
designated as such at the date of purchase based on management's positive
intent and ability to hold such investments to maturity. Unrealized
losses resulting from market valuation differences deemed other than
temporary are included in earnings. Gains and losses from the sale of
investment securities are computed under the specific identification
method.
LOANS: Loans are stated at their principal amount outstanding, net of
unearned income (including deferred loan fees and costs). Mortgage loans
held for sale are valued at the lower of aggregate cost or market.
Interest on loans and amortization of unearned income is credited to
income on a daily basis, based on principal amounts outstanding at
applicable rates. The accrual of interest on impaired loans is
discontinued when management has determined that the borrower may be
unable to meet payments as they become due. Accrual of interest income is
generally discontinued when a loan becomes 90 days past due as to
principal or interest. When interest accruals are discontinued, interest
credited to income in the current year is reversed, and interest accrued
in the prior year is charged to the allowance for loan losses. Interest
income is subsequently recognized only to the extend cash payments are
received.
CREDIT RISK AND THE ALLOWANCE FOR LOAN LOSSES: The management of credit
risk is the responsibility of Bancorp's Loan Committee. They have
established maximum credit limits for single borrowers and for loan
classifications generally. The comparison of limits and actual levels of
activity is reviewed by the Board of Directors on a regular basis.
The allowance for loan losses (the allowance) is intended to absorb
future possible losses in the loan portfolio. Provisions for loan losses,
which are charged to operating expenses and added to the allowance, are
based upon several factors including actual loss experience, current and
forecasted economic conditions, a review of the quality of the loan
portfolio, and other pertinent factors. The balance of the allowance is
considered by management adequate to absorb losses which may exist in the
loan portfolio at the balance sheet date. In connection with the
determination
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of the allowances for loan losses and real estate owned, management
obtains independent appraisals for significant properties.
As of January 1, 1995, Bancorp adopted Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures, an amendment of SFAS No. 114. These
statements require that impaired loans that are within their scope be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of
collateral if the loan is collateral dependent. Subsequent changes in the
measurement of impaired loans shall be reported as a provision for loan
losses in the same manner in which impairment initially was recognized or
as a reduction in the provision that would otherwise be reported. The
adoption of these statements had no material impact on Bancorp's
financial condition or results of operations.
LOAN FEE INCOME: Loan origination fees and certain direct loan
origination costs are deferred and the net amount recognized as an
adjustment to yield for the contractual life of the related loans. Fees
related to lending activities other than the origination of loans are
recognized as other income during the period the related services are
performed.
PREMISES AND EQUIPMENT: Premises and equipment are recorded at cost and
depreciated over their estimated useful lives. Depreciation expense is
computed using the straight-line method. Gains or losses on disposition
are reflected in operations. Expenditures for improvements are
capitalized and ordinary maintenance and repairs are charged to
operations as incurred.
OTHER REAL ESTATE OWNED: Real estate acquired through foreclosures or in
settlement of loans is recorded at the lower of fair market value minus
estimated costs to sell or carrying value of the loan at the acquisition
date.
INCOME TAXES: Bancorp and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes related to the timing
differences of recognizing income and expense for financial statement and
income tax purposes are recorded on the liability method.
MORTGAGE LOAN SERVICING: Mortgage loan servicing fees are based on a
percentage of the outstanding loan principal balances being serviced and
are included in income as related loan payments from mortgages are
collected.
NET INCOME PER SHARE: Net income per share is computed using the weighted
average number of shares of common stock outstanding, including shares
issuable under stock option plans, when dilutive, during the periods
presented, adjusted for stock splits.
The weighted average number of shares outstanding used to compute net
income per share was 1,038,120 in 1995 and 1,035,120 in 1994.
USE OF ESTIMATES: The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect amounts reported
in the financial statements. Changes in these estimates and assumptions
are considered reasonably possible and may have a material impact on the
financial statements. Bancorp has used significant estimates in
determining reported reserves and allowances for loan losses, tax
liabilities, and other contingencies.
RECLASSIFICATIONS: Certain items in the accompanying 1994 consolidated
financial statements have been reclassified to conform to the 1995
presentation.
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NOTE 2: RESTRICTIONS ON CASH AND DUE FROM BANKS
The subsidiaries are required to maintain reserve balances with the Federal
Reserve Bank. The average required reserve at December 31, 1995 and 1994, was
approximately $1,468,000 and $1,597,000, respectively. These required reserves
are based on specified percentages of the subsidiaries' total average
deposits. The percentage of deposits required to be maintained is established
by the Federal Reserve Board.
NOTE 3: SECURITIES
The amortized cost and estimated fair values of securities held to maturity
and securities available for sale at December 31, computed on a specific
identification basis, are summarized as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ----------- ----------
1995
Securities available for sale:
U.S. Treasury $ 18,999 $ 67 $ 27 $ 19,039
U.S. Government agencies
and corporations 6,700 1 2 6,699
Corporate securities 500 4 496
Obligations of states and
political subdivisions 100 2 102
-------- ---- ---- --------
$ 26,299 $ 70 $ 33 $ 26,336
======== ==== ==== ========
Securities held to maturity:
U.S. Treasury $ 2,998 $ 7 $ - $ 3,005
U.S. Government agencies
and corporations 4,000 19 4,019
Obligations of states and
political subdivisions 4,720 43 4 4,759
Mortgage-backed securities 5,001 18 58 4,961
-------- ---- ----- --------
$ 16,719 $ 87 $ 62 $ 16,744
======== ==== ===== ========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ----------- ----------
1994
Securities available for sale:
U.S. Treasury $ 18,437 $ - $460 $ 17,977
U.S. Government agencies
and corporations 7,761 103 7,658
Corporate securities 600 27 573
Obligations of states and
political subdivisions 80 1 81
-------- ---- ---- --------
$ 26,878 $ 1 $590 $ 26,289
======== ==== ==== ========
Securities held to maturity:
U.S. Treasury $ 6,450 $ - $100 $ 6,350
U.S. Government agencies
and corporations 3,541 56 3,485
Obligations of states and
political subdivisions 4,384 63 4,321
Mortgage-backed securities 5,841 320 5,521
-------- ---- ---- --------
$ 20,216 $ - $539 $ 19,677
======== ==== ==== ========
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The amortized cost and estimated fair value of securities held to maturity and
securities available for sale at December 31, 1995, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturity
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties (in thousands):
Securities Held to Securities
Maturity Available for Sale
--------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Due in one year or less $ 8,582 $ 8,610 $ 19,690 $ 19,680
Due after one year through
five years 2,343 2,364 6,509 6,554
Due after five years 793 809 100 102
-------- -------- -------- --------
11,718 11,783 26,299 26,336
Mortgage-backed securities 5,001 4,961
-------- --------
$ 16,719 $ 16,744 $ 26,299 $ 26,336
======== ======== ======== ========
Proceeds from sales of securities available for sale were $7,224,000 in 1994.
Gross losses of $244,000 were realized on those sales during 1994. There were
no sales of securities in 1995.
Securities carried at $3,987,000 and $3,621,000 at December 31, 1995 and 1994,
respectively, are pledged to secure public and trust deposits, and for other
purposes as required or permitted by law.
NOTE 4: LOANS
Loans by category at December 31 are summarized as follows (in thousands):
1995 1994
-------- ------
Real Estate:
1 - 4 single family $ 39,640 $ 38,801
Commercial 27,306 25,736
Construction 8,018 5,649
Installment 19,891 18,727
Commercial 20,426 18,255
Agricultural 13,594 12,750
All other 4,019 2,232
-------- --------
$132,894 $122,150
======== ========
Nonaccrual loans at December 31, 1995 and 1994, totalled approximately
$228,000 and $388,000, respectively. Interest income foregone on such loans
was $31,000 and $14,000 during 1995 and 1994, respectively. At December 31,
1995, there were no loans considered to be impaired in accordance with SFAS
No. 114.
Real estate mortgage loans at December 31, 1995 and 1994, include $1,507,000
and $259,000, respectively, of loans held for sale which are carried at the
lower of cost or market value.
Loans serviced for others totalled $76,123,000 and $64,200,000 at December 31,
1995 and 1994, respectively. Custodial accounts maintained in connection with
this servicing totalled $990,000 and $929,000 at December 31, 1995 and 1994,
respectively.
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Bancorp originates both adjustable and fixed interest rate loans. At December
31, 1995, the composition of those loans, less undisbursed amounts, are as
follows (in thousands):
1995
----
Fixed rate (term to maturity):
Three months or less $ 5,260
Three months through one year 4,989
Over one year through five years 25,709
Over five years 21,424
--------
$ 57,382
========
Adjustable rate (term to rate adjustment):
Quarterly or more frequently $ 36,426
Annually or more frequently, but less frequently
than quarterly 9,700
Every five years or more frequently, but less
frequently than annually 28,650
Less frequently than every five years 736
--------
$ 75,512
========
Substantially all of Bancorp's commercial loans are secured by assignments of
inventory or accounts receivable, buildings and equipment, or savings
deposits; agricultural loans are secured by crops and crop equipment; consumer
loans are generally secured by personal property or savings deposits; and all
real estate loans are secured by land and buildings.
On May 12, 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. SFAS No. 122 eliminates distinctions between servicing
rights that were purchased and those that were retained upon the sale of
loans. The statement requires mortgage servicers to recognize as separate
assets rights to service loans, no matter how the rights were acquired.
Institutions who sell loans and retain the servicing rights will be required
to allocate the total cost of the loans to servicing rights and loans based on
their relative fair values if that value can be estimated. SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995. Further, SFAS
No. 122 requires that all capitalized mortgage servicing rights be
periodically evaluated for impairment based upon the current fair value of
these rights. This statement will be adopted January 1, 1996; however, it is
not anticipated to have a material impact on the results of operations or
financial condition of the Bancorp.
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December 31
are as follows (in thousands):
1995 1994
------- -------
Balance, beginning of year $ 1,667 $ 1,156
Provision acquired 393
Provisions 120
------- -------
1,787 1,549
Loans charged off (228) (64)
Recoveries on loans previously charged off 236 182
------- -------
Net loans recovered 8 118
------- -------
Balance, end of year $ 1,795 $ 1,667
======= =======
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NOTE 6: PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows (in
thousands):
1995 1994
------- ------
Land $ 948 $ 948
Buildings and leasehold improvements 5,137 5,137
Equipment and fixtures 3,832 3,680
------- -------
9,917 9,765
Less accumulated depreciation and amortization 3,843 3,328
------- -------
$ 6,074 $ 6,437
======= =======
NOTE 7: INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31 are summarized as follows (in
thousands):
1995 1994
-------- --------
Interest-bearing demand (2.0%-2.6%) $ 38,526 $ 39,626
Money market accounts (3.0%-4.0%) 17,851 16,425
Savings accounts (3.0%-4.5%) 29,625 34,523
Time deposits, $100,000 or more (5.0%-7.1%) 13,459 12,155
Other time deposits (4.0%-8.5%) 53,089 45,216
-------- --------
$152,550 $147,945
======== ========
As of December 31, 1995, scheduled maturities of time deposits are as follows
(in thousands):
Year ending December 31
-----------------------
1996 $ 52,035
1997 6,356
1998 3,119
1999 2,039
Thereafter 2,999
--------
$ 66,548
========
Interest expense on time deposits of $100,000 or more totalled $759,000 in
1995 and $306,000 in 1994.
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are summarized as follows (in thousands):
1995 1994
------- -------
Securities sold under repurchase agreements $ 734 $ 412
Federal funds purchased 1,505 866
Treasury tax and loan note 656 922
------- -------
$ 2,895 $ 2,200
======= =======
Securities sold under repurchase agreements specify the sale and later
repurchase of certain U.S. Government or U.S. Government agency securities at
an agreed-upon interest rate. At December 31, 1995 and 1994, Bancorp sold
securities with par amounts of $740,000 and $430,000, respectively, with an
agreement to repurchase the securities on January 2, 1996 and January 3, 1995,
at an interest rate of 5.53% and 6.06%, respectively.
12
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<PAGE>
NOTE 9: NOTES PAYABLE
The subsidiaries have fixed and variable rate advances collateralized under
blanket pledge agreements with the Federal Home Loan Bank totalling $500,000
at both December 31, 1995 and 1994. Of the amount outstanding at December 31,
1994, $250,000 matures on September 9, 1997, with interest payable monthly at
5.38%. The remaining amount outstanding of $250,000 at December 31, 1995,
matures on March 3, 1998, with interest payable monthly at 5.26%.
Bancorp has a note payable of $1,800,000 and $2,700,000 at December 31, 1995
and 1994, respectively, maturing in April 28, 1999. Principal is payable in
semiannual installments of $300,000, and interest is payable quarterly at
prime plus one-half percent. The note is secured by all outstanding stock of
Central Washington Bank.
NOTE 10: INCOME TAXES
The components of income tax expense for the years ended December 31 were as
follows (in thousands):
1995 1994
------- ------
Current $ 1,143 $ 847
Deferred 117 17
------- -------
$ 1,260 $ 864
======= =======
The reasons for the differences between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income tax expense are as follows (in thousands):
1995 1994
------------------ -------------
Amount % Amount %
------ - ------ -
Expected tax expense $1,297 34% $ 894 34%
Tax-exempt interest (82) (2) (74) (3)
Other 45 1 44 2
------ -- ------ --
$1,260 33% $ 864 33%
====== == ====== ==
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below (in thousands):
1995 1994
------ ------
Deferred tax assets:
Deferred loan fees $ 68 $ 59
Loan loss reserve 312 104
Vacation accruals 9 54
Deferred compensation expense 216 190
Unrealized losses on securities
available for sale 201
Other 18 49
------ ------
Gross deferred tax assets 623 657
Deferred tax liabilities:
FHLB dividends (81) (59)
Depreciation (670) (529)
Unrealized gain on securities
available for sale (13)
Other (147) (26)
------ ------
Gross deferred liabilities (911) (614)
------ ------
$ (288) $ 43
====== ======
13
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<PAGE>
NOTE 11: STOCKHOLDERS' EQUITY
CAPITAL REQUIREMENTS: Bancorp and its subsidiaries are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on
Bancorp's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bancorp and its
subsidiaries must each meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Bancorp and its subsidiaries' capital amounts and
classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Bancorp and its subsidiaries to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier I capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1995, that Bancorp and its subsidiaries meet
all capital adequacy requirements to which they are subject.
The Federal Deposit Insurance Corporation (FDIC) has implemented new
regulations that establish categories of institutions with respect to
capital as required by the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). Depending on Bancorp and its
subsidiaries' FDICIA category classification, the FDIC may restrict
certain of their activities, including acceptance of brokered deposits or
offering interest rates on deposits that are significantly higher than
prevailing interest rates. In order to be categorized as a well-
capitalized institution, the FDIC requires financial institutions it
regulates to maintain a leverage ratio, defined as Tier I capital divided
by total regulatory assets, of at least 5%, total risk-based capital of
at least 10% of risk-weighted assets; and Tier I risk-based capital of at
least 6% of risk-weighted assets.
As of December 31, 1995, the most recent notification from the FDIC
categorized Bancorp as well capitalized under the regulatory framework
for prompt corrective action.
At December 31, 1995, Bancorp had the following regulatory capital and
capital ratios calculated in accordance with FDIC standards (amounts in
thousands):
Minimum Capital
Actual Requirement
------------------ --------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Central Bancorporation:
Total capital (to risk-
weighted assets) $17,519 13.0 % $10,816 8.0 %
Tier I capital (to risk-
weighted assets) 15,828 11.7 5,408 4.0
Tier I capital (to
average assets) 15,828 7.7 8,207 4.0
Central Washington Bank:
Total capital (to risk-
weighted assets) $13,763 13.4 % $ 8,204 8.0 %
Tier I capital (to risk-
weighted assets) 12,481 12.2 4,102 4.0
Tier I capital (to
average assets) 12,481 8.4 5,925 4.0
North Central Washington Bank:
Total capital (to risk-
weighted assets) $ 5,238 16.2 % $ 2,592 8.0 %
Tier I capital (to risk-
weighted assets) 4,832 14.9 1,296 4.0
Tier I capital (to
average assets) 4,832 8.5 2,274 4.0
DIVIDENDS: Bancorp paid dividends of $.60 per share in 1995 and $.60 per
share in 1994. On January 10, 1996, Bancorp declared a $.40 per share
cash dividend payable by February 9, 1996, to stockholders of record on
January 10, 1996.
RESTRICTIONS ON DIVIDENDS: There are limited restrictions on the ability
of Bancorp to pay dividends from its retained
14
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<PAGE>
earnings; however, under Washington State banking law, Bancorp's banking
subsidiaries may not, without approval of the Director of the State
Department of Financial Institutions (Director), declare dividends
payable to Bancorp in excess of undivided profits, as defined by statute,
less any required transfers to surplus. This State statute also grants to
the Director the discretion to require any bank to suspend the payment of
any and all dividends until any requirements that may have been made by
the Director, or any duly appointed examiner, shall have been complied
with. At December 31, 1995 and 1994, the subsidiaries could have
provided funds to Bancorp of up to approximately $7,715,000 and
$6,911,000, respectively, without further approval of regulatory
authorities.
STOCK OPTIONS: In 1986, the stockholders authorized and Bancorp adopted
an Incentive Stock Option Plan (the Plan) for officers and key employees.
All options granted immediately become exercisable. In total, as many as
94,000 shares may be issued under the Plan until the Plan's expiration
date in 1996. At December 31, 1995, 34,686 options previously granted
under the 1986 Plan remain outstanding.
In 1992, the stockholders approved the Company's 1992 Stock Option Plan,
which reserved an additional 60,000 shares of Bancorp's common stock for
the granting of options to key employees. Options granted under this
stock option plan vest over a period of seven to ten years. At December
31, 1995, 22,150 options had been granted, and no options had been
exercised.
In 1994, the stockholders approved the Company's 1994 Director's Stock
Option Plan, which reserved an additional 60,000 shares of Bancorp's
common stock for the granting of options to directors. All options
granted immediately become exercisable. At December 31, 1995, 40,000
options had been granted, and no options had been exercised.
Information on options is summarized below:
Shares Price
Under Option Per Share
------------ --------------
December 31, 1993 68,944 $5.08 - $16.00
Granted 52,500 20.00
Exercised 9,286 5.08
-------
December 31, 1994 112,158 5.08 - 20.00
Granted
Exercised 15,322 5.08 - 8.14
-------
December 31, 1995 96,836
=======
Exercisable shares under option at December 31, 1995, totalled 80,822 at
a price of $5.08 to $20.00 per share. Exercisable shares under option at
December 31, 1994, totalled 91,387 at a price of $5.08 to $20.00 per
share.
During 1994, 9,286 shares under option were exercised at a price of $5.08
per share. These shares were issued in an exchange whereby Bancorp
redeemed 2,359 shares of its common stock with a market price of $20.00
per share, in exchange for the shares issued under option.
During 1994, Bancorp issued 5,000 shares of its common stock to the
original investors of Sentinel Bancorporation (Sentinel) at a market
price of $20.00 per share. Sentinel was incorporated with the intention
of purchasing First Bank Washington from First Bank System, Inc. First
Bank Washington was subsequently purchased by Bancorp, and 5,000 shares
were issued to Sentinel's investors for their efforts and resulting
benefit to Bancorp.
NOTE 12: EMPLOYEE BENEFIT PLANS
Bancorp has adopted a 401(k) savings and profit sharing plan (PSP). All
full-time employees who have been continuously employed for one year are
eligible to participate by having a percentage of their pay deferred under the
PSP. Bancorp,
15
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<PAGE>
at its direction, may contribute a portion of the profits to the PSP.
Participants will receive their share of those profits upon retirement or
termination subject to a vesting schedule. The PSP provides deferred
investment options to participants. Bancorp's contribution to the PSP was
$69,000 during 1995 and $46,000 during 1994.
NOTE 13: DEFERRED COMPENSATION PLANS
Bancorp adopted deferred compensation plans for the subsidiaries' directors
and for Bancorp's executive officer. The plans allow for the deferral of
director fees and executive compensation until retirement or termination of
the plans. Under the terms of the plans, Bancorp agrees to pay the deferred
amount plus interest at retirement (or sooner based upon the agreements'
provisions) over a ten- to fifteen-year period. Bancorp has purchased
insurance policies on the lives of the plan participants as a vehicle to fund
the benefits payable under the agreements. The amounts charged to operations
for these plans were $92,000 in 1995 and $169,000 in 1994.
NOTE 14: INCENTIVE PLANS
The subsidiaries have adopted voluntary incentive compensation plans for
employees, senior officers, and directors. The plans allow for additional
compensation based upon a predetermined level of Bancorp or subsidiary
profitability, as defined. The amounts charged to operations for these plans
were $487,000 in 1995 and $237,000 in 1994.
NOTE 15: RELATIONSHIPS WITH AFFILIATES, DIRECTORS, AND EXECUTIVE OFFICERS
Bancorp and the subsidiaries have had and expect to have transactions in the
ordinary course of business with many of their directors, executive officers,
their associates, and family members.
The table below reflects information concerning loans (in thousands) by the
subsidiaries to the above-mentioned related parties at December 31. In the
opinion of management, these credit transactions did not, at the time they
were entered into, involve more than normal risk of collectibility or present
other unfavorable features.
Amounts
1994 Additions Collected 1995
------ --------- --------- ------
Loans to directors, executive
officers, and family members $ 514 $ 600 $ 123 $ 991
Loans to companies of which
directors were principal
stockholders or directors 487 326 192 621
------ ----- ----- ------
$1,001 $ 926 $ 315 $1,612
====== ===== ===== ======
Percent of loans outstanding .82% 1.21%
====== ======
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by Bancorp
using available market information and appropriate valuation methodologies.
However, considerable judgement is required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts Bancorp could realize in
a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
16
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<PAGE>
The fair value of financial instruments was as follows at December 31, 1995
(in thousands):
Carrying Fair
Amount Value
-------- --------
Financial assets:
Cash and due from banks $ 10,507 $ 10,507
Interest-bearing deposits in other banks 9,387 9,387
Federal Home Loan Bank stock 910 910
Securities available for sale 26,336 26,336
Securities held to maturity 16,719 16,744
Loans, exclusive of allowance for loan losses 132,894 132,832
Financial liabilities:
Noninterest-bearing deposits 27,363 27,363
Interest-bearing deposits:
Demand deposits 86,002 86,002
Time deposits 66,548 66,638
Short-term borrowings 2,895 2,895
Notes payable 2,295 2,295
Off-balance sheet information:
Commitments on line-of-credit arrangements
Undrawn credit card lines
Standby letters of credit
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument as of December 31, 1995:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS, FEDERAL FUNDS SOLD:
The carrying amount represented fair value.
SECURITIES AVAILABLE FOR SALE: Fair values were based on quoted market
prices or dealer quotes.
LOANS: Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
NONINTEREST-BEARING DEPOSITS: The fair value of noninterest-bearing
accounts was the amount payable on demand at the reporting date.
INTEREST-BEARING DEPOSITS, DEMAND DEPOSITS: The fair value of demand
deposit accounts was the amount payable on demand at the reporting date.
INTEREST-BEARING DEPOSITS, TIME DEPOSITS: For time certificates of
deposit, the fair value was determined using the discounted cash flow
method. The discount rate was equal to the rate currently offered on
similar products.
SHORT-TERM BORROWINGS: These notes are based on current rates equal to
current market rates.
NOTES PAYABLE: These notes were valued using the discounted cash flow
method. The discount rate was equal to rates currently offered on similar
borrowings.
COMMITMENTS ON LINE-OF-CREDIT AGREEMENTS, UNDRAWN CREDIT CARD LINES, AND
STANDBY LETTERS OF CREDIT: Total outstanding commitments are primarily
credit cards and personal lines of credit totalling $22,925,000 and
$24,221,000 at December 31, 1995 and 1994, respectively. These
commitments are at market interest rates.
17
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<PAGE>
NOTE 17: CONDENSED FINANCIAL INFORMATION OF CENTRAL BANCORPORATION
Condensed financial information of Central Bancorporation (parent only) for
the years ended December 31, 1995 and 1994, follows (in thousands):
BALANCE SHEETS 1995 1994
- -------------- -------- --------
Assets:
Cash and due from banks $ 440 $ 65
Investment in subsidiaries 17,338 16,120
Other assets, net 325 258
-------- --------
Total $ 18,103 $ 16,443
======== ========
Liabilities:
Notes payable $ 1,795 $ 2,694
Other liabilities 455 351
-------- --------
Total liabilities 2,250 3,045
Stockholders' equity:
Common stock 1,691 1,666
Capital surplus 2,678 2,616
Retained earnings 11,459 9,506
Unrealized gain (loss) on
securities available for sale 25 (390)
-------- --------
Total stockholders' equity 15,853 13,398
-------- --------
Total $ 18,103 $ 16,443
======== ========
STATEMENTS OF OPERATIONS
Equity in net income of subsidiary $ 3,129 $ 2,228
Expenses:
Interest expense 219 152
Operating expenses 746 551
-------- --------
Total expenses 965 703
-------- --------
Net income before federal income taxes 2,164 1,525
Federal income tax benefit 391 240
-------- --------
Net income $ 2,555 $ 1,765
======== ========
18
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<PAGE>
STATEMENTS OF CASH FLOWS 1995 1994
- ------------------------ -------- -------
Operating activities:
Net income $ 2,555 $ 1,765
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income of subsidiary (3,129) (2,228)
Dividends received from subsidiary 1,860 2,400
Other assets and liabilities 504 116
------- -------
Net cash provided by operating activities 1,790 2,053
Investing activities:
Payments for investment in subsidiary (4,119)
Financing activities:
Proceeds from issuance of note payable 2,993
Proceeds from stock options 87
Principal repayment of note payable (900) (299)
Cash dividends (602) (596)
------- -------
Net cash provided (used) by financing activities (1,415) 2,098
------- -------
Increase in cash due from banks 375 32
Cash and due from banks:
Beginning of year 65 33
------- -------
End of year $ 440 $ 65
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 219 $ 152
Income tax 1,042 757
NOTE 18: ACQUISITION OF FIRST BANK WASHINGTON
On April 30, 1994, Bancorp completed the cash purchase of 100% of the common
stock of First Bank Washington, a wholly owned subsidiary of FBS Washington
Bancorporation and First Bank System, Inc. The purchase price, including
acquisition cost, of $4,119,000 was financed with a combination of cash and by
a $3,000,000 note payable to an unaffiliated lender. The acquisition was
accounted for as a purchase for financial statement purposes, and operations
of the acquired bank are included in the financial statements from May 1,
1994, onward. Below is a summary of the fair values of First Bank Washington's
assets and liabilities at the date of acquisition (in thousands):
Total cash and cash equivalents $ 11,400
Securities 11,202
Net loans 27,499
Other assets 2,608
Deposits (48,428)
Other liabilities (162)
--------
Net assets acquired $ 4,119
========
As of May 1, 1994, the name First Bank Washington was changed to North Central
Washington Bank.
The income statements presented for December 31, 1995 and 1994, are not
comparable because the December 31, 1994, statements only contain eight months
of activity. To facilitate comparability, below are condensed pro forma
financial statements as though the purchase had occurred on December 31, 1993
(in thousands, except per share amounts):
19
<PAGE>
<PAGE>
CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
- --------------------------------------------
Twelve Months ended December 31,
--------------------------------
1995 1994
-------- --------
(unaudited)
Interest income $ 15,589 $ 13,520
Interest expense 6,180 4,788
Provision for loan loss 120
-------- --------
Net interest income 9,289 8,732
Other income 2,295 1,602
Other expense (7,769) (7,595)
Income tax expense (1,260) (902)
-------- --------
Net income $ 2,555 $ 1,837
======== ========
Net income per share $ 2.46 $ 1.77
======== ========
NOTE 19: COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments outstanding
and contingent liabilities (such as guarantees and commitments to extend
credit, etc.) that are not reflected in the accompanying financial statements.
Commitments to extend credit are agreements to lend to a borrower as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. Bancorp evaluates each
borrower's creditworthiness on a case-by-case basis. The amount of the
collateral obtained, if it is deemed necessary by Bancorp upon extension of
credit, is based on management's credit evaluation of the borrower. Collateral
held varies but may include accounts receivable; inventory; property, plant,
and equipment; and deposits.
Standby letters of credit are conditional commitments issued by the
subsidiaries to guarantee the performance of a customer to a third party.
Generally, standby letters of credit are expected to expire without being
drawn upon. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
borrowers. The subsidiaries hold real or personal property as collateral
supporting those commitments for which collateral is necessary.
The amounts committed under these agreements represent the maximum potential
loss of principal, if fully drawn and if the customer defaults. However, the
actual credit risk varies depending on the creditworthiness of the customer
and the value of the collateral held.
Commitments outstanding at December 31 are summarized as follows (in
thousands):
1995 1994
------- -------
Loan commitments $18,416 $20,477
Undrawn credit card lines 4,419 3,342
Standby letters of credit 90 412
NOTE 20: PROPOSED MERGER
On January 10, 1996, Bancorp and its subsidiary banks entered into an
agreement and plan of mergers with InterWest Bancorp, Inc., Oak Harbor,
Washington and InterWest's subsidiary, InterWest Savings Bank, pursuant to
which Bancorp will be merged into InterWest. The merger agreement provides
that Bancorp's common stock will be exchanged for shares of InterWest common
stock pursuant to a specified exchange ratio. Consummation of the acquisition
is subject to several conditions, including receipt of applicable regulatory
approval and approval by Bancorp and InterWest shareholders.
20
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Appendix B
CENTRAL BANCORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
- ------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------
ASSETS
Cash and due from banks $9,762 $10,507
Interest bearing deposits in other banks 16,127 9,387
-------- --------
Cash and cash equivalents 25,889 19,894
Securities available for sale, at market 22,716 26,336
Securities held to maturity (market value
of $14,520 in 1996 and $16,744 in 1995) 14,579 16,719
Loans 132,792 132,894
Less allowance for loan losses 2,008 1,795
-------- --------
Loans, net 130,784 131,099
Accrued interest receivable 1,687 1,628
Federal Home Loan Bank stock 943 910
Premises and equipment, net 5,841 6,074
Other assets, net 829 752
-------- --------
Total assets $203,268 $203,412
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $27,474 $27,363
Interest-bearing 153,562 152,550
-------- --------
Total deposits 181,036 179,913
Short-term borrowings 2,732 2,895
Notes payable 500 2,295
Accrued interest and other liabilities 2,541 2,456
-------- --------
Total liabilities 186,809 187,559
Stockholders' equity:
Common stock, $1.67 par value. Authorized
3,000,000 shares; issued and outstanding
1,015,315 in 1996 and 1,014,565 in 1995. 1,692 1,691
Surplus 2,692 2,678
Retained earnings 12,114 11,459
Unrealized gain (loss) on securities
available for sale (39) 25
-------- --------
Total stockholders' equity 16,459 15,853
-------- --------
Total liabilities and stockholders' equity $203,268 $203,412
======== ========
See accompanying notes to consolidated financial statements.
Page 1
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CENTRAL BANCORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts) (unaudited)
- ------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $3,214 $3,176 $6,402 $6,175
Interest on securities:
Taxable 462 526 977 1,102
Exempt from federal income tax 62 52 122 104
Other interest income 271 111 474 189
------ ------ ------ ------
Total interest income 4,009 3,865 7,975 7,570
INTEREST EXPENSE:
Interest on deposits 1,489 1,463 3,000 2,737
Interest on borrowings 76 96 166 198
------ ------ ------ ------
Total interest expense 1,565 1,559 3,166 2,935
------ ------ ------ ------
Net interest income 2,444 2,306 4,809 4,635
Provision for loan losses - - - -
------ ------ ------ ------
Net interest income after the
provision for loan loss 2,444 2,306 4,809 4,635
OTHER INCOME:
Loan servicing fees 62 49 125 98
Service charges on deposit
accounts 259 253 505 502
Gain on sales of loans, net 80 101 166 139
Other service charges and fees 163 157 315 290
------ ------ ------ ------
Total other income 564 560 1,111 1,029
Other expenses:
Salaries and employee benefits 1,013 985 2,115 2,010
Occupancy expense of premises 125 122 278 238
Printing, stationery and supplies 66 87 154 176
Equipment and data processing 165 186 341 354
Legal and professional 82 48 253 102
Business and occupation taxes 51 53 103 98
Deposit insurance assessment 1 98 2 196
Other 280 308 561 616
------ ------ ------ ------
Total other expenses 1,783 1,887 3,807 3,790
------ ------ ------ ------
Income before income tax
expense 1,225 979 2,113 1,874
Income tax expense 355 307 647 573
------ ------ ------ ------
Net income $870 $672 $1,466 $1,301
====== ====== ====== ======
Net income per share $0.82 $0.65 $1.39 $1.25
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
Page 2
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CENTRAL BANCORPORATION
Consolidated Statements of Cash Flows
(Dollars in Thousands) (unaudited)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED June 30,
1996 1995
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $1,466 $1,301
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 284 256
Cash provided (used) by changes in operating
assets and liabilities:
Origination of loans held for sale (8,825) (10,837)
Proceeds from sale of loans 9,532 10,800
Loan fees deferred, net of amortization 52 111
Dividends on FHLB stock (34) (25)
Other (482) (85)
-------- --------
Net cash provided by operating activities 1,993 1,521
INVESTING ACTIVITIES:
Proceeds from maturing securities held to maturity 14,471 1,309
Purchase of securities held to maturity (10,902) (317)
Proceeds from maturing securities available for sale 5,005 7,776
Purchase of securities available for sale (2,847) (1,021)
Loans originations, net of principal repayments (445) (10,402)
Acquisition of premise and equipment (51) (23)
------- --------
Net cash used in investing activities 5,231 (2,678)
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 1,125 2,031
Net increase in short-term borrowings (163) 390
Proceeds from stock options exercised 15 57
Principal payments on notes payable (1,800) (300)
Cash dividends (406) (350)
------- -------
Net cash provided by (used in) financing activities (1,229) 1,828
Net increase in cash and cash equivalents 5,995 671
Cash and cash equivalents at beginning of year 19,894 19,306
------- -------
Cash and cash equivalents at end of period $25,889 $19,977
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $3,060 $2,563
Income tax 726 555
See accompanying notes to consolidated financial statements.
Page 3
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CENTRAL BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB.
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, adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results anticipated for the year ending December 31, 1996.
For additional information refer to the consolidated financial statements and
footnotes thereto included in Central Bancorporation's annual report on Form
10-KSB for the year ended December 31, 1995.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common stock outstanding, including shares issuable under stock options plans,
when dilutive, during the periods presented.
The weighted average number of shares outstanding used to compute net
income per share was 1,058,137 during the quarter and 1,055,203 during the six
month periods in 1996 and 1,037,770 during the quarter and 1,038,438 during
the six month periods in 1995, respectively.
3. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest bearing deposits, and federal funds
sold.
4. CONSOLIDATION
The consolidated financial statements include the accounts of Central
Bancorporation, Central Washington Bank, North Central Washington Bank, and
Central Financial Services, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation.
5. PENDING MERGER
On January 10, 1996, Bancorp and its subsidiary banks entered into an
agreement and plan of mergers with InterWest Bancorp, Inc., Oak Harbor,
Washington and InterWest's subsidiary, InterWest Savings Bank, pursuant to
which Bancorp will be merged into InterWest. The merger agreement provides
that Bancorp's common stock will be exchanged for shares of InterWest common
stock pursuant to a specified exchange ratio. Consummation of the acquisition
is subject to several conditions, including receipt of applicable regulatory
approval. Stockholder approval was obtained during June of 1996.
6. DIVIDEND PAYABLE
On June 26, 1996, the directors of Bancorp declared a $.40 dividend
payable on July 26,1996, to those stockholders of record on July 10, 1996. The
amount of the dividend payable was recorded as a reduction in retained
earnings and an increase in accrued interest and other liabilities.
Page 4
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Appendix C
Pro Forma Condensed Combined Statement of Financial Condition
June 30, 1996
(unaudited)
Pro Forma Pro Forma
InterWest Central Adjustments Combined
--------- ------- ----------- ---------
(In thousands)
Assets
Cash and deposits. . . . . $ 22,321 $ 25,889 $ -- $ 48,210
Investment securities, net 1,757 29,678 -- 31,435
FHLB stock . . . . . . . . 19,589 943 -- 20,532
Mortgage-backed securities,
net . . . . . . . . . . 516,997 7,617 -- 524,614
Loans held for sale. . . . -- 802 -- 802
Loans receivable, net. . . 801,652 129,982 -- 931,634
Premises and equipment, net 28,049 5,841 -- 33,890
Real estate owned. . . . . 10,448 -- -- 10,448
Accrued interest receivable 8,907 1,687 -- 10,594
Deferred assets . . . . . -- -- -- --
Other assets . . . . . . . 4,206 829 -- 5,035
--------- ------- ----------- ---------
Total assets . . . . . . $1,413,926 $203,268 $ -- $1,617,194
Liabilities and Stockholders' Equity
Savings accounts . . . . . $ 798,681 $114,300 $ -- $ 912,981
NOW accounts . . . . . . . 88,704 66,736 -- 155,440
--------- ------- ----------- ---------
Total deposits . . . . . . 887,385 181,036 -- 1,068,421
Current and deferred income
taxes . . . . . . . . . 1,754 313 (315) 1,752
Advances from FHLB . . . . 356,193 500 -- 356,693
Accrued transaction costs. -- -- 900 900
Other liabilities. . . . . 72,255 4,960 -- 77,215
--------- ------- ----------- ---------
Total liabilities . . . . 1,317,587 186,809 585 1,504,981
Stockholders' equity . . . 96,339 16,459 (585) 112,213
--------- ------- ----------- ---------
Total liabilities and
stockholders' equity. . $1,413,926 $203,268 $ -- $1,617,194
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
1
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<PAGE>
Pro Forma Condensed Combined Statement of Operations
Nine Months Ended June 30, 1996
(unaudited)
Pro Forma
InterWest Central Combined
--------- ------- --------
(In thousands, except per share data)
Interest income. . . . $76,721 $12,009 $88,730
Interest expense . . . 45,800 4,786 50,586
--------- ------- --------
Net interest income. . 30,921 7,223 38,114
Provision for loan losses. . . 760 -- 760
--------- ------- --------
Net interest income after
provision for loan losses. . 30,161 7,223 37,384
Other Income:
Service charges and
fee income. . . . . 3,177 947 4,124
Income from real estate
operations. . . . . 213 -- 213
Gains on sales of loans and
mortgage-backed securities 1,493 293 1,786
Other income. . . . . 2,626 465 3,091
--------- ------- --------
Total . . . . . . 7,509 1,705 9,214
Other Expenses:
Compensation and benefits . . 10,873 3,319 14,192
Occupancy and equipment . . . 3,776 940 4,716
Other . . . . . . . . 5,849 1,720 7,569
--------- ------- --------
Total . . . . . . 20,498 5,979 26,477
Income before taxes. . 17,172 2,949 20,121
Provision for federal
income taxes. . . . . 5,913 1,009 6,922
--------- ------- --------
Net income . . . . . . $11,259 $ 1,940 $13,199
Weighted average shares outstanding:
Primary . . . . . . . 6,663,433 1,049,212 8,032,822
Fully diluted . . . . 6,553,433 1,049,212 8,032,822
Net income per share
Primary . . . . . . . $ 1.72 $ 1.85 $ 1.64
Fully diluted . . . . 1.72 1.85 1.64
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
2
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<PAGE>
Pro Forma Condensed Combined Statement of Operations
Year Ended September 30, 1995 (1)
(unaudited)
Pro Forma
InterWest Central Combined
--------- ------- --------
(In thousands, except per share data)
Interest income. . . . $84,675 $15,589 $100,264
Interest expense . . . 51,746 6,180 57,926
--------- ------- --------
Net interest income. . 32,929 9,409 42,338
Provision for loan losses. . . 600 120 720
Net interest income after provision --------- ------- --------
for loan losses . . . 32,329 9,289 41,618
Other Income:
Service charges and fee income. . . . . 2,327 1,604 3,931
Income from real estate operations. . . 16 -- 16
Gains on sales of loan servicing. . . . 1,831 478 2,309
Gains on sales of loans and
mortgage-backed securities . 726 -- 726
Other income. . . . . 2,797 213 3,010
--------- ------- --------
Total . . . . . . 7,697 2,295 9,992
Other Expenses:
Compensation and benefits . . 10,931 4,208 15,139
Occupancy and equipment . . . 4,171 1,229 5,400
Other . . . . . . . . 7,031 2,332 9,363
--------- ------- --------
Total . . . . . . 22,133 7,769 29,902
Income before taxes. . 17,893 3,815 21,708
Provision for federal
income taxes. . . . . 6,087 1,260 7,347
--------- ------- --------
Net income . . . . . $11,806 $ 2,555 $ 14,361
Weighted average shares outstanding. . 6,508,329 1,038,120 7,972,078
Net income per share . $1.81 $2.46 $1.80
- ---------------
(1) The historical financial information for Central is for the year ended
December 31, 1995.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
3
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<PAGE>
Pro Forma Condensed Combined Statement of Operations
Year Ended September 30, 1994 (1)
(unaudited)
Pro Forma
InterWest Central Combined
--------- ------- --------
(In thousands, except per share data)
Interest income. . . . $69,821 $12,449 $82,270
Interest expense . . . 36,351 4,334 40,685
--------- ------- --------
Net interest income. . 33,470 8,115 41,585
Provision for loan losses. . . 900 -- 900
Net interest income after provision --------- ------- --------
for loan losses . . . 32,570 8,115 40,685
Other Income:
Service charges and fee income. . . . . 2,240 1,458 3,698
Income from real estate operations. . . 746 -- 746
Gains on sales of loans and
mortgage-backed securities . 1,533 (201) 1,332
Other income. . . . . 1,732 200 1,932
--------- ------- --------
Total . . . . . . 6,251 1,457 7,708
Other Expenses:
Compensation and benefits . . 10,295 3,597 13,892
Occupancy and equipment . . . 3,857 1,187 5,044
Other . . . . . . . . 6,551 2,159 8,710
--------- ------- --------
Total . . . . . . 20,703 6,943 27,646
Income before taxes. . 18,118 2,629 20,747
Provision for federal income taxes . . . 6,416 864 7,280
--------- ------- --------
Net income . . . . . . $11,702 $ 1,765 $13,467
Weighted average shares outstanding. . . 6,518,422 1,035,120 7,977,941
Net income per share . $1.80 $1.70 $1.69
- ---------------
(1) The historical financial information for Central is for the year ended
December 31, 1994.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
4
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<PAGE>
Pro Forma Condensed Combined Statement of Operations
Year Ended September 30, 1993 (1)
(unaudited)
Pro Forma
InterWest Central Combined
--------- ------- --------
(In thousands, except per share data)
Interest income. . . . $63,282 $9,753 $73,035
Interest expense . . . 31,899 3,528 35,427
--------- ------- --------
Net interest income. . 31,383 6,225 37,608
Provision for loan losses. . . 1,399 -- 1,399
Net interest income after provision --------- ------- --------
for loan losses . . . 29,984 6,225 36,209
Other Income:
Service charges and fee income. . . . . 2,084 1,112 3,196
Income from real estate operations. . . -- -- --
Gains on sales of loans and
mortgage-backed securities . 3,157 399 3,556
Other income. . . . . 2,040 122 2,162
--------- ------- --------
Total . . . . . . 7,281 1,633 8,914
Other Expenses:
Compensation and benefits . . 9,443 2,653 12,096
Occupancy and equipment . . . 4,077 1,006 5,083
Other . . . . . . . . 7,463 1,636 9,099
--------- ------- --------
Total . . . . . . 20,983 5,295 26,278
Income before taxes. . 16,282 2,563 18,845
Provision for federal income taxes . . . 5,613 749 6,362
--------- ------- --------
Net income . . . . . . $10,669 $1,814 $12,483
Weighted average shares outstanding. . . 6,466,541 1,023,001 7,908,972
Net income per share . $1.65 $1.77 $1.58
- ---------------
(1) The historical financial information for Central is for the year ended
December 31, 1993.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements.
5
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<PAGE>
Notes to Pro Forma Condensed Combined Financial Statements
Note 1. Periods Combined
InterWest's consolidated statements of operation for each of the years in
the three-year period ended September 30, 1995 and the nine months ended June
30, 1996 have been combined with the Central consolidated statements of
operations for each of the years in the three-year period ended December 31,
1995 and the nine months ended June 30, 1996.
The InterWest consolidated statement of financial condition as of June 30,
1996 has been combined with the Central consolidated statement of financial
condition as of June 30, 1996.
Note 2. Pro Forma Net Income Per Share
The pro forma condensed combined statements of income for InterWest and
Central have been prepared as if the Merger was completed at the beginning of
the periods presented. Pro forma combined net income per share is based upon
combined historical net income for InterWest and Central divided by the
average pro forma common shares of the combined entities.
Note 3. Basis of Presentation
Pro forma basis of presentation. The pro forma condensed combined
financial statements reflect the issuance of 1,431,594 shares of InterWest
common stock in exchange for an aggregate of 1,015,315 shares of Central
common stock in connection with the Merger based on an exchange ratio of 1.41
shares of InterWest common stock for every share of Central common stock.
Merger transaction costs. InterWest and Central estimate they will incur
direct transaction costs of approximately $900,000 associated with the Merger,
consisting of transaction fees for investment bankers, attorneys, accountants,
financial printing and other related charges. These nonrecurring costs will
be charges to operations in the fiscal quarter in which the Merger is
consummated. The pro forma condensed combined statement of financial
condition gives effect to such expenses as if they had been accrued as of June
30, 1996, but the effect of these costs have not been reflected in the pro
forma condensed combined statements of operations.
Note 4. Conforming Adjustments
There have been no adjustments required to conform the accounting policies
of the combined company. There are no intercompany transactions.
6
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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, hereunto duly authorized.
INTERWEST BANCORP, INC.
/S/H. GLENN MOUW
DATE: September 13, 1996 By:-----------------
H. Glenn Mouw
Executive Vice President
<PAGE>
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Exhibit 99
FOR RELEASE TUESDAY, SEPTEMBER 3, 1996
For more information contact:
Carla Tucker, Vice President/Controller - (360) 679-4181
Gina Dyer, Corporate Relations - (360) 679-4181
INTERWEST BANCORP, INC. COMPLETES ACQUISITION
OF CENTRAL BANCORPORATION
Oak Harbor, WA - September 3, 1996 - InterWest Bancorp, Inc., (Nasdaq:IWBK)
announced today it completed its merger with Central Bancorporation of
Wenatchee, Washington effective August 31, 1996. This further diversifies
InterWest's operations into commercial banking activities and enhances the
long-term value of the company. Central operated ten full service branch
offices in Central and North Central Washington and had $203.3 million in
assets, $180.0 million in deposits and $16.5 million in stockholders' equity
at June 30, 1996.
Under the terms of the merger, each share of Central Bancorporation common
stock has been converted into 1.41 shares of InterWest Bancorp, Inc., common
stock. Approximately 1,431,600 shares are being issued in this transaction.
Instructions for exchanging stock certificates will be mailed to former
Central Bancorporation shareholders in early September.
Now that the merger is complete, InterWest will operate the ten Central
bank offices under the name of InterWest Bank. "We are pleased that the
merger had been finalized and are quickly implementing strategies for business
banking company wide," said Stephen M. Walden, president and chief executive
officer of InterWest. "Central Bancorporation has a proven record of success
in this area which will help us to effectively enter the business banking
arena," Walden added.
"Customers of both banks now have more branch office locations and
financial products and services to choose from," said Gary Bolyard, president
and chief executive officer of Central Bancorporation, who will become Vice
Chairman/Commercial Banking of InterWest. "Our shareholders will benefit from
the active trading of InterWest's stock and the potential for further in-
market acquisitions of other community banks located in non-metropolitan
cities."
With assets of approximately $1.6 billion, InterWest Bancorp, Inc., is the
third largest Washington-based bank holding company in Washington State.
InterWest offers a full range of non-traditional financial products through
InterWest Financial Services Inc., insurance products through InterWest
Insurance Agency, Inc., and brokered loan products through Cornerstone
Northwest Mortgage. InterWest Bank now operates 37 branch offices throughout
Central and Western Washington.
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