SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended March 31, 1997
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number ________________
InterWest Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Chartered by the State of Washington
(State or other jurisdiction of incorporation or organization)
91-1691216
(I.R.S. Employer Identification No.)
275 Southeast Pioneer Way
Oak Harbor, Washington
(Address of principal executive offices)
98277
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
As of March 31, 1997, 8,018,431 shares of common stock were outstanding with a
par value of $0.20.
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INTERWEST BANCORP, INC
INDEX PAGE
- ----- ----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial 1
Condition
Consolidated Statements of Operations 2-3
Consolidated Statements of Stockholder's Equity 4
Consolidated Statements of Cash Flow 5-7
Notes to Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share amounts)
March 31, September 30,
1997 1996
(Unaudited)
ASSETS -------- --------
Cash and cash equivalents $ 45,056 $ 48,501
Investment securities available for sale,
at fair value 254,394 26,166
Mortgage-backed and related securities
available for sale, at fair value 209,056 341,957
Investment securities held to maturity 44,014 134,106
Mortgage-backed and related securities held
to maturity 100,038 103,330
Loans receivable, net 1,030,856 965,920
Loans held for sale, at fair value 7,930 10,051
Accrued interest receivable 12,756 12,576
Real estate held for sale and for development 13,013 10,968
Federal Home Loan Bank (FHLB) stock, at cost 13,864 19,232
Premises and equipment, net 36,958 34,356
Intangible assets 2,739 2,869
Other assets 849 2,119
-------- --------
Total assets $1,771,523 $1,712,151
========= =========
LIABILITIES
Customer deposits $1,176,117 $1,120,743
Federal Home Loan Bank advances 252,931 336,839
Securities sold under agreements to repurchase 209,951 119,945
Accrued expenses and other liabilities 11,840 18,938
Advance payments by borrowers
for taxes and insurance 1,284 952
Other borrowings 608 3,713
-------- --------
Total liabilities 1,652,731 1,601,130
========= =========
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share
Authorized 20,000,000 shares; Issued
and outstanding 8,018,431 and 7,918,074 1,609 1,592
Paid-in-capital 20,091 18,995
Treasury stock <289> <289>
Retained earnings 101,629 93,963
Debt related to ESOP <102> <312>
Net Unrealized loss on
securities available for sale <4,146> <2,928>
-------- --------
Total stockholders' equity 118,792 111,021
-------- --------
Total $1,771,523 $1,712,151
========= =========
Stockholders' equity/total assets 6.71% 6.48%
Book value per share $14.81 $14.02
1
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Quarter ended March 31, Six months ended March 31
1997 1996 1997 1996
INTEREST INCOME -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans receivable $22,270 $20,297 $44,451 $40,581
Mortgage-backed and related securities 5,837 7,641 13,103 14,638
Interest-earning deposits 686 868 1,160 1,449
Investment securities 4,389 803 7,581 1,659
-------- -------- -------- --------
33,182 29,609 66,295 58,327
INTEREST EXPENSE
Customer deposits 12,804 11,798 25,321 24,241
FHLB advances and other borrowings 3,457 4,383 8,057 8,253
Securities sold under agreements to repurchase 2,747 585 4,699 1,196
-------- -------- -------- --------
19,008 16,766 38,077 33,690
Net interest income before provision for
losses on loans 14,174 12,843 28,218 24,637
Provision for losses on loans 300 300 600 550
-------- -------- -------- --------
Net interest income after provision for
losses on loans 13,874 12,543 27,618 24,087
OTHER OPERATING INCOME
Gain on sale of loans 250 811 521 1,131
Service fees 1,780 1,921 3,545 3,009
Insurance commissions 483 417 1,036 802
Other 557 295 872 527
Gain on real estate held for sale
and for development 143 -- 176 --
Gain (loss) on sale of investment securities
and mortgage-backed and related securities <25> 348 297 559
-------- -------- -------- --------
3,188 3,792 6,447 6,028
OTHER OPERATING EXPENSE
Compensation and employee benefits 4,818 4,979 9,954 9,076
General and administrative 2,567 2,377 4,905 4,315
Loss (gain) from real estate write-downs
and operations 61 25 192 <198>
Occupancy 1,167 1,118 2,429 2,132
Data processing 671 491 1,400 966
FDIC premium assessment 147 492 80 984
-------- -------- -------- --------
9,431 9,482 18,960 17,275
-------- -------- -------- --------
Income before federal income taxes 7,631 6,853 15,105 12,840
FEDERAL INCOME TAX EXPENSE 2,667 2,332 5,189 4,449
-------- -------- -------- --------
NET INCOME $4,964 $4,521 $9,916 $8,391
======== ======== ======== ========
2
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Quarter ended March 31, Six months ended March 31
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income per share $0.61 $0.56 $1.21 $1.05
Cash dividend declared $0.14 $0.12 $0.28 $0.22
Weighted average shares outstanding 8,203,553 8,040,551 8,172,973 8,013,973
Return on average stockholders' equity 16.90% 16.33% 17.17% 15.32%
Return on average assets 1.12% 1.18% 1.14% 1.12%
3
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
Unrealized
gain (loss) Debt
Common Stock on securities Related
# of Shares Amount Paid-in Retained available for to Treasury
Capital Earnings sale ESOP Stock Total
----------- ------ ------- -------- ------------- ------- -------- -------
Balance, September
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30, 1995 7,828,935 $1,581 $18,588 $85,784 $788 <712> <289> $105,740
Net income 8,391 8,391
Cash dividends <1,834> <1,834>
Proceeds from sale
of Common Stock 19,462 4 181 185
ESOP loan transaction 16,074 200 200
Unrealized loss on
securities available for sale <2,099> <2,099>
Pooling accounting adjustment <473> <473>
----------- ------ ------- -------- ------------- ------- -------- -------
Balance March 31,
1996 7,864,471 $1,585 $18,769 $91,868 $<1,311> <512> <289> $110,110
----------- ------ ------- -------- ------------- ------- -------- -------
Balance, September
30, 1996 7,918,074 $1,592 $18,995 $93,963 $<2,928> $<312> $<289> $111,021
Net income 9,916 9,916
Cash dividends <2,250> <2,250>
Proceeds from sale
of Common Stock 84,305 17 1,096 1,113
ESOP loan transaction 16,052 210 210
Unrealized loss on
Securities available for sale <1,218> <1,218>
----------- ------ ------- -------- ------------- ------- -------- -------
Balance March 31,
1997 8,018,431 $1,609 $20,091 $101,629 $<4,146> $<102> $<289> $118,792
=========== ====== ======= ======== ============= ======= ======== =======
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended March 31,
1997 1996
------ ------
OPERATING ACTIVITIES
Net Income $9,916 $8,391
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,216 1,013
Provision for losses on loans 600 550
Provision for loss on real estate held
for sale -- (250)
Accretion of premiums and discounts, net 653 1,153
Gain on sale of loans (521) (1,131)
Gain on sale of investment securities and
mortgage-backed and related securities (297) (559)
Gain on sale of real estate held for sale and
for development and premises and equipment (176) --
Amortization of deferred loan fees, net 27 (3,365)
FHLB stock dividends (632) (596)
Cash provided (used) by changes in operating
assets and liabilities:
Accrued interest receivable (180) (1,072)
Other assets 1,270 (1,415)
Accrued expenses and other liabilities (6,523) 2,635
Advance payments by borrowers for taxes
and insurance 332 (105)
Pooling accounting adjustment -- 2,782
------ ------
BALANCE, net cash provided by
operating activities, carried forward $5,685 $8,031
5
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Six months ended March 31,
1997 1996
------ ------
BALANCE, net cash provided by operating activities,
brought forward $5,685 $ 8,031
INVESTING ACTIVITIES
Purchase of investment securities available
for sale (279,787) (12,407)
Proceeds from maturing investment securities
available for sale 9,530 13,192
Proceeds from sale of investment securities
available for sale 39,590 --
Proceeds from maturing investment securities
held to maturity 175,080 26,482
Purchase of investment securities held to maturity (85,000) (6,471)
Principal repayments from mortgage-backed
and related securities available for sale 36,464 17,160
Principal repayments from mortgage-backed
and related securities held to maturity 3,242 6,503
Purchase of mortgage-backed and related
securities held to maturity -- --
Purchase of mortgage-backed and related securities
available for sale (7,965) (232,296)
Proceeds from sale of mortgage-backed and related
securities available for sale 148,471 138,501
Proceeds from sale of loans 13,180 63,689
Loan originations, net of repayments (120,691) (74,854)
Proceeds from sale of real estate held for sale
and for development 1,383 597
Purchases of premises and equipment (4,866) (4,434)
Purchase of FHLB stock -- (5,046)
Redemption of FHLB stock 6,000 --
Capital additions to real estate held for sale (1,292) (1,820)
Acquistion of intangible asset (1,291)
------ ------
Net cash used by investing activities (66,661) (72,495)
FINANCING ACTIVITIES
Net increase (decrease) in customer deposits 12,153 13,034
Net increase in certificates of deposit 43,220 22,360
Proceeds from FHLB advances and other borrowings 464,542 316,530
Repayment of FHLB advances and other borrowings (461,339) (251,311)
Dividends paid (2,158) (1,636)
Issuance of common stock 1,113 184
------ ------
Net cash provided by financing activities 57,531 99,161
------ ------
Net change in cash and cash equivalents (3,445) 34,697
CASH AND CASH EQUIVALENTS
Beginning of quarter 48,501 54,802
------ ------
End of quarter $45,056 $89,499
====== ======
6
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 13,447 $ 14,508
Income taxes 4,650 2,087
Noncash transactions:
Loans transferred to real estate held for sale, net 781 175
Transfer of premises to real estate held for sale 1,179 --
Transfer of securities held to maturity to
available for sale -- 198,523
Loans securitizied as mortgage-backed and related
securities 43,810 --
7
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INTERWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 1997
(unaudited)
NOTE A - Basis of Presentation
The unaudited consolidated financial statements have been prepared in
accordance with general accepted accounting principles for interim financial
information and with the instructions to the Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation are reflected in the interim financial statements. The results of
operations for the quarter and six months ended March 31, 1997 and 1996 are
not necessarily indicative of the operating results for the full year. The
September 30, 1996 consolidated statement of financial condition presented
with the interim financial statements was audited and received an unqualified
opinion. For further information, refer to the consolidated financial
statements and footnotes thereto included in the InterWest's annual report for
the year ended September 30, 1996.
On August 31, 1996, InterWest acquired Central Bancorporation (Central) of
Wenatchee, Washington, whose principle subsidiary was Central Washington Bank.
As the transaction was accounted for as a pooling-of-interests, prior period
financial statements have been restated to include the accounts of Central as
if the companies were combined for all periods presented.
NOTE B - Net Income per Share
The weighted average shares outstanding during the quarter and six months
ended March 31, 1997 and 1996 include the effect of shares held by the
Employee Stock Ownership Plan (ESOP) and stock options granted. Earnings per
share for the quarter ended March 31, 1997 and 1996 are calculated on the
basis of 8,203,553 and 8,040,551 weighted average shares outstanding,
respectively. Earnings per share for the six months ended March 31, 1997 and
1996 are calculated on the basis of 8,172,948 and 8,013,973 weighted average
shares outstanding, respectively.
NOTE C - Reclassification
Certain reclassifications have been made to prior financial statements to
conform with current presentation. Such reclassifications have no effect on
net income.
NOTE D - Accounting Pronouncements
Effective October 1, 1996, InterWest adopted Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of ". This
statement requires that when InterWest might be unable to recover,
through future operations or sales, the carrying amount of long-lived assets
and certain identifiable intangible assets and goodwill, an impairment loss be
recorded through a valuation allowance for the impaired asset. Such assets are
assessed quarterly for other-than-temporary impairment. Impairment is measured
based on the present value of expected cash flows for the asset and its
eventual disposition. The adoption of this statement had no material impact on
InterWest's financial condition or results of operations.
Effective October 1, 1996 InterWest adopted SFAS No.122 "Accounting for
Mortgage Servicing Rights" which requires that mortgage servicing rights be
capitalized when acquired either through the purchase or origination of
mortgage loans that are subsequently sold or securitized with the servicing
rights retained. Prior to the adoption of SFAS No. 122, InterWest did not
capitalize mortgage servicing rights.
8
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SFAS No. 122 also requires an enterprise, on a periodic basis, to assess the
capitalized mortgage servicing rights for impairment based on the fair value
of those rights. For this analysis, SFAS No. 122 specifies that mortgage
servicing rights be stratified based on one or more predominant risk
characteristics and any resulting impairment is to be recognized through a
valuation allowance for each impaired stratum. InterWest evaluates mortgage
servicing rights for impairment on a quarterly basis using a fair valuation
model which incorporates estimated future servicing income, discount rates,
prepayment speeds and default rates.
Mortgage servicing rights are included in other assets and are amortized as an
offset to services fees in proportion to and over the period of estimated net
servicing income not to exceed 15 years. The adoption of SFAS No. 122 did not
have a material effect on InterWest's financial condition or results of
operations.
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 SFAS No. 125 did not have a material effect on InterWest's
financial condition or results of operations.
In February, 1997, the Financial Accounting Standards Board 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. Management does
not believe the adoption of this statement will have a material impact on
InterWest's financial condition or results of operations.
9
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INTERWEST BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total assets increased $59.4 million from September 30, 1996 to $1.772 billion
at March 31, 1997. During the current fiscal year, InterWest began the process
of restructuring the interest-earning asset composition by decreasing the
percentage of investment and mortgage-backed and related securities portfolios
and increasing the loan portfolio. The loan portfolio increased by $62.8
million from $976.0 million at September 30, 1996, to $1,038.8 billion as of
March 31, 1997. This represents an increase from 60 percent of
interest-earning assets as of September 30, 1996 to 62 percent as of March 31,
1997. Investment and mortgage-backed and related securities increased $1.9
million from $605.6 million at September 30, 1996 to $607.5 million as of
March 31, 1997. Investment and mortgage-backed securities represent 36 percent
of interest-earning assets as of March 31, 1997, a 2 percent decrease from
September 30, 1996. This change in interest-earning asset composition would
have been more significant, however, during December 1996, InterWest
securitized $43.8 million of mortgage loans, the majority of which have been
sold as of March 31, 1997. This strategy of restructuring the interest-earning
asset composition should have a positive impact on net interest income.
As of March 31, 1997, InterWest has $463.4 million or 76 percent of its
investment and mortgage backed and related securities classified as available
for sale. The available for sale portfolio is required to be carried at fair
value, thus its carrying value fluctuates with changes in market conditions.
At March 31, 1997, InterWest has an unrealized loss on securities available
for sale of $6.4 million as compared to an unrealized loss of $4.5 million at
September 30, 1996.
Loans receivable increased $62.8 million from September 30, 1996. During the
quarter, InterWest had a decrease in its lending volume from $122.7 million
for the quarter ended March 31, 1996, to $113.0 million for the quarter ended
March 31, 1997. Fiscal year to date loan originations are $208.9 million, down
from $240.5 million for the six months ended March 31, 1996. This is due to a
decrease in single-family residential lending originations. Single-family
residential originations were $37.4 million and $70.9 million for the quarter
and six months ended March 31, 1997 compared with $55.7 million and $112.7
million for the like periods one year ago. This decrease is due to the
mortgage interest rate environment during the period which produced a flat
yield curve, strong rate competition and limited refinancing activity.
However, it is anticipated that mortgage loan originations will increase
significantly during the second half of 1997 due to a strengthening local
economy, seasonal increases and record highs in the mortgage loan pipeline.
The decreases in mortgage lending have been partially offset by increases in
consumer and business lending. Consumer lending has increased by $1.6 million
and $4.5 million as compared to the quarterly and six month periods a year
ago, which is primarily due to increased home equity lending. During the
quarter, InterWest initiated a concentrated effort to increase agricultural
lending which resulted in business lending originations of $23.2 million for
the quarter and $32.7 million for the six months ended March 31, 1997 compared
to $10.1 million and $20.3 million for the like periods a year ago.
10
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Loans Receivable, Net and Loans Held For Sale
- ---------------------------------------------
InterWest originates loans through its 37 full-service offices and its
mortgage subsidiary, Cornerstone Northwest Mortgage, Inc. The following table
indicates the loan portfolio mix as of March 31, 1997, and September 30, 1996:
March 31, 1997 September 30, 1996
(in thousands)
-------------- -------------
Single-family residential $653,530 $613,220
Multi-family residential 55,083 52,683
Commercial real estate 150,285 146,115
Residential construction 147,067 151,194
Commercial non-real estate 24,160 23,580
Agricultural 22,850 12,873
Consumer 57,725 54,109
-------------- -------------
1,110,700 1,053,774
Less:
Undisbursed loan proceeds 54,086 60,187
Allowance for losses on loans 8,510 8,074
Deferred loan fees and discounts 9,318 9,542
-------------- -------------
$1,038,786 $975,971
============== =============
The following table compares loan originations for the quarter and six months
ended ended March 31:
Quarter Six months
1997 1996 1997 1996
(in thousands)
------ ------ ------ ------
Single-family residential $37,356 $55,706 $70,881 $112,712
Multi-family residential/
Commercial real estate 11,179 18,423 22,512 34,021
Residential construction 31,543 30,287 64,117 59,481
Consumer 9,771 8,165 18,609 14,077
Commercial non-real estate 7,145 7,224 13,377 14,448
Agricultural 16,023 2,902 19,373 5,804
------ ------ ------ ------
Total loans originated $ 113,017 $122,707 $208,869 $240,543
======= ======= ======= =======
InterWest currently has $280.0 million in loans serviced for others.
Interest is accrued on loans receivable until the loan is 90 days delinquent
or management doubts the collectibility of the loan or the unpaid interest, at
which time InterWest establishes a reserve for any accrued interest. All loans
on which interest is not being accrued are referred to as non-accrual loans.
At March 31, 1997, non-accrual loans totaled $5.6 million, an increase from
$3.2 million at September 30, 1996. Total non-performing assets, including
real estate owned through foreclosure, increased to $12.2 million or 0.69
percent of assets at March 31, 1997, compared to $9.2 million or 0.54 percent
of assets at September 30, 1996.
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Total liabilities increased $51.6 million from September 30, 1996 to $1.653
billion at March 31, 1997. This growth is due to an increase in customer
deposits of $55.4 million. Certificates of deposit increased $43.2 million and
currently represent 68 percent of customer deposits. Transaction account
balances have increased $12.2 million from September 30, 1996 and currently
represent 32 percent of total customer deposits. It is management's intent and
strategy to increase the percentage of transaction accounts to approximately
40 percent of the deposit base by the end of the decade. This strategy of
shifting deposit liabilities should have a positive impact on net interest
income, service fee revenue and market penetration. InterWest has added 3,532
net new checking accounts and 3,249 net new check card accounts since
September 30, 1996. This represents annualized growth rates of 14 percent and
63 percent, respectively. InterWest has installed 7 new automatic teller
machines during the current fiscal year and plans to install an additional 5
machines prior to September 30, 1997.
Stockholders' equity increased by $7.8 million from $111.0 million at
September 30, 1996, to $118.8 million at March 31, 1997. The increase in
stockholders' equity resulted from after-tax earnings of $9.9 million for the
six months ended March 31, 1997, a $210,000 paydown on the Employee Stock
Ownership Plan ("ESOP") loan, and $1.1 million from the issuance of common
stock, offset by a $1.2 million increase in the unrealized loss on securities
available for sale, and $2.2 million representing $0.28 per share cash
dividends. Book value per share increased to $14.81 at March 31, 1997, from
$14.02 at September 30, 1996. Stockholders' equity as a percentage of total
assets increased from 6.48 percent at September 30, 1996, to 6.71 percent at
March 31, 1997.
Results of Operations
- ---------------------
Net income increased to $0.61 per share or $5.0 million for the quarter ended
March 31, 1997, a 9 percent increase from $0.56 per share or $4.5 million for
the quarter ended March 31, 1996. For the six months ended March 31, 1997
earnings were $1.21 per share or $9.9 million, a 15 percent increase compared
to $1.05 per share or $8.4 million for the same period one year ago. Increased
net income is primarily due to expansion and diversification of the balance
sheet, while controlling operational costs.
InterWest's return on average stockholders' equity for the quarter ended March
31, 1997, was 16.90 percent, an increase from 16.33 percent for the same
quarter last year. Return on average stockholders' equity for the six months
ended March 31, 1997 was 17.17 percent, an increase from 15.32 percent for the
same period a year ago. Return on average assets for the quarter was 1.12
percent, a decrease from 1.18 percent for the quarter ended March 31, 1996.
The fiscal year to date return on average assets increased to 1.14 percent
from 1.12 percent a year ago.
Net Interest Income
- -------------------
Net interest income before provision for losses on loans rose to $14.2 million
and $28.2 million for the quarter and six months ended March 31, 1997,
compared to $12.8 million and $24.6 million for the same periods a year ago.
These increase are primarily due to growth in interest-earning assets which is
partially offset by a decrease in the margin earned on these assets. Net
interest margin for the quarter ended March 31, 1997 was 3.42 percent as
compared to 3.56 percent for the quarter ended March 31, 1996. Fiscal year to
date net interest margin is 3.45 percent, a slight decrease from 3.47 percent
for the six month period ended March 31, 1996.
During March 1997, the federal funds rate was raised by 25 basis points.
InterWest has taken steps to insulate itself from the potential negative
impact of rising interest rates, a flat yield curve and resulting interest
rate risk. During December 1996, $43.8 million of fixed-rate mortgage loans
were securitized. A majority of the resulting mortgage-backed securities were
sold prior to interest rate increases. InterWest has also focused on
adjustable rate lending growth during the first six months of the fiscal year.
Of the $208.9 million in loan originations, $126.1 million or 60 percent have
been adjustable rate. InterWest has also focused loan production on loans with
higher interest rates: consumer and business.
Interest income for the quarter and six months ended March 31,1997 was $33.2
million and $66.3 million compared to $29.6 million and $58.3 million for the
same periods a year ago. This increase was due to
12
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growth in interest-earning assets, which was partially offset by a decrease in
the yield earned on those assets. The yield on interest-earning assets
decreased to 8.01 percent for the quarter ended March 31, 1997, compared to
8.20 percent for the quarter ended March 31, 1996. The fiscal year to date
yield on interest-earning assets has decreased to 8.11 percent from 8.22
percent one year ago.
Interest expense increased to $19.0 million for the current quarter compared
to $16.7 million for the quarter ended March 31, 1996. Interest expense for
the six months ended March 31, 1997 is $38.1 million, an increase from $33.7
million for the same period one year ago. These increases are due to an
increase in the balance of interest-bearing liabilities, offset by a decrease
in the cost of funds from the prior year. The increase in interest-bearing
liabilities has been necessary to fund the growth in interest -earning assets.
Average Rates and Balances
- --------------------------
The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the quarter
ended March 31:
1997 1996
Average Average
Balance Rate Balance Rate
(in thousands, except percentages)
------- ---- ------- ----
Loans receivable $1,004,921 8.86% $883,429 9.19%
Mortgage-backed and 352,904 6.62 451,444 6.77
related securities
Investment securities and
interest-earning deposits 298,761 6.79 109,582 6.10
------- ---- ------- ----
Total interest-earning assets $1,656,586 8.01% $1,444,455 8.20%
Customer deposits $1,178,066 4.35% $1,048,786 4.50%
FHLB advances, securities
sold under agreements to
repurchase and 454,615 5.46 358,503 5.54
other borrowings
------- ---- ------- ----
Total interest-bearing
liabilities $1,632,681 4.66% $1,407,289 4.77%
Net interest spread $ 23,905 3.35% $37,166 3.43%
======= ==== ======= ====
Net interest margin 3.42% 3.56%
==== ====
13
<PAGE>
<PAGE>
The following tables indicate the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the six
months ended March 31:
1997 1996
Average Average
Balance Rate Balance Rate
(in thousands, except percentages)
------- ---- ------- ----
Loans receivable $ 997,029 8.92% $884,429 9.18%
Mortgage-backed and 392,561 6.68 436,135 6.71
related securities
Investment securities and
interest-earning deposits 245,742 7.11 99,268 6.26
------- ---- ------- ----
Total interest-earnings assets $1,635,332 8.11% $1,419,832 8.22%
========= =========
Customer deposits $1,154,868 4.39% $1,044,146 4.64%
FHLB advances, securities sold
under agreements to repurchase
and other borrowings 457,537 5.58 337,204 5.60
------- ---- ------- ----
Total interest-bearing liabilities $1,612,405 4.72% $1,381,350 4.88%
Net interest spread $ 22,927 3.39% $38,482 3.34%
====== ==== ====== ====
Net interest margin 3.45% 3.47%
Net interest income is influenced by changes in both interest rates and
changes in interest-earning assets and interest-bearing liabilities. The
tables presented below are an analysis of these changes for the quarter and
six months ended March 31, 1997 as compared to the same periods a year ago (in
thousands):
Quarter ended
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $(703) $(475) $ (228)
Volume 4,008 2,786 1,222
Rate/Volume 268 (69) 337
------ ------- ------
Total $3,573 $2,242 $1,331
====== ======= ======
14
<PAGE>
<PAGE>
Six months ended
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $(807) $(1,394) $ 587
Volume 8,290 5,942 2,348
Rate/Volume 485 (161) 646
------ ------- ------
Total $7,968 $4,387 $3,581
====== ======= ======
Provision and Allowance for Losses on Loans
- -------------------------------------------
The allowance for losses on loans totaled $8.5 million (0.81 percent of loans)
at March 31, 1997 compared to $8.1 million (0.82 percent of loans) at
September 30, 1996. InterWest attempts to assess the risk level inherent in
the loan portfolio and provide adequate reserves to meet these risks as a part
of the ongoing review of the loan portfolio. Non-performing assets and
delinquency trends are key elements in determining the allowance for losses on
loans. The allowance for losses on loans is also determined by taking into
consideration general economic conditions in the market InterWest serves,
historical loss experience, individual loan review findings, loan mix and the
level of loans relative to the allowance for losses on loans.
The following tables summarize the activity in allowance for losses on loans
during the quarter and six months ended March 31 (in thousands):
Quarter ended Six months ended
1997 1996 1997 1996
------ ------ ------ ------
Balance at beginning of period $8,430 $6,273 $8,074 $6,078
Provisions 300 300 600 550
Charge-offs, net <220> <23> <164> <78>
------ ------ ------ ------
Balance at end of period $8,510 $6,550 $8,510 $6,550
====== ====== ====== ======
Other Income
- ------------
Other income for the quarter ended March 31, 1997, decreased to $3.2 million
from $3.8 million for the like quarter one year ago. This is primarily due to
a $934,000 decrease in the gain on sale of loans and securities which is
partially offset by $300,000 in mortgage servicing rights recognized during
the quarter. Fiscal year to date other income increased to $6.4 million from
$6.0 million for the six months ended March 31, 1996. Decreases of $872,000 in
the gains on the sale of securities and loans are more than offset by: an
increase of $450,000 in loan fees from Cornerstone Northwest Mortgage, Inc., a
$234,000 increase in revenues from InterWest's subsidiaries (InterWest
Financial Services, Inc. and InterWest Insurance Agency, Inc.), and an
increase of $176,000 in gains on the sale of real estate held for sale and for
development.
Other Expense
- -------------
In spite of significant balance sheet growth, operating expenses decreased
slightly to $9.4 million for the quarter ended March 31, 1997, compared to
$9.5 million for the quarter ended March 31, 1996. Increases in general
15
<PAGE>
<PAGE>
and administrative, data processing and occupancy expenses are due to bank
expansion and diversification, enhanced consumer and business lending, and
technological updates in the branch structure. These increases were more than
offset by a decrease in FDIC premium rates and the administrative
consolidations from the merger with Central Bancorporation. Current fiscal
year to date operating expenses of $19.0 million increased $1.7 million from
$17.3 million for the six months ended March 31, 1996. This increase is due to
bank expansion, diversification and technological updates discussed above and
a $500,000 increase in operating costs associated with Cornerstone Northwest
Mortgage, Inc., which was acquired effective January 1, 1996.
InterWest has consistently endeavored to become more efficient in its
operation. One commonly accepted measure of a bank's operating efficiency is
the ratio of total operating expenses to total revenue (net interest income
and other income). For the quarter ended March 31, 1997, this ratio was 55.3
percent as compared to 58.0 percent for the quarter a year ago. The fiscal
year to date efficiency ratio is 55.7, an improvement from 57.4 percent for
the six months ended March 31, 1996.
Federal Income Tax
- ------------------
The federal income tax expense for the quarter and six months ended March 31,
1997, was $2.7 million and $5.2 million, compared to $2.3 million and $4.4
million for the same periods last year. The effective tax rates for the three
and six months ended March 31, 1997 were 34.9 percent and 34.0 percent
compared to 34.4 percent and 34.6 percent for the three and six months ended
March 31, 1996.
Liquidity and Capital Resources
- -------------------------------
InterWest must maintain adequate liquidity to meet demands for deposits
outflow, loan originations, and normal operating costs. The primary sources of
liquidity are deposit generations, loan principal and interest payments, sales
of mortgage loans, principal payments on loans and mortgage-backed and related
securities, Federal Home Loan Bank advances and reverse repurchase agreements.
InterWest has a credit line available with the Federal Home Loan Bank of 40
percent of total assets. Prepayments on loans and mortgage-backed and related
securities, deposit inflows and outflows are affected significantly by
interest rates, general economic conditions and other factors.
InterWest Bancorp, Inc. and its banking subsidiary, InterWest Bank (the Bank)
are subject to regulatory capital requirements. Regulated by the Federal
Deposit Insurance Corporation (FDIC) and the State of Washington Division of
Banking. InterWest Bank is required to maintain minimum levels of regulatory
capital as a percentage of regulatory assets. The Banks total regulatory
capital must equal 8 percent of risk weighted assets, and one-half of that 8
percent must consist of core capital.
At March 31, 1997, the Bank had the following regulatory capital ratios
calculated in accordance with FDIC standards:
Required Actual
-------- ------
Tier I capital to risk-based assets 4% 13.31%
Total capital to risk-based assets 8% 14.26%
Leverage ratio 4% 6.74%
InterWest's management believes that under the current regulations the Bank
will continue to meet minimum capital requirements in the foreseeable future.
However, events beyond the control of the Bank, such as a downturn in the
economy in areas where the Bank has most of the its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet
future minimum capital requirements.
16
<PAGE>
<PAGE>
FDIC regulations establish the amount of capital for each of the Federal
Deposit Insurance Corporation Improvement Act (FDICIA) established categories
of institutions. Depending on the Bank's FDICIA category classification, the
FDIC may restrict certain activities of the Bank including acceptance of
brokered deposits or offering interest rates on deposits that are
significantly higher that prevailing rates. In general terms, the capital
definitions are as follows:
Total Tier I
Risk-Based Risk-Based
Capital Capital Leverage
FDICIA Category Ratio Ratio Ratio
------ ------ ------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized 2% or less
Total risk-based capital ratio is the ratio of total capital to risk-weighted
assets. Tier I risk-based capital ration is the ratio of core capital to
risk-weighted assets. Leverage ratio is the ratio of core capital to adjusted
total assets. At March 31, 1997, the Bank was in compliance with the
well-capitalized capital requirements.
InterWest had paid annual cash dividends for 13 years. At December 1990,
InterWest began paying quarterly dividends which it intends to continue to
pay. The amount of future dividends will be based on InterWest's earnings and
financial condition and is restricted by federal and state tax laws and by tax
considerations related to thrift institutions. Generally, InterWest is
precluded from paying dividends on its common stock if its regulatory capital
would be reduced to below regulatory capital requirements. InterWest is also
restricted by income appropriated to bad debt reserves and deducted for
federal income taxes.
17
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
InterWest Bancorp, Inc. or its subsidiaries are also involved
as parties to certain legal proceedings incidental to their
businesses. InterWest believes that the outcome of such
proceedings will not have a material effect upon InterWest
Bancorp's business or financial condition.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company ("Meeting") was
held on January 21, 1997. The results of the vote on the matters
presented at the Meeting is as follows:
1. The following individuals were elected as directors, each
for a three-year term:
Vote For Vote Withheld
Barney R. Beeksma 5,891,900 23,936
Larry Carlson 5,891,900 23,936
C. Stephen Lewis 5,891,900 23,936
Russel E. Olson 5,891,900 23,936
The following individual was elected as director for a two-year
term:
Vote For Vote Withheld
Gary M. Bolyard 5,891,900 23,936
The terms of Directors Michael T. Crawford, Jean Gorton, Henry
Koetje, Clark H. Mock, Vern Sims and Stephen M. Walden continued
after the meeting.
3. The InterWest Bancorp, Inc. 1996 Outside Directors Stock
Options-for-Fees Plan was approved by stockholders by the
following vote:
For Against Abstain No Vote
5,536,065 232,195 74,796 72,780
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERWEST BANCORP, INC.
By: /s/Stephen M. Walden
--------------------
Stephen M. Walden
President and
Chief Executive Officer
Date: May 12, 1997
-------------
<PAGE>
<PAGE>
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<ARTICLE> 9
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 34151
<INT-BEARING-DEPOSITS> 10905
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 463450
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<TOTAL-ASSETS> 1771523
<DEPOSITS> 1176117
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<LONG-TERM> 75204
0
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<COMMON> 1609
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