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 JUNE 30, 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
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(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 June 30, 1997, 8,035,973 shares of common stock were outstanding with a
par value of $0.20.
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INTERWEST BANCORP, INC
INDEX PAGE
- ----- ----
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1
CONSOLIDATED STATEMENTS OF OPERATIONS 2-3
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOW 5-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-17
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)
June 30, September 30,
1997 1996
(Unaudited)
ASSETS ------ ------
Cash and cash equivalents $ 62,193 $ 48,501
Investment securities available for sale,
at fair value 234,328 26,166
Mortgage-backed and related securities
available for sale, at fair value 199,454 341,957
Investment securities held to maturity 44,010 134,106
Mortgage-backed and related securities held to maturity 98,426 103,330
Loans receivable, net 1,074,428 965,920
Loans held for sale, at fair value 27,700 10,051
Accrued interest receivable 15,031 12,576
Real estate held for sale and for development 12,749 10,968
Federal Home Loan Bank (FHLB) stock, at cost 20,246 19,232
Premises and equipment, net 39,129 34,356
Intangible assets 2,674 2,869
Other assets 2,214 2,119
------ ------
TOTAL ASSETS $1,832,582 $1,712,151
========== ==========
LIABILITIES
Customer deposits $1,173,989 $1,120,743
Federal Home Loan Bank advances 333,277 336,839
Securities sold under agreements to repurchase 188,076 119,945
Accrued expenses and other liabilities 11,777 18,938
Advance payments by borrowers for taxes and insurance 758 952
Other borrowings 505 3,713
-------- ---------
TOTAL LIABILITIES 1,708,382 1,601,130
========= =========
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share,
Authorized 20,000,000 shares, Issued and
outstanding 8,035,973 and 7,918,074 1,611 1,592
Paid-in-capital 20,183 18,995
Treasury stock <289> <289>
Retained earnings 105,562 93,963
Debt related to ESOP --- <312>
Net Unrealized loss on securities available for sale <2,867> <2,928>
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 124,200 111,021
-------- ---------
TOTAL $1,832,582 $1,712,151
========== ==========
Stockholders' equity/total assets 6.78% 6.48%
Book value per share $15.46 $14.02
1
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
INTEREST INCOME ------ ------ ------ ------
- ---------------
Loans receivable $23,648 $20,665 $68,099 $61,246
Mortgage-backed and related securities 5,062 8,041 18,165 22,678
Interest-earning deposits 290 889 1,450 2,338
Investment securities 5,639 809 13,220 2,469
------- ------- ------- -------
34,639 30,404 100,934 88,731
INTEREST EXPENSE
- ----------------
Customer deposits 13,002 11,784 38,323 36,024
FHLB advances and other borrowings 4,756 4,389 12,813 12,643
Securities sold under agreements
to repurchase 2,647 724 7,346 1,920
------- ------- ------- -------
20,405 16,897 58,482 50,587
NET INTEREST INCOME BEFORE PROVISION
FOR LOSSES ON LOANS 14,234 13,507 42,452 38,144
PROVISION FOR LOSSES ON LOANS 200 210 800 760
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOSSES ON LOANS 14,034 13,297 41,652 37,384
OTHER OPERATING INCOME
- ----------------------
Gain on sale of loans 115 124 636 1,255
Service fees 2,150 1,920 5,695 4,928
Insurance commissions 596 767 1,631 1,569
Other 378 190 1,250 717
Gain on real estate held for sale
and for development 89 212 266 213
Gain (loss) on sale of investment
securities and mortgage-backed
and related securities 94 <28> 391 531
------- ------- ------- -------
3,422 3,185 9,869 9,213
OTHER OPERATING EXPENSE
- -----------------------
Compensation and employee benefits 5,058 5,115 15,013 14,191
General and administrative 2,268 2,273 7,173 6,587
Loss (gain) from real estate write-downs
and operations 83 <301> 275 <499>
Occupancy 1,347 1,116 3,775 3,249
Data processing 655 502 2,055 1,468
FDIC premium assessment 159 495 239 1,479
------ ------ ------- ------
9,570 9,200 28,530 26,475
------ ------ ------- ------
INCOME BEFORE FEDERAL INCOME TAXES 7,886 7,282 22,991 20,122
FEDERAL INCOME TAX EXPENSE 2,745 2,473 7,934 6,922
----- ----- ----- -----
NET INCOME $5,141 $4,809 $15,057 $13,200
====== ====== ======= =======
2
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------ ------ ------ ------
NET INCOME PER SHARE $0.63 $0.60 $1.84 $1.64
===== ===== ===== =====
Cash dividend declared $0.15 $0.13 $0.43 $0.35
===== ===== ===== =====
Weighted average shares outstanding 8,217,875 8,058,434 8,192,794 8,028,794
Return on average stockholders' equity 16.81% 17.07% 17.04% 15.91%
Return on average assets 1.13% 1.21% 1.14% 1.15%
3
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
<TABLE>
Unrealized
gain (loss)
securities Debt
available Related
Common Stock Paid-in Retained for to Treasury
# of Shares Amount Capital Earnings sale ESOP Stock Total
- ---------------------- --------- ------ ------- -------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 7,828,935 $1,581 $18,588 $85,784 $788 <712> <289> $105,740
1995
Net income 13,200 13,200
Cash dividends <3,085> <3,085>
Proceeds from sale of 20,819 4 200 204
Common Stock
ESOP loan transaction 32,150 400 400
Unrealized loss on securities
available for sale <3,189> <3,189>
Pooling accounting
adjustment <473> <473>
--------- ------ ------- -------- --------- ------ -------- --------
Balance June 30, 1996 7,881,904 $1,585 $18,788 $95,426 $<2,401> <312> <289> $112,797
========= ====== ======= ======== ========= ====== ======== ========
Balance, September 30, 7,918,074 $1,592 $18,995 $93,963 $<2,928> $<312> $<289> $111,021
1996
Net income 15,057 15,057
Cash dividends <3,458> <3,458>
Proceeds from sale of
Common Stock 94,123 19 1,188 1,207
ESOP loan transaction 23,776 312 312
Unrealized loss on Securities
available for sale 61 61
--------- ------ ------- -------- --------- ------ -------- --------
Balance June 30, 1997 8,035,973 $1,611 $20,183 $105,562 $<2,867> $ -- $<289> $124,200
========= ====== ======= ======== ========= ====== ======== ========
4
</TABLE>
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED JUNE 30,
1997 1996
------- -------
OPERATING ACTIVITIES
Net Income $15,057 $13,200
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 1,998 1,559
Provision for losses on loans 800 760
Provision for loss on real estate held for sale -- (625)
Accretion of premiums and discounts, net 958 1,475
Gain on sale of loans (636) (1,255)
Gain on sale of investment securities and
mortgage-backed and related securities (391) (531)
Gain on sale of real estate held for sale and
for development and premises and equipment (266) (213)
Amortization of deferred loan fees, net (731) (4,772)
FHLB stock dividends (960) (987)
CASH PROVIDED (USED) BY CHANGES IN
OPERATING ASSETS AND LIABILITIES:
Accrued interest receivable (2,455) (1,471)
Other assets (95) 371
Accrued expenses and other liabilities (7,348) 3,775
Advance payments by borrowers for
taxes and insurance (194) (498)
Pooling accounting adjustment 2,782
------- -------
BALANCE, NET CASH PROVIDED BY
OPERATING ACTIVITIES, CARRIED FORWARD $5,737 $13,570
5
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INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
(unaudited)
NINE MONTHS ENDED JUNE 30,
1997 1996
------- -------
BALANCE, NET CASH PROVIDED BY
OPERATING ACTIVITIES, BROUGHT FORWARD $5,737 $ 13,570
INVESTING ACTIVITIES
Purchase of investment securities available for sale (329,787) (7,403)
Proceeds from maturing investment securities
available for sale 29,665 7,696
Proceeds from sale of investment securities
available for sale 89,684 --
Proceeds from maturing investment securities
held to maturity 175,080 38,975
Purchase of investment securities held to maturity (85,000) (14,843)
Principal repayments from mortgage-backed
and related securities available for sale 47,668 44,855
Principal repayments from mortgage-backed
and related securities held to maturity 4,845 9,298
Purchase of mortgage-backed
and related securities held to maturity -- (94,903)
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 148,471 158,513
Proceeds from sale of loans 18,588 68,758
Loan originations, net of repayments (189,330) (122,048)
Proceeds from sale of real estate held for sale
and for development 2,718 766
Purchases of premises and equipment (7,755) (5,665)
Purchase of FHLB stock (6,054) (5,046)
Redemption of FHLB stock 6,000 --
Capital additions to real estate held for sale (1,713) (2,190)
Acquisition of intangible asset (1,291)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (104,885) (156,824)
FINANCING ACTIVITIES
Net increase in customer deposits 7,921 12,725
Net increase in certificates of deposit 45,325 15,815
Proceeds from FHLB advances and other borrowings 856,361 436,461
Repayment of FHLB advances and other borrowings (794,689) (326,123)
Dividends paid (3,285) (2,416)
Issuance of common stock 1,207 202
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 112,840 136,664
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 13,692 (6,590)
CASH AND CASH EQUIVALENTS
Beginning of quarter 48,501 54,802
------- -------
End of quarter $62,193 $48,212
======= =======
6
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SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the year for:
Interest $21,783 $21,798
Income taxes 5,064 6,048
Noncash transactions:
Loans transferred to real estate held for sale, net 1,344 1,037
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 JUNE 30, 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 nine
months ended June 30, 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 nine months ended
June 30, 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 June 30, 1997 and 1996 are calculated on the basis of 8,217,875
and 8,058,434 weighted average shares outstanding, respectively. Earnings per
share for the nine months ended June 30, 1997 and 1996 are calculated on the
basis of 8,192,517 and 8,028,794 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 $121.0 million from September 30, 1996 to $1.833 billion
at June 30, 1997. During the current fiscal year, InterWest began the process of
restructuring the interest-earning asset composition by decreasing the
percentage of the investment and mortgage-backed and related securities
portfolio and increasing the loan portfolio. The loan portfolio increased by
$126.0 million from $976.0 million at September 30, 1996, to $1.102 billion as
of June 30, 1997. This represents an increase from 60 percent of
interest-earning assets as of September 30, 1996 to 64 percent as of June 30,
1997. Investment and mortgage-backed and related securities decreased $29.4
million from $605.6 million at September 30, 1996 to $576.2 million as of June
30, 1997. Investment and mortgage-backed securities represent 34 percent of
interest-earning assets as of June 30, 1997, a 4 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 June 30, 1997.
This strategy of restructuring the interest-earning asset composition should
have a positive impact on net interest income.
As of June 30, 1997, InterWest has $433.8 million or 75 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
June 30, 1997, InterWest has an unrealized loss on securities available for sale
of $4.4 million as compared to an unrealized loss of $4.5 million at September
30, 1996.
Loans receivable increased $126.0 million from September 30, 1996. During the
quarter, InterWest had an increase in its lending volume from $126.3 million for
the quarter ended June 30, 1996, to $162.2 million for the quarter ended June
30, 1997. Fiscal year to date loan originations are $388.9 million, an increase
from $346.2 million for the nine months ended June 30, 1996. InterWest had an
increase in its mortgage lending volume from $113.6 million for the quarter
ended June 30, 1996, to $139.4 million for the quarter ended June 30, 1997.
Fiscal year to date mortgage loan originations are $336.9 million, up from
$319.8 million for the nine months ended June 30, 1996. This increase is due to
current year lending originations from Cornerstone Northwest Mortgage, Inc.
which primarily delivers single-family mortgage loans to InterWest Bank. During
fiscal year 1996, Cornerstone primarily brokered mortgage loans to other
financial institutions. Mortgage loan originations generated by Cornerstone
delivered to InterWest Bank were $23.7 million and $63.7 million for the quarter
and nine months ended June 30, 1997. It is anticipated that mortgage loan
originations will continue to increase during the fourth quarter of fiscal year
1997 due to a strengthening local economy, seasonal increases and high volumes
in the mortgage loan pipeline.
InterWest has experienced significant increases in consumer and business
lending. Consumer loan originations have increased by $1.2 million and $5.7
million as compared to the quarterly and nine month periods a year ago, which is
primarily due to increased home equity lending. During this fiscal year,
InterWest has initiated a concentrated effort to increase agricultural lending
which resulted in business loan increases of $9.7 million for the quarter and
$20.3 million for the nine months ended June 30, 1997 compared to $847,000 and
$468,000 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 38 full-service offices and its mortgage
subsidiary, Cornerstone Northwest Mortgage, Inc. The following table indicates
the loan portfolio mix as of June 30, 1997, and September 30, 1996:
June 30, 1997 September 30, 1996
(in thousands)
-------- --------
Single-family residential $692,571 $613,220
Multi-family residential 55,364 52,683
Commercial real estate 160,063 146,115
Real estate construction 169,058 151,194
Commercial non-real estate 26,828 23,580
Agricultural 29,928 12,873
Consumer 61,597 54,109
-------- --------
1,195,409 1,053,774
Less:
Undisbursed loan proceeds 74,741 60,187
Allowance for losses on loans 8,619 8,074
Deferred loan fees and discounts 9,921 9,542
-------- --------
$1,102,128 $975,971
========== ========
The following table compares loan originations for the quarter and nine months
ended ended June 30:
Quarter Nine months
1997 1996 1997 1996
------ ------ ------ ------
(in thousands)
Single-family residential $57,694 $46,736 $159,262 $159,448
Multi-family residential/
Commercial real estate 24,418 20,071 49,959 54,092
Real estate construction 57,255 46,763 127,705 106,244
------ ------ ------- -------
Total mortgage loans 139,367 113,570 336,926 319,784
Consumer 13,058 11,913 31,666 25,990
Net increase (decrease) in
principal balance
Commercial non-real estate 2,668 311 3,248 1,467
Agricultural 7,078 536 17,055 (999)
------ ------ ------ ------
Total loans originated $ 162,171 $126,330 $388,895 $346,242
========= ======== ======== ========
InterWest currently has $269.5 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
June 30, 1997, non-accrual loans totaled $4.8 million, an increase from $3.2
million at September 30, 1996. Total non-performing assets, including real
estate owned through foreclosure, increased to $11.7 million or 0.64 percent of
assets at June 30, 1997, compared to $9.2 million or 0.54 percent of assets at
September 30, 1996.
11
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Total liabilities increased $107.0 million from September 30, 1996 to $1.708
billion at June 30, 1997. This growth is primarily due to an increase in
customer deposits of $53.2 million and borrowings of $61.4 million to fund loan
growth. Certificates of deposit increased $48.1 million and currently represent
68 percent of customer deposits. Transaction account balances have increased
$5.1 million from September 30, 1996 and currently represent 32 percent of total
customer deposits. It is management's strategy to increase the percentage of
transaction accounts to approximately 40 percent of the deposit base by the end
of the decade, which should have a positive impact on net interest income,
service fee revenue and market penetration. InterWest has added a net total of:
250 business checking accounts, 6,750 consumer checking accounts and 8,436 check
card accounts since September 30, 1996. This represents annualized growth rates
of 12 percent, 18 percent and 109 percent respectively. InterWest has installed
9 new automated teller machines during the current fiscal year which results in
a total of 27 in operation as of June 30, 1997.
Stockholders' equity increased by $13.2 million from $111.0 million at September
30, 1996, to $124.2 million at June 30, 1997. The increase in stockholders'
equity resulted from after-tax earnings of $15.1 million for the nine months
ended June 30, 1997, a $312,000 pay down on the Employee Stock Ownership Plan
("ESOP") loan, and $1.2 million from the exercise of common stock options,
offset by $3.4 million representing $0.43 per share cash dividends. Book value
per share increased to $15.46 at June 30, 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 6.78 percent at June 30, 1997.
Results of Operations
- ---------------------
Net income increased to $0.63 per share or $5.1 million for the quarter ended
June 30, 1997, a 5 percent increase from $0.60 per share or $4.8 million for the
quarter ended June 30, 1996. For the nine months ended June 30, 1997 earnings
were $1.84 per share or $15.1 million, a 12 percent increase compared to $1.64
per share or $13.2 million for the same period one year ago. Increased net
income is primarily due to expansion and diversification of the balance sheet.
Operational costs have increased to develop the infrastructure for future
growth.
InterWest's return on average stockholders' equity for the quarter ended June
30, 1997, was 16.81 percent, a decrease from 17.07 percent for the same quarter
last year. Return on average stockholders' equity for the nine months ended June
30, 1997 was 17.04 percent, an increase from 15.91 percent for the same period a
year ago. Return on average assets for the quarter was 1.13 percent, a decrease
from 1.21 percent for the quarter ended June 30, 1996. The fiscal year to date
return on average assets decreased slightly to 1.14 percent from 1.15 percent a
year ago.
Net Interest Income
- -------------------
Net interest income before provision for losses on loans rose to $14.2 million
and $42.5 million for the quarter and nine months ended June 30, 1997, compared
to $13.5 million and $38.1 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 June 30, 1997 was 3.33 percent as compared
to 3.61 percent for the quarter ended June 30, 1996. Fiscal year to date net
interest margin is 3.41 percent, a decrease from 3.52 percent for the nine month
period ended June 30, 1996. The decrease in net interest margin is due to
greater increases in rates for short-term deposits and borrowings than rates
earned on loans and a flat yield curve.
Interest income for the quarter and nine months ended June 30,1997 was $34.6
million and $100.9 million compared to $30.4 million and $88.7 million for the
same periods a year ago. This increase was due to 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 8.11 percent for the
quarter ended June 30, 1997, compared to 8.13 percent for the quarter ended June
30, 1996. The fiscal year to date yield on interest-earning assets has decreased
to 8.11 percent from 8.19 percent one year ago.
Interest expense increased to $20.4 million for the current quarter compared to
$16.9 million for the
12
<PAGE>
<PAGE>
quarter ended June 30, 1996. Interest expense for the nine months ended June 30,
1997 is $58.5 million, an increase from $50.6 million for the same period one
year ago. These increases are due to an increase in the balance of interest-
bearing liabilities and an increase 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 June 30:
1997 1996
--------------------- ------------------
Average Average
Balance Rate Balance Rate
(in thousands, except percentages)
--------- ---- --------- ----
Loans receivable $ 1,064,571 8.89% $904,932 9.13%
Mortgage-backed and 305,830 6.62 496,339 6.48
related securities
Investment securities and
interest-earning deposits 338,015 7.02 94,435 7.19
--------- ---- --------- ----
Total interest-earnings assets $1,708,416 8.11% $1,495,706 8.13%
Customer deposits $1,161,339 4.48% $1,078,332 4.37%
FHLB advances, securities
sold under agreements
to repurchase and 520,407 5.69 385,938 5.30
other borrowings
--------- ---- --------- ----
Total interest-bearing
liabilities $1,681,746 4.85% $1,464,270 4.62%
Net interest spread $ 26,670 3.26% $ 31,436 3.51%
========== ===== ========== =====
Net interest margin 3.33% 3.61%
===== =====
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 nine months
ended June 30:
1997 1996
--------------------- ------------------
Average Average
Balance Rate Balance Rate
(in thousands, except percentages)
--------- ---- --------- ----
Loans receivable $1,019,543 8.91% $892,406 9.15%
Mortgage-backed and 363,651 6.66 455,454 6.64
related securities
Investment securities and
interest-earning deposits 276,500 7.07 95,963 6.68
--------- ---- --------- ----
Total interest-earnings assets $1,659,694 8.11% $1,443,823 8.19%
Customer deposits $1,157,025 4.42% $1,054,676 4.55%
FHLB advances, securities
sold under agreements
to repurchase and 478,493 5.62 352,814 5.50
other borrowings
--------- ---- --------- ----
Total interest-bearing
liabilities $1,635,518 4.77% $1,407,490 4.79%
Net interest spread $ 24,176 3.34% $ 36,333 3.40%
========== ===== ========== =====
Net interest margin 3.41% 3.52%
===== =====
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 nine months
ended June 30, 1997 as compared to the same periods a year ago (in thousands):
Quarter ended
-------------
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $(431) $ 666 $(1,097)
Volume 4,939 2,689 2,250
Rate/Volume (273) 153 (426)
------- ------ ------
Total $4,235 $3,508 $ 727
======= ====== ======
14
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<PAGE>
Nine months ended
Interest Interest Net Interest
Income Expense Income
------ ------- ------
Rate $(1,282) $ (790) $ (492)
Volume 13,200 8,684 4,516
Rate/Volume 285 1 284
------- ------- ------
Total $12,203 $7,895 $4,308
======= ======= ======
Provision and Allowance for Losses on Loans
- -------------------------------------------
The allowance for losses on loans totaled $8.6 million (0.78 percent of loans)
at June 30, 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 nine months ended June 30 (in thousands):
Quarter ended Nine months ended
1997 1996 1997 1996
---- ---- ---- ----
Balance at beginning of period $8,510 $6,550 $8,074 $6,078
Provisions 200 210 800 760
Charge-offs, net <91> 124 <255> 46
---- ---- ----- -----
Balance at end of period $8,619 $6,884 $8,619 $6,884
====== ====== ====== ======
Other Income
- ------------
Other income for the quarter ended June 30, 1997, increased to $3.4 million from
$3.2 million for the like quarter one year ago. This is primarily due to a
$200,000 increase in service fee revenue. Fiscal year to date other income
increased to $9.9 million from $9.2 million for the nine months ended June 30,
1996. Decreases of $750,000 in the gains on the sale of securities and loans are
more than offset by: an increase of $750,000 in service fees, $375,000 in
mortgage servicing rights recognized, a $150,000 increase in other fee income, a
$62,000 increase in revenues from InterWest's subsidiaries (InterWest Financial
Services, Inc. and InterWest Insurance Agency, Inc.), and an increase of $53,000
in gains on the sale of real estate held for sale and for development.
Other Expense
- -------------
Consistent with current year and planned future balance sheet growth, operating
expenses increased to $9.6 million and $28.5 million for the quarter and nine
months ended June 30, 1997, compared to $9.2 million and
15
<PAGE>
<PAGE>
$26.5 million for the like periods one year ago. Increases in general 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 are partially offset by a
decrease in FDIC premium rates and the administrative consolidations from the
merger with Central Bancorporation.
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 June 30, 1997, this ratio was 54.2 percent as
compared to 55.1 percent for the quarter a year ago. The fiscal year to date
efficiency ratio is 54.5, an improvement from 55.9 percent for the nine months
ended June 30, 1996.
Federal Income Tax
- ------------------
The federal income tax expense for the quarter and nine months ended June 30,
1997, was $2.7 million and $7.9 million, compared to $2.5 million and $6.9
million for the same periods last year. The effective tax rates for the three
and nine months ended June 30, 1997 were 34.8 percent and 34.5 percent compared
to 34.0 percent and 34.4 percent for the three and nine months ended June 30,
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 June 30, 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% 13.00%
Total capital to risk-based assets 8% 13.91%
Leverage ratio 4% 6.79%
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 June 30, 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
18
<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/H. GLENN MOUW
----------------
H. Glenn Mouw
Executive Vice President
Date: August 12, 1997
---------------
<PAGE>
<PAGE>
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