SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended December 31, 1996
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number _______________
InterWest Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
(State or other jurisdiction of incorporation or organization)
91-1691216
(I.R.S. Employer Identification No.)
275 Southeast Pioneer Way
Oak Harbor, Washington
(Address of principal executive offices)
98277
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of December 31, 1996, 8,000,756 shares of common stock were outstanding
with a par value of $0.20.
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INTERWEST BANCORP, INC
INDEX PAGE
- ----- ----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition 1
Consolidated Statements of Operations 2-3
Consolidated Statements of Stockholder's Equity 4
Consolidated Statements of Cash Flow 5-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share amounts)
December 31, September 30,
1996 1996
-------- --------
(Unaudited)
ASSETS
Cash and cash equivalents $ 49,870 $ 48,501
Investment securities available for sale,
at fair value 48,021 26,166
Mortgage-backed and related securities
available for sale, at fair value 329,344 341,957
Investment securities held to maturity 104,017 134,106
Mortgage-backed and related securities held
to maturity 101,647 103,330
Loans receivable, net 977,872 965,920
Loans held for sale, fair value 7,353 10,051
Accrued interest receivable 11,127 12,576
Real estate held for sale and for development 12,644 10,968
Federal Home Loan Bank (FHLB) stock, at cost 19,619 19,232
Premises and equipment, net 34,465 34,356
Intangible assets 2,804 2,869
Other assets 4,461 2,119
-------- --------
Total assets $1,703,244 $1,712,151
========= =========
LIABILITIES
Customer deposits $1,154,774 $1,120,743
Federal Home Loan Bank advances 258,985 336,839
Securities sold under agreements to repurchase 158,925 119,945
Accrued expenses and other liabilities 11,780 18,938
Advance payments by borrowers
for taxes and insurance 746 952
Other borrowings 1,962 3,713
-------- --------
Total liabilities 1,587,172 1,601,130
========= =========
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share
Authorized 20,000,000 shares
Issued and outstanding 8,000,756 and 7,918,074 1,605 1,592
Paid-in-capital 19,898 18,995
Treasury stock <289> <289>
Retained earnings 97,792 93,963
Debt related to ESOP <102> <312>
Net Unrealized loss on securities available
for sale <2,832> <2,928>
-------- --------
Total stockholders' equity 116,072 111,021
-------- --------
Total $1,703,244 $1,712,151
========= =========
Stockholders' equity/total assets 6.81% 6.48%
Book value per share $14.51 $14.02
1
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Quarter ended December 31,
1996 1995
------ ------
INTEREST INCOME
Loans receivable $22,181 $20,283
Mortgage-backed and related securities 7,266 6,996
Interest-earning deposits 473 582
Investment securities 3,192 857
------ ------
33,112 28,718
INTEREST EXPENSE
Customer deposits 12,517 12,443
FHLB advances and other borrowings 4,600 3,870
Securities sold under agreements to repurchase 1,952 611
------ ------
19,069 16,924
Net interest income before provision for
losses on loans 14,043 11,794
Provision for losses on loans 300 250
------ ------
Net interest income after provision for
losses on loans 13,743 11,544
OTHER OPERATING INCOME
Gain on sale of loans 270 320
Service fees 1,764 1,088
Insurance commissions 553 385
Other 316 231
Gain on real estate held for sale
and for development 34 --
Gain on sale of investment securities
and mortgage-backed and related securities 322 211
------ ------
3,259 2,235
OTHER OPERATING EXPENSE
Compensation and employee benefits 5,136 4,097
General and administrative 2,337 1,938
Loss (gain) from real estate write-downs
and operations 131 <224>
Occupancy 1,262 1,015
Data processing 729 475
FDIC premium assessment (67) 492
------ ------
9,528 7,793
------ ------
Income before federal income taxes 7,474 5,986
FEDERAL INCOME TAX EXPENSE 2,522 2,117
------ ------
NET INCOME $4,952 $3,869
====== ======
2
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended December 31,
1996 1995
------ ------
Net income per share $.61 $.48
Cash dividend declared $.14 $.10
Weighted average shares outstanding 8,136,297 7,987,395
Return on average stockholders' equity 17.45% 14.30%
Return on average assets 1.15% 1.05%
3
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
Unrealized
gain (loss) Debt
Common Stock on securities Related
# of Shares Amount Paid-in Retained available to Treasury
Capital Earnings for sale ESOP Stock Total
----------- ------ ------- -------- -------- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 7,828,935 $1,581 $18,588 $85,784 $788 <712> <289> $105,740
Net income 3,869 3,869
Cash dividends <649> <649>
Proceeds from sale of
Common Stock 15,987 3 143 146
ESOP loan transaction 16,074 200 200
Unrealized loss on securities
available for sale <1,286> <1,286>
Pooling accounting adjustment <473> <473>
----------- ------ ------- -------- -------- ----- ------ --------
Balance December 31, 1995 7,860,996 $1,584 $18,731 $88,531 $<498> <512> <289> $107,547
=========== ====== ======= ======== ======== ===== ====== ========
Balance, September 30, 1996 7,918,074 $1,592 $18,995 $93,963 $<2,928> $<312> $<289> $111,021
Net income 4,952 4,952
Cash dividends <1,123> <1,123>
Proceeds from sale of
Common Stock 66,630 13 903 916
ESOP loan transaction 16,052 210 210
Unrealized gain on
Securities available for sale 96 96
----------- ------ ------- -------- -------- ----- ------ --------
Balance December 31, 1996 8,000,756 $1,605 $19,898 $97,792 $<2,832> $<102> $<289> $116,072
=========== ====== ======= ======== ======== ===== ====== ========
4
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Quarter ended December 31,
1996 1995
-------- --------
OPERATING ACTIVITIES
Net Income $4,952 $3,869
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 597 507
Provision for losses on loans 300 250
Provision for loss on real estate held for sale -- (250)
Accretion of premiums and discounts, net 348 174
Gain on sale of loans (270) (320)
Gain on sale of investment securities and
mortgage-backed and related securities (322) (211)
Gain on sale of real estate held for sale and
for development and premises and equipment (34) --
Amortization of deferred loan fees, net 51 (1,494)
FHLB stock dividends (387) (264)
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable 1,449 (654)
Other assets (2,342) 700
Accrued expenses and other liabilities (7,287) 1,706
Advance payments by borrowers for
taxes and insurance (206) (363)
Pooling accounting adjustment 2,782
-------- --------
BALANCE, net cash provided (used) by
operating activities, carried forward $(3,151) $6,432
5
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Quarter ended December 31,
1996 1995
-------- --------
BALANCE, net cash provided (used) by
operating activities, brought forward $(3,151) $ 6,432
INVESTING ACTIVITIES
Purchase of investment securities available
for sale (44,952) (4,556)
Proceeds from maturing investment securities
available for sale 8,325 2,691
Proceeds from sale of investment securities
available for sale 14,622 --
Proceeds from maturing investment securities
held to maturity 115,080 24,504
Purchase of investment securities held to maturity (85,000) (3,190)
Principal repayments from mortgage-backed
and related securities available for sale 18,417 8,507
Principal repayments from mortgage-backed
and related securities held to maturity 1,653 5,293
Purchase of mortgage-backed
and related securities held to maturity -- (2,418)
Purchase of mortgage-backed and related securities
available for sale (7,677) (39,251)
Proceeds from sale of mortgage-backed and related
securities available for sale 45,980 89,052
Proceeds from sale of loans 4,513 5,865
Loan originations, net of repayments (57,944) (42,507)
Proceeds from sale of real estate held for sale
and for development 270 257
Purchases of premises and equipment (1,819) (1,881)
Purchase of FHLB stock -- (1,395)
Capital additions to real estate held for sale (445) (1,138)
-------- --------
Net cash provided by investing activities 11,023 39,833
FINANCING ACTIVITIES
Net increase (decrease) in customer deposits 8,202 (641)
Net increase in certificates of deposit 25,829 6,666
Proceeds from FHLB advances and other borrowings 249,805 150,851
Repayment of FHLB advances and other borrowings (290,220) (143,455)
Dividends paid (1,035) (582)
Issuance of common stock 916 145
-------- --------
Net cash provided (used) by financing activities (6,503) 12,984
-------- --------
Net increase in cash and cash equivalents 1,369 59,249
CASH AND CASH EQUIVALENTS
Beginning of quarter 48,501 54,802
-------- --------
End of quarter $49,870 $114,051
======== ========
6
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $6,941 $7,382
Income taxes -- 172
Noncash transactions:
Loans transferred to real estate held for sale, net 287 96
Transfer of premises to real estate held for sale 1,179 --
Transfer of securities held to maturity
to available for sale -- 200,941
Loans securitizied as mortgage-backed and related
securities 43,810 --
7
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INTERWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED DECEMBER 31, 1996
(unaudited)
NOTE A - Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements. The results
of operations for the quarter and ended December 31, 1996 and 1995 are not
necessarily indicative of the operating results for the full year. The
September 30, 1996 consolidated statement of financial condition presented
with the interim financial statements was audited and received an unqualified
opinion. For further information, refer to the consolidated financial
statements and footnotes thereto included in the InterWest's annual report for
the year ended September 30, 1996.
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.
NOTE B - Net Income per Share
The weighted average shares outstanding during the quarters ended December 31,
1996 and 1995 include the effect of shares held by the Employee Stock
Ownership Plan (ESOP) and stock options granted. Earnings per share for the
quarter ended December 31, 1996 and 1995 are calculated on the basis of
8,136,297 and 7,987,395 weighted average shares outstanding, respectively.
NOTE C - Reclassification
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
NOTE D - Accounting Pronouncements
Effective October 1, 1996, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of ". This statement requires that when
InterWest might be unable to recover, through future operations or sales, the
carrying amount of long-lived assets and certain identifiable intangible
assets and goodwill, an impairment loss be recorded through a valuation
allowance for the impaired asset. Such assets are assessed quarterly for
other-than-temporary impairment. Impairment is measured based on the present
value of expected cash flows for the asset and its eventual disposition. The
adoption of this statement had no material impact on InterWest's financial
condition or results of operations.
Effective October 1, 1996 InterWest adopted SFAS No.122 "Accounting for
Mortgage Servicing Rights" which requires that mortgage servicing rights be
capitalized when acquired either through the purchase or origination of
mortgage loans that are subsequently sold or securitized with the servicing
rights retained. Prior to the adoption of SFAS No. 122, InterWest did not
capitalize mortgage servicing rights.
8
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SFAS No. 122 also requires an enterprise, on a periodic basis, to assess the
capitalized mortgage servicing rights for impairment based on the fair value
of those rights. For this analysis, SFAS No. 122 specifies that mortgage
servicing rights be stratified based on one or more predominant risk
characteristics and any resulting impairment is to be recognized through a
valuation allowance for each impaired stratum. InterWest evaluates mortgage
servicing rights for impairment on a quarterly basis using a fair valuation
model which incorporates estimated future servicing income, discount rates,
prepayment speeds and default rates.
Mortgage servicing rights are included in other assets and are amortized as an
offset to services fees in proportion to and over the period of estimated net
servicing income not to exceed 15 years. The adoption of SFAS No. 122 did not
have a material effect on InterWest's financial condition or results of
operations.
9
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INTERWEST BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total assets decreased $8.9 million from September 30, 1996 to $1.703 billion
at December 31, 1996. During the quarter, InterWest began the process of
restructuring the balance sheet by decreasing the investment and mortgage-
backed and related securities portfolio and increasing the loan portfolio.
The loan portfolio increased by $9.2 million from $976.0 million at September
30, 1996, to $985.2 million as of December 31, 1996. Investment and mortgage-
backed and related securities decreased $22.6 million from $605.6 million at
September 30, 1996 to $583.0 million as of December 31, 1996. This change in
balance sheet composition would have been more significant, however, during
the quarter InterWest securitized $43.8 million of mortgage loans of which
$12.0 million have been sold as of quarter end.
As of December 31, 1996, InterWest has $377.4 million or 65 percent of its
investment and mortgage backed and related securities classified as available
for sale. The available for sale portfolio is required to be carried at fair
value, thus its carrying value fluctuates with changes in market conditions.
At December 31, 1996, InterWest has an unrealized loss on securities available
for sale of $4.4 million as compared to an unrealized loss of $4.5 million at
September 30, 1996.
Excluding loans securitized, loans receivable increased $53.0 million from
September 30, 1996. Loans originated totaled $95.9 for the quarter ended
December 31, 1996, a decrease from $117.8 million in loan originations for the
quarter ended December 31, 1995. Of current quarter originations, 55 percent
were adjustable rate and 45 percent were fixed rate. The decrease is
primarily due to a decrease in single-family residential lending originations
of $23.5 million compared to the like quarter a year ago. This decrease is
due to the current mortgage interest rateenvironment which has produced a flat
yield curve, strong rate competition and limited refinancing activity. In
periods of flat yield curves, adjustable rate mortgages, which are the focus
of InterWest's production, are generally not as attractive to borrowers due to
limited differences from fixed rate products.
Total liabilities decreased a total of $14.0 million from September 30, 1996
to $1.587 billion at December 31, 1996. This was primarily due to an decrease
in borrowings of $40.6 million, a decrease in accrued liabilities of $7.2
million, offset by an increase in customer deposits of $34.0 million. The
increase in customer deposits is primarily due to specific marketing efforts
and competitive pricing of certificate of deposits and to a lesser extent
growth in transaction accounts. InterWest has added 1,590 new transaction
accounts since September 30, 1996, representing a 10.6 percent annualized
growth rate. The shifting of interest-bearing liabilities from borrowings to
customer deposits increases net interest income and net interest margin as the
cost of funds on customer deposits is less than borrowings. The decrease in
accrued liabilities is due to the fact that at September 30, 1996 there were
significant accrued liabilities outstanding related to the acquisition of
Central Bancorporation and the one-time SAIF assessment charged as of
September 30, 1996.
Stockholders' equity increased by $5.1 million from $111.0 million at
September 30, 1996, to $116.1 million at December 31, 1996. The increase in
stockholders' equity resulted from after-tax earnings of $5.0 million for the
quarter, a $210,000 paydown on the Employee Stock Ownership Plan ("ESOP")
loan, $916,000 from the issuance of common stock and a $96,000 decrease in the
unrealized loss on securities available for sale, offset by $1.1 million
representing $0.14 per share cash dividends declared by the Board of Directors
for the quarter ended December 31, 1996.
10
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Loans Receivable, Net and Loans Held For Sale
InterWest originates loans through its 37 full-service offices and its
mortgage subsidiary, Cornerstone Northwest Mortgage, Inc. The following table
indicates the loan portfolio mix as of December 31, 1996, and September 30,
1996:
December 31, 1996 September 30, 1996
----------------- ------------------
(in thousands)
Single-family residential $608,935 $613,220
Multi-family residential 53,016 52,683
Commercial real estate 148,969 146,115
Residential construction 150,478 151,194
Commercial non-real estate 23,251 23,580
Agricultural 13,503 12,873
Consumer 58,534 54,109
----------------- ------------------
1,056,686 1,053,774
Less:
Undisbursed loan proceeds 53,723 60,187
Allowance for losses on loans 8,430 8,074
Deferred loan fees and discounts 9,308 9,542
----------------- ------------------
$985,225 $975,971
The following table compares loan originations, sales and securitizations for
the quarter ended December 31:
1996 1995
------- -------
(in thousands)
Single-family residential $33,525 $57,006
Multi-family residential/
Commercial real estate 11,333 15,598
Residential construction 32,574 29,194
Consumer 8,838 5,912
Commercial non-real estate 6,232 7,224
Agricultural 3,350 2,902
------- -------
Total loans originated $ 95,852 $117,836
======= =======
Loans sold $4,243 $ 5,545
Loans securitized $43,810 $ --
InterWest currently has $289.0 million in loans serviced for others.
Interest is accrued on loans receivable until the loan is 90 days delinquent
or management doubts the collectibility of the loan or the unpaid interest, at
which time InterWest establishes a reserve for any accrued interest. All
loans on which interest is not being accrued are referred to as non-accrual
loans. At December 31, 1996, non-accrual loans totaled $5.3 million, an
increase from $3.2 million at September 30, 1996. Total non-performing assets,
including real estate owned through foreclosure, increased to $11.6 million or
0.68 percent of assets at December 31, 1996, compared to $9.2 million or 0.54
percent of assets at September 30, 1996.
11
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Results of Operations
InterWest's net income of $5.0 million for the quarter ended December 31, 1996
was an increase of $1.1 from the net income of $3.9 million for the quarter
ended December 31, 1995. Earnings per share also increased to $0.61 for the
current quarter from $0.48 for the like quarter a year ago. InterWest's
return on average assets was 1.15 percent, up from 1.05 percent for the
quarter ended December 31, 1995. Return on average stockholders' equity
also increased to 17.45 percent compared to 14.30 percent for the quarter
ended December 31, 1995. InterWest's increased earnings are primarily
attributable to the growth in and diversification of InterWest's balance
sheet.
Net Interest Income
Net interest income increased $2.2 million to $14.0 million for the quarter
ended December 31, 1996, compared to $11.8 million for the quarter ended
December 31, 1995. This increase is primarily due to growth in interest-
earning assets and partially due to an increase in the margin earned on these
assets. Net interest margin for the quarter ended December 31, 1996 was 3.49%
as compared to 3.39% for the quarter ended December 31, 1995.
The yield curve has remained relatively flat during the quarter ended December
31, 1996. InterWest has taken steps to insulate itself from this flat yield
curve and interest rate risk by focusing on retail loan growth and production
of loans with greater margins: consumer, construction and commercial loans.
This process will create a reduced dependence upon single family lending and
potentially increase margins.
Interest income for the quarter ended December 31,1996 was $33.1 million
compared to $28.7 million for the same period a year ago. This increase was
due to growth in interest-earning assets, which was partially offset by a
slight decrease in the yield earned on those assets. The yield on
interest-earning assets decreased to 8.21 percent for the quarter ended
December 31, 1996, compared to 8.26 percent for the quarter ended December 31,
1995.
Interest expense increased $2.2 million to $19.1 million for the current
quarter compared to $16.9 million for the quarter ended December 31, 1995.
This increase is due to an increase in the balance of interest-bearing
liabilities, offset by a decrease in the cost of funds from the prior year.
The increase in interest-bearing liabilities has been necessary to fund the
growth in assets. The cost of funds was 4.79 percent for the quarter ended
December 31, 1996 which was a 22 basis point decrease from the cost of funds
of 5.01 percent for the quarter ended December 31, 1995. This decrease is
primarily due to the competitive pricing of customer deposits.
12
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Average Rates and Balances
The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the quarter
ended December 31:
1996 1995
Average Average
Balance Rate Balance Rate
------- ----- ------- -----
(in thousands, except percentages)
Loans receivable $ 989,136 8.97% $891,672 9.10%
Mortgage-backed and 432,218 6.72 399,305 7.01
related securities
Investment securities and
interest-earning deposits 192,721 7.61 99,099 5.81
------- ----- ------- -----
Total interest-earnings assets $1,614,075 8.21% $1,390,076 8.26%
Customer deposits $1,131,669 4.42% $1,039,776 4.79%
FHLB advances, securities
sold under agreements
to repurchase and 460,458 5.69 311,146 5.76
other borrowings ------- ----- ------- -----
Total interest-bearing liabilities $1,592,127 4.79% $1,350,922 5.01%
Net interest spread $ 21,948 3.42% $ 39,154 3.25%
====== ==== ====== ====
Net interest margin 3.49% 3.39%
==== ====
13
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Net interest income is influenced by changes in both interest rates and
changes in interest-earning assets and interest-bearing liabilities. The
table presented below is an analysis of these changes for the quarter ended
December 31, 1996 as compared to the same period a year ago (in thousands).
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $(125) $(995) $ 870
Volume 4,153 3,249 904
Rate/Volume 366 (109) 475
------ ------- ------
Total $4,394 $2,145 $2,249
====== ======= ======
Provision and Allowance for Losses on Loans
The allowance for losses on loans totaled $8.4 million (0.85 percent of loans)
at December 31, 1996 compared to $8.1 million (0.82 percent of loans) at
September 30, 1996. The provision for losses on loans increased to $300,000
for the current quarter as compared to $250,000 for the like quarter a year
ago. InterWest attempts to assess the risk level inherent in the loan
portfolio and provide adequate reserves to meet these risks as a part of the
ongoing review of the loan portfolio. Non-performing assets and delinquency
trends are key elements in determining the allowance for losses on loans. The
allowance for losses on loans is also determined by taking into consideration
general economic conditions in the market InterWest serves, historical loss
experience, individual loan review findings, loan mix and the level of loans
relative to the allowance for losses on loans.
The following tables summarize the activity in allowance for losses on loans
during the quarter ended December 31:
1996 1995
------ ------
(in thousands)
Balance at beginning of period $8,074 $6,078
Provisions 300 250
Charge-offs, net 56 <55>
------ ------
Balance at end of period $8,430 $6,273
====== ======
Other Income
Other income increased $1.1 million to $3.3 million for the quarter ended
December 31, 1996, compared to $2.2 million for the quarter ended December 31,
1995. This increase is primarily due to $533,000 in brokered loan fees from
Cornerstone Northwest Mortgage, Inc., a subsidiary of InterWest Bank. An
increase of $168,000 in revenues from the sale of non-traditional financial
and insurance products through InterWest's subsidiaries, InterWest Financial
Services, Inc., and InterWest Insurance Agency Inc., also contributed to this
increase in other income.
14
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Other Expense
Other expense increased $1.7 million to $9.5 million for the quarter ended
December 31, 1996, from $7.8 million for the same quarter last year. This
increase is partially attributable to the costs associated with operating
Cornerstone Northwest Mortgage Inc., of $675,000. With the increase from
Cornerstone netted out, compensation, occupancy, general and administrative
expenses have increased $1.0 million or 14 percent. These increases are due
to growth from bank expansion and diversification, enhanced consumer and
business lending, and technological updates in the branch structure. The
$254,000 increase in data processing expenses is primarily due to
technological changes associated with the acquisition of Central during 1996.
Also noted during the quarter ended December 31, 1996, was a decrease of
$559,000 in FDIC premiums primarily due to the SAIF-BIF legislation enacted
September 30, 1996, which reduced InterWest's premium rates on insured
deposits. The loss from real estate write-downs and operations has increased
by $355,000 from the prior year due to the fact that during the quarter ended
December 31, 1995, InterWest reduced the allowance for losses on real estate
held for sale by $250,000 which directly reduced 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.
InterWest has consistently endeavored to become more efficient in its
operation. One commonly accepted measure of a bank's operating efficiency is
the ratio of total operating expenses to total revenue (net interest income
and other income). For the quarter ended December 31, 1996, this ratio was
56.0% as compared to 56.6% for the quarter a year ago.
Federal Income Tax
The federal income tax expense for the quarter ended December 31, 1996, was
$2.5 million, compared to $2.1 million for the same period last year. The
effective tax rates for the quarter ended December 31, 1996 was 33.7%
compared to 35.4% for the quarter ended December 31, 1995.
Liquidity and Capital Resources
InterWest must maintain adequate liquidity to meet demands for deposits
outflow, loan originations, and normal operating costs. The primary sources of
liquidity are deposit generations, loan principal and interest payments, sales
of mortgage loans, principal payments on loans and mortgage-backed and related
securities, Federal Home Loan Bank advances and reverse repurchase agreements.
InterWest has a credit line available with the Federal Home Loan Bank of 40
percent of total assets. Prepayments on loans and mortgage-backed and related
securities, deposit inflows and outflows are affected significantly by
interest rates, general economic conditions and other factors.
InterWest Bancorp, Inc. and its banking subsidiary, InterWest Bank (the 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 is 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 December 31, 1996, the Bank had the following regulatory capital ratios
calculated in accordance with FDIC standards:
Required Actual
-------- ------
Tier I capital to risk-based assets 4% 12.65%
Total capital to risk-based assets 8% 13.21%
Leverage ratio 4% 6.68%
InterWest's management believes that under the current regulations the Bank
will continue to meet 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 the its loans, could adversely
affect future earnings and, consequently, the ability of the
Bank to meet future minimum capital requirements.
15
<PAGE>
<PAGE>
FDIC regulations establish the amount of capital for each of the Federal
Deposit Insurance Corporation Improvement Act (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 that prevailing rates. In general terms, the capital
definitions are as follows:
Total Tier I
Risk-Based Risk-Based
Capital Capital Leverage
FDICIA Category Ratio Ratio Ratio
------ ------ ------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized 2% or less
Total risk-based capital ratio is the ratio of total capital to risk-weighted
assets. Tier I risk-based capital ration is the ratio of core capital to
risk-weighted assets. Leverage ratio is the ratio of core capital to adjusted
total assets. At December 31, 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.
16
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
InterWest Bancorp, Inc. or its subsidiaries are also involved as
parties to certain legal proceedings incidental to their businesses.
InterWest believes that the outcome of such proceedings will not
have a material effect upon InterWest Bancorp's business or
financial condition.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
17
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERWEST BANCORP, INC.
By: /s/Stephen M. Walden
--------------------
Stephen M. Walden
President and
Chief Executive Officer
Date: February 12, 1997
<PAGE>
<PAGE>
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