SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26632
InterWest Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Washington 91-1691216
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification
No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 679-4181
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.20 per share
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $260,686,974 based upon the closing price of the
Registrant's common stock as quoted on the Nasdaq National Market on December
5, 1996 of $32.5625.
As of December 5, 1996, there were issued and outstanding 8,005,742
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the year ended September 30, 1996.
(Part I).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders. (Parts
II and III).
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PART I
Item 1. Business
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General
InterWest Bancorp, Inc. ("InterWest Bancorp" or the "Corporation") was
incorporated in the State of Washington in 1994 for the purpose of becoming a
bank holding company for InterWest Bank ("InterWest" or the "Bank"). On
January 17, 1995, the stockholders of the Bank approved a plan to reorganize
the Bank into the holding company form of ownership. The reorganization was
completed on July 28, 1995, on which date the Bank became the wholly-owned
subsidiary of the Corporation, and the stockholders of the Bank became
stockholders of the Corporation. Prior to completion of the reorganization,
the Corporation had no material assets or liabilities and engaged in no
business activities. Subsequent to the acquisition of InterWest, the
Corporation has engaged in no significant activity other than holding the
stock of the Bank.
InterWest was organized in 1956 as Island Savings and Loan Association
by two local business people who recognized the need to create a new business
to help families obtain homes in the growing community of Oak Harbor on
Whidbey Island. On July 5, 1957 Island Savings began operations as the first
state-chartered stock savings and loan association in the State of Washington.
By 1984, the name Island Savings and Loan Association had been outgrown both
as a geographic description and as an indicator of the scope of the company's
products and services. On May 30, 1984, the name InterWest Savings Bank was
ratified unanimously by stockholders and board members. In March of 1987,
InterWest acquired the assets of Home Savings and Loan Association. The
purchase added $150 million in assets and five branch offices to InterWest's
holdings.
Effective August 31, 1996, the Corporation consummated the acquisition
of Central Bancorporation ("Central"), Wenatchee, Washington, and its
wholly-owned subsidiary, Central Washington Bank. Effective October 14, 1996,
Central Washington Bank was merged into InterWest, with InterWest surviving
the merger. The acquisition was accounted for by the Corporation as a pooling
of interests, and all references to the Corporation hereafter with respect to
prior periods reflect this pooling of interests. For a discussion of the
accounting treatment of the acquisition, see Note 24 to Notes to Consolidated
Financial Statements. The acquisition of Central added 10 new branches in
central Washington and provides InterWest with an entrance into the business
of commercial banking. This acquisition represents the initial steps of
transforming InterWest from a traditional thrift to a blended financial
institution with business banking in its portfolio of products and less
reliance on a single-family mortgages as its primary asset. In November 1996,
the Bank changed its name from InterWest Savings Bank to InterWest Bank to
reflect the expansion of its business.
Today InterWest conducts its business through 37 full-service branch
offices. These offices are located in small cities and towns in the western
and central parts of the State of Washington. These smaller cities and towns
are generally outside Washington's most densely populated cities, such as
Seattle and Spokane. Management believes it is easier to develop long-term
customer relationships in outlying areas and that such relationships lead to
increased repeat business and greater customer loyalty. Management believes
that persons living in outlying areas are less likely to relocate outside of
InterWest's market area and are somewhat more likely to communicate among
themselves than are persons in more densely populated areas and, thus,
constitute a more stable customer base worthy of significant efforts to
develop high quality long-term relationships. Accordingly, InterWest has
developed a variety of policies designed to maintain high levels of customer
service, including customer service monitoring and follow-up procedures.
Management believes that InterWest has developed such long-term relationships
and that these relationships have resulted in increased profitability.
Investments are available through InterWest Financial Services, Inc., a
wholly-owned subsidiary of the Bank and insurance is
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available through InterWest Insurance Agency, Inc., a partially-owned
subsidiary of the Bank. Brokered loan products are available through
Cornerstone Northwest Mortgage, Inc., a wholly-owned subsidiary of the Bank.
Recent Developments
Recapture of Bad Debt Reserves. Recently enacted legislation repealed
the reserve method of accounting for bad debt reserves for tax years beginning
after December 31, 1995. As a result, savings associations, such as
InterWest, will no longer be able to calculate their deduction for bad debts
using the percentage-of-taxable-income method. Instead, savings associations
will be required to compute their deduction based on specific charge-offs
during the taxable year or, if the savings association or its controlled group
had assets of less than $500 million, based on actual loss experience over a
period of years. This legislation also requires savings associations to
recapture into income over a six-year period their post-1987 additions to
their bad debt tax reserves, thereby generating additional tax liability. At
September 30, 1996, InterWest's post-1987 reserves totalled approximately $5.2
million. The recapture may be suspended for up to two years if, during those
years, the institution satisfies a residential loan requirement. InterWest
anticipates that it will meet the residential loan requirement for the taxable
year ending September 30, 1997. See "TAXATION -- Federal Taxation."
New Branch Openings. During the year ended September 30, 1996, in
addition to the branches acquired through the acquisition of Central,
InterWest opened new branches in Mercer Island and Lakewood, Washington.
Key Operating Ratios
The table below sets forth certain performance ratios for the periods
indicated. These ratios are calculated based on month-end balances.
Year Ended September 30,
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1996 1995 1994 1993 1992
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KEY OPERATING RATIOS:
Return on average assets. . . 0.82% 1.08% 1.19% 1.31% 1.20%
Return on average stockholders'
equity . . . . . . . . . . . 11.48 14.37 15.26 16.32 15.30
Average stockholders' equity
to average assets . . . . . 7.12 7.52 7.77 8.03 7.85
Net interest margin . . . . . 3.53 3.37 3.88 4.22 3.81
Ratio of non-performing assets
to total assets(1) . . . . . 0.54 0.45 0.61 0.82 1.19
Dividend payout ratio . . . . 32.25 18.60 18.54 15.73 10.33
___________________
(1) Non-performing assets consist of non-performing loans (including
nonaccrual loans and certain other delinquent loans at the discretion of
management) and real estate held for sale.
Yields Earned and Rates Paid
The Corporation's pre-tax earnings depend primarily on its net interest
income, which is the difference between the income it receives on its loan
portfolio and investment and mortgage-backed and related securities and its
cost of money, consisting primarily of interest paid on customer deposits,
Federal
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Home Loan Bank advances, securities sold under agreements to repurchase and
other borrowings. Net interest income is affected by (i) the difference
("interest rate spread") between rates of interest earned on its
interest-earning assets and rates paid on its interest-bearing liabilities and
(ii) the relative amounts of its interest-earning assets and interest-bearing
liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. Thrift institutions have traditionally used interest
rate spreads as a measure of net interest income. Another indicator of an
institution's net interest income is its "net interest margin" which is net
interest income divided by average interest-earning assets.
In an effort to make the yields on its loan portfolio and investments
more interest rate sensitive, InterWest has implemented a number of measures.
Those measures include: (i) adoption of a policy under which InterWest
generally originates long-term, fixed-rate mortgage loans only when such loans
are written to specifications promulgated by the Federal Home Loan Mortgage
Corporation ("FHLMC") and qualify for sale in the secondary market, (ii)
origination of adjustable-rate mortgage loans on residential and commercial
properties subject to market conditions, (iii) origination of construction
loans secured by residential properties at interest rates subject to periodic
adjustment based upon prevailing market rates, (iv) origination of consumer
loans secured by autos, vehicles and other collateral, and (v) increased focus
on the origination of commercial non-real estate and agricultural loans. See
"-- Lending Activities."
The following table presents for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resulting yields,
interest rate spread, ratio of interest-earning assets to interest-bearing
liabilities and net interest margin. Average balances for the period have
been calculated using the average of month-end balances during such periods.
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Year Ended September 30,
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1996 1995 1994
-------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average & Yield/ Average & Yield/ Average & Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ------- ------- --------- ------- ------- --------- -------
(Dollars in Thousands)
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1) . $ 907,494 $82,925 9.14% $ 814,898 $70,803 8.69% $ 720,656 $61,865 8.58%
Mortgage-backed and
related securities. 466,320 31,874 6.84 350,877 23,621 6.73 249,217 15,198 6.10
Investment
securities. . . . . 64,131 3,312 5.16 70,474 4,545 6.45 65,879 3,506 5.32
Interest-earning
deposits. . . . . . 38,430 2,802 7.29 20,957 1,295 6.17 36,400 1,701 4.67
---------- ------- ---------- ------- ---------- ------
Total interest-
earning assets. . 1,476,375 120,913 8.19 1,257,206 100,264 7.98 1,072,152 82,270 7.67
Non-interest earning
assets . . . . . . . 86,316 72,609 63,771
---------- ---------- ----------
Total Assets . . . . . $1,562,691 $1,329,815 $1,135,923
========== ========== ==========
Interest-bearing
liabilities:
Passbook accounts . . 102,120 2,569 2.52 $ 111,538 3,275 2.94 $120,853 3,576 2.96
Demand and NOW
accounts(2) . . . . 161,506 1,867 1.16 143,122 2,031 1.42 141,949 2,050 1.44
Money market
accounts. . . . . . 95,782 3,854 4.02 89,183 3,398 3.81 84,037 2,308 2.75
Certificates of
deposit . . . . . . 706,250 39,876 5.65 654,395 37,248 5.69 528,374 24,948 4.72
---------- ------- ---------- ------- ---------- ------
Total Deposits. . . 1,065,658 48,166 4.52 998,238 45,952 4.60 875,213 32,882 3.76
FHLB advances, securities
sold under agreements
to repurchase and
other borrowings . . 372,200 20,642 5.55 222,605 11,974 5.38 165,693 7,803 4.71
---------- ------- ---------- ------- ---------- ------
Total interest-bearing
liabilities. . . . . 1,437,858 68,808 4.79 1,220,843 57,926 4.74 1,040,906 40,685 3.91
------- ------- ------
Non-interest bearing
liabilities. . . . . 13,566 9,021 6,763
---------- ---------- ----------
Total
liabilities. . . 1,451,424 1,229,864 1,047,669
Stockholders' equity . 111,267 99,951 88,254
---------- ---------- ----------
Total liabilities
and stockholders'
equity . . . . . . . $1,562,691 $1,329,815 $1,135,923
========== ========== ==========
Net interest income. . $52,105 $42,338 $41,585
======= ======= =======
Interest rate spread . 3.40 3.24 3.76
Net interest margin . 3.53 3.37 3.88
Ratio of average
interest-earning
assets to average
interest- bearing
liabilities. . . . . 102.68% 102.98% 103.00%
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(1) Does not include interest on loans 90 days or more past due.
(2) Includes average non-interest bearing demand accounts of $49.9 million, $43.1 and $38.4 million for the
years ended September 30, 1996, 1995 and 1994, respectively.
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Lending Activities
General. The principal lending activity of InterWest is the origination
of single-family residential mortgage loans and, to a lesser extent, loans
secured by income property. InterWest requires that mortgage loans be secured
by first liens on single-family, residential dwellings (one- to-four family
units), land, developed lots and income property. The purpose of most mortgage
loans has been for the purchase or refinancing of these properties, but some
loans have been for acquisition or development of residential lots or
construction of single-family houses or permanent loans secured by income
properties. As of September 30, 1996, $764.4 million, or 72.5 percent of
InterWest's loan portfolio (before the deduction of undisbursed loan proceeds,
deferred loan fees and discounts and allowance for losses on loans), consisted
of loans secured by one -to four-family residential properties (permanent and
construction) and $198.8 million, or 18.9 percent of total loans, consisted of
income property loans (multi-family residential and commercial real estate
loans).
The merger with Central provides InterWest with access to the higher
growth segment of commercial lending. This merger has initiated the process
of restructuring InterWest's loan portfolio into that of a financial
institution with less reliance on single-family lending as the primary loan
product. InterWest is striving to increase loan origination efforts in
commercial, agricultural and consumer lending. Growth in commercial,
agricultural and consumer loans, in addition to being an important part of
InterWest's diversification of the loan portfolio, promotes greater net
interest income stability because of their somewhat shorter maturities and
faster prepayment characteristics.
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Loan Portfolio Analysis. The following table sets forth the composition of the InterWest's loan portfolio
by type of loan as of the dates indicated.
At September 30,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Type of Loan:
Mortgage loans:
Single-family
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
residential(1). . $613,220 58.19% $552,845 59.34% $495,954 60.00% $447,559 61.78% $375,753 60.75%
Multi-family
residential . . . 52,683 5.00 51,515 5.53 38,567 4.67 32,853 4.53 27,177 4.39
Commercial real
estate. . . . . . 146,115 13.87 118,229 12.69 99,426 12.03 93,576 12.92 85,455 13.82
Residential
construction. . . 151,194 14.35 128,544 13.80 126,455 15.30 103,526 14.29 81,563 13.19
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total 963,212 91.41 851,133 91.36 760,402 92.00 677,514 93.52 569,948 92.15
Other loans:
Commercial non-
real estate . . . 23,580 2.24 20,571 2.21 18,398 2.23 11,167 1.54 11,238 1.82
Consumer . . . . . 54,109 5.13 45,996 4.96 34,946 4.22 28,929 3.99 32,356 5.23
Agriculture. . . . 12,873 1.22 13,659 1.47 12,801 1.55 6,856 0.95 4,964 0.80
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other
loans . . . . . 90,562 8.59 80,226 8.64 66,145 8.00 46,952 6.48 48,558 7.85
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross
loans . . . . .1,053,774 100.00% 931,359 100.00% 826,547 100.00% 724,466 100.00% 618,506 100.00%
--------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan
proceeds. . . . . (60,187) (38,305) (49,217) (40,785) (30,705)
Allowance for
losses on loans . (8,074) (6,078) (5,663) (4,444) (3,643)
Deferred loan fees
and discounts. . (9,542) (8,886) (8,676) (7,628) (5,256)
--------- -------- -------- -------- --------
Total loans
receivable,
net . . . . . . $975,971 $878,090 $762,991 $671,609 $578,902
========= ======== ======== ======== ========
_______________
(1) Includes construction loans converted to permanent loans.
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Loan Maturity and Repricing
The following table shows the contractual maturity of InterWest's gross
loans at September 30, 1996. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Loan balances do not include undisbursed loan proceeds,
deferred loan fees and discounts and allowance for losses on loans. The table
does not reflect any estimate of prepayments, which significantly shorten the
average life of all loans and may cause InterWest's actual repayment
experience to differ from that shown below.
After
Within One Year
One Through After
Year 5 Years 5 Years Total
---- ------- ------- -----
(In Thousands)
Single-family residential. . .$ 4,633 $ 35,175 $573,412 $ 613,220
Multi-family residential . . . 135 3,894 48,654 52,683
Commercial real estate . . . . 16,137 42,496 87,482 146,115
Residential construction . . . 43,426 20,306 87,462 151,194
Commercial non-real estate . . 14,003 5,977 3,600 23,580
Agricultural . . . . . . . . . 8,722 3,209 942 12,873
Consumer . . . . . . . . . . . 18,154 20,727 15,228 54,109
-------- -------- -------- ----------
Total loans. . . . . . . . .$105,210 $131,784 $816,780 $1,053,774
======== ======== ======== ==========
The following table sets forth the dollar amount of all loans due one
year or more after September 30, 1996 which have fixed interest rates and have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
Single-family residential. . . . . . . $308,583 $300,004
Multi-family residential . . . . . . . 2,177 50,371
Commercial real estate . . . . . . . . 20,653 109,325
Residential construction . . . . . . . 52,341 55,427
Commercial non real estate . . . . . . 7,514 2,063
Agricultural . . . . . . . . . . . . . 1,560 2,591
Consumer . . . . . . . . . . . . . . . 24,410 11,545
-------- --------
Total loans. . . . . . . . . . . . . $417,238 $531,326
======== ========
Mortgage Loans
--------------
Single-Family Residential Loans. The primary lending activity of
InterWest has been the granting of mortgage loans to enable borrowers to
refinance and purchase existing homes or to construct new single-family homes
on properties located within its primary market area. Management believes
that this policy of focusing on single-family residential mortgage loans has
been successful in contributing to interest income while keeping delinquencies
and losses to a minimum. InterWest's single-family residential loan portfolio
also includes loans on two- to four-family dwellings and mobile homes and
loans for the development of residential lot sites.
InterWest presently originates both fixed-rate loans and
adjustable-rate mortgage loans ("ARMs") secured by one- to four-family
properties with loan terms of 15 to 30 years. ARMs originated since 1988 have
interest rates that adjust every six months or one year based upon changes in
the pre-determined index for
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a period matching the repricing period of the loan. The majority of these
loans provide that the amount of any increase or decrease in the interest rate
is limited to one percentage point (upward or downward) per adjustment period
which is typically six months and generally limited to four and one-half
percentage points over the life of the loan. Borrower demand for ARMs versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate mortgage loans
and the rates and loan fees for ARMs.
Income Property Loans. Income property loans, which consist of loans
secured by multi-family residential and commercial real estate, totaled $198.8
million, or 18.9 percent of InterWest's total gross loan portfolio at
September 30, 1996. InterWest originates permanent loans on commercial real
estate and multi-family residences with terms of 10 to 30 years and interest
rate adjustments based on the Federal Cost of Funds Index. Changes in this
index generally lag behind changes in market interest rates. Accordingly,
adjustable- rate loans based on this index can take longer to adjust to market
rates than loans based on other indices. Currently, it is InterWest's policy
to originate income property loans on properties in its immediate service
area. InterWest's permanent income property loans are secured by improved
property such as multi- family properties, office buildings and small
commercial business properties, condominiums, churches, subdivision
developments and strip shopping centers.
Commercial real estate and multi-family loans in the portfolio are
generally made in amounts between $250,000 and $1.5 million. Loans secured by
income properties are generally larger and involve greater risks than
residential mortgage loans because payments on loans secured by income
properties are often dependent on the successful operation or management of
the properties. As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans to conditions in the real
estate market or the economy.
Residential Construction. At September 30, 1996, construction loans
totalled $151.2 million or 14.3 percent of total gross loans. InterWest
originates residential construction mortgage loans to residential
owner-occupants (custom construction loans) and to local contractors building
residential properties for resale, as well as construction loans for
condominiums, multi-family residential properties and land development on
properties located within its primary market area. Of the total construction
loans outstanding at September 30, 1996, $52.8 million was construction loans
to builders and $98.4 million was construction loans to owner-occupants.
Construction loans to owner-occupants generally have a term of six months and
then are converted to permanent loans. Construction loans to builders
generally are in amounts below $250,000 and are made with a twelve month term.
InterWest's construction loans to builders bear variable interest rates tied
to New York Prime plus a margin. Approximately $144.4 million, or 28.9
percent, and $111.1 million, or 27.3 percent, of the loans originated by
InterWest for the years ended September 30, 1996 and 1995, respectively, were
construction loans. Commitments to provide additional construction loans at
September 30, 1996 totaled $60.2 million.
InterWest's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, InterWest considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the
project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections
of the borrower. In addition, most of the construction loans granted by
InterWest are secured by property in InterWest's local market area.
InterWest's primary focus is on the origination of construction loans to
owner-occupants. However, InterWest also focuses on making construction loans
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to builders with whom InterWest has an established relationship. Some of the
construction loans made to builders are speculative loans, meaning that at the
time the loan is made, the builder has not identified a purchaser for the
finished home.
Other Loans
-----------
Management intends to expand the commercial, agricultural and consumer
loan portfolios through increased staffing, sales and marketing efforts. The
majority of InterWest's business loans are to borrowers located in central
Washington and were acquired through the acquisition of Central. It is
intended that business banking expansion will occur in western Washington
where the majority of InterWest's branches are located. InterWest's goal is
to reduce dependence on single-family lending and increase net income and net
interest margin as these types of loans generally bear higher interest rates
than residential mortgage loans.
Commercial Non-Real Estate Loans. Commercial non-real estate loans
totaled $23.6 million, or 2.2 percent of InterWest's total gross loan
portfolio at September 30, 1996. Commercial non-real estate loans include a
wide range of loan types to small and medium sized businesses. A significant
portion of these loans are commercial lines of credit with adjustable rates
and maturities of less than one year. The remaining commercial non-real
estate loans include equipment and operational loans with terms generally not
exceeding five years. These loans are primarily secured by capital assets and
inventory, although certain loans are unsecured.
Agricultural Loans. At September 30, 1996, agricultural loans totaled
$12.9 million, or 1.2 percent of total gross loans. Agricultural loans
include seasonal production loans secured by crops and equipment. These loans
generally have adjustable rates and maturities of less than one year.
Agricultural loans also include loans secured by farmland. The majority of
these loans have terms of less than five years and have adjustable rates.
Consumer Loans. As of September 30, 1996, consumer loans, consisting of
savings account loans, automobile loans, home equity loans and loans for other
consumer purposes were approximately $54.1 million, or 5.1 percent of
InterWest's total gross loan portfolio.
Certain Underwriting Risks. While loans that are not secured by single
family residences are integral to InterWest's asset and liability management
program and reduce exposure to interest rate changes, such loans may entail
significant additional risks compared to residential mortgage lending.
Commercial real estate and construction mortgage loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition, the
payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the properties and thus may
be subject to a greater extent to adverse conditions in the real estate market
or in the economy generally. Construction loans may involve additional risks
because loan funds are advanced upon the security of the project under
construction which is of uncertain value prior to the completion, delays may
arise from labor problems, material shortages may be experienced and other
unpredictable contingencies may occur. It is extremely important to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. Because of these factors, the analysis of prospective
construction loan projects requires an expertise that is different in
significant respects from the expertise required for residential mortgage
lending.
Construction lending is generally considered to involve a higher degree
of credit and collateral risk than long-term financing of residential
properties. InterWest's risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value and
marketability at
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completion of construction or development and the estimated cost (including
interest) of construction. If the estimate of construction costs and the
marketability of the property upon completion of the project prove to be
inaccurate, InterWest may be required to advance additional funds to complete
the development. Speculative construction loans have the added risk that if
the borrower is unable to sell the completed project in a timely manner or
obtain adequate proceeds to repay the loan, the loan may become nonperforming.
Furthermore, if the estimate of value proves to be inaccurate, InterWest may
be confronted with, at or prior to the maturity of the loan, a project with a
value which is insufficient to assure full repayment.
Consumer lending may involve special risks, including decreases in the
value of collateral and transaction costs associated with foreclosure and
repossession. Commercial non-real estate and agricultural lending have
increased risks as a result of dependence on income production for future
repayment, and in certain circumstances, the lack of tangible collateral.
Mortgage Loan Solicitation, Processing and Underwriting. Loan
originations are derived from a number of sources such as branch staff,
builders, existing customers and referrals. Upon receipt of a loan
application, a credit report and other information is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. In the case of most real estate loans, an appraisal of the
real estate intended to secure the proposed loan is undertaken by InterWest's
appraisal staff or other qualified fee appraisers. Appraisals done by other
qualified fee appraisers are selectively reviewed by InterWest's staff
appraisers. Residential mortgage loan documents used by InterWest conform to
standards imposed by the Federal National Mortgage Association ("FNMA") and
the FHLMC.
InterWest's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan.
InterWest requires a title insurance policy insuring that InterWest has a
valid lien on the real estate. Fire and casualty insurance, as well as flood
insurance, if applicable, also is required on collateral for loans.
InterWest's lending practices limit the maximum loan to value ratio on
conventional residential mortgage loans to 95 percent of either the appraised
value of the property as determined by an qualified appraiser or the purchase
price, whichever is less. Most of InterWest's one- to four-family
residential loans have loan to value ratios of less than 75 percent.
InterWest, typically, requires private mortgage insurance on any home loans in
excess of 80 percent of appraised value.
The Board of Directors approves credit over $1.5 million. InterWest's
loan committee, with two Board members, reviews applications for major loans
over $750,000, while a loan committee consisting of four of the top officers
reviews applications for loans of $350,000 to $750,000.
The Chairman of the Board or President may approve loans up to $500,000
and the Income Property Loan Production Manager, Executive Vice President in
charge of Lending, Manager at Wholesale/Secondary Marketing and Manager of
Residential Lending approves credit up to $350,000. The Regional Managers
approve credit of amounts up to $250,000.
Loan Originations, Purchases and Sales. Substantially all of the loans
in InterWest's portfolio were originated by InterWest. During the year ended
September 30, 1996, InterWest sold approximately $70.9 million of loans.
Mortgage loans are sold for cash on a non-recourse basis. InterWest has
infrequently purchased loans.
In connection with such sales, InterWest generally retains the right to
service the loans (i.e., collection of principal and interest payments), for
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which it generally receives a fee based on the difference between the rate
paid to the investor and that collected from the borrower, which generally
ranges from 1/4 percent to 1/2 percent of the unpaid balance of each loan.
The following table shows total loans originated, purchased, sold
andrepaid during the periods indicated.
Year Ended September 30,
-------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Total loans at beginning of period . $931,359 $826,547 $724,466
Loans originated:
Single-family residential . . . . . 198,263 156,896 220,544
Multi-family residential and
commercial real estate . . . . . . 80,094 64,559 56,788
Residential construction. . . . . . 144,407 111,136 146,533
Commercial non-real estate. . . . . 28,897 38,640 28,247
Agricultural. . . . . . . . . . . . 11,609 14,837 10,060
Consumer. . . . . . . . . . . . . . 36,337 21,691 19,543
Total loans originated. . . . . . 499,607 407,759 481,715
Loans acquired through acquisition . -- -- 27,499
Loans purchased. . . . . . . . . . . 3,942 179 114
Loans sold . . . . . . . . . . . . . (70,935) (82,111) (148,039)
Principal repayments . . . . . . . . (308,522) (220,721) (258,936)
Other (foreclosures) . . . . . . . . (1,677) (294) (272)
---------- -------- --------
Net loan activity. . . . . . . . . . 122,415 104,812 102,081
---------- -------- --------
Loans end of period. . . . . . . . . $1,053,774 $931,359 $826,547
========== ======== ========
Loan Origination and Other Fees. On most real estate loans, InterWest
receives loan origination fees and discount "points." Loan fees and points
are a percentage of the principal amount of the mortgage loan which are
charged to the borrower for funding the loan. InterWest usually charges
origination fees of 1.0 percent to 2.5 percent on one- to four-family
residential real estate loans. Fees on long-term commercial real estate and
residential construction loans are usually 2.0 percent to 3.0 percent.
Current accounting standards require fees received for originating loans to be
deferred and amortized into interest income over the contractual life of the
loan. Deferred fees associated with loans that are sold are recognized as
mortgage banking income at the time of sale. InterWest had $9.5 million of
net deferred loan fees and discounts at September 30, 1996.
Loan origination fee income varies with the volume and type of loans
made and purchased and with competitive conditions in mortgage markets, which
in turn tend to vary in response to the demand and availability of money.
InterWest also receives other fees and charges relating to existing
loans, which include prepayment penalties, late charges and fees collected in
connection with a change in borrower or other loan modifications. These fees
and charges have not constituted a material source of income.
Loan Servicing. The Bank sells loans to FHLMC, FNMA and other financial
institutions on a servicing-retained basis and receives fees in return for
11
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performing the traditional services of collecting individual payments and
managing the loans. At September 30, 1996, the Bank was servicing $249.3
million of loans for others. Loan servicing includes processing payments,
accounting for loan funds and collecting and paying real estate taxes, hazard
insurance and other loan-related items, such as private mortgage insurance.
When the Bank receives the gross mortgage payment from individual borrowers,
it remits to the investor in the mortgage a predetermined net amount based on
the yield on that mortgage. The difference between the coupon on the
underlying mortgage and the predetermined net amount paid to the investor is
the gross loan servicing fee. Effective October 1, 1996, InterWest adopted
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights." This statement requires mortgage servicers to
recognize servicing rights on loans as separate assets, no matter how
acquired. When InterWest sells loans and retains the servicing rights it will
be required to allocate the total cost of the loans between servicing rights
and loans based on their relative fair values if their values can be
estimated. SFAS No. 122 will not be applied retroactively. Management does
not believe the adoption of this statement will have a material impact on
InterWest's financial condition or results of operations.
Loan Commitments. InterWest issues commitments to make loans
conditioned upon the occurrence of certain events. Such commitments are made
in writing on specified terms and conditions and are honored for up to 30 days
after approval, depending on the type of transaction. InterWest had
outstanding commitments to originate mortgage loans aggregating $115.6 million
at September 30, 1996. Outstanding commitments on VISA credit cards totalled
$29.8 million at September 30, 1996.
Nonperforming Loans and Classified Assets. Loans are reviewed on a
monthly basis and an allowance for losses on loans is established when, in the
opinion of management, the fair value of the property collateralizing the loan
is less than the outstanding principal and the collectibility of the loan's
principal becomes uncertain. In some instances, the collateral underlying
construction and income property loans in InterWest's loan portfolio has been
insufficient to cover the book value and costs of selling the property. It is
intended that InterWest's allowance for losses on loans be adequate to cover
any potential shortfall. InterWest's procedures provide that when a loan
becomes delinquent 15 days or more the borrower is given notice of such
delinquency in writing. If the loan remains delinquent, the borrower is
contacted, usually by phone, within 15 to 30 days. When the loan is over 30
days delinquent, the borrower is contacted in writing. Typically, InterWest
will put a loan on non-accrual and initiate foreclosure action against the
borrower when principal and interest become 90 days or more delinquent.
InterWest develops an internal watchlist as a management tool to help focus
attention and efforts where they are needed most and to facilitate the
evaluation of the adequacy of the loan loss reserve. This watchlist of loans
meriting special attention is reported to the Board of Directors on a periodic
basis. As of September 30, 1996 and 1995, InterWest had $3.2 million and $2.4
million, respectively, of loans accounted for on a nonaccrual basis (i.e.,
loans upon which management believes the future collectibility of interest is
uncertain).
Other nonperforming assets include property acquired by InterWest
through foreclosure. The property is carried at the lower of its fair market
value or the principal balance of the foreclosed loan. At September 30, 1996,
InterWest had 16 foreclosed properties totaling $6.1 million, the largest of
which was a 154-room motel property located in Columbia, South Carolina. The
property was appraised in July 1996 for $2.9 million and had net operating
income of $312,000 for fiscal year 1996. As of September 30, 1996, the book
value was $2.7 million, net of charge-offs of $1.2 million and capital
improvements of $1.2 million. The second largest foreclosed property is a
land development project located in Fountain, Colorado. This property was
appraised in July 1996 at $2.2 million. During 1996, portions of this project
were sold at a gain of $302,000. As of September 30, 1996, the net book value
of this property was $1.7 million.
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In 1989, InterWest granted a $769,000 loan secured by approximately 80
acres of land in Mount Vernon, Washington, to finance the sale of property
InterWest had acquired for development in 1978. In March 1990, the borrowers
discovered two small dump sites approximately one and one-half acres in total
size. These dump sites were owned and operated by the City of Mount Vernon
as a burning dump in the 1930's and 1940's. InterWest cooperated with the
City of Mount Vernon in having all required environmental tests performed on
the site to ascertain the level of toxicity that might be present. The
findings of the reports indicated that there was a low level of toxicity. Due
to the delays in development, the borrowers, Mount Vernon and Associates, and
InterWest agreed to rescind the sale. InterWest took title to the entire
80-acre parcel by deed in lieu of foreclosure. InterWest has cooperated with
the City of Mount Vernon, Skagit County Health Department and the Washington
Department of Ecology to develop an independent remediation plan for the dump
sites and has implemented that plan. The City of Mount Vernon now has title
to the portion of the property on which the two small dumps were located.
InterWest has obtained the approval and permits to develop the remaining
property in four phases consisting of a total of 248 dwelling units. At this
time the construction of the first phase consisting of 64 single-family lots
is completed and all off-site improvements are substantially completed. The
property was appraised in January 1996 for $5 million. At September 30, 1996,
the book value was $4.1 million net of charge offs of $220,000 and including
capital improvements of $3.3 million.
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The following table sets forth information with respect to InterWest's
non- performing assets and restructured loans within the meaning of SFAS No.
15 at the dates indicated.
At September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans accounted for on
a nonaccrual basis:
Single-family residential. .$1,965 $ 985 $ 708 $1,024 $ 729
Multi-family residential . . -- 900 -- -- --
Commercial real estate . . . 791 308 624 315 1,205
Residential Construction . . -- -- 3 -- --
Commercial non-real estate . 225 71 84 79 67
Agricultural . . . . . . . . -- -- 123 123 --
Consumer . . . . . . . . . . 184 109 122 144 194
------ ------ ------ ------ -------
Total. . . . . . . . . . . 3,165 2,373 1,664 1,685 2,195
Accruing loans which
are contractually past
due 90 days or more:
Agricultural . . . . . . . . -- -- 129 -- --
Consumer . . . . . . . . . . -- -- 1 17 3
------ ------ ------ ------ -------
Total. . . . . . . . . . . -- -- 130 17 3
Real estate owned. . . . . . . 6,053 4,178 5,926 6,332 8,601
------ ------ ------ ------ -------
Total nonperforming assets . .$9,218 $6,551 $7,720 $8,034 $10,799
====== ====== ====== ====== =======
Restructured loans . . . . . .$1,715 $1,958 $ -- $ -- $ 217
Total loans delinquent
90 days or more to
net loans . . . . . . . . . . 0.32% 0.27% 0.22% 0.25% 0.38%
Total loans delinquent
90 days or more to
total assets. . . . . . . . . 0.18% 0.16% 0.13% 0.17% 0.24%
Total nonperforming assets
to total assets . . . . . . . 0.54% 0.45% 0.61% 0.82% 1.19%
Interest income that would have been recorded for the year ended
September 30, 1996 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $150,000.
InterWest utilizes four categories for problem assets: Special Mention,
Substandard, Doubtful and Loss. InterWest uses a Special Mention category,
described as assets which do not currently expose InterWest to a sufficient
degree of risk to warrant classification but do possess certain credit
deficiencies or potential weaknesses deserving management's close attention.
Substandard assets have one or more defined weaknesses and are characterized
by the possibility that InterWest will sustain some loss if the deficiencies
are not corrected. Doubtful assets have the weaknesses of Substandard assets
with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable and there is a high possibility of loss. An asset
classified Loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted and thus, the loss
portion is written off. Assets classified as Substandard or Doubtful may
require the institution to establish specific allowances for losses on loans.
14
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<PAGE>
InterWest's Substandard assets at September 30, 1996 totalled $18.9
million and consisted of $12.8 million of substandard loans and $6.1 million
in real estate owned. Substandard loans are comprised of $4.8 million in
commercial real estate, $2.1 million in multi-family residential and $5.9 in
single-family residential loans. No assets were classified as Doubtful or
Loss at September 30, 1996.
Analysis of Allowance for Losses on Loans. In originating loans,
InterWest recognizes that losses will be experienced and that the risk of loss
will vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the collateral
securing the loan.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio. Reserves are provided for loans based upon management's
continuing analysis of the factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loss experience, current economic conditions, detailed
analysis of individual loans for which full collectibility may not be assured,
and determination of the existence and realizable value of the collateral and
guarantees securing the loans. The reserve is based upon factors and trends
identified by management at the time financial statements are prepared.
InterWest increases its allowance for losses on loans by charging provisions
for losses on loans against InterWest's operations.
While InterWest believes it has established its existing allowance for
losses on loans in accordance with generally accepted accounting principles,
there can be no assurance that in the future, regulators, when reviewing
InterWest's loan portfolio, will not request InterWest to increase its
allowance for losses on loans thereby affecting InterWest's financial
condition and earnings. In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for losses on loans is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase
in the allowance for losses on loans may adversely affect InterWest's
financial condition and results of operations.
15
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<PAGE>
The following table sets forth an analysis of InterWest's allowance for
losses on loans for the periods indicated.
Year Ended September 30,
---------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period . $6,078 $5,663 $4,444 $3,643 $2,414
Provision for losses on loans. . . 1,060 720 900 1,399 1,653
Provision pursuant to acquisition. 900 -- -- -- --
Provision acquired . . . . . . . . -- -- 393 -- --
Charge offs:
Single-family residential . . . . 99 126 164 428 503
Multi-family residential. . . . . -- 142 -- -- --
Commercial real estate. . . . . . 2 -- -- 115 --
Residential construction. . . . . -- -- -- -- 78
Commercial non-real estate. . . . 31 61 15 76 52
Agricultural. . . . . . . . . . . -- -- 5 13 --
Consumer. . . . . . . . . . . . . 228 276 142 280 100
------ ------ ------ ------ ------
Total charge-offs . . . . . . . 360 605 326 912 733
Recoveries:
Single-family residential . . . . 6 20 84 15 65
Commercial real estate. . . . . . 13 22 -- -- 100
Commercial non-real estate. . . . 287 194 127 116 45
Agricultural. . . . . . . . . . . -- 4 5 174 11
Consumer. . . . . . . . . . . . . 90 60 36 9 88
------ ------ ------ ------ ------
Total recoveries. . . . . . . . 396 300 252 314 309
------ ------ ------ ------ ------
Net recoveries (charge-offs). . 36 (305) (74) (598) (424)
------ ------ ------ ------ ------
Balance at end of period. . . . $8,074 $6,078 $5,663 $4,444 $3,643
====== ====== ====== ====== ======
Ratio of allowance to total
loans outstanding at the
end of the period . . . . . . . . 0.83% 0.69% 0.74% 0.66% 0.63%
Ratio of net charge-offs
to average loans outstanding
during the period . . . . . . . . 0.00% 0.04% 0.01% 0.10% 0.08%
16
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<TABLE>
The following table sets forth the breakdown of the allowance for losses on loans by loan category for
the periods indicated.
September 30,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- --------------- ---------------- ----------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Single-family
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
residential. . $1,457 58.19% $1,314 59.34% $1,178 60.00% $1,063 61.78% $ 893 60.75%
Multi-family
residential . . 413 5.00 404 5.53 302 4.67 258 4.53 213 4.39
Commercial real
estate. . . . . 1,200 13.87 971 12.69 817 12.03 769 12.92 702 13.82
Residential
construction. . 321 14.35 273 13.80 268 15.30 220 14.29 173 13.19
Commercial non-
real estate . . 350 2.24 308 2.21 233 2.23 398 1.54 207 1.82
Agricultural. . . 200 1.22 205 1.47 158 1.55 113 0.95 97 0.80
Consumer. . . . . 981 5.13 834 4.96 634 4.22 524 3.99 506 5.23
Unallocated . . . 3,152 N/A 2,295 N/A 2,073 N/A 1,099 N/A 772 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance
for loan
losses. . . . .$8,074 100.00% $6,078 100.00% $5,663 100.00% $4,444 100.00% $3,643 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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</TABLE>
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<PAGE>
Investment Activities
Under Washington law, savings banks are permitted to own government and
government agency obligations, commercial paper, corporate debt, mutual fund
shares, debt and equity obligations issued by creditworthy entities, whether
traded on public securities exchanges or privately placed for investment
purposes.
The FDIC has adopted the Federal Financial Institutions Examination
Council statement of policy on securities activities and accounting
procedures. This policy requires that institutions establish prudent policies
and strategies for securities activities, identify certain securities trading
practices that are unsuitable for an investment portfolio, recommends
procedures for selection of a securities dealer, and limits investment in high
risk mortgage securities and disproportionately large holdings of long-term
zero coupon bonds.
The policy addresses concerns about speculative or other non-investment
activities in the securities investment portfolios of depository institutions.
Speculative securities activities can impair earnings or capital and, in some
cases, may cause the failure of the institution. The policy establishes a
framework for structuring securities activities and clarifies various
accounting issues concerning investment accounts versus trading accounts.
The investment policy of InterWest is determined by the Investment
Committee consisting of InterWest's Chief Financial Officer, Chief Executive
Officer and Executive Vice Presidents. It has generally been the policy of
InterWest to maintain liquidity in excess of regulatory guidelines. Liquidity
levels may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and management's
expectation of the level of yield that will be available in the future as well
as management's projections as to the short term demand for funds to be used
in the Bank's loan origination and other activities. InterWest's policy has
been to purchase investments in amounts sufficient to meet its liquidity
guidelines.
InterWest adopted SFAS No. 115, "Accounting for Certain Investment in
Debt and Equity Securities," at September 30, 1994. This statement requires
that investments be categorized as held to maturity, trading securities or
available for sale, based upon management's intent as to the ultimate
disposition of each security acquired. InterWest does not actively trade
investments. Pursuant to SFAS No. 115, securities classified as held to
maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts over the terms of the securities, while securities
classified as available for sale are reported at fair value, with unrealized
gains and losses reported as a net amount in a separate component of
stockholders' equity. See Notes 2, 3, 4 and 5 to Consolidated Financial
Statements regarding InterWest's investment and mortgage-backed and related
securities portfolio.
18
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<PAGE>
<TABLE>
Investment and Mortgage-Backed and Related Securities Held to Maturity. The following table sets forth
carrying values and estimated fair values for InterWest's investment and mortgage-backed and related
securities held to maturity at the dates indicated.
September 30,
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Estimated Estimated Estimated
Carrying Fair Percent of Carrying Fair Percent of Carrying Fair Percent of
Value Value Portfolio Value Value Portfolio Value Value Portfolio
-------- ----- ---------- -------- -------- ---------- -------- -------- ---------
(Dollars in Thousands)
U.S. Government
and Agency
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
securities (1) . $146,817 $146,044 61.84% $ 52,952 $ 52,471 16.00% $ 66,043 $ 63,360 19.31%
Obligations of
states and
political
subdivisions. . . 3,802 3,808 1.60 5,341 5,387 1.61 4,384 4,321 1.28
Other securities . 86,817 81,044 36.56 272,684 266,947 82.39 271,616 250,534 79.41
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total $237,436 $230,896 100.00% $330,977 $324,805 100.00% $342,043 $318,215 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
The following table sets forth the maturities and weighted average yields of the debt securities held
to maturity in InterWest's investment and mortgage-backed and related securities portfolio at September 30,
1996.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government
and Agency
securities (1). . . $-- --% $130,431 7.16% $ -- --% $16,386 5.82%
Obligations of
states and political
subdivisions. . . . 80 4.00 2,930 4.49 792 5.03 -- --
Other securities . . -- -- -- -- -- -- 86,817 5.47
--- -------- ---- --------
Total . . . $80 4.00 $133,361 7.10 $792 5.03 $103,203 5.53
=== ======== ==== ========
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<PAGE>
Investment and Mortgage-Backed and Related Securities Available for
Sale. The following table sets forth InterWest's investment and
mortgage-backed and related securities available for sale portfolio at the
dates indicated.
September 30,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Portfolio Value Portfolio Value Portfolio
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
U.S. Government and
Agency Securities. .$93,902 25.51% $25,738 18.22% $25,635 47.10%
SBA Certificates. . . 71,037 19.30 71,286 50.46 -- --
Obligations of
states and politi-
cal subdivisions . . 5,115 1.39 102 0.07 81 0.15
Other securities. . .198,069 53.80 44,146 31.25 28,706 52.75
-------- ------ -------- ------ ------- ------
Total $368,123 100.00% $141,272 100.00% $54,422 100.00%
======== ====== ======== ====== ======= ======
The following table sets forth the maturities and weighted average yields
of the investment and mortgage-backed and related securities in InterWest's
available for sale portfolio at September 30, 1996.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government
and Agency
Securities . . .$18,068 5.51% $ -- --% $ 3,374 6.00% $ 72,460 6.04%
SBA Certificates. -- -- 4,445 7.83 13,128 8.63 53,464 8.35
Obligations of
states and
political
subdivisions . . 1,482 4.13 2,057 4.79 1,407 4.50 169 5.97
Other securities. -- -- 615 5.31 245 5.31 197,209 5.39
------- ------ ------- --------
Total $19,550 5.20 $7,117 6.74 $18,154 7.77 $323,302 6.02
======= ====== ======= ========
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<PAGE>
The following table presents the name of the issuer and the aggregate
book value and aggregate fair value of the securities of each issuer for those
securities in InterWest's portfolio the aggregate book value of which exceed
10 percent of InterWest's stockholders equity as of September 30, 1996.
Carrying Value Fair Value
-------------- ----------
(In Thousands)
Chase Mortgage Finance Corporation . . . . $23,412 $22,082
CMC Securities Corporation . . . . . . . . 10,330 10,200
DLJ Mortgage Acceptance Corporation. . . . 26,321 26,159
GE Capital Mortgage Services, Inc. . . . . 57,612 52,098
Greenwich Capital Acceptance Inc.. . . . . 17,880 17,881
Independent National Mortgage Corporation. 13,913 13,733
Residential Funding Mortgage
Securities, Inc.. . . . . . . . . . . . . 23,589 23,290
Salomon Brothers Mortgage
Securities, Inc.. . . . . . . . . . . . . 11,749 11,639
Securitized Asset Sales, Inc.. . . . . . . 20,277 20,155
Saxon Mortgage Securities Corporation. . . 41,208 41,070
Deposit Activities and Borrowings
Deposits. InterWest offers various types of deposit accounts, including
passbook, NOW accounts, money market type accounts and a variety of
certificate accounts currently ranging in maturity from 14 days to ten years.
Deposit accounts vary as to terms, with the principal differences being the
minimum balance required, the time period the funds must remain on deposit,
the interest rate and the deposit or withdrawal option. Unlike some other
financial institutions, InterWest has rarely relied on brokered deposits, but
has relied on its own originations through a marketing strategy that employs a
sales staff responsible for generating deposits as well as fee products.
InterWest be that retail deposits are a more dependable and cost effective
source of funds. Furthermore, retail deposits offer InterWest an opportunity
to market other products to these customers.
The following table indicates the amount of InterWest's certificates of
deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1996.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less . . . . . . . . . . $95,832
Three through six months . . . . . . . . 41,302
Six through twelve months. . . . . . . . 41,844
Over twelve months . . . . . . . . . . . 22,756
--------
Total. . . . . . . . . . . . . . . . $201,734
========
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<TABLE>
Deposit Flow. The following table sets forth the balances and changes in dollar amount of deposits in
the various types of accounts offered by InterWest at the dates indicated.
At September 30,
-----------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ---------------------------- ---------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
------ ------- ---------- ------ ------- ---------- ------ -------
(Dollars in Thousands)
Non-interest bearing
<S> <C> <C> <C> <C> <C> <C> <C> <C>
demand accounts . .$ 57,580 5.14% $10,390 $ 47,190 4.54% $ 4,686 $ 42,504 4.43%
Interest bearing
demand and NOW
accounts. . . . . . 99,272 8.85 (1,193) 100,465 9.66 (6,584) 107,049 11.16
Money market
accounts. . . . . . 112,614 10.05 12,561 100,053 9.62 17,037 83,016 8.65
Passbook accounts. . 100,002 8.92 (1,875) 101,877 9.79 (25,810) 127,687 13.31
Certificates . . . . 751,275 67.04 60,550 690,725 66.39 91,637 599,088 62.45
---------- ------ ------- ---------- ------ ------- -------- ------
Total $1,120,743 100.00% $80,433 $1,040,310 100.00% $80,966 $959,344 100.00%
========== ====== ======= ========== ====== ======= ======== ======
22
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Borrowings. The Federal Home Loan Bank ("FHLB") functions as a central
reserve bank providing credit for member financial institutions. As a
member, InterWest is required to own capital stock in the FHLB, and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally securities that are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. These programs are generally tailored
to the institution's need while still reflecting market terms and conditions.
InterWest relies upon advances from the FHLB to supplement its supply of
lendable funds and to meet liquidity guidelines. The FHLB has served as
InterWest's primary borrowing source. The rates on these advances vary from
time to time in response to general economic conditions. At September 30,
1996, InterWest had advances totaling $336.8 million from the FHLB at interest
rates ranging from 4.36 percent to 6.27 percent. In addition, InterWest uses
retail repurchase agreements in order to meet short-term cash needs. In
general, such repurchase agreements are served by U.S. Government or federal
agency securities. See "Management Discussion and Analysis of Financial
Condition and Results of Operations for Fiscal Year 1996 -- Liquidity
Resources" in the Corporation's Annual Report to Stockholders for the fiscal
year ended September 30, 1996 ("Annual Report").
The following table sets forth certain information regarding short-term
borrowings by InterWest during the periods indicated:
At or For the
Year Ended
September 30,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Maximum amount outstanding at any
month end during the period:
FHLB advances . . . . . . . . . . . $378,499 $268,256 $192,381
Securities sold under agreements
to repurchase. . . . . . . . . . . 119,945 41,090 26,698
Approximate average amount outstanding
during the period:
FHLB advances . . . . . . . . . . . 310,897 190,944 154,720
Securities sold under agreements
to repurchase. . . . . . . . . . . 56,285 26,434 4,777
Balance outstanding at end of period:
FHLB advances . . . . . . . . . . . 336,839 268,256 171,672
Securities sold under agreements
to repurchase. . . . . . . . . . . 119,945 40,734 26,510
Approximate weighted average rate paid
during the period:
FHLB advances . . . . . . . . . . . 5.52% 5.23% 4.82%
Securities sold under agreements
to repurchase. . . . . . . . . . . 5.67 5.94 4.83
Weighted average rate paid at end
of period:
FHLB advances . . . . . . . . . . . 5.50 5.61 5.00
Securities sold under agreements
to repurchase. . . . . . . . . . . 5.45 5.84 4.97
23
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Personnel
As of September 30, 1996, InterWest, including its subsidiaries, had
556 full-time equivalent employees. InterWest believes that employees play a
vital role in the success of a service company such as InterWest and that
InterWest's relationship with its employees is excellent. Senior management
has worked together as a team for more than 19 years and turnover among
employees is minimal. Employees enjoy a responsive work environment with a
wide range of benefits including child care reimbursement, medical and dental
insurance, access to retirement plans, and continuing education.
Competition
At September 30, 1996, InterWest was the third largest bank with
headquarters located in the State of Washington based on total assets, as
reported by the Savings and Community Bankers of America. InterWest faces
strong competition in attracting deposits and in originating real estate
loans. Its most direct competition for deposits has historically come from
other savings institutions, credit unions and commercial banks located in its
primary market area. Particularly in times of high interest rates, InterWest
also faces significant competition for investors' funds from short-term money
market securities and other corporate and government securities. InterWest's
competition for real estate and consumer loans comes principally from other
savings institutions, commercial banks and mortgage banking companies. Some of
these institutions have offered below market teaser rates on ARMs and
fixed-rate loans with yields below those saleable in the secondary market.
InterWest competes for loans principally through the efficiency and
quality of the services it provides borrowers, real estate brokers and home
builders and the interest rates and loan fees it charges. It competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts and other services. Deposit client relationships are actively
solicited through a sales and service system.
Competition has further increased as a result of Washington banking
laws which permit statewide branching of Washington-domiciled financial
institutions and out-of-state holding companies acquiring Washington-based
financial institutions.
All of InterWest's employees are able to earn incentives, rewards, and
recognition for performance in sales and service. Management believes that
quality service backed by extensive training in sales, technical skills,
product knowledge, and motivation is the primary reason for InterWest's
continued growth and profitability. All personnel within InterWest have
immediate access to senior management for concerns, ideas, and suggestions,
and are encouraged to communicate regularly. The employees are not
represented by a collective bargaining unit.
REGULATION
The Bank
General. As a state-chartered, federally insured savings bank,
InterWest is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. InterWest is regularly
examined by the FDIC and the Washington Department of Financial Institutions,
Division of Banks ("Division") and files periodic reports concerning the
Bank's activities and financial condition with its regulators. The Bank's
relationship with depositors and borrowers also is regulated to a great extent
by both federal law and the
24
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laws of the State of Washington, especially in such matters as the ownership
of savings accounts and the form and content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal
and state bank regulatory agencies also have the general authority to limit
the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Corporation and the Bank have
authority to impose penalties, initiate civil and administrative actions and
take other steps intended to prevent banks from engaging in unsafe or unsound
practices.
State Regulation and Supervision. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington law and the
regulations of the Division adopted thereunder. Washington law and
regulations govern the Bank's ability to take deposits and pay interest
thereon, to make loans on or invest in residential and other real estate, to
make consumer loans, to invest in securities, to offer various banking
services to its customers, and to establish branch offices. Under state law,
savings banks in Washington also generally have all of the powers that federal
mutual savings banks have under federal laws and regulations. The Bank is
subject to periodic examination and reporting requirements by and of the
Division.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of depository
institutions. The FDIC currently maintains two separate insurance funds: the
Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). As insurer of its deposits, the FDIC has examination, supervisory
and enforcement authority over the Bank.
Except for accounts that were acquired through the acquisition of
Central Bancorporation, which are insured by the BIF, the Bank's accounts are
insured by the SAIF. The FDIC insures deposits at the Bank to the maximum
extent permitted by law. The Bank pays deposit insurance premiums to the FDIC
based on a risk-based assessment system established by the FDIC. Under
applicable regulations, institutions are assigned to one of three capital
groups that are based solely on the level of an institution's capital -- "well
capitalized," "adequately capitalized," and "undercapitalized" -- which are
defined in the same manner as the regulations establishing the prompt
corrective action system, as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates for SAIF members
that until September 30, 1996 ranged from 0.23 percent for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31
percent for undercapitalized institutions that pose a substantial risk of loss
to the SAIF unless effective corrective action is taken.
Until the second half of 1995, the same matrix applied to BIF-member
institutions. As a result of the BIF having reached its designated reserve
ratio, effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92 percent of
BIF members paying the statutory minimum annual assessment rate of $2,000.
Pursuant to the Deposit Insurance Funds Act of 1996 ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable
25
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<PAGE>
deposits so that the SAIF may achieve its designated reserve ratio. Beginning
January 1, 1997, the assessment schedule for SAIF members will be the same as
that for BIF members. In addition, beginning January 1, 1997, SAIF members
will be charged an assessment of 0.064 percent of SAIF-assessable deposits for
the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately 0.013 percent until the earlier of
December 31, 1999 or the date upon which the last savings association ceases
to exist, after which time the assessment will be the same for all insured
deposits. The DIF Act provides for the merger of the BIF and the SAIF into
the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Bank.
Prompt Corrective Action. Each federal banking agency has implemented
a system of prompt corrective action for institutions which it regulates. The
federal banking agencies have promulgated substantially similar regulations to
implement the system of prompt corrective action. Under the regulations, an
institution shall be deemed to be (i) "well capitalized" if it has a total
risk-based capital ratio of 10.0 percent or more, has a Tier I risk-based
capital ratio of 6.0 percent or more, has a Tier I leverage capital ratio of
5.0 percent or more and is not subject to specified requirements to meet and
maintain as specific capital level for any capital measure: (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0 percent or
more, a Tier I risk-based capital ratio of 4.0 percent or more and a Tier I
leverage capital ratio of 4.0 percent or more (3.0 percent under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0 percent, a Tier I risk-based capital ratio that is less than 1.0
percent or a Tier I leveragecapital ratio that is less than 4.0 percent (3.0
percent under certain circumstances), (iv) "significantly undercapitalized" if
it has a total risk-based capital ratio that is less than 6.0 percent, a Tier
I risk-based capital ratio that is less than 3.0 percent or a Tier I leverage
capital ratio that is less than 3.0 percent and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0 percent.
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The capital amounts and ratios as of September 30, 1996 are presented
in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
InterWest Bank:
Total Capital
(to Risk Weighted
Assets) $100,575 13.0% $61,702 8.0% $77,127 10.0%
Tier I Capital
(to Risk Weighted
Assets) $95,444 12.4% $30,851 4.0% $46,276 6.0%
Tier I Capital
(to Average
Assets) $95,444 6.5% $58,656 4.0% $73,320 5.0%
Central Washington Bank:
Total Capital
(to Risk Weighted
Assets) $18,265 11.3% $12,966 8.0% $16,208 10.0%
Tier I Capital
(to Risk Weighted
Assets) $15,323 9.5% $6,483 4.0% $12,966 8.0%
Tier I Capital
(to Average
Assets) $15,323 7.4% $8,249 4.0% $10,312 5.0%
Federal law and regulations also provide that a federal banking agency
may, after notice and an opportunity for a hearing, reclassify a well
capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to
comply with supervisory actions as if it were in the next lower category if
the institution is in an unsafe or unsound condition or engaging in an unsafe
or unsound practice. (The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At September 30, 1996, InterWest and Central Washington Bank were "well
capitalized" institutions under the prompt corrective action regulations of
the FDIC.
Standards for Safety and Soundness. Federal law requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; (v) asset growth; and (vi) compensation, fees and
benefits. The federal banking agencies adopted regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement safety and soundness standards. The Guidelines set forth the safety
and soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. If the FDIC determines that the Bank fails to meet any standard
prescribed by the Guidelines,
27
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the agency may require the Bank to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by federal law. Federal
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Capital Requirements. The FDIC's minimum capital standards applicable
to FDIC-regulated depository institutions require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3 percent
of total assets. Tier 1 (or "core capital") consists of common stockholders'
equity, noncumulative perpetual preferred stock and minority interests in
consolidated subsidiaries minus all intangible assets other than limited
amounts of purchased mortgage servicing rights and certain other accounting
adjustments. All other banks must have a Tier 1 leverage ratio of at least
100-200 basis points above the 3 percent minimum. The FDIC capital
regulations establish a minimum leverage ratio of not less than 4 percent for
banks that are not highly rated or are anticipating or experiencing
significant growth. Based on the definitions contained in the FDIC's capital
regulations, InterWest had a Tier 1 leverage capital ratio of 6.51 percent as
of September 30, 1996. Central Washington Bank's Tier 1 leverage capital
ratio at September 30, 1996 was 7.43 percent.
Any insured bank with a Tier 1 capital to total assets ratio of less
than 2 percent is deemed to be operating in an unsafe and unsound condition
unless the insured bank enters into a written agreement, to which the FDIC is
a party, to correct its capital deficiency. Insured banks operating with Tier
1 capital levels below 2 percent (and which have not entered into a written
agreement) are subject to an insurance removal action. Insured banks operating
with lower than the prescribed minimum capital levels, generally will not
receive approval of applications submitted to the FDIC. Also, inadequately
capitalized state nonmember banks will be subject to such administrative
action as the FDIC deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) to risk-weighted assets of 8 percent and Tier 1 capital to
risk-weighted assets of 4 percent. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0 percent to 100 percent, based on the risks the FDIC believes
are inherent in thetype of asset or item. The components of Tier 1 capital
are equivalent to those discussed above under the 3 percent leverage
requirement. The components of supplementary capital currently include
cumulative perpetual preferred stock, adjustable-rate perpetual preferred
stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25 percent of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100
percent of Tier 1 capital.
Net unrealized holding gains or losses on available for sale debt and
equity securities are not included when calculating core and risk-based
capital ratios.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC may
determine that the minimum adequate amount of capital for that bank is greater
than the minimum standards established in the regulation.
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The Bank's management believes that, under the current regulations, the
Bank will continue to meet 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 where the Bank has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet its
capital requirements.
Activities and Investments of Insured State-Chartered Banks. Federal
law, generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a
type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring
or retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2 percent of the bank's total assets, (iii) acquiring up to 10
percent of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions, and
(iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
FDIC regulations provide that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease
the impermissible activity.
Federal Reserve System. The Bank is subject to the reserve requirements
of the Board of Governors of the Federal Reserve System ("FRB") under
"Regulation D" with respect to depository institutions that maintain
transaction accounts or nonpersonal time deposits. These reserves may be in
the form of cash or non-interest-bearing deposits with the regional Federal
Reserve Bank. NOW accounts and other types of accounts that permit payments
or transfers to third parties fall within the definition of transaction
accounts and are subject to Regulation D reserve requirements, as are any
nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3 percent of the first $49.3 million of
transaction accounts, of which the first $4.4 million is exempt, and 10
percent on the remainder. The reserve requirement on nonpersonal time deposits
with original maturities of less than 1-1/2 years is 0 percent. As of
September 30, 1996, the Bank met its reserve requirements.
Affiliate Transactions. The Corporation and the Bank are legal entities
separate and distinct. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Corporation (an "affiliate"),
generally limiting such transactions with the affiliate to 10 percent of the
bank's capital and surplus and limiting all such transactions to 20 percent of
the bank's capital and surplus. Such transactions, including extensions of
credit, sales of securities or assets and provision of services, also must be
on terms and conditions consistent with safe and sound banking practices,
including credit standards, that are substantially the same or at least as
favorable to the bank as those prevailing at the time for transactions with
unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In
29
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addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of
any property or service.
Community Reinvestment Act. Banks are also subject to the provisions
of the Community Reinvestment Act of 1977, which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of
a bank, to assess the bank's record in meeting the credit needs of the
community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied, among other things, to establish a new branch office
that will accept deposits, relocate an existing office or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution.
Dividends. Dividends from the Bank constitute the major source of
funds for dividends which may be paid by the Corporation. The amount of
dividends payable by the Bank to the Corporation depend upon the Bank's
earnings and capital position, and is limited by federal and state laws,
regulations and policies. According to Washington law, the Bank may not
declare or pay a cash dividend on its capital stock if it would cause its net
worth to be reduced below (i) the amount required for liquidation accounts or
(ii) the net worth requirements, if any, imposed by the Director of the
Division. Dividends on the Bank's capital stock may not be paid in an
aggregate amount greater than the aggregate retained earnings of the Bank,
without the approval of the Director of the Division.
The amount of dividends actually paid during any one period will be
strongly affected by the Bank's management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
At September 30, 1996, approximately $42.1 million of retained earnings were
available for dividend distribution. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by
insured banks if such payments should be deemed to constitute an unsafe and
unsound practice.
The Corporation
General. The Corporation, as the sole shareholder of the Bank, is a
bank holding company and has registered as such with the FRB. Bank holding
companies are subject to comprehensive regulation by the FRB under the Bank
Holding Company Act, as amended (the "BHCA"), and the regulations of the FRB.
As a bank holding company, the Corporation is required to file with the FRB
annual reports and such additional information as the FRB may require and is
be subject to regular examinations by the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain FRB approval before:
(1) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5 percent of such shares (unless it already
owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
30
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The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more
than 5 percent of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services
for its subsidiaries. The principal exceptions to these prohibitions involve
certain non-bank activities which, by statute or by FRB regulation or order,
have been identified as activities closely related to the business of banking
or managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institutions, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings
Bonds; real estate and personal property appraising; providing tax planning
and preparation services; and, subject to certain limitations, providing
securities brokerage services for customers.
Dividends. The FRB has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the FRB's view that
a bank holding company should pay cash dividends only to the extent that the
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the
company's capital needs, asset quality and overall financial condition. The
FRB also indicated that it would be inappropriate for a company experiencing
serious financial problems to borrow funds to pay dividends. Furthermore,
under the prompt corrective action regulations adopted by the FRB, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10 percent or more of their consolidated net worth.
The FRB may disapprove such a purchase or redemption of it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB.
Capital Requirements. The FRB has established capital requirements for
bank holding companies that generally parallel the capital requirements for
national banks under the Office of the Comptroller of the Currency's
regulations. Under the FRB Board's capital guidelines, the Corporation's
levels of consolidated regulatory capital exceed the FRB's minimum
requirements, as follows:
Amount Percent
------ -------
(Dollars in Thousands)
Tier 1 Capital $111,080 6.7%
Minimum Tier 1 (leverage) requirement 49,600 3.0
-------- ---
Excess $ 61,480 3.7%
======== ===
Risk-based capital $119,154 13.2%
Minimum risk-based capital requirement 72,255 8.0
-------- ---
Excess $ 46,899 5.2%
======== ===
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TAXATION
Federal Taxation
General. The Corporation and the Bank report their income on a fiscal
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Corporation. The Bank has not been audited by
the IRS during the past five years. Reference is made to Note 17 of the Notes
to the Consolidated Financial Statements contained in the Annual Report for
additional information concerning the income taxes payable by the Bank.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional
tests primarily relating to their assets and the nature of their business
("qualifying thrifts") were permitted to establish a reserve for bad debts and
to make annual additions thereto, which additions may, within specified
formula limits, have been deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, may have been computed using an
amount based on the Bank's actual loss experience, or a percentage equal to 8
percent of the Bank's taxable income, computed with certain modifications and
reduced by the amount of any permitted additions to the nonqualifying reserve.
The Bank's deduction with respect to nonqualifying loans was computed under
the experience method, which essentially allows a deduction based on the
Bank's actual loss experience over a period of several years. Each year the
Bank selected the most favorable way to calculate the deduction attributable
to an addition to the tax bad debt reserve.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation also
requires savings associations to recapture into income over a six-year period
their post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At September 30, 1996, the Bank's post-1987
reserves totalled approximately $5.2 million. The recapture may be suspended
for up to two years if, during those years, the institution satisfies a
residential loan requirement. The Bank anticipates that it will meet the
residential loan requirement for the taxable year ending September 30, 1997.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions
to its bad debt reserve. Instead, the Bank would be required to deduct bad
debts as they occur and would additionally be required to recapture its bad
debt reserve deductions ratably over a multi-year period. At September 30,
1996, the Bank's total bad debt reserve for tax purposes was approximately
$16.2 million. Among other things, the qualifying thrift definitional tests
required the Bank to hold at least 60 percent of its assets as "qualifying
assets." Qualifying assets generally include cash, obligations of the United
States or any agency or instrumentality thereof, certain obligations of a
state or political subdivision thereof, loans secured by interests in improved
residential real property or by savings accounts, student loans and property
used by the Bank in the conduct of its banking business. Under current law, a
savings association will not be
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required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Corporation that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Bank's taxable income. Nondividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in
partial or complete liquidation. However, dividends paid out of the Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Bank's bad debt reserve. Thus, any dividends to the Corporation that would
reduce amounts appropriated to the Bank's bad debt reserve and deducted for
federal income tax purposes would create a tax liability for the Bank. The
amount of additional taxable income attributable to an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if the Bank makes a "nondividend
distribution," then approximately one and one-half times the amount so used
would be includable in gross income for federal income tax purposes, assuming
a 35 percent corporate income tax rate (exclusive of state and local taxes).
See "Regulation" for limits on the payments of dividends by the Bank. The
Bank does not intend to pay dividends that would result in a recapture of any
portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20 percent. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. In addition, only 90 percent of AMTI can be
offset by net operating loss carryovers. AMTI is increased by an amount equal
to 75 percent of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of .12
percent of the excess of AMTI (with certain modification) over $2.0 million is
imposed on the Corporation, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation may
exclude from its income 100 percent of dividends received from the Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70 percent in the case of dividends
received from unaffiliated corporations with which the Corporation and the
Bank will not file a consolidated tax return, except that if the Corporation
or the Bank owns more than 20 percent of the stock of a corporation
distributing a dividend, then 80 percent of any dividends received may be
deducted.
Washington Taxation
The Bank is subject to a business and occupation tax which is imposed
under Washington law at the rate of 1.60 percent of gross receipts; however,
interest received on loans secured by mortgages or deeds of trust on
residential properties is not subject to such tax. Washington's Department of
Revenue completed a Business and Occupation Tax Audit on the Bank for the
period January 1, 1988 to April 30, 1992 in September 1992.
33
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Item 2. Properties
- -------------------
The Corporation's main office, which is owned by the Corporation, is
located in Oak Harbor, Washington. At September 30, 1996, InterWest had 37
branch offices, all of which are located in the State of Washington. These
offices are located in the towns of Anacortes, Bellingham, Brewster, Burien,
Cashmere, Chelan, Clinton, Coupeville, East Wenatchee(2), Everett, Ferndale,
Freeland, Friday Harbor, Kent, Lakewood, Leavenworth, Lynden, Lynnwood,
Manson, Marysville, Mercer Island, Mount Vernon, Oak Harbor (2), Omak,
Oroville, Port Angeles, Port Townsend, Poulsbo, Redmond, Sedro-Woolley,
Sequim, Silverdale, Stanwood, Tonasket and Wenatchee. All of its branches are
located in owned properties except for the Cashmere, East Wenatchee and
Marysville branches, which are in leased facilities. The lease for the East
Wenatchee branch expires in August 1998, the lease for the Cashmere branch
expires July 2003 and the lease for the Marysville branch is month-to-month
while InterWest completes the construction of an owned facility. The total
net book value for InterWest's investment in premisses and property at
September 30, 1996 totaled $34.4 million.
Item 3. Legal Proceedings
- --------------------------
The Corporation is not engaged in any legal proceedings of a material
nature at the present time. Periodically, there are various claims and
lawsuits involving InterWest and its subsidiaries, principally as defendants,
such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the
Corporation's business. In the opinion of management and the Corporation's
legal counsel, no significant loss is expected from any of such pending claims
or lawsuits.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The information contained under the caption "Stock Information" in the
Annual Report is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the tables captioned "Financial Highlights"
contained in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Management Discussion and Analysis of
Financial Condition and Results of Operations for Fiscal Year 1996" in the
Annual Report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Annual Report, which are
listed under Item 14 herein, are incorporated herein by reference.
34
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
Information required by this item is incorporated by reference to the
section captioned "Auditors" in the Proxy Statement.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's Proxy Statement for the 1997
Annual Meeting of Stockholders is incorporated herein by reference.
The executive officers of the Corporation are as follows:
Age at Position
September 30, -----------------------------------------------
Name 1996 Corporation Bank
---- ---- ----------- ----
Stephen M. Walden 53 Director, President and Director, President and
Chief Executive Officer Chief Executive Officer
H. Glenn Mouw 43 Executive Vice President Executive Vice President
and Chief Financial
Officer
Kenneth G. Hulett 50 Executive Vice President Executive Vice President
and Retail Banking and
Loan Origination Officer
Clark W. Donnell 41 Executive Vice President Executive Vice President
and Chief Administrative
Officer
Gary M. Bolyard 60 Director, Vice Chairman/ Director, Vice Chairman/
Commercial Banking Commercial Banking
The principal occupation of each executive officer for the last five
years is set forth below. There are no family relationships among or between
the executive officers listed below.
STEPHEN M. WALDEN is President and Chief Executive Officer of InterWest
and the Corporation. Mr. Walden started his career at the Bank in 1966 and
became Vice President in 1974, Senior Vice President in 1977, Executive Vice
President in 1984, President and Chief Operating Officer in 1988 and President
and Chief Executive Officer in January 1990.
H. GLENN MOUW is Executive Vice President of the Corporation. He is
also Executive Vice President and Chief Financial Officer of InterWest, a
position he has held since 1988. He served as Senior Vice President and
Treasurer of InterWest from 1987 to 1988 and Vice President and Treasurer of
InterWest from 1981 to 1988.
KENNETH G. HULETT is Executive Vice President of the Corporation. He is
also Executive Vice President and Chief Lending Officer of InterWest, a
position he has held since 1988. He served as Vice President of InterWest
from 1977 to 1987.
CLARK W. DONNELL is Executive Vice President of the Corporation. He is
also Executive Vice President and Chief Administrative Officer of InterWest, a
35
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position he has held since 1988. He served as Vice President of InterWest
from 1984 to 1987 and as Senior Vice President of InterWest from 1987 to 1988.
GARY M. BOLYARD is Vice Chairman/Commercial Banking and a director of
the Company and the Bank, positions he has held since August 1996. Prior to
that time, Mr. Bolyard was President, Chief Executive Officer and a Director
of Central Bancorporation and Central Washington Bank and a Director of North
Central Washington Bank.
Item 11. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to the
section captioned - "Executive Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners
and Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners
and Management" of the Proxy Statement.
(c) Changes in Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may
at a subsequent date result in a change in control of the Corporation.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
- -----------------------------------------------------------------
(a) (1) Consolidated Financial Statements
Independent Auditors' Report
(a) Consolidated Statements of Financial Condition as of September 30,
1996 and 1995
(b) Consolidated Statements of Income For the Years Ended September
30, 1996, 1995 and 1994
(c) Consolidated Statements of Stockholders' Equity For the Years
Ended September 30, 1996, 1995 and 1994
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1996, 1995 and 1994
(e) Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
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<PAGE>
(2) All required financial statement schedules are included in the
Notes to Consolidated Financial Statements.
(b) The Corporation filed a Form 8-K dated September 13, 1996 to report the
consummation of the acquisition of Central Bancorporation.
(c) Exhibits
(3.1) Articles of Incorporation of InterWest Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated July 28, 1995)
(3.2) Bylaws of InterWest Bancorp, Inc. (incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated
July 28, 1995)
(10.1) Employment Agreement with B. R. Beeksma (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.2) Employment Agreement with Stephen M. Walden (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.3) Employment Agreement with H. Glenn Mouw (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.4) Employment Agreement with Clark W. Donnell (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.5) Employment Agreement with Kenneth G. Hulett (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.6) 1984 Stock Option Plan (incorporated by reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-8
(File No. 33-99742))
(10.7) 1993 Incentive Stock Option Plan (incorporated by reference to
Exhibit 99.3 to the Registrant's Registration Statement on Form
S-8 (File No. 33-99742))
(10.8) Non-Incentive Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No. 33-99742))
(10.8) Employment Agreement with Gary M. Bolyard
(10.9) Central Bancorporation 1992 Employee Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Forms S-8 (File No. 333-13191)).
(10.10) Central Bancorporation Director Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-13191)).
(13) 1996 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors
(23.2) Consent of Former Independent Auditors
(23.3) Consent of Independent Auditors for Central Bancorporation, Inc.
(23.4) Consent of Former Independent Auditors for Central
Bancorporation, Inc.
(27) Financial Data Schedule
(99.1) Prior Independent Auditors' Report
(99.2) Independent Auditors' Report for Central Bancorporation, Inc.
(99.3) Prior Independent Auditors' Report for Central Bancorporation,
Inc.
37
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the bank has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
InterWest Bancorp, Inc.
Date: December 30, 1996 By: /s/Stephen M. Walden
--------------------------------
Stephen M. Walden
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Stephen M. Walden By: /s/ Clark H. Mock
----------------------------- ----------------------------
Stephen M. Walden Clark H. Mock
President, Chief Executive Director
Officer and Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ H. Glenn Mouw By: /s/ Vern Sims
----------------------------- ----------------------------
H. Glenn Mouw Vern Sims
Chief Financial Officer Director
(Principal Financial Officer)
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Carla Tucker By: /s/ C. Stephen Lewis
----------------------------- ----------------------------
Carla Tucker C. Stephen Lewis
Principal Accounting Officer Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Barney R. Beeksma By: /s/ Russel E. Olson
----------------------------- ----------------------------
Barney R. Beeksma Russel E. Olson
Chairman of the Board Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Jean Gorton By: /s/ Henry Koetje
----------------------------- ----------------------------
Jean Gorton Henry Koetje
Director Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Michael T. Crawford By: /s/ Gary M. Bolyard
----------------------------- ----------------------------
Michael T. Crawford Gary M. Bolyard
Director Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Larry Carlson
-----------------------------
Larry Carlson
Director
Date: December 30, 1996
<PAGE>
<PAGE>
EXHIBIT 10.8
Employment Agreement with Gary M. Bolyard
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT dated as of August 31, 1996, by and between InterWest
Savings Bank (the "Bank"), Oak Harbor, Washington; InterWest Bancorp, Inc.
(the "Company"), a Washington corporation; and Gary M. Bolyard ( the
"Executive").
WHEREAS, the Bank and the Company wish to assure themselves of the
services of Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank and the
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
(a) During the Term of Employment (as defined below), Executive shall
serve as Vice Chairman/Commercial Banking of the Company and the Bank
reporting to the Chief Executive Officer of the Company and the Bank.
Executive will have responsibility for oversight of commercial banking
activities and the integration of such activities with the existing operations
of the Bank, development and participation in the implementation of
acquisition strategy, and such other duties as the Chief Executive Officer of
the Company and the Bank may assign after consultation with and consent of
Executive.
(b) During the Term of Employment (as defined below) hereunder, except
for periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of
his duties hereunder including activities and services related to the
organization, operation and management of the Company and the Bank.
2. TERM.
The term of this Agreement shall be for the period commencing on the
Closing Date and ending on June 30, 1998 (the "Term of Employment"). This
Agreement will only become effective if the Transaction (as defined below) is
consummated. For purposes of this Agreement, "Closing Date" shall mean the
date on which the Company and the Bank merge with or otherwise acquire Central
Bancorporation and its subsidiaries (the "Transaction").
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Section 1. The Bank
shall pay Executive as compensation a salary of $132,000 per year ("Base
Salary") in addition to any directors fees that Executive may be paid in
accordance with policies established by the Boards of Directors of the Company
and the Bank. Such Base Salary shall be payable in accordance with the
customary payroll practices of the Bank. During the Term of Employment,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made not later than one year from the Closing Date. Based on
such review, the Bank may increase, but not decrease, Executive's Base Salary.
The Bank shall provide Executive with all other benefits as are generally
provided to similarly situated senior executive officers of the Company and
the Bank and Executive shall be eligible to participate in any other executive
compensation or benefit program of the Bank and the Company on the same terms
as other similarly situated senior executives of the Bank and the Company,
including, but not limited to, the Bank's performance bonus plan, 401(k) plan
and Employee Stock Ownership Plan.
<PAGE>
<PAGE>
(b) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other expenses incurred in connection with Executive's performance
of his obligations under this Agreement, including without limitation, all
reasonable expenses incurred in connection with memberships in the Wenatchee
Golf & Country Club, the Washington Athletic Club (Seattle), and Executive's
participation in trade conferences and seminars. The Bank may provide such
additional compensation in such form and such amounts as the Board of the Bank
may from time to time determine. The Bank shall also provide Executive with
an automobile for use in connection with the performance of his duties under
this Agreement and shall pay such business-related expenses as are incurred in
connection with such use, including without limitation, expenses with respect
to insurance, gasoline, and maintenance. The automobile provided by the Bank
pursuant to the preceding sentence shall be comparable in all material
respects to the automobile used by Executive for business purposes immediately
prior to the Closing Date.
(c) All of the terms and conditions of the Executive Deferred
Compensation Agreement dated as of August 17, 1989, as amended on May 25,
1990, between Central Bancorporation and Executive (the "Executive Deferred
Compensation Agreement"), a copy of which is attached hereto as Exhibit A to
this Agreement, are incorporated into this Agreement by reference. The
Company and the Bank hereby assume, and jointly and severally agree to pay and
otherwise perform, all obligations owing and to be owed to Executive under the
Deferred Compensation Agreement. The obligations of the Company and the Bank
under the Deferred Compensation Agreement shall (1) be in addition to all
other obligations of the Company and the Bank under this Agreement and any
other agreement to which the Company and/or the Bank may at any time be a
party, and (2) survive the termination for any reason of Executive's
employment with the Company and/or the Bank.
(d) From time to time during the Term of Employment, Executive shall
receive an award of stock options under any stock option program of the
Company then in effect and at times and on terms and in amounts substantially
equivalent to those awarded to similarly situated senior executive officers.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Term of Employment, the provisions of this Section shall apply. As
used in this Agreement, an "Event of Termination" shall mean (1) termination
by the Company or the Bank of Executive's full-time employment hereunder for
any reason other than (A) death; (B) disability, as defined in Section 5
hereof; (C) retirement, as defined in Section 5 hereof, or (D) for cause, as
defined in Section 6 hereof or (2) Termination by Executive for "Good Reason"
as defined herein.
For purposes of this Agreement, Executive's termination for "Good
Reason" shall mean the occurrence of any of the following, in which event
Executive shall have the right to terminate his employment with the Bank and
Company, which termination shall be deemed a justifiable termination of his
employment and shall excuse Executive from the obligation to render services
under or relating to this Agreement:
(1) A material change in Executive's responsibilities or title
(as set forth in Section 1 of this Agreement);
(2) The Bank's or the Company's requiring Executive to be based
in any location other than Chelan County, Washington, except for normal travel
in the ordinary course of the Bank's or the Company's business;
(3) Unless specifically recommended or approved in writing by
Executive with respect to the transaction in question, (A) the sale or other
2
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disposition of all or substantially all of the assets of the Bank or the
Company to any person or entity other than an affiliate of the Bank or the
Company, or the merger or consolidation of the Bank or the Company with
another entity unless the Bank or the Company is the surviving corporation and
the merger or consolidation does not affect directly or indirectly the
ultimate control of the Bank or the Company; (B) if any person or entity,
other than the Company or an affiliate of the Company becomes the beneficial
owner, directly or indirectly, of securities of the Bank or the Company
representing a majority or more of the combined voting power of the Bank's or
the Company's then outstanding securities; or (C) any transactions, occurrence
or event or series of transactions, occurrences or events following which
individuals who, prior thereto constituted the Board of Directors of the Bank
or the Company, cease, for any reason, to constitute at least a majority
thereof (and, for purposes of this subparagraph (3), the term "person" shall
have the meaning ascribed to such term in Section 3(a)(9) and 14(d) of the
Securities Exchange Act of 1934 as in effect on the date hereof). For
purposes of paragraph 4(b) of this Agreement, the occurrence of an event
described in this subparagraph 4(a)(3) shall be deemed to constitute a
"Change in Control" of the Bank or the Company;
(4) Any material breach of this Agreement by the Bank or the
Company, including, without limitation, (A) the failure by the Bank to pay to
Executive any installment of annual salary and/or benefit (including, without
limitation, any benefit under any defined contribution plan or incentive plan)
required to be paid or provided by Executive, which failure continues for a
period of thirty (30) calendar days after written notice thereof is given by
Executive to the Bank or the Company (unless neither of the two immediately
preceding payments was made within fifteen (15) calendar days of their
respective due dates, in which case no grace period will be applicable), and
(B) any failure by the Bank or the Company to adopt, continue or maintain in
effect any plan or benefit which is required to be provided by the Bank or the
Company to Executive pursuant to this Agreement.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
to Executive (1) all compensation and benefits earned, and all reimbursable
expenses incurred, through the date on which the Event of Termination occurs,
and (2) all remaining installments of Executive's Base Salary through the
expiration of the Term of Employment. In the event of his death following the
occurrence of an Event of Termination, all payments then remaining shall be
made to his beneficiary or beneficiaries, or his estate, as the case may be.
5. TERMINATION UPON RETIREMENT, DEATH OR DISABILITY.
Termination by the Bank of Executive based on "retirement" shall mean
retirement at age 65 or in accordance with any retirement arrangement
established with Executive's consent with respect to him. Upon termination of
Executive upon retirement, Executive shall be entitled to all benefits under
any retirement plan of the Bank or the Company and other plans and agreements
to which Executive is a party. Upon the death of Executive during the Term of
Employment, the Bank shall pay to Executive's estate the compensation due and
reimbursable expenses incurred by Executive through the last day of the
calendar month in which his death occurred. In the event of Executive's
termination by reason of disability, as defined in the Bank's then current
disability plan, or if Executive is otherwise unable to serve as Vice
Chairman/Commercial Banking, Executive shall be entitled to receive group and
other disability benefits of the type then provided by the Bank for other
similarly situated senior executive officers. All amounts payable under this
paragraph shall be in addition to amounts payable by the Company and the Bank
under the Executive Deferred Compensation Agreement.
6. TERMINATION FOR CAUSE.
For purposes of this Agreement, termination for "cause" means
termination because Executive (a) willfully and continually fails to
3
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substantially perform his principal responsibilities with the Company and the
Bank, as outlined in Section 1 (other than any such failure resulting from
Executive's incapacity due to injury or illness), and such failures continue
for a period of at least thirty (30) calendar days after a written demand for
performance is delivered to Executive by a duly authorized member or
representative of the Board of Directors of the Company or the Bank that
specifically identifies the manner in which it is alleged that Executive has
not substantially performed such duties, (b) is adjudged guilty of any crime
involving a breach of fiduciary duties to the Company or the Bank or involving
moral turpitude, or (c) willfully and continually fails to comply with any
law, rule, or regulation (other than traffic violations or similar offenses)
or any final cease-and-desist order of any government agency having
jurisdiction over the Company or the Bank. For purposes of this Agreement, no
act or failure to act on the part of Executive shall be considered "willful"
unless done or omitted to be done in bad faith without reasonable disbelief
that such action or omission was in, or not opposed to, the best interests of
the Company or the Bank.
7. NON-COMPETITION.
(a) Upon any termination of Executive employment hereunder for
any reason other than an Event of Termination or the expiration of the Term of
Employment, Executive will not engage in Competition with the Bank and/or the
Company for a period of two (2) years following such termination in any city,
town or county in which the Bank and/or the Company has an office or has filed
an application for regulatory approval to establish an office, determined as
of the effective date of such termination. The term "Competition" means
working for or advising, or consulting or otherwise serving with, directly or
indirectly, any entity whose business materially competes with the depository,
lending or other business activities of the Bank and/or the Company; provided,
however, that Competition shall not include the acquisition and ownership of
an interest not exceeding 5% of the total equity interests in any publicly
held entity (whether or not such entity competes with the Company or the Bank
or any of its affiliates). The parties hereto, recognizing that irreparable
injury will result to the Bank and/or the Company, its business and property
in the event of Executive's breach of this Subsection 7(a), agree that in the
event of any such breach by Executive, the Bank and/or the Company will be
entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive. Executive represents
and admits that in the event of the termination of his employment for reasons
other than an Event of Termination, Executive's experience and capabilities
are such that Executive can obtain employment in a business engaged in other
lines and/or different nature than the Bank and/or the Company, and that the
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood. Nothing herein will be construed as prohibiting the Bank
and/or the Company from pursuing any other remedies available to the Bank
and/or the Company for such breach or threatened breach, including recovery of
damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of
the business activities and plans for business activities of the Company and
the Bank and affiliates thereof, as it may exist from time to time, is a
valuable, special unique asset of the business of the Company and the Bank.
Executive will not during or after the Term of Employment, disclose any
knowledge of the past, present, planned or considered business activities of
the Company or other entity for any reason or purpose whatsoever; provided,
however, that the foregoing shall not apply to any confidential or proprietary
information or trade secret that (1) is or becomes generally available to the
public other than as a result of a disclosure by Executive in violation of
this Agreement. (2) becomes available to Executive on a non-confidential
basis from a source other than the Company or the Bank or any of its agents or
affiliates, or (3) Executive is required to disclose pursuant to any law,
rule, regulation, legal proceeding, subpoena, court order or other similar
process. Notwithstanding the foregoing, Executive may disclose any knowledge
of banking, financial and/or economic principles, concepts
4
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<PAGE>
or ideas which are not solely and exclusively derived from the business plans
and activities of the Company and the Bank. In the event of a breach or
threatened breach by Executive of the provisions of this Section 7(b), the
Company and the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Company and the Bank or
affiliates thereof, or from rendering any services to any person, firm,
corporation or other entity to whom such knowledge, in whole or in part, has
been disclosed or is actively threatened to be disclosed. Nothing herein will
be construed as prohibiting the Company or the Bank from pursuing any other
remedies available to the Company or the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
8. NOTICE.
For purposes of this Agreement, notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified mail, return
receipt requested, postage prepaid. All notices to the Bank or the Company
shall be sent to the home office of the Bank, directed to the attention of the
Board of Directors of the Bank or the Company, as appropriate. All notices to
Executive shall be sent to 1018 Westmoreland, Wenatchee, Washington 98801, or
such other address as Executive may designate in writing to the Bank.
9. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
10. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Company or
the Bank or their predecessor and Executive, except that this Agreement shall
not affect or operate to reduce any benefit or compensation inuring to
Executive of a kind elsewhere provided. No provision of this Agreement shall
be interpreted to mean that Executive is subject to receiving fewer benefits
than those available to him without reference to this Agreement.
11. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
12. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such
5
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<PAGE>
waiver or estoppel. No such written waiver shall be deemed a continuing
waiver unless specifically stated therein, and each such waiver shall operate
only as to the specific term or condition waived and shall not constitute a
waiver of such term or condition for the future as to any act other than that
specifically waived.
13. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
14. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
15. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Washington,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.
16. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the Executive
within one hundred (100) miles from the location of the home office of the
Bank, in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. All expenses of arbitration, including without
limitation, arbitration fees, costs and reasonable attorneys' fees, shall be
awarded by one arbitrator(s) in favor of such party as the arbitrators shall
determine to be the substantially prevailing party in such arbitration.
17. NO OBLIGATION TO MITIGATE DAMAGES.
Executive shall not be required to mitigate damages or the amount
of any payment provided for under this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by Executive as a result of or
in connection with employment by another employer or by retirement or by any
other benefits, including workmens compensation and unemployment compensation,
either before the date of this Agreement or after the date of termination of
his employment with the Company or the Bank, or otherwise.
6
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<PAGE>
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement
to be executed and their seal to be affixed hereunto by a duly authorized
officer, and Executive has signed this Agreement, all on the day first above
written.
ATTEST: INTERWEST SAVINGS BANK
/s/Margaret Mordhorst /s/ Stephen M. Walden
- --------------------------- ----------------------------
ATTEST: INTERWEST BANCORP, INC.
/s/Margaret Mordhost /s/ Stephen M. Walden
- --------------------------- ----------------------------
WITNESS:
/s/ Joseph E. Riordan Gary M. Bolyard
- --------------------------- ----------------------------
Gary M. Bolyard
7
<PAGE>
<PAGE>
EXHIBIT 13
1996 Annual Report to Shareholders
INTERWEST BANCORP 1996 ANNUAL REPORT
SERVICE
FOCUS
SUCCESS
[depicted in a sphere]
<PAGE>
<PAGE>
CORPORATE PROFILE CONTENTS
Strategy. Thoughtful, proactive, Financial Highlights 1
integrated strategy, reaching aggres- Letter to Stockholders 2
sively into the future, every year, Service. Focus. Success. 5
all year. That is the core of our Directors and Officers 18
financial strength. It's the reason Financial Report 19
we outperform the market. And it's Corporate Information 57
the expression of our philosophy-our Locations 58
belief that we can always do better,
we can always improve. We're not just
expecting success. We're planning on it.
Net Income Total Deposits
(Dollars in Millions) (Dollars in Millions)
[Bar graph - values are below] [Bar graph - values are below]
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
$10.2 $12.5 $13.5 $14.4 $12.8 $755.7 $776.5 $959.3 $1,040.3 $1,120.7
Stock Price
(Per Share at Year End) Net Interest Margin
[Bar graph - values are below] [Bar graph - values are below]
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
$10.35 $15.75 $14.50 $15.50 $29.50 3.81% 4.22% 3.88% 3.37% 3.53%
Return on Average Equity* Return on Average Assets
[Bar graph - values are below] [Bar graph - values are below]
1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
15.30% 16.32% 15.26% 14.37% 11.48% 1.20% 1.31% 1.19% 1.08% 0.82%
* Includes nonrecurring SAIF assessment of $3.6 million (net of tax) and
special charges of $2.0 million (net of tax).
See Notes 15 and 16 in the notes to consolidated financial statements.
<PAGE>
<PAGE>
FINANCIAL HIGHLIGHTS
Year ended September 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
Dollars in thousands,
except share and per
share amounts
Summary of Operations
Interest Income $120,913 $ 100,264 $82,270 $73,035 $70,716
Interest Expense 68,808 57,926 40,685 35,427 40,790
Net Interest Income Before
Provision for Losses
on Loans 52,105 42,338 41,585 37,608 29,926
Provision for Losses on
Loans 1,960 720 900 1,399 1,653
Net Interest Income After
Provision for Losses
on Loans 50,145 41,618 40,685 36,209 28,273
Other Operating Income 12,553 9,993 7,708 8,914 9,294
Other Operating Expense 43,819 29,902 27,646 26,278 23,642
Federal Income Tax Expense 6,108 7,347 7,280 6,362 4,163
Cumulative Effect of Change
in Accounting - - - - 434
Net Income $12,771* $14,362 $13,467 $12,483 $10,196
======= ========= ========= ======= =======
Per Share:
Net Income $1.58 $1.80 $1.69 $1.58 $1.30
Cash Dividends Declared 0.51 0.37 0.35 0.28 0.21
Weighted Average
Shares Outstanding 8,064,344 7,971,909 7,977,772 7,908,972 7,829,807
--------- --------- --------- --------- ---------
September 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
Statement of Financial
Condition
Total Assets $1,712,151 $1,470,437 $1,262,352 $975,375 $911,012
Loans and Mortgage-Backed
and Related Securities 1,421,258 1,291,383 1,088,548 837,486 751,650
Customer Deposits 1,120,743 1,040,310 959,344 776,499 755,712
Borrowings 460,497 314,171 202,142 110,218 77,464
Stockholders' Equity 111,021 105,740 93,578 82,420 71,306
Book Value per Share $14.02 $13.51 $11.91 $10.59 $9.25
--------- --------- -------- ------- -------
The merger between InterWest Bancorp, Inc., and Central Bancorporation was
completed as of August 31, 1996, and accounted for as a pooling-of-interests,
accordingly, financial highlights for prior years have been restated as if the
companies were combined.
* Includes nonrecurring SAIF assessment of $3.6 million (net of tax) and
special charges of $2.0 million (net of tax).
See Notes 15 and 16 in the notes to consolidated financial statements.
p 1 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
To Our Stockholders
Service, Focus and Success. These words reflect the foundation of InterWest's
strategy for Fiscal Year 1996 and beyond. We had an exciting year of new
horizons, challenges and innovation. With the support of our customers,
stockholders and employees, we established new benchmarks in customer service,
set in place strategies to take us into the next century, and improved the
Company's financial picture with tangible results.
[photograph Over the years, InterWest set itself apart from thrifts by
of offering innovative products like adjustable rate
B.R. Beeksma] mortgages, non-traditional investment and insurance
services. This pioneering spirit continues as we implement
plans to further distance ourselves from the traditional thrift business. The
strategy is simple: take the best from the thrift industry and blend it with
the best of commercial banking. The result is a full service financial
institution with a complete line of customer products and services; business,
mortgage and consumer lending, retirement planning, securities, cash
management, insurance and more.
During Fiscal 1996, we had the opportunity to accelerate our strategy. On
August 31, 1996, the merger with Central Bancorporation, which operated
Central Washington Bank and North Central Washington Bank, was consummated
adding ten new locations in Central Washington. We want to welcome our new
customers and stockholders whose accounts have now been converted to
InterWest. Mergers and account conversions
p 2
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<PAGE>
are never as transparent to the customer and stockholder as we would like them
to be. We understand and are sensitive to the changes that have taken place
and deeply appreciate the continued loyalty and support of our newest
InterWest customers.
The merger furthered InterWest's expansion into business banking and
diversified our asset generation and income stream. [photograph
During the next year we will intensify our efforts of
to restructure the balance sheet by increasing loans Stephen M. Walden]
and reducing mortgage-backed and related securities
and investment securities.
On September 30, 1996, President Clinton signed into law legislation to
recapitalize the Savings Association Insurance Fund (SAIF) to a level
equivalent to the Bank Insurance Fund (BIF). Prior to this legislation most
savings institutions were paying 23 cents per hundred dollars of insured
deposits. Beginning January 1, 1997, savings institutions will begin paying
6.4 cents per hundred dollars of insured deposits. These premiums are
scheduled for further reduction by January 1, 2000, from 6.4 cents per hundred
dollars to 2.4 cents per hundred dollars of insured deposits for all FDIC
insured institutions. InterWest's share of the recapitalization of SAIF was a
one-time charge of $5.5 million, assessed during the fourth quarter ended
September 30, 1996. The new legislation should reduce InterWest's premium
expense by nearly 73 percent during 1997 for a savings of over $1.5 million,
which will allow us to recover this one-time assessment in less than four
years.
p 3
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<PAGE>
Our business strategy is producing results. InterWest's earnings, before the
one-time special SAIF assessment and the merger related charges of $3.1
million, increased 28 percent to $2.28 per share or $18.4 million compared to
$1.80 per share or $14.4 million for the Fiscal Year ended September 30, 1995.
After inclusion of the SAIF assessment and the merger related charges,
InterWest recorded earnings for the year ended September 30, 1996, of $1.58
per share or $12.8 million. As we restructure the balance sheet, we are
reducing InterWest's dependence upon single family lending and time deposits.
During 1996, less than 40 percent of InterWest's originations were single
family residential loans. Our focus on commercial, consumer and business
lending should result in future increased net interest margins and stockholder
value.
The implementation of our business strategy has resulted in a substantial
benefit to our stockholders. Within the last year InterWest's stock price
increased 90 percent from $15.50 at September 29, 1995, to $29.50 at September
30, 1996, reflecting the Market's confidence in InterWest's strategies and
value. Going forward, we will focus on continuing our tradition of product
innovation, increased stockholder value and superior customer service.
/s/B.R. Beeksma /s/Stephen M. Walden
B.R. Beeksma Stephen M. Walden
Chairman President and CEO
p 4
<PAGE>
<PAGE>
SERVICE
FOCUS
SUCCESS
[depicted in a sphere]
At InterWest, we think differently. Maybe it comes from having our
headquarters in a small town. We look at technology, and see a means of
freeing more time to spend with customers one-on-one. We look at our branches
and see 37 hometown banks, each shaped by the character of its community. We
look at customers, and we see our neighbors, our family members-ourselves. We
are a company of individual faces and names, and this vision is what guides
us.
<PAGE>
<PAGE>
We operate by the golden rule. So when Shelle
Finch of Kozi Kidz clothing needed business service takes us farther
and volunteer support, we did for her what
we'd do for ourselves. We delivered both, ASAP.
[photograph of child]
<PAGE>
<PAGE>
[prior page extended onto this page]
<PAGE>
<PAGE>
[graphic depiction of child's dress]
REALLY FREE CHECKING EASY PHONE BANKING VISA CHECK CARD
<PAGE>
<PAGE>
Shelle Finch champions the childrens' Discovery museum in
Wenatchee, and assistant manager April Ruse
volunteers each week at school.
"Little things make a difference," April says.
[photograph of Shelle Finch and April Ruse]
Our service will surprise you. We hire people who know how to have a warm,
intelligent conversation-people who solve problems efficiently, in a very
pleasant manner. The biggest part of our job is being in tune with other
people's needs. Shelle Finch, a children's clothing designer who sells her
work at craft shows, became an InterWest customer because she "didn't want to
do everything on the phone-I wanted a hometown bank." Still, when she asked
Wenatchee Assistant Manager April Ruse about a merchant account which would
allow her to accept Visa and Mastercard, Shelle had doubts. "All the other
crafters said it's too hard, you'll never get it,"she says. "But April just
said, 'We can do it!' I couldn't believe it was as painless as it was. At the
first show I did with the merchant account, my business doubled." Shelle is
also President of Wenatchee's Childrens' Discovery Museum. After she learned
about InterWest's focus on local childrens' charities, she asked us for a
contribution. We gladly gave it. But what she appreciated most were the
volunteer hours our employees put in. "The extra support we got was such a
bonus," Shelle says. "Sometimes you just find people you get along with, and I
feel like that at the bank." "Our customers are an extended family," April
says. "And everybody that works for InterWest is treated as family also. We're
served well, so we want to pass it along."
<PAGE>
<PAGE>
We set ambitious goals for ourselves, and
support our customers with theirs. Builder focus builds dreams
Pat Dowd has brought us some complex pro-
jects over the years. Together, we've per-
severed to make them work.
[photograph of house]
<PAGE>
<PAGE>
[prior page extended onto this page]
<PAGE>
<PAGE>
[graphic depiction of house]
BUSINESS LOANS LINES OF CREDIT ONE STEP CONSTRUCTION LOAN
<PAGE>
<PAGE>
Pat Dowd specializes in affordable, custom-built homes.
For Years, he and branch manager Russ Keithley
have come up with numbers that
turn floor plans into reality.
[photograph of Pat Dowd and Russ Keithley]
"We are an aggressive bank," says Russ Keithley, Assistant Vice President and
Manager of our Marysville branch. "When we get a loan referral, we jump right
on it. The very first day, we try to analyze it and see where the obstacles
are. We want to get it approved as quickly as possible-sometimes literally in
a day or two." Russ met Pat Dowd, owner of Omni Construction, six years ago.
Pat came into InterWest for the first time with paperwork on a loan for one
of his customers. "He was kind of grumbling about banks in general," Russ
recalls. "He was tired of getting the runaround." But InterWest gradually
earned Pat's trust. This year, after bringing in customer loans, construction
loans, a personal line of credit, family loans, and personal checking
accounts, Pat transferred his $2 million Omni Construction business account to
InterWest. "Pat's very focused and analytical when it comes to business. When
he moved the Omni account over, it was the icing on the cake for us," Russ
says. "It meant he had the confidence that we could take care of all his
business needs." "Omni gets courted all the time by banks who want to be our
buddy," Pat says. "But we see no reason to change. InterWest people are loyal
and straightforward. They don't gladhand you or mislead you. If Russ thought
something was baloney, he'd tell me, and that's the most important thing to
me."
<PAGE>
<PAGE>
We are here to create value: financial
rewards, and long-term relationships. success inspires growth
Customer John Allgire has invested in
InterWest for 14 years. To us, that's a
real sign of success.
<PAGE>
<PAGE>
[prior page extended onto this page]
<PAGE>
<PAGE>
[graphic depiction of a trophy]
BUSINESS CHECKING INSURANCE INVESTMENTS
<PAGE>
<PAGE>
John Allgire, here with local customer and branch
manager Pam Ewell, likes to head for the
greens after a day of selling
classic women's clothing at Casual House.
[photograph of John Allgire and Pam Ewell]
"There are lots of smiles at every stockholders' meeting," says John Allgire,
who started buying InterWest stock 14 years ago when it was privately held.
"In the beginning, people would call around to sell shares to those who might
be interested, and the highest bidder would get them. What got my attention
was the rate of escalation in the asking price." Today, along with his Casual
House business account, personal accounts, and certificates of deposit, John
continues to hold stock in InterWest. So do eight other family members. "I
scraped around for every penny I had when it went public," says John. "I went
overboard there and I've never been sorry. The stock has more than tripled. I
don't have any worries about the stability of the company, that's for sure."
John moved to Oak Harbor 45 years ago. Not long after, InterWest opened its
doors. "It started here in a very small, very old building, with just two
people," he recalls. John believes the bank has retained its hometown
personality over the years. "Everyone at the bank always has time to chat;
we've known each other a long time. I see them around town at the grocery
store or the Rotary Club. I think newcomers here have no awareness of the
bank's current size, and they wouldn't find out unless they asked. InterWest
has grown so rapidly, it's amazing to me," John says. "But I have every
confidence it will continue to do so. It looks like the sky's the limit."
<PAGE>
<PAGE>
INTERWEST BANCORP, INC. DIRECTORS AND OFFICERS
[a photograph of each director and officer is placed beside their name]
B. R. Beeksma Stephen M. Walden
Chairman President and CEO
InterWest Bancorp, Inc. InterWest Bancorp, Inc.
Years as Director: 23 Years as Director: 9
Russel E. Olson Clark Mock
Formerly, Vice President Management Consulting
and Treasurer in Banking and Real Estate
Puget Sound Power Years as Director: 3
and Light Co.
Years as Director: 9
Michael Crawford Vern Sims
Vice President and Owner, Ford and
General Manager Honda Car Dealerships
Concrete Nor'West Years as Director: 21
Years as Director: 2
Jean Gorton C. Stephen Lewis
Senior Vice President President and CEO
Trillium Corporation Weyerhaeuser
Loaned Executive Real Estate Co.
Washington State University Years as Director: 9
Years as Director: 6
Henry Koetje Gary M. Bolyard
Vice Chairman Vice Chairman
Part Owner Commercial Banking
Koetje Agency, Inc. InterWest Bancorp, Inc.
Years as Director: 39 Years as Director: New
Larry Carlson Clark W. Donnell
Attorney at Law Executive Vice President
Carlson, Drewelow & McMahon InterWest Bancorp, Inc.
Years as Director: New
Kenneth G. Hulett H. Glenn Mouw
Executive Vice President Executive Vice President
InterWest Bancorp, Inc. InterWest Bancorp, Inc.
Herbert C. Pickard Director Emeritus
[photograph not included]
p 18
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<PAGE>
FINANCIAL
REPORT
[depicted in a sphere]
InterWest had an excellent year, and our numbers reflect it. We experienced
vigorous planned geographic expansion, strong operating results and increased
shareholder value. We enjoyed a successful, mutually beneficial merger. And we
continued to stabilize our earnings stream through diversification. What do we
see ahead? Planned growth, in all the right directions.
<PAGE>
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR FISCAL YEAR 1996
In our Annual Report, we have included certain "forward looking statements"
concerning the future operations of InterWest. It is management's desire to
take advantage of the new "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing InterWest of the protections of such safe harbor with respect to all
"forward looking statements" contained in our Annual Report. We have used
"forward looking statements" to describe the future plans and strategies
including our expectations of InterWest's future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could effect results include
interest rate trends, the general economic climate in Washington state and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the "forward
looking statements" and undue reliance should not be placed on such
statements.
We will remember 1996 as a year in which InterWest Bancorp, Inc.,
(InterWest) took the initial steps to transform from a traditional thrift to a
financial institution with business banking in its portfolio of products. This
was accomplished through the merger with Central Bancorporation (Central),
which was finalized on August 31, 1996. Central, the holding company for
Central Washington Bank and North Central Washington Bank, had 10 commercial
banking offices located in central Washington. This merger began the process
of restructuring InterWest's balance sheet into a blended financial
institution with less reliance on single family lending as its primary asset.
Over the remainder of the decade, InterWest will increase its sales effort in
consumer, business and commercial lending in order to reconfigure the
composition of the balance sheet.
The merger with Central has been treated as a pooling-of-interests for
accounting purposes. In accordance with generally accepted accounting
principles, prior period financial statements, as well as management
discussion and analysis have been restated as if Central and InterWest had
been combined. The following discussion is provided for the consolidated
operations of InterWest which includes its wholly owned subsidiaries,
InterWest Bank and Central Washington Bank. Effective October 14, 1996,
Central Washington Bank has been merged with and into InterWest Bank. The
purpose of this discussion is to focus on significant factors affecting
InterWest's financial condition and results of operations. This discussion
should be read along with the consolidated financial statements (including
notes thereto) for an understanding of the following discussion and analysis.
RESULTS OF OPERATION
InterWest's net income of $12.8 million in 1996 was down from $14.4 million in
1995 and $13.5 million in 1994. Earnings per share were $1.58 in 1996
compared to $1.80 in 1995 and $1.69 in 1994. InterWest's return on average
assets was 0.82 percent, down from 1.08 percent in 1995 and 1.19 percent in
1994. Return on average stockholders equity of 11.48 percent was also down
from from 14.37 percent in 1995 and 15.26 percent in 1994. The results of
operations were significantly impacted by nonrecurring expenses of $5.5
million related to the recapitalization of the Savings Association Insurance
Fund (SAIF) and special charges primarily associated with the Central merger
of $3.1 million. Excluding these nonrecurring expenses, net income was $18.4
million, earnings per share was $2.28, return on average assets was 1.18
percent and return on average stockholders equity was 16.52 percent.
NET INTEREST INCOME
Interest rates began the calendar year at near record lows, but began to climb
as the Federal Reserve tightened in the Spring, and rates peaked early in the
Summer at nearly a one hundred basis point increase. The yield curve remained
relatively flat in spite of these changes in interest rates. In this type of
an environment, you can expect a traditional thrift to see margins decrease as
the yield curve begins to impact its spread opportunities. InterWest took
steps to insulate itself from this flat yield curve by focusing its loan
production on assets with greater margins. This strategy allowed InterWest to
increase its net interest margin to 3.53 percent in 1996 from 3.37 percent in
1995, compared to 3.88 percent in 1994. Net interest income increased to $52.1
million in 1996 from $42.3 million in 1995 and $41.6 million in 1994. This
increase in net interest income and net interest margin during 1996 is
attributable to increased yields in the real estate loan portfolio primarily
accomplished through a focus on adjustable rate lending, strong consumer and
commercial originations and increased sales of non-interest bearing checking
accounts. During 1996, less than 40 percent of InterWest's originations were
single family residential loans. This process of restructuring the balance
sheet will create a reduced dependence upon single family lending and
potentially
p 20 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
<TABLE>
increase margins as InterWest focuses its efforts and energy on commercial, consumer and business lending.
The following table indicates the average balance, interest income or expense, average interest rates earned
or paid, net interest rate spread and net interest margin for the years ended September 30.
1996 1995 1994
Average Average Average Average Average Average
Interest Balance Rate Interest Balance Rate Interest Balance Rate
- --------------------------------------------------------------------------------------------------
Dollars in thousands
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $82,925 $907,494 9.14% $70,803 $814,898 8.69% $61,865 $720,656 8.58%
Mortgage-backed
and related
securities 31,874 466,320 6.84 23,621 350,877 6.73 15,198 249,217 6.10
Investment
securities
and interest-
earning
deposits 6,114 102,561 5.96 5,840 91,431 6.39 5,207 102,279 5.09
-------- ---------- ---- -------- ---------- ---- ------- ---------- ----
Total interest-
earning assets $120,913 $1,476,375 8.19% $100,264 $1,257,206 7.98% $82,270 $1,072,152 7.67%
======== ========== ==== ======== ========== ==== ======= ========== ====
Customer deposits 48,166 1,065,658 4.52 45,952 998,238 4.60 32,882 875,213 3.76
FHLB advances,
securities
sold under
agreements to
repurchase and
other borrowings 20,642 372,200 5.55 11,974 222,605 5.38 7,803 165,693 4.71
-------- ---------- ---- -------- ---------- ---- ------- ---------- ----
Total interest-
bearing
liabilities $68,808 $1,437,858 4.79% $57,926 $1,220,843 4.74% $40,685 $1,040,906 3.91%
======== ========== ==== ======== ========== ==== ======= ========== ====
Net spread 52,105 38,517 3.40 42,338 36,363 3.24 41,585 31,246 3.76
-------- ---------- ---- -------- ---------- ---- ------- ---------- ----
Net interest
margin $52,105 $1,476,375 3.53% $42,338 $1,257,206 3.37% $41,585 $1,072,152 3.88%
======== ========== ==== ======== ========== ==== ======= ========== ====
</TABLE>
<TABLE>
The effect on net interest income due to changes in interest rates and the amounts of interest earning
assets and interest bearing liabilities are depicted in the following table. The table below provides
information on changes for the periods which are attributable to: 1) changes in interest rates, 2) changes
in volume and, 3) changes in rates and volume.
1996 vs 1995 1995 vs 1994 1994 vs 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in Due to Changes in
Rate Volume R/V Total Rate Volume R/V Total Rate Volume R/V Total
- ------------------------------------------------------------------------------------------------------------
Dollars in thousands
Interest-Earning Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans $3,661 $8,045 $416 $12,122 $751 $8,090 $97 $8,938 $(4,220) $9,081 $(665) $4,196
Mortgage-backed and
related securities 362 7,772 119 8,253 1,579 6,200 644 8,423 (361) 5,062 (171) 4,530
Investment securities
and interest-
earning deposits (390) 711 (47) 274 1,325 (552) (140) 633 398 102 9 509
Total net change in
income on interest-
earning assets $3,633 $16,528 $488 $20,649 $3,655 $13,738 $601 $17,994 $(4,183)$14,245 $(827) $9,235
====== ======= ==== ======= ====== ======= ==== ======= ======= ======= ===== ======
p 21 InterWest Bancorp, Inc.
</TABLE>
PAGE
<PAGE>
<TABLE>
1996 vs 1995 1995 vs 1994 1994 vs 1993
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in Due to Changes in
Rate Volume R/V Total Rate Volume R/V Total Rate Volume R/V Total
- ------------------------------------------------------------------------------------------------------------
Dollars in thousands
Interest-Bearing Liabilities
Interest-bearing
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
deposits $(833) $3,104 $(57) $2,214 $7,407 $4,622 $1,041 $13,070 $(1,144) $4,365 $(168) $3,053
FHLB advances, and
other borrowings 371 8,047 250 8,668 1,110 2,680 381 4,171 (613) 3,164 (346) 2,205
Total net change
in expense on
interest-bearing
liabilities $(462) $11,151 $193 $10,882 $8,517 $7,302 $1,422 $17,241 $(1,757) $7,529 $(514) $5,258
====== ======= ==== ======= ====== ====== ====== ======= ======== ====== ====== ======
Net change in net
interest income $4,095 $5,377 $295 $9,767 $(4,862) $6,436 $(821) $753 $(2,426) $6,716 $(313) $3,977
====== ======= ==== ======= ====== ====== ====== ======= ======== ====== ====== ======
</TABLE>
<PAGE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans in 1996 was $1,960,000 compared to $720,000
in 1995 and $900,000 in 1994. The decision to increase the provision is based
upon InterWest's entry into business banking which historically has required a
higher reserve level and to bring into conformity the provision for losses on
loans practices of the two merged companies. InterWest attempts to assess the
risk level inherent in the loan portfolio and provide adequate reserves to
meet these risks as a part of its ongoing review of the loan portfolio.
Non-performing assets and delinquency trends are key elements in determining
the allowance for losses on loans. In addition to non-performing assets and
loan delinquency levels, the allowance for losses on loans is determined by
taking into consideration general economic conditions in the markets InterWest
serves, historical loss experience, individual loan review findings, loan mix
and the level of loans relative to the allowance for losses on loans.
OTHER OPERATING INCOME
Other operating income increased to $12.6 million in 1996 from $10.0 million
and $7.7million in 1994. The increase in 1996 is primarily attributable to an
increase in service fees of $2.8 million from 1995 and increases in gains on
the sale of real estate held for sale and for development of $790,000. The
increase in service fees is primarily attributable to $1.9 million of brokered
loan fees earned by InterWest's mortgage subsidiary Cornerstone Northwest
Mortgage, which was acquired effective December 31, 1995. An increase in
service charges on customer deposit accounts of $600,000 was also a
significant factor in this increase.
Gains on the sale of real estate held for sale and for development
increased to $806,000 in 1996 from $16,000 in 1995 and $746,000 in 1994.
InterWest is currently selling two land development projects in Mount Vernon,
Washington, and Fountain, Colorado. Both properties have been held by
InterWest for many years and it will take approximately three to five years to
liquidate the investment. InterWest is anticipating the potential for profits
on both ventures. However, there can be no assurance in this regard.
During 1995, InterWest sold $126.0 million in servicing to take advantage
of rising interest rates and falling prepayments which increased the value of
the servicing portfolio resulting in a gain of $1.8 million. The increase in
the gain on the sale of investment securities and mortgage-backed and related
securities to $531,000 in 1996 from $287,000 in 1995 and $59,000 in 1994 is
primarily due to greater levels of sales which were $158.0 million in 1996,
$78.9 million in 1995 and $57.2 million in 1994. Sales of non-traditional
financial and insurance products through InterWest's subsidiaries, InterWest
Financial Services and InterWest Insurance Agency, increased slightly during
1996 to $2.3 million from $2.2 million in 1995 and $937,000 in 1994.
OTHER OPERATING EXPENSE
Other operating expense increased to $43.8 million from $29.9 million in 1995
and $27.6 million in 1994. During 1996, operating expenses were adversely
affected by the SAIF recapitalization charge of $5.5 million, the special
charges primarily associated with the Central merger of $3.1 million and the
operating costs of Cornerstone Northwest Mortgage, our newly acquired mortgage
subsidiary, of $2.3 million. Netting out these costs gives an increase of
10.0 percent in operating expenses during 1996 compared to 8.3 percent expense
growth in 1995.
p 22 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
The largest reoccurring increase was in compensation and benefits
expense. The increase was due to growth in full time employees resulting from
three new offices, enhanced consumer lending and the acquisition of
Cornerstone Northwest Mortgage. As of September 30, 1996, full time
equivalents for InterWest were 556 compared to 477 in 1995 and 454 at the end
of 1994. General and administrative costs were $7.9 million in 1996 compared
to $6.9 million in 1995 and $6.3 million in 1994. Occupancy costs increased
to $4.6 million in 1996 from $3.7 million in 1995 and $3.5 million in 1994.
These increases are primarily attributable to branch expansion and
technological updates in the branch structure.
During 1996, InterWest reduced the allowance for losses on real estate
held for sale by $1.0 million which directly decreased other operating
expenses. This reduction was due to the periodic evaluation of the real estate
held for sale portfolio and risks associated with the respective properties.
On September 30, 1996, a law was enacted to recapitalize the SAIF through
a one-time assessment of 0.657 percent of SAIF insured deposits as of March
31, 1995, resulting in a $5.5 million expense to InterWest. This legislation
was intended to recapitalize the SAIF to a level equivalent to the Bank
Insurance Fund (BIF). Prior to this legislation, most savings institutions
were paying 0.23 percent of insured deposits compared to nothing for
commercial banks. Beginning January 1, 1997, savings institutions will begin
paying 0.064 percent of insured deposits which, in InterWest's case, should
produce annual costs savings of over $1.5 million. This should allow InterWest
to recover this one time assessment in less than four years. This new law aims
to merge the SAIF and the BIF in January, 2000, when premiums are scheduled to
be 0.024 percent for all insured deposits.
INCOME TAX EXPENSE
Income tax expense for 1996 was $6.1 million, down from $7.3 million in 1995
and $7.3 million in 1994. The effective tax rates were 32.4 percent in 1996,
33.8 percent in 1995 and 35.1percent in 1994. The lower effective tax rate in
1996 is due to the utilization of tax credits, tax exempt interest earned on
municipal bonds and certain tax benefits resulting from the merger with
Central.
REVIEW OF FINANCIAL CONDITION
InterWest's total assets as of September 30, 1996, are $1.71 billion, an
increase of 16.5 percent or $242.0 million, as compared to $1.47 billion at
the end of 1995. During 1996, InterWest levered its capital position by
purchasing securities and retaining a majority of its loans originated during
the year. This was done to enhance earnings and reduce InterWest's interest
rate risk. During the year loans increased by over 11 percent while
investments and mortgage-backed and related securities increased by over 28
percent. During 1997, InterWest will seek to decrease the investment and
mortgage-backed and related securities portfolios and increase the loan
portfolio thus attempting to increase the net interest margin. At September
30, 1996, InterWest's investment and mortgage-backed and related securities
portfolio was $605.6 million, of which 39 percent, or $237.4 million, was
classified as held to maturity and 61 percent or $368.2 million was classified
as available for sale. During 1996, InterWest increased its available for
sale portfolio by 161 percent, or $226.9 million. During December 1995,
InterWest took advantage of a one-time amnesty provided by the Financial
Accounting Standards Board, to transfer $198.5 million of mortgage-backed and
related securities classified as held to maturity to available for sale. The
vast majority of the available for sale portfolio is adjustable or callable in
nature, thus reducing InterWest's interest rate exposure. The available for
sale portfolio is required to be carried at fair value, thus its carrying
value fluctuates with changes in market conditions. The held to maturity
portfolio consists primarily of fixed rate callable agency securities. See
Notes 2, 3, 4 and 5 in the Notes to Consolidated Financial Statements for
details of the investment and mortgage-backed and related securities
portfolios.
During 1996, originations totaled $499.6 million, up from $407.8 in 1995
and $481.7 million in 1994. The following table recaps InterWest's lending for
the past three years by collateral type.
1996 1995 1994
Year ended Loans Percent Loans Percent Loans Percent
September 30, Originated Total Originated Total Originated Total
- ------------------------------------------------------------------------------
Dollars in thousands
Single-family
residential $198,263 39.69% $156,896 38.47% $220,544 45.78%
Multi-family
residential
and commercial
real estate 80,094 16.04 64,559 15.83 56,788 11.79
Construction 144,407 28.90 111,136 27.26 146,533 30.42
Commercial non
real estate 28,897 5.78 38,640 9.48 28,247 5.86
Agricultural 11,609 2.32 14,837 3.64 10,060 2.09
Consumer 36,337 7.27 21,691 5.32 19,543 4.06
------- ------ -------- ------ -------- ------
Total loans
originated $499,607 100.00% $407,759 100.00% $481,715 100.00%
======== ====== ======== ====== ======== ======
p 23 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
InterWest continues to experience strong deposit growth in comparison to
others in our industry. Total deposits increased to $1.12 billion at fiscal
year end from $1.04 billion at the end of 1995. This increase of $80.0 million
is primarily attributable to a $60.6 million increase in certificates of
deposit. This increase is due to specific marketing efforts and competitive
pricing of certificates. We are developing a sales culture with incentives
and technology as cornerstones in the sales process. The primary focus of this
sales effort will be the emphasis on checking accounts and cross selling the
customer multiple services and products. Management contends that new checking
account relationships allow InterWest to affectively cross sell other
financial products and services, thus strengthening the customer's banking
relationship. We believe that checking accounts represent the customer's
primary banking relationship and provide significant revenue and sales
opportunities for consumer loans and other financial products.
Over the last year, InterWest has significantly increased its borrowings
from the Federal Home Loan Bank (FHLB) and securities sold under agreements to
repurchase them. These two borrowing sources grew to $456.8 million at the
end of 1996 from $309.0 million in 1995 and $198.2 million in 1994. The
proceeds from these borrowings were primarily used to fund growth in loans and
the investments and mortgage-backed and related securities portfolios.
CAPITAL REQUIREMENTS
InterWest's total stockholders equity was $111.0 million at September 30,
1996, compared to $105.7 million at September 30, 1995. This increase is
primarily due to net income during 1996 of $12.8 million which was partially
offset by dividends declared of $4.1 million and a change in the net
unrealized loss on securities available for sale of $3.7 million. InterWest
has consistently paid dividends to its stockholders for the last nineteen
years.
During fiscal year 1996 InterWest stockholders received dividends
totaling $0.51 per share, a 38 percent increase over the $0.37 per share in
1995. At the end of 1996 stockholders equity was 6.48 percent of total assets
compared to 7.19 percent at the end of 1995. This reduction in the capital
ratio reflects management's leveraging of the balance sheet. During 1992 the
FDIC implemented new regulations that established the amount of capital for
each of the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICA) established categories of institutions. Depending upon InterWest's
FDICA category classification, the FDIC may restrict certain activities of
InterWest including acceptance of broker deposits or offering interest rates
on deposits that are significantly higher than prevailing interest rates. See
Note 19 in Notes to Consolidated Financial Statements for disclosure of
capital ratios.
LIQUIDITY RESOURCES
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Primary sources of funds for
liquidity include deposits, FHLB advances, proceeds from sale of securities
under agreements to repurchase, loan repayments, loan sales and
mortgage-backed and related security repayments. Repayments on loans and
mortgage-backed and related securities and deposit inflows and outflows are
significantly affected by interest rates.
During 1996, repayments and prepayments on loans totaled $293.5 million
compared to $220.7 million in 1995 and $258.9 million in 1994. This increase
is due in large part to the relative ease at which borrowers can refinance
their loan. This change has come about due to increased customer
understanding and a process which is fast becoming technologically friendly.
Loans sold were $70.9 million in 1996 compared to $82.1 million in 1995 and
$148.0 million in 1994. This decrease in loan sales was due to management's
desire to grow the loan portfolio.
Trends noted in loan prepayments had a similar impact on mortgage-backed
and related securities prepayments. During 1996 repayments and prepayments on
mortgage-backed and related securities totaled $84.1 million compared to $21.3
million in 1995 and $85.7 million in 1994. InterWest has additional capacity
to borrow funds from the Federal Home Loan Bank of Seattle through a
preapproved credit line of 40 percent of consolidated assets.
InterWest is under a pledge agreement where it must maintain unincumbered
collateral with a par value at least equal to the outstanding balance. As of
September 30, 1996, InterWest has $336.8 million outstanding with
approximately $348.0 million still available. InterWest has at times used the
securities market as a vehicle for borrowing by utilizing its investment and
mortgage-backed securities as collateral. At September 30, 1996, InterWest
has $119.9 million balance outstanding in this source of funds. These
borrowings are collateralized by securities with a market value exceeding the
face value of the borrowings. If the market value of the securities were to
decline as a result of an increase in interest rates or other factors,
InterWest would be required to pledge additional securities or cash as
collateral.
ASSET AND LIABILITY MANAGEMENT
The long-term profitability of InterWest depends on properly priced products
and services, asset quality and asset and liability management. Historically,
InterWest has had a mismatch between the maturities of its assets and
liabilities because its customers have traditionally preferred short-term
deposits and long-term loans. InterWest is sensitive to the potential change
in interest rates and the resulting affect on net interest income and the
market value of assets. It has been an objective of management to reduce this
sensitivity through the use of adjustable rate assets which have enabled
InterWest to better match the duration of its deposit base with these types of
assets. InterWest currently indexes most of its adjustable rate loans to
p 24 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
the Federal Cost of Funds Index. However, in the future it will be
InterWest's goal to increase the use of prime base lending to better insulate
InterWest against interest rate swings. This index is preferable because it
has a better correlation to InterWest's cost of funds. InterWest will
implement this index in commercial, consumer and business lending. Management
believes that the use of this index will stabilize net interest income,
however, no assurance of this can be given. InterWest will continue to use
the Federal Cost of Funds Index on single family lending. This Index has a
generous spread to InterWest's cost of funds while at the same time providing
reasonable interest rate protection to our borrowers due to interest rate caps
that are placed on the allowable changes over the life of the loan as well as
limitations that are placed on periodic changes.
In addition to adjustable rate loans, InterWest employs a number of
additional strategies to minimize the impact on earnings during significant
changes in interest rates. The strategies utilized by InterWest to insure
this goal include: 1) origination of shorter term consumer loans, 2) emphasis
on intermediate to long-term fixed rate certificates of deposit, 3) sales of
fixed rate loan originations, 4) emphasis on interest- free checking accounts,
5) purchases of adjustable rate and callable agency securities, 6) short-term
business lending.
InterWest has consistently managed its one year gap position (total
assets subject to repricing and maturity less total liability subject to
repricing and maturity) to maximize earnings while at the same time lessening
the sensitivity of those earnings to changes in interest rates. A conventional
measure of interest rate sensitivity for financial institutions is to divide
the difference between assets maturing or repricing within one year and total
liabilities maturing or repricing within one year by total assets (the one
year gap). On September 30, 1996, InterWest's one year gap position was a
negative $156.2 million, or 9.12 percent of assets. This was a change from
the negative gap of $40.2 million or 2.73 percent of assets as of September
30, 1995. In periods of falling interest rates, the positive gap may result
in a decrease in net interest income, as InterWest's interest expense may not
decrease as rapidly as interest income. Management has established guidelines
regarding the gap in interest rate risk position of InterWest. These goals
are dependent on the level of interest rates, the relationship between short
term and long term interest rates, expectations concerning the level of future
interest rates and other relevant economic factors. The following table sets
forth the estimated repricing or maturity of InterWest's interest-earning
assets and interest bearing liabilities at September 30, 1996. The amounts
shown are influenced by assumptions that affect the estimated loan repayments,
prepayments and outflows in certain deposit accounts. Management believes the
assumptions to be reasonable based upon historical evidence and existing
market conditions. However, there can be no assurance that the assets and
liabilities will have the repricing characteristics used in developing this
table.
ASSET AND LIABILITY REPRICING
One Year Over One to Over Five
or Less Five Years Years Total
- ------------------------------------------------------------------------------
Dollars in thousands
Interest-Earning Assets
Total loans $ 587,092 $191,617 $194,097 $ 972,806
Mortgage-backed
related securities 341,244 87,301 16,742 445,287
Investments securities
and interest-earning
deposits 180,445 8,304 2,273 191,022
---------- -------- -------- ----------
Total interest-earning
assets $1,108,781 $287,222 $213,112 $1,609,115
========== ======== ======== ==========
Interest-Bearing Liabilities
Certificates 551,237 197,872 2,166 751,275
Demand and now accounts 156,852 - - 156,852
Money market accounts 112,614 - - 112,614
Passbook accounts 100,002 - - 100,002
---------- -------- -------- ----------
Total customer deposits 920,705 197,872 2,166 1,120,743
FHLB advances, securities
sold under agreements to
repurchase and other
borrowings 344,294 116,123 80 460,497
---------- -------- -------- ----------
Total interest-
bearing liabilities $1,264,999 $313,995 $2,246 $1,581,240
========== ======== ======== ==========
GAP $(156,218) $(26,773) $210,866 $27,875
Gap to total assets (9.12%) (1.56%) 12.32% 1.63%
Cumulative gap $(156,218) $(182,991) $27,875
Cumulative gap to total
assets (9.12%) (10.69%) 1.63%
========== ========== ======== =========
p 25 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
While the one year gap measure helps provide some information about a
financial institutions interest sensitivity, it does not predict the trends of
future earnings. For this reason, InterWest uses financial modeling to
forecast earnings under different interest rate projections. Although this
modeling is very helpful in managing interest rate risk, it does require
significant assumptions for the projection of loan prepayment rates, loan
origination volumes and liability funding sources that may prove to be
inaccurate.
ASSET QUALITY
InterWest's non-performing assets at September 30, 1996, which consists of
non-performing loans (including nonaccrual loans and certain other delinquent
loans at the discretion of management) and real estate held for sale was $9.2
million or 0.54 percent of assets. An increase from $6.6 million or 0.45
percent of assets at September 30, 1995. InterWest's non-performing assets at
September 30, 1994, were $7.7 million or 0.61 percent of assets. The increase
in real estate held for sale from $4.2 million in 1995 to $6.1 million in 1996
was primarily attributable to foreclosures of $1.8 million, capital additions
to real estate of $700,000 and a reduction in the allowance for losses on real
estate held for sale of $1.0 million. Total sales during 1996 amounted to
$1.6 million compared to $1.8 million in 1995. Non-performing loans increased
to $3.2 million in 1996 compared to $2.4 million in 1995. The asset quality
of the bank continues to be excellent which is attributable to the strong
local economy, stringent underwriting guidelines and internal review processes
customized to identify problem loans. The chart below summarizes the
non-performing assets for the last three fiscal years categorizing them by
loans and real estate held for sale in addition to the type of collateral
involved.
NON-PERFORMING ASSETS
September 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Dollars in thousands
Loans
Single-family residential $1,965 $ 985 $ 708
Multi-family residential
real estate - 900 -
Commercial real estate 791 308 624
Construction - - 3
Commercial non real estate 225 71 84
Agricultural - - 252
Consumer 184 109 123
------ -------- ------
Total non-performing
loans $3,165 $ 2,373 $1,794
====== ======== ======
Real Estate
Residential $1,025 $ 154 $ 23
Commercial real estate 5,014 4,937 6,514
Other 14 87 139
Allowance for losses on
real estate held for sale - $(1,000) $(750)
------ -------- ------
Total $6,053 $4,178 $5,926
====== ======== ======
Total non-performing assets $9,218 $6,551 $7,720
------ -------- ------
Percent of total assets 0.54% 0.45% 0.61%
===== ===== =====
p 26 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
REPORT OF MANAGEMENT
Stockholders
InterWest Bancorp, Inc.
InterWest Bancorp, Inc., is responsible for the preparation, integrity and
fair presentation of its published financial statements. The consolidated
financial statements included in this annual report have been prepared in
accordance with generally accept ted accounting principles and, as such,
include judgements and estimates of management. InterWest Bancorp, Inc., also
prepared the other information included in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The internal control
system is augmented by written policies and procedures and by audits performed
by an internal audit staff which reports to the Audit Committee of the Board
of Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee, and
corrective actions are taken to address identified control deficiencies and
other opportunities for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial reporting
process. There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control system may vary over time.
Management assesses InterWest Bancorp, Inc.'s internal control structure
over financial reporting. Based on these assessments, management believes that
InterWest Bancorp, Inc., maintains an effective internal control system over
financial reporting.
/s/Stephen M. Walden /s/H. Glenn Mouw
Stephen M. Walden H. Glenn Mouw
President and Chief Executive Vice-President
Executive Officer and Chief Financial
Officer
REPORT OF ERNEST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
InterWest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of InterWest Bancorp, Inc., and subsidiaries as of September 30,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of InterWest's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Central
Bancorporation and subsidiaries, which statements reflect total assets
constituting 13.8 percent of the related 1995 consolidated total and which
statements reflect net income constituting approximately 18.1 percent of the
related 1995 consolidated financial statement total, respectively. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to data included for Central
Bancorporation and subsidiaries, is based solely on the report of the other
auditors.
We conducted our audits 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 audits and the report of the
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits, and for 1995 the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
InterWest Bancorp, Inc., and subsidiaries at September 30, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
We also have audited, as to combination only, the accompanying
consolidated statements of income, stockholders' equity, and cash flows for
the year ended December 31, 1994. As described in Note 24 to such statements,
these statements have been combined from the consolidated statements of
InterWest Bank and subsidiaries and Central Bancorporation and subsidiaries
(which statements are not presented separately herein). The separate
financial statements of InterWest Bank and subsidiaries and Central
Bancorporation and subsidiaries have been audited by other auditors whose
reports dated October 28, 1994 and January 20, 1995, respectively, expressed
unqualified opinions on those statements. In our opinion, the accompanying
consolidated financial statements for 1994 have been properly combined on the
basis described in Note 24.
/s/Ernest & Young LLP
Seattle, Washington
November 7, 1996
p 27 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 1995
- ------------------------------------------------------------------------------
Dollars in thousands
Assets
Cash and cash equivalents
Non-interest bearing $ 36,983 $ 27,612
Interest-bearing 11,518 27,190
Investment securities
available for sale, at fair value 26,166 26,336
Mortgage-backed and related
securities available for sale,
at fair value 341,957 114,936
Investment securities held
to maturity (fair value: 1996-$134,117
and 1995-$32,711) 134,106 32,620
Mortgage-backed and related
securities held to maturity
(fair value: 1996-$96,779
and 1995-$292,094) 103,330 298,357
Loans receivable, net 965,920 867,002
Loans held for sale
(fair value: 1996-$ 10,228
and 1995-$11,212) 10,051 11,088
Accrued interest receivable 12,576 9,344
Real estate held for sale
and for development 10,968 7,147
Federal Home Loan Bank
(FHLB) stock, at cost 19,232 14,510
Premises and equipment, net 34,356 29,617
Intangible assets 2,869 1,516
Other assets 2,119 3,162
---------- ----------
Total $1,712,151 $1,470,437
========== ==========
Liabilities
Customer deposits $1,120,743 $1,040,310
FHLB advances 336,839 268,256
Securities sold under
agreements to repurchase 119,945 40,734
Other borrowings 3,713 5,181
Accrued expenses and other liabilities 18,938 9,185
Advance payments by borrowers for
taxes and insurance 952 1,031
---------- ----------
Total liabilities 1,601,130 1,364,697
Stockholders' Equity
Common stock, par value $.20 per share
Authorized 20,000,000
Issued and outstanding
1996-7,918,074 and 1995-7,828,935 shares 1,592 1,581
Paid-in capital 18.995 18,588
Retained earnings 93,963 85,784
Treasury stock (289) (289)
Debt related to ESOP (312) (712)
Unrealized gain (loss) on
securities available for sale (2,928) 788
---------- ----------
Total stockholders' equity 111,021 105,740
---------- ----------
Total $1,712,151 $1,470,437
========== ==========
See notes to consolidated financial statements.
p 28 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Dollars in thousands, except per share amounts
Interest Income
Loans receivable $ 82,925 $ 70,803 $ 61,865
Mortgage-backed and
related securities 31,874 23,621 15,198
Interest-earning deposits 2,802 1,295 1,701
Investment securities 3,312 4,545 3,506
------- ------- -------
120,913 100,264 82,270
Interest Expense
Customer deposits 48,166 45,952 32,882
FHLB advances and other borrowings 17,449 10,402 7,672
Securities sold under agreement
to repurchase 3,193 1,572 131
------- ------- -------
68,808 57,926 40,685
Net interest income before provision
for losses on loans 52,105 42,338 41,585
Provision for losses on loans 1,960 720 900
------- ------- -------
Net interest income after provision
for losses on loans 50,145 41,618 40,685
Other Operating Income
Gain on sale of loans 1,191 917 1,273
Gain on sale of loan servicing - 1,831 -
Service fees 6,832 3,965 3,663
Insurance commissions 2,302 2,221 937
Gain on sale of investment
securities and mortgage-backed
and related securities 531 287 59
Gain on sale of real estate
held for sale and for development 806 16 746
Other 891 756 1,030
------- ------- -------
12,553 9,993 7,708
Other Operating Expense
Compensation and employee benefits 19,496 15,139 13,892
General and administrative 7,928 6,931 6,272
Occupancy 4,571 3,743 3,528
Data processing 2,021 1,657 1,515
FDIC premium assessment 1,988 2,006 1,900
SAIF assessment 5,523 - -
Loss (credit) from real estate
write-downs and operations (813) 426 539
Special charges 3,105 - -
-------- ------- -------
43,819 29,902 27,646
Income before federal income taxes 18,879 21,709 20,747
Federal Income Tax Expense 6,108 7,347 7,280
-------- ------- -------
Net Income $ 12,771 $14,362 $13,467
======== ======= =======
Net Income Per Share $ 1.58 $ 1.80 $ 1.69
======== ======= =======
See notes to consolidated financial statements.
p 29 InterWest Bancorp, Inc.
PAGE
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Gain (Loss)
Debt on Securities
Common Stock Paid-In Retained Treasury Related Available
Shares Amount Capital Earnings Stock to ESOP for Sale Total
- ------------------------------------------------------------------------------------------------------------
Dollars in thousands,
except share data
Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
October 1, 1993 7,784,964 $1,557 $17,640 $63,223 $ - $ - $ - $ 82,420
Net income 13,467 13,467
Dividends,
$0.35 per share (2,497) (2,497)
Proceeds from exercise
of stock options 38,218 8 202 210
Proceeds from sale of
common stock, net 28,340 6 390 396
Common stock donated 7,050 1 99 (100)
Unrealized loss
on securities
available for sale (419) (419)
--------- ------ ------- ------- ------ ------- ------- --------
Balance
September 30,
1994 7,858,572 1,572 18,331 74,093 (419) 93,577
Net income 14,362 14,362
Dividends,
$0.37 per share (2,671) (2,671)
Proceeds from exercise
of stock options 43,409 9 240 249
Proceeds from sale of
common stock, net 1,380 17 17
Unrealized gain
on securities
available for sale 1,207 1,207
Purchase of
treasury stock (18,500) (289) (289)
Debt related to
ESOP (55,926) (712) (712)
--------- ------ ------- ------- ------ ------- ------- --------
Balance
September 30,
1995 7,828,935 1,581 18,588 85,784 (289) (712) 788 105,740
Net income 12,771 12,771
Dividends,
$0.51 per share (4,119) (4,119)
Proceeds from exercise
of stock options 56,989 11 407 418
Unrealized loss
on securities
available for sale (3,716) (3,716)
ESOP loan repayment 32,150 400 400
Pooling accounting
adjustment (473) (473)
--------- ------ ------- ------- ------ ------- ------- --------
Balance
September 30,
1996 7,918,074 $1,592 $18,995 $93,963 $ (289) $ (312) $(2,928) $111,021
========= ====== ======= ======= ====== ======= ======== ========
See notes to consolidated financial statements.
p 30 InterWest Bancorp, Inc.
</TABLE>
<PAGE>
<PAGE>
consolidated statements of cash flows
Year ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Dollars in thousands
Operating Activities
Net income $12,771 $14,362 $13,467
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,247 1,886 1,671
Provision for losses on loans 1,960 720 900
Provision (benefit) for losses on real
estate held for sale (1,000) 250 285
Accretion of premiums and discounts, net 2,069 856 426
Gain on sale of loans and loan servicing (1,191) (2,748) (1,273)
Gain on sale of investment securities and
mortgage-backed and related securities (531) (287) (59)
(Gain) loss on sale of real estate held
for sale and for development premises
and equipment (383) 30 (108)
Loan fees deferred, net of amortization (1,462) 945 2,967
FHLB stock dividends (1,397) (709) (781)
Pooling accounting adjustment (473) - -
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (3,232) (1,929) (1,794)
Other assets 1,043 (204) (11)
Accrued expenses and other liabilities 11,301 2,146 452
Advance payments by borrowers for taxes
and insurance (79) 183 82
-------- ------- -------
Balance, net cash provided by operating
activities, carried forward $21,643 $15,501 $16,224
See notes to consolidated financial statements.
p 31 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Consolidated Statements of Cash Flows (continued)
Year ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------
Dollars in thousands
Balance, net cash provided by
operating activities,
brought forward $21,643 $15,501 $16,224
Investing Activities
Proceeds from sale of investment
securities available for sale - - 27,335
Purchase of investment securities
available for sale (12,476) (11,162) (25,638)
Proceeds from maturing investment
securities available for sale 18,127 11,895 15,407
Proceeds from maturing investment
securities held to maturity 32,987 17,092 4,680
Purchase of investment securities
held to maturity (140,019) (4,279) (41,725)
Principal repayments on mortgage
-backed and related securities
available for sale 62,838 2,408 10,124
Purchase of mortgage-backed and
related securities available
for sale (250,260) (167,966) (48,243)
Proceeds from sale of mortgage
-backed and related securities
available for sale 158,513 79,206 29,884
Principal repayments on mortgage
-backed and related securities
held to maturity 21,217 18,864 75,611
Purchase of mortgage-backed and
related securities held to
maturity (31,493) (20,571) (231,358)
Proceeds from sale of loans 72,126 83,028 149,312
Loan originations, net of
repayments (171,009) (199,169) (216,061)
Proceeds from sale of servicing - 1,831 -
Cash received in acquisition, net - - 7,281
Proceeds from sale of real estate
held for sale and for development 2,446 1,774 2,252
Purchases of premises and equipment (7,248) (8,059) (1,885)
Purchase of FHLB stock (5,825) (3,764) (2,404)
Redemption of FHLB stock 2,500 646 -
Capital additions to real estate
held for sale (2,749) (1,528) (310)
Purchase of land for development - - (663)
Purchase of intangible assets (1,530) - (1,750)
--------- --------- ---------
Balance, net cash used by investing
activities, carried forward $(251,855)$(199,754)$(248,151)
See notes to consolidated financial statements.
p 32 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Consolidated Statements of Cash Flows (continued)
Year ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------
Dollars in thousands
Balance, net cash used by investing
activities, brought forward $(251,855) $(199,754) $(248,151)
Financing Activities
Net increase (decrease) in
customer deposits 19,882 (10,694) 19,524
Net increase in certificates of
deposit 60,551 91,637 114,896
Proceeds from FHLB advances,
securities sold under agreements
to repurchase, and other
borrowings 653,211 531,659 300,425
Repayment of FHLB advances,
securities sold under agreements
to repurchase, and other
borrowings (506,485) (420,417) (207,978)
Dividends paid (3,666) (2,606) (2,497)
Issuance of common stock 418 266 606
Purchase of treasury stock - (289) -
-------- ------- -------
Net cash provided by financing
activities 223,911 189,556 224,976
-------- ------- -------
Net increase (decrease) in cash
and cash equivalents (6,301) 5,303 (6,951)
Cash and Cash Equivalents
Beginning of year 54,802 49,499 56,450
-------- ------- -------
End of year $ 48,501 $54,802 $49,499
======== ======= =======
Supplemental Disclosures of Cash
Flow Information
Cash paid during the year for:
Interest $ 23,463 $20,458 $13,793
Income taxes $ 8,048 $ 6,042 $ 5,362
Noncash transactions:
Loans transferred to real
estate held for sale, net $ 1,695 $ 293 $ 271
Transfer of securities from
held to maturity to
available for sale $210,640 - $ 9,568
Transfer of securities
available for sale to held
to maturity - - $10,963
ESOP loan repayment $ 400 - -
In 1994, Central Bancorporation purchased all the capital stock of First
Bank Washington for $4,119,000. In connection with the acquisition,
liabilities were assumed as follows:
- -----------------------------------------------------------------------
Dollars in thousands
Fair value of assets $52,709
Cash paid for capital stock (4,119)
-------
Liabilities assumed $48,950
See notes to consolidated financial statements.
p 33 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of InterWest
Bancorp, Inc., and its majority and wholly owned subsidiaries (collectively,
InterWest). All material intercompany transactions and balances have been
eliminated. On July 28, 1995, InterWest Bank (the Bank) reorganized into the
holding company form of ownership resulting in InterWest Bancorp, Inc.
becoming the sole stockholder of the Bank. In the reorganization, each
outstanding share of common stock of the Bank and options to acquire shares of
common stock of the Bank were converted to shares or options for shares of
InterWest Bancorp, Inc., under the holding company structure, InterWest Bank
and Central Washington Bank, which was acquired effective August 31, 1996, are
the principal subsidiaries. Effective October 14, 1996, Central Washington
Bank has been merged with and into InterWest Bank.
On August 31, 1996, InterWest acquired Central Bancorporation (Central)
of Wenatchee, Washington, whose principle subsidiary was Central Washington
Bank. As the transaction was accounted for as a pooling-of-interests, prior
period financial statements have been restated to include the accounts of
Central as if the companies were combined for all periods presented.
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 and thus actual results
could differ from the amounts reported and disclosed herein.
NATURE OF BUSINESS
InterWest is a Washington corporation that provides a wide range of financial
services to individuals and businesses throughout western and central
Washington. Financial services of InterWest include the traditional savings
bank activities of accepting deposits from the general public and making
residential loans, consumer loans and certain types of commercial real estate
loans. The merger with Central provides InterWest with access to the higher
growth business segment of commercial banking.
Investments are available through InterWest Financial Services Inc., and
insurance products are provided by InterWest Insurance Agency Inc.,
subsidiaries of InterWest Bank.
CASH AND CASH EQUIVALENTS
For purposes of the Consolidated Statements of Cash Flows, InterWest considers
all deposits and investment securities with an original term to maturity of
three months or less to be cash equivalents.
INVESTMENT AND MORTGAGE-BACKED AND RELATED SECURITIES
At September 30, 1994, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". This statement requires that investments be categorized as
held to maturity, trading securities or available for sale, based upon
management's intent as to the ultimate disposition of each security acquired.
Application of this statement decreased stockholders' equity $419,000 relating
to net unrealized losses on securities available for sale.
Those securities that InterWest has the positive intent and ability to
hold to maturity are classified as held to maturity and are recorded at cost,
net of unamortized discounts or premiums. The discount or premium is amortized
using the effective interest method to maturity of the securities. Securities
are adjusted to the lower of cost or fair value only when an other than
temporary impairment in value occurs.
Those securities that are not classified as held to maturity are
classified as available for sale, and are carried at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. The basis of securities subsequently sold
is determined by the specific identification method.
LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable are stated at the principal amount outstanding, net of
deferred loan fees, any discounts and the allowance for losses on loans.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
On October 1, 1995, InterWest adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". It is
applicable to all loans except large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment, and loans measured at
fair value or at the lower of cost or fair value. InterWest considers all
single-family residential (including construction) and consumer loans to be
smaller balance homogenous loans. SFAS No. 114 also applies to all loans that
are restructured in a
p 34 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
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 loans
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 for losses on loans as an adjustment to the
allowance for losses on loans.
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. The adoption of SFAS No. 114
had no material impact on the results of operations or financial condition of
InterWest.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes
in the size and composition of the loan portfolio, actual loan loss
experience, current economic conditions, and detailed analysis of individual
loans for which full collectibility may not be assured. The detailed analysis
includes techniques to estimate the fair value of loan collateral and the
existence of possible alternative sources of repayment. The appropriate
reserve level is estimated based upon factors and trends identified by
management at the time financial statements are prepared.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged-off against the allowance
for losses on loans. The existence of some or all of the following criteria
will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or
intent to bring the loan current; InterWest has no recourse to the borrower,
or if it does, the borrower has insufficient assets to pay the debt; the fair
value of the loan collateral is significantly below the current loan balance,
and there is little or no near-term prospect for improvement.
A provision for losses on loans, which is a charge against net income, is
added to the allowance for losses on loans based on quarterly assessments of
the loan portfolio. While management has attributed the allowance for losses
on loans to various loan portfolio segments, the allowance is general in
nature and is available for the loan portfolio in its entirety.
Commercial loans (real estate and non real estate) are considered by
InterWest to have somewhat greater risk of uncollectibility than residential
real estate loans due to the dependency on income production or future
development of real estate.
The ultimate recovery of all loans is susceptible to future market
factors beyond InterWest's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
REAL ESTATE HELD FOR SALE AND REAL ESTATE HELD FOR DEVELOPMENT
Real estate held for sale and real estate held for development (collectively,
real estate) includes properties acquired through foreclosure, property
acquired with the intention of holding for development, and investments in
real estate joint ventures. These properties are initially recorded at the
lower of cost or fair value and are subsequently evaluated to determine that
the carrying value does not exceed the then current fair value of the
property. Development costs including materials and labor are capitalized on
properties being developed. Losses that result from ongoing periodic valuation
of these properties are charged to operations in the period in which they are
identified and are included in loss from real estate write-downs and
operations in the consolidated statements of income. The amounts InterWest
will ultimately recover from real estate held for sale and held for
development may differ substantially from the carrying value of the assets
because of future market factors beyond InterWest's control or because of
changes in InterWest's strategy for sale or development of the property.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. The
depreciation is computed on the straight-line method over estimated useful
lives as follows:
Bank buildings 40 years
Equipment 5-20 years
p 35 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
INTANGIBLE ASSETS
Intangible assets arising from certain branch and other acquisitions represent
the excess of the purchase price over fair value of net assets acquired.
These assets are amortized on the straight-line method over ten to
fifteen years. InterWest periodically evaluates intangible assets for
impairment. The level of intangible assets at September 30, 1996, was
supported by the value attributed to the operations acquired.
LOAN FEE INCOME, INTEREST INCOME ON LOANS RECEIVABLE AND UNEARNED INTEREST
Substantially all loan origination fees and direct costs related to loan
origination activities are deferred. Net deferred fees are amortized into
interest income over contractual or actual loan lives as an adjustment to the
loan yield. Net deferred fees related to loans sold are recognized in income
at the time the loans are sold.
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.
If management determines the ultimate collectibility of principal is in
doubt, cash receipts on nonaccrual loans are applied to reduce the principle
balance.
INCOME TAXES
InterWest reports income and expenses using the accrual method of accounting
and files a consolidated tax return which includes income earned by its
subsidiaries. InterWest accounts for income taxes on the liability method.
Under the liability method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in InterWest's income tax
returns. The deferred tax provision for the year is equal to the net change in
the deferred tax asset and liability accounts from the beginning to the end of
the year. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common and dilutive common equivalent shares outstanding using the treasury
stock method. Common stock equivalents include shares issuable upon exercise
of the stock options.
Unallocated shares relating to the Debt Leveraged Money Purchase Employee
Stock Ownership Plan debt obligation are deducted in the calculation of the
weighted average shares outstanding.
STOCK OPTIONS
Employee stock options are accounted for under Accounting Principle Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees". Stock
options are granted at exercise prices not less than the fair market value of
common stock on the date of grant. Under APB No. 25, no compensation expense
is recognized pursuant to InterWest's stock option plans.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to 1996 presentation.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued statements of
financial accounting standards which modify the current method of accounting
utilized by InterWest.
In March, 1995, FASB issued SFAS No. 121 "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of". This statement
addresses situations where information indicates that a company might be
unable to recover, through future operations or sales, the carrying amount of
long-lived assets and certain identifiable intangible assets and goodwill.
Under this statement, impairment is measured based on the present value of
expected cash flows from the asset and its eventual disposition. Effective
October 1, 1996, InterWest adopted SFAS No. 121.
In May, 1995 FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights". This statement eliminates the distinctions between servicing rights
that are purchased and those that are retained upon the sale or securitization
of loans. This statement requires mortgage servicers to recognize the
servicing rights on loans as separate assets, no matter how acquired.
Institutions who sell loans and retain the servicing rights will be required
to allocate the total cost of the loans between servicing rights and loans
based on their relative fair values if their values can be estimated.
Effective October 1, 1996, InterWest adopted SFAS No. 122.
Management does not believe that adoption of this statement will have a
material impact on its financial condition or results of operations.
p 36 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
In October, 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The statement requires expanded disclosures of stock-based
compensation arrangement with employees and encourages (but does not require)
application of the fair value recognition provisions in the statement. SFAS
No. 123 does not rescind or interpret the existing accounting rules for
employee stock-based arrangements. Companies may continue following those
rules to recognize and measure compensation as outlined in APB No. 25, but
they will be required to disclose the pro forma amounts of net income and
earnings per share that would have been reported had they elected to follow
the fair value recognition provisions of SFAS No. 123. For InterWest, adoption
of this statement is required in fiscal year 1998.
In June 1996, FASB issued SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
statement requires that accounting and reporting standards for transfers of
and servicing of financial assets and extinguishment of liabilities be based
on consistent application of financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This statement
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transactions entered into by InterWest subsequent to December
31, 1996, although certain portions of this statement have been deferred until
1998.
Note 2 Investment Securities Available for Sale
The amortized cost and estimated fair values of investment securities
available for sale by contractual maturity are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------
Dollars in thousands
September 30, 1996
U.S. Treasury:
Due in one year
or less $13,040 $13 $10 $13,043
Due after five
years through
ten years 3,024 1 16 3,009
------- --- --- -------
16,064 14 26 16,052
------- --- --- -------
U.S. Government
agencies and
corporations:
Due in one year
or less 5,000 3 4 4,999
------- --- --- -------
Obligations of
states and
political
subdivisions:
Due in one year
or less 1,480 2 - 1,482
Due in one through
five years 2,045 15 3 2,057
Due in five through
ten years 1,424 2 19 1,407
Due after ten years 162 7 - 169
------- --- --- -------
5,111 26 22 5,115
------- --- --- -------
$26,175 $43 $52 $26,166
======= === === =======
September 30, 1995
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
======= === === =======
Proceeds from sales of investment securities available for sale during
1994 were $27,335,000. The Bank realized $0 in gains and $244,000 in losses on
those sales during 1994. There were no sales of investment securities
available for sale in 1996 and 1995.
As permitted under SFAS No. 115, upon acquisition of Central
Bancorporation and subsequent restructuring of Central's investment portfolio,
$5,526,000 of investment securities classified as held to maturity have been
transferred to the available for sale portfolio.
p 37 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Note 3 Mortgage-Backed and Related Securities Available for Sale
The amortized cost and estimated fair value of mortgage-backed and related
securities available for sale by contractual maturity are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------
Dollars in thousands
September 30, 1996
Small Business
Association
(SBA) securities:
Due in one year
through five
years $ 4,571 $ - $ 126 $ 4,445
Due after five
years through
ten years 13,019 115 6 13,128
Due after ten
years 53,465 342 343 53,464
------- ------ ------ -------
71,055 457 475 71,037
U.S. Government agencies
and corporations:
Due in one year
or less 26 - - 26
Due after five
years through
ten years 374 - 9 365
Due after ten years 73,181 6 727 72,460
------- ------ ------ -------
73,581 6 736 72,851
Other securities:
Due in one year
through five
years 619 - 4 615
Due after five
years through
ten years 246 - 1 245
Due after ten
years 200,948 83 3,822 197,209
-------- ------ ------ --------
201,813 83 3,827 198,069
-------- ------ ------ --------
$346,449 $ 546 $5,038 $341,957
======== ====== ====== ========
September 30, 1995
SBA securities $ 70,116 $1,189 $ 19 $ 71,286
Other securities 43,646 68 64 43,650
-------- ------ ------ --------
$113,762 $1,257 $ 83 $114,936
======== ====== ====== ========
Proceeds from sales of mortgage-backed and related securities available
for sale during 1996, 1995 and 1994 were $158,513,000, $79,205,000, and
$29,884,000, respectively. The Bank realized $1,116,000, $374,000, and
$386,000 in gains and $585,000, $87,000, and $83,000 in losses on those sales
during 1996, 1995 and 1994, respectively.
During October, 1995, FASB issued a report entitled A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities, Questions and Answers that allowed companies a one-time
reassessment and related reclassification from the held to maturity category
to the available for sale category without adverse accounting consequences for
the remainder of the held to maturity portfolio. During December, 1995,
InterWest elected to take advantage of this opportunity and reclassified
$198,523,000 of its mortgaged backed and related securities held to maturity
into the available for sale portfolio. This transfer allowed InterWest to sell
$89,400,000 of mortgage-backed and related securities previously classified as
held to maturity at a net gain of $211,000. As permitted under SFAS No. 115,
upon acquisition of Central Bancorporation and subsequent restructuring of
Central's investment portfolio, $6,591,000 of mortgage-backed and related
securities classified as held to maturity have been transferred to the
available for sale portfolio.
p 38 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Note 4 Investment Securities Held to Maturity
The amortized cost and estimated fair value of investments securities held to
maturity by contractual maturity are summarized as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
Dollars in thousands
September 30, 1996
U.S. Government agencies
and corporations:
Due in one year
through five years $130,304 $11 $6 $130,309
Obligations of states
and political
subdivisions:
Due in one year or
less 80 80
Due in one year
through five years 2,930 19 8 2,941
Due after five through
ten years 792 1 6 787
-------- --- --- --------
3,802 20 14 3,808
-------- --- --- --------
$134,106 $31 $20 $134,117
======== === === ========
September 30,1995
U.S. Government agencies
and corporations $ 27,279 $45 $ - $ 27,324
Obligations of states
and political
subdivisions 5,341 50 4 5,387
-------- --- --- --------
$ 32,620 $95 $ 4 $ 32,711
======== === === ========
Note 5 Mortgage-Backed and Related Securities Held to Maturity
The amortized cost and estimated fair value of mortgage-backed and related
securities held to maturity, by contractual maturity are summarized as
follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------
Dollars in thousands
September 30, 1996
U.S. Government
agencies and
corporations:
Due in one year
through five years $ 127 $ - $ 4 $ 123
Due after ten years 16,386 - 774 15,612
-------- ---- ------ --------
16,513 - 778 15,735
-------- ---- ------ --------
Other securities:
Due after ten years 86,817 17 5,790 81,044
-------- ---- ------ --------
$103,330 $ 17 $6,568 $ 96,779
======== ==== ====== ========
September 30, 1995
SBA securities $ 2,235 $ 20 $ 1 $ 2,254
U.S. Government
agencies and
corporations 23,438 19 564 22,893
Other securities 272,684 528 6,265 266,947
-------- ---- ------ --------
$298,357 $567 $6,830 $292,094
======== ==== ====== ========
At September 30, 1996, InterWest had $53,593,000 of securities classified as
high-risk securities as per Federal Financial Institutions Examination
Council's supervisory guidance for analyzing and classifying mortgage
derivative products. The market value of those securities was $48,096,000 and
the weighted average yield was 6.05 percent.
p 39 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Note 6 Loans Receivable, Net and Loans Held for Sale
Loans receivable (originated principally in Washington) consisted of the
following at September 30:
1996 1995
- ---------------------------------------------------------------------------
Dollars in thousands
Single-family residential $ 613,220 $552,845
Multi-family residential 52,683 51,515
Commercial real estate 146,115 118,229
Residential construction 151,194 128,544
Commercial non real estate 23,580 20,571
Agricultural 12,873 13,659
Consumer 54,109 45,996
---------- --------
Total $1,053,774 $931,359
========== ========
Less:
Undisbursed loan proceeds 60,187 38,305
Allowance for losses on loans 8,074 6,078
Deferred loan fees and discounts 9,542 8,886
---------- --------
$ 975,971 $878,090
========== ========
InterWest serviced loans, owned in whole or in part by others, of
$249,251,000 and $242,425,000 at September 30, 1996 and 1995, respectively.
At September 30, 1996, InterWest had $115,607,000 in real estate loan
commitments outstanding. Non-accrual loans totaled $3,165,000 and $2,373,000
at September 30, 1996 and 1995, respectively. If interest on these loans had
been recognized, such income would have been $150,000 and $118,000 for the
years ended September 30, 1996 and 1995, respectively.
The following is a summary of loans considered to be impaired in
accordance with SFAS No. 114 and the related interest income as of and for the
year ended September 30, 1996:
- ----------------------------------------------------------------------------
Dollars in thousands
Recorded investment in impaired loans not requiring an allowance
for losses on loans in accordance with SFAS No. 114 $4,564
Recorded investment in impaired loans requiring an allowance for
losses on loans in accordance with SFAS No. 114 495
------
Total recorded investment in impaired loans $5,059
======
Average recorded investment in impaired loans $5,485
Interest income recognized on impaired loans $ 444
------
All impaired loans were evaluated for impairment based on the fair value of
the collateral as all impaired loans are collateral dependent. The allowance
for losses on loans on impaired loans as measured in accordance with SFAS No.
114 was $115,000 at September 30, 1996.
p 40 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
InterWest originates both fixed and adjustable interest rate loans. At
September 30, 1996, the composition of these loans was as follows:
Fixed Rate Adjustable Rate
Term to Term to
Maturity Book Value Rate Adjustment Book Value
- -----------------------------------------------------------------------------
Dollars in thousands Dollars in thousands
Less than one year $ 23,945 Less than one year $547,082
One to five years 71,694 One to five years 64,229
Over five years 345,544 Over five years 1,280
-------- --------
Total $441,183 Total $612,591
======== ========
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to InterWest's internal cost of funds, Federal Cost of
Funds Index, One Year Constant Maturity Index or the 11th District Cost of
Funds. Future market factors may affect the correlation of the interest rate
adjustment with the rates InterWest pays on the short-term deposits that
primarily have been utilized to fund these loans.
Note 7 Allowance for Losses on Loans
The activity in the allowance for losses on loans for the year ended September
30 is summarized as follows:
1996 1995 1994
- ------------------------------------------------------------------
Dollars in thousands
Balance, beginning of year $6,078 $5,663 $4,444
Provision for losses on loans 1,060 720 900
Provision pursuant to acquisition 900 - -
Provision acquired - - 393
Recoveries 396 300 252
Write-offs (360) (605) (326)
------ ------ ------
Balance, end of year $8,074 $6,078 $5,663
====== ====== ======
Note 8 Accrued Interest Receivable
Accrued interest receivable at September 30 is summarized as follows:
1996 1995
- ------------------------------------------------------------------
Dollars in thousands
Investment securities $2,695 $1,175
Mortgage-backed and related securities 3,231 2,979
Loans receivable 6,650 5,190
------- ------
$12,576 $9,344
======= ======
p 41 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
NOTE 9 Real Estate Held for Sale and for Development
Real estate held for sale and development at September 30 is
summarized as follows:
1996 1995
- ------------------------------------------------------------------
Dollars in thousands
Real estate owned through foreclosure $6,053 $5,178
Real estate held for development 4,915 2,969
Allowance for losses on real estate
held for sale and for development - (1,000)
------- ------
$10,968 $7,147
======= ======
Note 10 Allowance for Losses on Real Estate Held for Sale and for Development
The activity in the allowance for losses on real estate held for sale and for
development for the year ended September 30, is summarized as follows:
1996 1995 1994
- ------------------------------------------------------------------
Dollars in thousands
Balance, beginning of year $1,000 $ 750 $530
Provision (benefit) for losses
on real estate held for sale
and for development (1,000) 250 285
Write-offs - - (65)
------ ------ ----
Balance, end of year $ - $1,000 $750
====== ====== ====
The allowance for losses on real estate held for sale and for development
provides for inherent losses that may result from unforeseen market changes in
the real estate portfolio and declines in estimated fair values of properties
subsequent to their initial transfer to real estate held for sale.
Note 11 Premises and Equipment, Net
Premises and equipment consist of the following at September 30:
1996 1995
- ------------------------------------------------------------------
Dollars in thousands
Buildings $25,558 $23,736
Furniture and equipment 15,389 12,854
------- -------
40,947 36,590
Less accumulated depreciation (14,461) (13,767)
------- -------
26,486 22,823
Land 7,870 6,794
------- -------
$34,356 $29,617
======= =======
Depreciation expense for 1996, 1995 and 1994 was $2,070,000, $1,711,000 and
$1,613,000, respectively.
p 42 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Note 12 Customer Deposits
Customer deposits consist of the following at September 30:
Weighted
Average Rate at
September 30, 1996 1996 1995
- -----------------------------------------------------------------------------
Dollars in thousands
Demand and NOW accounts, including
non-interest-bearing
deposits of $57,580 and $47,190 0.85% $ 156,852 $ 147,655
Money market accounts 3.38 112,614 100,053
Passbook accounts 2.10 100,002 101,877
---- ---------- ---------
1.95 369,468 349,585
---- ---------- ---------
Certificates:
Due within one year 551,237 362,811
After one year but within two years 134,464 131,011
After two years but within three years 44,295 140,502
After three years but within four years 12,115 5,466
After four years but within five years 6,999 37,091
After five years 2,165 13,844
---- ---------- ---------
Total certificates 5.56 751,275 690,725
---- ---------- ---------
Total customer deposits 4.37% $1,120,743 $1,040,310
==== ========== ==========
Customer deposits at September 30, 1996 and 1995, include $71,390,000 and
$73,172,000, respectively, in public fund deposits. FNMA Participation
Certificates with a book value of $8,966,000 and $9,094,000 were pledged as
collateral on these deposits at September 30, 1996 and 1995, respectively,
which exceeds the minimum collateral requirements established by the
Washington Public Deposit Protection Commission.
Certificates greater than or equal to $100,000 included in the above
amounts totaled $201,734,000 and $181,583,000 at September 30, 1996 and 1995,
respectively. Deposit interest expense by type for the year ended September 30
was as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
Dollars in thousands
Other certificates $29,096 $26,755 $19,250
Certificates greater than or equal to $100,000 10,790 10,492 5,698
Money market accounts 3,854 3,398 2,308
Passbook accounts 2,559 3,276 3,576
Demand and NOW Accounts 1,867 2,031 2,050
------- ------- -------
$48,166 $45,952 $32,882
======= ======= =======
Note 13 Federal Home Loan Bank Advances
At September 30, FHLB advances were scheduled to mature as
follows:
1996 1995
Amount Interest Rates Amount Interest Rates
- -----------------------------------------------------------------------------
Dollars in thousands
Within one year $250,250 4.56% - 5.95% $150,000 4.37% - 8.63%
One to two years 49,802 4.36% - 6.27% 40,250 4.81% - 6.45%
Two to three years 22,753 5.36% - 5.53% 56,052 4.35% - 6.32%
Three to four years 14,034 4.68% 3,753 5.36%
Four to five years - - 18,201 4.68%
-------- ------------ -------- ------------
Total $336,839 - $268,256 -
======== ============ ======== ============
p 43 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
As provided for in the Advances, Security, and Deposit Agreement with the
FHLB, advances are collateralized by all FHLB stock owned by InterWest,
deposits with the FHLB and certain mortgages or deeds of trust securing such
properties. As a member of the FHLB of Seattle, InterWest currently has a
credit line of 40 percent of the total assets of InterWest, subject to
collateralization requirements. As of September 30, 1996, the minimum book
value of eligible collateral pledged for these borrowings was $403,607,000.
The maximum and average outstanding and weighted average interest rates
on advances from the FHLB were as follows during the year ended September 30:
1996 1995
- --------------------------------------------------------------------------
Dollars in thousands
Maximum outstanding at any month end $378,499 $268,256
Average outstanding $310,897 $190,944
Weighted average interest rates:
Annual 5.52% 5.23%
End of year 5.50% 5.61%
==== ====
Note 14 Securities Sold Under Agreements to Repurchase
InterWest has sold certain securities of the U.S. Government and its agencies
and other approved investments under agreements to repurchase to a
broker/dealer. The securities underlying the agreements are delivered directly
to the broker who arranged the transaction. The dealer may loan such
securities to other parties in the normal course of operations. The carrying
value of the securities sold was $136,310,000 with a fair value of
$133,159,000 at September 30, 1996.
At September 30, securities under agreements to repurchase were scheduled
to mature as follows:
1996 1995
Amount Interest Rates Amount Interest Rates
- -----------------------------------------------------------------------------
Dollars in thousands
Within one year $ 80,835 5.40 - 5.45% $40,734 5.53 - 5.85%
One to two years 39,110 5.42% - -
-------- ----------- ------- -----------
Total $119,945 - $40,734 -
======== =========== ======= ===========
The maximum and average outstanding and weighted average interest rates
on securities sold under agreements to repurchase were as follows during the
year ended September 30:
1996 1995
- ----------------------------------------------------------------------------
Dollars in thousands
Maximum outstanding at any month end $119,945 $41,090
Average outstanding $56,285 $26,434
Weighted average interest rates
Annual 5.67% 5.94%
End of year 5.45% 5.84%
==== ====
Note 15 SAIF Assessment
The deposits of InterWest Bank are insured through the Savings Association
Insurance Fund (SAIF). The deposits of Central Washington Bank are insured
through the Bank Insurance Fund (BIF). Assessment rates are calculated to keep
the respective insurance funds capitalized at 1.25 percent of estimated
insured deposits. Since the BIF has reached the required reserve ratio, under
the current assessment rate schedule, Central Washington Bank deposits are
assessed the statutory annual minimum of $2,000. In contrast, because the SAIF
is undercapitalized, the assessment rate schedule for InterWest Bank deposits
has been 0.23 percent of SAIF insured deposits per annum. To mitigate the
effect of the disparity between the BIF and SAIF, a one-time special
assessment of 0.657 percent of SAIF deposits has been enacted into law. The
special assessment is calculated based on March 31, 1995, SAIF deposits and
has resulted in a $5,523,000 expense to InterWest Bank.
p 45 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Also, under the new law SAIF premiums will lower to .064 percent and BIF
premiums will rise to .013 percent effective in January 1997. The new law aims
to merge the two funds in January, 2000 when premiums are anticipated to be
.024 percent for all insured deposits.
Note 16 Special Charges
Primarily in connection with the Central merger, InterWest incurred special
charges totaling $3,105,000 in 1996. These charges primarily represent the
data processing conversion, including write-off of Central data processing
equipment, deferred compensation, severance pay agreements, and professional
service fees. Branch network integration and consolidation, including the
consolidation of overlapping branches and the consolidation of administrative
services, occurred during September, 1996. The following summarizes special
charges incurred during the year ended September 30, 1996:
- -----------------------------------------------------------------------------
Dollars in thousands
Professional services $940
Deferred compensation 537
Data processing 581
Severance 669
Other 378
------
Total special charges $3,105
======
Note 17 Federal Income Taxes
InterWest Bank is qualified under a provision of the Internal Revenue Code to
deduct from taxable income an allowance for bad debts based on a percentage of
taxable income before such deduction or based on the experience method. The
percentage bad debt deduction available was 8 percent for the years ended
September 1996, 1995 and 1994.
InterWest Bank is required to maintain 60 percent in qualifying assets in
order to use the percentage of taxable income method, and to avoid recapture
of all or a portion of its existing tax basis bad debt reserves. The
cumulative amount of bad debt deductions constitutes a restriction of
InterWest's retained earnings. If any portion of this amount is subsequently
used for purposes other than to absorb loan losses, the amount will be subject
to federal income taxes at the then prevailing corporate tax rate. It is not
contemplated that such retained earnings will be used in any manner that would
create a federal income tax liability and, therefore, no provision has been
made for possible federal income taxes. The cumulative amount of bad debt
deductions at September 30, 1996 and 1995, totaled $16,170,000 and $14,206,000
respectively. Current taxes receivable were $2,910,000 and $794,000 at
September 30, 1996 and 1995, respectively.
A reconciliation of the tax provision based on the statutory corporate
tax rate on pre-tax income and the provision shown in the accompanying
consolidated statements of income for the year ended September 30 is as
follows:
1996 1995 1994
- ----------------------------------------------------------------------------
Dollars in thousands
Federal income taxes at statutory rates $6,607 $7,598 $7,261
Tax credit (35) (100) -
Tax exempt interest (93) (82) (74)
Other, net (371) (69) 93
------ ------ ------
$6,108 $7,347 $7,280
====== ====== ======
Current tax expense 5,817 5,499 6,319
Deferred tax expense 291 1,848 961
------ ------ ------
$6,108 $7,347 $7,280
====== ====== ======
p 45 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Deferred income taxes are provided for differences in the reporting of income
for financial statement and income tax purposes. Deferred income tax expense
results primarily from the following temporary differences for the year ended
September 30:
1996 1995 1994
- -----------------------------------------------------------------------------
Dollars in thousands
Loan fees $199 $1,404 $447
FHLB stock dividends (589) 242 256
General loss reserve (1,014) (308) (246)
Utilization of percentage method bad
debt deduction 915 348 360
Deferred compensation 174 (26) (56)
Other, net 606 188 200
---- ------ ----
Total $291 $1,848 $961
==== ====== ====
At September 30, deferred tax asset (liability) consisted of the
following:
1996 1995
- -----------------------------------------------------------------------
Dollars in thousands
Deferred tax asset:
General loss reserve $ 2,825 $ 1,811
Unrealized loss on securities available
for sale 1,577 -
Other, net - 338
------- -------
4,402 2,149
Deferred tax liability:
Loan fees (1,846) (1,647)
FHLB stock dividends (1,268) (1,857)
Depreciation (1,353) (1,224)
Unrealized gain on securities available
for sale - (424)
Bad debt tax reserve (1,362) (721)
Other, net (550) -
------- -------
(6,379) (5,873)
------- -------
Total $(1,977) $(3,724)
======= =======
The change in the net deferred tax liability was as follows for the year ended
September 30, 1996:
- ----------------------------------------------------------------------------
Dollars in thousands
Net deferred tax liability, beginning of year $3,724
Tax effect of change in unrealized gain (loss) on
securities available for sale (2,001)
Deferred income tax expense 291
Adjustment pursuant to merger (37)
------
Net deferred tax liability, end of year $1,977
======
Note 18 Employee Benefits
RETIREMENT AND SAVINGS PLANS
InterWest has a salary deferral 401(k) plan and trust and a debt leveraged
money purchase employee stock ownership plan (ESOP) for employees. Employees
who are at least 21 years of age and have completed one year (at least 1,000
hours) of service are eligible to participate in the plans.
p 46 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
The ESOP is a noncontributory stock ownership plan. InterWest makes an annual
contribution to the plan of 5 percent of all the participants' compensation.
On October 31, 1994, the ESOP signed a promissory note from an unrelated third
party which provided $912,000 for the purpose of acquiring common stock of
InterWest. The outstanding obligation of $312,000 and $712,000 at September
30, 1996 and 1995, respectively, is included in other borrowings in the
accompanying Consoli-dated Statements of Financial Condition, with a
corresponding reduction of stockholders' equity. Interest on the loan is
computed at prime rate or at the ESOP's election at one-month LIBOR, adjusted
for InterWest's federal reserve percentage and taxes, plus 2 percent. At
September 30, 1996, the rate applicable to this loan was 7.50 percent.
Interest paid was $30,000 and $38,000 for the year ended September 30, 1996
and 1995, respectively. The obligation is reduced, and stockholders' equity
increased, by the amount of any principal reduction of the debt by the ESOP.
Dividends paid on unallocated shares of stock may be used to make payments on
the loan. Accordingly, $17,000 and $6,000 of dividends were applied toward
loan payments during the years ended September 30, 1996 and 1995,
respectively. The loan is repayable in semi-annual installments of $200,000
with the next scheduled payment due on November 30, 1996 and interest is paid
monthly. The compensation of the leverage shares is calculated by taking
difference between the average fair value of the shares released and the cost
of the shares. Shares are released as the principal of the loan is paid down.
ESOP shares as of September 30, were as follows:
1996 1995
- --------------------------------------------------------------
Leveraged shares 55,926 72,000
Shares released for allocation 32,150 16,074
------ ------
Unallocated shares 23,776 55,926
====== ======
The fair value of unallocated shares was $701,392 and $847,279 at
September 30, 1996 and 1995, respectively.
The salary deferral 401(k) plan and trust is a defined contribution plan.
The employees can contribute to their deferred contribution accounts on a
pre-tax basis the maximum limit under the law. InterWest matches 100 percent
of the first 3 percent deferred by each participant.
Expenses of these plans were $724,000, $658,000 and $589,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
PERFORMANCE BONUS
A performance bonus plan is in effect for certain officers of InterWest and is
designated to compensate for performance. Approximately half of the
performance bonus is based on quantifiable data, such as return on equity and
level of operating expenses. Contributions to the plan are based upon a
percentage of the employee's compensation and achievement of performance
goals.
Contributions to the plan were $472,000, $708,000, and $470,000, for the
years ended September 30, 1996, 1995, and 1994, respectively.
DEFERRED COMPENSATION PLANS
Central Bancorporation adopted deferred compensation plans for directors and
the executive officer of Central. The plans allowed for the deferral of
director fees and executive compensation until retirement or termination of
the plans. Under the terms of the plans, Central agreed to pay the deferred
amount plus interest at retirement over a ten- to fifteen year period. Central
purchased insurance policies on the lives of the plan participants as a
vehicle to fund the benefits payable under the agreements. In accordance with
the terms of the deferred compensation agreement, the total amount of deferred
compensation provided by the plans became immediately due to the plan
participants upon consummation of the merger between Central and InterWest.
Accordingly, an expense of $537,000 has been incurred during 1996 and included
as a special charge. Normal expenses for these plans were $92,000 in 1995 and
$169,000 in 1994.
STOCK OPTION PLANS
InterWest had two qualified stock option plans which provided for the awarding
of stock options to certain officers and employees of InterWest at the
discretion of the Board of Directors. The term of the stock options granted
was four years and ten years from the granting. The latter plan was approved
by the Board of Directors on January 16, 1990. Both plans expired December 31,
1992.
p 47 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Information with respect to options granted under these plans is as follows:
Average Currently Currently
Authorized Price Exercised Outstanding Vested
- ------------------------------------------------------------------------------
Balance October 1, 1993 184,000 $7.31 114,023 59,648 59,648
Options exercised - 6.89 24,846 (24,846) (24,846)
------- ----- ------- ------- -------
Balance September 30,
1994 184,000 7.96 138,869 34,802 34,802
Options exercised - 6.99 18,930 (18,930) (18,930)
Options rescinded/
expired - 9.13 - (230) (230)
------- ----- ------- ------- -------
Balance September 30,
1995 184,000 9.13 157,799 15,642 15,642
Options exercised - 9.13 15,642 (15,642) (15,642)
------- ----- ------- ------- -------
Balance September 30,
1996 184,000 $- 173,441 - -
During January 1993, the stockholders approved the addition of a
qualified employee stock option plan (1993 incentive plan) and a non-qualified
director stock option plan (1993 non-incentive plan). The awarding of stock
options to certain employees at InterWest is at the discretion of the Board of
Directors. The term of the options granted is ten years. Substantially all of
the options granted under the employees' stock option plan have the following
vesting schedule:
One year but less than two years 20%
Two years but less than three years 40%
Three years but less than four years 60%
Four years but less than five years 80%
Over five years 100%
Information with respect to options granted under the 1993 incentive plan
is as follows:
Average Currently Currently
Authorized Price Exercised Outstanding Vested
- ------------------------------------------------------------------------------
Balance October 1, 1993 644,000 $10.45 - 127,138 -
Options granted - 14.50 - 16,200 -
Options exercised - 10.38 230 (230) (230)
Options rescinded/
expired - 12.06 - (3,685) (805)
------- ------ ----- ------- ------
Balance September 30,
1994 644,000 10.87 230 139,423 26,693
Options granted - 12.00 - 17,000 0
Options rescinded/
expired - 12.04 - (8,690) (4,178)
------- ------ ----- ------- ------
Balance September 30,
1995 644,000 10.94 230 147,733 52,815
Options granted - 19.56 - 58,200 -
Options exercised - 11.67 2,608 (2,608) (2,608)
Options rescinded/
expired - 15.42 - (5,870) (3,270)
------- ------ ----- ------- ------
Balance September 30,
1996 644,000 $13.34 2,838 197,455 80,050
======= ====== ===== ======= ======
Under the 1993 non-incentive director stock option plan, each director
was granted 2,875 options with a term of 10 years. Each director becoming a
member of the board subsequent to January 1993, will also be granted 2,875
options with the term limited such that the stock options expire with the
expiration of the initially granted options. These options are 100 percent
vested at the date of the grant.
p 48 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Information with respect to options granted under the 1993 non-incentive
director stock option plan is as follows:
Average Currently Currently
Authorized Price Exercised Outstanding Vested
- ------------------------------------------------------------------------------
Balance October 1, 1993 46,000 $10.28 - 20,125 20,125
Options granted - 13.00 - 2,875 2,875
Options rescinded/
expired - 10.68 - (3,375) (3,375)
------ ------ ----- ------ ------
Balance September 30,
1994 46,000 10.61 - 19,625 19,625
Options exercised - 10.28 2,875 (2,875) (2,875)
------ ------ ----- ------ ------
Balance September 30,
1995 46,000 10.67 2,875 16,750 16,750
Options granted - 13.00 - 2,125 2,125
Options exercise - 10.28 2,875 (2,875) (2,875)
------ ------ ----- ------ ------
Balance September 30,
1996 46,000 $11.05 5,750 16,000 16,000
====== ====== ===== ====== ======
Under a ten-year option plan there were 103,500 shares authorized,
outstanding and vested with an average price of $7.00 in each of the three
years in the period ended September 30, 1996.
Central Bancorporation had stock option plans which have been assumed by
InterWest. The number of shares and option prices have been appropriately
adjusted to reflect the common stock exchange ratio. In 1986, Central adopted
an Incentive Stock Option Plan for officers and key employees. All options
granted immediately become exercisable. In 1992, the stockholders of Central
approved the 1992 Stock Option Plan, reserving shares of common stock for the
granting options to key employees. These options immediately became
exercisable upon the consummation of the merger between InterWest and Central.
In 1994, the Director's Stock Option Plan was approved, which reserved shares
of common stock for the granting of options to directors. All options granted
immediately become exercisable.
Information with respect to options granted under the Central plans is as
follows:
Average Currently Currently
Authorized Price Exercised Outstanding Vested
- ------------------------------------------------------------------------------
Balance October 1, 1993 217,140 $5.25 46,684 97,211 83,605
Options authorized 84,600 - - - -
Options granted - 14.18 - 74,025 56,400
Options exercised - 3.60 13,093 (13,093) (13,093)
------- ----- ------ ------- -------
Balance September 30,
1994 301,740 9.57 59,777 158,143 128,856
Options exercised - 4.03 21,604 (21,604) (21,604)
------- ----- ------ ------- -------
Balance September 30,
1995 301,740 10.45 81,381 136,539 113,959
Options exercised - 5.99 35,865 (35,865) (35,865)
------- ----- ------ ------- -------
Balance September 30,
1996 301,740 $12.03 117,246 100,674 100,674
======= ====== ======= ======= =======
p 49 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
The exercise price of all options granted under these plans is equal to
the fair value of InterWest's common stock on the date of the grant. Average
exercise price per share, number of shares authorized, available for grant,
granted, exercised, outstanding and currently vested reflect the
dilutive effect of the stock splits.
Note 19 Regulatory Capital Requirements
InterWest Bancorp, Inc., and its subsidiaries, InterWest Bank and Central
Washington Bank are subject to regulatory capital requirements. Regulated by
the Federal Deposit Insurance Corporation (FDIC) and the State of Washington
Division of Banking, InterWest Bank and Central Washington Bank (collectively
the Banks) are required to maintain minimum levels of regulatory capital as a
percentage of regulatory assets. The Banks total regulatory capital must equal
8 percent of risk-weighted assets, and one-half of that 8 percent must consist
of core capital.
At September 30, 1996, the Banks had the following regulatory capital
ratios calculated in accordance with FDIC standards:
InterWest Bank Central Washington Bank
- -----------------------------------------------------------------------------
Tier I leverage capital ratio 6.51% 7.43%
Risk-based capital ratio 13.04% 11.27%
InterWest's management believes that under the current regulations the
Banks will continue to meet minimum capital requirements in the foreseeable
future. However, events beyond the control of the Banks, such as a downturn in
the economy in areas where the Banks have most of their loans, could adversely
affect future earnings and, consequently, the ability of the Banks to meet
future minimum capital requirements.
FDIC regulations establish the amount of capital for each of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (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 prevailing interest rates. In general terms, the
capital definitions are as follows:
FDICIA Category Total
Risk-Based Risk-Based Tier 1
Capital Capital Leverage
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
Total risk-based capital ratio is the ratio of total capital to risk-weighted
assets. Tier 1 risk-based capital ratio is the ratio of core capital to
risk-weighted assets. Leverage ratio is the ratio of core capital to adjusted
total assets. At September 30, 1996, the Bank was in compliance with the
well-capitalized capital requirements.
InterWest had paid annual cash dividends for 13 years. At December 1990,
InterWest began paying quarterly dividends which it intends to continue to
pay. The amount of future dividends will be based on InterWest's earnings and
financial condition and is restricted by federal and state tax laws and by tax
considerations related to thrift institutions. Generally, InterWest is
precluded from paying dividends on its common stock if its regulatory capital
would be reduced to below regulatory capital requirements. InterWest is also
restricted by income appropriated to bad debt reserves and deducted for
federal income taxes.
Note 20 Interest Rate Risk
InterWest is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At September 30, 1996, a portion of
the InterWest's assets earned interest at fixed interest rates. Those assets
were funded primarily with short-term liabilities that have interest rates
that vary with market rates over time. As a result, InterWest is exposed to
interest rate risk because, in a rising rate environment, liabilities will be
repricing faster at higher interest rates, thereby reducing the market value
of long-term assets and net interest income.
p 50 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
At September 30, 1996, InterWest had interest-earning assets and
interest-bearing liabilities of:
Interest-Earning Interest-Bearing
Assets Liabilities
- -----------------------------------------------------------------------------
Dollars in thousands
Balance outstanding $1,609,115 $1,581,240
Weighted average effective
interest rate 8.12% 4.69%
InterWest originates loans primarily in the state of Washington. Although
InterWest has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the local economy.
Note 21 Disclosures About Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments". The estimated fair value amounts
have been determined by InterWest using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessary to interpret market data in the development of the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts InterWest 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.
The following methods and assumptions were used to estimate the fair value of
each class of the Bank's financial instruments as of September 30, 1996 and
1995:
CASH AND CASH EQUIVALENTS
The carrying value is a reasonable estimate of the fair value.
MORTGAGE-BACKED AND RELATED SECURITIES, INVESTMENT SECURITIES AND LOANS HELD
FOR SALE
The fair value of investment securities, mortgage-backed and related
securities and loans held for sale are based on quoted market rates and dealer
quotes.
LOANS RECEIVABLE
The fair value of fixed rate loans is based upon quoted market prices for
similar loans. The fair value for adjustable-rate loans is based on discounted
cash flows, using estimated interest rates currently offered for loans of
similar characteristics adjusted for pre-payment estimates.
No adjustment was made to the estimated interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management believes that the risk factor embedded in the estimated interest
rates, along with the general reserves applicable to the loan portfolio for
which there are no known credit concerns, results in a fair valuation of such
loans on an entry-value basis.
DEPOSIT LIABILITIES
Under SFAS No. 107, the fair value of deposits with no stated maturity, such
as non-interest bearing demand deposits, NOW accounts, money market and
passbook accounts, is equal to the amount payable on demand as of September
30, 1996 and September 30, 1995, respectively. The fair value of certificates
of deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the current average rate for deposits of like
maturities of other local thrift institutions.
FHLB ADVANCES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair value of FHLB advances and reverse repurchase agreements are
estimated based on the present values using a discount rate equal to the rate
currently offered on similar borrowings with similar maturities.
p 51 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
OTHER
The carrying value of other financial instruments has been determined to be a
reasonable estimate of their fair value.
September 30, 1996 September 30, 1995
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------
Dollars in thousands
Assets
Cash and cash equivalents $48,501 $48,501 $54,802 $54,802
Investment securities
available for sale 26,166 26,166 26,336 26,336
Mortgage-backed and
related securities
available for sale 341,957 341,957 114,936 114,936
Investment securities
held to maturity 134,106 134,117 32,620 32,711
Mortgage-backed and
related securities
held to maturity 103,330 96,779 298,357 292,094
Loans receivable, net 975,971 977,974 878,090 886,761
FHLB stock 19,232 19,232 14,510 14,510
Liabilities
Demand and NOW accounts $156,852 $156,852 $147,655 $147,655
Money market accounts 112,614 112,614 100,053 100,053
Passbook accounts 100,002 100,002 101,877 101,877
Certificates of deposit 751,275 755,214 690,725 693,503
--------- --------- --------- ---------
Total deposits 1,120,743 1,124,682 1,040,310 1,043,088
FHLB advances and other
borrowings 340,552 338,959 273,437 271,002
Securities sold under
agreements to
repurchase 119,945 119,590 40,734 40,734
Off balance sheet loan
commitments:
Real estate 115,607 115,607 59,931 59,931
VISA credit cards 29,834 29,834 26,515 26,515
LIMITATIONS
The fair value estimates presented herein are based on pertinent information
available to management as of September 30, 1996 and 1995. Since September 30,
1996 and 1995, amounts have not been comprehensively revalued for purposes of
these financial statements and, therefore, current estimates of fair value may
differ from the amounts presented herein. Management is not aware of any
factors that would significantly affect the estimated fair value amounts.
Note 22 Contingencies
At periodic intervals, the FDIC and the State of Washington, Division of
Banking (collectively the regulators), examine InterWest's financial
statements as part of their legally prescribed oversight of the thrift and
banking industries. Based on their examinations, these regulators may direct
that InterWest's financial statements be adjusted in accordance with their
findings. A future examination by the regulators could include a review of
certain transactions or other amounts reported in InterWest's 1996 financial
statements. The regulators have not proposed significant adjustments to
InterWest's financial statements in prior years and management is not aware of
any basis for any such adjustments for 1996. But, in view of the uncertain
regulatory environment in which InterWest operates, the extent, if any, to
which a forthcoming examination may ultimately result in regulatory
adjustments to the 1996 financial statements cannot presently be determined.
p 52 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
In the normal course of business, InterWest has various legal claims and
other contingent matters outstanding. Bank management believes that any
ultimate liability arising from these actions will not have a material adverse
effect on InterWest's financial condition or results of operations.
InterWest's banking subsidiaries are required to maintain balances with the
Federal Reserve Bank based on a percentage of deposit liabilities. The average
required reserve at September 30, 1996 and 1995, was $6,485,000 and
$4,650,000, respectively.
Note 23 Condensed Parent Company Financial Information InterWest Bancorp, Inc.
Condensed financial information for InterWest Bancorp, Inc., (parent only) as
of and for the years ended September 30, is as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
1996 1995
- ----------------------------------------------------------------------------
Dollars in thousands
Assets
Cash and cash equivalents $ 366 $ 488
Other assets 1,386 907
Equity in net assets of subsidiaries 110,709 107,479
-------- --------
Total $112,461 $108,874
======== ========
Liabilities and Stockholders' Equity
Borrowings $ - $ 2,095
Other liabilities 1,440 1,039
Stockholders' equity 111,021 105,740
-------- --------
Total $112,461 $108,874
======== ========
CONDENSED STATEMENT OF INCOME
1996 1995
- ----------------------------------------------------------------------------
Dollars in thousands
Dividends received from subsidiaries $7,213 $1,860
-------- --------
Interest expense 140 219
Operating expenses 1,364 751
-------- --------
Total expenses 1,504 970
-------- --------
Net income before federal income taxes
and equity in undistributed net income
from subsidiaries 5,709 890
Federal income tax benefit (404) (391)
-------- --------
Net income before equity in undistributed
net income from subsidiaries 6,113 1,281
-------- --------
Equity in undistributed net income from
subsidiaries 6,658 13,081
-------- --------
Net income $12,771 $14,362
======== ========
p 53 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
STATEMENTS OF CASH FLOWS
1996 1995
- ----------------------------------------------------------------------------
Dollars in thousands
Cash flows from operating activities:
Net income $ 12,771 $ 14,362
-------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in net income from subsidiaries (13,871) (14,941)
Dividends received from subsidiaries 7,213 1,860
Change in other assets and liabilities (130) 504
Pooling accounting adjustment (361) -
-------- --------
Net cash provided by operating activities 5,622 1,785
Cash flows from financing activities:
Payment of dividends (3,667) (602)
Purchase of treasury stock - (289)
Net change in borrowings (2,095) (598)
Proceeds from exercise of stock options 418 127
Repayment of ESOP loan (400) -
-------- --------
Net cash used by financing activities (5,744) (1,362)
-------- --------
Net cash flows (122) 423
Cash at beginning of year 488 65
-------- --------
Cash at end of year $ 366 $ 488
======== ========
InterWest Bancorp, Inc., was formed as a holding company on July 28,
1995. Information includes Central Bancorporation which was formed as a
holding company on July 1, 1983.
Note 24 Business Combinations
On August 31, 1996, InterWest merged with Central Bancorporation, of
Wenatchee, Washington ("Central"), the holding company of Central Washington
Bank. Under the terms of this transaction, Central merged into InterWest. At
the merger date, Central had 10 offices located in central Washington and
total assets of $206,093,000, including total loans of $132,157,000, total
customer deposits of $181,952,000, and stockholders' equity of $17,109,000.
Each share of Central common stock has been exchanged for 1.41 shares of
InterWest common stock. The total number of shares issued was 1,431,594. The
merger has been treated as a pooling-of-interests for accounting purposes. In
accordance with generally accepted accounting principles, prior period
financial statements have been restated as if the companies had been combined.
The following pro forma information represents the results of operations
of InterWest and Central for the eleven-month period ending August 31, 1996,
and the years ending September 30, 1995 and 1994, on an individual as well as
a combined basis. The pro forma results do not necessarily indicate the actual
results that would have been obtained, nor are they necessarily indicative of
the future operations of the combined companies. The unaudited pro forma
statements of income were as follows:
p 54 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
InterWest Central Combined
- ----------------------------------------------------------------------------
Dollars in thousands
Eleven-month period ended August
31, 1996
Interest income $94,936 $14,708 $109,644
Interest expense 56,958 5,802 62,760
Net interest income 37,018 8,906 45,924
Net income $13,336 $ 2,570 $ 15,906
======= ======= ========
Year ended September 30, 1995
Interest income $84,675 $15,589 $100,264
Interest expense 51,746 6,180 57,926
Net interest income 32,329 9,289 41,618
Net income $11,807 $ 2,555 $ 14,362
======= ======= ========
Year ended September 30, 1994
Interest income $69,821 $12,449 $ 82,270
Interest expense 36,351 4,334 40,685
Net interest income 32,570 8,115 40,685
Net income $11,702 $ 1,765 $ 13,467
======= ======= ========
The unaudited pro forma statement of stockholders' equity for Central for the
eleven-month period ended August 31, 1996 is as follows:
Unrealized
Gain (Loss)
on Securities
Common Paid in Retained Available
Stock Capital Earnings for Sale Total
- ------------------------------------------------------------------------------
Dollars in thousands
Balance, October 1, 1995 $286 $4,083 $11,459 $ 25 $15,853
Net income 2,570 2,570
Dividends, $0.57 per
share (812) (812)
Exercise of stock
options 15 15
Unrealized loss on
securities available
for sale (44) (44)
---- ------ ------- ---- -------
Balance, August 31, 1996 $286 $4,098 $13,217 $(19) $17,582
==== ====== ======= ==== =======
The unaudited pro forma statement of stockholders' equity for InterWest for
the eleven month period ended August 31, 1996 is as follows:
Unrealized
Gain (Loss)
on
Securities
Available Debt
Common Paid in Retained for to Treasury
Stock Capital Earnings Sale ESOP Stock Total
- ------------------------------------------------------------------------------
Dollars in
thousands
Balance,
October 1,
1995 $1,295 $14,505 $74,325 $763 $(712) $(289) $89,887
Net income 13,336 13,336
Dividends,
$0.35 per
share (2,272) (2,272)
Exercised
stock
options 4 185 189
Unrealized
loss on
securities
available
for sale (3,124) (3,124)
ESOP loan
repayment 400 400
------ ------- ------- ------- ----- ----- -------
Balance,
August 31,
1996 $1,299 $14,690 $85,389 $(2,361) $(312) $(289) $98,416
====== ======= ======= ======= ===== ===== =======
p 55 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
The prior year financial statements have been restated to conform
Central's December 31 fiscal year end with InterWest's September 30 fiscal
year end. In accordance with generally accepted accounting principles,
Central's interest income of $4,033,000, net interest income of $2,413,000 and
net income of $473,000 for the period from October 1, 1995 to December 31,
1995 has been included in the consolidated statements of income for both of
the years ended September 30, 1996 and 1995. This amount is included as a
deduction from retained earnings in the statement of stockholders' equity for
the year ended September 30, 1996.
On April 30, 1994, Central Bancorporation completed the cash purchase of
100 percent 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 costs of $4,119,000 was financed with a
combination of cash and by a $3,000,000 note payable to an unaffiliated
lender. The purchase price was determined based on the fair value of First
Bank Washington's assets of $52,709,000 less the fair value of liabilities
assumed of $48,590,000. The acquisition was accounted for as a purchase for
accounting purposes, and operations of the acquired bank are included in the
financial statements from May 1, 1994, onward. As of May 1, 1994, the name
First Bank Washington was changed to North Central Washington Bank. As of
August 29, 1996, North Central Washington Bank was merged into Central
Washington Bank.
Note 25 Selected Quarterly Financial Data (Unaudited)
The merger between InterWest and Central was completed August 31, 1996 and was
accounted for as a pooling-of-interests accordingly, quarterly financial data
for the year ended September 30, 1995 and the first three quarters of the year
ended September 30, 1996 has been restated as if the companies were combined.
Fourth Third Second First
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
Dollars in thousands except per share data
Year ended September 30, 1996
Interest income $32,182 $30,404 $29,609 $28,718
Interest expense 18,221 16,897 16,766 16,924
Net interest income before
provision for losses on loans 13,961 13,507 12,843 11,794
Provision for losses on loans 1,200 210 300 250
Net interest income after
provision for losses on loans 12,761 13,297 12,543 11,544
Other operating income 3,340 3,185 3,793 2,235
Other operating expense 17,343 9,200 9,482 7,794
Income (loss) before federal
income taxes (1,242) 7,282 6,854 5,985
Federal income tax expense(benefit) (814) 2,473 2,332 2,117
Net income (loss) $ (428) $ 4,809 $ 4,522 $ 3,868
======= ======= ======= =======
Net income (loss) per share $ (0.05) $ 0.60 $ 0.56 $ 0.48
======= ======= ======= =======
Year ended September 30, 1995
Interest income 27,591 24,839 24,186 23,648
Interest expense 16,370 14,649 14,088 12,820
Net interest income before
provision for losses on loans 11,221 10,190 10,098 10,828
Provision for losses on loans 150 270 150 150
Net interest income after
provision for losses on loans 11,071 9,920 9,948 10,678
Other operating income 2,305 2,431 3,643 1,614
Other operating expense 7,678 7,028 8,048 7,148
Income before federal
income taxes 5,698 5,323 5,543 5,144
Federal income tax expense 1,999 1,781 1,909 1,658
Net income $ 3,699 $ 3,542 $ 3,634 $ 3,486
======= ======= ======= =======
Net income per share $ 0.46 $ 0.45 $ 0.45 $ 0.44
======= ======= ======= =======
p 56 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
INTERWEST BANK VICE-PRESIDENTS STOCK INFORMATION
Charles R. Brecht, Regional Manager InterWest's common stock trades
Marla Chase, Transaction Services on The Nasdaq Stock Market
Chandler P. Dalbey, Human Resources under the symbol "IWBK". As of
Steve W. Doty, Underwriting and Whole- September 30, 1996, there were
sale Lending 7,918,074 shares of common stock
Richard J. Engom, Income Lending outstanding held by approximately
Sharon A. Exley, Loan Administration 5,500 stockholders.
Keith A. Fakkema, Branch Manager Set forth below are the high
Robert W. Jennings, Regional Manager and low sales prices as reported
Steven M. Mong, Residential Lending on The Nasdaq Stock Market and
Operations the dividends declared on common
Larry Morse, Chief Appraiser stock for each quarter.
G.C. Piercy, Director of Marketing and
Sales Sales Price High Low Dividends
Deborah L. Potter, Operations ------------------------------------
Marc A. Rasmussen, Regional Manager 1996 Fiscal Year
Jonathan N. Rice, Regional Manager
Susan B. Riney, Retail Deposit Services First Qtr. $20.37 $15.25 $0.100
Joseph E. Riordan, Finance Second Qtr. 21.87 19.62 0.120
Scott W. Southwick, Business Lending Third Qtr. 25.12 21.37 0.130
Joseph D. Stella, Real Estate Owned Fourth Qtr. 29.87 24.00 0.130
Carla F. Tucker, Controller ====== ====== ======
Leslie Welch, Internal Audit
1995 Fiscal Year
CORPORATE HEADQUARTERS First Qtr. $14.50 $12.38 $0.075
Second Qtr. 14.75 12.00 0.075
InterWest Bancorp, Inc. Third Qtr. 14.37 12.75 0.080
275 Southeast Pioneer Way Fourth Qtr. 16.00 15.19 0.090
Oak Harbor, WA 98277 ====== ====== ======
360.679.4181
CORPORATE PROFILE FINANCIAL INFORMATION
InterWest Bancorp, Inc., is a Washington A copy of the Form 10-K as filed
State charteredbank holding company with the Securities and Exchange
headquartered in Oak Harbor, Washington. Commission will be furnished
InterWest Bancorp, Inc., is a holding without charge to stockholders
company for InterWest Bank and Central upon written request to Corporate
Washington Bank. The Bank operates 37 Secretary, InterWest Bancorp, Inc.,
offices throughout western and central 275 Southeast Pioneer Way, Oak
Washington state. InterWest believes in Harbor, Washington, 98277.
offering its customers highly personal-
ized service. As an extension of this STOCKHOLDERS INQUIRIES
philosophy, the Bank also provides a
wide array of products and services, ChaseMellon Shareholder Services,
specializing in home mortgages. Invest- L.L.C., stock transfer agent for
ments are available through InterWest InterWest Bancorp, Inc., stock,
Financial Services Inc., and insurance maintains shareholder records and
products are provided by InterWest can assist you with address changes,
Insurance Agency Inc., subsidiaries of corrections in Social Security or
InterWest Bank. tax identification numbers and
reissuance of stock certificates. If
ANNUAL MEETING OF STOCKHOLDERS you need assistance please contact
the stock transfer agent at the
The 1997 annual meeting of stockholders below.
address and/or phone number listed will
be held at 2:00pm on Tuesday, January INDEPENDENT AUDITORS
21, 1997 at the Elks Club, 155 NE Ernst
Street, Oak Harbor, Washington. All Ernest & Young LLP
stockholders are cordially invited to 999 Third Avenue
attend. Suite 3500
Seattle, WA 98104
STOCK TRANSFER AGENT
ChaseMellon Shareholder
Services, L.L.C.
50 California Street
10th Floor
San Francisco, CA 94111
1.800.356.2017
p 57 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
INTERWEST OFFICE LOCATIONS
[map is depicted in a sphere and shows
the location of its offices, listed below, around the
cities of Bellingham, Oak Harbor, Port Angeles, Everett,
Chelan, Seattle, Wenatchee, Tacoma and Olympia]
InterWest Bank 12. Freeland
1. Anacortes 13. Friday Harbor
2. Bellingham 14. Kent
3. Brewster 15. Lakewood
4. Burien 16. Leavenworth
5. Cashmere 17. Lynden
6. Chelan 18. Lynnwood
7. Clinton 19. Manson
8. Coupeville 20. Marysville
9. East Wenatchee (2) 21. Mercer Island
10. Everett 22. Mount Vernon
11. Ferndale 23. Oak Harbor (2)
24. Omak InterWest Insurance
25. Oroville Agency, Inc.
26. Port Angeles 36. Oak Harbor
27. Port Townsend
28. Poulsbo InterWest Financial
29. Redmond Services, Inc.
30. Sedro-Woolley 37. Anacortes
31. Sequim 38. Burien
32. Silverdale 39. Oak Harbor
33. Stanwood 40. Omak
34. Tonasket 41. Sequim
35. Wenatchee 42. Stanwood
43. Tacoma
44. Wenatchee
p.58 InterWest Bancorp
<PAGE>
<PAGE>
Design: Spangler Associates Inc. Portrait Photography:
David Perry * 1996 InterWest Bancorp, Inc.
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
InterWest Bancorp, Inc.
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership Incorporation
- ---------------- ------------ ---------------
InterWest Bank 100% Washington
Central Washington Bank (b) 100% Washington
InterWest Financial Services, Inc. (c) 100% Washington
InterWest Insurance Agency, Inc. (d) 70% Washington
InterWest Properties, Inc. (c) 100% Washington
I & B, Inc. (d) 90% Washington
Island Beach of Washington, Inc.
and Beach Club (c) 100% Washington
Islander Resort (e) 100% Florida
CI Resorts Equity Corp. (c) 100% Washington
Cornerstone Northwest Mortgage, Inc. (c) 100% Washington
- -------------
(a) The operation of the Corporation's wholly owned subsidiaries are
included in the Corporation's Financial Statements contained in the
Annual Report attached hereto as Exhibit 13.
(b) Subsequent to September 30, 1996, Central Washington Bank was merged
into InterWest Bank.
(c) Wholly-owned subsidiary of InterWest Bank.
(d) Interest owned by InterWest Bank.
(e) Wholly-owned by Island Beach of Washington, Inc. and Beach Club.
<PAGE>
<PAGE>
Exhibit 23.1
Consent of Auditors
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-99742) pertaining to the 1984 Stock Option Plan, the 1993
Incentive Stock Option Plan, and the Non-Incentive Stock Option Plan for
Outside Directors and in the Registration Statement (Form S-8 No. 333-13191)
pertaining to the Central Bancorporation 1992 Employee Stock Option Plan and
the Central Bancorporation Director Stock Option Plan of InterWest Bancorp,
Inc., of our report dated November 7, 1996, with respect to the consolidated
financial statements of InterWest Bancorp, Inc. and subsidiaries incorporated
by reference in the Annual Report on Form 10-K for the year ended September
30, 1996.
/s/Ernst1 & Young LLP
Seattle, Washington
December 26, 1996
<PAGE>
<PAGE>
Exhibit 23.2
Consent of Former Auditors
Deloitte &
Touche LLP
- ----------- ----------------------------------------------------------
700 Fifth Avenue, Suite 4500 Telephone: (206) 292-1800
Seattle, Washington 98104-5044 Facsimile: (206) 343-7809
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Interwest Bancorp, Inc.
Oak Harbor, Washington
We consent to the incorporation by reference in the Registration Statement of
Interwest Bancorp, Inc. on Form S-8 of our report dated October 28, 1994, for
Interwest Savings Bank and subsidiaries, appearing in the Annual Report on
Form 10-K of Interwest Bancorp, Inc. for the year ended September 30, 1996.
/s/Deloitte & Touche LLP
December 26, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<PAGE>
<PAGE>
Exhibit 23.3
Consent of Former Auditors
Deloitte &
Touche LLP
- ----------- ----------------------------------------------------------
700 Fifth Avenue, Suite 4500 Telephone: (206) 292-1800
Seattle, Washington 98104-5044 Facsimile: (206) 343-7809
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Interwest Bancorp, Inc.
Oak Harbor, Washington
We consent to the incorporation by reference in the Registration Statement of
Interwest Bancorp, Inc. on Form S-8 of our report dated January 19, 1996, for
Central Bancorporation and subsidiaries, appearing in the Annual Report on
Form 10-K of Interwest Bancorp, Inc. for the year ended September 30, 1996.
/s/Deloitte & Touche LLP
December 26, 1996
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<PAGE>
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
- ------------------------------------------------------------------------------
The Board of Directors
InterWest Bancorp, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-99742 and 33-13191) of our report dated January 20, 1995, relating to the
Central Bancorporation and subsidiaries consolidated statement of operations
for the year ended December 31, 1994, which report appears in the September
30, 1996 Annual Report on Form 10-K of InterWest Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
December 27, 1996
<PAGE>
<PAGE>
Exhibit 99.1
Prior Independent Auditors' Report
Deloitte &
Touche LLP
- ----------- ----------------------------------------------------------
700 Fifth Avenue, Suite 4500 Telephone: (206) 292-1800
Seattle, Washington 98104-5044 Facsimile: (206) 343-7809
INDEPENDENT AUDITORS' REPORT
Board of Directors
InterWest Savings Bank
Oak Harbor, Washington
We have audited the consolidated statements of income, stockholders' equity,
and cash flows of InterWest Savings Bank and subsidiaries (the Bank) for the
year ended September 30, 1994 (not presented separately herein). These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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, such consolidated financial statements present fairly, in all
material respects, the results of operations of the Bank and its cash flows
for the year ended September 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the consolidated financial statements include the
effect of the Bank's adoption of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities, in
1994.
/s/Deloitte & Touche LLP
October 28, 1994
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<PAGE>
<PAGE>
Exhibit 99.2
Deloitte &
Touche LLP
- ----------- ----------------------------------------------------------
700 Fifth Avenue, Suite 4500 Telephone: (206) 292-1800
Seattle, Washington 98104-5044 Facsimile: (206) 343-7809
INDEPENDENT AUDITORS' REPORT
Board of Directors
Central Bancorporation
Wenatchee, Washington
We have audited the consolidated balance sheet of Central Bancorporation
(Bancorp) and subsidiaries as of December 31, 1995, and the related statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented separately herein). 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.
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, such consolidated financial statements 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
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
<PAGE>
<PAGE>
Exhibit 99.3
INDEPENDENT AUDITORS' REPORT
- ------------------------------------------------------------------------------
The Board of Directors
Central Bancorporation:
We have audited the consolidated statement of operations of Central
Bancorporation and subsidiaries for the year ended December 31, 1994. The
consolidated statement of operations is the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
statement of operations based on our audit.
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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. As 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 statement of operations referred to above
presents fairly, in all material respects, the results of operations of
Central Bancorporation and subsidiaries for the year ended December 31, 1994,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
January 20, 1995
<PAGE>
<PAGE>
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