<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 MARCH 31, 1998
( ) 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 0-26632
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, 1998, 8,417,793 shares of common stock were outstanding with
a par value of $0.20.
<PAGE>
INTERWEST BANCORP, INC
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL
CONDITION AS OF MARCH 31, 1998
AND SEPTEMBER 30, 1997 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED
MARCH 31, 1998 AND 1997 2-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997 5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-19
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands except share amounts)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $39,285 $47,917
Interest-bearing deposits in banks 40,651 160,808
Securities available for sale, at fair value 600,277 515,980
Securities held to maturity
(fair value: $91,973 and $122,000) 93,739 124,768
Loans receivable, net 1,113,414 1,145,581
Loans held for sale (fair value: $98,150 and $8,057) 97,651 7,861
Accrued interest receivable 13,631 12,762
Real estate held for sale and for development 12,194 12,414
Federal Home Loan Bank (FHLB) stock, at cost 31,754 23,566
Premises and equipment, net 43,193 42,449
Intangible assets 3,504 3,036
Other assets 1,729 2,673
---------- ----------
TOTAL ASSETS $2,091,022 $2,099,815
---------- ----------
---------- ----------
LIABILITIES
Non-interest bearing deposits $76,565 $75,249
Interest-bearing deposits 1,162,160 1,141,794
---------- ----------
Total deposits 1,238,725 1,217,043
FHLB advances 567,537 471,372
Securities sold under agreements to repurchase 127,154 258,993
Accrued expenses and other liabilities 14,497 14,743
Other borrowings 1,753 1,912
---------- ----------
TOTAL LIABILITIES 1,949,666 1,964,063
STOCKHOLDERS' EQUITY
Common stock, par value $.20 per share
Authorized 20,000,000 shares
Issued and outstanding 8,417,793 and 8,441,103 1,696 1,692
Paid-in-capital 23,612 23,386
Treasury stock (289) (289)
Retained earnings 119,011 112,284
Debt related to ESOP (1,652) --
Net unrealized loss on
securities available for sale, net of tax (1,022) (1,321)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 141,356 135,752
---------- ----------
TOTAL $2,091,022 $2,099,815
---------- ----------
---------- ----------
Stockholders' equity/total assets 6.76% 6.46%
Book value per share $16.79 $16.08
</TABLE>
1
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $26,882 $23,181 $53,067 $46,175
Securities available for sale 10,128 7,567 20,824 13,869
Securities held to maturity 1,076 2,837 2,766 7,151
Other 306 705 782 1,197
------- ------- ------- -------
38,392 34,290 77,439 68,392
INTEREST EXPENSE
Deposits 13,154 13,207 26,648 26,093
FHLB advances and other borrowings 7,142 3,467 14,186 8,070
Securities sold under agreements to repurchase 2,244 2,747 5,437 4,699
------- ------- ------- -------
22,540 19,421 46,271 38,862
Net interest income before provision for
losses on loans 15,852 14,869 31,168 29,530
Provision for losses on loans 420 321 639 630
------- ------- ------- -------
Net interest income after provision for
losses on loans 15,432 14,548 30,529 28,900
NONINTEREST INCOME
Gain on sale of loans 1,903 588 3,498 974
Service fees 2,305 1,856 4,485 3,709
Insurance commissions 434 483 807 1,036
Gain (loss) on sale of securities available for sale 187 (25) 323 297
Gain on real estate held for sale
and for development 145 152 247 185
Other 366 274 723 512
------- ------- ------- -------
5,340 3,328 10,083 6,713
NONINTEREST EXPENSE
Compensation and employee benefits 6,141 5,108 12,121 10,529
General and administrative 2,833 2,662 5,631 5,090
Occupancy 1,599 1,235 3,129 2,565
Data processing 829 704 1,596 1,466
FDIC premium assessment 156 148 319 82
Merger Related Charges 1,300 -- 1,300 --
Loss from real estate write-downs
and operations 718 61 1,036 192
------- ------- ------- -------
13,576 9,918 25,132 19,924 --
Income before income taxes 7,196 7,958 15,480 15,689
INCOME TAX EXPENSE 2,566 2,752 5,429 5,341
------- ------- ------- -------
NET INCOME $4,630 $5,206 $10,051 $10,348
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
2
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE $0.55 $0.62 $1.19 $1.24
----- ----- ----- -----
----- ----- ----- -----
DILUTED NET INCOME PER SHARE $0.54 $0.61 $1.17 $1.21
----- ----- ----- -----
----- ----- ----- -----
Cash dividend declared $0.19 $0.14 $0.37 $0.28
----- ----- ----- -----
----- ----- ----- -----
Basic weighted average shares outstanding 8,417,028 8,364,016 8,424,064 8,336,074
Diluted weighted average shares outstanding 8,614,876 8,566,331 8,620,414 8,535,726
Return on average stockholders' equity 13.15% 17.04% 14.46% 17.23%
Return on average assets 0.91% 1.15% 0.98% 1.16%
</TABLE>
3
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share amounts)
(unaudited)
<TABLE>
<CAPTION>
Unrealized loss on
Common Stock securities Debt
------------ available for sale, Related
# of Shares Amount Paid-in Retained net of tax to Treasury
Capital Earnings ESOP Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 8,127,650 $1,662 $21,487 $ 95,878 $(2,937) $ (312) $(289) $115,489
Net income 10,348 10,348
Dividends, $0.28 per share (2,308) (2,308)
Proceeds from exercise of 84,305 17 1,096 1,113
common stock options
ESOP loan repayment 16,052 210 210
Unrealized loss on securities (1,217) (1,217)
available for sale, net of tax
- ---------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1997 8,228,007 $1,679 $22,583 $103,918 $(4,154) $ (102) $(289) $123,635
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 8,441,103 $1,692 $23,386 $112,284 $(1,321) $ -- $(289) $135,752
Net income 10,051 10,051
Dividends, $0.37 per share (3,064) (3,064)
Proceeds from exercise of 19,053 4 232 236
common stock options
Debt related to ESOP (42,204) (1,652) (1,652)
Fractional Shares (159) (6) (6)
Unrealized gain on securities 299 299
available for sale, net of tax
Pooling Accounting Adjustment (260) (260)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1998 8,417,793 $1,696 $23,612 $119,011 $(1,022) $(1,652) $(289) $141,356
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $10,051 $10,348
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 1,966 1,269
Provision for losses on loans 639 630
Loss on real estate held for sale 753 --
Accretion of premiums and discounts, net 732 653
Gain on sale of loans (3,498) (598)
Gain on sale of securities available for sale (323) (297)
Gain on sale of real estate held for sale and
for development (247) (185)
Amortization of deferred loan fees, net 572 27
FHLB stock dividends (1,085) (632)
CASH PROVIDED (used) BY CHANGES IN
OPERATING ASSETS AND LIABILITIES:
Accrued interest receivable (869) (214)
Other assets 944 1,270
Accrued expenses and other liabilities (728) (5,712)
Pooling accounting adjustment (279) --
--------- --------
BALANCE, NET CASH PROVIDED BY
OPERATING ACTIVITIES, $8,628 $6,559
INVESTING ACTIVITIES
Purchase of securities available for sale (562,426) (289,634)
Proceeds from matured securities available for sale 222,451 10,641
Proceeds from sale of securities available for sale 225,380 188,061
Proceeds from matured securities held to maturity 21,301 175,431
Purchase of securities held to maturity -- (85,794)
Principal repayments securities available for sale 35,184 36,464
Principal repayments from securities held to maturity 4,893 3,242
Proceeds from sale of loans 111,721 13,180
Net increase in loans receivable (169,797) (125,149)
Proceeds from sale of real estate held for sale
and for development 2,298 1,407
Purchases of premises and equipment (2,498) (5,014)
Purchase of FHLB stock (7,102) 6,000
Improvements capitalized to real estate held for sale (506) (1,292)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (119,101) (72,457)
</TABLE>
5
<PAGE>
INTERWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in transaction account deposits 15,252 11,610
Net increase in certificates of deposit 6,430 47,672
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 1,202,353 465,642
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (1,239,837) (461,339)
Dividends paid (2,744) (2,216)
Issuance of common stock from exercise of stock options 230 1,113
----------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (18,316) 62,482
----------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (128,789) (3,416)
CASH AND CASH EQUIVALENTS
Beginning of period 208,725 50,943
----------- ---------
End of period $79,936 $47,527
----------- ---------
----------- ---------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $46,693 $36,727
Income taxes 7,760 4,802
Noncash transaction
Loans transferred to real estate held for sale, net 2,079 796
Transfer of premises to real estate held for sale -- 1,179
Loans securitizied as mortgage-backed and related
securities -- 43,810
Securities held to maturity transferred to available
for sale 4,709 --
</TABLE>
6
<PAGE>
INTERWEST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 1998
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
InterWest Bancorp, Inc. and its wholly owned banking subsidiaries, which is
collectively defined as InterWest. The subsidiaries of InterWest Bancorp,
Inc. at March 31, 1998 were InterWest Bank and First National Bank of Port
Orchard. All material intercompany transactions and balances have been
eliminated.
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 consolidated financial statements.
The consolidated statements of operations for the quarter and six months
ended March 31, 1998 and 1997 are not necessarily indicative of the operating
results for the full year. 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 and six
months ended March 31, 1998 and 1997 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 (SFAS) 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 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- MERGERS AND ACQUISITIONS
On January 15, 1998, InterWest Bancorp, Inc. completed the acquisition of
Puget Sound Bancorp, Inc. (Puget Sound) the holding company for First
National Bank of Port Orchard. First National Bank of Port Orchard continues
to operate three branch offices as a subsidiary of InterWest Bancorp, Inc.
7
<PAGE>
This transaction has been accounted for using the pooling-of-interests method
of accounting. In accordance with generally accepted accounting principles,
prior period financial statements have been restated to include the accounts
of Puget Sound as if the companies were combined for all periods presented.
The consolidated financial statements have been adjusted to conform Puget
Sound's December 31 fiscal year end with InterWest's September 30 fiscal year
end. In accordance with generally accepted accounting principles, Puget
Sound's statement of operations for the quarter ended December 31, 1997 is
included in the consolidated statements of operations for both fiscal year
1997 and fiscal year 1998. Accordingly, Puget Sound's net income of $260,000
for the quarter ended December 31, 1997 has been deducted from retained
earnings in the consolidated statement of stockholders' equity for the six
months ended March 31, 1998.
As of January 15, 1998 Puget Sound had total assets of approximately $53.0
million. Pursuant to this transaction InterWest Bancorp, Inc. issued
approximately 390,000 shares of its common stock for all of the outstanding
shares of Puget Sound common stock at a value of approximately $15.6 million.
On January 15, 1998, InterWest Bancorp, Inc. signed a definitive agreement to
acquire Pacific Northwest Bank (Pacific) of Seattle, Washington, whereby
Pacific will become a separate subsidiary of InterWest Bancorp, Inc. Pacific,
which provides financial services through four branch officers, had assets of
approximately $194.2 million and equity of $16.4 million as of March 31,
1998. The agreement provides for the issuance of approximately 1.7 million
shares of InterWest Bancorp, Inc. common stock in exchange for all of the
outstanding shares of Pacific stock at a total value of approximately $75.2
million. This transaction is expected to be completed during the quarter
ending June 30, 1998 following approval of regulatory authorities and the
shareholders of Pacific. It is anticipated that the transaction will be
accounted for using the pooling-of-interests method under generally accepted
accounting principles.
On February 5, 1998, InterWest Bancorp, Inc. signed a definitive agreement to
acquire Pioneer Bancorp, Inc. (Pioneer) of Yakima, Washington and its
subsidiary Pioneer National Bank, which operates four offices in Yakima
County and one office in Benton County. InterWest Bancorp, Inc. will issue
approximately 500,000 shares of InterWest Bancorp, Inc. common stock in
exchange for all of the outstanding shares of Pioneer common stock based on a
floating exchange ratio and the current market price of InterWest Bancorp,
Inc. common stock. The total value of the proposed transaction is
approximately $22.1 million. Pioneer had consolidated assets of $108.0
million and equity of $9.3 million as of March 31, 1998. It is anticipated
that the merger will be completed in the quarter ending June 30, 1998,
following the approval regulatory authorities and the shareholders of
Pioneer. It is anticipated that the transaction will be accounted for using
the pooling-of-interests method under generally accepted accounting
principles.
On April 20, 1998 InterWest Bancorp, Inc. signed a definitive agreement to
acquire Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary,
Kittitas Valley Bank, N.A. of Ellensburg, Washington. The transaction is
structured such that, within certain limitations, stockholders of Kittitas
can elect to receive either cash, or a fixed number of shares of InterWest
Bancorp, Inc. common stock for each share of Kittitas common stock. The
transaction provides that, in the aggregate, fifty percent of the shares of
Kittitas common stock will be exchanged for cash and fifty percent of the
shares of Kittitas common stock will be exchanged for InterWest Bancorp, Inc.
common stock. The transaction is valued at approximately $13.0 million and
will result in the issuance of approximately 150,000 shares of InterWest
Bancorp, Inc. common stock. As of March 31, 1998, Kittitas had total
consolidated assets of $45.9 million and stockholders' equity of $4.0
million. Kittitas Valley Bank operates three branch offices in Kittitas
County. The acquisition of Kittitas is expected to be completed during the
quarter ending December 31, 1998 following approval of regulatory authorities
and the shareholders of Kittitas.
8
<PAGE>
ITEM 2. INTERWEST BANCORP, INC
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income was $4.6 million for the quarter ended March 31, 1998, compared to
$5.2 million for the quarter ended March 31, 1997. Basic and diluted net
income per share was $0.55 and $0.54 for the quarter ended March 31, 1998
compared to $0.62 and $0.61, respectively for the quarter ended March 31,
1997. For the six months ended March 31, 1998 net income was $10.1 million
compared to $10.3 million for the six months ended March 31, 1997. Basic and
diluted net income per share was $1.19 and $1.17 for the six months ended
March 31, 1998 compared to $1.24 and $1.21, respectively for the six months
ended March 31, 1997.
The results of operations for the quarter and six months ended March 31, 1998
have been impacted by nonrecurring merger related charges associated with the
merger with Puget Sound Bancorp on January 15, 1998. Net income before
nonrecurring merger related charges was $5.7 million and $11.1 for the
quarter and six months ended March 31, 1998, respectively. Basic and diluted
net income per share before merger related charges was $0.67 and $0.66 for
the quarter and $1.32 and $1.29 for the six months ended March 31, 1998.
Merger related charges incurred during the quarter and six months ended March
31, 1998 are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
Severance and other personnel $ 462
Professional fees 397
Data and facilities conversion 269
Other 172
------
1,300
Merger related provision for losses on loans 100
------
Total merger related expenses 1,400
Income tax benefit (355)
------
Merger related expenses, net of tax $1,045
------
------
</TABLE>
The following table summarizes net income, net income per share and key
financial ratios after and before nonrecurring merger related expenses
(dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
AFTER MERGER RELATED EXPENSES
Net income $4,630 $5,206 $10,051 $10,348
------ ------ ------- -------
------ ------ ------- -------
Basic net income per share $0.55 $ 0.62 $1.19 $ 1.24
------ ------ ------- -------
------ ------ ------- -------
Diluted net income per share $0.54 $ 0.61 $1.17 $ 1.21
------ ------ ------- -------
------ ------ ------- -------
Efficiency ratio 64.06% 54.50% 60.92% 54.97%
Return on average stockholders' equity 13.15% 17.04% 14.46% 17.23%
Return on average assets 0.91% 1.15% 0.98% 1.16%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BEFORE MERGER RELATED EXPENSES
Net income $5,675 $5,206 $11,096 $10,348
------ ------ ------- -------
------ ------ ------- -------
Basic net income per share $ 0.67 $ 0.62 $ 1.32 $ 1.24
------ ------ ------- -------
------ ------ ------- -------
Diluted net income per share $ 0.66 $ 0.61 $ 1.29 $ 1.21
------ ------ ------- -------
------ ------ ------- -------
Efficiency ratio 57.93% 54.50% 57.77% 54.97%
Return on average stockholders' equity 16.12% 17.04% 15.97% 17.23%
Return on average assets 1.12% 1.15% 1.08% 1.16%
</TABLE>
NET INTEREST INCOME
Net interest income before provision for losses on loans increased to $15.9
million for the quarter ended March 31, 1998, compared to $14.9 million for
the quarter ended March 31, 1997. For the six months ended March 31, 1998 net
interest income before provision for losses on loans was $31.2 million, an
increase from $29.5 million for the six months ended March 31, 1997. The
increase in net interest income is due to growth in interest-earning assets
which is partially offset by a decrease in the margin earned on these assets.
InterWest's net interest margin was 3.31 percent for the quarter ended March
31, 1998, an increase from 3.14 percent for the quarter ended December 31,
1997. Net interest margin was 3.49 percent for the quarter ended March 31,
1997. For the six months ended March 31, 1998 net interest margin was 3.23
percent, a decrease from 3.51 percent for the six months ended March 31,
1997.
The increase in net interest margin for the current quarter compared to the
quarter ended December 31, 1997 is primarily due to changes in the
composition of interest-earning assets and interest-bearing liabilities.
During the quarter ended March 31, 1998, loans and deposits have increased
and securities and borrowings have decreased which increases net interest
margin as loan yields are generally higher than securities and the cost of
deposits is generally less than the cost of borrowings.
Net interest margin has decreased from the corresponding periods of fiscal
year 1997 primarily due to the continued flattening of the yield curve. 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 rates and lending rates.
InterWest focused on originating adjustable-rate loans, increasing short-term
business and consumer loans and selling fixed-rate mortgage loans in the
secondary market to offset the impact of a flat yield curve.
Interest income for the quarter ended March 31, 1998 was $38.4 million
compared to $34.3 million for the quarter ended March 31, 1997. For the six
months ended March 31, 1998, interest income was $77.4 million compared to
$68.4 million for the six months ended March 31, 1997. The 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 8.03 percent and 8.02 percent for the quarter and six months
ended March 31, 1998, compared to 8.05 percent and 8.13 percent for the
quarter and six months ended March 31, 1997.
Interest expense increased to $22.5 million for the quarter ended March 31,
1998 compared to $19.4 million for the quarter ended March 31, 1997. For the
six months ended March 31, 1998 interest expense was $46.3 million compared
to $38.9 million for the six months ended March 31, 1997. 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. Interest-bearing
10
<PAGE>
liabilities increased to fund the growth in interest-earning assets. The
increase in the cost of funds is due to the fact that the growth in
interest-bearing liabilities has been borrowings which bears a higher cost
than deposits.
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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Average Average
Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans receivable, net and loans
held for sale $1,196,375 8.99% $1,038,470 8.93%
Securities available for sale,
securities held to maturity and
other interest-earning assets 716,490 6.43% 664,903 6.68%
---------- ----- ---------- -----
Total interest-earnings assets $1,912,865 8.03% $1,703,373 8.05%
Deposits $1,206,265 4.36% $1,221,920 4.32%
FHLB advances, securities
sold under agreements
to repurchase and 663,787 5.66% 455,423 5.46%
other borrowings
---------- ----- ---------- -----
Total interest-bearing liabilities $1,870,052 4.82% $1,677,343 4.63%
Net interest spread $ 42,813 3.21% $26,030 3.42%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net interest margin 3.31% 3.49%
----- -----
----- -----
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Average Average
Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans receivable, net and loans
held for sale $1,185,168 8.96% $1,029,406 8.97%
Securities available for sale,
securities held to maturity and
other interest-earning assets 745,676 6.54% 651,145 6.82%
---------- ----- ---------- -----
Total interest-earnings assets $1,930,844 8.02% $1,680,551 8.14%
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
Average Average
Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Deposits $1,205,530 4.42% $1,197,488 4.36%
FHLB advances, securities
sold under agreements
to repurchase and 685,889 5.72% 458,061 5.58%
other borrowings
---------- ----- ---------- -----
Total interest-bearing liabilities $1,891,419 4.89% $1,655,549 4.69%
Net interest spread $ 39,425 3.13% $25,002 3.44%
---------- ----- ---------- -----
---------- ----- ---------- -----
Net interest margin 3.23% 3.51%
----- -----
----- -----
</TABLE>
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 and six
months ended March 31, 1998 as compared to the quarter and six months ended
March 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Quarter 1998 vs 1997 Six months 1998 vs 1997
Increase (Decrease) Increase (Decrease)
Due to changes in Due to changes in
Rate Volume Total Rate Volume Total
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net
and loans held for sale $ 154 $3,547 $3,701 $ (82) $6,974 $6,892
Securities available for
sale, securities held
to maturity and other
interest-earning assets (395) 796 401 (879) 3,034 2,155
-------------------------------------------------------------------
Total net change in income
on interest-earning assets (241) 4,343 4,102 (961) 10,008 9,047
INTEREST-BEARING LIABILITIES
Deposits 121 (174) (53) 379 176 555
FHLB advances, securities
sold under agreement to
repurchase and other
borrowings 233 2,939 3,172 344 6,510 6,854
-------------------------------------------------------------------
Total net change in expense
on interest-bearing liabilities 354 2,765 3,119 723 6,686 7,409
-------------------------------------------------------------------
Net change in net
interest income $(595) $1,578 $983 $(1,684) $3,322 $1,638
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
12
<PAGE>
Noninterest Income
Noninterest income for the quarter ended March 31, 1998 was $5.3 million, an
increase from $3.3 million for the quarter ended March 31, 1997. This is
primarily due to increased gains on the sale of mortgage loans of $1.3
million, an increase of $400,000 in service fee revenue and a $200,000
increase in the gain on sale of securities available for sale. The increase
in service fee revenue is primarily due to growth in transaction deposit
accounts and the development of new business and consumer banking products.
Noninterest income was $10.1 million for the six months ended March 31, 1998,
an increase from $6.7 million for the six months ended March 31, 1997.
Consistent with the quarterly increase, this is primarily due to an increase
in the gain on sale of mortgage loans of $2.5 million and increased service
fee revenue of $800,000.
Noninterest Expense
Excluding nonrecurring merger related charges associated with the Puget Sound
Bancorp merger, noninterest expenses were $12.3 million for the quarter ended
March 31, 1998, compared to $11.6 million for the quarter ended December 31,
1997 and $9.9 million for the quarter ended March 31, 1997. Excluding merger
related charges, the operating efficiency ratio was 57.93 percent for the
quarter ended March 31, 1998 as compared to 57.68 percent for the quarter
ended December 31, 1997 and 54.50 percent for the quarter ended March 31,
1997. For the six months ended March 31, 1998 noninterest expenses were
$23.8 million and the efficiency ratio was 57.77 percent before merger
related charges, compared to noninterest expenses of $19.9 million and an
efficiency ratio of 54.97 percent for the six months ended March 31, 1997.
The increase in noninterest expenses and the efficiency ratio from the
respective periods one year ago is consistent with planned consumer and
business loan portfolio growth and diversification of deposit product lines.
Increases in compensation and benefits, general and administrative, occupancy
and data processing 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 the second half of fiscal 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. During the quarter ended March 31, 1998,
InterWest recorded an expense of $550,000 associated with fair value
adjustments on certain properties in the real estate held for development
portfolio. This expense resulted from the periodic assessment of the value
of the real estate held for sale and for development portfolios and the risks
associated with respective properties.
FEDERAL INCOME TAX
Income tax expense was $2.6 million and $5.4 million for the quarter and six
months ended March 31, 1998, compared to $2.8 million and $5.3 million for
the quarter and six months ended March 31, 1997, respectively. The effective
tax rates were 35.7 percent and 35.1 percent for the quarter and six months
ended March 31, 1998, compared to 34.6 percent and 34.0 percent for the
quarter and six months ended March 31, 1997. The higher effective tax rate
in 1998 is due to certain merger expenses that are not deductible for federal
income tax purposes.
STATEMENT OF CONDITION
Total assets were $2.091 billion as of March 31, 1998, compared to $2.1
billion as of September 30, 1997.
The loan portfolio, including loans held for sale, has increased 5.0 percent
from $1.153 billion at September 30, 1997, to $1.211 billion as of March 31,
1998. Other interest-earning assets, which includes securities available for
sale, securities held to maturity, FHLB stock and interest-bearing deposits
in banks, decreased 7.1 percent from $825.1 million at September 30, 1997 to
$766.4 million as of March 31, 1998.
13
<PAGE>
As of March 31, 1998, InterWest had $600.3 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. As of March 31, 1998, InterWest
has an unrealized loss on securities available for sale of $1.6 million as
compared to an unrealized loss of $2.0 million as of September 30, 1997. The
remaining $93.7 million or 14 percent of securities are classified as held to
maturity. As permitted by SFAS No. 115 "ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES", upon the merger with Puget Sound Bancorp and
subsequent restructuring of First National Bank of Port Orchard's investment
portfolio, $4.7 million of securities classified as held to maturity have
been transferred to the available for sale portfolio.
The loan portfolio, including loans held for sale, increased $58.0 million
from September 30, 1997. The consumer and business (which includes
commercial and agricultural loans) loan principal balance outstanding has
increased to $68.1 and $78.6 million as of March 31, 1998, representing
annual growth rates of 7.3 percent and 44.1 percent, respectively. As of
March 31, 1998, outstanding business loans represent 6.4 percent and consumer
loans 5.6 percent of the total loan portfolio compared to 5.5 percent and 5.6
percent, respectively, as of September 30, 1997. InterWest will continue
activities to implement a strategy of changing the composition of the loan
portfolio. Real estate mortgage loans have experienced an annualized growth
rate of 4.9 percent during the first six months of fiscal year 1998 and real
estate construction loans outstanding have increased by $18.2 for the same
period. During the quarter ended March 31, 1998, InterWest experienced
record real estate mortgage loan originations. However, there is not a
corresponding growth in real estate mortgage loan balances due to mortgage
banking activities to sell fixed rate mortgage loans and high prepayment
rates on real estate mortgage loans compared to recent periods.
The following table indicates the loan portfolio mix as of March 31, 1998,
and September 30, 1997:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
-------------- ------------------
(in thousands)
<S> <C> <C>
Real estate mortgage loans
Single-family residential $713,508 $691,951
Multi-family residential 54,819 54,943
Commercial 180,084 178,926
Real estate construction 134,772 116,554
Consumer loans 68,148 65,755
Commercial loans 44,143 34,824
Agricultural loans 34,477 29,600
---------- ----------
1,229,951 1,172,553
Less:
Allowance for losses on loans 9,268 9,033
Deferred loan fees and discounts 9,618 10,078
---------- ----------
$1,211,065 $1,153,442
---------- ----------
---------- ----------
</TABLE>
InterWest had $341.4 million in loans serviced for others as of March 31,
1998 as compared to $301.9 million as of September 30, 1997. This increase
is reflective of mortgage banking activities during the first six months of
fiscal year 1998 and the fact that the majority of mortgage loans are sold
with servicing retained.
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 March 31, 1998, non-accrual loans totaled $6.7 million, an
increase from $4.9 million as of September 30, 1997. Total non-performing
assets, including non-accrual loans and real estate owned through
foreclosure, increased
14
<PAGE>
to $13.9 million or 0.66 percent of total assets as of March 31, 1998,
compared to $11.8 million or 0.56 percent of total assets as of September 30,
1997.
The following table summarizes non-performing assets as of March 31, 1998 and
September 30, 1997:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
-------------- ------------------
(in thousands)
<S> <C> <C>
NONACCRUAL LOANS
Real estate mortgage loans
Single-family residential $3,807 $3,181
Multi-family residential 229 407
Commercial 834 484
Real estate construction 626 123
Consumer loans 232 424
Commercial loans 987 173
Agricultural loans 16 78
------ ------
Total nonaccrual loans 6,731 4,870
REAL ESTATE OWNED THROUGH FORECLOSURE
Single-family residential 2,255 2,100
Multi-family residential 414 --
Commercial 4,482 4,845
------ ------
Total real estate owned through
foreclosure 7,151 6,945
------ ------
Total non performing assets $13,882 $11,815
------ ------
------ ------
</TABLE>
The allowance for losses on loans totaled $9.3 million (0.76 percent of
loans) as of March 31, 1998 compared to $9.0 million (0.78 percent of loans)
as of September 30, 1997. Net loan charge-offs were $385,000 or 0.03 percent
of the average balance of loans outstanding for the six months ended March
31, 1998. 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.
15
<PAGE>
The following tables summarize the activity in allowance for losses on loans
during the quarter and six months ended March 31 (in thousands):
<TABLE>
<CAPTION>
Quarter Six months
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $8,938 $8,746 $9,033 $8,381
Provisions 420 321 639 630
Pooling adjustment (19)
Recoveries 76 30 192 164
Charge-offs (166) (258) (577) (336)
------ ------ ------ ------
Balance at end of period $9,268 $8,839 $9,268 $8,839
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Total liabilities were $1.950 billion as of March 31, 1998, compared to
$1.964 billion at September 30, 1997. This change resulted from a decrease in
borrowings of $35.8 million, which is partially offset by an increase in
deposits of $21.7 million.
Certificates of deposit increased $6.4 million or 0.8 percent from September
30, 1997 and currently represent 65.0 percent of total deposits. Transaction
account balances increased $15.3 million or 3.6 percent from September 30,
1997 and currently represent 35.0 percent of total deposits. Money market,
non-interest bearing checking and interest bearing checking account balances
increased by $13.5 million, $1.3 million and $4.3 million from September 30,
1997, respectively. This represents annualized growth rates of 20.0 percent,
3.5 percent and 7.9 percent for money market, non-interest bearing checking
and interest bearing checking account balances, 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. The pending acquisitions of Pacific
Northwest Bank, Pioneer Bancorp and Kittitas Valley Bancorp should help
achieve this objective.
The following table indicates the deposit mix as of March 31, 1998 and
September 30, 1997:
<TABLE>
<CAPTION>
March 31, 1998 September 30, 1997
-------------- ------------------
(in thousands)
<S> <C> <C>
Non-interest bearing deposits $76,565 $75,249
Interest-bearing checking accounts 111,920 107,660
Money market accounts 148,652 135,155
Savings accounts 96,837 100,658
Certificates 804,751 798,321
---------- ----------
Total $1,238,725 $1,217,043
---------- ----------
---------- ----------
</TABLE>
InterWest's total stockholders' equity was $141.4 million as of March 31,
1998, an increase of $5.6 million from $135.8 million as of September 30,
1997. This increase is due to net income of $10.1 million for the six months
ended March 31, 1998, $200,000 in proceeds from the exercise of common stock
options and a $300,000 decrease in the net unrealized loss on securities
available for sale. These changes are offset by $3.1 million in common stock
dividends declared during the six months ended March 31, 1998, the
16
<PAGE>
borrowing of $1.6 million to purchase common stock for the ESOP and a
$300,000 pooling of interests accounting adjustment to conform Puget Sound
Bancorp's December 31 fiscal year end with InterWest's September 30 fiscal
year end in accordance with generally accepted accounting principles. For
the quarter ended March 31, 1998 InterWest declared dividends totaling $0.19
per share, which was an increase from $0.18 per share for the quarter ended
December 31, 1997. Book value per share was $16.79 at March 31, 1998, which
was an increase from $16.08 at September 30, 1997. Stockholders' equity as a
percentage of total assets increased from 6.46 percent at September 30, 1997,
to 6.76 percent at March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Management of liquidity 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 has structured 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 can
be significantly impacted by interest rates.
InterWest has additional capacity to borrow funds from the FHLB through a
preapproved credit line. 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 March 31, 1998, InterWest has $567.5
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. As of March 31, 1998,
InterWest has $127.2 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.
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 subsidiary
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 subsidiaries, InterWest Bank and First
National Bank of Port Orchard, are subject to risk-based capital guidelines
requiring minimum capital levels based on the perceived credit risk of assets.
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>
17
<PAGE>
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 March 31, 1998, 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 March 31, 1998 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
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $142,837 14.40% $79,343 8.0% $99,178 10.0%
Tier I Capital
(to Risk Weighted Assets) 134,055 13.52% 39,671 4.0% 59,507 6.0%
Tier I Capital
(to Average Assets) 134,055 6.78% 79,075 4.0% 98,844 5.0%
FIRST NATIONAL BANK OF PORT ORCHARD:
Total Capital
(to Risk Weighted Assets) $5,960 14.54% $3,279 8.0% $4,099 10.0%
Tier I Capital
(to Risk Weighted Assets) 5,474 13.35% 1,640 4.0% 2,459 6.0%
Tier I Capital
(to Average Assets) 5,474 10.19% 2,148 4.0% 2,686 5.0%
INTERWEST BANCORP, INC.
Total Capital
(to Risk Weighted Assets) $149,344 14.47% $82,561 8.0% $103,201 10.0%
Tier I Capital
(to Risk Weighted Assets) 140,076 13.57% 41,280 4.0% 61,921 6.0%
Tier I Capital
(to Average Assets) 140,076 6.91% 81,076 4.0% 101,345 5.0%
</TABLE>
At March 31, 1998, InterWest Bancorp, Inc., InterWest Bank and First National
Bank of Port Orchard were in compliance with the well-capitalized capital
requirements. Management believes that under the current regulations
InterWest Bancorp, Inc. and subsidiaries 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.
18
<PAGE>
Year 2000 Issues
The century date change for the Year 2000 is a serious issue that may impact
virtually every organization, including InterWest. The challenge is
especially important to financial institutions since many processes, such as
interest accruals and payments, are date sensitive and InterWest has
interaction with numerous customers, vendors and third party service
providers whom must also address the century date change issue.
InterWest has developed a plan, is developing contingency plans and has
performed assessments on its systems. As part of InterWest's process to
address the Year 2000 issue, InterWest has implemented a program to monitor
Year 2000 efforts of its suppliers, service providers and large customers.
Testing on systems identified as critical to validate upgrades, vendor
certification and other changes necessary is expected to begin in 1998.
Current estimates indicate renovation costs will not be material to
InterWest's results of operations. Costs incurred related to renovating and
testing will be expensed in the period incurred. InterWest could possibly be
impacted by the century change to the extent other entities not affiliated
with InterWest are unsuccessful in addressing this issue.
FORWARD LOOKING STATEMENTS
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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company ("Meeting") was held
on January 20, 1998. 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:
<TABLE>
<CAPTION>
Vote For Vote Withheld
--------- -------------
<S> <C> <C>
Michael T. Crawford 6,377,326 16,540
Jean Gorton 6,377,326 16,540
Vern Sims 6,377,326 16,540
</TABLE>
The terms of Directors Gary M. Bolyard, Henry Koetje, Clark H. Mock,
Stephen M. Walden, Barney R. Beeksma, Larry Carlson, C. Stephen Lewis
and Russel E. Olson continued after the meeting.
2. The InterWest Bancorp, Inc. 1993 Incentive Stock Option Plan was
amended and restated as approved by stockholders by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
5,658,344 551,162 184,360
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
InterWest Bancorp, Inc. filed a Form 8-K dated January 26, 1998 to
report the signing of a definitive agreement to merge with Pacific
Northwest Bank.
InterWest Bancorp, Inc. filed a Form 8-K dated February 6, 1998 to
report the signing of a definitive agreement to merge with Pioneer
Bancorp, Inc.
InterWest Bancorp, Inc. filed a Form 8-K dated April 20, 1998 to
report the signing of a definitive agreement to acquire Kittitas
Valley Bancorp.
(b) EXHIBITS
(27) Financial Data Schedule
20
<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: May 12,1998
21
<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 SIX MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 39,285
<INT-BEARING-DEPOSITS> 40,651
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 600,277
<INVESTMENTS-CARRYING> 93,739
<INVESTMENTS-MARKET> 91,973
<LOANS> 1,211,065
<ALLOWANCE> 9,268
<TOTAL-ASSETS> 2,091,022
<DEPOSITS> 1,238,725
<SHORT-TERM> 500,564
<LIABILITIES-OTHER> 14,497
<LONG-TERM> 195,880
0
0
<COMMON> 1,696
<OTHER-SE> 139,660
<TOTAL-LIABILITIES-AND-EQUITY> 2,091,022
<INTEREST-LOAN> 53,067
<INTEREST-INVEST> 23,590
<INTEREST-OTHER> 782
<INTEREST-TOTAL> 77,439
<INTEREST-DEPOSIT> 26,648
<INTEREST-EXPENSE> 46,271
<INTEREST-INCOME-NET> 31,168
<LOAN-LOSSES> 639
<SECURITIES-GAINS> 323
<EXPENSE-OTHER> 25,132
<INCOME-PRETAX> 15,480
<INCOME-PRE-EXTRAORDINARY> 10,051
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,051
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 3.31
<LOANS-NON> 6,731
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,033
<CHARGE-OFFS> 577
<RECOVERIES> 192
<ALLOWANCE-CLOSE> 9,268
<ALLOWANCE-DOMESTIC> 5,340
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,928
</TABLE>
