<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
-----------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-26632
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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
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(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of December 31, 1997, 8,037,015 shares of common stock were outstanding with
a par value of $0.20.
<PAGE>
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 STOCKHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-17
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
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents
Non-interest bearing $ 46,191 $ 45,834
Interest-bearing deposits in banks -- 159,564
Securities available for sale, at fair value 582,469 511,354
Securities held to maturity
(fair value: $94,686 and $117,071) 96,515 119,993
Loans receivable, net 1,136,710 1,106,850
Loans held for sale (fair value: $14,242 and $8,057) 13,970 7,861
Accrued interest receivable 15,618 12,412
Real estate held for sale and for development 12,830 12,414
Federal Home Loan Bank (FHLB) stock, at cost 28,848 23,566
Premises and equipment, net 42,478 41,340
Intangible assets 3,320 3,036
Other assets 3,368 2,481
---------- ----------
TOTAL ASSETS $1,982,317 $2,046,705
---------- ----------
---------- ----------
LIABILITIES
Non-interest bearing deposits $ 67,217 $ 66,205
Interest-bearing deposits 1,087,697 1,105,235
---------- ----------
Total deposits 1,154,914 1,171,440
FHLB advances 516,571 470,172
Securities sold under agreements to repurchase 163,290 258,993
Accrued expenses and other liabilities 11,508 14,364
Other borrowings 2,636 1,912
---------- ----------
TOTAL LIABILITIES 1,848,919 1,916,881
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share
Authorized 20,000,000 shares
Issued and outstanding 8,037,015 and 8,050,266 1,615 1,614
Paid-in-capital 20,362 20,312
Treasury stock (289) (289)
Retained earnings 113,220 109,512
Debt related to ESOP (652) --
Net unrealized loss on
securities available for sale, net of tax (858) (1,325)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 133,398 129,824
---------- ----------
TOTAL $1,982,317 $2,046,705
---------- ----------
---------- ----------
Stockholders' equity/total assets 6.73% 6.34%
Book value per share $16.60 $16.13
</TABLE>
1
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31,
--------------------------
1997 1996
---- ----
(unaudited)
<S> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $25,173 $22,181
Securities available for sale 10,625 6,206
Securities held to maturity 1,626 4,252
Other 444 473
------- -------
37,868 33,112
INTEREST EXPENSE
Deposits 13,073 12,517
FHLB advances and other borrowings 7,024 4,600
Securities sold under agreements to repurchase 3,193 1,952
------- -------
23,290 19,069
Net interest income before provision for
losses on loans 14,578 14,043
Provision for losses on loans 200 300
------- -------
Net interest income after provision for
losses on loans 14,378 13,743
NONINTEREST INCOME
Gain on sale of loans 1,585 270
Service fees 2,083 1,764
Insurance commissions 374 553
Gain on sale of securities available for sale 136 322
Gain on real estate held for sale
and for development 102 34
Other 348 316
------- -------
4,628 3,259
NONINTEREST EXPENSE
Compensation and employee benefits 5,694 5,136
General and administrative 2,701 2,337
Occupancy 1,461 1,262
Data processing 734 729
FDIC premium assessment 161 (67)
Loss from real estate write-downs
and operations 318 131
------- -------
11,069 9,528
Income before income taxes 7,937 7,474
INCOME TAX EXPENSE 2,776 2,522
------- -------
NET INCOME $ 5,161 $ 4,952
------- -------
------- -------
</TABLE>
2
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31,
--------------------------
1997 1996
---- ----
<S> <C> <C>
BASIC NET INCOME PER SHARE $0.64 $0.62
----- -----
----- -----
DILUTED NET INCOME PER SHARE $0.63 $0.61
----- -----
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Cash dividend declared $0.18 $0.14
----- -----
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Basic weighted average shares outstanding 8,042,897 7,959,173
Diluted weighted average shares outstanding 8,228,624 8,136,297
Return on average stockholders' equity 15.75% 17.45%
Return on average assets 1.02% 1.15%
</TABLE>
3
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Unrealized loss Debt
------------ on securities Related
# of Shares Amount Paid-in Retained available for to Treasury
Capital Earnings sale, net of tax ESOP Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 7,918,074 $1,592 $18,995 $93,963 $(2,928) $(312) $(289) $111,021
Net income 4,952 4,952
Dividends, $0.14 per share (1,123) (1,123)
Proceeds from exercise of 66,630 13 903 916
common stock options
ESOP loan repayment 16,052 210 210
Unrealized gain on securities 96 96
available for sale, net of tax
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 8,000,756 $1,605 $19,898 $97,792 $(2,832) $(102) $(289) $116,072
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 8,050,266 $1,614 $20,312 $109,512 $(1,325) $ -- $(289) $129,824
Net income 5,161 5,161
Dividends, $0.18 per share (1,453) (1,453)
Proceeds from exercise of 3,953 1 50 51
common stock options
ESOP loan transaction (17,204) (652) (652)
Unrealized gain on securities
available for sale, net of tax 467 467
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 8,037,015 $1,615 $20,362 $113,220 $(858) $(652) $(289) $133,398
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31,
--------------------------
1997 1996
---- ----
(unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $5,161 $4,952
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 939 597
Provision for losses on loans 200 300
Loss on real estate held for sale 201 --
Accretion of premiums and discounts, net 248 348
Gain on sale of loans (1,585) (270)
Gain on sale of securities available for sale (136) (322)
Gain on sale of real estate held for sale and
for development (102) (34)
Amortization of deferred loan fees, net 217 51
FHLB stock dividends (528) (387)
CASH PROVIDED (USED) BY CHANGES IN
OPERATING ASSETS AND LIABILITIES:
Accrued interest receivable (3,206) 1,449
Other assets (887) (2,342)
Accrued expenses and other liabilities (3,268) (7,493)
------ ------
BALANCE, NET CASH USED BY
OPERATING ACTIVITIES, CARRIED FORWARD $(2,746) $(3,151)
INVESTING ACTIVITIES
Purchase of securities available for sale (199,921) (52,629)
Proceeds from matured securities available for sale 52,675 8,325
Proceeds from sale of securities available for sale 60,146 60,602
Proceeds from matured securities held to maturity 21,235 115,080
Purchase of securities held to maturity -- (85,000)
Principal repayments securities available for sale 16,640 18,417
Principal repayments from securities held to maturity 2,194 1,653
Proceeds from sale of loans 57,993 4,513
Net increase in loans receivable (94,133) (57,944)
Proceeds from sale of real estate held for sale
and for development 632 270
Purchases of premises and equipment (1,979) (1,819)
Purchase of FHLB stock (4,754) --
Improvements capitalized to real estate held for sale (190) (445)
------ ------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (89,462) 11,023
</TABLE>
5
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED DECEMBER 31,
--------------------------
1997 1996
---- ----
(unaudited)
FINANCING ACTIVITIES
<S> <C> <C>
Net increase in transaction account deposits 9,255 8,202
Net increase (decrease) in certificates of deposit (25,782) 25,829
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 519,503 249,805
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (568,735) (290,220)
Dividends paid (1,291) (1,035)
Issuance of common stock from exercise of stock options 51 916
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NET CASH USED BY FINANCING ACTIVITIES (66,999) (6,503)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (159,207) 1,369
CASH AND CASH EQUIVALENTS
Beginning of quarter 205,398 48,501
-------- --------
End of quarter $ 46,191 $ 49,870
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 24,395 $ 18,029
Income taxes 2,250 --
Noncash transactions:
Loans transferred to real estate held for sale, net 957 287
Transfer of premises to real estate held for sale -- 1,179
Loans securitizied as mortgage-backed and related
securities -- 43,810
</TABLE>
6
<PAGE>
INTERWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED DECEMBER 31, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
InterWest Bancorp, Inc. and its wholly owned subsidiary (InterWest). The
only subsidiary of InterWest Bancorp, Inc. at December 31, 1997 was InterWest
Bank. All material intercompany transactions and balances have been
eliminated. On July 28, 1995, InterWest Bank reorganized into to the holding
company form of ownership resulting in InterWest Bancorp, Inc. becoming the
sole stockholder of InterWest Bank. In the reorganization, each outstanding
share of common stock of InterWest Bank and options to acquire shares of
common stock of InterWest Bank were converted to shares or options for shares
of InterWest Bancorp, Inc. Under the holding company structure, InterWest
Bank is the principal subsidiary.
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 ended
December 31, 1997 and 1996 are not necessarily indicative of the operating
results for the full year. The September 30, 1997 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 InterWest's
annual report for the year ended September 30, 1997.
NOTE B - NET INCOME PER SHARE
The diluted weighted average shares outstanding during the quarters ended
December 31, 1997 and 1996 includes common equivalent shares outstanding using
the treasury stock method. Common stock equivalents include shares issuable
upon exercise of stock options. Unallocated shares relating to the Employee
Stock Ownership Plan (ESOP) debt obligation are deducted in the calculation of
weighted average shares outstanding.
NOTE C - RECLASSIFICATION
Certain reclassifications have been made to prior financial statements to
conform with current presentation. The effects of the reclassifications are not
considered material.
NOTE D - ACCOUNTING CHANGES
On December 31, 1997, InterWest adopted Statement of Financial Accounting
Standards No. 128 "EARNINGS PER SHARE" which provides standards for computing
net income per share. It requires dual presentation of basic and diluted net
income per share on the face of the income statement. Basic net income per
share excludes 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
7
<PAGE>
income 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.
NOTE E- SUBSEQUENT EVENTS
On January 15, 1998, InterWest completed the acquisition of Puget Sound Bancorp,
the holding company for First National Bank of Port Orchard. First National
Bank of Port Orchard will continue to operate three offices as a subsidiary of
InterWest Bancorp, Inc. This transaction will be accounted for as a
pooling-of-interests under generally accepted accounting principles. As of
December 31, 1997 Puget Sound Bancorp had total assets of approximately $53.0
million. Pursuant to the transaction InterWest issued approximately 390,000
shares of its common stock for all of the outstanding shares of Puget Sound
Bancorp at a value of approximately $15.6 million. The financial information
contained herein does not include amounts for either Puget Sound Bancorp or
First National Bank of Port Orchard.
On January 15, 1998, InterWest entered into a definitive agreement to acquire
Pacific Northwest Bank (PNB) of Seattle, Washington, whereby PNB will become a
separate subsidiary of InterWest Bancorp. Pacific Northwest Bank had assets of
approximately $197.0 million and equity of $16.0 million as of December 31,
1997 providing financial services through four branch offices. The agreement
provides for the issuance of approximately 1.6 million shares of InterWest
common stock in exchange for all of the outstanding shares of Pacific Northwest
Bank stock at a total value of approximately $61.0 million. This transaction is
expected to be completed in the second quarter of calendar year 1998 following
approval of the applicable regulatory authorities and the shareholders of
Pacific Northwest Bank. It is anticipated that the transaction will be
accounted for as a pooling-of-interests under generally accepted accounting
principles.
On February 5, 1998, InterWest entered into a definitive agreement to acquire
Pioneer Bancorp of Yakima, Washington and its subsidiary Pioneer National Bank,
which operates four offices in Yakima County and one office in Benton County.
The total value of the proposed transaction is approximately $20.3 million.
Pioneer National Bank had assets of $106.0 million and equity of $9.0 million as
of December 31, 1997. It is anticipated that the merger will be completed in
the second quarter of calendar year 1998, following the approval of applicable
regulatory authorities and the shareholders of Pioneer National Bank. It is
anticipated that the transaction will be accounted for as a pooling-of-interests
under generally accepted accounting principles.
8
<PAGE>
INTERWEST BANCORP, INC
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Total assets decreased $65.0 million from September 30, 1997 to $1,982 million
as of December 31, 1997. This was primarily due to a decrease in other
interest-earning assets of $105.0 million partially offset by an increase in
loans receivable and loans held for sale of $36.0 million.
The loan portfolio, including loans held for sale, increased by 3.2 percent
from $1.115 billion at September 30, 1997, to $1,151 million as of December
31, 1997. This represents an increase from 58 percent of interest-earning
assets as of September 30, 1997 to 62 percent as of December 31, 1997. Other
interest-earning assets, which includes securities available for sale,
securities held to maturity, FHLB stock and interest-bearing deposits in
banks, decreased 13 percent from $814.5 million at September 30, 1997 to
$707.8 million as of December 31, 1997. Other interest-earning assets
represent 38 percent of interest-earning assets as of December 31, 1997, a 4
percent decrease from September 30, 1997.
As of December 31, 1997, InterWest had $582.5 million or 86 percent of its
securities classified as available for sale. The available for sale portfolio
is required to be carried at fair value, thus its carrying value fluctuates with
changes in market conditions. At December 31, 1997, InterWest has an unrealized
loss on securities available for sale of $1.3 million as compared to an
unrealized loss of $2.0 million at September 30, 1997. The remaining $96.5
million or 14 percent of securities are classified as held to maturity.
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.
The loan portfolio, including loans held for sale, has increased $65.0 million
from September 30, 1997. The consumer and business (which includes commercial
and agricultural loans) loan portfolios have increased to $66.8 and $65.1
million as of December 31, 1997, representing annual growth rates of 23.1
percent and 46.7 percent, respectively. As of December 31, 1997, outstanding
business loans represent 5.7 percent and consumer loans 5.8 percent of the total
loan portfolio. InterWest will continue activities to implement a strategy of
changing the composition of the loan portfolio to that of a financial services
company that provides a variety of loan products for both individual and
business customers. This strategy is designed to reduce duration risk, increase
net interest margin, create better protection from interest rate volatility and
ultimately meet the needs of InterWest's individual and business customers.
Real estate mortgage loans have experienced an annualized growth rate of 4.2
percent during the first quarter of fiscal year 1998 and real estate
construction loans have increased at an annualized rate of 11.9 percent.
9
<PAGE>
LOANS RECEIVABLE, NET AND LOANS HELD FOR SALE
InterWest originates loans through its 39 full-service offices and its mortgage
subsidiary, Cornerstone Northwest Mortgage, Inc. The following table indicates
the loan portfolio mix as of December 31, 1997, and September 30, 1997:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
(in thousands)
<S> <C> <C>
Real estate mortgage loans
Single-family residential $ 693,111 $ 681,012
Multi-family residential 54,330 54,674
Commercial 163,422 165,591
Real estate construction 203,304 197,445
Consumer loans 66,775 63,133
Commercial loans 33,652 28,729
Agricultural loans 31,430 29,549
---------- ----------
1,246,024 1,220,133
Less:
Undisbursed loan proceeds on real
estate construction loans 76,790 86,677
Allowance for losses on loans 8,572 8,667
Deferred loan fees and discounts 9,982 10,078
---------- ----------
$1,150,680 $1,114,711
---------- ----------
---------- ----------
</TABLE>
Total loan volume was $148.5 million for the quarter ended December 31, 1997, an
increase from $106.5 million for the quarter ended December 31, 1996. InterWest
had an increase in its mortgage lending volume from $97.4 million for the
quarter ended December 31, 1996, to $131.1 million for the quarter ended
December 31, 1997. This is partially due to an increase in single family
residential loan originations which were $64.6 million for the quarter ended
December 31, 1997 compared to $48.1 million for the quarter ended December 31,
1996. Real estate construction loan originations also increased to $52.2
million for the quarter ended December 31, 1997 from $35.1 million for the
quarter one year ago.
InterWest experienced increases in consumer and business lending during the
first quarter of fiscal year 1998. Consumer loan originations increased by
$1.8 million for the quarter ended December 31, 1997, as compared to same
quarter one year ago, which is primarily due to an increase in home equity line
of credit lending. InterWest initiated a concentrated effort to increase
business lending volumes which resulted in commercial and agricultural loan
principal balance outstanding increases of $6.8 million for the quarter ended
December 31, 1997 compared to $300,000 for the quarter ended December 31, 1996.
10
<PAGE>
The following table compares loan volume for the quarter ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in thousands)
<S> <C> <C>
Real estate mortgage loans
Single-family residential $ 64,638 $ 48,140
Multi-family residential/
commercial 14,269 14,175
Real estate construction 52,172 35,055
--------- ---------
Total 131,079 97,370
Consumer loans 10,607 8,838
Net increase (decrease) in
principal balance
Commercial and
agricultural loans 6,804 301
--------- ---------
Total loan volume $ 148,490 $ 106,509
--------- ---------
--------- ---------
</TABLE>
InterWest had $311.3 million in loans serviced for others as of December 31,
1997 as compared to $301.9 million at September 30, 1997.
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. As
of December 31, 1997, non-accrual loans totaled $6.5 million, an increase from
$4.9 million at September 30, 1997. Total non-performing assets, including
non-accrual loans and real estate owned through foreclosure, increased to $13.7
million or 0.69 percent of assets at December 31, 1997, compared to $11.8
million or 0.58 percent of assets at September 30, 1997.
Total liabilities decreased $68.0 million to $1,849 million at December 31,
1997, compared to $1,917 million at September 30, 1997. This is primarily due
to a decrease in borrowings of $48.6 million and deposits of $16.5 million.
Certificates of deposit decreased $25.8 million or 3.3 percent and currently
represent 65.2 percent of total deposits. Transaction account balances increased
$9.3 million or 2.4 percent from September 30, 1997 and currently represent 34.8
percent of total deposits. Money market, non-interest bearing checking and
interest bearing checking account balances increased by $7.9 million, $1.0
million and $1.6 million, respectively. This represents annualized growth rates
of 24.7 percent, 6.1 percent and 6.2 percent, respectively. During the quarter
ended December 31, 1997, InterWest added a net total of approximately 200 money
market accounts, 1,200 non-interest bearing checking accounts and 400
interest-bearing checking accounts. This represents growth rates of 9.7
percent, 15.3 percent and 5.3 percent, respectively. It is management's intent
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.
11
<PAGE>
The following table indicates the deposit mix as of December 31 and September
30, 1997:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1997
----------------- ------------------
(in thousands)
<S> <C> <C>
Non-interest bearing deposits $ 67,217 $ 66,205
Interest-bearing checking accounts 104,941 103,301
Money market accounts 135,951 128,008
Savings accounts 93,347 94,686
Certificates 753,458 779,240
---------- ----------
Total $1,154,914 $1,171,440
---------- ----------
---------- ----------
</TABLE>
Stockholders' equity increased by $3.6 million from $129.8 million at September
30, 1997, to $133.4 million at December 31, 1997. The increase in stockholders'
equity resulted from net income of $5.2 million for the quarter ended December
31, 1997 and a $500,000 decrease in the net unrealized loss on securities
available for sale, net of tax. These increases are partially offset by $1.5
million in common stock dividends declared during the quarter ended December 31,
1997 and the borrowing of $600,000 to purchase common stock for the Employee
Stock Ownership Plan (ESOP). For the quarter ended December 31, 1997 InterWest
stockholders received dividends totaling $0.18 per share, an increase from $0.14
per share for the quarter ended December 31, 1996. Book value per share
increased to $16.60 at December 31, 1997, from $16.13 at September 30, 1997.
Stockholders' equity as a percentage of total assets increased from 6.34 percent
at September 30, 1997, to 6.73 percent at December 31, 1997.
RESULTS OF OPERATIONS
Net income increased to $5.2 million for the quarter ended December 31, 1997, an
increase from $5.0 million for the quarter ended December 31, 1996. Basic and
diluted net income per share was $0.64 and $0.63 for the quarter ended December
31, 1997 compared to $0.62 and $0.61, respectively for the quarter ended
December 31, 1996. This increase in net income is due to growth in the balance
sheet, and increased mortgage banking activities, which is partially offset by a
decrease in the margin earned on interest-earning assets and increased
operational costs associated with the development of the infrastructure for
growth in consumer and business banking.
InterWest's return on average stockholders' equity for the quarter ended
December 31, 1997, was 15.75 percent, a decrease from 17.45 percent for the
quarter ended December 31, 1996. Return on average assets for the quarter ended
December 31, 1997 was 1.02 percent, a decrease from 1.15 percent for the quarter
ended December 31, 1996.
NET INTEREST INCOME
Net interest income before provision for losses on loans increased to $14.6
million for the quarter ended December 31, 1997, compared to $14.0 million for
the quarter ended December 31, 1996. This increase is 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 December 31,
1997 was 3.07 percent as compared to 3.49 percent for the quarter ended December
31, 1996. The decrease is primarily due to a flat yield curve and increased
leveraging of capital to offset higher operational costs associated with the
development of the infrastructure for anticipated growth in consumer and
business banking.
In an interest rate environment with a flat yield curve, the margin earned on
mortgage lending has decreased due to the compression of the interest rate
spread between short-term deposit and borrowing
12
<PAGE>
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 loans and selling fixed-rate mortgage loans in
the secondary market.
During the second half of fiscal year 1997 and the first two months of fiscal
year 1998, management increased the leveraging of capital with securities
growth. This increased net interest income but decreased net interest margin as
the margin earned on securities is less than loans. Management expects net
interest margin to increase in the remaining quarters of fiscal year 1998
compared to the quarter ended December 31, 1997 in part due to decreased
leveraging of capital and increasing consumer and business lending volumes.
Interest income for the quarter ended December 31, 1997 was $37.9 million
compared to $33.1 million for the quarter ended December 31, 1996. This increase
is due to growth in interest-earning assets, which is partially offset by a
decrease in the yield earned on those assets. The yield on interest-earning
assets decreased to 7.97 percent for the quarter ended December 31, 1997,
compared to 8.21 percent for the quarter ended December 31, 1996.
Interest expense increased to $23.3 million for the quarter ended December 31,
1997 compared to $19.1 million for the quarter ended December 31, 1996. This is
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 December 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------
Average Average
Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans receivable, net and loan
held for sale $ 1,136,139 8.86% $ 989,136 8.97%
Securities available for sale,
securities held to maturity and
other interest-earning assets 763,764 6.65 624,939 7.00
---------- ----- ---------- -----
Total interest-earnings assets $1,899,903 7.97% $1,614,075 8.21%
Deposits $1,159,499 4.51% $1,131,669 4.42%
FHLB advances, securities
sold under agreements
to repurchase and
other borrowings 706,601 5.78 460,458 5.69
---------- ----- ---------- -----
Total interest-bearing liabilities $1,866,100 4.99% $1,592,127 4.79%
Net interest spread $ 33,803 2.98% $ 21,948 3.42%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net interest margin 3.07% 3.49%
---- ----
---- ----
</TABLE>
13
<PAGE>
Net interest income is impacted 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 ended December 31, 1997
as compared to the quarter ended December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Interest Interest Net Interest
Income Expense Income
------ ------- ------
<S> <C> <C> <C>
Rate $ (770) $ 352 $(1,122)
Volume 5,526 3,869 1,657
------- ------- -------
Total $ 4,756 $ 4,221 $ 535
------- ------- -------
------- ------- -------
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans totaled $8.6 million (0.74 percent of loans)
at December 31, 1997 compared to $8.7 million (0.77 percent of loans) at
September 30, 1997. Net loan charge-offs were $295,000 or 0.03 percent of the
average balance of loans outstanding for the quarter ended December 31, 1997.
InterWest assesses the risk level inherent in the loan portfolio to provide
adequate reserves to meet these risks as a part of the ongoing review of the
loan portfolio. Non-performing assets and delinquency trends are key elements
in determining the allowance for losses on loans. The allowance for losses on
loans is also determined by taking into consideration general economic
conditions in the market InterWest serves, historical loss experience,
individual loan review findings, loan mix and the level of loans relative to the
allowance for losses on loans.
The following tables summarize the activity in allowance for losses on loans
during the quarter ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of period $8,667 $8,074
Provisions 200 300
Recoveries 116 134
Charge-offs (411) (78)
------- -------
Balance at end of period $8,572 $8,430
------- -------
------- -------
</TABLE>
NONINTEREST INCOME
Noninterest income for the quarter ended December 31, 1997 increased to $4.6
million from $3.3 million for the quarter ended December 31, 1996. This
increase primarily resulted from gains on the sale of mortgage loans of $1.6
million, an increase of $1.3 million from $300,000 for the quarter ended
December 31, 1996. It is anticipated that mortgage banking activities will
continue for the remainder of fiscal year 1998 to offset the impact of the
flattening yield curve on net interest income. Another contributing factor to
the overall increase in noninterest income was an increase in service fee
revenue from $1.8 million for the quarter ended December
14
<PAGE>
31, 1996 to $2.1 million for the quarter ended December 31, 1997. This increase
is primarily due to growth in transaction deposit accounts and the development
of new business and consumer banking products.
NONINTEREST EXPENSE
Noninterest expenses were $11.1 million for the quarter ended December 31, 1997,
compared to $9.5 million for the quarter ended December 31, 1996. The operating
efficiency ratio was 57.63 percent for the quarter ended December 31, 1997 as
compared to 56.04 percent for the quarter ended December 31, 1996. The increase
in noninterest expenses and the efficiency ratio from the prior year is
consistent with planned loan portfolio growth and diversification of deposit
product lines. Increases in compensation and benefits, general and
administrative and occupancy expenses are due to bank expansion and
diversification, enhanced focus on consumer and business banking products and
services, and the opening of two new branches during calendar year 1997. Key
elements of the consumer and business banking focus were the development of
credit administration, business and consumer lending support, business
relationship officers and the addition of several experienced commercial banking
management personnel.
FEDERAL INCOME TAX
Consistent with increased net income, income tax expense increased to $2.8
million for the quarter ended December 31, 1997, compared to $2.5 million for
the quarter ended December 31, 1996. The effective tax rates were 35.0 percent
for the quarter ended December 31, 1997 and 33.7 percent for the quarter ended
December 31, 1996. The lower effective tax rate in 1996 was due to certain tax
credits recorded during the quarter ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
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 them 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 significantly impacted by
interest rates.
InterWest has additional capacity to borrow funds from the FHLB through a
preapproved 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
December 31, 1997, InterWest has $516.6 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 December 31, 1997, InterWest has $163.3 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.
15
<PAGE>
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 and it's subsidiary, InterWest Bank, are subject to risk-based capital
guidelines requiring minimum capital levels based on the perceived 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>
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
December 31, 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 December 31, 1997 are presented in the
following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANK: (dollars in thousands)
Total Capital
(to Risk Weighted Assets) $140,797 13.94% $80,827 8.0% $101,033 10.0%
Tier I Capital
(to Risk Weighted Assets) 132,225 13.09% 40,413 4.0% 60,620 6.0%
Tier I Capital
(to Average Assets) 132,225 6.58% 80,444 4.0% 100,555 5.0%
INTERWEST BANCORP, INC.
Total Capital
(to Risk Weighted Assets) $140,522 13.89% $80,915 8.0% $101,144 10.0%
Tier I Capital
(to Risk Weighted Assets) 131,950 13.05% 40,458 4.0% 60,686 6.0%
Tier I Capital
(to Average Assets) 131,950 6.56% 80,467 4.0% 100,584 5.0%
</TABLE>
16
<PAGE>
At December 31, 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 their 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. Beginning in 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 regulatory capital
would be reduced to a level below regulatory capital requirements. InterWest is
also restricted by income appropriated to bad debt reserves and deducted for
federal income taxes.
In this document, InterWest has included certain "forward looking statements"
within the meaning 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". InterWest has used "forward looking statements" to describe future
plans and strategies including 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 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.
17
<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>
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: H. Glenn Mouw
--------------------
H. Glenn Mouw
Executive Vice President
Date: February 10 , 1998
------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF INTERWEST BANCORP, INC. AS OF AND FOR THE QUARTER ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 46,191
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 582,469
<INVESTMENTS-CARRYING> 96,515
<INVESTMENTS-MARKET> 94,646
<LOANS> 1,150,680
<ALLOWANCE> 8,572
<TOTAL-ASSETS> 1,982,317
<DEPOSITS> 1,154,914
<SHORT-TERM> 556,413
<LIABILITIES-OTHER> 11,508
<LONG-TERM> 126,084
0
0
<COMMON> 1,615
<OTHER-SE> 131,783
<TOTAL-LIABILITIES-AND-EQUITY> 1,982,317
<INTEREST-LOAN> 25,173
<INTEREST-INVEST> 12,251
<INTEREST-OTHER> 444
<INTEREST-TOTAL> 37,868
<INTEREST-DEPOSIT> 13,073
<INTEREST-EXPENSE> 23,290
<INTEREST-INCOME-NET> 14,578
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 136
<EXPENSE-OTHER> 11,069
<INCOME-PRETAX> 7,937
<INCOME-PRE-EXTRAORDINARY> 5,161
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,161
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 3.07
<LOANS-NON> 6,475
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,667
<CHARGE-OFFS> 411
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 8,572
<ALLOWANCE-DOMESTIC> 4,713
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,859
</TABLE>
