<PAGE> 1
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, 1997 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1691216
- ---------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
- -------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360)679-4181
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.20 per share
--------------------------------------
(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 [ ]
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.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $321,144,597 based upon the closing price of the Registrant's
common stock as quoted on the Nasdaq National Market on December 2, 1997 of
$39.875.
As of December 2, 1997, there were issued and outstanding 8,053,783
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Financial Highlights, Management Discussion and Analysis and
Consolidated Financial Statements included in the Annual Report to Stockholders
for the year ended September 30, 1997. (Part II).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders ("Proxy
Statement"). (Part III).
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PART I
ITEM 1. BUSINESS
GENERAL
InterWest Bancorp, Inc. ("Bancorp") was incorporated in the State of
Washington in 1994 for the purpose of becoming a bank holding company for
InterWest Bank (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 Bancorp, and the stockholders of the
Bank became stockholders of Bancorp. Prior to completion of the reorganization,
Bancorp had no material assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of the Bank, Bancorp has engaged in no
significant activity other than holding the stock of the Bank.
InterWest Bank 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, the
Bank acquired the assets of Home Savings and Loan Association. The purchase
added $150 million in assets and five branch offices to the Bank's holdings.
Effective August 31, 1996, Bancorp consummated the acquisition of
Central Bancorporation ("Central"), Wenatchee, Washington, and its wholly-owned
subsidiary, Central Washington Bank. The acquisition was accounted for by
Bancorp as a pooling of interests. The acquisition of Central added 10 new
branches in central Washington and provided Bancorp with an entrance into the
business of commercial banking. This acquisition represented the initial steps
of transforming Bancorp from a traditional thrift to a financial institution
with business banking in its portfolio of products. In November 1996, the Bank
changed its name from InterWest Savings Bank to InterWest Bank to reflect the
expansion of its business.
Continuing its commitment to commercial banking, on September 18, 1997
Bancorp entered into a definitive agreement to acquire Puget Sound Bancorp of
Port Orchard, Washington. Puget Sound Bancorp is the holding company for First
National Bank of Port Orchard which operates three commercial banking branch
offices in western Washington. Puget Sound Bancorp had approximately $52.8
million of total assets as of September 30, 1997. It is anticipated that the
merger will be completed during the first quarter of calendar year 1998,
following the approval of the applicable regulatory authorities and the
shareholders of Puget Sound Bancorp. It is planned that the merger will be
accounted for as a pooling of interests by Bancorp under generally accepted
accounting principles.
A source of future growth will be through acquisitions. Bancorp believes
it is in a unique position to acquire and effectively operate other financial
institutions because of its management experience and its ability to provide
centralized administrative services. Bancorp believes that many stockholders of
other financial institutions are seeking to sell their institutions for a
variety of reasons, including lack of stockholder liquidity, management
succession problems, the difficulty of compliance with current banking
regulations and increasing competition. Bancorp actively reviews proposals for
various acquisition opportunities. Bancorp has established a due diligence
review process to evaluate potential acquisitions and has
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established parameters for potential acquisitions relating to market factors,
financial performance and certain nonfinancial factors. Successful completion of
acquisitions by Bancorp depends on several factors such as the availability of
suitable acquisition candidates, necessary regulatory and stockholder approval
and compliance with applicable capital requirements.
Today the Bank conducts its business through 39 full-service branch
offices in 13 counties in western and central Washington State. These offices
are located in towns, small cities, suburbs and metropolitan markets. The towns
and small cities traditionally served by the Bank 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. The Bank has several initiatives designed to maintain
high levels of customer service, including customer service monitoring and
follow-up procedures. Management believes the Bank has developed such long-term
relationships and that these relationships have resulted in increased
profitability. Results from recent penetration into suburbs and markets
indicates an acceptance of the Bank's product lines and delivery system in what
has not been the Bank's "traditional" small city and town market.
Investments are available through InterWest Financial Services, Inc., a
wholly-owned subsidiary of the Bank and insurance is 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.
NEW BRANCH OPENINGS. During the year ended September 30, 1997 the
Bank opened new branches in Lake Stevens and Kirkland, Washington.
KEY OPERATING RATIOS FOR INTERWEST BANCORP, INC. The table below sets
forth certain performance ratios for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1997 1996(2) 1995 1994 1993
---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
KEY OPERATING RATIOS:
Return on average assets ............. 1.12% 0.82% 1.08% 1.19% 1.31%
Return on average stockholders' equity 16.98 11.48 14.37 15.26 16.32
Average stockholders' equity to
average assets ...................... 6.60 7.12 7.52 7.77 8.03
Net interest margin .................. 3.35 3.53 3.37 3.88 4.22
Ratio of non-performing assets
to total assets(1) .................. 0.58 0.54 0.45 0.61 0.82
Dividend payout ratio ................ 23.40 32.25 18.60 18.54 15.73
</TABLE>
(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.
(2) Includes impact of nonrecurring SAIF assessment of $5.5 million and special
charges primarily incurred in connection with the Central merger of $3.1
million.
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NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share".
This statement provides standards for computing net income per share and makes
them comparable to international earnings per share standards. It requires dual
presentation of basic and diluted net income per share on the face of the income
statement. Basic net income per share will exclude dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net income per share
will reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the net income of
the entity. This statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
Following the requirements of SFAS No. 128, Bancorp's basic net income per share
was $2.53, $1.62 and $1.83 for the years ended September 30, 1997, 1996 and
1995, respectively. Diluted net income per share was $2.48, $1.58 and $1.80 for
the years ended September 30, 1997, 1996 and 1995, respectively. See Note 2 of
the Consolidated Financial Statements for a discussion of other new accounting
standards that will have an impact on Bancorp.
YIELDS EARNED AND RATES PAID
Bancorp's net income is significantly impacted by net interest income,
which is the difference between the interest income received on interest-earning
assets and interest paid on interest-bearing liabilities. 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.
Historically, the Bank 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. The Bank is sensitive to the potential
change in interest rates and the resulting impact on net interest income. It has
been an objective of management to reduce this sensitivity through the use of
adjustable rate assets which enables the Bank to better match the duration of
its deposit base with these types of assets. In addition to adjustable rate
loans, the Bank uses a number of additional strategies to minimize the impact on
earnings during significant changes in interest rates. The strategies utilized
by the Bank to achieve this goal include: origination of short-term consumer and
business loans; emphasis on issuing intermediate to long-term fixed rate
certificates of deposit; sales of fixed-rate mortgage loans; efforts to increase
non-interest bearing checking accounts; and purchases of adjustable rate and
callable agency securities.
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 yield and cost
ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for Bancorp. Average
balances for the period have been calculated using the average of month-end
balances during the years ended September 30, 1996 and 1995. Average balances
for the year ended September 30, 1997 have been calculated using daily average
balances. The difference between using daily average balances and the average of
month-end balances is not material.
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<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------
1997 1996
----------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)..................... $1,041,835 $ 92,899 8.92% $ 907,494 $ 82,925 9.14%
Securities available for sale and
securities held to maturity........... 637,349 43,334 6.80 530,451 35,186 6.63
Interest-earning deposits in banks...... 24,034 1,778 7.40 38,430 2,802 7.29
---------- -------- ---------- ---------
Total interest-earning
assets............................... 1,703,218 138,011 8.10 1,476,375 120,913 8.19
Non-interest earning assets.............. 109,088 86,316
---------- ----------
Total Assets............................. $1,812,306 $1,562,691
========== ==========
Interest-bearing liabilities:
Savings accounts........................ 95,460 2,340 2.45 102,120 2,569 2.52
Checking accounts(2).................... 164,423 1,377 0.84 161,506 1,867 1.16
Money market accounts................... 119,256 4,201 3.52 95,782 3,854 4.02
Certificates of deposit................. 782,427 43,788 5.60 706,250 39,876 5.65
---------- -------- --------- --------
Total Deposits........................ 1,161,566 51,706 4.45 1,065,658 48,166 4.52
FHLB advances, securities sold
under agreements to repurchase
and other borrowings................... 515,144 29,197 5.67 372,200 20,642 5.55
---------- -------- --------- --------
Total interest-bearing
liabilities............................ 1,676,710 80,903 4.83 1,437,858 68,808 4.79
-------- --------
Non-interest bearing
liabilities............................ 16,069 13,566
---------- ----------
Total liabilities.................... 1,692,779 1,451,424
Stockholders' equity..................... 119,527 111,267
---------- ----------
Total liabilities and
stockholders' equity................... $1,812,306 $1,562,691
========== ==========
Net interest income...................... $ 57,108 $52,105
======== =======
Interest rate spread...................... 3.27 3.40
Net interest margin ...................... 3.35 3.53
Ratio of average interest-earning
assets to average interest-
bearing liabilities...................... 101.58% 102.68%
<CAPTION>
Year Ended September 30,
-------------------------------------
1995
-------------------------------------
Average Average
Balance Interest Yield/Cost
--------- --------- ------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)..................... $ 814,898 $ 70,803 8.69%
Securities available for sale and
securities held to maturity........... 421,351 28,166 6.68
Interest-earning deposits in banks...... 20,957 1,295 6.17
---------- --------
Total interest-earning
assets............................... 1,257,206 100,264 7.98
Non-interest earning assets.............. 72,609
----------
Total Assets............................. $1,329,815
==========
Interest-bearing liabilities:
Savings accounts........................ $ 111,538 3,275 2.94
Checking accounts(2).................... 143,122 2,031 1.42
Money market accounts................... 89,183 3,398 3.81
Certificates of deposit................. 654,395 37,248 5.69
---------- --------
Total Deposits........................ 998,238 45,952 4.60
FHLB advances, securities sold
under agreements to repurchase
and other borrowings................... 222,605 11,974 5.38
---------- --------
Total interest-bearing
liabilities............................ 1,220,843 57,926 4.74
--------
Non-interest bearing
liabilities............................ 9,021
----------
Total liabilities.................... 1,229,864
Stockholders' equity..................... 99,951
----------
Total liabilities and
stockholders' equity................... $1,329,815
==========
Net interest income...................... $ 42,338
========
Interest rate spread...................... 3.24
Net interest margin ...................... 3.37
Ratio of average interest-earning
assets to average interest-
bearing liabilities...................... 102.98%
</TABLE>
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(1) Does not include interest on loans 90 days or more past due.
(2) Includes average non-interest bearing deposits of $60.5 million, $49.9 and
$43.1 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
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LENDING ACTIVITIES
General. The principal lending activity of the Bank is the origination
of single-family residential mortgage loans and, to a lesser extent, loans
secured by income property, consumer loans, commercial loans and agricultural
loans. The Bank typically 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 real estate mortgage
loans has been for the purchase or construction of single-family residential
dwellings or refinancing of these properties, but some loans have been for
acquisition or development of residential lots or permanent loans secured by
income properties.
As of September 30, 1997, $681.0 million, or 55.81 percent of the Bank'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 and $220.2 million, or
18.05 percent of total loans, consisted of income property loans (multi-family
residential and commercial real estate loans). Real estate construction loans,
which are primarily secured by one-to-four family residential properties, were
$197.4 million or 16.18 percent of total loans as of September 30, 1997.
The merger with Central provided the Bank with access to commercial
lending. This initiated the process of changing the composition of the Bank's
loan portfolio to that of a financial institution with less reliance on
single-family lending as the primary loan product. The Bank will continue to
focus loan origination efforts in commercial, agricultural and consumer lending.
Growth in commercial, agricultural and consumer loans should shorten duration
risk, produce higher net interest margin, create better protection from interest
rate volatility and ultimately meet the needs of the Bank's individual and
business customers.
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LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Bank's loan portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- -------- -------- -------- ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate mortgage loans:
Single-family residential(1) $ 681,012 55.82% $ 613,220 58.19% $552,845 59.34% $495,954 60.00% $447,559 61.78%
Multi-family residential ... 54,674 4.48 52,683 5.00 51,515 5.53 38,567 4.67 32,853 4.53
Commercial ................. 165,591 13.57 146,115 13.87 118,229 12.69 99,426 12.03 93,576 12.92
Real estate construction ..... 197,445 16.18 151,194 14.35 128,544 13.80 126,455 15.30 103,526 14.29
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total ..................... 1,098,722 90.05 963,212 91.41 851,133 91.36 760,402 92.00 677,514 93.52
Consumer loans .............. 63,133 5.18 54,109 5.13 45,996 4.96 34,946 4.22 28,929 3.99
Commercial loans ............ 28,729 2.35 23,580 2.24 20,571 2.21 18,398 2.23 11,167 1.54
Agricultural loans .......... 29,549 2.42 12,873 1.22 13,659 1.47 12,801 1.55 6,856 0.95
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total other loans ......... 121,411 9.95 90,562 8.59 80,226 8.64 66,145 8.00 46,952 6.48
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total gross loans ......... 1,220,133 100.00% 1,053,774 100.00% 931,359 100.00% 826,547 100.00% 724,466 100.00%
========= ====== ========= ====== ======= ====== ======= ====== ======= ======
Less:
Undisbursed loan proceeds.... (86,677) (60,187) (38,305) (49,217) (40,785)
Allowance for losses
on loans................... (8,667) (8,074) (6,078) (5,663) (4,444)
Deferred loan fees
and discounts.............. (10,078) (9,542) (8,886) (8,676) (7,628)
--------- -------- -------- -------- --------
Total loans receivable, net $1,114,711 $975,971 $878,090 $762,991 $671,609
========== ======== ======== ======== ========
</TABLE>
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(1) Includes construction loans converted to permanent loans.
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LOAN MATURITY AND REPRICING
The following table shows the contractual maturity of the Bank's gross
loans at September 30, 1997. 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 the Bank's actual repayment experience to differ
from that shown below.
<TABLE>
<CAPTION>
After
Within One Year
One Through After
Year 5 Years 5 Years Total
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential $ 5,757 $ 35,481 $ 639,774 $ 681,012
Multi-family residential 2,336 1,323 51,015 54,674
Commercial .............. 20,004 45,900 99,687 165,591
Real estate construction .. 51,770 32,352 113,323 197,445
Consumer loans ............ 32,412 16,499 14,222 63,133
Commercial loans .......... 16,506 9,537 2,686 28,729
Agricultural loans ........ 24,353 3,395 1,801 29,549
---------- ---------- ---------- ----------
Total loans ............. $ 153,138 $ 144,487 $ 922,508 $1,220,133
========== ========== ========== ==========
</TABLE>
The following table sets forth the dollar amount of all loans due one
year or more after September 30, 1997 which have fixed interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
<S> <C> <C>
Real estate mortgage loans:
Single-family residential $370,921 $304,334
Multi-family residential 1,249 51,089
Commercial .............. 21,031 124,556
Real estate construction .. 68,874 76,801
Consumer loans ............ 20,274 10,447
Commercial loans .......... 5,807 6,416
Agricultural loans ........ 2,557 2,639
-------- --------
Total ................... $490,713 $576,282
======== ========
</TABLE>
Real Estate Mortgage Loans
Single-Family Residential Loans. The primary lending activity of the
Bank has been the granting of mortgage loans to enable borrowers to refinance
and purchase existing dwellings or to construct new single-family dwellings on
properties located within its primary market area. Management believes that
focusing on single-family residential mortgage loans has been successful in
contributing to interest income while keeping delinquencies and losses to a
minimum. The Bank's single-family residential
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loan portfolio also includes loans on two- to four-family dwellings and
manufactured homes.
The Bank presently originates both fixed-rate loans and adjustable-rate
mortgage loans ("ARMs") secured by one- to four-family properties with loan
terms of up to 30 years. ARMs originated since 1988 have interest rates that
adjust based upon changes in the pre-determined index for 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.
Commercial real estate and multi-family residential mortgage ("income
property") loans. The Bank originates permanent loans on commercial real estate
and multi-family residences with terms of up to 30 years. Currently, the Bank
originates income property loans in its primary market area. The Bank'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.
Income property loans in the portfolio are generally made in amounts
between $250,000 and $2.5 million. Commercial real estate and multi-family
residential mortgage 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 dependent on the successful operation or
management of the properties. As a result, repayment of such loans may be
subject to conditions in the real estate market or the economy to a greater
extent than single-family residential real estate loans.
Real Estate Construction. The Bank originates residential construction
mortgage loans to residential owner-occupants (custom construction loans) and to
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, 1997, $80.5 million was construction loans to
builders and $116.9 million was construction loans to owner-occupants.
Construction loans to owner-occupants generally have a term of six months and
then are converted to single-family residential mortgage loans. Construction
loans to builders generally are in amounts below $250,000 and are made with a
terms of twelve to eighteen months. The Bank's construction loans to builders
bear variable interest rates. Commitments to provide additional construction
loan funds at September 30, 1997 totaled $86.7 million.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank 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 the Bank are secured by
property in the Bank's local market area.
The Bank's primary focus is on the origination of construction loans to
owner-occupants. However, the Bank also focuses on making construction loans to
builders with whom the Bank has an established relationship. Some of the
construction loans made to
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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 increase the commercial, agricultural and consumer
loan portfolios relative to real estate mortgage loans. To accomplish this
strategy the Bank has added several experienced commercial banking management
personnel to develop credit administration, consumer and business lending
support, and added business relationship officers. This strategy should shorten
duration risk, produce higher net interest margin, create better protection from
interest rate volatility and ultimately meet the needs of the Bank's individual
and business customers.
Commercial Loans. Commercial loans include a wide range of loan types to
small and medium sized businesses. A portion of these loans are commercial lines
of credit with adjustable rates and maturities of less than one year. The
remaining commercial 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. 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, 1997, consumer loans, consisting of
savings account loans, automobile loans, home equity loans and loans for other
consumer purposes were approximately $63.1 million, or 5.2 percent of the Bank's
total gross loan portfolio.
Certain Underwriting Risks. Loans that are not secured by single family
residences are integral to the Bank's asset and liability management program and
reduce exposure to interest rate changes, such loans may entail additional risks
compared to residential mortgage lending. Commercial real estate and real estate
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. Real
estate 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 real estate mortgage lending.
Construction lending is generally considered to involve a higher degree
of collateral risk than long-term financing of residential properties. The
Bank'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
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, the Bank may be required to advance additional funds to complete the
development. Speculative construction loans have the added risk that if
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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, the Bank may have
a loan on a project with a value insufficient to assure full repayment.
Commercial 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.
Consumer lending may involve special risks, including decreases in the
value of collateral and transaction costs associated with foreclosure and
repossession.
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 the Bank's appraisal staff or other
qualified fee appraisers. Appraisals done by other qualified fee appraisers are
selectively reviewed by the Bank's staff appraisers. Residential real estate
mortgage loan documents used by the Bank conform to standards imposed by the
Federal National Mortgage Association ("FNMA") and the FHLMC.
The Bank's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan. The Bank
requires a title insurance policy insuring that the Bank 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.
The Bank'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. The Bank, typically, requires private mortgage
insurance on any home loans in excess of 80 percent of appraised value.
The Board of Directors approves aggregate credit requests over $2.5
million. The Bank's loan committee, with two Board members, reviews applications
for loans from $1.5 million to $2.5 million. A loan committee consisting of
executive and senior officers reviews applications for loans up to $1.5 million.
The Chairman of the Board, President, Chief Financial Officer and the
Senior Vice President/Credit Administrator may approve loans up to $1.0 million.
The Vice Chairman-Commercial Banking, Chief Lending Officer and Chief
Administrative Officer may approve credits up to $500,000.
Loan Originations, Purchases and Sales. Substantially all of the loans
in the Bank's portfolio were originated by the Bank or its mortgage subsidiary,
Cornerstone Northwest Mortgage, Inc. Mortgage loans are sold for cash on a
non-recourse basis. During 1997, the Bank securitized and sold $86.9 million in
fixed-rate mortgage loans. Of these loan securitizations, $43.1 million were
sold immediately and $43.8 million were held for a period of time as securities
available for sale. The Bank has infrequently purchased loans.
In connection with such sales, the Bank generally retains the right to
service the loans (i.e., collection of principal and interest payments), for
which it generally receives a fee based on the difference between the rate paid
to the investor and that
11
<PAGE> 12
collected from the borrower, which generally ranges from 1/4 percent to 1/2
percent of the unpaid balance of each loan. In accordance with SFAS No. 125
"Accounting for Transfers and Servicing of Assets and Extinguishments of
Liabilities", the Bank capitalizes mortgage servicing rights when acquired
either through the purchase or origination of mortgage loans that are
subsequently sold or securitized with the servicing rights retained. Mortgage
servicing rights are included in intangible 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.
Loan Origination and Other Fees. On most real estate mortgage loans, the
Bank receives loan origination fees and discount. Loan fees and discount are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The Bank usually charges origination fees of 1.0
percent to 2.5 percent on one- to four-family residential real estate loans.
Loan origination fees on long-term commercial real estate and real estate
construction loans are usually 1.5 percent to 3.0 percent. Accounting standards
require fees received and costs incurred for originating loans to be deferred
and amortized into interest income over the contractual life of the loan.
Deferred fees and costs associated with loans that are sold are recognized as
gain on sale of loans at the time of sale. The Bank had $10.1 million of net
deferred loan fees and discounts at September 30, 1997.
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.
The Bank 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 and other financial
institutions on a servicing-retained basis and receives fees in return for
performing the traditional services of collecting payments and managing the
loans. At September 30, 1997, the Bank was servicing $301.9 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.
Loan Commitments. The Bank 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. The Bank had unfunded commitments to
originate real estate mortgage loans aggregating $209.9 million at September 30,
1997. Unfunded commitments on business and consumer credit lines totaled $42.3
million at September 30, 1997.
Delinquent and Nonperforming Loans. 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; the Bank 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
12
<PAGE> 13
prospect for improvement. A provision for losses on loans, which is a charge
against operations, is added to the allowance for losses on loans based on
ongoing assessments of credit risk in the loan portfolio.
The Bank'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, the Bank will put a loan on non-accrual and initiate
foreclosure action against the borrower when principal and interest become 90
days or more delinquent. The Bank develops an internal list 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 allowance for losses on loans. This list
of loans requiring special attention is reported to the Board of Directors on a
periodic basis. As of September 30, 1997 and 1996, the Bank had $4.9 million and
$3.2 million, respectively, of loans on nonaccrual.
Real estate held for sale. Real estate held for sale includes property
acquired by the Bank 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, 1997, the Bank had 27 foreclosed properties totaling $6.9 million,
the largest of which was a 148-room motel property located in Columbia, South
Carolina. The second largest foreclosed property is a land development project
located in Fountain, Colorado. During the years ended September 30, 1997 and
1996, portions of this project were sold and gains of $210,000 and $302,000 were
recorded, respectively.
Real estate held for development. In 1989, the Bank granted a loan
secured by approximately 80 acres of land in Mount Vernon, Washington, to
finance the sale of property the Bank had acquired for development in 1978. In
March 1990, the borrowers discovered two 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. The Bank
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 the Bank agreed to rescind the sale. The Bank took title to the
entire 80-acre parcel by deed in lieu of foreclosure. The Bank 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 material from the smaller dump
site was removed and consolidated with the materials from the larger dump site
and the City of Mount Vernon now has title to the larger dump site and all of
the area where the contaminants were located. The Bank 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 complete and the lots are for sale on the
real estate market. The third phase of the project is currently on the market as
a multi-family building site. The second and fourth phases of the project
consisting of 9 and 19 single family lots, respectively, are being held for
future development. As of September 30, 1997, the property was estimated to have
a fair value of $5.3 million using a discounted cash flow projection based on
expected lot sales and future development costs. At September 30, 1997, the book
value of the property was $5.1 million.
13
<PAGE> 14
The following table sets forth information with respect to the Bank's
non-performing assets and restructured loans at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real estate mortgage loans:
Single-family residential .......... $ 3,181 $ 1,965 $ 985 $ 708 $ 1,024
Multi-family residential ........... 407 -- 900 -- --
Commercial ......................... 484 791 308 624 315
Real estate construction ............. 123 -- -- 3 --
Consumer loans ....................... 411 184 109 122 144
Commercial loans ..................... 173 225 71 84 79
Agricultural loans ................... 78 -- -- 123 123
------- ------- ------- ------- -------
Total ............................ 4,857 3,165 2,373 1,664 1,685
Accruing loans which are contractually
past due 90 days or more:
Agricultural ....................... -- -- -- 129 --
Consumer ........................... -- -- -- 1 17
------- ------- ------- ------- -------
Total ............................ -- -- -- 130 17
Real estate owned .................... 6,945 6,053 4,178 5,926 6,332
------- ------- ------- ------- -------
Total nonperforming assets ........... $11,802 $ 9,218 $ 6,551 $ 7,720 $ 8,034
======= ======= ======= ======= =======
Restructured loans ................... $ 948 $ 1,715 $ 1,958 $ -- $ --
Total loans delinquent
90 days or more to
net loans ........................... 0.44% 0.32% 0.27% 0.22% 0.25%
Total loans delinquent
90 days or more to
total assets ........................ 0.24% 0.18% 0.16% 0.13% 0.17%
Total nonperforming assets
to total assets ..................... 0.58% 0.54% 0.45% 0.61% 0.82%
</TABLE>
Interest income that would have been recorded for the year ended
September 30, 1997 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $354,000.
The Bank utilizes four categories for problem loans: Special Mention,
Substandard, Doubtful and Loss. The Bank uses a Special Mention category,
described as loans which do not currently expose the Bank to a sufficient degree
of risk to warrant classification but do possess certain credit deficiencies or
potential weaknesses deserving management's close attention. Substandard loans
have one or more defined weaknesses and are characterized by the possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of Substandard loans 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. A loan classified as Loss is the
14
<PAGE> 15
portion of the loan considered uncollectible. Amounts classified as Loss are
charged- off immediately to the allowance for losses on loans. Assets classified
as Substandard or Doubtful may require the institution to establish specific
reserves as part of determining the allowance for losses on loans.
The Bank's Substandard loans at September 30, 1997 totaled $9.8 million.
Substandard loans are comprised of $5.5 million in single-family residential
loans, $400,000 in multi-family residential loans, $1.6 million in commercial
real estate loans, $300,000 in real estate construction loans, $400,000 in
consumer loans, $1.0 million in commercial loans and $600,000 in agricultural
loans. No loans were classified as Doubtful or Loss at September 30, 1997.
Analysis of Allowance for Losses on Loans. In originating loans, the
Bank 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 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, delinquency levels, actual loan
loss experience, current economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
appropriate level of the allowance for losses on loans is estimated based upon
factors and trends identified by management.
While the Bank believes it has established its allowance for losses on
loans in accordance with generally accepted accounting principles, there can be
no assurance that in the future, regulators, when reviewing the Bank's loan
portfolio, will not request the Bank to increase its allowance for losses on
loans thereby impacting the Bank's financial condition and results of
operations. In addition, because future events impacting 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.
15
<PAGE> 16
The following table sets forth an analysis of the Bank's allowance for
losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period .. $ 8,074 $ 6,078 $ 5,663 $ 4,444 $ 3,643
Provision for losses on loans ..... 1,000 1,060 720 900 1,399
Provision pursuant to acquisition . -- 900 -- -- --
Provision acquired ................ -- -- -- 393 --
Charge-offs:
Real estate mortgage loans:
Single-family residential ....... 109 99 126 164 428
Multi-family residential ........ -- -- 142 -- --
Commercial ...................... 80 2 -- -- 115
Real estate construction ......... -- -- -- -- --
Consumer loans ................... 429 228 276 142 280
Commercial loans ................. 142 31 61 15 76
Agricultural loans ............... 2 -- -- 5 13
------- ------- ------- ------- -------
Total charge-offs .............. 762 360 605 326 912
Recoveries:
Real estate mortgage loans:
Single-family residential ..... 39 6 20 84 15
Commercial .................... 46 13 22 -- --
Consumer loans ................. 138 90 60 36 9
Commercial loans ............... 132 287 194 127 116
Agricultural loans ............. -- -- 4 5 174
------- ------- ------- ------- -------
Total recoveries ............. 355 396 300 252 314
------- ------- ------- ------- -------
Net recoveries (charge-offs) . (407) 36 (305) (74) (598)
------- ------- ------- ------- -------
Balance at end of period ..... $ 8,667 $ 8,074 $ 6,078 $ 5,663 $ 4,444
======= ======= ======= ======= =======
Ratio of allowance to total
loans outstanding at the
end of the period .............. 0.77% 0.82% 0.69% 0.74% 0.66%
Ratio of net charge-offs
to average loans outstanding
during the period .............. 0.04% 0.00% 0.04% 0.01% 0.10%
</TABLE>
16
<PAGE> 17
The following table sets forth the allocation of the allowance for losses
on loans by loan category for the periods indicated.
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ------------------
% 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential... $1,919 55.82% $1,457 58.19% $1,314 59.34% $1,178 60.00% $1,063 61.78%
Multi-family residential.... 221 4.48 413 5.00 404 5.53 302 4.67 258 4.53
Commercial.................. 265 13.57 1,200 13.87 971 12.69 817 12.03 769 12.92
Real estate construction...... 380 16.18 321 14.35 273 13.80 268 15.30 220 14.29
Consumer loans................ 935 5.18 981 5.13 834 4.96 634 4.22 524 3.99
Commercial loans.............. 710 2.35 350 2.24 308 2.21 233 2.23 398 1.54
Agricultural loans............ 49 2.42 200 1.22 205 1.47 158 1.55 113 0.95
Unallocated................... 4,188 N/A 3,152 N/A 1,769 N/A 2,073 N/A 1,099 N/A
------ --- ------ ------- ------ ------ ------ ----- ------ ------
Total allowance
for losses on loans........ $8,667 100.00% $8,074 100.00% $6,078 100.00% $5,663 100.00% $4,444 100.00%
====== ======= ====== ======= ====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE> 18
INVESTMENT ACTIVITIES
Under Washington State 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 Bank has generally maintained liquidity in excess of regulatory
guidelines. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives, management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
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.
Securities are categorized as held to maturity or available for sale,
based upon management's intent as to the ultimate disposition of each security
acquired. The Bank does not actively trade securities. 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 (net of deferred income taxes) reported as a net amount in a
separate component of stockholders' equity. See Notes 3 and 4 to Consolidated
Financial Statements regarding the Bank's securities available for sale and
securities held to maturity.
18
<PAGE> 19
Securities Held to Maturity. The following table sets forth carrying
values and estimated fair values for the Bank's securities held to maturity at
the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- -------------------------------- ----------------------------------
Estimated Estimated Estimated
Amortized Fair Percent of Amortized Fair Percent of Amortized Fair Percent of
Cost Value Portfolio Cost Value Portfolio Cost Value Portfolio
--------- ---------- ---------- --------- ---------- ---------- --------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and Agency
securities (1) ..... $ 49,738 $ 49,492 41.45% $146,817 $146,044 61.84% $ 52,952 $ 52,471 16.00%
Obligations of states
and political
subdivisions ....... 3,706 3,723 3.09 3,802 3,808 1.60 5,341 5,387 1.61
Other securities .... 66,549 63,856 55.46 86,817 81,044 36.56 272,684 266,947 82.39
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ...... $119,993 $117,071 100.00% $237,436 $230,896 100.00% $330,977 $324,805 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
The following table sets forth the maturities and weighted average yields of the
securities held to maturity at September 30, 1997.
<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
---------------- ---------------- ------------------ -------------------
Amortized Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------ --------- ----- --------- ----- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and Agency
securities (1) ..... $ 300 5.19% $20,093 6.59% $ -- --% $29,345 6.42%
Obligations of states
and political
subdivisions ....... 936 3.79 2,562 4.42 208 5.36 -- --
Other securities .... -- -- -- -- -- 66,549 6.51
------- ------- ------ -------
Total ...... $ 1,236 4.12 $22,655 6.33 $ 208 5.36 $95,894 6.47
======= ======= ====== =======
</TABLE>
19
<PAGE> 20
Securities Available for Sale. The following table sets forth the Bank's
securities available for sale portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
Estimated Estimated Estimated
Fair Percent of Fair Percent of Fair Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ---------- ---------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Securities............... $375,708 73.47% $93,902 25.51% $25,738 18.22%
SBA Certificates................. 61,160 11.96 71,037 19.30 71,286 50.46
Obligations of states and
political subdivisions.......... 681 0.13 5,115 1.39 102 0.07
Other securities................. 73,805 14.44 198,069 53.80 44,146 31.25
-------- ------ -------- ------ -------- -----
Total......................... $511,354 100.00% $368,123 100.00% $141,272 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth the maturities and weighted average yields
of the Bank's securities available for sale portfolio at September 30, 1997.
<TABLE>
<CAPTION>
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------- ------------------ ------------------ -------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
Value Yield Value Yield Value Yield Value Yield
--------- ----- --------- ----- ---------- ----- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
Agency Securities................. $ -- --% $262,182 6.54% $10,219 6.33% $103,307 6.71%
SBA Certificates................... -- -- -- -- 11,683 8.33 49,477 7.89
Obligations of states and
political subdivisions............ 512 4.90 65 5.86 -- -- 104 5.37
Other securities................... -- -- -- -- 3,245 7.40 70,560 6.58
---- -------- ------- --------
Total........................... $512 4.90 $262,247 6.53 $25,147 7.35 $223,448 6.91
==== ======== ======= ========
</TABLE>
20
<PAGE> 21
The following table presents the name of the issuer and the aggregate
amortized cost and aggregate estimated fair value of the securities of each
issuer for those securities in the Bank's portfolio whereby the aggregate
amortized cost exceeds 10 percent of Bancorp's stockholders' equity as of
September 30, 1997.
<TABLE>
<CAPTION>
Estimated
Amortized Cost Fair Value
-------------- ----------
(In Thousands)
<S> <C> <C>
Chase Mortgage Finance Corporation................. $21,631 $20,896
DLJ Mortgage Acceptance Corporation................ 18,208 18,153
GE Capital Mortgage Services, Inc.................. 56,827 53,899
Greenwich Capital Acceptance Inc................... 13,606 13,621
</TABLE>
DEPOSIT ACTIVITIES AND BORROWINGS
Deposits. The Bank offers various types of deposit accounts, including savings,
checking accounts, money market type accounts and a variety of certificate
accounts. 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. The Bank has
rarely relied on brokered deposits, but has relied on generating deposits
through a marketing strategy that employs a sales staff responsible for
generating deposits as well as fee products. Transaction deposit accounts offer
the Bank an opportunity to market other products to these customers.
The following table indicates the amount of the Bank's certificates of
deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
<S> <C>
Three months or less............................ $125,961
Three through six months........................ 41,182
Six through twelve months....................... 66,099
Over twelve months.............................. 59,943
--------
Total....................................... $293,185
========
</TABLE>
21
<PAGE> 22
The following table sets forth the balances and changes in dollar
amount of deposits in the various types of accounts offered by the Bank at the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ------------------------------- --------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
---------- ------- ---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits........ $66,205 5.65% $8,625 $ 57,580 5.14% $10,390 $ 47,190 4.54%
Interest bearing checking accounts... 103,301 8.82 4,029 99,272 8.85 (1,193) 100,465 9.66
Money market accounts................ 128,008 10.93 15,394 112,614 10.05 12,561 100,053 9.62
Savings accounts..................... 94,686 8.08 (5,316) 100,002 8.92 (1,875) 101,877 9.79
Certificates......................... 779,240 66.52 27,965 751,275 67.04 60,550 690,725 66.39
---------- ------ ------- ---------- ------ ------- ---------- -------
Total........................... $1,171,440 100.00% $50,697 $1,120,743 100.00% $80,433 $1,040,310 100.00%
========== ======= ======= ========== ====== ======= ========== ======
</TABLE>
22
<PAGE> 23
Borrowings. The Federal Home Loan Bank ("FHLB") functions as a central
reserve bank providing credit for member financial institutions. As a member,
the Bank 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 to members pursuant to several
different programs. These programs are generally tailored to the institution's
need while still reflecting market terms and conditions. The Bank relies upon
advances from the FHLB to supplement its supply of lendable funds and to meet
liquidity guidelines. The rates on these advances vary from time to time in
response to general economic conditions. At September 30, 1996, the Bank had
advances totaling $470.2 million from the FHLB at interest rates ranging from
4.36 percent to 6.40 percent.
The Bank uses the securities market as a vehicle for borrowing by
utilizing its securities available for sale and securities held to maturity as
collateral. At September 30, 1997, the Bank has $259.0 million outstanding in
securities sold under agreement to repurchase at interest rates ranging from
5.03 percent to 6.43 percent. These borrowings are collateralized by securities
with a fair value exceeding the face value of the borrowings.
The following table sets forth certain information regarding borrowings
by the Bank during the periods indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended
September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount outstanding at any
month end during the period:
FHLB advances ........................... $470,172 $378,499 $268,256
Securities sold under agreements
to repurchase .......................... 258,993 119,945 41,090
Approximate average amount outstanding
during the period:
FHLB advances ........................... 332,682 310,897 190,944
Securities sold under agreements
to repurchase .......................... 183,246 56,285 26,434
Balance outstanding at end of period:
FHLB advances ........................... 470,172 336,839 268,256
Securities sold under agreements
to repurchase .......................... 258,993 119,945 40,734
Approximate weighted average rate paid
during the period:
FHLB advances ........................... 5.64% 5.52% 5.23%
Securities sold under agreements
to repurchase .......................... 5.66 5.67 5.94
Weighted average rate paid at end of period:
FHLB advances ........................... 5.68 5.50 5.61
Securities sold under agreements
to repurchase .......................... 5.66 5.45 5.84
</TABLE>
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<PAGE> 24
PERSONNEL
As of September 30, 1997, Bancorp, including its subsidiaries, had 621
full-time equivalent employees. Bancorp believes that employees play a vital
role in the success of a service company such as Bancorp and that Bancorp's
relationship with its employees is excellent. Executive management has worked
together as a team for more than 20 years and turnover among management
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.
All of Bancorp'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 Bancorp's continued growth
and profitability. All personnel within Bancorp 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.
COMPETITION
At September 30, 1997, Bancorp was the second largest bank holding
company with headquarters located in the State of Washington based on total
assets. The Bank 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. As with all banking organizations, the
Bank has experienced increasing competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. The Bank's competition for loans comes principally from other
savings institutions, commercial banks, credit unions and mortgage banking
companies. Many of the Bank's competitors have more significant financial
resources, larger market share and greater name recognition than the Bank. The
existence of such competitors may make it difficult for Bancorp to achieve its
financial goals.
The Bank 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 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.
SUPERVISION AND REGULATION
INTRODUCTION
The following refers to certain statutes and regulations affecting the
banking industry. These references are only intended to provide brief summaries
and therefore, are not complete and are qualified by the statutes and
regulations referenced. In addition, due to the numerous statutes and
regulations which apply to and regulate the operation of the banking industry,
many are not referenced below.
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<PAGE> 25
BANCORP
GENERAL. Bancorp is a bank holding company by virtue of its ownership of
InterWest Bank, and is registered as such with the Federal Reserve Bank ("FRB").
As a bank holding company, Bancorp is subject to the Bank Holding Company Act
("BHCA"), which governs and subjects Bancorp and the Bank to supervision and
examination by the FRB. Under the BHCA, Bancorp files with the FRB an annual
report of its operations and such additional information as the FRB may require.
BANK HOLDING COMPANY STRUCTURE. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other
banking-related activities. Certain recent legislation designed to expand
interstate branching and relax federal restrictions on interstate banking may
expand opportunities for bank holding companies (see below under "Regulation of
Banking Subsidiaries - Recent Federal Legislation - Interstate Banking and
Branching"). However, the impact that this legislation may have on Bancorp and
the Bank is unclear at this time.
FRB REGULATION. Bank holding companies must obtain the FRB's approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5% of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; and (3) acquire
substantially all of the assets of any additional banks. Until September of
1995, the BHCA also prohibited bank holding companies from acquiring any such
interest in any bank or bank holding company located in a state other than the
state in which the bank holding company was located, unless the laws of both
states expressly authorized the acquisition. Now, subject to certain state laws,
such as age and contingency laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of an out-of-state
bank.
CONTROL OF NONBANKS. With certain exceptions, the BHCA also prohibits
bank holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds Bancorp's business to be incidental to the business of banking.
When making this determination, the FRB in part considers whether allowing a
bank holding company to engage in those activities would offer advantages to the
public that would outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek FRB approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the statute. A bank holding company meeting
the specifications is now required only to notify the FRB within 10 business
days after the activity has begun. The FRB has issued a final rule incorporating
the changes enacted by the Economic Growth Act, and as of April 21, 1997, a
well-run bank holding company, without any prior notice or FRB approval, may
commence immediately any activity that is currently or at the time of
commencement included in the FRB's list of acceptable nonbanking activities.
Acceptable nonbanking activities include: (1) operating an industrial
loan company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate
25
<PAGE> 26
brokerage and syndication, land development, property management, and the
underwriting of life insurance not related to credit transactions. From time to
time, the FRB may add to or delete from the list of activities permissible for
bank holding companies.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, requires a person or group of persons acquiring "control" of a bank
holding company to provide the FRB with at least 60 days' prior written notice
of the proposed acquisition. Following receipt of this notice, the FRB has 60
days to issue a notice disapproving the proposed acquisition, but the FRB may
extend this time period for up to another 30 days. An acquisition may be
completed before the disapproval period expires if the FRB issues written notice
of its intent not to disapprove the action. Under a rebuttable presumption
established by the FRB, the acquisition of 10% or more of a class of voting
stock of a bank holding company with a class of securities registered under
Section 12 of the Exchange Act would, under the circumstances set forth in the
presumption, constitute the acquisition of control. In addition, any "company"
would be required to obtain the approval of the FRB under the BHCA before
acquiring 25% (5% if the "company" is a bank holding company) or more of the
outstanding shares of Bancorp, or otherwise obtain control over Bancorp.
TRANSACTIONS WITH AFFILIATES. Bancorp and the Bank are deemed affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. These restrictions apply to
Bancorp and the Bank through the BHCA, which provide that transactions between
an insured subsidiary of a holding company and its affiliates are subject to the
restrictions applicable to transactions between banks that are members of the
Federal Reserve System and their affiliates in accordance with Sections 23A and
23B of the Federal Reserve Act. Generally, Sections 23A and 23B: (1) limit the
extent to which the financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, to an amount equal to 10%
of such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
REGULATION OF MANAGEMENT. Federal law: (1) sets forth the circumstances
under which officers or directors of a financial institution may be removed by
the institution's federal supervisory agency; (2) places restraints on lending
by an institution to its executive officers, directors, principal stockholders,
and their related interests; and (3) prohibits management personnel from serving
as a director or in other management positions of another financial institution
whose assets exceed a specified amount or which has an office within a specified
geographic area.
FIRREA. The Financial Institution Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
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<PAGE> 27
TIE-IN ARRANGEMENTS. Bancorp and the Bank, are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, neither Bancorp, nor the Bank may condition an extension of credit
on either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. Effective April, 1997, the FRB has adopted
significant amendments to its anti-tying rules that: (1) remove FRB-imposed
anti-tying restrictions on bank holding companies and their non-bank
subsidiaries; (2) create exemptions from the statutory restriction on bank tying
arrangements to allow banks greater flexibility to package products with their
affiliates; and (3) establish a safe harbor from the tying restrictions for
certain foreign transactions. These amendments are designed to enhance
competition in banking and nonbanking products and allow banks and their
affiliates to provide more efficient and lower-cost service to customers.
However, the impact of the amendments on Bancorp and the Bank is unclear at this
time.
STATE LAW RESTRICTIONS. As a corporation chartered under the laws of the
State of Washington, Bancorp may be subject to certain limitations and
restrictions as provided under applicable Washington corporate laws.
SECURITIES REGISTRATION AND REPORTING. Bancorp Common Stock is
registered as a class with the SEC under the Securities Exchange Act of 1934 and
thus is subject to the periodic reporting and proxy solicitation requirements
and the insider-trading restrictions of that Act. The periodic reports, proxy
statements, and other information filed by Bancorp under that Act can be
inspected and copied at or obtained from the Washington, D.C., office of the
SEC. In addition, the securities issued by Bancorp are subject to the
registration requirements of the Securities Act of 1933 and applicable state
securities laws unless exemptions are available.
THE BANK
GENERAL. Applicable federal and state statutes and regulations governing
a bank's operations relate, among other matters, to capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings, issuance
of securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
InterWest Bank is a state-chartered savings bank subject to extensive
regulation and supervision by the Washington Department of Financial
Institutions Division of Banks (the "Division"), and 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 also subject
to regulation and examination by the FDIC, which insures the deposits of the
Bank to the maximum extent permitted by law and by requirements established by
the FRB. The federal laws that apply to the Bank regulate, among other things,
the scope of its business, its investments, its reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for loans. The laws and regulations governing the Bank generally have
been promulgated to protect depositors and not to protect stockholders of such
institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of
27
<PAGE> 28
areas to ensure bank safety and soundness, including: internal controls; credit
underwriting; asset growth; management compensation; ratios of classified assets
to capital; and earnings. FDICIA also contains provisions which are intended to
change independent auditing requirements; restrict the activities of
state-chartered insured banks; amend various consumer banking laws; limit the
ability of "undercapitalized banks" to borrow from the FRB's discount window;
and require regulators to perform annual on-site bank examinations and set
standards for real estate lending.
FORMAL SUPERVISORY ACTION. A compliance examination of the Bank
performed by the FDIC as of July 15, 1996 disclosed reimbursable violations of
the Truth in Lending Act and resulted in a less than satisfactory compliance
rating. As a result of this examination and in an effort to address these
matters, the Bank and its Board of Directors of the Bank entered into a
Memorandum of Understanding ("MOU") with the FDIC dated as of February 10, 1997.
The Board of Directors of the Bank has taken actions to comply with the
terms and provisions of the MOU that included the hiring of a Compliance Officer
and the development of a formal Compliance Policy. Monetary restitution (which
in the aggregate, was not material) has been made to customers for Truth in
Lending violations and procedures have been implemented to prevent reoccurrence
of further violations. The Bank has provided quarterly written reports detailing
the actions taken to comply with the MOU. Results from a recent FDIC review in
July 1997 confirmed that significant progress has been made towards compliance
with the terms of the MOU. The next FDIC compliance examination will occur
during calendar year 1998.
LOANS-TO-ONE BORROWER. The Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans-to-one borrower
to 15 to 20% of unimpaired capital and surplus. As of September 30, 1997, the
Bank was in compliance with applicable loans-to-one borrower requirements.
FDIC INSURANCE. Generally, customer deposit accounts in banks are
insured by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted
a risk-based insurance assessment system under which depository institutions
contribute funds to the Bank Insurance Fund ("BIF") and/or the Savings
Association Insurance Fund ("SAIF"), as applicable, based on their risk
classification.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits.
The one-time assessment was designed to place the SAIF at its 1.25 reserve ratio
goal.
The Funds Act, for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis points)
imposed on SAIF insured deposits (approximately 6.5 basis points). Beginning in
the year 2000, BIF insured institutions will be required to pay the FICO
obligations on a pro-rata basis with all thrift institutions; annual assessments
are expected to equal approximately 2.4 basis points until 2017, to be phased
out completely by 2019.
For the remainder of 1997 and until further action by the FDIC, BIF
premiums will be maintained at their current level.
28
<PAGE> 29
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. The Funds Act also provides for the merger of the BIF and SAIF
on January 1, 1999, only if no thrift institutions exist on that date. It is
expected that Congress will continue to address comprehensive legislation on the
merger of the funds and elimination of the thrift charter.
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. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL ADEQUACY REQUIREMENTS. The FRB and the FDIC (collectively, the
"Agencies") have adopted risk-based capital guidelines for banks and bank
holding companies that are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies
and account for off-balance sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios in excess of the
minimums. Failure to achieve and maintain adequate capital levels may give rise
to supervisory action through the issuance of a capital directive to ensure the
maintenance of required capital levels.
The current guidelines require all federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common stockholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for losses on loans. Total capital includes the excess of any
preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and the allowance for losses on loans up to 1.25% of
risk-weighted assets. The Bank has not received any notice indicating that it
will be subject to higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0%,
20%, 50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans (both carry a 50% rating).
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to limit the maximum degree to which a bank may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis
29
<PAGE> 30
points. Any institution operating at or near the 3% level is expected to have
well-diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity and good earnings, and in general, to be a strong
banking organization without any supervisory, financial or operational
weaknesses or deficiencies. Any institutions experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The
regulators require the FDIC and other Federal Banking Agencies to take certain
"prompt corrective action" when a bank fails to meet certain capital
requirements. The regulations establish and define five capital levels: (1)
"well-capitalized," (2) "adequately capitalized," (3) "undercapitalized," (4)
"significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10% total
risk-based capital, 6% Tier 1 risk-based capital, and a leverage ratio of no
less than 5%. Increasingly severe restrictions are imposed on the payment of
dividends and management fees, asset growth and other aspects of the operations
of institutions that fall below the category of being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital, and a leverage ratio of at least 4%). Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of the date of this filing, neither Bancorp, nor the Bank were subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. Dividends paid to Bancorp by the
Bank are a material source of Bancorp's cash flow. Various federal and state
statutory provisions limit the amount of dividends the Bank is permitted to pay
to Bancorp without regulatory approval. FRB policy further limits the
circumstances under which bank holding companies may declare dividends. For
example, a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset qualify, and overall financial condition.
If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the FRB and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
30
<PAGE> 31
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 (1) the amounts required for liquidation accounts or (2) 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.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts) and non-personal time deposits. Currently, reserves of 3% must be
maintained against total transaction accounts of $49.8 million or less (after a
$4.2 million exemption), and an initial reserve of 10% (subject to adjustment by
the FRB to a level between 8% and 14%) must be maintained against that portion
of total transaction accounts in excess of such amount. On September 30, 1997,
the Bank was in compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
FRB may be used to satisfy applicable liquidity requirements. Because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the earning assets the Bank.
RECENT FEDERAL LEGISLATION
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act") generally permits
nationwide interstate banking and branching by relaxing federal law restrictions
on interstate banking and providing general authorization for interstate
branching. Subject to certain state laws, such as age and contingency laws, the
Interstate Act allows adequately capitalized and adequately managed bank holding
companies to purchase the assets of out-of-state banks. Additionally, since June
1, 1997, the Interstate Act permits interstate bank mergers, subject to these
state laws, unless the home state of either merging bank has "opted-out" of
these provisions by enacting "opt-out" legislation. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, as of June 6,
1996, an out-of-state bank holding company may now acquire more than 5% of the
voting shares of a Washington-based bank, regardless of reciprocity, provided
such bank or its predecessor has been doing business for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to Washington
law, (3) resulted from a relocation of a head office of a state bank or a main
office of a national bank pursuant to federal law, or (4) resulted from the
establishment of a savings bank branch in compliance with applicable Washington
law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
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<PAGE> 32
REGULATORY IMPROVEMENT. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act"), with
the intent of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax certain regulatory compliance requirements. In addition, the
Regulatory Improvement Act specifically directs each federal banking agency to
review and streamline its regulations and written supervisory policies.
At this time, the full impact that the Interstate Act and the Regulatory
Improvement Act might have on Bancorp is impossible to predict.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal banking regulators are
substantial and include, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities. Applicable law
also requires public disclosure of final enforcement actions by the federal
banking agencies.
TAXATION
FEDERAL TAXATION
GENERAL. Bancorp 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 Bancorp. The Bank has not been audited by the IRS during the past five
years. Reference is made to Note 14 of the Notes to the Consolidated Financial
Statements contained in the Annual Report for additional information concerning
the income taxes payable by Bancorp.
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 allowed 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.
Legislation enacted repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995. As result,
savings
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institutions will no longer be able to calculate their deduction for bad
debts using the percentage-of-taxable-income method. Instead, savings
institutions will be required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings institution 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
institutions 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, 1997 the Bancorp's post-1987 reserves totaled
approximately $6.0 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, 1998.
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, 1997, the Bank's
total bad debt reserve for tax purposes was approximately $17.4 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 institution will not be
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 Bancorp 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 Bancorp 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
33
<PAGE> 34
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
Bancorp, including the Bank, whether or not an Alternative Minimum Tax ("AMT")
is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. Bancorp 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 Bancorp and the Bank will not file a
consolidated tax return, except that if Bancorp 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 STATE 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.
ITEM 2. PROPERTIES
Bancorp's main office, which is owned by Bancorp, is located in Oak
Harbor, Washington. At September 30, 1997, the Bank had 39 branch offices, all
of which are located in the State of Washington. These offices are located in
Anacortes, Bellingham, Brewster, Burien, Cashmere, Chelan, Clinton, Coupeville,
East Wenatchee(2), Everett, Ferndale, Freeland, Friday Harbor, Kent, Kirkland,
Lake Stevens, 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 and one East Wenatchee branch office. The lease for the
East Wenatchee branch expires in August 1998 and the lease for the Cashmere
branch expires July 2003. The total net book value for the Bank's investment in
premises and equipment at September 30, 1997 totaled $41.3 million.
ITEM 3. LEGAL PROCEEDINGS
Bancorp is not engaged in any legal proceedings of a material nature at
the present time. Periodically, there are various claims and lawsuits involving
Bancorp 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 Bancorp's business. In the opinion of
management and Bancorp'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.
34
<PAGE> 35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock trades on The Nasdaq Stock Market under the
symbol "IWBK". As of September 30, 1997, there were 8,050,266 shares of common
stock outstanding held by approximately 5,500 stockholders.
Set forth in the following table are the high and low sales prices as
reported on The Nasdaq Stock Market and the dividends declared on common stock
for each quarter.
<TABLE>
<CAPTION>
Sales Price Dividends
High Low Declared
------- ------- ---------
<S> <C> <C> <C>
Fiscal Year 1997
First Quarter ............... $ 33.00 $ 29.12 $ 0.14
Second Quarter .............. 36.25 31.75 0.14
Third Quarter ............... 39.50 27.62 0.15
Fourth Quarter .............. 43.25 37.00 0.16
Fiscal Year 1996
First Quarter ............... $ 20.37 $ 15.25 $ 0.10
Second Quarter .............. 21.87 19.62 0.12
Third Quarter ............... 25.12 21.37 0.13
Fourth Quarter .............. 29.87 24.00 0.13
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the tables captioned "Financial Highlights"
contained in the Annual Report, which is listed under Item 14 herein, 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 1997" in the
Annual Report, which is listed under Item 14 herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section caption "Management Discussion and Analysis of
Financial Condition and Results of Operations for Fiscal Year 1997" in the
Annual Report, which is listed under Item 14 herein.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
<PAGE> 36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I --
Election of Directors" in Bancorp's Proxy Statement for the 1998 Annual Meeting
of Stockholders ("Proxy Statement").
The executive officers of Bancorp are as follows:
<TABLE>
<CAPTION>
Age at Position
September 30, -------------------------------------------------------
Name 1997 Bancorp The Bank
- ---- ------------- ------- --------
<S> <C> <C> <C>
Stephen M. Walden 54 Director, President and Director, President and
Chief Executive Officer Chief Executive Officer
H. Glenn Mouw 44 Executive Vice President Executive Vice President
and Chief Financial
Officer
Kenneth G. Hulett 50 Executive Vice President Executive Vice President
and Chief Lending
Officer
Clark W. Donnell 42 Executive Vice President Executive Vice President
and Chief Administrative
Officer
Gary M. Bolyard 61 Director, Vice Chairman/ Director, Vice Chairman/
Commercial Banking Commercial Banking
</TABLE>
The principal occupation of each executive officer for the last five
years is set forth below.
STEPHEN M. WALDEN is President and Chief Executive Officer of Bancorp and the
Bank. 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 Bancorp. He is also Executive Vice
President and Chief Financial Officer of the Bank, a position he has held since
1988. He served as Senior Vice President and Treasurer of the Bank from 1987 to
1988 and Vice President and Treasurer of the Bank from 1981 to 1988.
KENNETH G. HULETT is Executive Vice President of Bancorp. He is also Executive
Vice President and Chief Lending Officer of the Bank, a position he has held
since 1988. He served as Vice President of the Bank from 1977 to 1987.
CLARK W. DONNELL is Executive Vice President of Bancorp. He is also Executive
Vice President and Chief Administrative Officer of the Bank, a position he has
held since 1988. He served as Vice President of the Bank from 1984 to 1987 and
as Senior Vice President of the Bank from 1987 to 1988.
36
<PAGE> 37
GARY M. BOLYARD is Vice Chairman/Commercial Banking and a director of Bancorp
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
Bancorp is not aware of any arrangements, including any pledge by any
person of securities of Bancorp, the operation of which may at a
subsequent date result in a change in control of Bancorp.
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, 1997 and 1996
(b) Consolidated Statements of Income For the Years Ended September
30, 1997, 1996 and 1995
(c) Consolidated Statements of Stockholders' Equity For the Years
Ended September 30, 1997, 1996 and 1995
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1997, 1996 and 1995
(e) Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
37
<PAGE> 38
(2) All required financial statement schedules are included in the
Notes to Consolidated Financial Statements.
Consolidated Financial Statements and Notes to Consolidated
Financial Statements are included in Exhibit 13 herein.
(b) Bancorp did not file a Form 8-K during the year ended September 30, 1997.
(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.
(3.3) First Amendment to the Bylaws of InterWest Bancorp, Inc.
(3.4) Second Amendment to the Bylaws of InterWest Bancorp, Inc.
(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))
(10.9) Employment Agreement with Gary M. Bolyard(incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1996)
(10.10) 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)).
(10.11) 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)).
(10.12) 1996 Outside Directors Stock Options-for-Fees Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-24525))
(10.13) Agreement and Plan of Merger with Puget Sound Bancorp, Inc.
(incorporated by reference to Appendix A to the Registrant's
Registration Statement on Form S-4 (File No. 333-39329))
38
<PAGE> 39
(13) Financial Highlights, Management Discussion and Analysis and
Consolidated Financial Statements included in the 1997 Annual
Report to Stockholders.
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors, Ernst & Young LLP
(23.2) Consent of Independent Auditors for Central Bancorporation,
Deloitte & Touche LLP
(27) Financial Data Schedule
(99.1) Independent Auditors' Report for Central Bancorporation
39
<PAGE> 40
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 15, 1997 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 15, 1997 Date: December 15, 1997
By: /s/ H. Glenn Mouw By: /s/ Vern Sims
------------------------------ ---------------------------
H. Glenn Mouw Vern Sims
Chief Financial Officer Director
(Principal Financial Officer)
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Eric Jensen By: /s/ C. Stephen Lewis
------------------------------ ---------------------------
Eric Jensen C. Stephen Lewis
Chief Accounting Officer Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Barney R. Beeksma By: /s/ Russel E. Olson
------------------------------ ---------------------------
Barney R. Beeksma Russel E. Olson
Chairman of the Board Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Jean Gorton By: /s/ Henry Koetje
------------------------------ ---------------------------
Jean Gorton Henry Koetje
Director Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Michael T. Crawford By: /s/ Gary M. Bolyard
------------------------------ ---------------------------
Michael T. Crawford Gary M. Bolyard
Director Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Larry Carlson
------------------------------
Larry Carlson
Director
Date: December 15, 1997
41
<PAGE> 1
EXHIBIT 3.2
BYLAWS OF
INTERWEST BANCORP, INC.
1. OFFICES
The principal office of the corporation in the State of Washington shall
be located at 1259 West Pioneer Way, Oak Harbor, Washington 98277, or at
such other location as may be determined by the board of directors.
2. SHAREHOLDERS
1. Annual Meeting: The annual meeting of shareholders shall be held
on the third Tuesday of January in each year, at 1:30 p.m., or
on such other date and at such other time as may be determined
by the board of directors, for the purpose of electing directors
and for the transaction of such other business as may properly
come before the meeting. If the day fixed for the annual meeting
shall be a legal holiday in the State of Washington, the meeting
shall be held on the next succeeding business day. If the
election of directors is not held on the day designated herein
for any annual meeting of the shareholders or at any adjournment
thereof, the board of directors shall cause the election to be
held at a meeting of the shareholders as soon thereafter as
conveniently may be held.
2. Special Meetings: Special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by statute, may
be called by the president, by the board of directors, or by the
written request of holders of not less than a majority of all
the shares of the bank entitled to vote at the meeting.
3. Place of Meeting: All meetings of the shareholders shall be held
at the principal place of business of the corporation, or at
such other place as shall be determined from time to time by the
board of directors. The place at which the meeting of
shareholders will be held shall be stated in the notice of the
meeting.
4. Notice of Meetings: Written or printed notice stating the place,
day and hour of a meeting of shareholders and, in case of a
special meeting of shareholders, the purpose or purposes for
which the meeting is called shall be delivered to each
shareholder entitled to vote at such meeting, not less than 10
days and no more than 50 days before the meeting, either
personally or by mail, by the secretary or at the direction of
the person or persons calling the meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the
United States mail, addressed to the shareholder at his address
as it appears on the stock transfer records of the bank, with
postage thereon prepaid.
5. Closing of Stock Transfer Records or Fixing of Record Date: For
the purpose of determining shareholders entitled to notice of or
to vote at any meeting of shareholders or any adjournment
thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders
for any other proper purpose, the board of directors may provide
that the stock transfer records of the corporation shall be
closed
-1-
<PAGE> 2
for a stated period but not to exceed in any case 50 days. If
the stock transfer records shall be closed for the purpose of
determining shareholders entitled to notice of or to vote at a
meeting of shareholders, such books shall be closed for at least
10 days immediately preceding such meeting. In lieu of closing
the stock transfer records, the board of directors may fix, in
advance, a date as the record date for any such determination of
shareholders, which date in any case shall not be more than 50
days and, in case of a meeting of shareholders, not less than 10
days prior to the date on which the particular action requiring
such determination of shareholders entitled to notice of, or to
vote at, a meeting of shareholders, or shareholders entitled to
receive payment of a dividend. When a determination of
shareholders entitled to vote at any meeting of shareholders has
been made as provided in this section, such determination shall
apply to any adjournment thereof.
6. Voting Lists: At least 10 days before each meeting of the
shareholders, the officer or agent having charge of the stock
transfer records for shares of the corporation shall make a
complete record of the shareholders entitled to vote at the
meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by
each, which record for a period of 10 days prior to the meeting
shall be kept on file at the registered office of the
corporation. Such record shall be produced and kept open at the
time and place of the meeting and shall be subject to the
inspection of any shareholder for any proper purpose during the
whole time of the meeting. Failure to comply with the
requirements of this bylaw shall not affect the validity of any
action taken at the meeting.
7. Quorum: One-third of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. The
shareholders present at a duly organized meeting may continue to
transact business until adjournment notwithstanding the
withdrawal of sufficient shares to leave less than a quorum. If
less than one-third of the outstanding shares are represented at
a meeting, the meeting may be adjourned to such time and place
as may be determined, with the approval of a majority of the
shares represented at the meeting, without further notice,
except that any meeting at which directors are to be elected
shall be adjourned only from day to day until such directors
have been elected. At any adjourned meeting at which a quorum
shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally
called, and in the case of any adjourned meeting called for the
election of directors, those who attend the second of the
adjourned meetings, although less than a quorum, shall
nevertheless constitute a quorum for the purpose of electing
directors.
8. Proxies: A shareholder of record may vote either in person or by
proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. All proxies shall be filed with the
secretary of the corporation before or at the commencement of
meetings. No unrevoked proxy shall be valid after 11 months from
the date of its execution unless otherwise expressly provided in
the proxy.
9. Voting of Shares: Each outstanding share, shall be entitled to
one vote on each matter submitted to a vote of the shareholders
at a meeting of shareholders. In the election of directors,
every shareholder of record entitled to vote at the meeting of
shareholders shall have the right to vote the number of shares
owned by him for as many persons as there are directors to be
elected by the holders of such shares. Cumulative voting shall
not be permitted in the election of directors.
-2-
<PAGE> 3
10. Voting of Shares by Certain Holders:
1. Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the
bylaws of such corporation may prescribe, or in the absence of
such provision, as the board of directors of such corporation
may determine. A certified copy of action taken by the
corporations shall be conclusive as to proper authorization by
the corporation.
2. Shares held by an administrator, executor, guardian or
conservator may be voted by such person, either in person or by
proxy, upon delivery of appropriate evidence of such person's
authority to act as administrator, executor, guardian or
conservator. Shares standing in the name of a trustee may be
voted by such person, either in person or by proxy.
3. Shares held by a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted
by the receiver without the transfer thereof into the name of
the receiver if authority so to do be contained in an
appropriate order of the court by which such receiver was
appointed.
4. If shares are held jointly by three or more fiduciaries, the
will of the majority of the fiduciaries shall control the manner
of voting or the giving of a proxy, unless the instrument or
order appointing such fiduciaries directs otherwise.
5. Treasury shares shall not be voted at any meeting or counted in
determining the total number of outstanding shares entitled to
vote at any meeting of shareholders.
6. Shares of another corporation held by this corporation may be
voted by the chairman of the board, the president or any
executive vice president, or by proxy executed by any such
officer, unless the board of directors by resolution shall
designate some other person to vote shares held by the
corporation.
11. Informal Action by Shareholders: Any action required to be taken at a
meeting of the shareholders or any other action which may be taken at a
meeting of the shareholders may be taken without a meeting if a consent
in writing setting forth such action shall be signed by all the
shareholders entitled to vote with respect to the subject matter
thereof.
12. Notice for Nominations and Proposals:
1. Nominations for the election of directors and proposals for any
new business to be taken up at any annual or special meeting of
shareholders may be made by the board of directors of the
corporation or by any shareholder of the corporation entitled to
vote generally in the election of directors. In order for a
shareholder of the corporation to make any such nominations
and/or proposals, he or she shall give notice thereof in
-3-
<PAGE> 4
writing, delivered or mailed by first class United States
mail, postage prepaid, to the Secretary of the corporation not
less than thirty days nor more than sixty days prior to any such
meeting; provided, however, that if less than thirty-one days'
notice of the meeting is given to shareholders, such written
notice shall be delivered or mailed, as prescribed, to the
Secretary of the corporation not later than the close of the
tenth day following the day on which notice of the meeting was
mailed to shareholders. Each such notice given by a shareholder
with respect to nominations for election of directors shall set
forth (i) the name, age, business address and, if known,
residence address of each nominee proposed in such notice (ii)
the principal occupation or employment of each such nominees,
(iii) the number of shares of stock of the corporation which are
beneficially owned by each such nominee, (iv) such other
information as would be required to be included in a proxy
statement soliciting proxies for the election of the proposed
nominee pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, including, without limitation, such
person's written consent to being named in the proxy statement
as a nominee and to serving as a director, if elected, and (v)
as to the shareholder giving such notice (a) his name and
address as they appear on the corporation's books, and (b) the
class and number of shares of the corporation which are
beneficially owned by such shareholder. In addition, the
shareholder making such nomination shall promptly provide any
other information reasonably requested by the corporation.
2. Each such notice given by a shareholder to the Secretary with
respect to business proposals to bring before a meeting shall
set forth in writing as to each matter: (i) a brief description
of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the
name and address, as they appear on the corporation's books, of
the shareholder proposing such business; (iii) the class and
number of shares of the corporation which are beneficially owned
by the shareholder, and (iv) any material interest of the
shareholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at the
meeting except in accordance with the procedures set forth in
this Article.
3. The Chairman of the annual or special meeting of shareholders
may, if the facts warrant, determine and declare to the meeting
that a nomination or proposal was not made in accordance with
the foregoing procedure, and, if he should so determine, he
shall so declare to the meeting and the defective nomination or
proposal shall be disregarded and laid over for action at the
next succeeding adjourned, special or annual meeting of the
shareholders taking place thirty days or more thereafter. This
provision shall not require the holding of any adjourned or
special meeting of shareholders for the purpose of considering
such defective nomination or proposal.
-4-
<PAGE> 5
3. BOARD OF DIRECTORS
1. General Powers: The business and affairs of the corporation
shall be managed by the board of directors.
2. Number, Tenure and Qualifications:
1. The board of directors shall consist of nine members, a
majority of which shall not be officers or employees of
the corporation or any of its subsidiaries. The number
of directors may at any time be increased or decreased
by the board of directors at any regular or special
meeting of the board of directors, provided that no
decrease shall have the effect of shortening the term of
any incumbent director except as provided in Section 3.9
of this Article 3.
2. Directors shall be elected to staggered terms so that
one-third of the directors, or as near as may be, are
elected each year. If additional directors are added to
the board, the terms of those directors shall be
staggered so that approximately one-third of the
directors are elected each year. Unless removed in
accordance with the corporation's Articles of
Incorporation each director shall hold office until his
successor shall have been elected and qualified.
3. A person shall not be a director of the corporation if
the person has been adjudicated bankrupt, or has taken
the benefit of any assignment for the benefit of
creditors, or has suffered a judgment recovered against
him for a sum of money to remain unsatisfied of record
or unsuperseded on appeal for a period of more than
three months. A person shall not be a director of the
corporation if the person (1) is not a resident of a
state of the United States; (2) has been adjudicated a
bankrupt or has taken the benefit of any insolvency law,
or has made a general assignment for the benefit of
creditors; (3) has suffered a judgment recovered against
him for a sum of money to remain unsatisfied of record
or unsecured on appeal for a period of more than three
months; (4) is a trustee, officer, clerk or other
employee of a savings bank that is not controlled by the
corporation. 1.
4. Oath. Each director upon election shall take an oath
that he will, so far as it devolves on him, diligently
and honestly administer the affairs of the corporation,
and will not knowingly violate, or willing permit to be
violated, any of the provisions of law applicable to
such corporation. Further, upon such election, each
director shall sign a statement certifying compliance
with the foregoing qualifications as a director.
5. Age. No person shall be eligible for initial election as
a director who is 72 years of age or more and no person
shall continue to serve as a director who is 75 years of
age or more and the office of such director shall be
come vacant on the last day of the month in which such
director reaches his 75th birthday.
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3. Meetings: An annual meeting of the board of directors and of any
committee designated by the board of directors shall be held,
without other notice than this bylaw, immediately after and at
the same place as the annual meeting of shareholders. The board
of directors may provide, by resolution, the notice, if any,
required, and the time and place, either within or without the
State of Washington, for holding any other regular meetings of
the board of directors; the chairman, the president, the board
of directors or any director may call a special meeting of
directors. 1.
4. Notice: Notice of special meetings of the board of directors
giving the time and place thereof shall be provided to each
director at least one day prior to the date set for such meeting
by the person or persons authorized to call such meeting or by
the secretary at the direction of the person or persons
authorized to call the meeting, either by personal delivery,
mail or telegram addressed to the last known address of such
director, or by personal telephone call or any other means
sufficient to permit attendance at the meeting. If mailed,
notice shall be deemed to be delivered when deposited in the
United States mail, postage prepaid, so addressed to the
director. If notice is by telegram, notice shall be deemed
delivered when the telegram is delivered to the telegraph office
for transmission. If notice is by personal telephone call or
other means, the information concerning the meeting shall be
given to the director personally and an affidavit of the person
giving such notice shall be included in the minute book with the
minutes of the meeting. If no place for a special meeting is
designated in the notice thereof, the meeting shall be held at
the principal place of business of the corporation. A waiver of
notice signed by the director or directors, whether before or
after the time stated for meeting, shall be equivalent to the
giving of notice. The attendance of a director or a committee
member at a meeting shall constitute a waiver of notice of the
meeting except where a director or committee member attends a
meeting for the express purpose of objecting to the transaction
of any business because the meeting is not lawfully convened.
Unless otherwise required by law, neither the business to be
transacted at, nor the purpose of, any regular or special
meeting of the board of directors or any committee designated by
the board of directors need be specified in the notice or waiver
or notice of such meeting.
5. Quorum: A majority of the number of directors fixed by or in the
manner provided in these bylaws shall constitute a quorum for
the transaction of any business at any meeting of the directors.
If less than such majority shall attend a meeting, a majority of
the directors present may adjourn the meeting from time to time
without further notice, and a quorum present at such adjourned
meeting may transact business.
6. Manner of Acting: The act of the majority of the directors
present at a meeting or adjourned meeting at which a quorum is
present shall be the act of the board of directors. Members of
the board of directors or any committee designated by the board
of directors may participate in a meeting of such board or
committee by means of a conference telephone or similar
communications equipment by which all persons participating in
the meeting can hear each other at the same time; participating
by such means shall constitute presence in person at a meeting.
Notwithstanding the foregoing, the following decisions shall
require the act of 2/3 of the directors present:
1. approval of any plan of merger, consolidation or
exchange involving the corporation; and
2. the sale of substantially all of the assets of the
corporation.
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7. Informal Action: Any action permitted or required to be taken at
a meeting of the directors or permitted to be taken at a meeting
of a committee of directors may be taken without a meeting if a
consent in writing setting forth the action so taken shall be
signed by all the directors or all the members of the committee,
as the case may be.
8. Board Committees: The board of directors may designate, by
resolution adopted by a majority of the full board of directors
of the corporation, from among its members an executive
committee and one or more other committees, each of which, to
the extent provided in such resolution, shall have and may
exercise the authority of the board of directors, except as
limited by law. The designation of any such committee and the
delegation thereto of authority shall not relieve the board of
directors, or any member thereof, of any responsibility imposed
by law. The executive committee shall be three members of the
board if the board consists of seven or fewer members; and the
executive committee shall consist of four members of the board
if the board consists of eight or more members.
9. Removal: A director may be removed from office only in the
manner prescribed by the corporation's Articles of
Incorporation.
10. Vacancies: Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the board of directors. A
director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any vacancy to be
filled by reason of an increase in the number of directors shall
be filled by the board of directors for a term of office
continuing only until the next election of directors by
shareholders.
11. Compensation: By resolution of the board of directors, the
directors may be paid a fixed sum for attendance and their
expenses, if any, of attendance at meetings of the board of
directors or committee thereof. No such payment shall preclude
any director from serving the bank in any other capacity and
receiving compensation therefor. A director receiving
compensation for service as an officer of the corporation,
provided his duties as officer require and receive his regular
and faithful attendance at the corporation, shall not receive
any additional compensation for service as a director.
4. OFFICERS
1. Number: The officers of the corporation may include a chief
executive officer, chief operations officer, chairman of the
board of directors, president, one or more executive vice
presidents, one or more senior vice presidents, one or more vice
presidents, a secretary and a treasurer, each of whom shall be
elected by the board of directors. Such other officers as may be
deemed necessary or appropriate may be elected or appointed by
the board of directors with the power and authority of such
officer being established at the time such office is
established. Except for the offices of president and secretary,
any two or more offices may be held by the same person.
Assistant vice presidents shall not be considered as officers of
the corporation.
2. Election and Term of Office: The officers of the corporation to
be elected by the board of directors may be elected for such
term as the board may deem advisable or may be elected to serve
for an indefinite term at the pleasure of the board. Officers of
the corporation
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shall be elected at the first meeting of directors following the
expiration of the term of office. Each officer shall hold office
until his successor shall have been duly elected and qualified
regardless of his term of office, except in the event of his
prior death or resignation or his removal in the manner
hereinafter provided.
3. Removal: Any officer or agent elected or appointed by the board
of directors may be removed by the board of directors whenever
in its judgment the best interests of the bank would be served
thereby, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Election or
appointment of an officer or agent shall not of itself create
contract rights.
4. Vacancies: A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be
filled by the board of directors for the unexpired portion of
the term. 1.
5. Chairman of the Board: The chairman of the board, if there be
such an officer, shall, if present, preside at all meetings of
the board of directors, and exercise and perform such other
powers and duties as may be determined from time to time by the
board of directors.
6. Chief Executive Officer: The chief executive officer shall
exercise and perform all duties incident to such office and such
duties as may be determined from time to time by the board of
directors.
7. Chief Operating Officer: The chief operating officers shall
exercise and perform all duties incident to such office and such
duties as may be determined from time to time by the board of
directors.
8. President: The president shall exercise and perform such powers
and duties as may be determined from time to time by the board
of directors. He may sign, with the secretary or any other
proper officer of the corporation, certificates for shares of
the corporation. In general, he shall perform all duties
incident to the office and such duties as may be prescribed by
resolution of the board of directors from time to time.
9. The Executive Vice Presidents and/or Senior Vice Presidents: The
executive vice presidents and/or senior vice presidents, if any,
shall exercise and perform such powers and duties as may be
determined from time to time by the board of directors.
10. The Vice Presidents: The vice presidents shall exercise and
perform such powers and duties as may be determined from time to
time by the board of directors.
11. The Secretary: The secretary shall keep the minutes of the
proceedings of the shareholders and board of directors, shall
give notices in accordance with the provisions of these bylaws
and as required by law, shall be custodian of the corporate
records and of the seal of the corporation, shall keep a record
of the names and addresses of all shareholders and the number
and class of shares held by each, have general charge of the
stock transfer records of the corporation, may sign with the
corporation, deeds, mortgages, bonds, contracts or other
instruments which shall have been authorized by resolution of
the board of directors, and in general shall perform all duties
incident to the office of secretary and such other duties as
from time to time may be assigned by the board of directors.
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12. The Treasurer: If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his
duties in such sum and with such surety or sureties as the board
of directors shall determine. He shall have charge and custody
of and be responsible for keeping correct and complete books and
records of account, for all funds and securities of the
corporation, receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, deposit
all such moneys in the name of the corporation in the banks,
trust companies or other depositories as shall be selected in
accordance with the provisions of these bylaws, and in general
perform all of the duties incident to the office of treasurer
and such other duties as from time to time may be assigned to
him by the board of directors.
13. Assistant Vice Presidents, Assistant Secretaries and Assistant
Treasurers: The assistant vice presidents, assistant secretaries
and assistant treasurers, in general, shall perform such duties
as shall be assigned to them by the board of directors. If
required by the board of directors, the assistant treasurers
shall respectively give bonds for the faithful discharge of
their duties in such sums and with such sureties as the board of
directors shall determine. Neither the assistant vice
presidents, the assistant secretaries nor the assistant
treasurers shall be considered officers of the corporation.
14. Compensation of Officers and Employees: Compensation of officers
and other employees may be fixed from time to time by the board
of directors. No officer shall be prevented from receiving a
salary because of service as a director of the corporation.
5. CONTRACTS
1. Contracts: The board of directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the
corporation, and that authority may be general or confined to
specific instances.
2. Contracts with, Loans to Corporate Directors and Officers: The
corporation may enter into contracts and otherwise transact
business as vendor, purchaser, or otherwise, with its directors,
officers, and shareholders and with corporations, associations,
firms and entities in which they are, or may become interested
in, as directors, officers, shareholders, or otherwise, as
freely as though such interest did not exist, except that no
loan shall be made by the corporation secured by its shares. In
the absence of fraud, the fact that any director, officer,
shareholder, or any association, firm or other entity of which
any director, officer, or shareholder is interested, is in any
way interested in any transaction or contract shall not make the
transaction or contract void or voidable, or require the
director, officer, or shareholder to account to this bank for
any profits therefrom if the transaction or contract is or shall
be authorized, ratified, or approved by (1) vote of a majority
of quorum of the board of directors, excluding any interested
director or directors, (2) the written consent of the holders of
a majority of the shares entitled to vote, or (3) a general
resolution approving the acts of the directors and officers
adopted by vote of the holders of a majority of the shares
entitled to vote at a meeting of shareholders. All transactions
or contracts, including loans to officers and directors, made
pursuant to this section of these bylaws, shall be subject to
any applicable federal and state laws and regulations. Nothing
herein contained shall create or imply any liability in the
circumstances above described
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or prevent the authorization, ratification or approval of such
transactions or contracts in any other manner.
6. SHARES
1. The shares of stock issued by the corporation shall be at par
value as authorized by the Articles of Incorporation. The
shareholders at any regular or special meeting called for that
purpose may authorize the issuance of additional capital stock
upon such terms and conditions as may be included in such
authorization.
The board of directors may change the number of authorized
shares of stock to effectuate a split of, or stock dividend in,
the corporation's own shares, and to change the number of
authorized shares in proportion thereto.
2. Withdrawal:
1. Stock shall be paid for in cash or other consideration
at a price not less than the par value thereof as may be
approved by the board of directors. Stock shall not be
subject to withdrawal except upon liquidation or
dissolution and until all claims of creditors first
shall have been fully paid.
2. Shareholders shall participate in any distribution of
assets upon liquidation or dissolution after payment has
been made in full to all creditors and to all holders of
withdrawable savings.
3. Certificates for Shares: The shares of the corporation shall be
represented by certificates in such form as may be required by
law and signed by the president or executive vice president and
by the secretary or an assistant secretary and may be sealed
with the seal of the corporation or a facsimile thereof. The
signatures of the corporate officers on the certificate may be
facsimiles if the certificate is manually signed on behalf of an
independent transfer agent or registrar.
4. Transfer of Shares: Transfer of shares of the corporation shall
be made only on the stock transfer records of the corporation by
the holder of record thereof or by his legal representative who
shall furnish proper evidence of authority to transfer shares,
or by his attorney thereunto authorized by power of attorney
duly executed and filed with the secretary of the corporation,
on surrender for cancellation of the certificate for the shares.
Except as otherwise permitted by these bylaws, the person in
whose name shares stand on the stock transfer records of the
corporation shall be deemed by the corporation to be the owner
thereof for all purposes. All certificates surrendered to the
corporation for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a
like number of shares shall have been surrendered and canceled,
except that in case of a lost, destroyed or mutilated
certificates, a new certificate may be issued therefor upon the
terms, including indemnification as the corporation may request.
5. Dividends: No dividends shall be declared on stock until the
corporation has satisfied any applicable net worth or other
requirements imposed by law. Subject to such requirements,
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shares of stock shall be entitled to such dividends, as may be
declared and issued from time to time by the board of directors.
7. SEAL
The seal of the corporation shall be circular in form and consist of the
name of the corporation, the state and year of incorporation, and the
words "corporate seal."
8. WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or
director of the corporation, a waiver thereof in writing, signed by the
person or persons entitled thereto, whether before or after the time
stated for such notice, shall be deemed equivalent to the giving of
notice.
9. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
1. As used in this article
1. "Director" means any person who is or was a director of
the corporation and any person who, while a director of
the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other
enterprise, or employee benefit plan.
2. "Corporation" includes any domestic or foreign
predecessor entity of the corporation in a merger,
consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of such
transaction.
3. "Expenses" includes attorneys' fees.
4. "Official capacity" means: (1) when used with respect to
a director, the office of director in the corporation
and (2) when used with respect to a person other than a
director as contemplated in subsection 10 of this
article, the elective or appointive office in the
corporation held by the officer or the employment or
agency relationship undertaken by the employee or agent
in behalf of the corporation, but in each case does not
include service for any other foreign or domestic
corporation or any partnership, joint venture, trust,
other enterprise, or employee benefit plan.
5. "Party" includes a person who was, is, or is threatened
to be made, a named defendant or respondent in a
proceeding.
6. "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative.
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2. The corporation shall indemnify any person made a party to any
proceeding (other than a proceeding referred to in subsection
9.3 of this article), by reason of the fact that he is or was a
director, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by him in connection with
such proceeding if:
1. He conducted himself in good faith and (1) in the case
of conduct in his own official capacity with the
corporation, he reasonably believed his conduct to be in
the corporation's best interest, or (2) in all other
cases, he reasonably believed his conduct to be at least
not opposed to the corporation's best interests; and
2. In the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, be determinative that the
person did not meet the requisite standard of conduct set forth
in this subsection.
3. The corporation shall indemnify any person made a party to any
proceeding by or in the right of the corporation by reason of
the fact that he is or was a director against reasonable
expenses actually incurred by him in connection with such
proceeding if he conducted himself in good faith, and
1. in the case of conduct in his official capacity with the
corporation, he reasonably believed his conduct to be in
its best interests; or
2. in all cases, he reasonably believed his conduct to be
at least not opposed to its best interests; provided
that no indemnification shall be made pursuant to this
section in respect to any proceeding in which such
person shall have been adjudged to be liable to the
corporation.
4. A director shall not be indemnified under subsection 9.2 or 9.3
of this article in respect of any proceeding charging improper
personal benefit to him, whether or not involving action in his
official capacity, in which he shall have been adjudged to be
liable on the basis that personal benefit was improperly
received by him.
5. Unless otherwise limited by the articles of incorporation, a
director who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding referred to in
subsection 9.2 or 9.3 of this article shall be indemnified
against reasonable expenses incurred by him in connection with
the proceeding.
6. No indemnification under subsection 9.2 or 9.3 of this article
shall be made by the corporation unless authorized in the
specific case after a determination that indemnification of the
director is permissible in the circumstances because he has met
the standard of conduct set forth in the applicable section.
Such determination shall be made:
1. by the board of directors by a majority vote of a quorum
consisting of directors not at the time parties to such
proceeding; or
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2. if such a quorum cannot be obtained, then by a majority
vote of a committee of the board of directors, duly
designated to act in the matter, by a majority vote of
the full board of directors (in which designation
directors who are parties may participate), consisting
solely of two or more directors not at the time parties
to such proceeding; or
3. in a written opinion by legal counsel other than an
attorney, or a firm having associated with it an
attorney, who has been retained by or who has performed
services within the past three years for the corporation
or any party to be indemnified, selected by the board of
directors or a committee thereof by vote as set forth in
9.6.1 or 9.6.2 of this subsection, or if the requisite
quorum of the full board of directors cannot be obtained
therefor and such committee cannot be established, by a
majority vote of the full board of directors (in which
selection directors who are parties may participate); or
4. by the shareholders.
Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as
the determination that indemnification is permissible, except
that if the determination that indemnification is permissible is
made by such legal counsel, authorization of indemnification and
determination as to reasonableness of expenses shall be made in
a manner specified in paragraph 9.6.3 of this subsection for the
selection of such counsel.
7. Reasonable expenses incurred by a director who is party to a
proceeding may be paid or reimbursed by the corporation in
advance of the final disposition of such proceeding:
1. After a determination, made in the manner specified by
subsection 9.6 of this article, that the information
then known to those making the determination (without
undertaking further investigation for purposes thereof)
does not establish that indemnification would not be
permissible under subsection 9.2 or 9.3 of this article;
or
2. upon receipt by the corporation of (1) a written
affirmation by the director of his good faith belief
that he has met the standard of conduct necessary for
indemnification by the corporation as authorized in this
article; and (2) a written undertaking by or on behalf
of the director to repay such amount if it shall
ultimately be determined that he has not met such
standard of conduct.
The undertaking required by paragraph 9.7.2 of this
subsection shall be an unlimited general obligation of
the director but need not be secured and may be accepted
without reference to financial ability to make the
repayment. Payments pursuant to this subsection may be
authorized in the manner specified in subsection 9.6 of
this article.
8. No provision for the corporation to indemnify a director who is
made a party to a proceeding, whether contained in the articles
of incorporation, these bylaws, or resolution of shareholders or
directors, an agreement, or otherwise (except as contemplated by
subsection 9.11 of this article), shall be valid unless
consistent with this article, or to the
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extent that indemnity hereunder is limited by the articles of
incorporation, consistent therewith. Nothing contained in this
article shall limit the corporation's ability to reimburse
expenses incurred by a director in connection with his
appearance as a witness in a proceeding at a time when he has
not been made a named defendant or respondent in the proceeding.
9. For purposes of this article the corporation shall be deemed to
have requested a director to serve an employee benefit plan
where the performance by him of his duties to the corporation
also imposes duties on, or otherwise involves services by, him
to the plan or participants or beneficiaries of the plan; excise
taxes assessed on a director with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and
action taken or omitted by him with respect to an employee
benefit plan in the performance of his duties for a purpose
reasonably believed by him to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the
corporation.
10. Unless otherwise limited by the articles of incorporation:
1. the corporation shall provide indemnification, including
advances of expenses, to an officer, employee or agent
of the corporation to the same extent that it may
indemnify directors pursuant to this article except that
subsection 9.12 of this article shall not apply to any
person other than a director; and
2. the corporation, in addition, shall have the power to
indemnify an officer who is not a director, as well as
employees and agents of the corporation who are not
directors, to such further extent, consistent with law,
as may be provided by the articles of incorporation,
these bylaws, general or specific action of the board of
directors, or contract.
11. The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation or is or was
serving at the request of the corporation as an officer,
employee or agent of another bank, corporation, partnership,
joint venture, trust, other enterprise, or employee benefit plan
against any liability asserted against him and incurred by him
in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify
him against such liability under the provisions of this article.
12. Any indemnification of a director in accordance with this
article, including any payment or reimbursement of expenses,
shall be reported to the shareholders with the notice of the
next shareholders meeting, or prior thereto, in a written report
containing a brief description of the proceedings involving the
director being indemnified and the nature and extent of such
indemnification.
10. LOANS AND INVESTMENTS
The funds of the corporation may also be loaned or invested as the board
of directors may from time to time direct, subject to applicable law.
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11. FISCAL YEAR
The fiscal year of the corporation shall end on the last day of
September each year.
12. AMENDMENTS TO BYLAWS
These bylaws may be amended or repealed and new bylaws adopted by a
two-thirds majority vote of the directors at any regular or special
meeting of the board of directors or by a majority of votes eligible to
be cast by the shareholders of the corporation at any legal meeting.
13. MISCELLANEOUS
Unless some other meaning and intent is apparent from the context, the
plurals shall include the singular and vice versa, and masculine,
feminine and neuter words shall be used interchangeably.
<PAGE> 1
EXHIBIT 3.3
FIRST AMENDMENT TO THE BYLAWS OF INTERWEST BANCORP, INC.
Dated: July 17, 1995
THIS AMENDMENT to the Bylaws of InterWest Bancorp, Inc. as adopted on
December 20, 1994, was approved by unanimous vote of a quorum of the Board of
Directors of InterWest Bancorp, Inc. at a regular meeting held July 17, 1995, at
which a quorum was present and voting.
Section 5.2 is amended to read as follows:
5.2 Contracts with, Loans to Corporate Directors and Officers: The
corporation may enter into contracts and otherwise transact business as
vendor, purchaser, or otherwise, with its directors, officers, and
shareholders and with corporations, associations, firms and entities in
which they are, or may become interested in, as directors, officers,
shareholders, or otherwise, as freely as though such interest did not
exist, except that no loan shall be made by the corporation secured by
its shares. In the absence of fraud, the fact that any director,
officer, shareholder, or any association, firm, or other entity of which
any director, officer, or shareholder is interested, is in any way
interested in any transaction or contract shall not make the transaction
or contract void or voidable, or require the director, officer, or
shareholder to account to the this corporation for any profits therefrom
if approved by either (1) vote of a majority of quorum of the board of
directors, excluding any interested director or directors, or (2) the
written consent of the holders of a majority of the shares entitled to
vote, or (3) a general resolution approving the acts of the directors
and officers adopted by vote of the holders of a majority of the shares
entitled to vote at a meeting of shareholders. All transactions or
contracts, including loans to officers and directors, made pursuant to
this section of these bylaws, shall be subject to any applicable federal
and state laws and regulations. Nothing herein contained shall create or
imply any liability in the circumstances above described or prevent the
authorization, ratification or approval of such transactions or
contracts in any other matter.
<PAGE> 1
EXHIBIT 3.4
SECOND AMENDMENT TO THE BYLAWS OF INTERWEST BANCORP, INC.
Dated: January 21, 1997
THIS AMENDMENT to the Bylaws of InterWest Bancorp, Inc. as adopted on
December 20, 1994, was approved by unanimous vote of a quorum of the Board of
Directors of InterWest Bancorp, Inc. at a regular meeting held January 21, 1997,
at which a quorum was present and voting.
Section 3.11 is amended to read as follows:
3.11 Compensation: The directors may be paid their expenses, if any, for
attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors, a
stated retainer as Director and/or such other compensation as may be
fixed by the Board of Directors by Resolution. Members of special or
standing committees may be allowed like compensation for serving on
committees of the Board of Directors. No such payments shall preclude
any Director from serving the Corporation or any of its subsidiaries in
any other capacity and receiving compensation therefore.
<PAGE> 1
EXHIBIT 13
FINANCIAL HIGHLIGHTS, MANAGEMENT DISCUSSION AND ANALYSIS AND CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THE 1997 ANNUAL REPORT TO
STOCKHOLDERS
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Year ended September 30, 1997
- -----------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share
and per share amounts 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 138,011 $ 120,913 $ 100,264 $ 82,270 $ 73,035
Interest Expense 80,903 68,808 57,926 40,685 35,427
Net Interest Income Before
Provision for Losses on Loans 57,108 52,105 42,338 41,585 37,608
Provision for Losses on Loans 1,000 1,960 720 900 1,399
Net Interest Income After
Provision for Losses on Loans 56,108 50,145 41,618 40,685 36,209
Other Operating Income 14,714 12,553 9,993 7,708 8,914
Other Operating Expense 39,765 43,819 29,902 27,646 26,278
Federal Income Tax Expense 10,758 6,108 7,347 7,280 6,362
Net Income $ 20,299 $ 12,771* $ 14,362 $ 13,467 $ 12,483
- -----------------------------------------------------------------------------------------------------------------
Per Share:
Net Income $ 2.48 $ 1.58 $ 1.80 $ 1.69 $ 1.58
Cash Dividends Declared 0.59 0.51 0.37 0.35 0.28
Weighted Average
Shares Outstanding 8,196,600 8,064,344 7,971,909 7,977,772 7,908,972
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
As of September 30, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Financial Condition
Total Assets $2,046,705 $1,712,151 $1,470,437 $1,262,352 $ 975,375
Loans Receivable and
Loans Held for Sale 1,114,711 975,971 878,090 762,991 671,609
Deposits 1,171,440 1,120,743 1,040,310 959,344 776,499
Borrowings 731,077 460,497 314,171 202,142 110,218
Stockholders' Equity 129,824 111,021 105,740 93,578 82,420
Book Value Per Share $ 16.13 $ 14.02 $ 13.51 $ 11.91 $ 10.59
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes nonrecurring SAIF assessment of $3.6 million (net of tax) and
special charges of $2.0 million (net of tax).
<PAGE> 3
M A N A G E M E N T D I S C U S S I O N A N D A N A L Y S I S O F
F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F
O P E R A T I O N S F O R F I S C A L Y E A R 1 9 9 7
The past year was one of change, growth and success for InterWest Bancorp,
Inc. (InterWest). InterWest is implementing the plan to become a financial
services company that provides a variety of products and services for both
individual and business customers. InterWest's sales efforts in consumer and
business lending will continue to change the composition of the loan
portfolio. InterWest intends to change the funding sources for asset growth.
We will be emphasizing higher growth in transaction accounts relative to
certificates of deposit and borrowings. This should have a positive impact
on net interest income, service fee revenue and market penetration while
meeting the needs of InterWest's customers.
The merger with Central Bancorporation at the end of fiscal year 1996
began this process. Continuing its commitment to commercial banking,
InterWest entered into a definitive agreement to acquire Puget Sound Bancorp
of Port Orchard, Washington in September, 1997. Puget Sound Bancorp is the
holding company for First National Bank of Port Orchard which operates three
commercial banking branch offices in Bremerton, Gig Harbor and Port Orchard.
Puget Sound Bancorp had approximately $52.8 million of total assets as of
September 30, 1997 and net income of $747,000 for the nine months ended
September 30, 1997. It is anticipated that the merger will be completed
during the first quarter of calendar year 1998, following the approval of
the applicable regulatory authorities and the shareholders of Puget Sound
Bancorp. It is planned that the merger will be accounted for as a pooling of
interests by InterWest under generally accepted accounting principles.
The following discussion is provided for the consolidated operations of
InterWest, which includes its wholly owned subsidiary, InterWest Bank. The
purpose of this discussion is to focus on significant factors concerning
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.
R E S U L T S O F O P E R A T I O N s | InterWest's net income of $20.3
million in 1997 increased from $12.8 million in 1996 and $14.4 million in
1995. Earnings per share were $2.48 in 1997 compared to $1.58 in 1996 and
$1.80 in 1995. InterWest's return on average assets was 1.12 percent in
1997, an increase from 0.82 percent in 1996 and 1.08 percent in 1995. Return
on average stockholders' equity of 16.98 percent in 1997 also increased from
11.48 percent in 1996 and 14.37 percent in 1995. The results of operations
for 1996 included significant 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 for 1996 was
$18.4 million, earnings per share were $2.28, return on average assets was
1.18 percent and return on average stockholders' equity was 16.52 percent.
N E T I N T E R E S T I N C O M E | Net interest margin was 3.35
percent in 1997, a decrease from 3.53 percent in 1996 and 3.37 percent in
1995. The decrease in net interest margin is primarily due to a flat yield
curve. In this interest rate environment, the margin earned on mortgage
lending has decreased due to the compression of the spread between
short-term deposit and borrowing rates and lending rates. InterWest has
taken steps to insulate itself from the impact of a flat yield curve by
focusing on adjustable-rate lending, increasing short-term business and
consumer loan originations and selling fixed-rate mortgage loans. During
1997, the securities portfolio has increased and InterWest has used
borrowings from the Federal Home Loan Bank (FHLB) and securities sold under
agreements to repurchase to fund this growth. Leveraging capital offsets
higher operating costs associated with the development of the infrastructure
for growth in consumer and commercial banking by increasing net interest
income. This activity decreases net interest margin as the spread earned on
securities funded by borrowings is lower compared to the spread earned on
loans funded by customer deposits. In spite of the decrease in net interest
margin, net interest income increased to $57.1 million in 1997 from $52.1
million in 1996 and $42.3 million in 1995. The increase in net interest
income is due to growth in interest-earning assets which is partially offset
by a decrease in the margin earned on these assets. 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.
PG 20
<PAGE> 4
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
Average Average Average Average Average
Dollars in thousands Interest Balance Rate Interest Balance Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 92,899 $1,041,835 8.92% $ 82,925 $ 907,494 9.14%
Securities available for
sale, securities held
to maturity and other
interest-earning assets 45,112 661,383 6.82 37,988 568,881 6.68
- -----------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets $138,011 $1,703,218 8.10% $120,913 $1,476,375 8.19%
=======================================================================================================================
Deposits 51,706 1,161,566 4.45 48,166 1,065,658 4.52
FHLB advances, securities
sold under agreements
to repurchase and
other borrowings 29,197 515,144 5.67 20,642 372,200 5.55
- -----------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities $ 80,903 $1,676,710 4.83% $ 68,808 $1,437,858 4.79%
=======================================================================================================================
Net interest rate spread 57,108 26,508 3.27 52,105 38,517 3.40
- -----------------------------------------------------------------------------------------------------------------------
Net interest margin $ 57,108 $1,703,218 3.35% $ 52,105 $1,476,375 3.53%
=======================================================================================================================
1995
Average Average
Interest Balance Rate
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans receivable $ 70,803 $ 814,898 8.69%
Securities available for
sale, securities held
to maturity and other
interest-earning assets 29,461 442,308 6.66
- ------------------------------------------------------------------------------------------------
Total interest-
earning assets $100,264 $1,257,206 7.98%
================================================================================================
Deposits 45,952 998,238 4.60
FHLB advances, securities
sold under agreements
to repurchase and
other borrowings 11,974 222,605 5.38
- ------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities $ 57,926 $1,220,843 4.74%
================================================================================================
Net interest rate spread 42,338 36,363 3.24
- ------------------------------------------------------------------------------------------------
Net interest margin $ 42,338 $1,257,206 3.37%
================================================================================================
</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 changes in interest rates
and changes in volume.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1 9 9 7 v s 1 9 9 6 1 9 9 6 v s 1 9 9 5
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Dollars in thousands Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable $(1,947) $11,921 $ 9,974 $3,791 $ 8,331 $12,122
Securities available for
sale, securities held
to maturity and other
interest-earning assets 830 6,294 7,124 75 8,452 8,527
- -------------------------------------------------------------------------------------------------------------------
Total net change in
income on interest-
earning assets $(1,117) $18,215 $17,098 $3,866 $16,783 $20,649
===================================================================================================================
- ------------------------------------------------------------------------
1 9 9 5 v s 1 9 9 4
Increase (Decrease)
Due to Changes in
Rate Volume Total
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Loans receivable $ 759 $ 8,179 $ 8,938
Securities available for
sale, securities held
to maturity and other
interest-earning assets 3,289 5,767 9,056
- ------------------------------------------------------------------------
Total net change in
income on interest-
earning assets $4,048 $13,946 $17,994
========================================================================
</TABLE>
pg 21
<PAGE> 5
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1 9 9 7 v s 1 9 9 6 1 9 9 6 v s 1 9 9 5
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Dollars in thousands Rate Volume Total Rate Volume Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Bearing Liabilities
Deposits $(716) $ 4,256 $ 3,540 $ (812) $ 3,026 $ 2,214
FHLB advances,
securities sold under
agreements to repurchase
and other borrowings 463 8,092 8,555 382 8,286 8,668
- --------------------------------------------------------------------------------------------------------------------
Total net change in expense
on interest-bearing
liabilities $(253) $12,348 $12,095 $ (430) $11,312 $10,882
====================================================================================================================
Net change in net
interest income $(864) $ 5,867 $ 5,003 $ 4,296 $ 5,471 $ 9,767
====================================================================================================================
- -------------------------------------------------------------------------------
1 9 9 5 v s 1 9 9 4
Increase (Decrease)
Due to Changes in
Rate Volume Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-Bearing Liabilities
Deposits $ 8,048 $5,022 $13,070
FHLB advances,
securities sold under
agreements to repurchase
and other borrowings 1,222 2,949 4,171
- -------------------------------------------------------------------------------
Total net change in expense
on interest-bearing
liabilities $ 9,270 $7,971 $17,241
===============================================================================
Net change in net
interest income $(5,222) $5,975 $ 753
===============================================================================
</TABLE>
P R O V I S I O N F O R L O S S E S O N L O A N S | The provision
for losses on loans in 1997 was $1,000,000 compared to $1,960,000 in 1996
and $720,000 in 1995. The 1996 provision included $900,000 to bring into
conformity the provision for losses on loan practices of Central and
InterWest. InterWest's allowance for losses on loans is $8.7 million or 0.77
percent of loans as of September 30, 1997, compared to $8.1 million or 0.82
percent of loans at September 30, 1996. Net loan charge-offs for 1997 were
$407,000 or 0.04 percent of the average balance of loans outstanding
compared to an average of $235,000 or 0.03 percent of loans for fiscal years
1993 through 1996.
InterWest assesses the risk level inherent in the loan portfolio to
provide adequate reserves to meet these risks as a part of its ongoing
review of the loan portfolio. Non-performing loans and delinquency trends
are key elements in determining the allowance for losses on loans. In
addition to non-performing loans 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.
O T H E R O P E R A T I N G I N C O M E | Other operating income was
$14.7 million in 1997, an increase from $12.6 million in 1996 and $10.0
million in 1995. This increase in 1997 is primarily due to the
securitization and sale of $86.9 million in fixed-rate mortgage loans. Of
these loan securitizations, $43.1 million were sold immediately and $43.8
million were held for a period of time as securities available for sale.
Additionally during fiscal year 1997, $4.9 million of sub-prime and $17.4
million of other mortgage loans originated by InterWest Bank's mortgage
subsidiary, Cornerstone Northwest Mortgage Inc. (Cornerstone), were sold.
These transactions resulted in increases of $1.6 million in the gain on sale
of loans as compared to fiscal year 1996. For the year ended September 30,
1997 gains on sale of loans totaled $2.8 million, representing 19.1 percent
of other operating income compared to an average of 16.9 percent for fiscal
years 1993 through 1996.
Another contributing factor to the overall increase in other operating
income was an increase in service fee revenues of $835,000 from 1996. This
increase in service fees is primarily due to a $325,000 increase in loan
fees earned by Cornerstone and an increase of $325,000 in service charges on
customer deposits.
Income from the sale of non-traditional financial and insurance products
through InterWest Bank's subsidiaries, InterWest Financial Services and
InterWest Insurance Agency were $2.2 million for 1997, compared to $2.3
million in 1996 and $2.2 million in 1995. It is anticipated that income from
these subsidiaries will increase in 1998 due to expansion of locations
served, an increase in the number of sales personnel and the implementation
of new sales strategies.
Gains on the sale of real estate held for sale and for development were
$337,000 in 1997 compared to $806,000 in 1996 and $16,000 in 1995. 1997 is
lower compared to 1996 primarily as a result of a gain of $500,000 recorded
on the sale of one significant real estate property during 1996. InterWest
is currently attempting to sell two land development projects in Mount
Vernon, Washington, and Fountain, Colorado. Both properties will take
several years to sell out.
O T H E R O P E R A T I N G E X P E N S E | Other operating expenses
totaled $39.8 million in 1997 compared to $43.8 million in 1996 and $29.9
million in 1995. During 1996, other operating expenses were adversely
impacted by the SAIF
PG 22
<PAGE> 6
recapitalization charge of $5.5 million and the special charges primarily
associated with the Central merger of $3.1 million. Another contributing
factor to the increase in other operating expenses from 1995 to 1996 were
operating costs of $2.3 million for Cornerstone, which was acquired during
1996. Excluding these nonrecurring expenses in 1996, other operating
expenses increased $4.6 million or 13.1 percent in 1997 compared to $3.0
million or 10.0 percent expense growth in 1996.
Excluding the nonrecurring SAIF assessment and special charges from the
Central merger incurred in 1996, InterWest's efficiency ratio was 55.37
percent in 1997, 54.43 percent in 1996 and 57.94 percent in 1995.
The increase in other operating expenses and the efficiency ratio is
consistent with strategies for planned future balance sheet growth and
diversification of product lines. Increases in compensation and employee
benefits, general and administrative, data processing and occupancy expenses
are due to bank expansion and diversification, enhanced focus on consumer
and commercial banking products and services, and the opening of two new
branch offices during 1997. Key elements of the consumer and commercial
banking focus were the development of credit administration, consumer and
business lending support, business relationship officers and the addition of
several experienced commercial banking management personnel. As of September
30, 1997, InterWest had a total of 621 full time equivalent employees,
compared to 556 in 1996 and 477 in 1995.
InterWest recorded a charge of $200,000 for fair value adjustments on
certain properties in the real estate held for sale portfolio during 1997.
During 1996, InterWest reduced the allowance for losses on the real estate
held for sale by $1.0 million which reduced other operating expenses. These
charges and credits are based on the periodic evaluation of the real estate
held for sale and for development portfolios and risks associated with
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,
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. Beginning January 1, 1997,
savings institutions began paying 0.064 percent of insured deposits which,
in InterWest's case, produced an annual costs savings of approximately $1.5
million in FDIC premium assessments. This should allow InterWest to recover
this one time assessment in less than four years. FDIC premium assessments
decreased to $395,000 in 1997, compared to $2.0 million in both 1996 and
1995.
InterWest has established a task force to review all systems and to
develop an action plan for the century date change for the year 2000.
Preliminary estimates indicate that costs will not be material to the
results of operations. InterWest could possibly be impacted by the century
change to the extent other entities not affiliated with InterWest are
unsuccessful in addressing this issue.
I N C O M E T A X E X P E N S E | Consistent with increased net income,
income tax expense for 1997 was $10.8 million, an increase from $6.1 million
in 1996 and $7.3 million in 1995. The effective tax rates were 34.6 percent
in 1997, 32.4 percent in 1996 and 33.8 percent in 1995. The lower effective
tax rate in 1996 is primarily due to certain tax benefits resulting from the
merger with Central.
R E V I E W O F F I N A N C I A L C O N D I T I O N | InterWest's
total assets were $2.047 billion as of September 30, 1997, compared to
$1.712 billion at the end of 1996. This is an increase of $335.0 million, or
19.6 percent.
The loan portfolio has increased by $139.0 million or 14.2 percent from
$976.0 million at September 30, 1996 to $1.115 billion at the end of 1997.
The consumer loan portfolio and the business loan portfolio, which includes
commercial and agricultural loans, have increased to $63.1 million and $58.3
million, representing growth rates of 16.7 percent and 59.9 percent,
respectively, during 1997. Currently, business loans represent 5.2 percent
and consumer loans 5.7 percent of the total loan portfolio. InterWest will
attempt to increase these portfolios to accomplish its strategy of changing
the composition of the loan portfolio. This should shorten duration risk,
produce higher net interest margin, create better protection from interest
rate volatility and ultimately meet the needs or InterWest's individual and
business customers. Mortgage loans have increased by 12.1 percent during
fiscal year 1997. The increase in mortgage loans and the overall loan growth
would have been more significant, however InterWest securitized and sold
$86.9 million of fixed-rate mortgage loans during 1997.
Other interest-earning assets, including securities available for sale,
securities held to maturity, FHLB stock and interest-bearing deposits,
increased to $814.5 million as of September 30, 1997, compared to $636.3
million at September 30, 1996. It is InterWest's intent to increase the loan
portfolio relative to other interest-earning assets. During the current
year, management has leveraged capital with securities growth in an attempt
to offset increased operational costs associated with the implementation of
the plan for
PG 23
<PAGE> 7
consumer and business banking growth. This has increased net interest income
but decreased net interest margin as the margin earned on securities is less
than loans. As of September 30, 1997, the securities portfolio consists of
$335.0 million or 53 percent, of mortgage-backed and related securities and
$296.3 million or 47 percent, of investment securities. This is a change
from September 30, 1996 when 74 percent of all securities were
mortgage-backed and related securities and 26 percent were investment
securities. At September 30, 1997, 81 percent of InterWest's securities are
classified as available for sale an increase from 61 percent as of September
30, 1996. Management believes that a higher percentage of securities
classified as available for sale provides greater flexibility to respond to
interest rate changes and liquidity needs to fund loan growth. See Notes 3
and 4 in the Notes to the Consolidated Financial Statements for further
details of securities available for sale and securities held to maturity.
Total loan originations were $543.6 million in 1997, an increase from
$461.3 million in 1996 and $357.3 million in 1995. Mortgage loan
originations were $479.3 million in 1997, an increase from $422.8 million in
1996 and $332.6 million in 1995. This increase for 1997 is primarily due to
increased construction lending volumes which were $195.9 million in 1997, an
increase from $144.4 million in 1996 and $111.1 million in 1995. Cornerstone
loan originations were $102.6 million for the year ended September 30, 1997,
of which $81.2 million were originated for InterWest Bank, and contributed
to this increase in mortgage loan originations. It is anticipated that
mortgage loan originations will continue to increase during fiscal year 1998
due to a strong mortgage loan pipeline and a favorable interest rate
environment.
InterWest has experienced increases in consumer and business lending
during 1997. Consumer loan originations have increased to $42.5 million from
$36.3 million in 1996 and $21.7 million in 1995. This increase is primarily
due to increased home equity lending. During 1997, InterWest has initiated a
concentrated effort to increase business lending which resulted in increases
of business loan balances outstanding of $21.8 million during 1997 compared
to $2.2 million in 1996 and $3.0 million in 1995.
The following table recaps InterWest's lending for the past three years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year ended September 30, 1997
- ------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate mortgage loans
Single-family residential $202,838 $198,263 $156,896
Multi-family residential and commercial 80,507 80,094 64,559
Real estate construction 195,933 144,407 111,136
- ------------------------------------------------------------------------------------------
Total 479,278 422,764 332,591
Consumer loan originations 42,489 36,337 21,691
- ------------------------------------------------------------------------------------------
Net increase in principal balance
Commercial and agricultural loans 21,825 2,223 3,031
- ------------------------------------------------------------------------------------------
$543,592 $461,324 $357,313
==========================================================================================
</TABLE>
Total liabilities increased $316.0 million to $1.917 billion at year end
1997, compared to $1.601 billion as of September 30, 1996. This growth is
primarily due to an increase in borrowings of $270.6 million and deposits of
$50.7 million.
Certificates of deposit increased $28.0 million or 3.7 percent in 1997,
and totaled $779.2 million or 66.5 percent of deposits at year end 1997.
Transaction account balances have increased $22.7 million or 6.1 percent
from 1996 and totaled $392.2 million or 33.5 percent of total deposits as of
September 30, 1997. Money market, non-interest bearing checking and
interest-bearing checking account balances have increased by $15.4 million,
$8.6 million and $4.0 million, respectively. This represents annualized
growth rates of 13.7 percent, 15.0 percent and 4.1 percent, respectively.
During the year ended September 30, 1997 InterWest has added a net total of
approximately 500 money market, 7,000 non-interest bearing checking accounts
and 2,200 interest-bearing checking accounts. This represents growth rates
of 5.8 percent, 28.7 percent and 7.8 percent, respectively. The total
account balance growth rate for money market, non-interest bearing and
interest-bearing checking accounts of 10.4 percent is less than the growth
in the number of accounts of 17.6 percent. InterWest
PG 24
<PAGE> 8
expects that within a few years transaction account growth will translate
into growth in transaction account balances. It is management's strategy to
increase the percentage of transaction deposits to approximately 40 percent
of the total deposit base within the next five years, which should have a
positive impact on net interest income, service fee revenue and market
penetration.
Over the last two fiscal years, InterWest has increased its borrowings
from the Federal Home Loan Bank (FHLB) and securities sold under agreements
to repurchase. These two borrowing sources increased to $729.2 million at
the end of 1997 from $456.8 million in 1996 and $309.0 million in 1995. The
proceeds from these borrowings were used to fund growth in loans and
securities. It is management's intention to decrease the percentage of
liabilities represented by borrowings and increase deposits. This should
increase net interest income.
C A P I T A L R E Q U I R E M E N T S | InterWest is committed to
managing capital for maximum stockholder benefit and maintaining strong
protection for depositors and creditors. InterWest manages various capital
levels at both the holding company and InterWest Bank level to maintain
appropriate capital ratios and levels in accordance with external
regulations and capital guidelines established by the Board of Directors.
InterWest's total stockholders equity was $129.8 million at September 30,
1997, an increase of $18.8 million or 16.9 percent from $111.0 million at
September 30, 1996. This increase is due to net income of $20.3 million for
fiscal year 1997, a $1.6 million decrease in the net unrealized loss on
securities available for sale, the scheduled $312,000 repayment of the
Employee Stock Ownership Plan (ESOP) loan and $1.3 million from the exercise
of common stock options. These increases are offset by $4.7 million in cash
dividends declared during fiscal year 1997.
During fiscal year 1997 InterWest stockholders received dividends
totaling $0.59 per share, a 15.7 percent increase over $0.51 per share
received in fiscal year 1996. Book value per share increased to $16.13 at
September 30, 1997, from $14.02 at September 30, 1996. Stockholders' equity
as a percentage of total assets decreased from 6.48 percent at September 30,
1996, to 6.34 percent at September 30, 1997. This reduction in the capital
ratio reflects management's leveraging of the balance sheet to increase net
income, net income per share and return on stockholders' equity.
L I Q U I D I T Y R E S O U R C E S | Liquidity management focuses on the
need to meet both short-term funding requirements and InterWest's long-term
strategies and goals. Specifically, the objective of liquidity management is
to ensure the continuous availability of funds to meet the demands of
depositors, creditors and borrowers. Management is structuring the balance
sheet to meet these needs. InterWest desires to attract and retain consumer
and business customer relationships with a focus on transaction accounts and
short-term business and consumer lending. InterWest also uses wholesale
funds through advances from the Federal Home Loan Bank of Seattle (FHLB) and
the sale of securities under agreements to repurchase to fund asset growth.
Other sources of funds for liquidity include loan repayments, loan sales,
securities sales and mortgage-backed and related security repayments.
Repayments on loans and mortgage-backed and related securities and deposit
inflows and outflows are impacted by changes in interest rates.
InterWest has additional capacity to borrow funds from the FHLB through
a pre-approved credit line of 40 percent of consolidated assets. This credit
line has a pledge requirement whereby InterWest must maintain unencumbered
collateral with a par value at least equal to the outstanding balance. As of
September 30, 1997, InterWest has $470.2 million outstanding in advances
from the FHLB. InterWest uses the securities market as a vehicle for
borrowing by utilizing its securities available for sale and securities held
to maturity as collateral. At September 30, 1997, InterWest has $259.0
million outstanding in securities sold under agreement to repurchase. 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.
The analysis of liquidity also includes a review of InterWest's
consolidated statement of cash flows for fiscal year 1997. The statement of
cash flows details InterWest's operating, investing and financing activities
during the fiscal year. The most significant item under operating activities
was 1997 net income of $20.3 million. Investing activities included proceeds
from the sale of securities available for sale of $343.2 million, security
maturities totaling $330.9 million and purchases of securities available for
sale and securities held to maturity of $606.1 million and $115.0 million,
respectively. Investing activities also included $260.9 million in loan
originations, net of principal repayments and $75.9 million of proceeds from
the sale of loans. Additionally, $43.8 million of mortgage loans were
securitized, held for a period of time as securities available for sale and
sold during 1997. As such, total proceeds from the sale of loans originated
PG 25
<PAGE> 9
by InterWest were $119.7 million in 1997. During 1997, financing activities
included $270.9 million in borrowing proceeds, net of borrowing repayments,
a $50.7 million increase in deposits and a total of $4.5 million paid in
cash dividends to stockholders.
M A R K E T R I S K | InterWest's results of operations are largely
dependent upon its ability to manage interest rate risk. Management
considers interest rate risk to be a significant market risk that could have
a material effect on InterWest's financial condition and results of
operations. InterWest does not currently use derivatives to manage market
and interest rate risks.
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 impact on net interest
income. It has been an objective of management to reduce this sensitivity
through the use of adjustable rate assets which enables 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 the Federal Cost of
Funds Index. However, it is InterWest's goal to increase lending that uses a
prime based index to better insulate InterWest against interest rate
changes. Prime based lending is preferable due to market acceptance and its
conformity with rates offered by other financial institutions. InterWest
will continue to use the Federal Cost of Funds Index on single-family
lending which has a generous spread to InterWest's cost of funds while at
the same time providing reasonable interest rate protection for our
borrowers.
In addition to adjustable rate loans, InterWest uses a number of
additional strategies to minimize the impact on net income during
significant changes in interest rates. The strategies utilized by InterWest
to achieve this goal include: origination of short-term consumer loans;
emphasis on intermediate to long-term fixed-rate certificates of deposit;
sales of fixed-rate mortgage loans; growth in non-interest bearing checking
accounts; purchases of adjustable rate and callable agency securities; and
short-term business lending.
The table on page 27 sets forth the balances of the InterWest's
financial instruments at the expected maturity dates as well as the fair
value of those financial instruments as of September 30, 1997. The expected
maturities take into consideration historical and estimated principal
prepayments for loans and securities. Principal prepayments are the amounts
of principal reduction, over and above normal amoritization. Fixed-rate
loans and mortgage backed securities are expected to have annual prepayment
rates between 10 percent and 20 percent. Adjustable rate loans and mortgage
backed securities are assumed to have prepayment rates between 25 percent
and 35 percent. Expected maturities are also adjusted from contractual
maturities with respect to callable securities which are expected to mature
at the respective call dates.
The expected maturities for financial liabilities with no stated
maturity reflect assumptions based on historical and estimated future
roll-off rates. The roll-off rates for non-interest bearing deposits,
interest-bearing checking accounts, money market accounts and savings
accounts are 14 percent, 20 percent, 33 percent and 20 percent,
respectively. The weighted average interest rates for financial instruments
presented are actual as of September 30, 1997.
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 amounts. 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 carrying value of cash and
cash equivalents and accrued interest receivable is a reasonable estimate of
the fair value for such financial assets. The fair values of securities
available for sale, securities held to maturity and loans held for sale are
based on quoted market rates and dealer quotes. The fair value of fixed-rate
loans is based on quoted market rates 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 prepayment estimates. FHLB stock does not have a market and the
fair value is unknown. As such, the carrying value is a reasonable estimate
of the fair value. The fair value of deposits with no stated maturity, such
as checking accounts, money market accounts and savings accounts, is equal
to the amount payable on demand as of September 30, 1997. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows using a discount rate based on the current average rate for deposits
of like maturities of other local institutions. The fair value of FHLB
advances and securities sold under agreements to repurchase are estimated
based on the present value of future cash flows using a discount rate equal
to the rate offered on similar borrowings with similar maturities as of
September 30, 1997. The fair value estimates presented are based on
information available as of September 30, 1997.
PG 26
<PAGE> 10
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
M A R K E T R I S K
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended September 30, Expected maturity date
- ----------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1998 1999 2000 2001 2002 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents
Non-interest bearing $ 45,834 $ -- $ -- $ -- $ -- $ -- $ 45,834 $ 45,834
Weighted average interest rate -- -- -- -- -- -- -- --
Interest-bearing deposits in banks 159,564 -- -- -- -- -- $159,564 159,564
Weighted average interest rate 6.28% -- -- -- -- -- 6.28% --
Securities available for sale
Fixed rate 286,738 8,585 7,530 6,492 5,712 21,663 336,720 336,720
Weighted average interest rate 6.55 6.23 6.24 6.26 6.27 6.45 6.54 --
Adjustable rate 57,317 38,855 26,333 17,718 11,800 22,611 174,634 174,634
Weighted average interest rate 7.00 7.02 7.02 7.02 7.03 6.82 6.99 --
Securities held to maturity
Fixed rate 24,518 3,084 3,132 3,183 6,291 47,832 88,040 85,896
Weighted average interest rate 6.43 6.17 5.86 5.96 5.96 6.14 6.19 --
Adjustable rate 5,711 3,853 2,583 1,720 1,136 16,950 31,953 31,175
Weighted average interest rate 7.73 7.81 7.81 7.81 7.81 5.89 6.78 --
Loans receivable, net
Fixed rate 72,032 64,925 54,068 48,592 41,775 186,247 467,639 478,391
Weighted average interest rate 8.22 7.93 7.81 7.69 7.80 7.74 8.07 --
Adjustable rate 211,631 124,482 96,461 56,860 40,750 109,027 639,211 642,315
Weighted average interest rate 9.24 9.16 9.26 9.06 9.07 9.12 9.18 --
Loans held for sale 7,861 -- -- -- -- -- 7,861 8,057
Weighted average interest rate 8.20 -- -- -- -- -- 8.20 --
Accrued interest receivable 12,412 -- -- -- -- -- 12,412 12,412
Weighted average interest rate -- -- -- -- -- -- -- --
Federal Home Loan Bank (FHLB) stock -- -- -- -- -- 23,566 23,566 23,566
Weighted average interest rate -- -- -- -- -- 8.00 8.00 8.00
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Non-interest bearing deposits 9,269 7,971 6,855 5,895 5,070 31,145 66,205 66,205
Weighted average interest rate -- -- -- -- -- -- -- --
Interest-bearing checking accounts 20,660 16,528 13,223 10,578 8,462 33,850 103,301 103,301
Weighted average interest rate 1.39 1.39 1.39 1.39 1.39 1.39 1.39 --
Money market accounts 42,243 28,303 18,963 12,705 8,512 17,282 128,008 128,008
Weighted average interest rate 3.66 3.66 3.66 3.66 3.66 3.66 3.66 --
Savings accounts 18,937 15,150 12,120 9,696 7,757 31,026 94,686 94,686
Weighted average interest rate 2.65 2.65 2.65 2.65 2.65 2.65 2.65 --
Certificates of deposit
Fixed rate 507,314 92,770 116,409 6,949 7,151 1,188 731,781 733,934
Weighted average interest rate 5.57 5.79 6.11 5.97 6.10 6.30 5.70 --
Adjustable rate 37,247 10,212 -- -- -- -- 47,459 47,956
Weighted average interest rate 5.22 5.30 -- -- -- -- 5.24 --
FHLB advances and other borrowings
Fixed rate 365,369 71,758 9,873 5 5 74 447,084 446,344
Weighted average interest rate 5.68 5.59 4.68 7.00 7.00 7.00 5.64 --
Adjustable rate 25,000 -- -- -- -- -- 25,000 25,060
Weighted average interest rate 6.27 -- -- -- -- -- 6.27 --
Securities sold under agreements
to repurchase 135,993 -- -- -- 123,000 -- 258,993 256,486
Weighted average interest rate 5.56 -- -- -- 5.78 -- 5.66 --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
While the table presented above helps provide some information about
InterWest's 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. While this modeling is
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.
PG 27
<PAGE> 11
A S S E T Q U A L I T Y | InterWest's non-performing assets at September
30, 1997, which consist of non-performing loans and real estate held for
sale totaled $11.8 million or 0.58 percent of total assets. This is an
increase from $9.2 million or 0.54 percent of total assets at September 30,
1996. InterWest's non-performing assets at September 30, 1995, totaled $6.6
million or 0.45 percent of assets. The increase in real estate held for sale
from $6.1 million at year end 1996 to $6.9 million in 1997 was due to
foreclosures of $2.1 million, expenditures capitalized to improve real
estate of $900,000 and write-downs of real estate properties of $200,000.
Total sales of real estate during 1997 totaled $2.0 million, an increase
from $1.6 million in 1996. The two most significant properties included in
real estate held for sale at year end 1997 include a hotel in Columbia,
South Carolina and a land development project in Fountain, Colorado.
Non-performing loans increased to $4.9 million in 1997 compared to $3.2
million in 1996 and $2.4 million in 1995. During 1997 the asset quality of
InterWest continued to be strong. This 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------
Year ended September 30, 1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans
Real estate mortgage loans
Single-family residential $ 3,181 $1,965 $ 985
Multi-family residential 407 -- 900
Commercial 484 791 308
Real estate construction 123 -- --
Commercial loans 173 225 71
Agricultural loans 78 -- --
Consumer loans 411 184 109
- --------------------------------------------------------------------------------
Total non-performing loans $ 4,857 $3,165 $ 2,373
================================================================================
Real Estate
Single-family residential $ 2,100 $1,025 $ 154
Commercial 4,845 5,014 4,937
Other -- 14 87
Allowance for losses on real estate held for sale -- -- (1,000)
- --------------------------------------------------------------------------------
Total $ 6,945 $6,053 $ 4,178
================================================================================
Total non-performing assets $11,802 $9,218 $ 6,551
- --------------------------------------------------------------------------------
Percent of total assets 0.58% 0.54% 0.45%
================================================================================
</TABLE>
F O R W A R D L O O K I N G S T A T E M E N T S | 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 "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.
<PAGE> 12
R E P O R T OF M A N A G E M E N T T O S T O C K H O L D E R S,
I N T E R W E S T B A N C O R P, I N C.
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 accepted accounting principles and, as such,
include judgments 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 supported 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. The concept of
reasonable assurance is based on the recognition that the costs of such a
system should not exceed the benefits to be received. Management believes
the system provides an appropriate cost/benefit balance.
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 T E P H E N M. W A L D E N H. G L E N N M O U W
President and Chief Executive Officer Executive Vice-President
- --------------------------------------------------------------------------------
R E P O R T OF E R N S T & Y O U N G L L P, I N D E P E N D E N T
A U D I T O R S B O A R D O F D I R E C T O R S, I N T E R W E S T
Board of Direectors, InterWest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of InterWest Bancorp, Inc., and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended September 30, 1997. 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 net income constituting approximately 18.1 percent
of the related 1995 consolidated financial statement total. 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, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997.
As described in Note 2 to the Consolidated Financial Statements,
InterWest Bancorp, Inc. adopted certain new accounting standards in fiscal
year 1997 as required by the Financial Accounting Standards Board.
S E A T T L E, W A S H I N G T O N
October 30, 1997 /s/ ERNST & YOUNG LLP
<PAGE> 13
C O N S O L I D A T E D S T A T E M E N T S O F F I N A N C I A L
C O N D I T I O N
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
September 30, 1997
- ----------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents
Non-interest bearing $ 45,834 $ 36,983
Interest-bearing deposits in banks 159,564 11,518
Securities available for sale, at fair value 511,354 368,123
Securities held to maturity (fair value: 1997--$117,071 and 1996--$230,896) 119,993 237,436
Loans receivable, net 1,106,850 965,920
Loans held for sale (fair value: 1997--$8,057 and 1996--$10,228) 7,861 10,051
Accrued interest receivable 12,412 12,576
Real estate held for sale and for development 12,414 10,968
Federal Home Loan Bank (FHLB) stock, at cost 23,566 19,232
Premises and equipment, net 41,340 34,356
Intangible assets 3,036 2,869
Other assets 2,481 2,119
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 2,046,705 $ 1,712,151
================================================================================================================
Liabilities
Non-interest bearing deposits $ 66,205 $ 57,580
Interest-bearing deposits 1,105,235 1,063,163
- ----------------------------------------------------------------------------------------------------------------
Total deposits 1,171,440 1,120,743
FHLB advances 470,172 336,839
Securities sold under agreements to repurchase 258,993 119,945
Accrued expenses and other liabilities 14,364 19,890
Other borrowings 1,912 3,713
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 1,916,881 1,601,130
Stockholders' Equity
Common stock, par value $.20 per share
Authorized shares 20,000,000
Issued and outstanding: 1997--8,050,266 shares and 1996--7,918,074 shares 1,614 1,592
Paid-in capital 20,312 18,995
Retained earnings 109,512 93,963
Treasury stock (289) (289)
Debt related to employee stock ownership plan (ESOP) -- (312)
Net unrealized loss on securities available for sale, net of tax (1,325) (2,928)
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 129,824 111,021
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,046,705 $ 1,712,151
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
PG 30
<PAGE> 14
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Year ended September 30, 1997
- ------------------------------------------------------------------------------------------------
Dollars in thousands, except per share amounts 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable and loans held for sale $ 92,899 $ 82,925 $ 70,803
Securities available for sale 31,904 20,758 5,740
Securities held to maturity 11,430 14,428 22,426
Other 1,778 2,802 1,295
- ------------------------------------------------------------------------------------------------
138,011 120,913 100,264
Interest Expense
Deposits 51,706 48,166 45,952
FHLB advances and other borrowings 18,831 17,449 10,402
Securities sold under agreements to repurchase 10,366 3,193 1,572
- ------------------------------------------------------------------------------------------------
80,903 68,808 57,926
Net interest income before provision for losses on loans 57,108 52,105 42,338
Provision for losses on loans 1,000 1,960 720
- ------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 56,108 50,145 41,618
Other Operating Income
Gain on sale of loans 2,805 1,191 917
Gain on sale of loan servicing -- -- 1,831
Service fees 7,667 6,832 3,965
Insurance commissions 2,172 2,302 2,221
Gain on sale of securities available for sale 516 531 287
Gain on sale of real estate held for sale and for development 337 806 16
Other 1,217 891 756
- ------------------------------------------------------------------------------------------------
14,714 12,553 9,993
Other Operating Expense
Compensation and employee benefits 20,632 19,496 15,139
General and administrative 10,088 7,928 6,931
Occupancy 5,199 4,571 3,743
Data processing 2,866 2,021 1,657
FDIC premium assessment 395 1,988 2,006
Loss (credit) from real estate write-downs and operations 585 (813) 426
SAIF assessment -- 5,523 --
Special charges -- 3,105 --
- ------------------------------------------------------------------------------------------------
39,765 43,819 29,902
Income before income taxes 31,057 18,879 21,709
Income Tax Expense 10,758 6,108 7,347
- ------------------------------------------------------------------------------------------------
Net Income $ 20,299 $ 12,771 $ 14,362
================================================================================================
Net Income Per Share $ 2.48 $ 1.58 $ 1.80
================================================================================================
</TABLE>
See notes to consolidated financial statements.
PG 31
<PAGE> 15
C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S'
E Q U I T Y
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gain (Loss)
on Securities
Debt Available
Common Stock Paid-In Retained Treasury Related for Sale,
Shares Amount Capital Earnings Stock to ESOP Net of Tax Total
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in thousands, except share data
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
October 1, 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
Net income 20,299 20,299
Dividends,
$0.59 per share (4,750) (4,750)
Proceeds from exercise
of stock options 108,416 22 1,317 1,339
Unrealized gain
on securities
available for sale 1,603 1,603
ESOP loan repayment 23,776 312 312
- -------------------------------------------------------------------------------------------------------------------------------
Balance
September 30, 1997 8,050,266 $ 1,614 $ 20,312 $109,512 $(289) $-- $(1,325) $129,824
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
PG 32
<PAGE> 16
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year ended September 30, 1997
- ----------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 20,299 $ 12,771 $ 14,362
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,926 2,247 1,886
Provision for losses on loans 1,000 1,960 720
Provision (benefit) for losses on real estate held for sale 196 (1,000) 250
Accretion of premiums and discounts, net 1,217 2,069 856
Gain on sale of loans and loan servicing (2,805) (1,191) (2,748)
Gain on sale of securities available for sale (516) (531) (287)
Gain on sale of real estate held for sale and
for development (337) (806) (16)
Loan fees deferred, net of amortization 1,219 1,462 945
FHLB stock dividends (1,403) (1,397) (709)
Pooling accounting adjustment -- (473) --
Cash provided (used) by changes in operating assets and liabilities:
Accrued interest receivable 164 (3,232) (1,929)
Other assets (362) 1,043 (204)
Accrued expenses and other liabilities (6,348) 11,645 2,375
- ----------------------------------------------------------------------------------------------------------------
Balance, net cash provided by operating activities $ 15,250 $ 24,567 $ 15,501
Investing Activities
Proceeds from sale of securities available for sale 343,161 158,513 79,206
Purchases of securities available for sale (606,101) (262,736) (179,128)
Proceeds from maturing securities available for sale 105,830 18,127 11,895
Proceeds from maturing securities held to maturity 225,080 32,987 17,092
Purchases of securities held to maturity (115,000) (171,512) (24,850)
Principal repayments on securities available for sale 59,561 62,838 2,408
Principal repayments on securities held to maturity 7,259 21,217 18,864
Proceeds from sale of loans 75,904 72,126 83,028
Net increase in loans receivable (260,925) (173,933) (199,169)
Proceeds from sale of loan servicing -- -- 1,831
Proceeds from sale of real estate
held for sale and for development 4,040 2,446 1,774
Purchases of premises and equipment (10,772) (7,248) (8,059)
Purchases of FHLB stock (9,331) (5,825) (3,764)
Redemption of FHLB stock 6,400 2,500 646
Improvements capitalized to real estate held for sale (1,894) (2,749) (1,528)
Intangible assets acquired through acquisitions -- (1,530) --
- ----------------------------------------------------------------------------------------------------------------
Balance, net cash used by investing activities $(176,788) $(254,779) $(199,754)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Continued on following page
See notes to consolidated financial statements.
PG 33
<PAGE> 17
C O N S O L I D A T E D S T A T E M E N T S OF C A S H F L O W S
(Continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year ended September 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Financing Activities
<S> <C> <C> <C>
Net increase (decrease) in deposits 22,732 19,882 (10,694)
Net increase in certificates of deposit 27,965 60,551 91,637
Proceeds from FHLB advances, securities sold under agreements
to repurchase, and other borrowings 1,430,899 653,211 531,659
Repayment of FHLB advances, securities sold under agreements
to repurchase, and other borrowings (1,160,007) (506,485) (420,417)
Dividends paid (4,493) (3,666) (2,606)
Issuance of common stock from exercise of stock options 1,339 418 266
Purchase of treasury stock -- -- (289)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 318,435 223,911 189,556
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 156,897 (6,301) 5,303
Cash and Cash Equivalents
Beginning of year 48,501 54,802 49,499
- -------------------------------------------------------------------------------------------------------------------------
End of year $ 205,398 $ 48,501 $ 54,802
=========================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 31,858 $ 23,463 $ 20,458
Income taxes $ 7,864 $ 8,048 $ 6,042
Noncash transactions:
Loans receivable transferred to real estate held for sale, net $ 2,274 $ 1,695 $ 293
Premises and equipment transferred to real estate held for sale $ 1,179 -- --
Loans receivable securitized as securities available for sale $ 43,810 -- --
Transfer of securities from held to maturity to available for sale -- $ 210,640 --
ESOP loan repayment $ 312 $ 400 --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
PG 34
<PAGE> 18
N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S
S U M M A R Y OF S I G N I F I C A N T A C C O U N T I N G P O L I C I E S
1 B A S I S O F P R E S E N T A T I O N | 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 is the principal subsidiary.
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 impact 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.
N A T U R E OF B U S I N E S S | 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 banking 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 has
provided 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. Cornerstone Northwest Mortgage Inc., offers
a variety of mortgage loan products.
C A S H A N D C A S H E Q U I V A L E N T S | For purposes of the
Consolidated Statements of Cash Flows, InterWest considers all deposits and
securities with an original term to maturity of three months or less to be
cash equivalents.
S E C U R I T I E S A V A I L A B L E F O R S A L E A N D
S E C U R I T I E S H E L D T O M A T U R I T Y | 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. Discounts are accreted and premiums are amortized
using the effective yield 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.
L O A N S R E C E I V A B L E A N D L O A N S H E L D F O R
S A L E | 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 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.
L O A N F E E I N C O M E , I N T E R E S T I N C O M E O N
L O A N S R E C E I V A B L E A N D U N E A R N E D
I N T E R E S T | Loan origination fees and direct costs related to loan
origination activities are deferred and amortized into interest income over
contractual or actual loan lives as an adjustment to the loan yield.
Deferred fees and costs related to loans sold are recognized into 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 principal
balance.
PG 35
<PAGE> 19
A L L O W A N C E F O R L O S S E S O N L O A N S | 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 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.
On October 1, 1995, InterWest adopted Statement of Financial Accounting
Standards (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 that are 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. 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. 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.
A provision for losses on loans, which is a charge against 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 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.
R E A L E S T A T E H E L D F O R S A L E A N D R E A L
E S T A T E H E L D F O R D E V E L O P M E N T | 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 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.
PG 36
<PAGE> 20
P R E M I S E S A N D E Q U I P M E N T | Premises and equipment are
stated at cost less accumulated depreciation. Depreciation expense is
computed on the straight-line method over estimated useful lives of forty
years for bank buildings and five to twenty years for furniture and
equipment.
I N T A N G I B L E A S S E T S | 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, 1997, was supported by the value attributed to the
operations acquired.
I N C O M E T A X E S | 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.
N E T I N C O M E P E R S H A R E | 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. Net
income per share for the years ended September 30, 1997, 1996, and 1995 was
calculated on the basis of 8,196,600, 8,064,344, and 7,971,909 weighted
average shares outstanding, respectively.
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.
S T O C K O P T I O N S | InterWest 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.
R E C L A S S I F I C A T I O N S | Certain reclassifications have been
made to the 1996 and 1995 consolidated financial statements to conform to
1997 presentation. The effects of the reclassifications are not considered
material.
2 A C O U N T I N G C H A N G E S
InterWest adopted the following accounting pronouncements during the year
ended September 30, 1997.
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" which requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events or changes indicate that the carrying amount of
an asset is not recoverable. 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. 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. InterWest evaluates mortgage
servicing rights for impairment on a quarterly basis using a valuation model
which incorporates estimated future servicing income, discount rates,
prepayment speeds and default rates. Mortgage servicing rights are included
in intangible assets and are amortized as an offset to services fees in
proportion to and over the period of
PG 37
<PAGE> 21
estimated net servicing income not to exceed 15 years. The adoption of SFAS
No. 122 did not have a material impact on InterWest's financial condition or
results of operations. This statement was only effective during the period
October 1, 1996 through December 31, 1996 as SFAS No. 122 was superseded
effective January 1, 1997 by SFAS No. 125.
Effective January 1, 1997 InterWest adopted SFAS No. 125 "Accounting for
Transfers and Servicing of Assets and Extinguishments of Liabilities" which
supersedes SFAS No. 122. This statement requires that accounting and
reporting standards for the transfer of and servicing of financial assets
and extinguishments of liabilities be based on consistent application of
financial-components approach that focuses on control. Under this approach,
after a transfer of financial assets, InterWest 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. Provisions of SFAS No.
125 that deal with securities lending, repurchase and dollar repurchase
agreements and the recognition of collateral will not be adopted until
January 1, 1998. The adoption of delayed provision of SFAS No. 125 is not
expected to have a material impact on InterWest's financial condition or
results of operations. The adoption of SFAS No. 125 did not have a material
effect on InterWest's financial condition or results of operations.
Effective October 1, 1997 InterWest adopted SFAS No. 123, "Accounting
for Stock-based Compensation." This statement requires expanded disclosures
of stock-based compensation arrangements with employees and encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. As permitted by this statement,
InterWest continues to follow the rules to measure compensation as outlined
in APB No. 25, but InterWest is now required to disclose pro forma amounts
of net income and earnings per share that would have been reported under the
fair value recognition provisions of SFAS No. 123. The adoption of SFAS No.
123 had no material impact on the results of operations or financial
condition of InterWest.
The Financial Accounting Standards Board (FASB) has issued statements of
financial accounting standards which will modify the current method of
accounting utilized by InterWest.
In February, 1997, the FASB issued SFAS No. 128, "Earnings per Share."
This statement simplifies the standards for computing earnings per share and
makes them comparable to international earnings per share standards. It
requires dual presentation of basic and diluted earnings per share on the
face of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. This statement is effective for
financial statements issued for periods ending after December 15, 1997;
earlier application is not permitted.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and disclosure
of comprehensive income and its components. Comprehensive income is defined
as the change in equity during a period. Comprehensive income includes net
income and other comprehensive income which refers to unrealized gains and
losses that under generally accepted accounting principles are excluded from
net income. Under this statement, InterWest will include a comprehensive
income statement that is presented as a financial statement. For InterWest,
adoption of this statement is required in fiscal year 1999.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards and requirements for public enterprises regarding information
about operating segments in annual financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Operating segments are components of
an enterprise that are evaluated regularly by the chief executive officer in
deciding how to allocate resources and in assessing performance. For
InterWest, adoption of this statement is required in fiscal year 1999.
The adoption of these statements will impact the disclosures in
InterWest's financial statements, however, management does not believe that
adoption of these statements will have a material impact on InterWest's
financial condition or results of operations.
PG 38
<PAGE> 22
3 S E C U R I T I E S A V A I L A B L E F O R S A L E
InterWest's securities available for sale consists of investment securities
and mortgage-backed and related securities. Securities available for sale
are recorded at estimated fair value and totaled $511,354,000 and
$368,123,000 at September 30, 1997 and 1996, respectively.
The amortized cost and estimated fair values of investment securities
available for sale by contractual maturity are summarized as follows.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. Government agencies and corporations:
Due after one through five years $261,883 $104 $ 263 $261,724
Due after five through ten years 9,968 -- 31 9,937
- -----------------------------------------------------------------------------------------------------------------
271,851 104 294 271,661
- -----------------------------------------------------------------------------------------------------------------
Obligations of states and political subdivisions:
Due in one year or less 510 2 -- 512
Due after one through five years 65 -- -- 65
Due after ten years 100 4 -- 104
- -----------------------------------------------------------------------------------------------------------------
675 6 -- 681
- -----------------------------------------------------------------------------------------------------------------
$272,526 $110 $ 294 $272,342
=================================================================================================================
September 30, 1996
U.S. Treasury $ 16,064 $ 14 $ 26 $ 16,052
U.S. Government agencies and corporations 5,000 3 4 4,999
Obligations of states and political subdivisions 5,111 26 22 5,115
=================================================================================================================
$ 26,175 $ 43 $ 52 $ 26,166
=================================================================================================================
</TABLE>
PG 39
<PAGE> 23
The amortized cost and estimated fair value of mortgage-backed and
related securities available for sale by contractual maturity are summarized
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------=----------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- ----------------------------------------------------------------------------------=----------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. Government agencies and corporations:
Due after one through five years $ 458 $-- $-- $ 458
Due after five through ten years 285 -- 3 282
Due after ten years 103,434 126 253 103,307
- ----------------------------------------------------------------------------------=----------------------------
104,177 126 256 104,047
Small Business Association (SBA) securities:
Due after five through ten years 11,681 37 35 11,683
Due after ten years 49,530 374 427 49,477
- ----------------------------------------------------------------------------------=----------------------------
61,211 411 462 61,160
Other securities:
Due after five years through ten years 3,218 28 1 3,245
Due after ten years 72,261 15 1,716 70,560
- ----------------------------------------------------------------------------------=----------------------------
75,479 43 1,717 73,805
- ----------------------------------------------------------------------------------=----------------------------
$240,867 $ 580 $ 2,435 $239,012
===============================================================================================================
September 30, 1996
U.S. Government agencies and corporations $ 73,581 $ 6 $ 736 $ 72,851
SBA securities 71,055 457 475 71,037
Other securities 201,813 83 3,827 198,069
- ----------------------------------------------------------------------------------=----------------------------
$346,449 $ 546 $ 5,038 $341,957
===============================================================================================================
</TABLE>
Proceeds from sales of securities available for sale during 1997, 1996
and 1995 were $343,161,000, $158,513,000, and $79,206,000, respectively.
InterWest realized gains of $1,045,000, $1,116,000, and $374,000 and losses
of $529,000, $585,000, and $87,000 on those sales during 1997, 1996 and
1995, 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
portfolio to the available for sale portfolio 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 securities held to maturity into the
available for sale portfolio. This transfer allowed InterWest to sell
$89,400,000 of securities previously classified as held to maturity at a net
gain of $211,000.
PG 40
<PAGE> 24
4 S E C U R I T I E S H E L D T O M A T U R I T Y
InterWest's securities held to maturity consists of investment securities
and mortgage-backed and related securities. Securities held to maturity are
recorded at amortized cost and totaled $119,993,000 and $237,436,000 at
September 30, 1997 and 1996, respectively.
The amortized cost and estimated fair value of investment securities
held to maturity by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. Treasury:
Due in one year or less $ 300 $-- $-- $ 300
U.S. Government agencies and corporations:
Due after one through five years 20,000 19 -- 20,019
Obligations of states and political subdivisions:
Due in one year or less 936 1 935
Due after one through five years 2,562 18 1 2,579
Due after five through ten years 208 2 1 209
- -----------------------------------------------------------------------------------------------------------------
3,706 20 3 3,723
- -----------------------------------------------------------------------------------------------------------------
$ 24,006 $39 $ 3 $ 24,042
=================================================================================================================
September 30,1996
U.S. Government agencies and corporations $130,304 $11 $ 6 $130,309
Obligations of states and political subdivisions 3,802 20 14 3,808
- -----------------------------------------------------------------------------------------------------------------
$134,106 $31 $ 20 $134,117
=================================================================================================================
</TABLE>
The amortized cost and estimated fair value of mortgage-backed and
related securities held to maturity, by contractual maturity are summarized
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Dollars in thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997
U.S. Government agencies and corporations:
Due after one through five years $ 93 $-- $ 2 $ 91
Due after ten years 29,345 46 309 29,082
- -----------------------------------------------------------------------------------------------------------
29,438 46 311 29,173
- -----------------------------------------------------------------------------------------------------------
Other securities:
Due after ten years 66,549 29 2,722 63,856
- -----------------------------------------------------------------------------------------------------------
$ 95,987 $ 75 $ 3,033 $93,029
===========================================================================================================
September 30, 1996
U.S. Government agencies and corporations $ 16,513 $-- $ 778 $15,735
Other securities 86,817 17 5,790 81,044
- -----------------------------------------------------------------------------------------------------------
$103,330 $ 17 $ 6,568 $96,779
===========================================================================================================
</TABLE>
PG 41
<PAGE> 25
At September 30, 1997, InterWest had $53,609,000 of securities
classified as high-risk securities according to Federal Financial
Institutions Examination Council's supervisory guidance for analyzing and
classifying mortgage derivative products. The market value of those
securities was $50,653,000 and the weighted average yield was 6.02 percent.
5. L O A N S R E C E I V A B L E , N E T A N D L O A N S H E L D
F O R S A L E
Loans receivable, net and loans held for sale (originated principally in
Washington) consisted of the following at September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $ 681,012 $ 613,220
Multi-family residential 54,674 52,683
Commercial 165,591 146,115
Real estate construction 197,445 151,194
Consumer loans 63,133 54,109
Commercial loans 28,729 23,580
Agricultural loans 29,549 12,873
- --------------------------------------------------------------------------------
Total $1,220,133 $1,053,774
- --------------------------------------------------------------------------------
Less:
Undisbursed loan proceeds 86,677 60,187
Allowance for losses on loans 8,667 8,074
Deferred loan fees and discounts 10,078 9,542
- --------------------------------------------------------------------------------
$1,114,711 $ 975,971
================================================================================
</TABLE>
InterWest serviced loans, owned in whole or in part by others, of
$301,919,000, $249,251,000, and $242,425,000 at September 30, 1997, 1996,
and 1995 respectively.
At September 30, 1997, InterWest had $209,870,000 in real estate loan
commitments outstanding. Other loan commitments, which includes business and
consumer credit lines, totaled $42,313,000 as of September 30, 1997.
Non-accrual loans totaled $4,857,000 and $3,165,000 at September 30,
1997 and 1996, respectively. If interest on these loans had been recognized,
such income would have been $354,000 and $150,000 for the years ended
September 30, 1997 and 1996, respectively.
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.
InterWest originates both fixed and adjustable interest rate loans. At
September 30, 1997, the composition of these loans was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
F I X E D R A T E A D J U S T A B L E R A T E
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Term to Maturity Book Value Term to Rate Adjustment Book Value
- --------------------------------------------------------------------------------------------------------
Dollars in thousands Dollars in thousands
- --------------------------------------------------------------------------------------------------------
Less than one year $ 15,486 Less than one year $ 604,712
- --------------------------------------------------------------------------------------------------------
One to five years 71,193 One to five years 103,564
- --------------------------------------------------------------------------------------------------------
Over five years 420,028 Over five years 5,150
- --------------------------------------------------------------------------------------------------------
Total $ 506,707 Total $ 713,426
========================================================================================================
</TABLE>
PG 42
<PAGE> 26
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.
6 A L L O W A N C E F O R L O S S E S O N L O A N S
The activity in the allowance for losses on loans for the year ended
September 30 is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 8,074 $ 6,078 $ 5,663
Provision for losses on loans 1,000 1,060 720
Provision pursuant to acquisition -- 900 --
Recoveries 355 396 300
Charge-offs (762) (360) (605)
- --------------------------------------------------------------------------------
Balance, end of year $ 8,667 $ 8,074 $ 6,078
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Recorded investment in impaired loans $2,998 $5,059
Average recorded investment in impaired loans $3,508 $5,485
Interest income recognized on impaired loans $ 308 $ 444
================================================================================
</TABLE>
All impaired loans were evaluated for impairment based on the fair value
of the collateral as all impaired loans are collateral dependent. Total
allocated reserves for impaired loans were $36,000 and $52,000 as of
September 30, 1997 and 1996, respectively. Interest income on impaired loans
is normally recognized on the accrual basis, unless the loan is more than 90
days past due, in which case interest income is recorded on a cash basis.
7 R E A L E S T A T E H E L D F O R S A L E A N D F O R
D E V E L O P M E N T
Real estate held for sale and for development at September 30 is summarized
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned acquired through foreclosure $ 6,945 $ 6,053
Real estate held for development 5,469 4,915
- --------------------------------------------------------------------------------
$12,414 $10,968
================================================================================
</TABLE>
PG 43
<PAGE> 27
8 P R E M I S E S A N D E Q U I P M E N T , N E T
Premises and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 29,409 $ 25,558
Furniture and equipment 19,739 15,389
- --------------------------------------------------------------------------------
49,148 40,947
Less accumulated depreciation (16,113) (14,461)
- --------------------------------------------------------------------------------
33,035 26,486
Land 8,305 7,870
- --------------------------------------------------------------------------------
$ 41,340 $ 34,356
================================================================================
</TABLE>
Depreciation expense for 1997, 1996 and 1995 was $2,594,000, $2,070,000
and $1,711,000, respectively.
9 D E P O S I T S
Deposits consisted of the following at September 30:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Weighted Average
Interest Rate at
Dollars in thousands September 30, 1997 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing deposits -- $ 66,205 $ 57,580
Interest-bearing checking accounts 1.39% 103,301 99,272
Money market accounts 3.66 128,008 112,614
Savings accounts 2.65 94,686 100,002
- ------------------------------------------------------------------------------------------------
2.20 392,200 369,468
- ------------------------------------------------------------------------------------------------
Certificates:
Due within one year 544,561 551,237
After one year but within two years 102,982 134,464
After two years but within three years 116,409 44,295
After three years but within four years 6,949 12,115
After four years but within five years 7,151 6,999
After five years 1,188 2,165
- ------------------------------------------------------------------------------------------------
Total certificates 5.67 779,240 751,275
- ------------------------------------------------------------------------------------------------
Total deposits 4.51% $1,171,440 $1,120,743
================================================================================================
</TABLE>
Deposits at September 30, 1997 and 1996, include $86,205,000 and
$71,390,000, respectively, in public fund deposits. FNMA Participation
Certificates and municipal bonds with a book value of $9,985,000 and
$8,966,000 were pledged as collateral on these deposits at September 30,
1997 and 1996, 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 $293,185,000 and $201,734,000 at September 30, 1997 and
1996, respectively.
PG 44
<PAGE> 28
- --------------------------------------------------------------------------------
Deposit interest expense by account type for the year ended September 30
was as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other certificates $28,500 $29,096 $26,755
Certificates greater than or equal to $100,000 15,288 10,790 10,492
Money market accounts 4,201 3,854 3,398
Savings accounts 2,340 2,559 3,276
Checking accounts 1,377 1,867 2,031
- ----------------------------------------------------------------------------------------
$51,706 $48,166 $45,952
========================================================================================
</TABLE>
10 F E D E R A L H O M E L O A N B A N K A D V A N C E S
At September 30, FHLB advances were scheduled to mature as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------------------
1996
- -------------------------------------------------------------------------------------------------
Dollars in thousands Amount Interest Rates Amount Interest Rates
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $388,551 4.36%--6.40% $250,250 4.56%--5.95%
One to two years 71,753 5.36%--5.62% 49,802 4.36%--6.27%
Two to three years 9,868 4.68% 22,753 5.36%--5.53%
Three to four years 14,034 4.68%
- -------------------------------------------------------------------------------------------------
Total $470,172 -- $336,839 --
=================================================================================================
</TABLE>
As provided for in the Advances, Security, and Deposit Agreement with
the FHLB, advances are collateralized by FHLB stock owned by the Bank,
deposits with the FHLB and certain mortgages or deeds of trust securing such
properties. As a member of the FHLB of Seattle, the Bank currently has a
credit line of 40 percent of the total assets of the Bank, subject to
collateralization requirements. As of September 30, 1997, the minimum book
value of eligible collateral pledged for these borrowings was $564,206,000.
The maximum and average outstanding and weighted average interest rates
on advances from the FHLB were as follows during the year ended September
30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding at any month end $ 470,172 $ 378,499
Average outstanding $ 332,682 $ 310,897
Weighted average interest rates:
Annual 5.64% 5.52%
End of year 5.68% 5.50%
================================================================================
</TABLE>
PG 45
<PAGE> 29
11 S E C U R I T I E S S O L D U N D E R A G R E E M E N T S T O
R E P U R C H A S E
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 $270,468,000 with a fair value of
$270,400,000 at September 30, 1997.
At September 30, securities sold under agreements to repurchase were
scheduled to mature as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------
Dollars in thousands Amount Interest Rates Amount Interest Rates
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $ 96,883 5.03%--5.63% $ 6,135 5.03%--5.40%
30 to 90 days -- -- 74,700 5.44%--5.54%
Over 90 days 162,110 5.42%--6.43% 39,110 5.42%
- ----------------------------------------------------------------------------------------------
Total $ 258,993 -- $ 119,945 --
==============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding at any month end $ 258,993 $ 119,945
Average outstanding $ 183,246 $ 56,285
Weighted average interest rates
Annual 5.66% 5.67%
End of year 5.66% 5.45%
================================================================================
</TABLE>
12 S A I F A S S E S S M E N T
The deposits of InterWest Bank are insured through the Savings Association
Insurance Fund (SAIF). Because the SAIF was undercapitalized, a one-time
special assessment of 0.657 percent of SAIF deposits was enacted into law.
The special assessment was calculated based on March 31, 1995 SAIF deposits
and resulted in a $5,523,000 expense to InterWest Bank for the year ended
September 30, 1996. Under the new law SAIF premiums have been lowered to
.064 percent of deposits.
PG 46
<PAGE> 30
13 S P E C I A L C H A R G E S
Primarily in connection with the Central merger, InterWest incurred special
charges totaling $3,105,000 for the year ended September 30, 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.
14 I N C O M E T A X E S
A reconciliation of the income tax expense based on the statutory corporate
tax rate on pre-tax income and the expense shown in the accompanying
consolidated statements of income for the year ended September 30 is as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rates $ 10,870 $ 6,607 $ 7,598
Tax effect of:
Tax exempt interest (81) (93) (82)
Other, net (31) (406) (169)
- ------------------------------------------------------------------------------------
$ 10,758 $ 6,108 $ 7,347
====================================================================================
Current tax expense 12,242 5,817 5,499
Deferred tax expense (benefit) (1,484) 291 1,848
- ------------------------------------------------------------------------------------
$ 10,758 $ 6,108 $ 7,347
====================================================================================
</TABLE>
Deferred income taxes are provided for temporary differences in the
reporting of income for financial statement and income tax purposes.
Deferred income tax expense (benefit) results primarily from the following
temporary differences for the year ended September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loan fees $ (88) $ 199 $ 1,404
FHLB stock dividends (1,026) (589) 242
Allowance for losses on loans 623 (99) 40
Deferred compensation 35 174 (26)
FDIC premiums (124) 11 165
Other, net (904) 595 23
- --------------------------------------------------------------------------------------
Total deferred tax expense (benefit) $(1,484) $ 291 $ 1,848
======================================================================================
</TABLE>
PG 47
<PAGE> 31
Tax effects of temporary differences that give rise to elements of
deferred tax assets (liabilities) consisted of the following at September
30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997
- -------------------------------------------------------------------------------------
Dollars in thousands 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Allowance for losses on loans $ 840 $ 1,463
Unrealized loss on securities available for sale 713 1,577
Other 969 816
- -------------------------------------------------------------------------------------
2,522 3,856
Deferred tax liability:
Loan fees (1,758) (1,846)
FHLB stock dividends (242) (1,268)
Depreciation (1,410) (1,353)
Other (460) (1,366)
- -------------------------------------------------------------------------------------
(3,870) (5,833)
- -------------------------------------------------------------------------------------
Net deferred tax liability $(1,348) $(1,977)
=====================================================================================
</TABLE>
The tax effect of the change in the unrealized loss on securities
available for sale was a $864,000 increase and a $2,001,000 decrease in the
deferred tax liability during the years ended September 30, 1997 and 1996,
respectively.
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 1997, 1996 and 1995.
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, 1997 and 1996, totaled
$17,400,000 and $16,170,000 respectively. Current taxes payable were
$1,336,000 at September 30, 1997. Current taxes receivable were $2,910,000
at September 30, 1996.
15 E M P L O Y E E B E N E F I T S
R E T I R E M E N T A N D S A V I N G S P L A N S | InterWest has a
salary deferral 401(k) plan 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.
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 at September 30, 1996 is included
in other borrowings in the accompanying Consolidated Statements of Financial
Condition, with a corresponding reduction of stockholders' equity. The
obligation was paid in full during the year ended September 30, 1997.
Interest on the loan was 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 $8,000, $30,000, and $38,000 for
the years ended September 30, 1997, 1996, and 1995, respectively. The
obligation is reduced, and stockholders' equity increased, by the amount of
any principal
PG 48
<PAGE> 32
reduction of the debt by the ESOP. Dividends paid on unallocated shares of
stock may be used to make payments on the loan. Accordingly, $35,000,
$34,000, and $6,000 of dividends were applied toward loan payments during
the years ended September 30, 1997, 1996, and 1995, respectively. The
compensation of the leverage shares is calculated by taking the 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 during the years ended September 30, were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Leveraged shares, beginning of year 23,776 55,926 72,000
Shares released for allocation 23,776 32,150 16,074
- --------------------------------------------------------------------------------
Unallocated shares, end of year -- 23,776 55,926
================================================================================
</TABLE>
The fair value of unallocated shares was $701,392 at September 30, 1996.
The salary deferral 401(k) plan 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 of salary deferred by each participant.
Expenses of these plans were $718,000, $724,000 and $658,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
P E R F O R M A N C E B O N U S | 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 the 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 $514,000, $472,000, and $708,000, for the years ended September 30,
1997, 1996, and 1995, respectively.
S T O C K O P T I O N P L A N S | InterWest had a qualified stock
option plan 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 between four years and
ten years from the granting. This plan expired during 1993, however, there
are exercisable options outstanding under the plan at September 30, 1997.
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 vest over a five-year period. Under the 1993 non-qualified
director stock option plan, each director was granted 2,875 options with a
term of 10 years. These options were 100 percent vested at the date of the
grant. This plan expired during 1997.
In January, 1997, stockholders approved the non-qualified 1996 Outside
Directors Stock Options-For-Fees Plan (the "1996 Director Plan"). Under the
1996 Director Plan, nonemployee directors may elect to receive stock options
in lieu of fees otherwise due for board services and may exercise those
options after one year. Each option granted under the 1996 Director Plan has
a five-year term.
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. In
1992, the stockholders of Central approved the 1992 Stock Option Plan,
reserving shares of common stock for the granting of options to key
employees. In 1994, the Central Director Stock Option Plan was approved,
which reserved shares of common stock for the granting of options to
directors. All outstanding Central stock options immediately became 100
percent vested and exercisable upon the consummation of the merger between
InterWest and Central.
The exercise price of all options granted under these plans is equal
to the fair value of the common stock
PG 49
<PAGE> 33
on the date of the grant. Average exercise price per share, number of shares
authorized, available for grant, granted, exercised, outstanding and
currently exercisable reflect the dilutive effect of the stock splits.
Information with respect to options granted under all stock option plans
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Average Currently Options Options
Authorized Exercise Price Exercised Outstanding Exercisable
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1994 1,279,240 $ 9.18 198,876 455,493 313,476
Options granted -- 12.00 -- 17,000 --
Options exercised -- 5.73 43,409 (43,409) (43,409)
Options rescinded/expired -- 11.96 -- (8,920) (8,920)
Options vested -- -- -- -- 41,519
- --------------------------------------------------------------------------------------------------------------
Balance September 30, 1995 1,279,240 9.74 242,285 420,164 302,666
Options granted -- 19.33 -- 60,325 2,125
Options exercised -- 7.33 56,990 (56,990) (56,990)
Options rescinded/expired -- 15.42 -- (5,870) (3,270)
Options vested -- -- -- -- 55,693
- --------------------------------------------------------------------------------------------------------------
Balance September 30, 1996 1,279,240 11.37 299,275 417,629 300,224
Options authorized 25,000 -- -- -- --
Options granted -- 32.68 -- 30,190 2,750
Options exercised -- 12.39 108,438 (108,438) (108,438)
Options rescinded/expired -- 17.22 -- (8,210) (8,210)
Options vested -- -- -- -- 59,421
- --------------------------------------------------------------------------------------------------------------
Balance September 30, 1997 1,304,240 $ 12.82 407,713 331,171 245,747
==============================================================================================================
</TABLE>
Additional financial data pertaining to outstanding stock options as of
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Remaining Weighted Average Number of Exercise Price
Range of Number of Contractual Life Exercise Price Exercisable of Exercisable
Exercise Prices Option Shares (in years) of Option Shares Option Shares Option Shares
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.77- $7.26 113,100 2.15 $ 6.85 113,100 $ 6.85
$10.38-$14.50 136,914 5.61 10.99 115,413 11.03
$19.50-$20.18 51,937 8.17 19.50 14,484 19.50
$32.00-$32.75 29,220 8.70 32.68 2,750 32.00
- -----------------------------------------------------------------------------------------------------------------------
Total 331,171 5.10 $ 12.82 245,747 $ 9.84
=======================================================================================================================
</TABLE>
SFAS No. 123 requires the disclosure of pro forma net income and
earnings per share had InterWest adopted the fair value method as of the
beginning of fiscal year 1996. Under this statement, the fair value of
stock-based awards is calculated through the use of option pricing models.
These models require the subjective assumptions, including future stock
price volatility and expected time to exercise. The fair value of options
granted under InterWest's stock option plans is estimated on the date of
grant using the Black-Scholes option-pricing model. The weighted average
fair value of options granted was $6.91 in 1996 and $10.04 for options
granted in 1997. If compensation cost for InterWest's stock option plans had
been determined consistent with SFAS No. 123, InterWest's net income and net
income per share would have been the pro forma amounts indicated as follows
for the year ended September 30:
PG 50
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands, except per share amounts 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 20,299 $ 12,771
Pro forma 20,194 12,718
Net income per share:
As reported $ 2.48 $ 1.58
Pro forma 2.47 1.58
- --------------------------------------------------------------------------------
</TABLE>
The compensation expense included in the pro forma net income and net
income per share is not likely to be representative of the effect on
reported net income for future years because stock options vest over several
years and additional option grants generally are made each year.
The following weighted average assumptions were used in the computation
of the fair value of stock options for the year ended September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Expected volatility 23.2% 32.1%
Expected dividend yield 1.6% 1.7%
Risk-free interest rate 6.2% 5.4%
Expected life (in years) 6.2 6.4
- --------------------------------------------------------------------------------
</TABLE>
16 R E G U L A T O R Y C A P I T A L R E Q U I R E M E N T S
InterWest Bancorp, Inc., and its subsidiary, InterWest Bank, are subject to
risk-based capital guidelines requiring minimum capital levels based on the
credit risk of assets.
InterWest Bank is regulated by the Federal Deposit Insurance Corporation
(FDIC) and the Washington Department of Financial Institutions, Division of
Banks. FDIC regulations establish the amount of capital for each of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established categories of institutions. The regulations define the relevant
capital levels for the five categories. In general terms, the capital
definitions are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Total Capital Tier 1 Tier 1
(to Risk (to Risk (to Average
Weighted Assets) Weighted Assets) Assets)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------
</TABLE>
PG 51
<PAGE> 35
InterWest Bancorp, Inc. is subject to risk-based capital guidelines
issued by the Federal Reserve Board (FRB) which establish a risk-adjusted
ratio relating capital to different categories of assets. InterWest's Tier I
capital is comprised of stockholders' equity less certain intangibles, and
excludes the equity impact of adjusting securities available for sale to
fair value. Total capital is Tier I capital and the allowance for losses on
loans. The FRB's risk-based capital rules have been supplemented by a
leverage capital ratio, defined as Tier I capital to adjusted quarterly
average total assets. As of September 30, 1997, under the FRB's capital
guidelines, InterWest's levels of consolidated regulatory capital exceed the
FRB's minimum requirements.
The capital amounts and ratios as of September 30, 1997 are presented in
the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
Dollars in thousands Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
InterWest Bank:
Total Capital
(to Risk Weighted Assets) $136,681 13.75% $79,499 8.0% $99,373 10.0%
Tier I Capital
(to Risk Weighted Assets) 128,014 12.88% 39,749 4.0% 59,624 6.0%
Tier I Capital
(to Average Assets) 128,014 6.58% 77,815 4.0% 97,269 5.0%
- ---------------------------------------------------------------------------------------------------------------------------
InterWest Bancorp, Inc.:
Total Capital
(to Risk Weighted Assets) $137,479 13.80% $79,710 8.0% $99,638 10.0%
Tier I Capital
(to Risk Weighted Assets) 128,812 12.93% 39,855 4.0% 59,783 6.0%
Tier I Capital
(to Average Assets) 128,812 6.62% 58,361 3.0% 97,269 5.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997, InterWest Bank was in compliance with the
well-capitalized capital requirements. 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 InterWest, such as a downturn in the economy in areas where InterWest has
most of its loans, could adversely affect future earnings and, consequently,
the ability of InterWest to meet future minimum 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 financial institutions. Generally,
InterWest is precluded from paying dividends on its common stock if its
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. At September 30, 1997 $50.2 million of retained
earnings were available for dividend distribution.
17 I N T E R E S T R A T E R I S K
InterWest's results of operations are largely dependent upon its ability to
manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on InterWest's
financial condition and results of operations. InterWest does not currently
use derivatives to manage interest rate risk.
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 potential
change in interest rates and the resulting impact on net interest income. It
has been
PG 52
<PAGE> 36
an objective of management to reduce this sensitivity through the use of
adjustable rate assets which enables InterWest to better match the duration
of its deposit base with these types of assets. In addition to adjustable
rate loans, InterWest uses a number of additional strategies to minimize the
impact on net income during significant changes in interest rates. The
strategies utilized by InterWest to achieve this goal include: origination
of short-term consumer loans; emphasis on intermediate to long-term fixed
rate certificates of deposit; sales of fixed-rate mortgage loans; increase
non-interest bearing checking accounts; purchases of adjustable rate and
callable agency securities; and short-term business lending.
At September 30, 1997, InterWest had interest-earning assets and
interest-bearing liabilities of:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Interest-Earning Interest-Bearing
Dollars in thousands Assets Liabilities
- ----------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding $ 1,937,855 $ 1,902,517
Weighted average effective interest rate 7.98% 4.95%
- ----------------------------------------------------------------------------------
</TABLE>
18 D I S C L O S U R E S A B O U T F A I R V A L U E O F
F I N A N C I A L I N S T R U M E N T S
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 impact on the estimated fair value
amounts. The following methods and assumptions were used to estimate the
fair value of each class of InterWest's financial instruments as of
September 30, 1997 and 1996:
C A S H A N D C A S H E Q U I V A L E N T S | The carrying value is a
reasonable estimate of the fair value.
S E C U R I T I E S A V A I L A B L E F O R S A L E,
S E C U R I T I E S H E L D T O M A T U R I T Y A N D L O A N S
H E L D F O R SALE | The fair value of securities available for sale,
securities held to maturity and loans held for sale are based on quoted
market rates and dealer quotes.
L O A N S R E C E I V A B L E | 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 allowance for losses on loans applicable to the loan
portfolio, results in a fair valuation of such loans.
F H L B S T O C K | F H L B stock does not have a market and the fair
value is unknown. As such, the carrying value is a reasonable estimate of
the fair value.
D E P O S I T L I A B I L I T I E S | Under SFAS No. 107, the fair value
of deposits with no stated maturity, such as checking accounts, money market
and savings accounts, is equal to the amount payable on demand as of
September 30, 1997 and September 30, 1996, 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.
F H L B A D V A N C E S, S E C U R I T I E S S O L D U N D E R
A G R E E M E N T S T O R E P U R C H A S E | The fair value of FHLB
advances and securities sold under agreements to repurchase are estimated
based on the present values using a discount rate equal to the rate
currently offered on similar borrowings with similar maturities.
O T H E R | The carrying value of other financial instruments has been
determined to be a reasonable estimate of their fair value.
PG 63
<PAGE> 37
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
September 30, 1997 September 30, 1996
Carrying Estimated Carrying Estimated
Dollars in thousands Value Fair Value Value Fair Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 205,398 $ 205,398 $ 48,501 $ 48,501
Securities available for sale 511,354 511,354 368,123 368,123
Securities held to maturity 119,993 117,071 237,436 230,896
Loans receivable, net 1,106,850 1,120,706 965,920 967,746
Loans held for sale 7,861 8,057 10,051 10,228
FHLB stock 23,566 23,566 19,232 19,232
Liabilities
Non-interest bearing deposits $ 66,205 $ 66,205 $ 57,580 $ 57,580
Interest-bearing checking accounts 103,301 103,301 99,272 99,272
Money market accounts 128,008 128,008 112,614 112,614
Savings accounts 94,686 94,686 100,002 100,002
Certificates of deposit 779,240 781,890 751,275 755,214
- ----------------------------------------------------------------------------------------------------------
Total deposits 1,171,440 1,174,090 1,120,743 1,124,682
FHLB advances and other borrowings 472,084 471,404 340,552 338,959
Securities sold under agreements to repurchase 258,993 256,486 119,945 119,590
Off balance sheet loan commitments:
Real estate 209,870 209,870 115,607 115,607
Other 42,313 42,313 29,834 29,834
- ----------------------------------------------------------------------------------------------------------
</TABLE>
L I M I T A T I O N S | The fair value estimates presented herein are
based on information available to management as of September 30, 1997 and
1996. Since September 30, 1997 and 1996, 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.
19 C O N T I N G E N C I E S
At periodic intervals, the FDIC, the Washington Department of Financial
Institutions, Division of Banks, and the FRB (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 1997 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 1997. 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 1997
financial statements cannot presently be determined.
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 impact on InterWest's financial condition or results of operations.
InterWest Bank is required to maintain balances with the Federal Reserve
Bank based on a percentage of deposit liabilities. The average required
reserve at September 30, 1997 and 1996, was $11,016,000 and $6,485,000,
respectively.
PG 54
<PAGE> 38
20 C O N D E N S E D P A R E N T C O M P A N Y F I N A N C I A L
I N F O R M A T I O N I N T E R W E S T B A N C O R P, I N C.
Condensed financial information for InterWest Bancorp, Inc., (parent company
only) as of and for the years ended September 30, is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
C O N D E N S E D S T A T E M E N T S O F F I N A N C I A L
C O N D I T I O N
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
Dollars in thousands 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,369 $ 366
Other assets 1,856 1,386
Investment in subsidiaries 129,026 110,709
- --------------------------------------------------------------------------------
Total $132,251 $112,461
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other liabilities $ 2,427 $ 1,440
Stockholders' equity 129,824 111,021
- --------------------------------------------------------------------------------
Total $132,251 $112,461
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
C O N D E N S E D S T A T E M E N T S O F I N C O M E
- ---------------------------------------------------------------------------------------------------------------
1997
- ---------------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends received from subsidiaries $ 4,899 $ 7,213 $ 1,860
- ---------------------------------------------------------------------------------------------------------------
Interest expense -- 140 219
Operating expenses 537 1,364 751
- ---------------------------------------------------------------------------------------------------------------
Total expenses 537 1,504 970
- ---------------------------------------------------------------------------------------------------------------
Net income before federal income taxes and equity in
undistributed net income from subsidiaries 4,362 5,709 890
Federal income tax benefit (188) (404) (391)
- ---------------------------------------------------------------------------------------------------------------
Net income before equity in undistributed net income from subsidiaries 4,550 6,113 1,281
- ---------------------------------------------------------------------------------------------------------------
Equity in undistributed net income from subsidiaries 15,749 6,658 13,081
- ---------------------------------------------------------------------------------------------------------------
Net income $ 20,299 $ 12,771 $ 14,362
===============================================================================================================
</TABLE>
PG 55
<PAGE> 39
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
C O N D E N S E D S T A T E M E N T S O F C A S H F L O W S
- ----------------------------------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------------------------------
Dollars in thousands 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,299 $ 12,771 $ 14,362
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income from subsidiaries (20,648) (13,871) (14,941)
Dividends received from subsidiaries 4,899 7,213 1,860
Change in other assets and liabilities, net (393) (530) 504
Pooling accounting adjustment -- (361) --
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,157 5,222 1,785
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payment of dividends (4,493) (3,667) (602)
Purchase of treasury stock -- -- (289)
Net decrease in borrowings -- (2,095) (598)
Proceeds from stock option plans 1,339 418 127
- ----------------------------------------------------------------------------------------------------------
Net cash used by financing activities (3,154) (5,344) (1,362)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,003 (122) 423
Cash and cash equivalents at beginning of year 366 488 65
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,369 $ 366 $ 488
==========================================================================================================
</TABLE>
21 B U S I N E S S C O M B I N A T I O N S
In September 1997, InterWest entered into a definitive agreement to acquire
Puget Sound Bancorp, the holding company for First National Bank of Port
Orchard, located in Port Orchard, Washington. As of September 30, 1997,
Puget Sound Bancorp has total assets of $52.8 million and operates three
branch offices. Pursuant to the terms of the definitive agreement the
transaction is subject to approval by regulators and the shareholders of
Puget Sound Bancorp as well as the covenants, representations and warranties
of both parties. It is anticipated that the transaction will be accounted
for as a pooling-of-interests under generally accepted accounting
principles. Pro forma results of operations have not been presented because
the effects of this acquisition are not material to InterWest's results of
operations.
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 was 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 consolidated financial statements have been adjusted 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. Accordingly, $473,000 has
been deducted from retained earnings in the statement of stockholders'
equity for the year ended September 30, 1996.
PG 56
<PAGE> 40
22 S E L E C T E D Q U A R T E R L Y F I N A N C I A L D A T A
(U N A U D I T E D)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Fourth Third Second First
Dollars in thousands except per share data Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1997
Interest income $37,077 $34,639 $33,182 $33,113
Interest expense 22,421 20,405 19,008 19,069
Net interest income before
provision for losses on loans 14,656 14,234 14,174 14,044
Provision for losses on loans 200 200 300 300
Net interest income after
provision for losses on loans 14,456 14,034 13,874 13,744
Other operating income 4,844 3,422 3,188 3,260
Other operating expense 11,235 9,570 9,431 9,529
Income before federal income taxes 8,065 7,886 7,631 7,475
Federal income tax expense 2,824 2,745 2,667 2,522
Net income $ 5,241 $ 5,141 $ 4,964 $ 4,953
========================================================================================================
Net income per share $ 0.64 $ 0.63 $ 0.61 $ 0.61
========================================================================================================
</TABLE>
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 first three quarters of the year ended September 30,
1996 have been restated as if the companies were combined.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fourth Third Second First
Dollars in thousands except per share data Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
===============================================================================================================
</TABLE>
Other operating expenses for the fourth quarter of 1996 include
$5,523,000 related to the recapitalization of the SAIF and special charges
of $2,849,000 primarily associated with the Central merger. See Notes 12 and
13 for further details. The provision for losses on loans for the fourth
quarter of 1996 includes $900,000 to bring into conformity the provision for
losses on loan practices of Central and InterWest.
PG 57
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
InterWest Bancorp, Inc.
<TABLE>
<CAPTION>
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership Incorporation
- ---------------- ------------ -------------
<S> <C> <C>
InterWest Bank 100% Washington
InterWest Financial Services, Inc. (b) 100% Washington
InterWest Insurance Agency, Inc. (c) 70% Washington
InterWest Properties, Inc. (b) 100% Washington
I & B, Inc. (c) 90% Washington
Island Beach of Washington, Inc.
and Beach Club (b) 100% Washington
Islander Resort (d) 100% Florida
CI Resorts Equity Corp. (b) 100% Washington
Cornerstone Northwest Mortgage, Inc. (b) 100% Washington
</TABLE>
- ----------
(a) The operation of Bancorp's wholly owned subsidiaries are included in
Bancorp's Financial Statements contained in the Annual Report attached
hereto as Exhibit 13.
(b) Wholly-owned subsidiary of InterWest Bank.
(c) Interest owned by InterWest Bank.
(d) Wholly-owned by Island Beach of Washington, Inc. and Beach Club.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS, ERNST & YOUNG LLP
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, and in the Registration Statement
(Form S-8 No. 333-24525) pertaining to the 1996 Outside Directors
Options-for-Fees Plan of InterWest Bancorp, Inc., of our report dated October
30, 1997, 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, 1997.
Ernst & Young LLP
Seattle, Washington
December 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS FOR CENTRAL BANCORPORATION,
DELOITTE & TOUCHE LLP
Independent Auditors' Consent
Board of Directors
InterWest Bancorp, Inc.
Oak Harbor, Washington
We consent to the incorporation by reference in the Registration Statements of
InterWest Bancorp, Inc. on Form S-8 No. 33-99742, Form S-8 No. 333-13191, and
Form S-8 No. 333-24525 of our report dated January 19, 1996, on the consolidated
statements of operations, stockholders' equity, and cash flows of Central
Bancorporation and subsidiaries for the year ended December 31, 1995 (not
presented separately herein), appearing in the Annual Report on Form 10-K of
InterWest Bancorp, Inc. for the year ended September 30, 1997.
Deloitte & Touche LLP
Seattle, Washington
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF INTERWEST BANCORP, INC. AS OF AND FOR THE YEAR ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 45,834
<INT-BEARING-DEPOSITS> 159,564
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 511,354
<INVESTMENTS-CARRYING> 119,993
<INVESTMENTS-MARKET> 117,071
<LOANS> 1,114,711
<ALLOWANCE> 8,667
<TOTAL-ASSETS> 2,046,705
<DEPOSITS> 1,171,440
<SHORT-TERM> 526,362
<LIABILITIES-OTHER> 14,364
<LONG-TERM> 204,715
0
0
<COMMON> 1,614
<OTHER-SE> 128,210
<TOTAL-LIABILITIES-AND-EQUITY> 2,046,705
<INTEREST-LOAN> 92,899
<INTEREST-INVEST> 43,334
<INTEREST-OTHER> 1,778
<INTEREST-TOTAL> 138,011
<INTEREST-DEPOSIT> 51,706
<INTEREST-EXPENSE> 80,903
<INTEREST-INCOME-NET> 57,108
<LOAN-LOSSES> 1,000
<SECURITIES-GAINS> 516
<EXPENSE-OTHER> 39,765
<INCOME-PRETAX> 31,057
<INCOME-PRE-EXTRAORDINARY> 20,299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,299
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.48
<YIELD-ACTUAL> 3.35
<LOANS-NON> 4,857
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,074
<CHARGE-OFFS> 762
<RECOVERIES> 355
<ALLOWANCE-CLOSE> 8,667
<ALLOWANCE-DOMESTIC> 4,479
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,188
</TABLE>
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT FOR CENTRAL BANCORPORATION
Independent Auditors' Report
Board of Directors
Central Bancorporation
Wenatchee, Washington
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Central Bancorporation (Bancorp) and subsidiaries for the year
ended December 31, 1995 (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 results of operations and cash flows of Central
Bancorporation and subsidiaries for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
January 19, 1996
