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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended September 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 Commission File Number: 0-26632
InterWest Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Washington 91-1691216
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 679-4181
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $415,791,977 based upon the closing price of the
Registrant's common stock as quoted on the Nasdaq National Market on October 30,
1998 of $26.5625.
As of October 30, 1998, there were issued and outstanding 15,653,345
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Selected Consolidated Financial Data, Management Discussion and
Analysis and Consolidated Financial Statements included in the Annual Report
to Shareholders for the year ended September 30, 1998. (Part II).
2. Proxy Statement for the 1999 Annual Meeting of Shareholders ("Proxy
Statement"). (Part III).
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PART I
Item 1. Business
GENERAL
InterWest Bancorp, Inc. (InterWest Bancorp) is a multibank holding
company incorporated in the State of Washington in 1994. The consolidated entity
includes InterWest Bancorp and its wholly owned subsidiaries and is collectively
referred to as InterWest. As of September 30, 1998, InterWest Bancorp's wholly
owned subsidiaries were InterWest Bank, Pacific Northwest Bank, Pioneer National
Bank, First National Bank of Port Orchard and Kittitas Valley Bank, N.A.
On January 17, 1995, the shareholders of InterWest Bank approved a plan
to reorganize InterWest Bank into the holding company form of ownership. The
reorganization was completed on July 28, 1995, on which date InterWest Bank
became the wholly-owned subsidiary of InterWest Bancorp, and the shareholders of
InterWest Bank became shareholders of InterWest Bancorp. Subsequent to the
holding company reorganization, InterWest Bancorp has engaged in no significant
activity other than holding the stock of banking subsidiaries.
InterWest Bank was organized in 1956 as Island Savings and Loan
Association by two local business people who recognized the need to create a new
business to help families obtain homes in the growing community of Oak Harbor on
Whidbey Island. On July 5, 1957 Island Savings began operations as the first
state-chartered stock savings and loan association in the State of Washington.
By 1984, the name Island Savings and Loan Association was outgrown both as a
geographic description and as an indicator of the scope of the company's
products and services. On May 30, 1984, the name InterWest Savings Bank was
ratified unanimously by shareholders and board members. In March of 1987,
InterWest Bank acquired the assets of Home Savings and Loan Association. The
purchase added $150 million in assets and five branch offices. In November 1996,
the name InterWest Savings Bank was changed to InterWest Bank to reflect the
expansion of the business.
Through its banking subsidiaries, a wide range of financial services
are offered to individuals and businesses throughout Western and Central
Washington state. Financial services of InterWest include the banking activities
of accepting deposits from individuals and businesses and originating
residential loans, consumer loans and certain types of commercial real estate
loans. Recent acquisitions have provided InterWest with access to commercial
banking. InterWest is committed to growth in commercial banking and expansion in
Washington state.
The acquisition of Central Bancorporation (Central) on August 31, 1996
began this process. Central's commercial banking subsidiary, Central Washington
Bank, operated ten offices in central Washington. At the merger date, Central
had total consolidated assets of $206.1 million, including total loans
receivable of $132.2 million, total deposits of $181.9 million and shareholders'
equity of $17.1 million. Effective October 14, 1996, Central Washington Bank was
merged into InterWest Bank.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First National
Bank of Port Orchard. Under the terms of this transaction, Puget merged into
InterWest Bancorp, with First National Bank of Port Orchard becoming a
subsidiary of InterWest Bancorp. First National Bank of Port Orchard operated
three branch offices in western Washington. At the acquisition date, Puget had
total consolidated assets of $53.1 million, including total loans receivable of
$38.7 million, total deposits of $45.6 million, and shareholders' equity of $5.9
million. Each share of Puget common stock was exchanged for 2.50 shares of
InterWest Bancorp common stock. On October 15, 1998, First National Bank of Port
Orchard was merged into Pacific Northwest Bank. This internal merger was
completed to obtain operating efficiencies and cost savings.
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction, Pacific
became a subsidiary of InterWest Bancorp. At the acquisition date, Pacific had
four offices in the metropolitan Seattle area of western Washington and total
assets of $200.2 million, including total loans receivable of $150.1 million,
total deposits of $170.2 million, and shareholders' equity of $16.8 million.
Each share of Pacific common stock was exchanged for 5.93 shares of InterWest
Bancorp common stock.
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National Bank.
Under the terms of this transaction, Pioneer merged into InterWest
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Bancorp, and Pioneer National Bank became a subsidiary of InterWest Bancorp.
Pioneer National Bank operates five branch offices in central Washington. At the
acquisition date, Pioneer had total consolidated assets of $108.4 million,
including total loans receivable of $63.4 million, total deposits of $87.2
million, and shareholders' equity of $9.3 million. Each share of Pioneer common
stock was exchanged for 2.01 shares of InterWest Bancorp common stock. An
application has been filed with the appropriate banking regulators to merge
Pioneer National Bank into Pacific Northwest Bank. The merger is expected to
close in early calendar year 1999.
The acquisitions of Central, Puget, Pacific and Pioneer were accounted
for using the pooling-of-interests method of accounting. In accordance with
generally accepted accounting principles, prior period financial statements, as
well as management discussion and analysis have been restated as if the
companies were combined for all periods presented.
On August 31, 1998, InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas), of Ellensburg, Washington, the holding
company of Kittitas Valley Bank, N.A. Under the terms of this transaction,
Kittitas merged into InterWest Bancorp, and Kittitas Valley Bank, N.A. became a
subsidiary of InterWest Bancorp. The acquisition was completed through the
payment of $6.4 million in cash and the issuance of 229,831 shares of InterWest
Bancorp common stock to Kittitas shareholders. The shares issued to Kittitas
shareholders were purchased by InterWest Bancorp in the open market. At the
acquisition date, Kittitas had total consolidated assets of $47.4 million and
shareholders' equity of $4.3 million. This acquisition has been accounted for
using the purchase method of accounting.
A source of future growth may be through acquisitions. InterWest
Bancorp believes that many other financial institutions are considering selling
their institutions for a variety of reasons, including lack of shareholder
liquidity, management succession issues, technology challenges and increasing
competition. InterWest Bancorp actively reviews proposals for various
acquisition opportunities. Successful completion of acquisitions by InterWest
Bancorp depends on several factors such as the availability of suitable
acquisition candidates, necessary regulatory and shareholder approval and
compliance with applicable capital requirements. Accordingly, no assurance can
be made that acquisition activity will continue in the future.
Presently, InterWest conducts its business through 55 full-service
branch offices in western and central Washington State. These offices are
located in towns, small cities, suburbs and metropolitan markets. Retail
non-deposit investment products are available through InterWest Financial
Services, Inc., a wholly-owned subsidiary of InterWest Bank and insurance is
available through InterWest Insurance Agency, Inc., a majority-owned subsidiary
of InterWest Bank.
KEY OPERATING RATIOS
The section "Selected Consolidated Financial Data" contained in the Annual
Report, which is listed as an exhibit under Item 14 herein, is incorporated
herein by reference.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
The section "Net Interest Income" contained in "Management Discussion and
Analysis" in the Annual Report, which is listed as an exhibit under Item 14 is
incorporated herein by reference.
INVESTMENT ACTIVITIES
The section "Securities and Other Interest-Earning Assets" contained in
"Management Discussion and Analysis" in the Annual Report, which is listed as an
exhibit under Item 14 is incorporated herein by reference.
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The following table presents the name of the issuer and the aggregate amortized
cost and aggregate estimated fair value of securities of each issuer for those
securities in InterWest's portfolio for which the aggregate amortized cost
exceeds 10 percent of InterWest's shareholders' equity as of September 30, 1998.
<TABLE>
<CAPTION>
Estimated
Dollars in thousands Amortized Cost Fair Value
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<S> <C> <C>
Chase Mortgage Finance Corporation ............... $19,165 $18,514
GE Capital Mortgage Services, Inc................. 52,741 52,350
</TABLE>
LENDING ACTIVITIES
The section "Loans Receivable and Loans Held for Sale" contained in "Management
Discussion and Analysis" in the Annual Report, which is listed as an exhibit
under Item 14 is incorporated herein by reference.
ALLOWANCE FOR LOSSES ON LOANS
The section "Allowance for Losses on Loans" contained in "Management Discussion
and Analysis" in the Annual Report, which is listed as an exhibit under Item 14
is incorporated herein by reference.
NONPERFORMING ASSETS
The section "Nonperforming Assets" contained in "Management Discussion and
Analysis" in the Annual Report, which is listed as an exhibit under Item 14 is
incorporated herein by reference.
DEPOSITS
The section "Deposits" contained in "Management Discussion and Analysis" in the
Annual Report, which is listed as an exhibit under Item 14 is incorporated
herein by reference.
BORROWINGS
The section "FHLB Advances, Securities Sold Under Agreements to Repurchase and
Other Borrowings" contained in "Management Discussion and Analysis" in the
Annual Report, which is listed as an exhibit under Item 14 is incorporated
herein by reference.
PERSONNEL
As of September 30, 1998, InterWest Bancorp, including its
subsidiaries, had 864 full-time equivalent employees. InterWest believes that
employees play a vital role in the success of a service company such as
InterWest and that InterWest's relationship with its employees is good. The
employees are not represented by a collective bargaining unit.
COMPETITION
The banking industry is highly competitive. InterWest Bancorp's
subsidiary banks face strong competition in attracting deposits and in
originating loans. The most direct competition for deposits has historically
come from savings institutions, commercial banks and credit unions located in
the primary market area. As with all banking organizations, InterWest has
experienced increasing competition from nonbanking sources, including mutual
funds, corporate and governmental debt securities and other investment
alternatives. InterWest's competition for loans comes principally from savings
institutions, commercial banks, credit unions and mortgage banking companies.
Many of
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InterWest's competitors have more significant financial resources,
larger market share and greater name recognition than InterWest. The existence
of such competitors may make it difficult for InterWest to achieve its financial
goals.
InterWest competes for loans principally through the efficiency and
quality of the services it provides borrowers, real estate brokers and home
builders and the interest rates and loan fees it charges. InterWest competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts, certificates and other services. Deposit relationships are actively
solicited through a sales and service system.
Competition has further increased as a result of Washington banking
laws which permit statewide branching of Washington-domiciled financial
institutions and out-of-state holding companies acquiring Washington-based
financial institutions.
SUPERVISION AND REGULATION
INTRODUCTION
The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. They are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
may exist which apply to and regulate the banking industry, but are not
referenced below.
InterWest Bancorp is a bank holding company. Its wholly-owned
subsidiaries are InterWest Bank, Pacific Northwest Bank , Pioneer National Bank
and Kittitas Valley Bank, N.A. (collectively, the "Subsidiaries"). The Bank
Holding Company Act of 1956, as amended ("BHCA") subjects InterWest Bancorp and
the Subsidiaries to supervision and examination by the Federal Reserve Bank
("FRB"), and InterWest Bancorp files annual reports of operations with the FRB.
BANK HOLDING COMPANY REGULATION
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Bank holding
companies must obtain the FRB's approval before they: (1) acquire direct or
indirect ownership or control of any voting shares of any bank that results in
total ownership or control, directly or indirectly, of more than 5% of the
voting shares of such bank; (2) merge or consolidate with another bank holding
company; or (3) acquire substantially all of the assets of any additional banks.
Subject to certain state laws, such as age and contingency laws, a bank holding
company that is adequately capitalized and adequately managed may acquire the
assets of both in-state and out-of-state banks.
Control of Nonbanks. With certain exceptions, the BHCA prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company that is not a bank or a bank holding company unless
the FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is
well-capitalized and meets certain criteria specified by the FRB, it may engage
de novo in certain permissible nonbanking activities without prior FRB approval.
Control Transactions. The Change in Bank Control Act of 1978, as
amended, requires a person (or group of persons acting in concert) acquiring
"control" of a bank holding company to provide the FRB with 60 days' prior
written notice of the proposed acquisition. Following receipt of this notice,
the FRB has 60 days within which to issue a notice disapproving the proposed
acquisition, but the FRB may extend this time period for up to another 30 days.
An acquisition may be completed before expiration of the disapproval period if
the FRB issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the FRB's approval before acquiring 25%
(5% if the "company" is a bank holding company) or more of the outstanding
shares or otherwise obtaining control over InterWest Bancorp.
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TRANSACTIONS WITH AFFILIATES
InterWest Bancorp and the Subsidiaries are deemed affiliates within the
meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Accordingly, InterWest Bancorp and the
Subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B (1) limit the extent to which a financial
institution or its subsidiaries may engage in "covered transactions" with an
affiliate, as defined, to an amount equal to 10% of such institution's capital
and surplus and an aggregate limit on all such transactions with all affiliates
to an amount equal to 20% of such capital and surplus, and (2) require all
transactions with an affiliate, whether or not "covered transactions," to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
REGULATION OF MANAGEMENT
Federal law (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal shareholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
TIE-IN ARRANGEMENTS
InterWest Bancorp and the Subsidiaries cannot engage in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither InterWest Bancorp nor the Subsidiaries may condition an extension of
credit on either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor.
The FRB has adopted significant amendments to its anti-tying rules
that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies
and their non-bank subsidiaries; (2) allow banks greater flexibility to package
products with their affiliates; and (3) establish a safe harbor from the trying
restrictions for certain foreign transactions. These amendments were designed to
enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. However, the impact of the amendments on InterWest Bancorp and the
Subsidiaries is unclear at this time.
STATE LAW RESTRICTIONS
As a Washington corporation, InterWest Bancorp may be subject to
certain limitations and restrictions as provided under applicable Washington
corporate law. InterWest Bank, a Washington state-charted savings bank, and
Pacific Northwest Bank, a Washington state-chartered commercial bank, are
subject to supervision and regulation by the Washington Department of Financial
Institutions (the "DFI").
THE SUBSIDIARIES
GENERAL
InterWest Bank and Pacific Northwest Bank are subject to extensive
regulation and supervision by both the Washington Department of Financial
Institutions and the Federal Deposit Insurance Corporation (the "FDIC"). Pioneer
National Bank and Kittitas Valley Bank, N.A., as national banking associations,
are subject to regulation and examination by the Office of the Comptroller of
Currency (the "OCC"). The federal laws that apply to the Subsidiaries
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regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans. The laws and
regulations governing the Subsidiaries generally have been promulgated to
protect depositors and not to protect shareholders of such institutions or their
holding companies.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the Federal Reserve or the FDIC evaluates the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility.
INSIDER CREDIT TRANSACTIONS. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA"), each federal banking agency has prescribed, by
regulation, noncapital safety and soundness standards for institutions under its
authority. These standards cover internal controls, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution which
fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of InterWest Bancorp believes that the
Subsidiaries meet all such standards, and therefore, does not believe that these
regulatory standards materially affect InterWest Bancorp's business operations.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has "opted
out." The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
With regard to interstate bank mergers, Washington has "opted in" to
the Interstate Act and allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Washington law generally authorizes the
acquisition of an in-state bank by an out-of-state bank or bank holding company
through the acquisition of or a merger
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with a financial institution that has been in existence for at least 5 years
prior to the acquisition. At this time, the full impact that the Interstate Act
might have on InterWest Bancorp is impossible to predict.
DEPOSIT INSURANCE
The deposits of the Subsidiaries are currently insured to a maximum of
$100,000 per depositor by the FDIC. All insured banks are required to pay
semi-annual deposit insurance premium assessments to the FDIC.
The FDICIA included provisions to reform the Federal Deposit Insurance
System, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources, or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on how much risk they present to the BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
DIVIDENDS
The principal source of InterWest Bancorp's cash revenues is dividends
received from the Subsidiaries. The payment of dividends is subject to
government regulation, in that regulatory authorities may prohibit banks and
bank holding companies from paying dividends which would constitute an unsafe or
unsound banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither InterWest Bancorp nor the Subsidiaries is currently subject to any
regulatory restrictions on its dividends.
CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make such capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I capital. Tier I capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
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companies and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions.
InterWest Bancorp does not believe that these regulations have any material
effect on their operations.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of InterWest Bancorp are affected not only by
general economic conditions, but also by the fiscal and monetary policies of the
federal government, particularly the Federal Reserve. The Federal Reserve can
and does implement national monetary policy for such purposes as curbing
inflation and combating recession, but its open market operations in U.S.
government securities, control of the discount rate applicable to borrowings
from the Federal Reserve, and establishment of reserve requirements against
certain deposits, influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans or paid on deposits. The nature
and impact of future changes in monetary policies and their impact on InterWest
Bancorp and the Subsidiaries cannot be predicted with certainty.
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. This year, legislation was
proposed in Congress which contained proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. Although the legislation was not passed in the 1998 general
session of Congress, similar legislation may be proposed in the coming years
and, if enacted into law, such bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills may reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations of
bank holding companies, alter the extent to which banks could engage in
securities activities, and change the structure and jurisdiction of various
financial institution regulatory agencies. Whether or in what form such
legislation may be adopted, or the extent to which the business of InterWest
Bancorp might be affected thereby, cannot be predicted with certainty.
TAXATION
FEDERAL TAXATION
GENERAL. InterWest Bancorp and its subsidiaries report their income on
a fiscal year basis using the accrual method of accounting. Except for interest
expense rules pertaining to certain tax exempt income applicable to banks and
the recently repealed bad debt reserve deduction, InterWest is subject to
federal income tax, under existing provisions of the Internal Revenue Code of
1986, as amended, in generally the same manner as other corporations. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to
InterWest. InterWest has not been audited by the IRS during the past five years.
Reference is made to Note 17 of the Notes to Consolidated Financial Statements
contained in the Annual Report for additional information concerning the income
taxes.
TAX BAD DEBT RESERVE RECAPTURE. For taxable years beginning prior to
January 1, 1996, qualified thrift institutions such as InterWest Bank were
permitted to establish a reserve for bad debts based on InterWest's actual loss
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experience or based on a percentage equal to 8 percent of InterWest Bank's
taxable income, computed with certain adjustments. Each year, InterWest Bank
selected the most favorable method for calculating the tax deduction
attributable to the tax bad debt reserve. The Small Business Job Protection Act
of 1996 requires that InterWest Bank recapture for federal income tax purposes
the portion of the balance of tax bad debt reserves that exceeds the year end
1987 balance, with certain adjustments. As a result of this legislation, the
recaptured amount are to be taken into taxable income ratably over a six-year
period beginning in fiscal year 2000. This legislation also requires InterWest
Bank to calculate the tax bad debt deduction based on actual current losses.
DIVIDENDS-RECEIVED DEDUCTION. InterWest Bancorp may exclude from its
income 100 percent of dividends received from subsidiary banks as a member of
the same affiliated group of corporations.
WASHINGTON STATE TAXATION
The state of Washington does not currently have a corporate income tax.
The subsidiary banks are subject to a business and occupation tax which is
imposed under Washington law at the rate of 1.50 percent of gross receipts;
however, interest received on loans secured by mortgages or deeds of trust on
residential properties is not subject to such tax.
ITEM 2. PROPERTIES
The main office of InterWest Bancorp and InterWest Bank, which is owned
by InterWest Bank, is located in Oak Harbor, Washington. The subsidiary banks
operate a total of 55 branch offices, of which 45 are owned by the respective
subsidiary banks and ten are leased from third parties. InterWest Bank operates
40 branch offices, located in Western and Central Washington state. Pacific
Northwest Bank operates seven branch offices in Western Washington. The main
office of Pacific Northwest Bank is located in Seattle, Washington. Pioneer
National Bank operates 5 branch offices in Central Washington. The main office
of Pioneer National Bank is located in Yakima, Washington. Kittitas Valley Bank,
N.A. operates three branch offices in Central Washington. The main office of
Kittitas Valley Bank, N.A. and is located in Ellensburg, Washington. See Note 9
in the Notes to Consolidated Financial Statements for further information with
respect to Properties.
ITEM 3. LEGAL PROCEEDINGS
InterWest is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there are various claims and lawsuits
involving InterWest Bancorp and its subsidiaries, principally as defendants,
such as claims to enforce liens, condemnation proceedings on properties in which
InterWest holds security interests, claims involving the making and servicing of
real property loans and other issues incident to InterWest's business. In the
opinion of management and InterWest's legal counsel, no significant loss is
expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
InterWest Bancorp's common stock trades on The Nasdaq Stock Market
under the symbol "IWBK". As of September 30, 1998, there were 15,651,345 shares
of common stock outstanding held by approximately 6,200 shareholders.
Set forth in the following table are the high and low sales prices as
reported on The Nasdaq Stock Market and the dividends declared on common stock
for each quarter.
<TABLE>
<CAPTION>
Sales Price Dividends
High Low Declared
-------- ---------- ---------
<S> <C> <C> <C>
FISCAL YEAR 1998
First Quarter ....................... $27.42 $24.00 $0.12
Second Quarter ...................... 30.17 24.17 0.13
Third Quarter ....................... 31.50 27.83 0.13
Fourth Quarter ...................... 30.67 21.50 0.14
FISCAL YEAR 1997
First Quarter ....................... $22.25 $19.42 $0.09
Second Quarter ...................... 24.33 21.00 0.09
Third Quarter ....................... 26.75 18.33 0.10
Fourth Quarter ...................... 28.83 24.67 0.11
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the tables captioned "Selected
Consolidated Financial Data" contained in the Annual Report, which is listed
under Item 14 herein, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to the section captioned "Management Discussion and Analysis" in the
Annual Report, which is listed under Item 14 herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section "Market Risk" in "Management Discussion and Analysis"
in the Annual Report, which is listed under Item 14 herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained in the Annual Report,
which are listed under Item 14 herein, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the sections captioned "Election of
Directors", "Management -- Executive Officers" and "Compliance with Section
16(A) of the Exchange Act" in InterWest Bancorp's Proxy Statement for the 1999
Annual Meeting of Shareholders ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section captioned - "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Management --Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Management --Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(c) Changes in Control
InterWest Bancorp is not aware of any arrangements, including any pledge
by any person of securities of InterWest Bancorp, the operation of which
may at a subsequent date result in a change in control of InterWest
Bancorp.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the sections captioned "Transactions
with Management" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Consolidated Financial Statements
Independent Auditors' Report
(a) Consolidated Statements of Financial Condition as of September 30,
1998 and 1997
(b) Consolidated Statements of Income For the Years Ended
September 30, 1998, 1997 and 1996
(c) Consolidated Statements of
Shareholders' Equity For the Years Ended September 30, 1998, 1997
and 1996
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1998, 1997 and 1996
(e) Notes to Consolidated Financial Statements
12
<PAGE>
Notes to Consolidated Financial Statements
(2) All required financial statement schedules are included in
the Notes to Consolidated Financial Statements.
Consolidated Financial Statements and Notes to Consolidated
Financial Statements are included in Exhibit 13 herein.
(b) Reports on Form 8-K
InterWest Bancorp filed a Form 8-K dated June 15, 1998, which was
amended July 24, 1998 to report the completion of the acquisitions of
Pacific Northwest Bank and Pioneer Bancorp, Inc. Historical financial
statements and management discussion and analysis have been restated to
reflect these acquisitions.
InterWest Bancorp filed a Form 8-K dated July 21, 1998 to report the
impact of a three-for-two stock split on the pending acquisition of
Kittitas Valley Bancorp, Inc.
InterWest Bancorp filed a Form 8-K dated August 31, 1998 to report the
completion of the acquisition of Kittitas Valley Bancorp, Inc.
(c) Exhibits
(3.1) Restated Articles of Incorporation of InterWest Bancorp, Inc.
(3.2) First Amendment to the Articles of Incorporation of InterWest Bancorp,
Inc.
(3.3) Restated Bylaws of InterWest Bancorp, Inc.
(3.4) Third Amendment to the Bylaws of InterWest Bancorp, Inc.
(10.1) Employment Agreement with B. R. Beeksma (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended September
30, 1995)
(10.2) Employment Agreement with Stephen M. Walden (incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended
September 30, 1995)
(10.3) Employment Agreement with H. Glenn Mouw (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended September
30, 1995)
(10.4) Employment Agreement with Clark W. Donnell (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended September
30, 1995)
(10.5) Employment Agreement with Kenneth G. Hulett (incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended
September 30, 1995)
(10.6) 1984 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8 (File No. 33-99742))
(10.7) InterWest Bancorp, Inc. Amended and Restated 1993 Incentive Stock Option
Plan
(10.8) Non-Incentive Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 99.2 to the Registrant's Registration Statement on
Form S-8 (File No. 33-99742))
(10.9) Employment Agreement with Gary M. Bolyard (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended September
30, 1996)
(10.10) Central Bancorporation 1992 Employee Stock Option Plan (incorporated by
reference to Exhibit 99.2 to the Registrant's Registration Statement on
Forms S-8 (File No. 333-13191)).
(10.11) Central Bancorporation Director Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-13191)).
(10.12) 1996 Outside Directors Stock Options-for-Fees Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-24525))
13
<PAGE>
(10.13) Employment Agreement with Patrick M. Fahey (incorporate by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
(File No. 333-49131))
(10.14) First National Bank of Port Orchard 1990 Employee and Director Stock
Option Plan (incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8 (File No. 333-50685))
(10.15) Pacific Northwest Bank 1988 Stock Option Plan (incorporated by reference
to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8
(File No. 333-57679))
(10.16) Pioneer Bancorp, Inc. Amended and Restated Incentive Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No. 333-57679))
(10.17) Kittitas Valley Bancorp 1996 Director Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-65839))
(10.18) Kittitas Valley Bancorp Employee Stock Option Plan (incorporated by
reference to Exhibits 99.2 and 99.3 to the Registrant's Registration
Statement on Form S-8 (File No. 333-65839))
(13) Selected Consolidated Financial Data, Management Discussion and Analysis
and Consolidated Financial Statements included in the 1998 Annual Report
to Shareholders
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors
(27) Financial Data Schedule
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, InterWest Bancorp, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
InterWest Bancorp, Inc.
Date: December 15, 1998 By: /s/ Stephen M.Walden
-------------------------------------
Stephen M. Walden
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on this 15th day of December, 1998.
Signatures Titles
/s/ Stephen M. Walden Director, President and Chief Executive Officer
- ---------------------------
Stephen M. Walden
/s/ H. Glenn Mouw Executive Vice President (Principal Financial
- --------------------------- Officer)
H. Glenn Mouw
/s/ Eric Jensen Chief Accounting Officer (Principal Accounting
- --------------------------- Officer)
Eric Jensen
/s/ Barney R. Beeksma Chairman of the Board
- ---------------------------
Barney R. Beeksma
/s/ Gary M. Bolyard Director
- ---------------------------
Gary M. Bolyard
Director
- ---------------------------
Larry Carlson
/s/ Michael T. Crawford Director
- ---------------------------
Michael T. Crawford
/s/ Patrick M. Fahey Director
- ---------------------------
Patrick M. Fahey
/s/ Jean Gorton Director
- ---------------------------
Jean Gorton
/s/ C. Stephen Lewis Director
- ---------------------------
C. Stephen Lewis
/s/ Clark H. Mock Director
- ---------------------------
Clark H. Mock
/s/ Russel E. Olson Director
- ---------------------------
Russel E. Olson
/s/ Vern Sims Director
- ---------------------------
Vern Sims
<PAGE>
Exhibit 3.1
Restated Articles of Incorporation of
Interwest Bancorp, Inc.
<PAGE>
RESTATED ARTICLES OF INCORPORATION OF
INTERWEST BANCORP, INC.
Pursuant to the provisions of Title 23B of the Revised Code of
Washington, the Washington Business Corporations Act ("WBCA"), the following
shall constitute the Restated Articles of Incorporation of InterWest Bancorp,
Inc., a Washington Corporation.
ARTICLE I. NAME.The name of the corporation is InterWest Bancorp,
Inc.("the corporation").
ARTICLE II. DURATION. The duration of the corporation is perpetual.
ARTICLE III. PURPOSE AND POWERS. The nature of the business and the objects
and purposes to be transacted, promoted or carried on by the
corporation are to engage in the activities of a bank holding
company and in any other lawful act or busyness for which
corporations may be organized under the WBCA as now in
existence or as such laws may hereafter be amended.
ARTICLE IV. CAPITAL STOCK. The total number of shares of all classes of
capital stock which the corporation has authority to issue is
30,000,000 shares of common stock of no par value. The
consideration for the issuance of any such shares shall be
paid in full before their issuance, which consideration shall
be determined by the Board of Directors, subject only to any
limitations imposed by law at the time of such issuance. Upon
payment of such consideration in exchange for which the Board
of Directors has authorized the issuance of any such shares,
the shares issued shall be fully paid and nonassessable. Upon
authorization by the Board of Directors, the corporation may
issue its own shares in exchange for or in conversion of its
outstanding shares or distribute its own shares, pro rata to
its shareholders or the shareholders of one or more classes or
series, to effectuate stock dividends or splits, and any such
transaction shall not require consideration.
The holders of the common stock shall exclusively possess all
voting power. Each holder of shares of common stock shall be
entitled to one vote for each share held by such holder, and
there shall be no right to cumulate votes for the election of
directors or for any other purpose. Each share of common stock
shall have the same relative rights as and be identical in all
respects with all the other shares of common stock.
ARTICLE V. PREEMPTIVE RIGHTS. Holders of the capital stock of the
corporation shall not be entitled to preemptive rights with
respect to any shares of the corporation which may be issued.
1
<PAGE>
ARTICLE VI. DIRECTORS.
A. Number. The corporation shall be under the direction
of a Board of Directors. The number of directors
shall be as stated in the corporation's bylaws, but
in no event shall be fewer than five nor more than
15.
B. Classified Board. After the initial one-year term, an
election will be held and one-third of the directors
will be elected for one-year terms, one-third of the
directors be elected for two-year terms, and the
remaining directors will be elected for three-years
terms. At each annual shareholders meeting held
thereafter, directors shall be chosen for a term of
three Years to succeed those whose terms expire.
ARTICLE VII. INITIAL DIRECTORS. The names and addresses of the persons who
shall serve as the Board of Directors of the corporation until
the first annual meeting of stockholders, at which time they
may stand for reelection, are as follows:
NAME ADDRESS
Barney R. Beeksma 930 West Waterloo Road, Oak Harbor, WA 98277
C. Stephen Lewis 28843 7th South, Federal Way, WA 98003
Russel E. Olsen 9721 112th N.E., Kirkland, WA 98033
Vern Sims 2133 A Bassett Road, Sedro Wolley, WA 98284
Jean Gorton 213 Sea Pines Lane, Bellingham, WA 98226
Henry Koetje 2123 200th Avenue S.W., #306, Oak Harbor,WA
98277
Stephen M. Walden 1234 N. Lombardy Lane, Oak Harbor, WA 98277
Clark H. Mock 7010 80th Avenue S.E., Mercer Island, WA 98040
Michael T. Crawford 1868 Rocky Ridge Lane, Sedro Wolley, WA 98284
ARTICLE VIII. REMOVAL OF DIRECTORS. Notwithstanding any other provisions of
these articles of incorporation or the corporation's bylaws
(and notwithstanding the fact that some lesser percentage may
be specified by law, these articles of incorporation or the
corporation's bylaws), any director or the entire Board of
Directors may be removed only for cause and only by a majority
of the directors of the corporation or by the affirmative vote
of the holders of a majority of the total votes eligible to be
cast at a legal meeting called expressly for such purpose. For
purpose of this Article VIII, "cause" shall mean fraudulent or
dishonest acts, a gross abuse of authority in discharge of
duties to the corporation or acts that are detrimental or
hostile to the interest of the corporation.
2
<PAGE>
ARTICLE IX. REGISTERED OFFICE AND AGENT. The registered office of the
corporation shall be located at 1259 West Pioneer Way, Oak
Harbor, Washington 98277. The initial registered agent of the
corporation at such address shall be Margaret Mordhorst.
ARTICLE X. APPROVAL OF CERTAIN BUSINESS COMBINATIONS. The stockholder
vote required to approve Business Combinations (as hereinafter
defined) shall be as set forth in this section.
A. (1) Except as otherwise expressly provided in this
Article, the affirmative vote of the holders of (i)
at least 80% of the outstanding shares entitled to
vote thereon (and, if any class of series or shares
is entitled to vote thereon separately, the
affirmative vote of the holders of at least 80% of
the outstanding shares of each such class or series),
and (ii) at least a majority of the outstanding
shares entitled to vote thereon, not including shares
deemed beneficially owned by a Related Person (as
hereinafter defined), shall be required in order to
authorize any of the following:
(a) any merger or consolidation of the corporation
with or into a Related Person (as hereinafter
defined);
(b) any sale, lease, exchange, transfer or other
disposition, including without limitation, a
mortgage, or any other security device, of all or any
Substantial Part (as hereinafter defined) of the
assets of the corporation (including without
limitation any voting securities of a subsidiary) or
of a subsidiary, to a Related Person;
(c) any merger or consolidation of a Related Person
with or into the corporation or a subsidiary of the
corporation;
(d) any sale, lease, exchange, transfer or other
disposition of all or any Substantial Part of the
assets of a Related Person to the corporation or a
subsidiary of the corporation;
(e) the issuance of any securities of the corporation
or a subsidiary of the corporation to a Related
Person;
(f) the acquisition by the corporation or a
subsidiary of the corporation of any securities of a
Related Person;
(g) any reclassification of the common stock of the
corporation, or any recapitalization involving the
common stock of the corporation;
(h) any liquidation or dissolution of the
corporation; and
3
<PAGE>
(i) any agreement, contract or other arrangement
providing for any of the transactions described in
this Article.
(2) Such affirmative vote shall be required
notwithstanding any other provision of these Articles
of Incorporation, any provision of law, or any
agreement with any regulatory agency or national
securities exchange which might otherwise permit a
lesser vote or no vote.
(3) The term "Business Combination" as used in this
Article shall mean any transaction which is referred
to in any one or more of subparagraphs (a) through
(I) above.
B. The provisions of Part A of this Article shall not be
applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote
as is required by any other provision of this certificate, any
provision of law, or any agreement with any regulatory agency
or national securities exchange, if the Business Combination
shall have been approved by two thirds of the Continuing
Directors (as hereinafter defined); provided, however, that
such approval shall only be effective if obtained at a meeting
at which a Continuing Director Quorum (as hereinafter defined)
is present.
C. For the purposes of this section the following definitions
apply:
(1) The term "Related Person" shall mean and include (a)
any individual, corporation, partnership or other
person or entity which together with its "affiliates"
(as that term is defined in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange
Act of 1934), "beneficially owns" (as that term is
defined in Rule 13d-3 of the General Rules and
Regulations under the Securities Act of 1934) in the
aggregate 10% or more of the outstanding shares of
the common stock of the corporation (excluding tax
qualified benefit plans of the corporation); and (b)
any "affiliate" (as that term is defined in Rule
12b-2 under the Securities Exchange Act of 1934) of
any such individual, corporation, partnership or
other person or entity. Without limitation, any
shares of common stock of the corporation which any
Related Person has the right to acquire pursuant to
any agreement, or upon exercise or conversion rights,
warrants or options, or otherwise, shall be deemed
"beneficially owned" by such Related Person.
(2) The term "Substantial Part" shall mean more than 25%
of the total assets of the corporation, as of the end
of its most recent fiscal year ending prior to the
time the determination is made.
(3) The term "Continuing Director" shall mean any member
of the Board of Directors of the corporation who is
unaffiliated with the Related Person and was a member
of the Board prior to the time that the Related
Person became a Related Person, and any successor of
a Continuing Director who is unaffiliated with the
Related Person and is recommended to succeed a
Continuing Director by a majority of Continuing
Directors then on the Board.
4
<PAGE>
(4) The term "Continuing Director Quorum" shall mean
seventy-five percent 75%) of the Continuing Directors
capable of exercising the powers conferred on them.
D. Nothing contained in this Article X shall be construed to
relieve a Principal Shareholder from any fiduciary obligation
imposed by law. In addition, nothing contained in the Article
X shall prevent any shareholders of the corporation from
objecting to any Business Combination and from demanding any
appraisal rights which may be available to such shareholder.
E. No amendment, alteration, change, or repeal of any provision
of the Article X may be effected unless it is approved at a
meeting of the corporation's shareholders called for that
purpose. Notwithstanding any other provision ofthis charter,
the affirmative vote of the holders of not less than eighty
percent (80%) of the outstanding shares of Voting Stock shall
be required to amend, alter, change, or repeal, directly or
indirectly, any provision of this Article X, provided,
however, that the preceding provisions of the Part E shall not
be applicable to any amendment to this Article X if such
amendment receives this affirmative vote required by law and
any other provisions of this charter and if such amendment has
been approved by a majority of the continuing directors.
ARTICLE XI. EVALUATION AND BUSINESS COMBINATIONS. In connection with the
exercise of its judgment in determining what is in the best
interests of the corporation and of the shareholders, when
evaluating a Business Combination (as defined in Article X) or
a tender or exchange offer, the board of directors of the
corporation shall, in addition to considering the adequacy of
the amount to be paid in connection with any such transaction,
consider all of the following factors and any other factors
which it deems relevant; (i) the social and economic effects
of the transaction on the corporation and its subsidiaries,
employees, depositors, loan and other customers, creditors and
other elements of the communities in which the corporation and
its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring
person or entity, including, but not limited to, debt service
and other existing financial obligations, financial
obligations to be incurred in connection with the acquisition
and other likely financial obligations of the acquiring person
or entity and the possible effect of such conditions upon the
corporation and its subsidiaries and the other elements of the
communities in which the corporation and its subsidiaries
operate or are located; and (iii) the competence, experience,
and integrity of the acquiring person or entity and its or
their management.
ARTICLE XII. LIMITATION OF DIRECTORS' LIABILITY. To the fullest extent
permitted by Washington law, as it now exists or may hereafter
be amended, a director of this corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for conduct as a director, except for
liability of the director for acts or
5
<PAGE>
omissions that involve: (i) intentional misconduct by the
director; (ii) a knowing violation of law by the director;
(iii) conduct violating Section 23B.08.310 of the Revised Code
of Washington; or (iv) any transaction from which the director
will personally receive a benefit in money, property or
services to which the director is not legally entitled. If the
WBCA is amended in the future to authorize corporate action
further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation
shall be eliminated or limited to the full extent permitted by
the WBCA, as so amended, without any requirement or further
action by stockholders. An amendment or repeal of this Article
shall not adversely affect any right or protection of a
director of the corporation existing at the time of such
amendment or repeal.
ARTICLE XIII. INDEMNIFICATION. The corporation shall indemnify and advance
expenses to its directors, officers, agents and employees as
follows:
A. Directors and Officers: In all circumstances and to the full
extent permitted by the Washington Business Corporation Act
now or hereafter in force, the corporation shall indemnify any
person who is or was a director, of fleer or agent of the
corporation and who was or is a party or is threatened to be
made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (including an
action by or in the right of the corporation), by reason of
the fact that he is or was an agent of the corporation,
against expenses, judgements, fines and amounts paid in
settlement and incurred by him in connection with such action,
suit or proceeding. However, such indemnity shall not apply on
account of: (a) acts or omissions of the director and officer
finally adjudged to be in violation of law; (b) conduct of the
director and officer finally adjudged to be in violation of
RCW 23B.08.310, or (c) any transaction with respect to which
it was finally adjudged that such director and officer
personally received a benefit in money, property, or services
to which the director was not legally entitled. The
corporation shall advance expenses incurred in a proceeding
for such persons pursuant to the terms set forth in a separate
directors' resolution or contract.
B. Implementation. The Board of Directors may take such action as
is necessary to carry out these indemnification and expense
advancement provisions. It is expressly empowered to adopt,
approve and amend from time to time such Bylaws, resolutions,
contracts or further indemnification and expense advancement
arrangements as may be permitted by law, implementing these
provisions. Such Bylaws, resolutions, contracts, or further
arrangements shall include, but not be limited to,
implementing the manner in which determinations as to any
indemnity or advancement of expenses shall be made.
6
<PAGE>
C. Survival of Indemnification Rights. No amendment or repeal of
this Article shall apply to or have any effect on any right to
indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
D. Service for Other Entities. The indemnification and
advancement of expenses provided under this Article shall
apply to directors, officers, employees, or agents of the
corporation for both (a) service in such capacities for the
corporation, and (b) service at the corporation's request as a
director, of ricer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise. A
person is considered to be serving an employee benefit plan at
the corporation's request if such person's duties to the
corporation also impose duties on, or otherwise involve
services by, the director to plan or to participants in or
beneficiaries of the plan.
E. Insurance. The corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, trustee, of
ricer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise against liability
asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the
corporation would have had the power to indemnify him against
such liability under the provisions of this bylaw and
Washington law.
F. Other Rights. The indemnification provided by this section
shall not be deemed exclusive of any other right to which
those indemnified may be entitled under any other bylaw,
agreement, vote of stockholders, or disinterested directors,
or otherwise, both as to action in his official capacity and
as to action in another capacity while holding such an of
lice, and shall continue as to a person who has cease to be a
director, trustee, of ricer, employee, or agent and shall
inure to the benefit of the heirs, executors, and
administrators of such person.
ARTICLE XIV. SPECIAL MEETING OF SHAREHOLDERS. Special meetings of the
shareholders for any purpose or purposes may be called by the
president, by the Board of Directors, or by the written
request of holders of not less than a majority of all the
shares of the corporation entitled to vote at the meeting.
ARTICLE XV. REPURCHASE OF SHARES. The corporation may from time to time,
pursuant to authorization by the board of directors of the
corporation and without action by the shareholders, purchase
or otherwise acquire shares of any class, bonds, debentures,
note, scrip, warrants, obligations, evidences of indebtedness,
or other securities of the corporation in such manner, upon
such terms, and in such amounts as the board of directors
shall determine; subject, however, to such limitations or
restrictions, if any, as are contained in the express terms of
any class
7
<PAGE>
of shares of the corporation outstanding at the time of
purchase or acquisition in question or as are imposed by law.
ARTICLE XVI. AMENDMENT OF ARTICLES OF INCORPORATION. The corporation
reserves the right to repeal, alter, amend or rescind any
provision contained in the Articles of Incorporation in the
manner now or hereafter prescribed by law, and all rights
conferred on stockholders herein are granted subject to this
reservation. notwithstanding the foregoing, the provisions set
forth in Articles II, III and IV (other than a change to the
number of authorized shares in connection with a split of, or
stock dividend in, the corporation's own shares, provided the
corporation has only one class of shares outstanding or a
change in the par value of such shares), V, VI, VIII, X, XI,
XII, XIII, XIV, XV and this Article XVI of the Articles of
Incorporation may not be repealed, altered, amended or
rescinded in any respect unless the same is approved by the
affirmative vote of the holders of not less than a majority of
the votes entitled to be cast by each separate voting group
entitled to vote thereon, cast at a meeting of stockholders
called for that purpose (provided that notice of such proposed
adoption, repeal, alteration, amendment or rescission is
included in the notice of such meeting).
ARTICLE XVII. INCORPORATOR. The name and mailing address of the incorporator
is as follows:
Stephen M. Walden, 1259 West Pioneer Way, Oak Harbor, WA 98277
These Restated Articles of Incorporation of InterWest Bancorp, Inc. do
not include any new amendments to the Articles of Incorporation of InterWest
Bancorp, Inc. as amended. These Restated Articles of Incorporation of InterWest
Bancorp, Inc. supersede the original Articles of Incorporation of InterWest
Bancorp, Inc. and all ants thereto.
Executed this 11th day of December 1998.
INTERWEST BANCORP, INC.
/s/ Stephen M. Walden
----------------------------
Stephen M. Walden, President
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Exhibit 3.2
First Amendment to the Articles of Incorporation of InterWest Bancorp, Inc.
<PAGE>
FIRST AMENDMENT TO THE ARTICLES OF INCORPORATION
OF INTERWEST BANCORP, INC.
Articles of Amendment of the Articles of Incorporation of InterWest
Bancorp, Inc., a Washington corporation (the "corporation"), are hereby executed
by the corporation pursuant to the provisions of Title 23B RCW, Title 32 RCW,
and the Articles of Incorporation and Bylaws of the corporation as follows:
NAME OF THE CORPORATION.
The name of the corporation is InterWest Bancorp, Inc.
AMENDMENT.
The following amendment has been adopted by the corporation:
ARTICLE IV.
ARTICLE IV is amended to read as follows:
ARTICLE IV. CAPITAL STOCK. The total number of shares of all classes of
capital stock which the corporation has authority to issue is 30,000,000 shares
of common stock of no par value. The consideration for the issuance of any such
shares shall be paid in full before their issuance, which consideration shall be
determined by the Board of Directors, subject only to any limitations imposed by
law at the time of such issuance. Upon payment of such consideration in exchange
for which the Board of Directors has authorized the issuance of any such shares,
the shares issued shall be fully paid and nonassessable. Upon authorization by
the Board of Directors, the corporation may issue its own shares in exchange for
or in conversion of its outstanding shares or distribute its own shares, pro
rata to its shareholders or the shareholders of one or more classes or series,
to effectuate stock dividends or splits, and any such transaction shall not
require consideration.
The holders of the common stock shall exclusively possess all voting
power. Each holder of shares of common stock shall be entitled to one vote for
each share held by such holder, and there shall be no right to cumulate votes
for the election of directors or for any other purpose. Each share of common
stock shall have the same relative rights as and be identical in all respects
with all the other shares of common stock.
<PAGE>
The foregoing amendment was adopted by more than a majority vote of a
quorum of the Board of Directors of the corporation, without shareholder action,
at a regular board meeting held on July 21, 1996, at which a quorum was present
and voting. Shareholder action was not required under RCW 23B.10.020(1) and (4),
RCW 32.32.490(2)(a) and (c), and the Articles of Incorporation and Bylaws of the
corporation.
DATED this 21st day of July, 1998.
/s/ B.R. Beeksma
-----------------------------
B.R. Beeksma, Chairman
Attested by:
/s/ Margaret Mordhorst
- -----------------------------
Margaret Mordhorst, Secretary
<PAGE>
Exhibit 3.3
Restated Bylaws of InterWest Bancorp, Inc.
<PAGE>
RESTATED BYLAWS OF INTERWEST BANCORP, INC.
The following constitute the Restated Bylaws of InterWest Bancorp,
Inc., a Washington Corporation.
1. OFFICES
The principal office of the corporation in the State of Washington
shall be located at 1259 West Pioneer Way, Oak Harbor, Washington
98277, or at such other location as may be determined by the board of
directors.
2. SHAREHOLDERS
2.1. Annual Meeting: the annual meeting of shareholders shall be
held on the third Tuesday of January in each year, at 1:30
p.m., or on such other date and at such other time as may be
determined by the board of directors, for the purpose of
electing directors and for the transaction of such other
business as may properly come before the meeting. If the day
fixed for the annual meeting shall be a legal holiday in the
State of Washington, the meeting shall be held on the next
succeeding business day. If the election of directors is not
held on the day designated herein for any annual meeting of
the shareholders or at any adjournment thereof, the board of
directors shall cause the election to be held at a meeting of
the shareholders as soon thereafter as conveniently may be
held.
2.2. Special Meetings: Special meetings of the shareholders for any
purpose or purposes, unless otherwise prescribed by statute,
may be called by the president, by the board of directors, or
by the written request of holders of not less than a majority
of all the shares of the bank entitled to vote at the meeting.
2.3. Place of Meeting: All meetings of the shareholders shall be
held at the principal place of business of the corporation, or
at such other place as shall be determined from time to time
by the board of directors. The place at which the meeting of
shareholders will be held shall be stated in the notice of the
meeting.
2.4. Notice of Meeting: Written or printed notice stating the
place, day and hour of a meeting of shareholders and, in case
of a special meeting of shareholders, the purpose or purposes
for which the meeting is called shall be delivered to each
shareholder entitled to vote at such meeting, not less than 10
days and no more than 50 days before the meeting, either
personally or by mail, by the secretary or at the direction of
the person or persons calling the meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the
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United States mail addressed to the shareholder at his address
as it appears on the stock transfer records of the bank, with
postage thereon prepaid.
2.5. Closing of Stock Transfer Records or Fixing of Record Date:
For the purpose of determining shareholders entitled to notice
of or to vote at any meeting of shareholders or any
adjournment thereof, or shareholders entitle to receive
payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the board of
directors may provide that the stock transfer records of the
corporation shall be closed for a stated period but not to
exceed in any case 50 days. If the stock transfer records
shall be closed for the purpose of determining shareholders
entitled to notice of or to vote at a meeting of shareholders,
such books shall be closed for at least 10 days immediately
preceding such meeting. In lieu of closing the stock transfer
records, the board of directors may fix, in advance, a date as
the record date for any such determination of shareholder,
which date in any case shall note be more than 50 days and, in
case of a meeting of shareholders, not less than 10 days prior
to the date on which the particular action requiring such
determination of shareholders entitled to notice of, or to
vote at, a meeting of shareholders, or shareholders entitled
to receive payment of a dividend. When a determination of
shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination
shall apply to any adjournment thereof.
2.6. Voting Lists: At least 10 days before each meeting of the
shareholders, the officer or agent having charge of the stock
transfer records for shares of the corporation shall make a
complete record of the shareholders entitled to vote at the
meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by
each, which record for a period of 10 days prior to the
meeting shall be kept on file at the registered office of the
corporation. Such record shall be produced and kept open at
the time and place of the meeting and shall be subject to the
inspection of any shareholder for any proper purpose during
the whole time of the meeting. Failure to comply with the
requirements of this bylaw shall not affect the validity of
any action taken at the meeting.
2.7. Quorum: One-third of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. The
shareholders present at a duly organized meeting may continue
to transact business until adjournment notwithstanding the
withdrawal of sufficient shares to leave less than a quorum.
If less than one-third of the outstanding shares are
represented at a meeting, the meeting may be adjourned to such
time and place as may be determined, with the approval of a
majority of the shares represented at the meeting, without
further notice, except that any meeting at which directors are
to be elected shall be adjourned only from day to day until
such directors have been elected. At any adjourned meeting at
which a quorum shall be present or represented, any business
may be transacted which might have been transacted at the
meeting as originally called, and in the case of any adjourned
meeting called for the election of directors, those who attend
the second of the adjourned meetings, although less than a
quorum, shall nevertheless constitute a quorum of the purpose
of electing directors.
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2.8. Proxies: A shareholder of record may vote either in person or
by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. All proxies shall be filed with
the secretary of the corporation before or at the commencement
of meetings. No unrevoked proxy shall be valid after 11 months
from the date of its execution unless otherwise expressly
provided in the proxy.
2.9. Voting of Shares: Each outstanding share, shall be entitled to
one vote on each matter submitted to a vote of the
shareholders at a meeting of shareholders. In the election of
directors, every shareholder of record entitled to vote at the
meeting of shareholders shall have the right to vote the
number of shares owned by him for as many persons as there are
directors to be elected by the holders of such shares.
Cumulative voting shall not be permitted in the election of
directors.
2.10. Voting of Shares by Certain Holders:
2.10.1. Shares standing in the name of another corporation,
domestic or foreign, may be voted by such officer,
agent or proxy as the bylaws of such corporation may
prescribe, or in the absence of such provision, as
the board of directors of such corporation may
determine. A certified copy of action taken by the
corporations shall be conclusive as to proper
authorization by the corporation.
2.10.2. Shares held by an administrator, executor, guardian
or conservator may be voted by such person, either in
person or by proxy, upon delivery of appropriate
evidence of such person's authority to act as
administrator, executor, guardian or conservator.
Shares standing in the name of a trustee may be voted
by such person, either in person or by proxy.
2.10.3. Shares held by a receiver may be voted by such
receiver, and shares held by or under the control of
a receiver may be voted by the receiver without the
transfer thereof into the name of the receiver if
authority so to do be contained in an appropriate
order of the court by which such receiver was
appointed.
2.10.4. If shares are held jointly by three of more
fiduciaries, the will of the majority of the
fiduciaries shall control the manner of voting or the
giving of a proxy, unless the instrument or order
appointing such fiduciaries directs otherwise.
2.10.5 Treasury shares shall not be voted at any meeting or
counted in determining the total number of
outstanding shares entitled to vote at any meeting of
shareholders.
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2.10.6. Shares of another corporation held by this
corporation may be voted by the chairman of the
board, the president or any executive vice president,
or by proxy executed by any such officer, unless the
board of directors by resolution shall designate some
other person to vote shares held by the corporation.
2.11. Informal Action by Shareholders: Any action required to be
taken at a meeting of the shareholders or any other action
which may be taken at a meeting of the shareholders may be
taken without a meeting if a consent in writing setting forth
such action shall be signed by all the shareholders entitled
to vote with respect to the subject matter thereof.
2.12. Notice for Nominations and Proposals:
2.12.1. Nominations for the election of directors and
proposals for any new business to be taken up at any
annual or special meeting of shareholders may be made
by the board of directors of the corporation or by
any shareholders of the corporation entitled to vote
generally in the election of directors. In order for
a shareholder of the corporation to make any such
nominations and/or proposals, he or she shall give
notice thereof in writing, delivered or mailed by
first class Untied States mail, postage prepaid, to
the Secretary of the corporation not less than thirty
days nor more than sixty days prior to any such
meeting; provided, however, that if less than thirty
one days' notice of the meeting is given to
shareholders, such written notice shall be delivered
or mailed, as prescribed, to the Secretary of the
corporation not later than the close of the tenth day
following the day on which notice of the meeting was
mailed to shareholders. Each such notice given by a
shareholder with respect to nominations for election
of directors shall set forth (i) the name, age,
business address and, if known, residence address of
each nominee proposed in such notice, (ii) the
principal occupation or employment of each such
nominees, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such
nominee, (iv) such other information as would be
required to be included in a proxy statement
soliciting proxies for the election of the proposed
nominee pursuant to Regulations 14A of the Securities
Exchange Act of 1934, as amended, including, without
limitation, such person's written consent to be named
in the proxy statement as a nominee and to serving as
a director, if elected, and (v) as to the shareholder
giving such notice (a) his name and address as they
appear of the corporation's books, and (b) the class
and number of shares of the corporation which are
beneficially owned by such shareholder. In addition,
the shareholder making such nomination shall promptly
provide any other information reasonably requested by
the corporation.
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2.12.2. Each such notice given by a shareholder to the
Secretary with respect to business proposals to bring
before a meeting shall set forth in writing as to
each matter: (i) a brief description of the business
desired to be brought before the meeting and the
reasons for conducting such business at the meeting,
(ii) the name and address, as they appear on the
corporation's books, of the shareholder proposing
such business; (iii) the class and number of shares
of the corporation which are beneficially owned by
the shareholder, and (iv) any material interest of
the shareholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business
shall be conducted at the meeting except in
accordance with the procedures set forth in this
Article.
2.12.3. The Chairman of the annual or special meeting of
shareholders may, if the facts warrant, determine and
declare to the meeting that a nomination or proposal
was not made in accordance with the foregoing
procedure, and, if he should so determine, he shall
so declare to the meeting and the defective
nomination or proposal shall be disregarded and laid
over for action at the next succeeding adjourned,
special or annual meeting of the shareholders taking
place thirty days or more thereafter. This provision
shall not require the holding of any adjourned or
special meeting of shareholders for the purpose of
considering such defective nomination or proposal.
3. BOARD OF DIRECTORS
3.1. General Powers: The business and affairs of the corporation
shall be managed by the board of directors.
3.2. Number Tenure and Qualifications:
3.2.1. The board of directors shall consist of nine members,
a majority of which shall not be officers or
employees of the corporation or any of its
subsidiaries. The number of directors may at any time
be increased or decreased by the board of directors
at any regular or special meeting of the board of
directors, provided that no decrease shall have the
effect of shortening the term of any incumbent
director except as provided in Section 3.9 of this
Article 3.
3.2.2. Directors shall be elected to staggered terms so that
one-third of the directors, or as near as may be, are
elected each year. If additional directors are added
to the board, the terms of those directors shall be
staggered so that approximately one-third of the
directors are elected each year. Unless removed in
accordance with the corporation's Articles of
Incorporation each director shall hold office until
his successor shall have been elected and qualified.
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<PAGE>
3.2.3. A person shall not be a director of the corporation
if the person has been adjudicated bankrupt, or has
take the benefit of any assignment for the benefit of
creditors, or has suffered a judgment recovered
against him for a sum of money to remain unsatisfied
of record or unsuperseded on appeal for a period of
more than three months. A person shall not be a
director of the corporation if the person (1) is not
a resident of a state of the United States; (2) has
been adjudicated a bankrupt taken the benefit of any
insolvency law, or has made a general assignment for
the benefit of creditors; (3) has suffered a judgment
recovered against him for a sum of money to remain
unsatisfied of record or unsecured on appeal for a
period of more than three months; (4) is a trustee,
officer, clerk or other employee of a savings bank
that is not controlled by the corporation.
3.2.4. Oath. Each director upon election shall take an oath
that he will, so far as it devolves on him,
diligently and honestly administer the affairs of the
corporation, and will not knowingly violate, or
willing permit to be violated, any of the provision
of law applicable to such corporation. Further, upon
such election, each director shall sign a statement
certifying compliance with the foregoing
qualifications as a director.
3.2.5. Age. No person shall be eligible for initial election
as a director who is 72 years of age or more and no
person shall continue to serve as a director who is
75 years of age of more and the office of such
director shall become vacant on the last day of the
warmth in which such director reaches his 75th
birthday.
3.3. Meetings: An annual meeting of the board of directors and of
any committee designated by the board of directors shall be
held, without other notice than this bylaw, immediately after
and at the same place as the annual meeting of shareholders.
The board of directors may provide, by resolution, the notice,
if any, required, and the time and place, either within or
without the State of Washington, for holding any other regular
meeting of the board of directors; the chairman, the
president, the board of directors or any director may call a
special meeting of directors.
3.4. Notice: Notice of special meetings of the board of directors
giving the time and place thereof shall be provided to each
director at least one day prior to the date set for such
meeting by the person or persons authorized to call such
meeting or by the secretary at the direction of the person or
persons authorized to call the meeting, either by personal
delivery, mail or telegram addressed to the last known address
of such director, or by personal telephone call or any other
means sufficient to permit attendance at the meeting. If
mailed, notice shall be deemed to be delivered when deposited
in the United States mail, postage prepaid, so addressed to
the director. If notice is by telegram, notice shall be deemed
delivered when the telegram is delivered to the telegraph of
lice for transmission. If notice is by personal telephone call
or other means, the information concerning the meeting shall
be given to the
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director personally and an affidavit of the person giving such
notice shall be included in the minute book with the minutes
of the meeting. If no place for a special meeting is
designated in the notice thereof, the meeting shall be held at
the principal place of business of the corporation. A waiver
of notice signed by the director or directors, whether before
or after the time state for meeting, shall be equivalent to
the giving of notice. The attendance of a director or a
committee member at a meeting shall constitute a waiver of
notice of the meeting except where a director or committee
member attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not
lawfully convened. Unless otherwise required by law, neither
the business to be transacted at, nor the purpose of, any
regular or special meeting of the board of directors or any
committee designated by the board of directors need to be
specified in the notice or waiver or such notice of such
meeting.
3.5. Quorum: A majority of the number of directors fixed by or in
the manner provided in these bylaws shall constitute a quorum
for the transaction of any business at any meeting of the
directors. If less than such majority shall attend a meeting,
a majority of the directors present may adjourn the meeting
from time to time without further notice, and a quorum present
at such adjourned meeting may transact business.
3.6. Manner of Acting: The act of the majority of the directors
present at a meeting or adjourned meeting at which a quorum is
present shall be the act of the board of directors. Members of
the board of directors or any committee designated by the
board of directors may participate in a meeting of such board
or committee by mens of a conference telephone or similar
communication equipment by which all persons participating in
the meeting can hear each other at the same time;
participating by such means shall constitute presence in
person at a meeting. Notwithstanding the foregoing, the
following decisions shall require the act of 2/3 of the
directors present:
3.6.1. approval of any plan of merger, consolidation or
exchange involving the corporation; and
3.6.2. the sale of substantially all of the assets of the
corporation.
3.7. Informal Action: Any action permitted or required to be taken
at a meeting of the directors or permitted to be taken at a
meeting of a committee of directors may be taken without a
meeting if a consent in writing setting forth the action so
taken shall be signed by all the directors or all the members
of the committee, as the case may be.
3.8. Board Committees: The board of directors may designate, by
resolution adopted by a majority of the full board of
directors of the corporation, from among its members an
executive committee and one or more other committees, each of
which, to the extent
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provided in such resolution, shall have and may exercise the
authority of the board of directors, except as limited by law.
The designation of any such committee and the delegation
thereto of authority shall not relieve the board of directors,
or any member thereof, of any responsibility imposed by law.
The executive committee shall be three members of the board if
the board consists of seven or fewer members; and the
executive committee shall consist of four members of the board
if the board consists of eight or more members.
3.9. Removal: A director may be removed from office only in the
manner prescribed by the corporation's Articles of
Incorporation.
3.10. Vacancies: Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the
remaining directors through less than a quorum of the board of
directors. A director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office.
Any vacancy to be filled by reason of an increase in the
number of directors shall be filled by the board of directors
for a term of office only until the next election of directors
by shareholders.
3.11. Compensation: The directors may be paid their expenses, if
any, for attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of
the Board of Directors, as stated retainer as Directors and/or
such other compensation as may be fixed by the Board of
Directors by Resolution. Members of special or standing
committees may be allowed like compensation for serving on
committees of the Board of Directors. No such payments shall
preclude any Director from serving the Corporation or any of
its subsidiaries in any other capacity and receiving
compensation therefore.
4. OFFICERS
4.1. Number: The officers of the corporation may include a chief
executive officer, chief operations officer, chairman of the
board of directors, president, one or more executive vice
presidents, one or more senior vice presidents, one or more
vice presidents, a secretary and a treasurer, each of whom
shall be elected by the board of directors. Such other
officers as may be deemed necessary or appropriate may be
elected or appointed by the board of directors with the power
and authority of such officer being established at the time
such officer is established. Except for the offices of
president and secretary, any two or more offices may be held
by the same person. Assistant vice presidents shall not be
considered as officers of the corporation.
4.2. Election and Term of Office: The officers of the corporation
to be elected by the board of directors may be elected for
such term as the board may deem advisable or may be elected
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to serve for an indefinite term at the pleasure of the board.
Officers shall be elected at the first meeting of directors
following the expiration of the term of office. Each officer
shall hold office until his successor shall have been duly
elected and qualified regardless of his term of office, except
in the event of his prior death or resignation or his removal
in the manner hereinafter provided.
4.3. Removal: Any officer or agent elected or appointed by the
board of directors may be removed by the board of directors
whenever in its judgment the best interest of the bank would
be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
Election or appointment of any officer or agent shall not of
itself create contract rights.
4.4. Vacancies: A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be
filled by the board of directors for the unexpired portion of
the term.
4.5. Chairman of the Board: The chairman of the board, if there be
such an officer, shall, if present, preside at all meetings of
the board of directors, and exercise and perform such other
powers and duties as may be determined from time to time by
the board of directors.
4.6. Chief Executive Officer: The chief executive officers shall
exercise and perform all duties incident to such office and
such duties as may be determined from time to time by the
board of directors.
4.7. Chief Operating Officer: The chief operating officer shall
exercise and perform all duties incident to such office and
such duties as may be determined from time to time by the
board of directors.
4.8. President: The president shall exercise and perform such
powers and duties as may be determined from time to time by
the board of directors. He may sign, with the secretary or any
other proper officer of the corporation, certificates for
shares of the corporation. In general, he shall perform all
duties incident to the office and such duties as may be
prescribed by resolution of the board of directors from time
to time.
4.9. The Executive Vice Presidents and/or Senior Vice Presidents:
The executive vice presidents and/or senior vice presidents,
if any, shall exercise and perform such powers and duties as
may be determined from time to time by the board of directors.
4.10. The Vice Presidents: The vice presidents shall exercise and
perform such powers and duties as may be determined from time
to time by the board of directors.
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4.11. The Secretary: shall keep the minutes of the proceedings of
the shareholders and board of directors, shall give notices in
accordance with the provisions of these bylaws and as required
by law, shall be custodian of the corporate records and of the
seal of the corporation, shall keep a record of the names and
addresses of all shareholders and the number and class of
shares held by each, have general charge of the stock transfer
records of the corporation, may sign with the corporation,
deeds and mortgages, bonds, contracts or other instruments
which shall have been authorized by resolution of the board of
directors, and in general shall perform all duties incident to
the office of secretary and such other duties as form time to
time may be assigned by the board of directors.
4.12. The Treasurer: If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his
duties in such sum and with such surety or sureties as the
board of directors shall determine. He shall have charge and
custody of and be responsible for keeping correct and complete
books and records of account, for all funds and securities of
the corporation, receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, deposit
all such moneys in the name of the corporation in the banks,
trust companies or other such moneys in the name of the
corporation in banks, trust companies or other depositories as
shall be selected in accordance with the provisions of these
bylaws, and in general perform all of duties incident to the
of lice of treasurer and such other duties as from time to
time may be assigned to him by the board of directors.
4.13. Assistant Vice Presidents. Assistant Secretaries and Assistant
Treasurers: The assistant vice presidents, assistant
secretaries and assistant treasurers, in general, shall
perform such duties as shall be assigned to them by the board
of directors. If required by the board of directors, the
assistant treasurers shall respectively give bonds for the
faithful discharge of their duties in such sums and with such
sureties as the board of directors shall determine. Neither
the assistant vice presidents, the assistant secretaries nor
the assistant treasurers shall be considered officers of the
corporation.
4.14. Compensation of Officers and Employees: Compensation of
officers and other employees may be fixed from time to time by
the board of directors. No officer shall be prevented from
receiving a salary because of service as a director of the
corporation.
5. CONTRACTS
5.1. Contracts: The board of directors may authorize any officer or
officers, agent or agents, to enter into any contract or
execute deliver any instrument in the name of and on behalf of
the corporation, and that authority may be general or confined
to specific instances.
5.2. Contracts with. Loans to Corporate Directors and Officers: The
corporation may enter into contracts and otherwise transact
business as vendor, purchaser, or otherwise, with its
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directors, officers, and shareholders and with corporations,
associations, firms and entities in which they are, or may
become interested in, as directors, officers, or otherwise, as
freely as though such interest did not exist, except that no
loan shall be made by the corporation secured by its shares.
In the absence of fraud, the fact that any director, officer,
shareholder, or any association, firm or other entity of which
any director, officer, or shareholder is interested, is in any
way interested in any transaction or contract shall not make
the transaction or contract void or voidable, or require the
director, officer, or shareholder to account to this
corporation for any profits therefrom if the transaction or
contract is or shall be authorized, ratified, or approved by
either (1) vote of a majority of quorum of the board of
directors, excluding any interested director or directors, (2)
the written consent of the holders of a majority of the shares
entitled to vote, or (3) a general resolution approving the
acts of the directors and officers adopted by vote of the
holders of a majority of the shares entitled to vote at a
meeting of shareholders. All transactions or contracts,
including loans to officers and directors, made pursuant to
this section of these bylaws, shall be subject to any
applicable federal and state laws and regulations. Nothing
herein contained shall create or imply any liability in the
circumstances above described or prevent the authorization,
ratification or approval of such transactions or contracts in
any other manner.
6. SHARES
6.1. The shares of stock issued by the corporation may be either
with or without par value, as authorized by the Articles of
Incorporation. The shareholders at any regular or special
meeting called for that purpose may authorize the issuance of
additional capital stock upon such terms and conditions as may
be included in such authorization. The board of directors may
change the number of authorized shares of stock to effectuate
a split of, or stock dividend in, the corporation's own
shares, and to change the number of authorized shares in
proportion thereto.
6.2. Withdrawal:
6.2.1. Stock shall be paid for in cash or other consideration
at a price not less than the par value thereof as may
be approved by the board of directors. Stock shall not
be subject to withdrawal except upon liquidation or
dissolution and until all claims of creditors first
shall have been fully paid.
6.2.2. Shareholders shall participate in any distribution of
assets upon liquidation or dissolution after payment
has been made in full to all creditors and to all
holders of withdrawable savings.
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6.3. Certificate for Shares: The shares of the corporation shall be
represented by certificates in such form as may be required by
law and signed by the president or executive vice president
and by the secretary or an assistant secretary and may be
sealed with the seal of the corporation or a facsimile
thereof. The signatures of the corporate officers on the
certificate may be facsimiles if the certificate is manually
signed on behalf of an independent transfer agent or
registrar.
6.4. Transfer of Shares: Transfer of shares of the corporation
shall be made only on the stock transfer records of the
corporation by the holder of record thereof or by his legal
representative who shall furnish proper evidence of authority
to transfer shares, or by his attorney "hereunto authorized by
power of attorney duly executed and filed with the secretary
of the corporation, on surrender for cancellation of the
certificate for the shares. Except as otherwise permitted by
these bylaws, the person in whose name shares stand on the
stock transfer records of the corporation shall be deemed by
the corporation to be the owner thereof for all purposes. All
certificates surrendered to the corporation for transfer shall
be canceled and no new certificate shall be issued until the
former certificate for a like number of shares shall have teen
surrendered and canceled, except that in case of a lost,
destroyed or mutilated certificates, a new certificate may be
issued therefor upon the terms, including indemnification as
the corporation may request.
6.5. Dividends: No dividends shall be declared on stock until the
corporation has satisfied any applicable net worth or other
requirements imposed by law. Subject to such requirements,
shares of stock shall be entitled to such dividends, as may be
declared and issued from time to time by the board of
directors.
7. SEAL
The seal of the corporation shall be circular in form and consist of
the name of the corporation, the state and year of incorporation, and
the words "corporate seal".
8. WAIVER
Whenever any notice is required to be given to any shareholder or
director of the corporation, a waiver thereof in writing, signed by the
person or persons entitled thereto, whether before or after the time
stated for such notice, shall be deemed equivalent to the giving of
notice.
9. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
9.1. As used in this article
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9.1.1. "Director" means any person who is or was a director
of the corporation and any person who, while a
director of the corporation, is or was serving at the
request of the corporation as a director, officer,
partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint
venture, trust, other enterprise, or employee benefit
plan.
9.1.2. "Corporation" includes any domestic or foreign
predecessor entity of the corporation in a merger,
consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of
such transaction.
9.1.3. "Expenses" includes attorneys' fees.
9.1.4. "Official capacity" means: (1) when used with respect
to a director, the office of director in the
corporation and (2) when used with respect to a
person other than a director as contemplated in
subsection 10 of this article, the elective or
appointive of lice in the corporation held by the
officer or the employment or agency relationship
undertaken by the employee or agent in behalf of the
corporation, but in each case does not include
service for any other foreign or domestic corporation
or any partnership, joint venture, trust, other
enterprise, or employee benefit plan.
9.1.5. "Party" includes a person who was, is, or is
threatened to be made, a named defendant or
respondent in a proceeding.
9.1.6. "Proceeding" means any threatened, pending or
completed action, suite or proceeding. whether civil.
criminal. administrative or investigative.
9.2. The corporation shall indemnify any person made a party to any
proceeding (other than a proceeding referred to in subsection
9.3 of this article), by reason of the fact that he is or was
a director, against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by him in connection
with such proceeding if:
9.2.1. He conducted himself in good faith and (1) in the
case of conduct in his own official capacity with the
corporation, he reasonably believed his conduct to be
in the corporation's best interest, or (2) in all
other cases, he reasonably believed his conduct to be
at least not opposed to the corporation's best
interests; and
9.2.2. In the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, be determinative that
the person did
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not meet the requisite standard of conduct set forth in this
subsection.
9.3. The corporation shall indemnify any person made a party to any
proceeding by or in the right of the corporation by reason of
the fact that he is or was a director against reasonable
expenses actually incurred by him in connection with such
proceeding if he conducted himself in good faith, and
9.3.1. in the case of conduct in his official with the
corporation, he reasonably believed his conduct to be
in its best interests; or
9.3.2. in all cases, he reasonably believed his conduct to
be at least not opposed to its best interest;
provided that no indemnification shall be made
pursuant to this section in respect to any proceeding
in which such person shall have been adjudged to be
liable to the corporation.
9.4. A director shall not be indemnified under subsection 9.2 or
9.3 of this article in respect of any proceeding charging
improper personal benefit to him, whether or not involving
action in his official capacity, in which he shall have been
adjudged to be liable on the basis that personal benefit was
improperly received by him.
9.5. Unless otherwise limited by the articles of incorporation, a
director who has been wholly successful, on the merits or
otherwise, in the defense of any proceeding referred to in
subsection 9.2 or 9.3 of this article shall be indemnified
against reasonable expenses incurred by him in connection with
the proceeding.
9.6. No indemnification under subsection 9.2 or 9.3 of this article
shall be made by the corporation unless authorized in the
specific case after a determination that indemnification of
the director is permissible in the circumstances because he
has met the standard of conduct set forth in the applicable
section. Such determination shall be made:
9.6.1. by the board of directors by a majority vote of a
quorum consisting of directors not at the time
parties to such proceeding; or
9.6.2. if such a quorum cannot be obtained, then by a
majority vote of a committee of the board of
directors, duly designated to act in the matter, by a
majority vote of the full board of directors (in
which designation directors who are parties may
participate), consisting solely of two or more
directors not at the time parties to such proceeding;
or
9.6.3. in a written opinion by legal counsel other than an
attorney, or a firm having associated with it an
attorney, who has been retained by or who has
performed
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services within the past three years for the
corporation or any party to be indemnified, selected
by the board of directors or a committee thereof by
vote as set forth in 9.6.1 or 9.6.2 of this
subsection, or if the requisite quorum of the full
board of directors cannot be obtained therefor and
such committee cannot be established, by a majority
vote of the full board of directors (in which
selection directors who are parties may participate);
or
9.6.4. by the shareholders.
Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as
the determination that indemnification is permissible, except
that if the determination that indemnification is permissible
is made by such legal counsel, authorization of
indemnification and determination as to reasonableness of
expenses shall be made in a manner specified in paragraph
9.6.3 of this subsection for the selection of such counsel.
9.7. Reasonable expenses incurred by a director who is party to a
proceeding may be paid or reimbursed by the corporation in
advance of the final disposition of such proceeding:
9.7.1. After a determination, made in the manner specified
by subsection 9.6 of this article, that the
information then known to those making the
determination (without undertaking further
investigation for purposes thereof) does not
establish that indemnification would not be
permissible under subsection 9.2 or 9.3 of this
article; or
9.7.2. upon receipt by the corporation of (1) a written
affirmation by the director of his good faith belief
that he has met the standard of conduct necessary for
indemnification by the corporation as authorized in
this article; and (2) a written undertaking by or on
behalf of the director to repay such amount if it
shall ultimately be determined that he has not met
such standard of conduct.
The undertaking required by paragraph 9.7.2 of this subsection
shall be an unlimited general obligation of the director but
need not be secured and may be accepted without reference to
financial ability to make the repayment. Payments pursuant to
this subsection may be authorized in the manner specified in
subsection 9.6 of this article.
9.8. No provision for the corporation to indemnify a director who
is made a party to a proceeding, whether contained in the
articles of incorporation, these bylaws, or resolution of
shareholders or directors, an agreement, or otherwise (except
as contemplated by subsection 9.11 of this article), shall be
valid unless consistent with this article, or to the extent
that indemnity hereunder is limited by the articles of
incorporation, consistent therewith. Nothing contained in this
article shall limit
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the corporation's ability to reimburse expenses incurred by a director in
connection with his appearance as a witness in a proceeding at a time when he
has not been made a named defendant or respondent in the proceeding.
9.9. For purposes of this article the corporation shall be deemed
to have requested a director to serve an employee benefit plan
where the performance by him of his duties to the corporation
also imposes duties on, or otherwise involves services by, him
to the plan or participants or beneficiaries of the plan;
excise taxes assessed on a director with respect to an
employee benefit plan pursuant to applicable law shall be
deemed "fines"; and action taken or omitted by him with
respect to an employee benefit plan in the performance of his
duties for a purpose reasonably believed by him to be in the
interest of the participants and beneficiaries of the plan
shall be deemed to be for a purpose which is not opposed to
the best interests of the corporation.
9.10. Unless otherwise limited by the articles of incorporation:
9.10.1. the corporation shall provide indemnification,
including advances of expenses, to an officer,
employee or agent of the corporation to the same
extent that it may indemnify directors pursuant to
this article except that subsection 9.12 of this
article shall not apply to any person other than a
director; and
9.10.2. the corporation, in addition, shall have the power to
indemnify an officer who is not a director, as well
as employees and agents of the corporation who are
not directors, to such further extent, consistent
with law, as may be provided by the articles of
incorporation, these bylaws, general or specific
action of the board of directors, or contract.
9.11. The corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation or is or was
serving at the request of the corporation as an officers,
employee or agent of another bank, corporation, partnership,
joint venture, trust, other enterprise, or employee benefit
plan against any liability asserted against him and incurred
by him in any such capacity or arising out of his status as
such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of
this article.
9.12. Any indemnification of a director in accordance with this
article, including any payment or reimbursement of expenses,
shall be reported to the shareholders with the notice of the
next shareholders meeting, or prior thereto, in a written
report containing a brief description of the proceedings
involving the director being indemnified and the nature and
extent of such indemnification.
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10. LOANS AND INVESTMENTS
The funds of the corporation may also be loaned or invested as the
board of directors may from time to time direct, subject to applicable
law.
11. FISCAL YEAR
The fiscal year of the corporation shall end on the last day of
September each year.
12. AMENDMENTS TO BYLAWS
These bylaws may be amended or repealed and new bylaws adopted by a
two-thirds majority vote of the directors at any regular or special
meeting of the board of directors or by a majority of votes eligible to
be cast by the shareholders of the corporation at any legal meeting.
13. MISCELLANEOUS
Unless some other meaning and intent is apparent from the context, the
plurals shall include the singular and vice versa, and masculine,
feminine and neuter words shall be used interchangeably.
These Restated Bylaws of InterWest Bancorp, Inc. supercede the original Bylaws
of InterWest Bancorp, Inc. and all Amendments thereto.
DATED this 11th day of December, 1998.
INTERWEST BANCORP, INC.
/s/ Stephen M. Walden
----------------------------
Stephen M. Walden, President
Attested by:
/s/ Margaret Mordhorst
- -----------------------------
Margaret Mordhorst, Secretary
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Exhibit 3.4
Third Amendment to the Bylaws of InterWest Bancorp, Inc.
<PAGE>
THIRD AMENDMENT TO THE BYLAWS OF
INTERWEST BANCORP, INC.
THIS AMENDMENT to the Bylaws of InterWest Bancorp, Inc., a Washington
Corporation (the "corporation"), was adopted by more than a two-thirds majority
vote of a quorum of the Board of Directors of the corporation, at a regular
meeting held on July 21, 1998, at which a quorum was present and voting:
Section 6.1 is amended to read as follows:
6.1. The shares of stock issued by the corporation may be either with or
without par value, as authorized by the Articles of Incorporation. The
shareholders at any regular or special meeting called for that purpose
may authorize the issuance of additional capital stock upon such terms
and conditions as may be included in such authorization.
The board of directors may change the number of authorized shares of
stock to effectuate a split of, or stock dividend in, the corporation's
own shares, and to change the number of authorized shares in proportion
thereto.
DATED this 21st day of July, 1998.
/s/ B.R. Beeksma
---------------------------
B.R. Beeksma, Chairman
Attested by:
/s/ Margaret Mordhorst
- -----------------------------
Margaret Mordhorst, Secretary
<PAGE>
Exhibit 10.7
InterWest Bancorp, Inc. Amended and Restated 1993 Incentive Stock Option Plan
<PAGE>
INTERWEST BANCORP, INC.
AMENDED AND RESTATED
1993 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the InterWest
Bancorp, Inc. Amended and Restated 1993 Incentive Stock Option Plan (the
"Plan"). Prior to the formation of the Holding Company, the Plan was maintained
by the Holding Company's wholly-owned subsidiary, InterWest Bank. The purpose of
the amendment and restatement is to reflect the assumption of the Plan by the
Holding Company, to incorporate provisions relating to the grant of
Non-Incentive Stock Options, and to make other changes deemed necessary and
appropriate by the Board. The purpose of the Plan is to attract and retain the
best available personnel as officers and employees and to provide additional
incentive to employees of the Holding Company or any present or future parent or
subsidiary of the Holding Company to promote the success of the business. The
Plan is intended to provide for the grant of Incentive Stock Options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") and Non-Incentive Stock Options. Each and every one of the provisions of
the Plan relating to Incentive Stock Options shall be interpreted to conform to
the requirements of Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Committee of an Incentive
Stock Option, a Non-Incentive Stock Option, or any combination thereof, as
provided in the Plan.
(b) "Board" shall mean the Board of Directors of the Holding
Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Common Stock" shall mean common stock, $.20 par value per
share, of the Holding Company.
(e) "Committee" shall mean the Stock Option Committee
appointed by the Board in accordance with paragraph 4(a) of the Plan.
(f) "Continuous Employment" or "Continuous Status as an
Employee" shall mean the absence of any interruption or termination of
employment by the Holding Company or any present or future Parent or Subsidiary
of the Holding Company. Employment shall not be considered interrupted in the
case of sick leave, military leave or any other leave of absence approved by the
Holding Company or in the case of transfers between payroll locations of the
Holding Company or between the Holding Company, its Parent, its Subsidiaries or
a successor.
(g) "Effective Date" shall mean the date specified in Section
14 hereof.
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(h) "Employee" shall mean any person employed by the Holding
Company or any present or future Parent or Subsidiary of the Holding Company.
(i) "Holding Company" shall mean InterWest Bancorp, Inc., a
Washington corporation.
(j) "Incentive Stock Option" or "ISO" means an option to
purchase Shares granted by the Committee pursuant to Section 7 hereof which is
subject to the limitations and restrictions of Section 7 hereof and is intended
to qualify under Section 422 of the Code.
(k) "Non-Incentive Stock Option" or "Non-ISO" means an option
to purchase Shares granted by the Committee pursuant to Section 8, which option
is not intended to qualify under Section 422 of the Code.
(l) "Option" shall mean an Incentive or Non-Incentive Stock
Option granted pursuant to this Plan.
(m) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(n) "Optionee" shall mean any person who receives an Option.
(o) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Subsections 424(e) and (g)
of the Code.
(p) "Participant" means any officer or key employee of the
Holding Company or any Parent or Subsidiary of the Holding Company or any other
person providing a service to the Holding Company who is selected by the
Committee to receive an Award.
(q) "Plan" shall mean this InterWest Bancorp, Inc. Amended and
Restated 1993 Incentive Stock Option and Plan.
(r) "Share" shall mean one share of the Common Stock.
(s) "Subsidiary" shall mean any present or future corporation
which would be a "subsidiary corporation" as defined in Subsections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 12 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 644,000 shares.
Such Shares may either be authorized but unissued or treasury shares.
An Award shall not be considered to have been made under the
Plan with respect to any Option which terminates and new Awards may be granted
under the Plan with respect to the number of Shares as to which such termination
has occurred.
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4. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be
administered by the Committee consisting of at least two directors of the
Holding Company who are "nonemployee directors" within the meaning of Rule 16b-3
of the regulations issued under the Securities Exchange Act of 1934, as amended.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the expressed provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The Chairman of the Holding Company and such other officers as
shall be designated by the Committee are hereby authorized to execute
instruments evidencing Awards on behalf of the Holding Company and to cause them
to be delivered to the Participants.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
5. Eligibility.
(a) Awards may be granted to officers, key employees and other
persons. The Committee shall from time to time determine the officers and key
employees and other persons who shall be granted Options or Awards under the
Plan, the number to be granted to each such officers and key employees and other
persons under the Plan, and whether Options granted to each such Participant
under the Plan shall be Incentive and/or Non-Incentive Stock Options. In
selecting Participants and in determining the number of shares of Common Stock
to be granted to each such Participant pursuant to each Award granted under the
Plan, the Committee may consider the nature of the services rendered by each
such Participant, each such Participant's current and potential contribution to
the Holding Company, and such other factors as the Committee may, in its sole
discretion, deem relevant. Officers and key employees or other persons who have
been granted an Award may, if otherwise eligible, be granted additional Options
or Awards.
(b) The aggregate fair market value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by each Employee during the calendar
year in which they are first exercisable (under all Incentive Stock Option
plans, as defined in Section 422 of the Code, of the Holding Company or any
present or future Parent or Subsidiary of the Holding Company) shall not exceed
$100,000. Notwithstanding the prior provisions of this Section 5, the Committee
may grant Options in
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excess of the foregoing limitations, provided said Options shall be clearly and
specifically designated as not being Incentive Stock Options, as defined in
Section 422 of the Code.
6. Term of Plan. The Plan shall continue in effect for a term of ten
(10) years from January 1, 1993, the original effective date of the Plan prior
to its amendment and restatement, unless sooner terminated pursuant to Section
17. No Option shall be granted under the Plan after ten (10) years from January
1, 1993.
7. Terms and Conditions of Incentive Stock Options. Incentive Stock
Options may be granted only to Participants who are Employees. Each Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each and every
Incentive Stock Option granted pursuant to the Plan shall comply with, and be
subject to, the following terms and conditions:
(a) OPTION PLAN.
(i) The price per share at which each Incentive Stock
Option granted under the Plan may be exercised shall not, as to any
particular Incentive Stock Option, be less than the fair market value
of the Common Stock at the time such Incentive Stock Option is granted.
For such purposes, the price per share shall be not less than the
average of the bid and asked price on the business day preceding the
grant of the options.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common
Stock at the time the Incentive Stock Option is granted, the Incentive
Stock Option price shall not be less than one hundred and ten percent
(110%) of the fair market value of the Common Stock at the time the
Incentive Stock Option is granted.
(b) PAYMENT.
Full payment for each share of Common Stock purchased upon the
exercise of any Incentive Stock Option granted under the Plan shall be made at
the time of exercise of each such Incentive Stock Option and shall be paid in
cash (in United States Dollars), Common Stock or a combination of cash and
Common Stock. Common Stock utilized in full or partial payment of the exercise
price shall be valued at its fair market value at the date of exercise. The
Holding Company shall accept full or partial payment in Common Stock only to the
extent permitted by applicable law. No shares of Common Stock shall be issued
until full payment therefor has been received by the Holding Company, and no
Optionee shall have any of the rights of a shareholder of the Holding Company
until shares of Common Stock are issued to him.
(c) TERM OF INCENTIVE STOCK OPTION.
The term of each Incentive Stock Option granted pursuant to
the Plan shall be not more than ten (10) years from the date each such Incentive
Stock Option is granted, provided that in the case of an Employee who owns stock
representing more than 10% of the Common Stock
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<PAGE>
outstanding at the time the Incentive Stock Option is granted, the term of the
Incentive Stock Option shall not exceed five (5) years.
(d) EXERCISE GENERALLY.
Except as otherwise provided in Section 9 hereof, no Incentive
Stock Option may be exercised unless the optionee shall have been in the employ
of the Holding Company at all times during the period beginning with the date of
grant of any such Incentive Stock Option and ending on the date three (3) months
prior to the date of exercise of any such Incentive Stock Option. The Committee
may impose additional conditions upon the right of an Optionee to exercise any
Incentive Stock Option granted hereunder which are not inconsistent with the
terms of the Plan or the requirements for qualification as an Incentive Stock
Option under Section 422 of the Code.
(e) TRANSFERABILITY.
Any Incentive Stock Option granted pursuant to the Plan shall
be exercised during any Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution.
8. Terms and Conditions of Non-Incentive Stock Options. Each
Non-Incentive Stock Option granted pursuant to the Plan shall be evidenced by an
instrument in such form as the Committee shall from time to time approve. Each
and every Non-Incentive Stock Option granted pursuant to the Plan shall comply
with and be subject to the following terms and conditions:
(a) OPTION PRICE.
The exercise price per share of Common Stock for each
Non-Incentive Stock Option granted pursuant to the Plan shall be determined in
the same manner as the exercise price of an Incentive Stock Option by applying
the provisions of Section 7(a) of the Plan.
(b) PAYMENT.
Full payment for each share of Common Stock purchased upon the
exercise of any Non-Incentive Stock Option granted under the Plan shall be made
at the time of exercise of each such Non-Incentive Stock Option and shall be
paid in cash (in United States Dollars), Common Stock or a combination of cash
and Common Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its fair market value at the date of exercise.
The Holding Company shall accept full or partial payment in Common Stock only to
the extent permitted by applicable law. No shares of Common Stock shall be
issued until full payment therefor has been received by the Holding Company and
no Optionee shall have any of the rights of a shareholder of the Holding Company
until the shares of Common Stock are issued to him.
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(c) TERM.
The term of each Non-Incentive Stock Option granted pursuant
to the Plan shall be not more than ten (10) years from the date each such
Non-Incentive Stock Option is granted.
(d) EXERCISE GENERALLY.
The Committee may impose additional conditions upon the right
of any Participant to exercise any Non-Incentive Stock Option granted hereunder
which are not inconsistent with the terms of the Plan.
(e) TRANSFERABILITY.
Except as provided herein, no Non-Qualified Stock Option
granted under this Plan is transferable except by will or the laws of descent
and distribution. The Committee shall have discretionary authority to permit the
transfer of any Non-Incentive Stock Option to members of an Optionee's immediate
family, including trusts for the benefit of such family members and partnerships
in which such family members are the only partners; provided, however, that a
transferred Non-Incentive Stock Option may be exercised by the transferee on any
date only to the extent that the Optionee would have been entitled to exercise
the Non-Incentive Stock Option on such date had the Non-Incentive Stock Option
not been transferred. Any transferred Non-Incentive Stock Option shall remain
subject to the terms and conditions of the Participant's stock option agreement.
9. Effect of Termination of Employment, Disability or Death on
Incentive Stock Options.
(a) TERMINATION OF EMPLOYMENT.
In the event that any Optionee's employment by the Holding
Company shall terminate for any reason, other than Permanent and Total
Disability (as such term is defined in Section 22(e)(3) of the Code) or death,
all of any such Optionee's Incentive Stock Options, and all of any such
Optionee's rights to purchase or receive shares of Common Stock pursuant
thereto, shall automatically terminate on the earlier of (i) the respective
expiration dates of any such Incentive Stock Options or (ii) the expiration of
not more than three (3) months after the date of such termination of employment,
but only if, and to the extent that, the Optionee was entitled to exercise any
such Incentive Stock Options at the date of such termination of employment. In
the event that a subsidiary ceases to be a subsidiary of the Holding Company,
the employment of all of its employees who are not immediately thereafter
employees of the Holding Company shall be deemed to terminate upon the date such
subsidiary so ceases to be a subsidiary of the Holding Company.
(b) DISABILITY.
In the event that any Optionee's employment by the Holding
Company shall terminate as the result of the Permanent and Total Disability of
such Optionee, such Optionee
6
<PAGE>
may exercise any Incentive Stock Options granted to him pursuant to the Plan at
any time prior to the earlier of (i) the respective expiration dates of any such
Incentive Stock Options or (ii) the date which is one (1) year after the date of
such termination of employment, but only if, and to the extent that, the
Optionee was entitled to exercise any such Incentive Stock Options at the date
of such termination of employment.
(c) DEATH.
In the event of the death of any Optionee, any Incentive Stock
Options granted to any such Optionee may be exercised by the person or persons
to whom the Optionee's rights under any such Incentive Stock Options pass by
will or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of death of such Optionee but only if, and
to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of death. For purposes of this Section 9(c), any
Incentive Stock Option held by an Optionee shall be considered exercisable at
the date of his death if the only unsatisfied condition precedent to the
exercisability of such Incentive Stock Option at the date of death is the
passage of a specified period of time.
(d) INCENTIVE STOCK OPTIONS DEEMED EXERCISABLE.
For purposes of Sections 9(a), 9(b) and 9(c) above, any
Incentive Stock Option held by any Optionee shall be considered exercisable at
the date of the termination of his employment if any such Incentive Stock Option
would have been exercisable at such date of termination of employment.
(e) TERMINATION OF INCENTIVE STOCK OPTIONS.
To the extent that any Incentive Stock Option granted under
the Plan to any Optionee whose employment by the Holding Company terminates
shall not have been exercised within the applicable period set forth in this
Section 9, any such Incentive Stock Option, and all rights to purchase or
receive shares of Common Stock pursuant thereto, as the case may be, shall
terminate on the last day of the applicable period.
10. Effect of Termination of Employment, Disability or Death on
Non-Incentive Stock Options. To the extent that any Non-Incentive Stock Option
granted under the Plan to any Optionee whose employment by the Holding Company
or the Association has terminated for any reason other than for cause, shall not
have been exercised, such Non-Incentive Stock Option, and the right to purchase
or receive shares of Common Stock pursuant thereto, as the case may be, shall
terminate upon the earlier to occur of (1) the date that is ten (10) years from
the date of grant of the Non-Incentive Stock Option or (2) the date that is one
(1) year from the date of the Optionee's termination of employment (two (2)
years in the event of termination of employment by reason of death or Permanent
and Total Disability (as such term is defined in Section 22(e)(3) of the Code)).
7
<PAGE>
11. Right of Repurchase and Restrictions on Disposition. The Committee,
in its sole discretion, may include, as a term of any Incentive Stock Option or
Non-Incentive Stock Option, the right (the "Repurchase Right"), but not the
obligation, to repurchase all or any amount of the Shares acquired by an
Optionee pursuant to the exercise of any such Options. The intent of the
Repurchase Right is to encourage the continued employment of the Optionee. The
Repurchase Right shall provide for, among other things, a specified duration of
the Repurchase Right, a specified price per Share to be paid upon the exercise
of the Repurchase Right and a restriction on the disposition of the Shares by
the Optionee during the period of the Repurchase Right. The Repurchase Right may
permit the Holding Company to transfer or assign such right to another party.
The Holding Company may exercise the Repurchase Right only to the extent
permitted by applicable law.
12. Recapitalization, Merger, Consolidation, Change in Control and
Similar Transactions.
(a) ADJUSTMENT.
Subject to any required action by the shareholders of the
Holding Company, the aggregate number of shares of Common Stock for which stock
options may be granted hereunder, the number of shares of Common Stock covered
by each outstanding stock option, and the exercise price per share of Common
Stock of each such stock option, shall be proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend (but only on the Common Stock) or any other increase or
decrease in the number of such shares of Common Stock effected without the
receipt of consideration by the Holding Company.
(b) CHANGE IN CONTROL.
All outstanding Options shall become immediately exercisable
in the event of a change in control or imminent change in control of the Holding
Company, as determined by the Committee. In the event of such a change in
control or imminent change in control, the Optionee shall, at the discretion of
the Committee, be entitled to receive cash in an amount equal to the fair market
value of the Common Stock subject to any Incentive Stock Option over the Option
Price of such shares, in exchange for the surrender of such Options by the
Optionee on that date in the event of a change in control or imminent change in
control of the Holding Company. For purposes of this Section, "change in
control" shall mean: (i) the execution of an agreement for the sale of all, or a
material portion, of the assets of the Holding Company; (ii) the execution of an
agreement for a merger or recapitalization of the Holding Company or any merger
or recapitalization whereby the Holding Company is not the surviving entity;
(iii) a change of control of the Holding Company, as otherwise defined or
determined under regulations promulgated by any applicable bank regulatory
agency; or (iv) the acquisition, directly or indirectly, of the beneficial
ownership (within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934, as amended and the rules promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Holding Company by any person, trust, entity or group. The
term "person" refers to an individual or a
8
<PAGE>
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. For purposes of this Section, "imminent change in
control" shall refer to any offer or announcement, oral or written, by any
person or persons acting as a group, to acquire control of the Holding Company.
The decision of the Committee as to whether a change in control or imminent
change in control has occurred shall be conclusive and binding.
(c) EXTRAORDINARY CORPORATE ACTION.
Subject to any required action by the shareholders of the
Holding Company, in the event of any change in control, recapitalization,
merger, consolidation, exchange of shares, spin-off, reorganization, tender
offer, liquidation or other extraordinary corporate action or event, the
Committee, in its sole discretion, shall have the power, prior or subsequent to
such action or event to:
(i) appropriately adjust the number of shares of
Common Stock subject to each stock option, the exercise price per share
of Common Stock, and the consideration to be given or received by the
Holding Company upon the exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in
connection therewith; and/or
(iii) make such other adjustments in connection with
the Plan as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable; provided, however, that no action
shall be taken by the Committee which would cause Incentive Stock
Options granted pursuant to the Plan to fail to meet the requirements
of Section 422 of the Code.
Except as expressly provided in Section 12(a) and
12(b) hereof, no Optionee shall have any rights by reason of the
occurrence of any of the events described in this Section 12.
(d) ACCELERATION.
The Committee shall at all times have the power to accelerate
the exercise date of Options previously granted under the Plan.
13. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the determination shall be
given to each Employee to whom an Option is so granted within a reasonable time
after the date of such grant.
14. Effective Date. This amended and restated Plan shall become
effective upon adoption by the Board. Options may be granted prior to
ratification of the Plan by the stockholders if the exercise of such Options is
subject to such stockholder ratification.
9
<PAGE>
15. Approval of Stockholders. The amended and restated Plan shall be
approved by stockholders of the Holding Company within twelve (12) months before
or after the date it becomes effective.
16. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on him by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 18 hereof.
17. Reload Options.
On or after the grant date of any Non-Incentive Stock Option (or any
Incentive Stock Option awarded on or after the Effective Date of the Plan), the
Committee may provide for the automatic grant to the Optionee of a "reload"
Option in the event the Optionee surrenders Shares of Common Stock in
satisfaction of the exercise price upon the exercise of an Option or the
Optionee's tax withholding obligation. Each reload Option shall cover the same
number of Shares of Common Stock as the number of Shares of Common Stock
utilized by the Optionee to exercise the original Option (including shares
related to the Optionee's tax withholding obligation) and shall, to the extent
not inconsistent with any requirements applicable to an Incentive Stock Option
under the Code, be of the same type as the original Option.
18. Amendment and Termination of the Plan.
(a) ACTION OF THE BOARD.
The Board shall have complete power and authority to amend the Plan at
any time it is deemed necessary or appropriate; provided, however, that no
amendment shall be made without shareholder approval if such approval is
necessary for the Holding Company to comply with an applicable tax law or
regulatory requirement. No termination or amendment of the Plan may, without the
consent of the Optionee to whom any award shall theretofore have been granted
under the Plan, adversely affect the right of such individual under such award.
(b) CHANGE IN APPLICABLE LAW.
Notwithstanding any other provision contained in the Plan, in
the event of a change in any Federal or state law, rule or regulation which
would make the exercise of all or part of any previously granted Incentive
and/or Non-Incentive Stock Option unlawful or subject the Holding Company to any
penalty, the Committee may restrict any such exercise without the consent of the
Optionee or other holder thereof in order to comply with any such law, rule or
regulation or to avoid any such penalty.
10
<PAGE>
19. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Holding Company to obtain from any
regulatory body or authority deemed by the Holding Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Holding Company of any liability with respect to the nonissuance of such
Shares.
As a condition to the exercise of an Option, the Holding
Company may require the person exercising the Option to make such
representations and warranties as may be necessary to assure the availability of
an exemption from the registration requirements of Federal or state securities
law.
20. Reservation of Shares. During the term of the Plan, the Holding
Company will reserve and keep available a number of Shares sufficient to satisfy
the requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Holding Company by reason of the
Plan or the grant of any Incentive or Non-Incentive Stock Option to him under
the Plan. No trust fund shall be created in connection with the Plan or any
grant of any Incentive or Non-Incentive Stock Option hereunder and there shall
be no required funding of amounts which may become payable to any Participant.
22. Withholding Tax. Where a Participant or other person is entitled to
receive Shares pursuant to the exercise of an Option pursuant to the Plan, the
Holding Company shall have the right to require the Participant or such other
person to pay the Holding Company the amount of any taxes which the Holding
Company is required to withhold with respect to such Shares, or, in lieu
thereof, to retain, or sell without notice, a number of such Shares sufficient
to cover the amount required to be withheld.
24. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of Washington, except to the extent that
Federal law shall be deemed to apply.
11
<PAGE>
Exhibit 13
Selected Consolidated Financial Data, Management Discussion
and Analysis and Consolidated Financial Statements included
in the 1998 Annual Report to Shareholders
<PAGE>
InterWest Bancorp
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1998(1) 1997 1996(2) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 180,279 $ 165,206 $ 143,827 $ 119,731 $ 97,850
Interest Expense 101,483 91,081 77,127 65,119 45,251
Net Interest Income Before Provision for Losses on Loans 78,796 74,125 66,700 54,612 52,599
Provision for Losses on Loans 2,807 1,508 2,452 929 1,053
Net Interest Income After Provision for Losses on Loans 75,989 72,617 64,248 53,683 51,546
Noninterest Income 26,473 18,645 15,744 13,030 10,428
Noninterest Expense 66,972 54,032 55,716 40,718 36,924
Income Tax Expense 12,848 12,681 7,785 8,721 8,568
Net Income $ 22,642 $ 24,549 $ 16,491 $ 17,274 $ 16,482
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Share $ 1.45 $ 1.58 $ 1.08 $ 1.13 $ 1.08
Diluted Net Income Per Share 1.40 1.54 1.05 1.11 1.06
Cash Dividends Declared Per Share 0.50 0.33 0.29 0.19 0.19
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $2,447,848 $2,402,928 $2,016,085 $1,723,780 $1,485,978
Loans Receivable and Loans Held for Sale 1,452,175 1,348,681 1,170,271 1,035,099 895,564
Deposits 1,564,825 1,468,460 1,389,402 1,260,946 1,154,331
Borrowings 682,390 755,968 466,693 321,932 209,468
Shareholders' Equity 171,652 160,770 137,647 128,882 113,210
Book Value Per Share $ 10.97 $ 10.26 $ 8.93 $ 8.45 $ 7.41
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
KEY OPERATING RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
Return on Average Assets 0.95% 1.15% 0.90% 1.10% 1.23%
Return on Average Shareholders' Equity 13.58% 16.64% 12.13% 14.25% 15.49%
Average Shareholders' Equity to Average Assets 6.99% 6.89% 7.38% 7.73% 7.96%
Net Interest Margin 3.52% 3.70% 3.85% 3.70% 4.16%
Ratio of Non-performing Assets to Total Assets(3) 0.64% 0.52% 0.49% 0.41% 0.53%
Dividend Payout Ratio 33.98% 21.35% 26.97% 17.04% 16.31%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1998 results include nonrecurring merger-related charges of $4.4 million
(net of tax) and a merger-related provision for losses on loans of
$0.7 million (net of tax).
(2) 1996 results include nonrecurring SAIF assessment of $3.6 million (net of
tax), merger-related charges of $2.0 million (net of tax) and a merger-
related provision for losses on loans of $0.6 million (net of tax).
(3) Non-performing assets consist of non-performing loans (including non-
accrual loans and certain other delinquent loans) and real estate held
for sale.
Page 016
<PAGE>
InterWest Bancorp
Management Discussion and Analysis
The following discussion is provided for the consolidated operations of
InterWest Bancorp, Inc. (InterWest Bancorp), including its wholly owned
subsidiaries (collectively InterWest). As of September 30, 1998, InterWest
Bancorp's wholly owned subsidiaries were InterWest Bank, Pacific Northwest Bank,
Pioneer National Bank, First National Bank of Port Orchard and Kittitas Valley
Bank N.A. The purpose of this discussion is to focus on significant factors
concerning InterWest's financial condition and results of operations. This
discussion should be read along with the consolidated financial statements
(including notes thereto) for an understanding of the following discussion and
analysis.
1998 was a significant year for InterWest. The acquisitions of Pacific
Northwest Bank, Pioneer National Bank, First National Bank of Port Orchard
and Kittitas Valley Bank N.A. reflect a continuing commitment to commercial
banking and the goal of becoming a statewide institution. InterWest has
implemented a plan to become a financial services company that provides a
variety of products and services for both individual and business customers.
InterWest's sales efforts will continue to change the composition of the loan
portfolio and the funding sources for asset growth. InterWest has experienced
strong growth in transaction accounts while reducing reliance on certificates
of deposit. These changes are designed to have a positive impact on net
interest income, service fee revenue and market penetration while meeting the
needs of InterWest's customers.
The merger with Central Bancorporation (Central) on August 31, 1996,
began this process. Central's commercial banking subsidiary, Central
Washington Bank, operated ten offices in Central Washington. At the merger
date, Central had total consolidated assets of $206.1 million, including
total loans receivable of $132.2 million, total deposits of $181.9 million
and shareholders' equity of $17.1 million.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First
National Bank of Port Orchard. Under the terms of this transaction, Puget
merged into InterWest Bancorp, with First National Bank of Port Orchard
becoming a subsidiary of InterWest Bancorp. First National Bank of Port
Orchard operated three branch offices in Western Washington. At the
acquisition date, Puget had total consolidated assets of $53.1 million,
including total loans receivable of $38.7 million, total deposits of $45.6
million, and shareholders' equity of $5.9 million. Each share of Puget common
stock was exchanged for 2.50 shares of InterWest Bancorp common stock. On
October 15, 1998, First National Bank of Port Orchard was merged into Pacific
Northwest Bank. This internal merger was completed to obtain operating
efficiencies and cost savings.
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction,
Pacific became a subsidiary of InterWest Bancorp. At the acquisition date,
Pacific had four offices in the metropolitan Seattle area of Western
Washington and total assets of $200.2 million, including total loans
receivable of $150.1 million, total deposits of $170.2 million, and
shareholders' equity of $16.8 million. Each share of Pacific common stock was
exchanged for 5.93 shares of InterWest Bancorp common stock.
Page 018
<PAGE>
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National
Bank. Under the terms of this transaction, Pioneer merged into InterWest
Bancorp, and Pioneer National Bank became a subsidiary of InterWest Bancorp.
Pioneer National Bank operates five branch offices in Central Washington. At
the acquisition date, Pioneer had total consolidated assets of $108.4
million, including total loans receivable of $63.4 million, total deposits of
$87.2 million, and shareholders' equity of $9.3 million. Each share of
Pioneer common stock was exchanged for 2.01 shares of InterWest Bancorp
common stock.
These mergers were accounted for using the pooling-of-interests method.
In accordance with generally accepted accounting principles, prior period
financial statements, as well as management discussion and analysis, have
been restated as if the companies were combined for all periods presented.
On August 31, 1998, InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas), of Ellensburg, Washington, the
holding company of Kittitas Valley Bank N.A. Under the terms of this
transaction, Kittitas merged into InterWest Bancorp, and Kittitas Valley Bank
N.A. became a subsidiary of InterWest Bancorp. The acquisition was completed
through the payment of $6.4 million in cash and the issuance of 229,831
shares of InterWest Bancorp common stock to Kittitas shareholders. The shares
issued to Kittitas shareholders were purchased by InterWest Bancorp in the
open market. At the merger date, Kittitas had total consolidated assets of
$47.4 million and shareholders' equity of $4.3 million. This acquisition has
been accounted for using the purchase method of accounting.
The following table summarizes pertinent information related to the
completed mergers:
<TABLE>
<CAPTION>
TOTAL ASSETS
AT MERGER DATE COMMON
ACQUISITION DATE INSTITUTION (DOLLARS IN THOUSANDS) SHARES ISSUED
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 31, 1996 Central Bancorporation $206,093 2,147,391
January 15, 1998 Puget Sound Bancorp, Inc. 53,109 586,420
June 15, 1998 Pacific Northwest Bank 200,219 2,346,081
June 16, 1998 Pioneer Bancorp, Inc. 108,399 692,846
August 31, 1998 Kittitas Valley Bancorp, Inc. 47,441 229,831(1)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Additionally, $6.4 million in cash was paid to Kittitas shareholders.
A source of future growth may be through acquisitions. InterWest believes that
many other financial institutions are considering selling their institutions for
a variety of reasons, including lack of shareholder liquidity, management
succession issues, technology challenges and increasing competition. InterWest
actively reviews proposals for various acquisition opportunities. InterWest has
established a due diligence review process to evaluate potential acquisitions
and has established parameters for potential acquisitions relating to market
factors, financial performance and certain nonfinancial factors. Successful
completion of acquisitions by InterWest depends on several factors, such as the
availability of suitable acquisition candidates, necessary regulatory and
shareholder approval and compliance with applicable capital requirements. No
assurance can be made that acquisition activity will continue in the future.
Today InterWest conducts its business through 55 full-service branch
offices in Western and Central Washington state. These offices are located in
towns, small cities, suburbs and metropolitan markets. Investments are
available through InterWest Financial Services, Inc., a wholly owned
subsidiary of InterWest Bank, and insurance products are available through
InterWest Insurance Agency, Inc., a majority owned subsidiary of InterWest
Bank.
Page 019
<PAGE>
InterWest Bancorp
Results of Operations
InterWest's net income was $22.6 million in 1998, compared to $24.4 million in
1997 and $16.5 million in 1996. Diluted net income per share was $1.40 in 1998,
compared to $1.54 in 1997 and $1.05 in 1996. InterWest's return on average
assets was 0.95 percent in 1998, compared to 1.15 percent in 1997 and 0.90
percent in 1996. Return on average shareholders' equity was 13.58 percent in
1998, compared to 16.64 percent in 1997 and 12.13 percent in 1996.
The results of operations for 1998 included nonrecurring merger-related
charges of $5.1 million, net of tax. merger-related charges include $1.9
million for professional fees and other direct transaction costs, $1.5
million for severance and other personnel expenses, $1.4 million for data and
facilities conversions, $1.1 million for a merger-related provision for
losses on loans, $0.7 million for other merger-related expenses and an income
tax benefit of $1.5 million. See Note 16 to the Consolidated Financial
Statements for further details. The results of operations for 1996 also
included significant nonrecurring expenses of $3.6 million, net of tax,
related to the recapitalization of the Savings Association Insurance Fund
(SAIF) and merger-related charges primarily associated with the Central
merger of $2.6 million, net of tax. The following table summarizes net
income, net income per share and key financial ratios before and after
nonrecurring expenses for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
BEFORE NONRECURRING EXPENSES AFTER NONRECURRING EXPENSES
--------------------------------- ----------------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $27,719 $24,549 $22,684 $22,642 $24,549 $16,491
Basic net income per share $ 1.77 $ 1.58 $ 1.48 $ 1.45 $ 1.58 $ 1.08
Diluted net income per share $ 1.72 $ 1.54 $ 1.44 $ 1.40 $ 1.54 $ 1.05
Return on average shareholders' equity 16.62% 16.64% 16.69% 13.58% 16.64% 12.13%
Return on average assets 1.16% 1.15% 1.23% 0.95% 1.15% 0.90%
Efficiency ratio 58.40% 58.24% 57.12% 63.62% 58.24% 67.58%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME InterWest's net income is significantly affected by changes
in net interest income, which is the difference between interest income received
on loans receivable and other interest-earning assets and interest paid on
deposits and borrowings. InterWest's operations are sensitive to changes in
interest rates and the resulting impact on net interest income.
Net interest income before the provision for losses on loans was $78.8
million in 1998, compared to $74.1 million in 1997 and $66.7 million in 1996.
The increase in net interest income was due to growth in interest-earning
assets, which was partially offset by a decrease in the margin earned on
these assets.
Net interest margin, which is net interest income divided by average
interest-earning assets, was 3.52 percent in 1998, a decrease from 3.70
percent in 1997 and 3.85 percent in 1996. The decrease in net interest margin
was primarily the result of 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 long-term lending
rates. InterWest is taking the following steps to increase net interest
income and net interest margin: increasing commercial lending, reducing
dependence on single-family residential mortgages, and increasing
non-interest-bearing and interest-bearing transaction deposits.
The following table presents, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resulting yield and
cost ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for InterWest.
Page 020
<PAGE>
1998 Annual Report
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998 1997 1996
-------------------------------- -------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
DOLLARS IN THOUSANDS BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
Loans receivable and loans
held for sale(1) $1,406,307 $127,472 9.06% $1,258,351 $115,053 9.14% $1,086,149 $101,292 9.33%
Securities available for
sale and securities
held to maturity 773,631 49,591 6.41 709,235 47,563 6.71 594,208 38,879 6.54
Other interest-earning assets 60,681 3,216 5.30 38,486 2,590 6.73 54,349 3,656 6.73
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,240,619 180,279 8.05 2,006,072 165,206 8.24 1,734,706 143,827 8.29
Non-interest-earning assets 145,767 134,860 107,331
Total assets $2,386,386 $2,140,932 $1,842,037
- --------------------------------------------------- ---------- ----------
- --------------------------------------------------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Savings accounts and
money market accounts $ 321,520 $ 10,410 3.24% $ 294,112 $ 9,196 3.13% $ 272,427 $ 8,710 3.20%
Checking accounts 140,832 2,055 1.46 131,024 1,803 1.38 136,525 2,266 1.66
Certificates of deposit 866,602 48,376 5.58 893,244 50,008 5.60 800,306 45,107 5.63
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,328,954 60,841 4.58 1,318,380 61,007 4.63 1,209,258 56,083 4.64
FHLB advances, securities
sold under agreements
to repurchase and
other borrowings 718,527 40,642 5.66 530,356 30,074 5.67 379,319 21,044 5.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,047,481 101,483 4.96 1,848,736 91,081 4.93 1,588,577 77,127 4.86
Non-interest-bearing deposits 150,360 125,805 101,793
Other non-interest-bearing
liabilities 21,766 18,837 15,741
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,219,607 1,993,378 1,706,111
Shareholders' equity 166,779 147,554 135,926
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,386,386 $2,140,932 $1,842,037
- --------------------------------------------------- ---------- ----------
- --------------------------------------------------- ---------- ----------
Net interest income $ 78,796 $ 74,125 $ 66,700
- -------------------------------------------------------------- -------- ---------
- -------------------------------------------------------------- -------- ---------
Interest rate spread 3.09% 3.31% 3.43%
Net interest margin 3.52% 3.70% 3.85%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 109.43% 108.51% 109.20%
</TABLE>
(1) Average balances do not include non-accrual loans.
Page 021
<PAGE>
InterWest Bancorp
The following table provides information on changes in net interest income for
the periods which are attributable to changes in interest rates and changes in
volume.
<TABLE>
<CAPTION>
1998 VS 1997 1997 VS 1996
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGES IN TO CHANGES IN
------------------------------ -------------------------------
DOLLARS IN THOUSANDS RATE VOLUME TOTAL RATE VOLUME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
Loans receivable and loans held for sale $ (983) $13,402 $12,419 $(1,939) $15,700 $13,761
Securities available for sale, securities
held to maturity and other
interest-earning assets (2,516) 5,170 2,654 986 6,632 7,618
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in income
on interest-earning assets (3,499) 18,572 15,073 (953) 22,332 21,379
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------
Deposits (2,108) 1,942 (166) (690) 5,614 4,924
FHLB advances, securities sold
under agreements to repurchase
and other borrowings (75) 10,643 10,568 475 8,555 9,030
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (2,183) 12,585 10,402 (215) 14,169 13,954
- ---------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $(1,316) $ 5,987 $ 4,671 $ (738) $ 8,163 $ 7,425
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOSSES ON LOANS The provision for losses on loans in 1998 was $2.8
million, compared to $1.5 million in 1997 and $2.5 million in 1996. The increase
in the provision for losses on loans for 1998 as compared to 1997 was primarily
due to a merger-related provision of $1.1 million. The 1996 provision included a
$0.9 million merger-related provision. These merger-related provisions were the
result of conforming the allowance for losses on loans practices of the acquired
companies to that of InterWest.
NONINTEREST INCOME Non-interest income was $26.5 million in 1998, an increase
from $18.6 million in 1997 and $15.7 million in 1996, which was primarily due to
increased mortgage banking activities and resulting gains on the sale of loans.
Gains on the sale of loans were $10.4 million for 1998, compared to $4.2 million
in 1997 and $2.0 million in 1996. The increase in mortgage banking activities is
due to the overall strategy of changing the composition of the loan portfolio
with less reliance on single-family residential mortgages and a greater emphasis
on commercial lending. During 1998, the low interest rate environment resulted
in increased fixed-rate single-family residential mortgage loan refinances.
InterWest securitized and sold $293 million of single-family residential
mortgage loans on the secondary market during 1998, an increase from $87 million
in 1997. Based on the current interest rate environment, InterWest anticipates
that mortgage banking activities will remain at high levels during 1999.
Another factor contributing to the overall increase in non-interest
income was an increase in service fee revenues. These fees were $11.0 million
in 1998, compared to $9.5 million in 1997 and $8.7 million in 1996. This
increase in service fees was due to growth in transaction deposit accounts and
commercial banking services.
NON-INTEREST EXPENSE Non-interest expense totaled $67.0 million in 1998,
compared to $54.0 million in 1997 and $55.7 million in 1996. Non-interest
expenses for 1998 include $5.5 million in nonrecurring merger-related charges.
During 1996, non-interest expenses included a SAIF recapitalization charge of
$5.5 million and merger-related
Page 022
<PAGE>
1998 Annual Report
charges of $3.1 million. Excluding these nonrecurring expenses in 1998 and
1996, non-interest expenses were $61.5 million in 1998, compared to $54.0
million in 1997 and $47.1 million in 1996, representing annual increases of 13
percent for 1998 compared to 1997 and 15 percent for 1997 compared to 1996,
respectively.
Excluding the nonrecurring SAIF assessment in 1996 and merger-related
charges incurred in 1998 and 1996, InterWest's efficiency ratio was 58.40
percent in 1998, 58.24 percent in 1997 and 57.12 percent in 1996.
The increase in non-interest expenses for the respective periods was
primarily due to activities to develop the resources and infrastructure for
commercial banking growth. Key elements of commercial banking growth were the
development of credit administration and commercial lending support, the
addition of commercial lending officers and the addition of several
experienced commercial banking management personnel.
Compensation and employee benefits were $32.6 million in 1998, an
increase from $28.1 million in 1997 and $25.6 million in 1996. This was
primarily due to the focus on commercial banking growth discussed above.
Compensation expense also increased as a result of higher lending volumes and
deposit growth, which increased compensation resulting from variable
compensation plans.
During 1998, InterWest recorded a charge of $1.4 million for fair value
adjustments on two real estate properties held for sale and for development.
During 1996, InterWest reduced the allowance for losses on the real estate
held for sale by $1.0 million, which reduced non-interest expense. The $1.4
million charge was based on the periodic evaluation of the real estate held
for sale and for development portfolios and risks associated with respective
properties.
On September 30, 1996, a law was enacted to recapitalize the SAIF through
a one-time assessment of 0.657 percent of SAIF insured deposits, resulting in
a $5.5 million expense to InterWest. This legislation was intended to
recapitalize the SAIF to a level equivalent to the Bank Insurance Fund (BIF).
Prior to this legislation, most savings institutions were paying 0.23 percent
of insured deposits. Beginning January 1, 1997, savings institutions began
paying 0.064 percent of insured deposits which, in InterWest's case, produced
an annual costs savings of approximately $1.5 million in FDIC premium
assessments. InterWest anticipates to recover this one-time assessment in less
than four years. FDIC premium assessments were $0.7 million in 1998, compared
to $0.4 million in 1997 and $2.0 million in 1996.
INCOME TAX EXPENSE Income tax expense for 1998 was $12.9 million, compared to
$12.7 million in 1997 and $7.8 million in 1996. The effective tax rates were
36.2 percent in 1998, 34.1 percent in 1997 and 32.1 percent in 1996. The higher
effective tax rate in 1998 is primarily due to certain direct merger-related
expenses that are not deductible for federal income tax purposes.
Review of Financial Condition
InterWest's total consolidated assets were $2.448 billion as of September 30,
1998, compared to $2.403 billion as of September 30, 1997. This was an increase
of $45 million, or 2 percent.
SECURITIES AND OTHER INTEREST-EARNING ASSETS Securities and other
interest-earning assets, including securities available for sale, securities
held to maturity, FHLB stock, interest-bearing deposits in banks and federal
funds sold were $826.4 million as of September 30, 1998, compared to $901.8
million as of September 30, 1997. As of September 30, 1998, 87 percent of
InterWest's securities were classified as available for sale, an increase from
81 percent as of September 30, 1997. 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.
InterWest has generally maintained liquidity in excess of regulatory
guidelines. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives, management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and management's expectation of the level of yield that will be available in
the future, as well as management's projections as to the short-term demand
for funds to be used for loan originations and other activities.
Page 023
<PAGE>
InterWest Bancorp
Securities are categorized as held to maturity or available for sale,
based upon management's intent as to the ultimate disposition of each security
acquired. InterWest does not currently trade securities. Securities classified
as held to maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts over the terms of the securities, while securities
classified as available for sale are reported at estimated fair value, with
unrealized gains and losses (net of deferred income taxes) reported as a net
amount in a separate component of shareholders' equity.
The following table sets forth amortized cost and estimated fair value for
InterWest's securities held to maturity as of the dates indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
PERCENT PERCENT PERCENT
AMORTIZED ESTIMATED OF AMORTIZED ESTIMATED OF AMORTIZED ESTIMATED OF
DOLLARS IN THOUSANDS COST FAIR VALUE PORTFOLIO COST FAIR VALUE PORTFOLIO COST FAIR VALUE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $27,084 $27,632 31.0% $ 54,905 $ 54,622 41.5% $158,389 $157,505 62.0%
Obligations of states
and political subdivisions 2,756 2,799 3.2% 10,841 10,992 8.2% 10,301 10,413 4.0%
Other securities 57,422 56,935 65.8% 66,549 63,856 50.3% 86,817 81,044 34.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $87,262 $87,366 $132,295 $129,470 $255,507 $248,962
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the maturities and weighted average yields of the
securities held to maturity as of September 30, 1998.
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
------------------ ------------------ ------------------ ------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
DOLLARS IN THOUSANDS COST YIELD COST YIELD COST YIELD COST YIELD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $-- -- % $ 52 9.27% $15,044 6.85% $11,988 5.98%
Obligations of states and
political subdivisions 270 4.26% 2,486 4.51% -- -- -- --
Other securities -- -- 20 3.50% -- -- 57,402 6.40%
- --------------------------------------------------------------------------------------------------------------------------
Total $270 4.26% $2,558 4.60% $15,044 6.85% $69,390 6.33%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth InterWest's securities available for sale
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 1997 1996
---------------------- ---------------------- ----------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF ESTIMATED PERCENT OF
DOLLARS IN THOUSANDS FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government and agency securities $398,868 69.5% $421,856 74.9% $134,969 32.4%
SBA securities 48,370 8.4% 61,160 10.8% 71,037 17.0%
Obligations of states and political
subdivisions 2,333 0.4% 5,414 1.0% 11,458 2.8%
Other securities 124,775 21.7% 74,737 13.3% 199,367 47.8%
- -------------------------------------------------------------------------------------------------------------------
Total $574,346 $563,167 $416,831
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 024
<PAGE>
1998 Annual Report
The following table sets forth the maturities and weighted average yields of
InterWest's securities available for sale portfolio as of September 30, 1998.
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
------------------ ------------------ ------------------ ------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
DOLLARS IN THOUSANDS FAIR VALUE YIELD FAIR VALUE YIELD FAIR VALUE YIELD FAIR VALUE YIELD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $7,851 6.16% $210,201 6.16% $ 92,620 6.38% $ 88,196 6.12%
SBA securities -- -- 945 8.51% 8,116 8.29% 39,309 7.89%
Obligations of states and
political subdivisions 748 5.15% 1,130 4.87% 319 5.22% 136 5.26%
Other securities 582 5.65% -- -- 9,273 6.22% 114,920 6.54%
- ----------------------------------------------------------------------------------------------------------------------
Total $9,181 6.05% $212,276 6.16% $110,328 6.50% $242,561 6.60%
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE Loans receivable increased by $21
million or 1.5 percent from $1.338 billion as of September 30, 1997, to $1.359
billion as of September 30, 1998. The commercial loan portfolio has increased
$62.2 million from September 30, 1997, representing a growth rate of 40
percent from September 30, 1997. As of September 30, 1998, outstanding
commercial loans total $217.5 million, or 14.8 percent of the total loan
portfolio compared to $155.3 million, or 11.3 percent as of September 30,
1997. InterWest will continue to implement a strategy of changing the
composition of the loan portfolio with emphasis on commercial lending.
Commercial real estate mortgage loans increased $43.7 million from
September 30, 1997, representing a growth rate of 20.4 percent, and real
estate construction loans outstanding have increased by $45.4 million, or 33.2
percent, for the same period.
During the year ended September 30, 1998, InterWest originated $550
million of single-family residential loans (including single-family
construction loans) as compared to $399 million for the respective periods of
fiscal year 1997. The single-family residential real estate mortgage loan
portfolio has decreased due to mortgage banking activities and the increased
emphasis on commercial lending. During the year ended September 30, 1998,
InterWest securitized and sold $293 million of single-family residential real
estate mortgage loans on the secondary market. A continued low interest rate
environment should result in strong single-family mortgage loan originations
and mortgage banking for fiscal year 1999.
The principal lending activity of InterWest Bank is the origination of
single-family residential mortgage loans and, to a lesser extent, loans
secured by income property, consumer loans, commercial loans and agricultural
loans. Pacific Northwest Bank, Pioneer National Bank, First National Bank of
Port Orchard and Kittitas Valley Bank N.A. have loan portfolios which have a
greater percentage of commercial loans than InterWest Bank.
As of September 30, 1998, $627.2 million, or 42.5 percent, of InterWest's
loan portfolio consisted of loans secured by single-family residential
properties and $320.9 million, or 21.8 percent of total loans, consisted of
income property loans (multi-family residential and commercial real estate
loans). Real estate construction loans, which are primarily secured by
single-family residential properties, were $182.0 million or 12.3 percent of
total gross loans as of September 30, 1998. InterWest typically requires that
mortgage loans be secured by first liens on single-family residential
dwellings, land, developed lots or commercial property. The purpose of the
majority of real estate mortgage loans has been for the purchase or
construction of single-family residential dwellings or refinancing of these
properties, but some loans have been for acquisition or development of
residential lots or permanent loans secured by income properties.
The acquisitions of Central, Pacific, Pioneer, Puget and Kittitas
increased InterWest's access to commercial lending. These acquisitions, as
well as the development of commercial banking at InterWest Bank, are changing
the composition of the InterWest loan portfolio to that of a financial
institution that emphasizes both real estate and commercial lending. Growth in
commercial lending should shorten duration risk, produce higher net interest
margin, create better protection from interest rate volatility and ultimately
meet the needs of InterWest's customers.
Page 025
<PAGE>
InterWest Bancorp
The following table sets forth the composition of InterWest's loan
portfolio by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
AS OF SEPTEMBER 30, ------------------ ------------------- ------------------- ------------------ -----------------
DOLLARS IN THOUSANDS AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Real estate mortgage loans:(1)
Single-family residential $ 627,191 42.5% $ 701,840 51.2% $ 630,147 52.9% $ 570,377 54.2% $509,842 55.9%
Multi-family residential 62,948 4.3% 58,137 4.2% 55,256 4.6% 53,608 5.1% 39,741 4.4%
Commercial 257,906 17.5% 214,232 15.6% 191,348 16.1% 165,547 15.7% 138,727 15.2%
Real estate construction 182,020 12.3% 136,580 10.0% 114,698 9.6% 105,212 10.0% 89,759 9.9%
Consumer loans 81,386 5.5% 73,876 5.4% 63,240 5.3% 55,299 5.3% 43,889 4.8%
Commercial loans 217,546 14.8% 155,265 11.4% 122,275 10.3% 87,788 8.3% 76,346 8.4%
Agricultural loans 45,637 3.1% 30,491 2.2% 14,007 1.2% 14,878 1.4% 13,169 1.4%
- -----------------------------------------------------------------------------------------------------------------------------------
Total gross loans 1,474,634 1,370,421 1,190,971 1,052,709 911,473
LESS:
Loans held for sale (93,125) (10,230) (11,223) (9,581) (7,786)
Allowance for losses on loans (13,224) (11,104) (10,235) (7,841) (7,233)
Deferred loan fees
and discounts (9,235) (10,636) (10,465) (9,769) (8,676)
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans
receivable, net $1,359,050 $1,338,451 $1,159,048 $1,025,518 $887,778
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes construction loans converted to permanent loans.
The following table shows the contractual maturity of InterWest's gross loans at
September 30, 1998. Loans having no stated schedule of repayments and no stated
maturity are reported as due within one year. Loan balances do not include
deferred loan fees and discounts and allowance for losses on loans. The table
does not reflect any estimate of prepayments, which significantly shorten the
average life of all loans and will cause InterWest's actual repayment experience
to differ significantly from that indicated below.
<TABLE>
<CAPTION>
AFTER ONE
YEAR THROUGH AFTER
DOLLARS IN THOUSANDS WITHIN ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential $ 12,962 $ 46,636 $567,593 $ 627,191
Multi-family residential 2,855 1,052 59,041 62,948
Commercial 34,717 84,100 139,089 257,906
Real estate construction 50,278 35,433 96,309 182,020
Consumer loans 48,191 18,312 14,883 81,386
Commercial loans 104,474 57,212 55,860 217,546
Agricultural loans 34,896 7,046 3,695 45,637
- -------------------------------------------------------------------------------------------------
Total gross loans $288,373 $249,791 $936,470 $1,474,634
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
Page 026
<PAGE>
1998 Annual Report
The following table sets forth the dollar amount of all loans due one year or
more after September 30, 1998, that have fixed interest rates and have floating
or variable interest rates.
<TABLE>
<CAPTION>
FIXED FLOATING OR
DOLLARS IN THOUSANDS RATES VARIABLE RATES
- -------------------------------------------------------------------
<S> <C> <C>
Loans maturing in more than one year $500,331 $685,930
</TABLE>
SINGLE-FAMILY RESIDENTIAL MORTGAGE LOANS The primary lending activity of
InterWest has historically been the granting of mortgage loans to enable
borrowers to refinance and purchase existing dwellings or to construct new
single-family dwellings on properties located within its primary market area.
Management believes that focusing on single-family residential mortgage loans
has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. InterWest's single-family residential
loan portfolio also includes loans on two- to four-family dwellings and
manufactured homes.
InterWest presently originates both fixed-rate loans and adjustable-rate
mortgage loans ("ARMs") secured by single-family residential properties with
loan terms of up to 30 years. ARMs have interest rates that adjust based upon
changes in the predetermined index for a period matching the repricing period of
the loan. Borrower demand for ARMs versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the interest rates and loan
fees offered for fixed-rate mortgage loans and the rates and loan fees for ARMs.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE MORTGAGE LOANS InterWest
originates mortgage loans on commercial real estate and multi-family residences
with terms of up to 30 years in its primary market area. These loans are secured
by improved property such as multi-family properties, office buildings and small
commercial business properties, condominiums, churches, subdivision developments
and strip shopping centers.
Multi-family residential and commercial real estate mortgage loans are
generally larger and involve greater risks than residential mortgage loans
because payments on loans secured by income properties are dependent on the
successful operation or management of the properties. As a result, repayment
of such loans may be subject to conditions in the real estate market or the
economy to a greater extent than single-family residential real estate loans.
These loans may involve large loan balances to single borrowers or groups of
related borrowers.
REAL ESTATE CONSTRUCTION InterWest originates residential construction mortgage
loans to residential owner-occupants (custom construction loans) and to
contractors building residential properties for resale, as well as construction
loans for condominiums, multi-family residential properties and land development
on properties located within its primary market area. Construction loans to
owner-occupants generally are converted to single-family residential mortgage
loans.
Real estate construction loans may involve additional risks because loan
funds are collateralized by the project under construction which is of
uncertain value prior to the completion, delays may arise from labor problems,
material shortages may be experienced and other unpredictable contingencies
may occur. It is important to evaluate accurately the total loan funds
required to complete a project and related loan-to-value ratios. Because of
these factors, the analysis of prospective construction loan projects requires
an expertise that is different in significant respects from the expertise
required for residential real estate mortgage lending. Construction lending is
generally considered to involve a higher degree of collateral risk than
long-term financing of residential properties. InterWest's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value and marketability at completion of
construction or development and the estimated cost (including interest) of
construction. If the estimate of construction costs and the marketability of
the property upon completion of the project prove to be inaccurate, InterWest
may be required to advance additional funds to complete development of the
project.
Page 027
<PAGE>
InterWest Bancorp
InterWest's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, InterWest considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the
project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections
of the borrower. In addition, most of the construction loans granted by
InterWest are secured by property located in InterWest's market areas.
COMMERCIAL Commercial loans include a wide range of loan types to small and
medium-sized businesses. A significant portion of these loans are commercial
lines of credit with variable rates and maturities of less than one year. The
remaining commercial loans include equipment and operational loans with terms
generally not exceeding five years. These loans are primarily secured by capital
assets, accounts receivable, and inventory, although certain loans are
unsecured. Commercial lending has increased risks as a result of dependence on
income production for future repayment, and in certain circumstances, the lack
of tangible collateral. Commercial loans are underwritten based on the financial
strength and repayment ability of the borrower, as well as the value of any
collateral securing the loans. Commercial lending operations rely on a strong
credit culture that combines prudent credit policies and individual lender
accountability.
AGRICULTURAL Agricultural loans include seasonal production loans secured by
crops and equipment. These loans generally have variable rates tied to prime
that are renewed annually. Agricultural loans also include loans secured by
farmland. The majority of these loans have terms of less than five years and
have variable rates.
CONSUMER Consumer loans consist of automobile loans, home equity loans and loans
for other consumer purposes. Consumer lending may involve special risks,
including decreases in the value of collateral and transaction costs associated
with foreclosure and repossession.
LOANS HELD FOR SALE Loans held for sale total $93.1 million as of September 30,
1998, compared to $10.2 million as of September 30, 1997. Loans intended for
sale in the secondary market are carried at the lower of cost or estimated fair
value in aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. Loans that are held for sale are generally
fixed-rate mortgage loans and loans originated under a Small Business
Administration program. The loans are typically sold to FHLMC and other
financial institutions. In connection with most of these loan sales, InterWest
retains the right to service the loans (i.e., collection of principal and
interest payments), for which it generally receives a fee based on the
difference between the rate paid to the investor and that collected from the
borrower. InterWest capitalizes loan servicing rights either through the
purchase or origination of mortgage loans that are subsequently sold or
securitized with the servicing rights retained. Loan servicing rights are
included in intangible assets and are amortized as an offset to services fees in
proportion to and over the period of servicing income, not exceeding 15 years.
NONACCRUAL AND PROBLEM LOANS Loans are generally placed on nonaccrual when they
become past due over 90 days or when the collection of interest or principal is
considered unlikely. InterWest does not return a loan to accrual status until it
is brought current with respect to both principal and interest and future
principal payments are no longer in doubt. When a loan is placed on nonaccrual
status, any previously accrued and uncollected interest is reversed from
interest income. As of September 30, 1998 and 1997, InterWest had $8.2 million
and $5.1 million, respectively, of loans on nonaccrual status.
Page 028
<PAGE>
1998 Annual Report
InterWest performs a review of its loan portfolio for weaknesses in credit
quality on an ongoing basis to identify problem loans. This review results in
internal loan classifications based on risk characteristics and loan
performance. The overall objective of this review process is to identify trends
in the credit quality of the loan portfolio and to determine the level of loss
exposure to evaluate the need for an adjustment to the allowance for losses on
loans.
ALLOWANCE FOR LOSSES ON LOANS InterWest's allowance for losses on loans was
$13.2 million or 0.96 percent of loans receivable as of September 30, 1998,
compared to $11.1 million, or 0.82 percent of loans receivable as of September
30, 1997. Net loan charge-offs for the year ended September 30, 1998, were $0.9
million or 0.06 percent of the average balance of loans outstanding. Net loan
charge-offs were $0.6 million and $0.1 million during the years ended September
30, 1997 and 1996, respectively.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in
the loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, delinquency levels, actual
loan loss experience, current economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
appropriate level of the allowance for losses on loans is estimated based upon
factors and trends identified by management.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged off against the allowance
for losses on loans. The existence of some or all of the following criteria
will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or
intent to bring the loan current; there is no recourse to the borrower, or if
there is recourse, the borrower has insufficient assets to pay the debt; the
fair value of the loan collateral is significantly below the current loan
balance, and there is little or no near-term prospect for improvement. A
provision for losses on loans, which is a charge against operations, is added
to the allowance for losses on loans based on ongoing assessments of credit
risk in the loan portfolio.
While InterWest believes it has established its allowance for losses on
loans in accordance with generally accepted accounting principles, there can
be no assurance that in the future, regulators, when reviewing InterWest's
loan portfolio, will not request InterWest to increase its allowance for
losses on loans, thereby affecting InterWest's financial condition and results
of operations. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for losses on loans is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as
a result of the factors discussed above.
Page 029
<PAGE>
InterWest Bancorp
The following table sets forth an analysis of the InterWest's allowance
for losses on loans for the periods indicated.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance as of beginning of year $11,104 $10,235 $ 7,841 $7,233 $5,958
Provision for losses on loans 1,707 1,508 1,552 929 1,053
MERGER AND ACQUISITION ACTIVITY:
Conforming provision pursuant
to acquisition 1,100 -- 900 -- --
Allowance acquired 295 -- -- -- 393
Pooling accounting adjustment (76) -- -- -- --
CHARGE-OFFS:
Real estate mortgage loans:
Single-family residential 413 109 99 126 164
Multi-family residential 100 -- -- 142 --
Commercial 19 234 20 -- --
Real estate construction 134 -- -- -- --
Consumer loans 428 449 304 314 247
Commercial loans 194 246 60 138 54
Agricultural loans 2 2 -- -- 5
- ----------------------------------------------------------------------------------------------------------
Total charge-offs 1,290 1,040 483 720 470
RECOVERIES:
Real estate mortgage loans:
Single-family residential 61 39 6 20 84
Commercial 55 67 13 22 --
Consumer loans 176 162 118 152 77
Commercial loans 88 133 288 201 133
Agricultural loans 4 -- -- 4 5
- ----------------------------------------------------------------------------------------------------------
Total recoveries 384 401 425 399 299
- ----------------------------------------------------------------------------------------------------------
Net charge-offs (906) (639) (58) (321) (171)
- ----------------------------------------------------------------------------------------------------------
Allowance as of end of year $13,224 $11,104 $10,235 $7,841 $7,233
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Ratio of allowance to total loans
receivable at the end of the period 0.96% 0.82% 0.88% 0.76% 0.81%
Ratio of net charge-offs to average
loans outstanding during the period 0.06% 0.05% 0.01% 0.03% 0.02%
</TABLE>
Page 030
<PAGE>
1998 Annual Report
InterWest has historically maintained a positive variance from the minimum
estimated allowance for losses on loans based on the analyses conducted by
management and credit personnel. The allowance for losses on loans is allocated
to certain loan categories based on the relative risk characteristics and
charge-off histories of the loan portfolio. Management has reviewed the
allocations in the various loan categories and believes the allowance for losses
on loans was adequate at all times during the five-year period ended September
30, 1998. Although the allocation of the allowance for losses on loans is an
important credit management tool, the entire allowance for losses on loans is
available for the entire loan portfolio. The following table sets forth the
allocation of the allowance for losses on loans by loan category as of the dates
indicated.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
SEPTEMBER 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential $ 3,288 $ 2,092 $ 1,611 $1,455 $1,292
Multi-family residential 387 256 445 424 314
Commercial 1,491 742 1,685 1,365 1,157
Real estate construction 424 494 459 388 368
Consumer loans 996 1,012 1,047 904 703
Commercial loans 2,454 1,592 1,064 843 720
Agricultural loans 285 59 214 217 162
Unallocated 3,899 4,857 3,710 2,245 2,517
- ---------------------------------------------------------------------------------------------
Total allowance
for losses on loans $13,224 $11,104 $10,235 $7,841 $7,233
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
REAL ESTATE HELD FOR SALE AND FOR DEVELOPMENT Real estate held for sale
includes property acquired by InterWest through foreclosure. The properties
are carried at the lower of the estimated fair value or the principal balance
of the foreclosed loans. As of September 30, 1998, InterWest had foreclosed
properties totaling $7.6 million.
The real estate held for development portfolio of $4.4 million as of
September 30, 1998, consists primarily of one land development project.
NONPERFORMING ASSETS InterWest's non-performing assets as of September 30, 1998,
which consist of non-performing loans and real estate held for sale, totaled
$15.8 million or 0.64 percent of total assets. This is an increase from $12.4
million or 0.52 percent of total assets as of September 30, 1997. InterWest's
non-performing assets at September 30, 1996, totaled $9.9 million or 0.49
percent of assets. Real estate held for sale was $7.6 million as of September
30, 1998, an increase from $6.9 million as of September 30, 1997. Non-performing
loans increased to $8.2 million as of September 30, 1998, compared to $5.5
million as of September 30, 1997, and $3.8 million as of September 30, 1996.
Page 031
<PAGE>
InterWest Bancorp
The following table sets forth information with respect to InterWest's
non-performing assets and restructured loans as of the dates indicated.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF SEPTEMBER 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOANS ACCOUNTED FOR ON A NONACCRUAL BASIS:
Real estate mortgage loans:
Single-family residential $ 5,036 $ 3,181 $2,008 $ 985 $ 708
Multi-family residential -- 407 -- 900 --
Commercial 557 484 1,323 308 624
Real estate construction 634 234 -- -- 3
Consumer loans 174 417 208 132 144
Commercial loans 1,682 343 300 507 138
Agricultural loans 127 78 -- -- 123
- -----------------------------------------------------------------------------------------------------------------------
Total 8,210 5,144 3,839 2,832 1,740
ACCRUING LOANS WHICH ARE CONTRACTUALLY
PAST DUE 90 DAYS OR MORE:
Commercial real estate mortgage loans -- 321 -- -- --
Commercial loans -- -- -- -- 16
Agricultural loans -- -- -- -- 129
- -----------------------------------------------------------------------------------------------------------------------
Total -- 321 -- -- 145
Real estate owned acquired through foreclosure 7,553 6,945 6,053 4,178 5,930
- -----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $15,763 $12,410 $9,892 $7,010 $7,815
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Restructured loans $ 883 $ 1,403 $1,715 $1,958 $ --
Total loans delinquent 90 days or more to
loans receivable, net 0.60% 0.41% 0.33% 0.28% 0.20%
Total loans delinquent 90 days or more to total assets 0.34% 0.21% 0.19% 0.16% 0.12%
Total nonperforming assets to total assets 0.64% 0.52% 0.49% 0.41% 0.53%
</TABLE>
Interest income that would have been recorded for the year ended September 30,
1998, had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $521,000.
DEPOSITS InterWest offers various types of deposit accounts, including savings,
checking accounts, money market type accounts and a variety of certificate
accounts. Deposit accounts vary as to terms, with the principal differences
being the minimum balance required, the time period the funds must remain on
deposit, the interest rate, and the deposit or withdrawal option. InterWest has
rarely relied on brokered deposits, but has relied on generating deposits
through a marketing strategy that employs a sales staff responsible for
generating new customer relationships.
Non-interest-bearing deposits increased to $178.6 million as of September
30, 1998, from $150.4 million as of September 30, 1997.
Page 032
<PAGE>
1998 Annual Report
Interest-bearing transaction accounts (which includes interest-bearing
checking, money market and savings accounts) increased to $539.2 million as of
September 30, 1998, compared to $437.6 million as of September 30, 1997.
Interest-bearing transaction accounts represent 34.5 percent of total deposits
as of September 30, 1998, an increase from 29.8 percent as of September 30,
1997. Money market and interest-bearing checking account balances increased by
$82.9 million and $25.6 million, respectively, from September 30, 1997. This
represents growth rates of 45 percent and 19 percent for money market and
interest-bearing checking account balances from September 30, 1997,
respectively.
Certificates of deposit decreased to $847.0 million as of September 30,
1998, compared to $880.5 million as of September 30, 1997. Certificates of
deposit currently represent 54.1 percent of total deposits, a decrease from
60.0 percent as of September 30, 1997.
Management is pursuing initiatives to increase the percentage of
non-interest-bearing deposits and interest-bearing transaction deposits
relative to certificates of deposit. This activity should increase net
interest income, service fee revenue and customer growth and retention. As of
September 30, 1998, 46 percent of InterWest's deposits are transaction
accounts, an increase from 40 percent as of September 30, 1997.
The following table indicates the amount of the InterWest's certificates
of deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1998.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
MATURITY PERIOD CERTIFICATES OF DEPOSIT
- ----------------------------------------------------------------------------
<S> <C>
Three months or less $194,901
Three through six months 47,657
Six through twelve months 52,717
Over twelve months 74,298
- ----------------------------------------------------------------------------
Total $369,573
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
The following table sets forth the balances and changes in dollar amount of
deposits in the various types of accounts offered by InterWest as of the dates
indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 1997 1996
-------------------------------- -------------------------------- -------------------
PERCENT PERCENT PERCENT
OF INCREASE OF INCREASE OF
DOLLARS IN THOUSANDS AMOUNT TOTAL (DECREASE) AMOUNT TOTAL (DECREASE) AMOUNT TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits $ 178,625 11.4% $ 28,197 $ 150,428 10.2% $27,410 $ 123,018 8.9%
Interest-bearing checking
accounts 162,051 10.4% 25,649 136,402 9.3% 9,495 126,907 9.1%
Money market accounts 267,953 17.1% 82,924 185,029 12.6% 15,272 169,757 12.2%
Savings accounts 109,148 7.0% (6,987) 116,135 7.9% (4,424) 120,559 8.7%
Certificates 847,048 54.1% (33,418) 880,466 60.0% 31,305 849,161 61.1%
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,564,825 $ 96,365 $1,468,460 $79,058 $1,389,402
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER
BORROWINGS InterWest borrows through advances from the Federal Home Loan Bank
(FHLB) and securities sold under agreements to repurchase. These borrowing
sources totaled $678.4 million as of the end of fiscal year 1998, compared to
$753.6 million as of September 30, 1997, and $463.0 million as of September 30,
1996. The proceeds from these borrowings were used to fund growth in loans
receivable and securities. It is management's intention to decrease the
percentage of liabilities represented by borrowings and increase deposits. This
should increase net interest income.
Page 033
<PAGE>
InterWest Bancorp
FHLB provides credit for member financial institutions. As members, banks
are required to own capital stock in the FHLB, and are authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally securities that are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Advances are made to members pursuant to several different
programs. These programs are generally tailored to the institution's need
while still reflecting market terms and conditions. InterWest relies upon
advances from the FHLB to supplement its supply of lendable funds and to meet
liquidity guidelines. The rates on these advances vary from time to time in
response to general economic conditions.
InterWest uses the securities market as a vehicle for borrowing by
utilizing its securities available for sale and securities held to maturity as
collateral. These borrowings are collateralized by securities with a fair
value exceeding the face value of the borrowings. The following table sets
forth certain information regarding borrowings by InterWest during the periods
indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding as of any month end during the period:
FHLB advances $663,385 $494,948 $386,637
Securities sold under agreements to repurchase 214,917 258,993 119,945
Approximate average amount outstanding during the period:
FHLB advances 559,012 347,444 317,554
Securities sold under agreements to repurchase 157,898 183,246 56,285
Balance outstanding as of end of period:
FHLB advances 546,033 494,648 343,035
Securities sold under agreements to repurchase 128,613 258,993 119,945
Approximate weighted average rate paid during the period:
FHLB advances 5.61% 5.64% 5.53%
Securities sold under agreements to repurchase 5.81 5.66 5.67
Weighted average rate paid as of end of period:
FHLB advances 5.40 5.68 5.51
Securities sold under agreements to repurchase 5.72 5.66 5.45
</TABLE>
Capital
InterWest is committed to managing capital for maximum shareholder benefit and
maintaining strong protection for depositors and creditors at both the holding
company and subsidiary bank level. 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 of each institution. See Note
19 of the Consolidated Financial Statements for detail of regulatory capital
ratios for InterWest Bancorp.
On July 21, 1998, InterWest Bancorp announced a three-for-two common
stock split, which was paid on August 17, 1998, to shareholders of record on
August 3, 1998. Common stock issued and outstanding, average shares
outstanding and net income per share for all periods presented have been
retroactively adjusted to give effect to this transaction.
InterWest's total shareholders' equity was $171.7 million as of September
30, 1998, an increase of $10.9 million or 7 percent from $160.8 million as of
September 30, 1997.
Page 034
<PAGE>
1998 Annual Report
Book value per share increased to $10.97 as of September 30, 1998, from
$10.26 as of September 30, 1997. Shareholders' equity as a percentage of
total assets was 6.99 percent as of September 30, 1998, compared to 6.69
percent as of September 30, 1997.
During fiscal year 1998, InterWest Bancorp, Inc. declared cash dividends
totaling $0.52 per share, an increase from $0.39 per share for fiscal year
1997. The amount of dividends reported in the consolidated statement of
shareholders' equity varies from these amounts due to the application of the
pooling-of-interests method of accounting to the financial statements for the
mergers with Central, Pacific, Pioneer and Puget.
Liquidity 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 commercial and consumer lending. InterWest also uses
wholesale funds through advances from the Federal Home Loan Bank of Seattle
(FHLB) and the sale of securities under agreements to repurchase to fund asset
growth. Other sources of funds for liquidity include loan repayments, loan
sales, securities sales and mortgage-backed and related security repayments.
Repayments on loans and mortgage-backed and related securities and deposit
inflows and outflows are affected by changes in interest rates.
InterWest has additional capacity to borrow funds from the FHLB through
a pre-approved 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 September 30, 1998, the additional
amount available under credit lines from the FHLB was $315.9 million.
InterWest uses the securities market as a vehicle for borrowing by utilizing
its securities available for sale and securities held to maturity as
collateral. 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. As of September 30, 1998, InterWest had $277 million of
available credit from broker/dealers to sell securities under agreements to
repurchase.
The analysis of liquidity also includes a review of InterWest's
consolidated statement of cash flows for fiscal year 1998. The consolidated
statement of cash flows details InterWest's operating, investing and
financing activities during the fiscal year. The most significant item under
operating activities was 1998 net income of $22.6 million. Investing
activities included proceeds from the sale of securities available for sale
of $374.6 million, security maturities totaling $437.8 million and purchases
of securities available for sale of $903.2 million. Investing activities also
included $439.0 million in loan originations, net of principal repayments and
$362.7 million of proceeds from the sale of loans. During 1998, financing
activities included $80.8 million in borrowing repayments, net of borrowing
proceeds, a $101.1 million increase in deposits, a $45.7 million decrease in
certificates of deposit and a total of $6.4 million paid in cash dividends to
shareholders.
Supervision and Regulation
InterWest Bancorp is a registered bank holding company under the Bank Holding
Company Act of 1956 (BHCA) and is subject to the supervision of, and regulation
by, the Board of Governors of the Federal Reserve System (FRB). Under the BHCA,
InterWest Bancorp files with the FRB annual reports of operations and such
additional information as the FRB may require. Under the BHCA, a bank holding
company may engage in banking, managing or controlling banks, furnishing or
performing services for banks it controls, and conducting activities that the
FRB has determined to be closely related to banking.
Page 035
<PAGE>
InterWest Bancorp
The subsidiary banks are members of the Federal Deposit Insurance
Corporation (FDIC), and as such, are subject to examination thereby. Pioneer
National Bank and Kittitas Valley Bank N.A. are national banking associations
that are also subject to regulation and supervision by the Office of the
Comptroller of Currency. InterWest Bank is a state-chartered savings bank and
Pacific Northwest Bank is a state-chartered commercial bank, both of which
are also subject to regulation and supervision by the Washington Department
of Financial Institutions Division of Banks. In practice, the primary
regulator makes regular examinations of each subsidiary bank subject to its
regulatory review or participates in joint examinations with other
regulators. Areas subject to regulation by federal or state authorities
include the allowance for losses on loans, investments, loans, mergers,
issuance of securities, payment of dividends, establishment of branches and
other aspects of operations.
The enforcement powers available to banking regulators are substantial
and include, among other things, the ability to assess civil monetary
penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, enforcement actions must be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions, or inactions, may provide the basis for enforcement action,
including misleading or untimely reports filed with regulatory authorities.
Applicable law also requires public disclosure of final enforcement actions.
Year 2000
The century date change for the year 2000 is a serious issue that may impact
virtually every organization, including InterWest. Many software programs are
not able to recognize the year 2000, since most programs and systems were
designed to store calendar years in the 1900s by assuming the "19" and storing
only the last two digits of the year. The problem is especially important to
financial institutions since many transactions, such as interest accruals and
payments, are date sensitive, and because InterWest interacts with numerous
customers, vendors and third party service providers who must also address the
year 2000 issue. The problem is not limited to computer systems. Year 2000
issues will potentially affect every system that has an embedded microchip, such
as automated teller machines, elevators and vaults.
INTERWEST'S STATE OF READINESS InterWest is committed to addressing these
Year 2000 issues in a prompt and responsible manner, and has dedicated the
resources to do so. Management has completed an assessment of its automated
systems and has implemented a program consistent with applicable regulatory
guidelines, to complete all steps necessary to resolve identified issues.
InterWest's compliance program has several phases, including project
management, assessment, testing, remediation and implementation.
PROJECT MANAGEMENT Each subsidiary bank has developed a process to address
Year 2000 compliance matters. This process includes a project manager, senior
management and departmental representatives. There are periodic meetings with
senior management of each subsidiary bank to discuss the process, assign
tasks, determine priorities and monitor progress. Periodic reports are
provided to each subsidiary banks' Board of Directors on the status of the
Year 2000 project. Additionally, the subsidiary banks regularly report to
InterWest Bancorp management and to the InterWest Bancorp Board of Directors.
ASSESSMENT InterWest's computer equipment and mission-critical software
programs have been identified. This phase is essentially complete.
InterWest's primary software vendors were also assessed during this phase,
and vendors who provide mission-critical software have been contacted.
InterWest will continue to monitor and work with these vendors. Additionally,
InterWest has identified, and began working with, significant borrowers to
assess the extent to which they may be affected by Year 2000 issues.
Page 036
<PAGE>
1998 Annual Report
TESTING Updating and testing of InterWest's automated systems is currently
under way and InterWest anticipates that initial testing of mission-critical
systems will be completed by December 31, 1998. Upon completion, InterWest
will be able to identify any internal computer systems that remain
noncompliant.
REMEDIATION AND IMPLEMENTATION This phase involves obtaining and
implementing renovated software applications provided by InterWest's vendors.
As renovated applications or new applications are received and implemented,
InterWest will test them for Year 2000 compliance. This phase also involves
upgrading and replacing systems where appropriate, and will continue
throughout 1998 and 1999.
ESTIMATED COSTS TO ADDRESS INTERWEST'S YEAR 2000 ISSUES The total financial
effect that year 2000 issues will have on InterWest cannot be predicted with
any certainty at this time. In fact, in spite of all efforts being made to
rectify these problems, the success of the InterWest's efforts will not be
known until the year 2000 actually arrives. However, based on its assessment
to date, InterWest does not believe that expenses or required capital
expenditures related to meeting Year 2000 challenges will have a material
effect on the operations or financial condition of InterWest. Year 2000
challenges facing vendors of mission-critical software and systems,
third-party service providers, and customers could have a material effect on
the operations or financial condition of InterWest, to the extent such
parties are materially affected by such challenges.
RISKS RELATED TO YEAR 2000 ISSUES The year 2000 poses certain risks to
InterWest and its operations. Some of these risks are present because
InterWest purchases technology and information systems applications from
other parties who face Year 2000 challenges and relies on third-party service
providers for processing data. In addition, other risks are inherent in the
business of banking or are risks faced by many companies. Although it is
impossible to identify all possible risks that InterWest may face moving into
the millennium, management has identified the following significant potential
risks:
Commercial banks may experience a contraction in their deposit base, if
a significant amount of deposited funds are withdrawn by customers prior to
the year 2000, and interest rates may increase as the millennium approaches.
This potential deposit contraction could make it necessary for InterWest to
change its sources of funding and could affect future earnings. InterWest has
established a contingency plan for addressing this situation, should it
arise, in its asset and liability management policies. The plan includes
maintaining the ability to borrow funds from correspondent banks and the
Federal Home Loan Bank of Seattle. Significant demand for funds from other
banks could reduce the amount of funds available for InterWest to borrow. If
insufficient funds are available from these sources, InterWest may also sell
investment securities or other liquid assets to meet liquidity needs.
InterWest originates loans to businesses in its marketing area. If these
businesses are adversely affected by year 2000 problems, their ability to
repay loans could be impaired. This increased credit risk could adversely
affect InterWest's financial performance. During the assessment phase of
InterWest's Year 2000 program, InterWest identified substantial borrowers,
and is working with such borrowers to ascertain their levels of exposure to
Year 2000 problems. To the extent that InterWest is unable to assure itself
of the Year 2000 readiness of such borrowers, it intends to apply additional
risk assessment criteria to the indebtedness of such borrowers and make any
necessary related adjustments to InterWest's provision for loan losses.
InterWest's operations, like those of many other companies, can be
adversely affected by the Year 2000-triggered failures of other companies
upon whom InterWest depends for the functioning of its automated systems.
Accordingly, InterWest's operations could be materially affected if the
operations of mission-critical third-party service providers are adversely
affected. As described above, InterWest has identified its mission-critical
vendors and is monitoring their Year 2000 compliance programs.
Page 037
<PAGE>
InterWest Bancorp
INTERWEST'S CONTINGENCY PLANS InterWest has initially developed contingency
plans related to Year 2000 issues. As InterWest continues the testing phase,
and based on future ongoing assessment of the readiness of vendors, service
providers and substantial borrowers, InterWest will modify contingency plans
as necessary or develop additional contingency plans. The review of
contingency plans is an ongoing process subject to internal assessments,
third party and regulatory review. Additionally, specific timeframes have
been established for the monitoring and assessment of contingency planning as
well as "trigger" dates for implementing contingency plans. Certain
circumstances, as described above in "Risks," may occur for which there are
no completely satisfactory contingency plans.
Market Risk
InterWest's results of operations are largely dependent upon its ability to
manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on InterWest's
financial condition and results of operations. InterWest does not currently use
derivatives to manage market and interest rate risks.
InterWest is sensitive to the potential change in interest rates and the
resulting impact on net interest income. It has been an objective of
management to reduce this sensitivity through the use of adjustable rate
loans, which enables InterWest to better match the duration of its deposit
base with these types of assets.
In addition to adjustable rate loans, InterWest uses a number of
additional strategies to minimize the impact on net income during significant
changes in interest rates. The strategies utilized by InterWest to achieve
this goal include sales of fixed-rate mortgage loans, growth in
non-interest-bearing deposits, purchases of adjustable rate and callable
agency securities, and short-term commercial lending.
The table on the following page sets forth the balances of the
InterWest's financial instruments at the expected maturity dates, as well as
the fair value of those financial instruments as of September 30, 1998. The
expected maturities take into consideration historical and estimated
principal prepayments for loans and mortgage-backed securities. Principal
prepayments are the amounts of principal reduction, over and above normal
amortization.
The expected maturities for financial liabilities with no stated
maturity reflect assumptions based on historical and estimated future
roll-off rates. The roll-off rates for non-interest-bearing deposits,
interest-bearing checking accounts, money market accounts and savings
accounts are 14 percent, 20 percent, 33 percent and 20 percent, respectively.
The weighted average interest rates for financial instruments presented are
actual as of September 30, 1998.
The estimated fair value amounts have been determined by InterWest using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data in the
development of the estimates of fair value amounts. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
InterWest could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The carrying value of cash and cash
equivalents, federal funds sold and accrued interest receivable is a
reasonable estimate of the fair value for such financial assets. The fair
values of securities available for sale, securities held to maturity and
loans held for sale are based on quoted market rates and dealer quotes. The
estimated fair value of loans receivable is based on discounted cash flows,
using estimated interest rates currently offered for loans of similar
characteristics adjusted for prepayment estimates. FHLB stock does not have a
market and the fair value is unknown. As such, the carrying value is a
reasonable estimate of the fair value. The fair value of deposits with no
stated maturity, such as checking accounts, money market accounts and savings
accounts, is equal to the amount payable on demand as of September 30, 1998.
The fair value of certificates of deposit is based on the discounted value of
contractual cash flows using a discount rate based on the current average
rate for deposits of like maturities. The fair value of FHLB advances and
securities sold under agreements to repurchase is estimated based on the
present value of future cash flows using a discount rate equal to the rate
offered on similar borrowings with similar maturities as of September 30,
1998. The fair value estimates presented are based on information available
as of September 30, 1998.
Page 038
<PAGE>
1998 Annual Report
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
EXPECTED MATURITY DATE, ESTIMATED
YEAR ENDED SEPTEMBER 30, 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET RISK
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents
Non-interest-bearing $ 74,018 $ -- $ -- $ -- $ -- $ -- $ 74,018 $ 74,018
Interest-bearing
deposits in banks 107,404 -- -- -- -- -- 107,404 107,404
Weighted average interest rate 5.63% --% --% --% --% --% 5.63%
Federal funds sold 19,863 -- -- -- -- -- 19,863 19,863
Weighted average interest rate 5.66 -- -- -- -- -- 5.66
Securities available for sale
Fixed rate 12,710 31,835 12,825 41,019 138,544 161,853 398,786 398,786
Weighted average interest rate 6.12 6.19 6.21 6.15 6.32 6.50 6.35
Variable rate 13,211 15,023 13,869 13,869 13,647 105,941 175,560 175,560
Weighted average interest rate 6.18 6.03 6.03 6.03 6.01 5.57 5.76
Securities held to maturity
Fixed rate 1,812 2,713 2,515 2,898 2,325 49,125 61,388 61,128
Weighted average interest rate 5.82 5.63 5.64 5.57 5.92 6.14 6.05
Variable rate 2,823 3,337 3,080 3,080 3,080 10,474 25,874 26,238
Weighted average interest rate 6.69 6.50 6.50 6.50 6.50 6.66 6.58
Loans receivable, net
Fixed rate 88,496 49,216 38,602 29,075 36,683 250,311 492,383 493,140
Weighted average interest rate 8.97 8.89 8.43 8.39 7.87 8.10 8.36
Variable rate 303,243 61,231 26,442 19,879 21,032 434,840 866,667 870,060
Weighted average interest rate 9.76 9.53 9.55 9.43 9.41 8.66 9.17
Loans held for sale 93,125 -- -- -- -- -- 93,125 95,626
Weighted average interest rate 7.22 -- -- -- -- -- 7.22
Accrued interest receivable 14,991 -- -- -- -- -- 14,991 14,991
Federal Home Loan Bank
(FHLB) stock -- -- -- -- -- 37,496 37,496 37,496
Weighted average interest rate -- -- -- -- -- 7.94 7.94
</TABLE>
Page 039
<PAGE>
InterWest Bancorp
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
EXPECTED MATURITY DATE, ESTIMATED
YEAR ENDED SEPTEMBER 30, 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET RISK
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL LIABILITIES
Non-interest-bearing deposits $ 25,008 $ 21,506 $ 18,496 $ 15,906 $ 13,679 $ 84,030 $178,625 $178,625
Interest-bearing
checking accounts 32,410 25,928 20,743 16,594 13,275 53,101 162,051 162,051
Weighted average interest rate 1.55% 1.55% 1.55% 1.55% 1.55% 1.55% 1.55%
Money market accounts 88,424 59,244 39,694 26,595 17,819 36,177 267,953 267,953
Weighted average interest rate 3.83 3.83 3.83 3.83 3.83 3.83 3.83
Savings accounts 21,830 17,464 13,971 11,177 8,941 35,765 109,148 109,148
Weighted average interest rate 2.08 2.08 2.08 2.08 2.08 2.08 2.08
Certificates of deposit
Fixed rate 603,203 161,132 26,104 8,086 4,628 908 804,061 808,039
Weighted average interest rate 5.54 6.00 5.51 6.03 5.38 6.40 5.48
Variable rate 31,280 11,707 -- -- -- -- 42,987 43,015
Weighted average interest rate 4.48 4.54 -- -- -- -- 4.49
FHLB advances and
other borrowings
Fixed rate 25,506 7,336 25,005 161,205 92,005 125,075 436,132 438,166
Weighted average
interest rate 5.58 5.05 5.31 5.47 5.41 5.36 5.42
Variable rate 29,038 1,312 36,312 983 50,000 -- 117,645 118,323
Weighted average
interest rate 5.44 7.31 5.64 7.31 5.19 -- 5.43
Securities sold under
agreements to repurchase 5,613 -- -- -- 123,000 -- 128,613 130,844
Weighted average interest rate 4.35 -- -- -- 5.78 -- 5.71
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
While the table presented above helps provide some information about InterWest's
interest sensitivity, it does not predict the trends of future earnings. For
this reason, InterWest uses financial modeling to forecast earnings under
different interest rate projections. While this modeling is helpful in managing
interest rate risk, it does require significant assumptions for the projection
of loan prepayment rates, loan origination volumes and liability funding sources
that may prove to be inaccurate.
FORWARD-LOOKING STATEMENTS In our annual report, we have included certain
"forward-looking statements" concerning the future operations of InterWest. It
is management's desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. This statement is for the
express purpose of availing InterWest of the protections of such safe harbor
with respect to all forward-looking statements contained in this registration
statement. We have used forward-looking statements to describe future plans and
strategies, including our expectations of InterWest's future financial results.
Management's ability to predict results or the effect of future plans and
strategy is inherently uncertain. Factors that could affect results include
interest rate trends, the general economic climate in Washington state and the
country as a whole, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements.
Page 040
<PAGE>
1998 Annual Report
Report of Management to Shareholders,
InterWest Bancorp, Inc.
Management of InterWest Bancorp, Inc. is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements included in this annual report have been
prepared in accordance with generally accepted accounting principles and, as
such, include judgments and estimates of management. InterWest Bancorp, Inc.,
also prepared the other information included in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management is responsible for establishing and maintaining effective
internal control over financial reporting. The internal control system is
supported by written policies and procedures and by audits performed by an
internal audit staff that reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee, and
corrective actions are taken to address identified control deficiencies and
other opportunities for improving the system. The Audit Committee, composed
solely of outside directors, provides oversight to the financial reporting
process. There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and circumvention
or overriding of controls. Accordingly, even an effective internal control
system can provide only reasonable assurance with respect to financial
statement preparation. The concept of reasonable assurance is based on the
recognition that the costs of such a system should not exceed the benefits to
be received. Management believes the system provides an appropriate
cost/benefit balance.
Management assesses InterWest Bancorp, Inc.'s internal control over
financial reporting. Based on these assessments, management believes that
InterWest Bancorp, Inc. maintains an effective internal control system over
financial reporting.
STEPHEN M. WALDEN, H. GLENN MOUW,
PRESIDENT AND CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
InterWest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of InterWest Bancorp, Inc., and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the
period ended September 30, 1998. These consolidated financial statements are
the responsibility of InterWest's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of InterWest Bancorp, Inc., and subsidiaries at September 30, 1998 and 1997,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1998, in conformity
with generally accepted accounting principles.
As described in Note 2 to the consolidated financial statements,
InterWest Bancorp, Inc. adopted certain new accounting standards in fiscal
year 1998 as required by the Financial Accounting Standards Board.
SEATTLE, WASHINGTON
OCTOBER 30, 1998 /s/ Ernst & Young LLP
Page 041
<PAGE>
InterWest Bancorp
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF SEPTEMBER 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents
Non-interest-bearing $ 74,018 $ 68,953
Interest-bearing deposits in banks 107,404 166,935
Federal funds sold 19,863 12,225
Securities available for sale, at fair value 574,346 563,167
Securities held to maturity (fair value: 1998-$87,366 and 1997-$129,470) 87,262 132,295
Loans receivable, net 1,359,050 1,338,451
Loans held for sale (fair value: 1998-$95,626 and 1997-$10,451) 93,125 10,230
Interest receivable 14,991 14,551
Real estate held for sale and for development 11,996 12,414
Federal Home Loan Bank (FHLB) stock, at cost 37,496 27,211
Premises and equipment, net 50,314 47,381
Intangible assets 14,026 4,291
Other assets 3,957 4,824
- ---------------------------------------------------------------------------------------------------------
Total assets $ 2,447,848 $ 2,402,928
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
- ---------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits $ 178,625 $ 150,428
Interest-bearing deposits 1,386,200 1,318,032
- ---------------------------------------------------------------------------------------------------------
Total deposits 1,564,825 1,468,460
FHLB advances 546,033 494,648
Securities sold under agreements to repurchase 128,613 258,993
Other liabilities 28,981 17,730
Other borrowings 7,744 2,327
- ---------------------------------------------------------------------------------------------------------
Total liabilities 2,276,196 2,242,158
SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding: 1998--15,651,345 shares and 1997--15,664,812 shares -- --
Paid-in capital 36,512 36,110
Retained earnings 139,781 126,064
Less cost of common stock in treasury: 1997--27,750 shares 0 (289)
Debt related to employee stock ownership plan (ESOP) (3,935) --
Net unrealized loss on securities available for sale, net of tax (706) (1,115)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 171,652 160,770
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,447,848 $ 2,402,928
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 042
<PAGE>
1998 Annual Report
Consolidated Statements of Income
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED SEPTEMBER 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
INTEREST INCOME
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans receivable and loans held for sale $ 127,472 $ 115,053 $ 101,292
Securities available for sale 43,996 35,201 23,452
Securities held to maturity 5,595 12,362 15,427
Other 3,216 2,590 3,656
- -------------------------------------------------------------------------------------------------
180,279 165,206 143,827
INTEREST EXPENSE
- -------------------------------------------------------------------------------------------------
Deposits 60,841 61,007 56,083
FHLB advances and other borrowings 31,468 19,708 17,851
Securities sold under agreements to repurchase 9,174 10,366 3,193
- -------------------------------------------------------------------------------------------------
101,483 91,081 77,127
Net interest income before provision for losses on loans 78,796 74,125 66,700
Provision for losses on loans 2,807 1,508 2,452
- -------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 75,989 72,617 64,248
NON-INTEREST INCOME
- -------------------------------------------------------------------------------------------------
Gain on sale of loans 10,421 4,209 1,989
Service fees 10,987 9,452 8,675
Investment product fees and insurance commissions 2,130 2,172 2,302
Gain on sale of securities available for sale 813 587 584
Gain on sale of real estate held for sale and for development 289 346 806
Other 1,833 1,879 1,388
- -------------------------------------------------------------------------------------------------
26,473 18,645 15,744
NON-INTEREST EXPENSE
- -------------------------------------------------------------------------------------------------
Compensation and employee benefits 32,636 28,112 25,572
General and administrative 13,568 13,707 11,046
Occupancy 8,893 7,665 6,650
Data processing 3,766 3,535 2,635
FDIC premium assessment 657 428 1,998
Loss (benefit) from real estate write-downs and operations 1,957 585 (813)
SAIF assessment -- -- 5,523
Merger-related charges 5,495 -- 3,105
- -------------------------------------------------------------------------------------------------
66,972 54,032 55,716
- -------------------------------------------------------------------------------------------------
Income before income taxes 35,490 37,230 24,276
Income tax expense 12,848 12,681 7,785
- -------------------------------------------------------------------------------------------------
Net income $ 22,642 $ 24,549 $ 16,491
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Basic net income per share $ 1.45 $ 1.58 $ 1.08
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.40 $ 1.54 $ 1.05
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 043
<PAGE>
InterWest Bancorp
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN
(LOSS) ON
LESS COST OF SECURITIES
COMMON STOCK, NO PAR VALUE COMMON DEBT AVAILABLE
DOLLARS IN THOUSANDS, --------------------------- PAID-IN RETAINED STOCK IN RELATED FOR SALE,
EXCEPT SHARE DATA SHARES AMOUNT CAPITAL EARNINGS TREASURY TO ESOP NET OF TAX TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1995 15,264,444 -- 33,849 95,160 (289) (712) 874 128,882
Net income 16,491 16,491
Dividends, $0.29 per share (4,439) (4,439)
Issuance of common stock:
Stock option plans 88,328 -- 503 503
Stock purchase plans 9,130 -- 81 81
Unrealized loss on securities
available for sale (3,798) (3,798)
ESOP loan repayment 48,225 -- -- 400 400
Pooling accounting
adjustment (473) (473)
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1996 15,410,127 -- 34,433 106,739 (289) (312) (2,924) 137,647
Net income 24,549 24,549
Dividends, $0.33 per share (5,224) (5,224)
Issuance of common stock:
Stock option plans 236,013 -- 2,053 2,053
Stock purchase plans 18,788 -- 194 194
Unrealized gain on securities
available for sale 1,809 1,809
Purchase and retirement
of treasury stock (35,780) -- (570) (570)
ESOP loan repayment 35,664 -- -- 312 312
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 15,664,812 -- 36,110 126,064 (289) -- (1,115) 160,770
Net income 22,642 22,642
Dividends, $0.50 per share (7,676) (7,676)
Issuance of common stock:
Stock option plans 132,993 -- 706 706
Stock purchase plans 1,404 -- 19 19
Unrealized gain on securities
available for sale 409 409
Purchase and retirement
of treasury stock (809) -- (323) 289 (34)
Debt related to ESOP (147,055) -- -- (3,935) (3,935)
Pooling accounting
adjustment (1,249) (1,249)
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 15,651,345 $-- $36,512 $139,781 $ -- $(3,935) $ (706) $171,652
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
Page 044
<PAGE>
1998 Annual Report
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 22,642 $ 24,549 $ 16,491
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,937 3,781 3,007
Provision for losses on loans 2,807 1,508 2,452
Provision (benefit) for losses on real estate held
for sale and for development 1,595 196 (1,000)
Accretion of premiums and discounts, net 3,465 1,249 2,187
Gain on sale of loans (10,421) (4,209) (1,989)
Gain on sale of securities available for sale (813) (587) (584)
Gain on sale of real estate held for sale and for development (289) (346) (806)
Loan fees deferred, net of amortization 2,002 1,192 1,464
FHLB stock dividends (2,526) (1,551) (1,536)
Pooling accounting adjustment (1,114) -- (473)
Cash provided by (used in) changes in operating assets and liabilities:
Accrued interest receivable (440) (231) (3,285)
Other assets 867 (996) 1,679
Other liabilities 10,841 (6,054) 12,501
- ------------------------------------------------------------------------------------------------------------
Balance, net cash provided by operating activities $ 33,553 $ 18,501 $ 30,108
INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------
Proceeds from sale of securities available for sale 374,572 359,641 173,847
Purchases of securities available for sale (903,174) (634,115) (300,250)
Proceeds from maturing securities available for sale 413,334 113,433 26,074
Proceeds from maturing securities held to maturity 24,511 232,471 39,016
Purchases of securities held to maturity (20) (118,673) (173,013)
Principal repayments on securities available for sale 117,664 61,567 64,148
Principal repayments on securities held to maturity 11,210 7,259 21,217
Proceeds from sale of loans 362,724 87,807 83,858
Net increase in loans receivable (439,047) (312,024) (222,913)
Proceeds from sale of real estate held for sale
and for development 4,603 4,064 2,492
Purchases of premises and equipment (5,771) (12,797) (8,662)
Purchases of FHLB stock (7,102) (9,331) (5,825)
Redemption of FHLB stock -- 6,400 2,500
Cash paid for acquisition, net of cash received (8,899) -- --
Improvements capitalized to real estate held for sale
and for development (1,395) (1,894) (2,749)
Net decrease (increase) in federal funds sold (7,638) (10,425) 6,405
Federal funds sold received in acquisition 7,487 -- --
Intangible assets acquired through acquisitions -- -- (1,530)
- ------------------------------------------------------------------------------------------------------------
Balance, net cash used by investing activities $ (56,941) $(226,617) $(295,385)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements CONTINUED ON FOLLOWING PAGE
Page 045
<PAGE>
InterWest Bancorp
Consolidated Statements of Cash Flows, continued
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net increase in deposits 101,104 47,753 51,018
Net increase (decrease) in certificates of deposit (45,701) 31,305 77,438
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 1,655,130 1,459,216 654,071
Repayment of FHLB advances, securities sold under
agreements to repurchase, and other borrowings (1,735,966) (1,169,629) (508,910)
Dividends paid (6,441) (4,966) (3,986)
Issuance of common stock from exercise of stock options 830 2,246 584
Purchase and retirement of treasury stock (34) (570) ---
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (31,078) 365,355 270,215
Net increase (decrease) in cash and cash equivalents (54,466) 157,239 4,938
Cash and cash equivalents:
Beginning of year 235,888 78,649 73,711
- -----------------------------------------------------------------------------------------------------------
End of year $ 181,422 $ 235,888 $ 78,649
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -----------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 104,537 $ 89,762 $ 76,050
Income taxes 10,976 9,829 9,810
Noncash investing and financing activities:
Loans receivable transferred to real estate held for sale, net 4,060 2,274 1,695
Premises and equipment transferred to real estate held for sale -- 1,179 --
Loans receivable securitized as securities available for sale -- 43,810 --
Transfer of securities from held to maturity to available for sale 9,239 -- 210,640
Retirement of treasury stock 289 -- --
ESOP loan repayment -- 312 400
Debt related to ESOP 3,935 -- --
</TABLE>
See Notes to Consolidated Financial Statements
Page 046
<PAGE>
1998 Annual Report
Notes to Consolidated Financial Statements
NOTE 1
Summary of Significant Accounting Policies
BASIS OF PRESENTATION The consolidated financial statements include the accounts
of InterWest Bancorp, Inc. (InterWest Bancorp), and its wholly owned
subsidiaries (collectively, InterWest). As of September 30, 1998, InterWest
Bancorp's wholly owned subsidiaries were InterWest Bank, Pacific Northwest Bank,
Pioneer National Bank, First National Bank of Port Orchard and Kittitas Valley
Bank N.A. All material intercompany transactions and balances have been
eliminated.
On August 31, 1996, InterWest Bancorp acquired Central Bancorporation
(Central) of Wenatchee, Washington, whose subsidiary, Central Washington Bank,
was merged into InterWest Bank effective October 14, 1996. On January 15,
1998, InterWest Bancorp acquired Puget Sound Bancorp (Puget) of Port Orchard,
Washington, whose subsidiary bank was First National Bank of Port Orchard. On
June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank (Pacific) of
Seattle, Washington. On June 16, 1998, InterWest Bancorp acquired Pioneer
Bancorp (Pioneer) of Yakima, Washington, whose subsidiary bank was Pioneer
National Bank. These transactions have been accounted for using the
pooling-of-interests method. Accordingly, InterWest's consolidated financial
statements have been restated to include the accounts and operations of
Central, Puget, Pacific and Pioneer as if the companies were combined for all
periods presented.
On August 31, 1998, InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary, Kittitas
Valley Bank N.A. of Ellensburg, Washington. This acquisition has been
accounted for using the purchase method.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements. Changes
in these estimates and assumptions are considered reasonably possible and may
have a material impact on the financial statements and thus actual results
could differ from the amounts reported and disclosed herein.
NATURE OF BUSINESS InterWest Bancorp is a multibank holding company incorporated
in Washington state. Through its subsidiaries, a wide range of financial
services are offered to individuals and businesses throughout Western and
Central Washington state. Financial services of InterWest include the banking
activities of accepting deposits from individuals and businesses and originating
residential loans, consumer loans and certain types of commercial real estate
loans. The acquisitions of Central, Puget, Pacific, Pioneer and Kittitas
provided InterWest with access to commercial banking.
Investment products are available through InterWest Financial Services
Inc., and insurance products are available through InterWest Insurance Agency
Inc., subsidiaries of InterWest Bank.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, InterWest considers all deposits and securities with an original term to
maturity of three months or less to be cash equivalents.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Those securities
that InterWest has the positive intent and ability to hold to maturity are
classified as held to maturity and are carried at amortized cost. Securities are
adjusted to the lower of cost or fair value only when an other than temporary
impairment in value occurs.
Those securities that are not classified as held to maturity are
classified as available for sale, and are carried at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. The basis of securities subsequently sold
is determined by the specific identification method.
Page 047
<PAGE>
InterWest Bancorp
The carrying value of securities held to maturity and securities
available for sale is adjusted for unamortized discounts and premiums.
Discounts are accreted and premiums are amortized using the effective yield
method to maturity of the securities. Such accretion and amortization is
included as interest income on securities.
LOANS RECEIVABLE Loans receivable are stated at the principal amount
outstanding, net of deferred loan fees, discounts and the allowance for losses
on loans. InterWest typically requires that mortgage loans be secured by first
liens on single-family dwellings, land, developed lots or commercial property.
Commercial loans can also be secured by capital assets, accounts receivable and
inventory, although certain loans are unsecured. Agricultural loans are
generally secured by farmland, crops and/or equipment.
LOANS HELD FOR SALE Loans intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in aggregate. Net unrealized losses
are recognized in a valuation allowance by charges to income.
LOAN FEE INCOME, INTEREST INCOME ON LOANS RECEIVABLE AND UNEARNED INTEREST Loan
origination fees and direct costs related to loan origination activities are
deferred and amortized into interest income over contractual or actual loan
lives as an adjustment to the loan yield. Deferred fees and costs related to
loans sold are recognized into income at the time the loans are sold.
Interest is accrued on loans receivable until the loan is 90 days
delinquent or until management doubts the collectibility of the loan or the
unpaid interest, at which time InterWest establishes a reserve for any accrued
interest. If management determines the ultimate collectibility of principal is
in doubt, cash receipts on nonaccrual loans are applied to reduce the
principal balance.
ALLOWANCE FOR LOSSES ON LOANS The allowance for losses on loans is maintained at
a level sufficient to provide for estimated losses based on evaluating known and
inherent risks in the loan portfolio and upon management's continuing analysis
of the factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual loan
loss experience, current economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
appropriate reserve level is estimated based upon factors and trends identified
by management at the time financial statements are prepared.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged off against the allowance
for losses on loans. The existence of some or all of the following criteria
will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or
intent to bring the loan current; InterWest has no recourse to the borrower,
or if it does, the borrower has insufficient assets to pay the debt; the fair
value of the loan collateral is significantly below the current loan balance,
and there is little or no near-term prospect for improvement.
All loans are periodically evaluated for impairment, except large groups
of smaller-balance homogenous loans that are collectively evaluated for
impairment, and loans that are measured at estimated fair value or at the
lower of cost or estimated fair value. InterWest considers all single-family
residential (including construction), consumer loans, and certain commercial
loans to be smaller-balance homogenous loans. A loan is impaired when it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The valuation of impaired
loans is based on the present value of expected future cash flows discounted
at the loans effective interest rate or, as a practical expedient, at the
loan's observable market price or the estimated fair value of the collateral
if the loan is collateral dependent. Generally, InterWest evaluates a loan for
impairment when it is placed on nonaccrual status or if a loan is internally
risk-rated as substandard or doubtful.
A provision for losses on loans, which is a charge against income, is
added to the allowance for losses on loans based on quarterly assessments of
the loan portfolio. While management has attributed the allowance for losses
on loans to various loan portfolio segments, the allowance is general in
nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market
factors beyond InterWest's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
Page 048
<PAGE>
1998 Annual Report
REAL ESTATE HELD FOR SALE AND REAL ESTATE HELD FOR DEVELOPMENT Real estate held
for sale and real estate held for development (collectively, real estate)
includes properties acquired through foreclosure and property acquired with the
intention of holding for development. These properties are initially recorded at
the lower of cost or estimated fair value and are subsequently evaluated to
determine that the carrying value does not exceed the fair value of the
property. Losses that result from ongoing periodic valuation of these properties
are charged to operations in the period in which they are identified and are
included in loss from real estate write-downs and operations in the consolidated
statements of income.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed on the straight-line
method over estimated useful lives of up to forty years for bank buildings and
three to twenty years for furniture and equipment.
INTANGIBLE ASSETS Intangible assets arising from acquisitions represent the
excess of the purchase price over estimated fair value of net assets acquired.
InterWest periodically evaluates these intangible assets for impairment.
Loan servicing rights are capitalized when acquired either through the
purchase or origination of loans that are subsequently sold or securitized
with the servicing rights retained. InterWest evaluates loan servicing rights
for impairment based on the fair value of those rights on a periodic basis,
using a valuation model that incorporates estimated future servicing income,
discount rates, prepayment speeds and default rates. Loan servicing rights are
included in intangible assets and are amortized as an offset to services fees
in proportion to and over the period of estimated net servicing income.
Intangible assets are amortized using the straight-line and accelerated
methods over periods not exceeding twenty years. The level of intangible
assets as of September 30, 1998, was supported by the value attributed to the
operations acquired and loan servicing rights retained.
INCOME TAXES InterWest accounts for income taxes on the liability method. Under
the liability method, a deferred tax asset or liability is determined based on
the enacted tax rates that will be in effect when the differences between the
financial statement carrying amounts and tax basis of existing assets and
liabilities are expected to be reported in InterWest's income tax returns. The
deferred tax provision for the year is equal to the net change in the deferred
tax asset and liability accounts from the beginning to the end of the fiscal
year. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
NET INCOME PER SHARE The diluted weighted average shares outstanding during the
years ended September 30, 1998, 1997 and 1996 includes common stock equivalent
shares outstanding using the treasury stock method. Common stock equivalents
include shares issuable upon exercise of stock options. Unallocated shares
relating to the debt-leveraged money purchase employee stock ownership plan debt
obligation are deducted in the calculation of the weighted average shares
outstanding.
STOCK OPTIONS InterWest employee stock options are accounted for under
Accounting Principle Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." Stock options are granted at exercise prices not less than the fair
value of common stock on the date of grant. Under APB No. 25, no compensation
expense is recognized pursuant to InterWest's stock option plans.
RECLASSIFICATIONS Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to 1998 presentation. The effects
of the reclassifications are not considered material.
Page 049
<PAGE>
InterWest Bancorp
NOTE 2
Accounting Changes
Effective January 1, 1997, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Assets and
Extinguishments of Liabilities." This statement requires that accounting and
reporting standards for the transfer of and servicing of financial assets and
extinguishments of liabilities be based on consistent application of the
financial-components approach that focuses on control. Under this approach,
after a transfer of financial assets, InterWest recognizes the financial and
servicing assets it controls and the liabilities incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. Provisions of SFAS No. 125 that deal with securities
lending, repurchase and dollar repurchase agreements and the recognition of
collateral were adopted on January 1, 1998, as provided through SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." The adoption of SFAS No. 125 and SFAS 127 did not have a material effect
on InterWest's financial condition or results of operations.
Effective December 31, 1997, InterWest adopted SFAS No. 128, "Earnings
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 income available to common shareholders
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 or resulted in the issuance of common stock that
then shared in the net income of the entity. The adoption of SFAS No. 128 did
not have a material impact on InterWest's reported net income per share.
The Financial Accounting Standards Board (FASB) has issued statements of
financial accounting standards that will modify the current method of
accounting utilized by InterWest.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and disclosure of
comprehensive income and its components. Comprehensive income is defined as
the change in equity during a period. Comprehensive income includes net income
and other comprehensive income which refers to unrealized gains and losses
that under generally accepted accounting principles are excluded from net
income. Under this statement, InterWest will include a comprehensive income
statement that is presented as a financial statement. For InterWest, adoption
of this statement is required in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes
standards and requirements for public enterprises regarding information about
operating segments in annual financial statements. This statement also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Operating segments are components of an
enterprise that are evaluated regularly by the chief executive officer in
deciding how to allocate resources and in assessing performance. For
InterWest, adoption of this statement is required in fiscal year 1999.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," which amends SFAS No. 65
"Accounting for Certain Mortgage Banking Activities." SFAS No. 65 required
that after the securitization of a mortgage loan held for sale, an entity
classify the resulting mortgage-backed security as a trading security. SFAS
No. 134 amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those securities. This statement will be adopted by InterWest during
fiscal year 1999.
The adoption of these statements will affect the disclosures in
InterWest's financial statements; however, management does not believe these
statements will materially impact InterWest's financial condition or results
of operations.
Page 050
<PAGE>
1998 Annual Report
NOTE 3
Business Combinations
On August 31, 1996, InterWest Bancorp acquired Central Bancorporation, of
Wenatchee, Washington (Central), the holding company of Central Washington Bank.
Under the terms of this transaction, Central merged into InterWest Bancorp.
Central Washington Bank operated ten branch offices in Central Washington.
Effective October 14, 1996, Central Washington Bank was merged into InterWest
Bank. At the merger date, Central had total consolidated assets of $206,093,000,
including total loans receivable of $132,157,000, total customer deposits of
$181,952,000, and shareholders' equity of $17,109,000. Each share of Central
common stock was exchanged for 2.12 shares of InterWest Bancorp common stock.
The total number of shares issued was 2,147,391. The merger was accounted for
using the pooling-of-interests method. In accordance with generally accepted
accounting principles, prior period financial statements have been restated as
if the companies had been combined.
The consolidated financial statements have been adjusted to conform
Central's December 31 fiscal year end with InterWest's September 30 fiscal
year end. In accordance with generally accepted accounting principles,
Central's interest income of $4,033,000, net interest income of $2,413,000 and
net income of $473,000 for the period from October 1, 1995 to December 31,
1995 has been included in the consolidated statements of income for both of
the years ended September 30, 1996 and 1995. Accordingly, $473,000 has been
deducted from retained earnings in the statement of shareholders' equity for
the year ended September 30, 1996.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp, Inc.
(Puget), of Port Orchard, Washington, the holding company of First National
Bank of Port Orchard. Under the terms of this transaction, Puget merged into
InterWest Bancorp, with First National Bank of Port Orchard becoming a
subsidiary of InterWest Bancorp. First National Bank of Port Orchard operated
three branch offices in Western Washington. At the merger date, Puget had
total consolidated assets of $53,109,000, including total loans receivable of
$38,731,000, total deposits of $45,602,000, and shareholders' equity of
$5,928,000. Each share of Puget common stock has been exchanged for 2.50
shares of InterWest Bancorp common stock. The total number of shares issued
was 586,420. Effective October 15, 1998, First National Bank of Port Orchard
has been merged into Pacific Northwest Bank.
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction,
Pacific has become a wholly owned subsidiary of InterWest Bancorp. At the
merger date, Pacific had four offices in the metropolitan Seattle area of
Western Washington with total assets of $200,219,000, including total loans
receivable of $150,125,000, total deposits of $170,210,000, and shareholders'
equity of $16,787,000. Each share of Pacific common stock has been exchanged
for 5.92 shares of InterWest Bancorp common stock. The total number of shares
issued was 2,346,081.
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National
Bank. Under the terms of this transaction, Pioneer merged into InterWest
Bancorp, with Pioneer National Bank becoming a wholly owned subsidiary of
InterWest Bancorp. Pioneer National Bank operates five offices in Central
Washington. At the merger date, Pioneer had total consolidated assets of
$108,399,000, including total loans receivable of $63,377,000, total deposits
of $87,213,000, and shareholders' equity of $9,337,000. Each share of Pioneer
common stock has been exchanged for 2.01 shares of InterWest Bancorp common
stock. The total number of shares issued was 692,845.
The mergers with Puget Pacific and Pioneer have been accounted for using
the pooling-of-interests method. In accordance with generally accepted
accounting principles, prior period financial statements have been restated as
if the companies had been combined for all periods presented. The following
unaudited pro forma information represents the results of operations of
InterWest, Pacific, Pioneer and Puget for the respective periods prior to
acquisition during fiscal year 1998 as well as the years ending September 30,
1997 and 1996, on an individual as well as a combined basis.
Page 051
<PAGE>
InterWest Bancorp
The unaudited pro forma results do not necessarily indicate the actual results
that would have been obtained, nor are they necessarily indicative of the
future operations of the combined companies. The unaudited pro forma
statements of income were as follows:
<TABLE>
<CAPTION>
Year ended September 30,
Nine months ended Three months ended ------------------------
DOLLARS IN THOUSANDS June 30, 1998 December 31, 1997 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERWEST
Net interest income $ -- $14,578 $57,108 $52,105
Net income -- 5,161 20,299 12,771
PUGET
Net interest income -- 738 2,774 2,263
Net income -- 260 915 711
COMBINED INTERWEST AND PUGET
Net interest income 47,202 15,316 59,882 54,368
Net income 13,338 5,421 21,214 13,482
PACIFIC
Net interest income 7,838 -- 9,484 7,803
Net income 1,510 -- 2,254 1,846
PIONEER
Net interest income 3,521 -- 4,759 4,529
Net income 387 -- 1,081 1,163
COMBINED INTERWEST, PUGET,
PACIFIC AND PIONEER
Net interest income 58,561 -- 74,125 66,700
Net income 15,235 -- 24,549 16,491
</TABLE>
The consolidated financial statement have been adjusted to conform the December
31 fiscal year end of Pacific, Pioneer and Puget with InterWest's September 30
fiscal year end. In accordance with generally accepted accounting principles,
interest income of $7,185,000, net interest income of $4,535,000 and net income
of $1,249,000 for the period from October 1, 1997 to December 31, 1997 has been
included in the consolidated statements of income for both of the years ended
September 30, 1998 and 1997. Accordingly, $1,249,000 has been deducted from
retained earnings in the statement of shareholders' equity for the year ended
September 30, 1998.
On August 31, 1998 InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary, Kittitas
Valley Bank N.A., of Ellensburg, Washington. Kittitas Valley Bank N.A.
operates three offices in Central Washington. At the acquisition date,
Kittitas had total consolidated assets of $47,441,000 and shareholders' equity
of $4,290,000. The transaction was completed through the payment of $6,436,000
in cash and the issuance of 229,831 shares of InterWest Bancorp common stock
to Kittitas shareholders. The shares issued to Kittitas shareholders were
purchased by InterWest Bancorp in the open market. The total acquisition price
was $12,284,000 and resulted in the recording of $8,341,000 in goodwill by
InterWest Bancorp. This goodwill will be amortized using the straight-line
method over a period of twenty years. This acquisition has been accounted for
using the purchase method and as such the operations of Kittitas Valley Bank
N.A. have been included in the consolidated financial statements for the
period subsequent to August 31, 1998. Pro forma financial information has not
been included for the Kittitas acquisition as the results of operations for
Kittitas are immaterial relative to the consolidated financial statements of
InterWest.
Page 052
<PAGE>
1998 Annual Report
NOTE 4
Securities Available for Sale
Securities available for sale are carried at estimated fair value. The amortized
cost and estimated fair values of investment securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DOLLARS IN THOUSANDS COST GAINS LOSSES FAIR VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
U.S. treasury and agency securities $294,476 $ 883 $ 100 $295,259
Obligations of states and political subdivisions 2,280 53 -- 2,333
Mortgage-backed and related securities 253,179 638 2,103 251,714
Other securities 25,519 1 480 25,040
- ----------------------------------------------------------------------------------------------------
Total $575,454 $ 1,575 $ 2,683 $574,346
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997
U.S. treasury and agency securities $306,280 $ 319 $ 308 $306,291
Obligations of states and political subdivisions 5,310 104 -- 5,414
Mortgage-backed and related securities 252,427 622 2,460 250,589
Other securities 871 3 1 873
- ----------------------------------------------------------------------------------------------------
Total $564,888 $ 1,048 $ 2,769 $563,167
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of securities available for sale as
of September 30, 1998, by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
DOLLARS IN THOUSANDS AMORTIZED COST FAIR VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 4,835 $ 4,872
Due after one year but within five years 204,622 205,092
Due after five years but within ten years 86,422 86,729
Due after ten years 26,396 25,939
- ------------------------------------------------------------------------------------------
322,275 322,632
Mortgage-backed and related securities 253,179 251,714
- ------------------------------------------------------------------------------------------
Total $575,454 $574,346
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sale of securities available for sale during 1998, 1997 and
1996 were $374,572,000, $359,641,000 and $173,847,000, respectively. InterWest
realized gains of $905,000, $1,132,000, and $1,195,000 and losses of $92,000,
$545,000 and $611,000 on those sales during 1998, 1997 and 1996, respectively.
As permitted under generally accepted accounting principles, upon
acquisition of Pacific, Pioneer and Puget and to conform to the InterWest
investment policy, $9,239,000 of securities classified as held to maturity
were transferred to the available for sale portfolio during the year ended
September 30, 1998.
Page 053
<PAGE>
InterWest Bancorp
NOTE 5
Securities Held to Maturity
Securities held to maturity are carried at amortized cost. The amortized cost
and estimated fair value of securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Obligations of states and political subdivisions $ 2,756 $ 43 $ -- $ 2,799
Mortgage-backed and related securities 84,506 568 507 84,567
- ----------------------------------------------------------------------------------------------------------
Total $ 87,262 $611 $ 507 $ 87,366
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997
U.S. treasury and agency securities $ 20,300 $19 $ -- $ 20,319
Obligations of states and political subdivisions 10,841 154 3 10,992
Mortgage-backed and related securities 101,154 78 3,073 98,159
- ----------------------------------------------------------------------------------------------------------
Total $132,295 $251 $3,076 $129,470
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of securities held to maturity as of
September 30, 1998, by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
DOLLARS IN THOUSANDS AMORTIZED COST FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 270 $ 271
Due after one year but within five years 2,486 2,528
- --------------------------------------------------------------------------------
2,756 2,799
Mortgage-backed and related securities 84,506 84,567
- --------------------------------------------------------------------------------
Total $87,262 $87,366
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
As of September 30, 1998, InterWest had $51,014,000 of securities classified as
high-risk securities according to Federal Financial Institutions Examination
Council's supervisory guidance for analyzing and classifying mortgage derivative
products. The estimated fair value of those securities was $50,633,000 and the
weighted average yield was 6.03 percent.
Page 054
<PAGE>
1998 Annual Report
NOTE 6
Loans Receivable and Loans Held for Sale
Loans receivable and loans held for sale (originated principally in Washington
state) consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $ 627,191 $ 701,840
Multi-family residential 62,948 58,137
Commercial 257,906 214,232
Real estate construction 182,020 136,580
Consumer loans 81,386 73,876
Commercial loans 217,546 155,265
Agricultural loans 45,637 30,491
- ----------------------------------------------------------------------------
Total 1,474,634 1,370,421
LESS:
Loans held for sale 93,125 10,230
Allowance for losses on loans 13,224 11,104
Deferred loan fees and discounts 9,235 10,636
- ----------------------------------------------------------------------------
Loans receivable, net $1,359,050 $1,338,451
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
InterWest serviced loans, owned in whole or in part by others, of $511,331,000,
$365,876,000, and $311,764,000 as of September 30, 1998, 1997, and 1996,
respectively.
As of September 30, 1998, InterWest had $271,706,000 in real estate loan
commitments outstanding. Other loan commitments, which includes business and
consumer credit lines, totaled $220,207,000 as of September 30, 1998.
Outstanding commitments under standby letters of credit and commercial letters
of credit totaled $1,631,000 and $1,109,000, respectively, as of September 30,
1998.
Non-accrual loans totaled $8,210,000 and $5,144,000 as of September 30,
1998 and 1997, respectively. If interest on these loans had been recognized,
such income would have been $521,000 and $382,000 for the years ended
September 30, 1998 and 1997, respectively.
InterWest originates loans primarily in the state of Washington. Although
InterWest has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economy of
Washington state.
Page 055
<PAGE>
InterWest Bancorp
NOTE 7
Allowance for Losses on Loans
The activity in the allowance for losses on loans for the year ended September
30 is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $11,104 $10,235 $ 7,841
Provision for losses on loans 1,707 1,508 1,552
Merger and acquisition activity:
Conforming provision pursuant to acquisition 1,100 -- 900
Allowance acquired 295 -- --
Pooling accounting adjustment (76) -- --
Recoveries 384 401 425
Charge-offs (1,290) (1,040) (483)
- ---------------------------------------------------------------------------------------------
Balance, end of year $13,224 $11,104 $10,235
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of loans considered to be impaired and the related
interest income as of and for the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Recorded investment in impaired loans $ 2,448 $ 3,261 $ 5,677
Average recorded investment in impaired loans 3,043 4,109 5,980
Interest income recognized on impaired loans 240 326 526
</TABLE>
All impaired loans were evaluated for impairment based on the fair value of the
collateral as all impaired loans are collateral dependent. Total allocated
reserves for impaired loans were $404,000, $92,000 and $155,000 as of September
30, 1998, 1997 and 1996 respectively. Interest income on impaired loans is
normally recognized on the accrual basis, unless the loan is more than 90 days
past due, in which case interest income is recorded on a cash basis.
NOTE 8
Real Estate Held for Sale and for Development
Real estate held for sale and for development as of September 30 is summarized
as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned acquired through foreclosure $ 7,553 $ 6,945
Real estate held for development 4,443 5,469
- --------------------------------------------------------------------------------
Total $11,996 $12,414
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Page 056
<PAGE>
1998 Annual Report
NOTE 9
Premises and Equipment, Net
Premises and equipment consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Buildings $ 35,495 $ 33,105
Furniture and equipment 28,485 24,821
- --------------------------------------------------------------------------------
63,980 57,926
Less accumulated depreciation (24,536) (20,375)
- --------------------------------------------------------------------------------
39,444 37,551
Land 10,870 9,830
- --------------------------------------------------------------------------------
Total $ 50,314 $ 47,381
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Depreciation expense for 1998, 1997 and 1996 was $4,166,000, $3,379,000, and
$2,717,000, respectively.
InterWest leases certain premises under operating leases. Rental expense
for leased premises was $1,372,000 $1,417,000, and $1,223,000 for 1998, 1997
and 1996, respectively. Minimum rental commitments under noncancelable
operating leases having an original or remaining term of more than one year
were as follows as of September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDING SEPTEMBER 30: 1999 2000 2001 2002 2003 THEREAFTER TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rental commitments $1,374 $1,383 $1,375 $1,160 $714 $3,611 $9,617
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10
Intangible Assets
Intangible assets consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 9,344 $1,141
Core deposit intangible 992 1,167
Loan servicing intangibles 3,690 1,983
- -------------------------------------------------------------------
Total $14,026 $4,291
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The changes in the loan servicing intangible assets for the years ended
September 30 is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $1,983 $1,423
Additions 2,490 995
Less amortization (783) (435)
- -------------------------------------------------------------------
Balance, end of year $3,690 $1,983
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
Page 057
<PAGE>
InterWest Bancorp
The estimated fair value of servicing intangible assets approximated the net
book value as of September 30, 1998 and 1997. The estimated fair value was
determined by using discounted estimated future cash flows from the servicing
assets, using discount rates that approximate current market rates and using
estimated future prepayment rates.
NOTE 11
Deposits
Deposits consisted of the following as of September 30:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATE AS OF
DOLLARS IN THOUSANDS SEPTEMBER 30, 1998 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest-bearing deposits $ 178,625 $ 150,428
Interest-bearing checking accounts 1.55% 162,051 136,402
Money market accounts 3.83% 267,953 185,029
Savings accounts 2.08% 109,148 116,135
- -------------------------------------------------------------------------------------------
2.09% 717,777 587,994
- -------------------------------------------------------------------------------------------
Certificates:
Due within one year 634,483 633,426
After one year but within two years 172,839 113,481
After two years but within three years 26,104 117,246
After three years but within four years 8,086 7,356
After four years but within five years 4,628 7,752
After five years 908 1,205
- -------------------------------------------------------------------------------------------
Total certificates 5.43% 847,048 880,466
- -------------------------------------------------------------------------------------------
Total deposits 3.90% $1,564,825 $1,468,460
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
Deposits as of September 30, 1998 and 1997, include $119,421,000 and
$103,279,000, respectively, in public fund deposits. Securities with book values
of $17,475,000 and $12,756,000 were pledged as collateral on these deposits as
of September 30, 1998 and 1997, respectively, which exceeds the minimum
collateral requirements established by the Washington Public Deposit Protection
Commission.
Certificates greater than or equal to $100,000 included in the above
amounts totaled $369,573,000 and $338,062,000 as of September 30, 1998 and
1997, respectively.
Deposit interest expense by account type for the year ended September 30
was as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Other certificates $27,890 $31,678 $32,005
Certificates greater than or equal to $100,000 20,486 18,330 13,102
Money market accounts 7,955 6,316 5,559
Savings accounts 2,455 2,880 3,151
Checking accounts 2,055 1,803 2,266
- ---------------------------------------------------------------------------------
Total $60,841 $61,007 $56,083
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
Page 058
<PAGE>
1998 Annual Report
NOTE 12
Federal Home Loan Bank Advances
As of September 30, FHLB advances were scheduled to mature as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
DOLLARS IN THOUSANDS AMOUNT INTEREST RATES AMOUNT INTEREST RATES
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 50,501 5.53%-7.28% $296,354 4.36%-6.82%
One to two years 7,332 4.68%-6.55% 25,546 5.36%-7.28%
Two to three years 60,000 5.31%-5.58% 11,548 4.68%-6.55%
Three to four years 161,200 5.39%-7.70% -- --
Four to five years 142,000 5.19%-5.56% 161,200 5.35%-7.70%
Six to seven years 25,000 4.98% -- --
Nine to ten years 100,000 5.36%-5.56% -- --
- ----------------------------------------------------------------------------------------
Total $546,033 -- $494,648 --
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
Advances are collateralized by FHLB stock owned by InterWest, deposits with the
FHLB and certain mortgages or deeds of trust securing such properties. As of
September 30, 1998, the minimum book value of eligible collateral pledged for
these borrowings was $655,240,000. As of September 30, 1998, the additional
amount available under credit lines from the FHLB was $315,890,000.
The maximum and average outstanding and weighted average interest rates
on advances from the FHLB were as follows during the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding as of any month end $663,385 $494,948
Average outstanding 559,012 347,444
Weighted average interest rates:
Annual 5.61% 5.64%
End of year 5.40% 5.68%
</TABLE>
NOTE 13
Securities Sold Under Agreements to Repurchase
InterWest has sold certain securities of the U.S. government and its agencies
and other approved investments under agreements to repurchase. The carrying
value of the securities sold was $132,934,000 with an estimated fair value of
$133,474,000 as of September 30, 1998. As of September 30, 1998, InterWest had
$277,000,000 of available credit from broker/dealers to sell securities under
agreements to repurchase.
As of September 30, securities sold under agreements to repurchase were
scheduled to mature as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
DOLLARS IN THOUSANDS AMOUNT INTEREST RATES AMOUNT INTEREST RATES
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $ 5,613 4.00%-5.03% $ 96,883 5.03%-5.63%
30 to 90 days -- -- -- --
Over 90 days 123,000 5.03%-6.43% 162,110 5.42%-6.43%
- ----------------------------------------------------------------------------------------
Total $128,613 -- $258,993 --
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
Page 059
<PAGE>
InterWest Bancorp
The maximum and average outstanding and weighted average interest rates on
securities sold under agreements to repurchase were as follows during the year
ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding as of any month end $214,917 $258,993
Average outstanding 157,898 183,246
Weighted average interest rates
Annual 5.81% 5.66%
End of year 5.72% 5.66%
</TABLE>
NOTE 14
Stock Split
On July 21, 1998, InterWest Bancorp declared a three-for-two common stock split,
which was paid on August 17, 1998, to shareholders of record on August 3, 1998.
Common stock issued and outstanding, average shares outstanding and net income
per share for all periods presented have been retroactively adjusted to give
effect to this transaction.
NOTE 15
SAIF Assessment
The deposits of InterWest Bank are insured through the Savings Association
Insurance Fund (SAIF). Because the SAIF was undercapitalized, a one-time special
assessment of 0.657 percent of SAIF deposits was calculated based on March 31,
1995, SAIF deposits and resulted in a $5,523,000 expense to InterWest Bank for
the year ended September 30, 1996. The deposits of Pacific Northwest Bank,
Pioneer National Bank, First National Bank of Port Orchard, and Kittitas Valley
Bank N.A. are insured through the Bank Insurance Fund (BIF).
NOTE 16
Merger-Related Charges
During the year ended September 30, 1998, InterWest incurred merger-related
charges totaling $5,495,000 in connection with the Pacific, Pioneer and Puget
mergers. In connection with the Central merger, InterWest incurred
merger-related charges totaling $3,105,000 during the year ended September 30,
1996.
Merger-related charges for the year ended September 30 are summarized as
follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Professional fees $1,938 $-- $ 940
Severance and other personnel 1,468 -- 1,206
Data and facilities conversion 1,382 -- 581
Other 707 -- 378
- -----------------------------------------------------------------
Total $5,495 $-- $3,105
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
Page 060
<PAGE>
1998 Annual Report
The following table presents the a summary of the activity in the reserve for
merger-related charges during the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ -- $ 765 $ --
Merger-related charges 5,495 -- 3,105
Cash outlays and non-cash write-downs (2,688) (765) (2,340)
- ---------------------------------------------------------------------------
Balance, end of year $2,807 $ -- $ 765
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
It is expected that the majority of the reserve for merger-related charges will
be paid out during fiscal year 1999.
NOTE 17
Income Taxes
A reconciliation of the income tax expense based on the statutory corporate tax
rate on pre-tax income and the expense shown in the accompanying consolidated
statements of income for the year ended September 30 is as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rates $12,421 $12,968 $8,442
Tax effect of:
Non-deductible merger-related charges 611 -- --
Tax-exempt interest (140) (303) (240)
Other, net (44) 16 (417)
- ------------------------------------------------------------------------------
Total $12,848 $12,681 $7,785
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Current tax expense $10,568 $14,192 $7,501
Deferred tax expense (benefit) 2,280 (1,511) 284
- ------------------------------------------------------------------------------
Total $12,848 $12,681 $7,785
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
Tax effects of temporary differences that give rise to elements of deferred tax
assets (liabilities) consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Allowance for losses on loans $ 2,946 $ 1,453
Deferred compensation 971 735
Unrealized loss on securities available for sale 409 605
Loans held for sale 875 77
Other 901 401
- ---------------------------------------------------------------------------
6,102 3,271
Deferred tax liability:
Loan fees (3,874) (1,863)
FHLB stock dividends (2,902) (501)
Depreciation (2,300) (1,556)
Other (721) (397)
- ---------------------------------------------------------------------------
(9,797) (4,317)
- ---------------------------------------------------------------------------
Net deferred tax liability $(3,695) $(1,046)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
Page 061
<PAGE>
InterWest Bancorp
The realization of InterWest deferred tax assets is dependent upon InterWest's
ability to generate taxable income in future periods. InterWest has evaluated
available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that deferred tax assets will be realized.
NOTE 18
Employee Benefits
RETIREMENT AND SAVINGS PLANS InterWest has a debt-leveraged money purchase
employee stock ownership plan (ESOP) for employees. The ESOP is a
noncontributory stock ownership plan. InterWest makes an annual contribution to
the plan of 5 percent of qualified participants' compensation.
During the year ended September 30, 1998, the ESOP entered into two lines
of credit agreements with an unrelated third party to borrow up to a total of
$4,000,000 for the purpose of acquiring common stock of InterWest Bancorp.
Interest on lines of credit is computed at prime rate or at the ESOP's
election, one-month LIBOR plus 1 3/4 percent. Interest paid was $104,000,
$8,000, and $30,000 for the years ended September 30, 1998, 1997, and 1996,
respectively. The obligation is reduced, and shareholders' equity increased,
by the amount of any principal reduction of the debt by the ESOP. Dividends
paid on unallocated shares of stock may be used to make payments on the loan.
Accordingly, $31,000, $35,000, and $34,000 of dividends were applied toward
loan payments during the years ended September 30, 1998, 1997, and 1996,
respectively. The compensation of the leverage shares is calculated by taking
the difference between the average fair value of the shares released and the
cost of the shares. Shares are released as the loan is paid down. Leveraged
ESOP shares during the years ended September 30, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Leveraged shares, beginning of year -- 23,776 55,926
Shares leveraged 147,055 -- --
Shares released for allocation -- 23,776 32,150
- ---------------------------------------------------------------------
Unallocated shares, end of year 147,055 -- 23,776
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
The fair value of unallocated shares was $3,363,883, $0 and $701,000 as of
September 30, 1998, 1997 and 1996, respectively.
InterWest has a salary deferral 401(k) plan that is a defined
contribution plan. Employees can contribute to their deferred contribution
accounts on a pre-tax basis the maximum limit under the law. InterWest matches
a portion of the salary deferred by each participant. Expenses of the ESOP and
401(k) plan were $1,302,000, $1,042,000, and $1,006,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
InterWest also maintains several unfunded, nonqualified deferred
compensation programs for certain executive officers.
STOCK OPTION PLANS During January 1993, the shareholders of InterWest approved
the addition of a qualified employee stock option plan (1993 incentive plan) and
a non-qualified director stock option plan (1993 non-incentive plan). The
awarding of stock options to certain employees at InterWest is at the discretion
of the Board of Directors. The term of the options granted is generally ten
years. Substantially all of the options granted under the employees' stock
option plan vest over a five-year period. Under the 1993 non-incentive plan,
each director was granted 2,875 options with a term of ten years. These options
were 100 percent vested at the date of the grant. This plan expired during 1997.
In January, 1997, shareholders of InterWest approved the non-qualified
1996 Outside Directors Stock Options-For-Fees Plan (1996 Director Plan). Under
the 1996 Director Plan, nonemployee directors may elect to receive stock
options in lieu of fees otherwise due for board services and may exercise
those options after one year. Each option granted under the 1996 Director Plan
has a five-year term.
Page 062
<PAGE>
1998 Annual Report
InterWest had a qualified stock option plan that provided for the
awarding of stock options to certain officers and employees of InterWest at
the discretion of the Board of Directors. The term of the stock options
granted ranged from four to ten years from the date of grant. This plan
expired during 1993; however, there are exercisable options outstanding under
the plan as of September 30, 1998.
Central, Puget, Pacific, Pioneer and Kittitas had stock option plans that
have been assumed by InterWest. The number of shares and exercise prices have
been appropriately adjusted to reflect the common stock exchange ratios for
each entity. All outstanding Central, Puget, Pacific, Pioneer and Kittitas
stock options became 100 percent vested and exercisable upon the consummation
of the respective mergers. No further awards will be granted under any of
these plans.
The exercise price of options granted under most of these plans was equal
to the fair value of the common stock on the date of the grant. Average
exercise price per share, number of shares authorized, available for grant,
granted, exercised, outstanding and currently exercisable reflect the dilutive
effect of the stock splits.
Information with respect to options granted under all stock option plans
is as follows:
<TABLE>
<CAPTION>
AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE OCTOBER 1, 1995 $ 6.05 976,592 765,494
Options granted 11.35 140,224 3,187
Options exercised 4.73 (88,329) (88,329)
Options rescinded/expired 10.20 (11,820) (7,920)
Options vested -- -- 118,713
BALANCE SEPTEMBER 30, 1996 6.85 1,016,667 791,145
Options granted 15.89 89,127 --
Options exercised 8.30 (256,647) (256,647)
Options rescinded/expired 11.63 (17,340) (17,340)
Options vested -- -- 147,783
BALANCE SEPTEMBER 30, 1997 7.27 831,807 664,941
Options acquired 11.14 46,227 46,227
Options granted 25.75 169,050 3,000
Options exercised 4.76 (132,971) (132,971)
Options rescinded/expired 16.97 (12,086) --
Options vested -- -- 89,699
- ----------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 $11.17 902,027 670,896
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
Additional financial data pertaining to outstanding stock options as of
September 30, 1998, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE
RANGE OF NUMBER OF CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE OF EXERCISABLE
EXERCISE PRICES OPTION SHARES (IN YEARS) OF OPTION SHARES OPTION SHARES OPTION SHARES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.85-$5.49 317,022 0.98 $ 4.35 317,022 $ 4.35
$6.75-$9.79 237,738 5.06 7.56 230,538 7.54
$10.47-$14.74 141,790 7.60 12.39 108,097 12.20
$21.33-$27.73 205,477 7.31 25.01 15,239 22.33
- ------------------------------------------------------------------------------------------------------------
Total 902,027 4.54 $11.17 670,896 $ 7.12
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Page 063
<PAGE>
InterWest Bancorp
As of September 30, 1998, there were a total of 1,711,833 shares authorized
under all stock option plans and a total of 514,820 shares available for future
stock option grants.
SFAS No. 123, "Accounting for Stock-based Compensation," requires the
disclosure of pro forma net income and net income per share had InterWest
adopted the fair value method as of the beginning of fiscal year 1996. Under
this statement, the fair value of stock-based awards is calculated through the
use of option pricing models. These models require the subjective assumptions,
including future stock price volatility and expected time to exercise. The
fair value of options granted under stock option plans is estimated on the
date of grant using the Black-Scholes option-pricing model. Using the
assumptions below, the weighted average fair value of options granted was
$8.04 in 1998, $5.21 in 1997 and $4.52 in 1996.
The following weighted average assumptions were used in the computation
of the fair value of stock options for the year ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 27.1% 17.4% 28.4%
Expected dividend yield 1.6% 1.5% 1.4%
Risk-free interest rate 5.7% 6.2% 5.6%
Expected life (in years) 6.0 7.3 7.3
</TABLE>
If compensation expense for InterWest's stock option plans had been determined
consistent with SFAS No. 123, InterWest's net income and net income per share
would have been the pro forma amounts indicated as follows for the year ended
September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $22,642 $24,549 $16,491
Pro forma 22,397 24,377 16,364
BASIC NET INCOME PER SHARE:
As reported $ 1.45 $ 1.58 $ 1.08
Pro forma 1.43 1.57 1.07
DILUTED NET INCOME PER SHARE:
As reported $ 1.40 $ 1.54 $ 1.05
Pro forma 1.39 1.53 1.04
</TABLE>
The compensation expense included in the pro forma net income and net income per
share is not likely to be representative of the effect on reported net income
for future years because stock options vest over several years and additional
option grants generally are made each year.
Page 064
<PAGE>
1998 Annual Report
NOTE 19
Regulatory Capital
InterWest Bancorp and its banking subsidiaries are subject to risk-based capital
guidelines requiring minimum capital levels based on the credit risk of assets.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a material effect on InterWest's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
InterWest Bancorp and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
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-WEIGHTED ASSETS) (TO RISK-WEIGHTED ASSETS) (TO AVERAGE 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 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 Bancorp's Tier I capital is
composed of shareholders' equity less certain intangibles, and excludes the
equity impact of adjusting securities available for sale to fair value. Total
capital is Tier I capital and the allowance for losses on loans. The FRB's
risk-based capital rules have been supplemented by a leverage capital ratio,
defined as Tier I capital to adjusted quarterly average total assets. As of
September 30, 1998, under the FRB's capital guidelines, InterWest Bancorp's
levels of consolidated regulatory capital exceed the FRB's minimum requirements.
Page 065
<PAGE>
InterWest Bancorp
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and
Pacific Northwest Bank as of September 30, 1998 and 1997 are presented in the
following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
AMOUNT ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------ ------------------
DOLLARS IN THOUSANDS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANCORP:
Total capital (to risk-weighted assets) $174,997 11.96% $117,018 8.0% $146,272 10.0%
Tier I capital (to risk-weighted assets) 161,773 11.06% 58,509 4.0% 87,763 6.0%
Tier I capital (to average assets) 161,773 6.61% 73,384 3.0% 122,307 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $136,214 12.14% $ 89,789 8.0% $112,236 10.0%
Tier I capital (to risk-weighted assets) 127,269 11.34% 44,894 4.0% 67,342 6.0%
Tier I capital (to average assets) 127,269 6.20% 82,145 4.0% 102,681 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $ 19,112 10.32% $ 14,809 8.0% $ 18,511 10.0%
Tier I capital (to risk-weighted assets) 17,461 9.43% 7,404 4.0% 11,107 6.0%
Tier I capital (to average assets) 17,461 7.94% 8,800 4.0% 11,000 5.0%
- --------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------------------------------------
INTERWEST BANCORP:
Total capital (to risk-weighted assets) $170,652 13.64% $100,122 8.0% $125,153 10.0%
Tier I capital (to risk-weighted assets) 159,548 12.75% 50,061 4.0% 75,092 6.0%
Tier I capital (to average assets) 159,548 6.97% 68,657 3.0% 114,429 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $136,681 13.75% $ 79,499 8.0% $ 99,373 10.0%
Tier I capital (to risk-weighted assets) 128,014 12.88% 39,749 4.0% 59,624 6.0%
Tier I capital (to average assets) 128,014 6.58% 77,815 4.0% 97,269 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $17,319 11.16% $ 12,419 8.0% $ 15,523 10.0%
Tier I capital (to risk-weighted assets) 15,994 10.27% 6,209 4.0% 9,314 6.0%
Tier I capital (to average assets) 15,994 8.50% 7,507 4.0% 9.383 5.0%
</TABLE>
Page 066
<PAGE>
1998 Annual Report
As of September 30, 1998, all subsidiary banks were in compliance with the
well-capitalized capital requirements. Management believes that under the
current regulations the subsidiary banks will continue to meet minimum capital
requirements in the foreseeable future. However, events beyond the control of
the subsidiary banks, such as a downturn in the economy in areas where the
subsidiary banks have most of their loans, could adversely affect future
earnings and, consequently, the ability of the subsidiary banks to meet future
minimum capital requirements.
Currently, InterWest Bancorp pays quarterly dividends, which it intends
to continue to do. The amount of future dividends will be based on InterWest's
earnings and financial condition. Generally, InterWest is precluded from
paying dividends on its common stock if capital would be reduced to below
regulatory capital requirements at either the holding company or subsidiary
bank level. As of September 30, 1998, $55.2 million of retained earnings was
available for dividend distribution based on the capital levels and
restrictions of InterWest Bancorp and the banking subsidiaries.
NOTE 20
Disclosure About Fair Value of Financial Instruments
The estimated fair value amounts have been determined by InterWest using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data in the development
of the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts InterWest could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material impact on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of
each class of InterWest's financial instruments as of September 30, 1998 and
1997:
CASH AND CASH EQUIVALENTS The carrying value is a reasonable estimate of the
fair value.
SECURITIES AVAILABLE FOR SALE, SECURITIES HELD TO MATURITY AND LOANS HELD FOR
SALE The fair value of securities available for sale, securities held to
maturity and loans held for sale are based on quoted market rates and dealer
quotes.
LOANS RECEIVABLE The fair value for loans receivable is based on discounted cash
flows, using estimated interest rates currently offered for loans of similar
characteristics adjusted for pre-payment estimates.
No adjustment was made to the estimated interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management believes that the risk factor embedded in the estimated interest
rates, along with the allowance for losses on loans applicable to the loan
portfolio, results in a fair valuation of such loans.
FHLB STOCK FHLB stock does not have a market and the fair value is unknown. As
such, the carrying value is a reasonable estimate of the fair value.
DEPOSITS The fair value of deposits with no stated maturity, such as checking
accounts, money market and savings accounts, is equal to the amounts payable on
demand as of September 30, 1998 and September 30, 1997, respectively. The fair
value of certificates of deposit is based on the discounted value of contractual
cash flows. The discount rate is estimated using the current rate for deposits
of like maturities.
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The fair value of
FHLB advances and securities sold under agreements to repurchase are estimated
based on the present values using a discount rate equal to the rate currently
offered on similar borrowings with similar maturities.
OTHER The carrying value of other financial instruments has been determined to
be a reasonable estimate of their fair value.
Page 067
<PAGE>
InterWest Bancorp
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------------- ---------------------------
ESTIMATED ESTIMATED
DOLLARS IN THOUSANDS CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 181,422 $ 181,422 $ 235,888 $ 235,888
Securities available for sale 574,346 574,346 563,167 563,167
Securities held to maturity 87,262 87,366 132,295 129,470
Loans receivable, net 1,359,050 1,363,200 1,338,451 1,353,277
Loans held for sale 93,125 95,626 10,230 10,451
Federal funds sold 19,863 19,863 12,225 12,225
FHLB stock 37,496 37,496 27,211 27,211
LIABILITIES
- ------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits $ 178,625 $ 178,625 $ 150,428 $ 150,428
Interest-bearing checking accounts 162,051 162,051 136,402 136,402
Money market accounts 267,953 267,953 185,029 185,029
Savings accounts 109,148 109,148 116,135 116,135
Certificates of deposit 847,048 851,054 880,466 883,580
- ------------------------------------------------------------------------------------------------------------
Total deposits 1,564,825 1,568,831 1,468,460 1,471,574
FHLB advances and other borrowings 553,777 556,489 496,975 496,431
Securities sold under agreements to repurchase 128,613 130,844 258,993 256,486
OFF BALANCE SHEET LOAN COMMITMENTS:
Real estate $ 271,706 $ 271,706 $ 219,755 $ 219,755
Other 220,207 220,207 111,668 111,668
Standby letters of credit 1,631 1,631 3,045 3,045
Commercial letters of credit 1,109 1,109 969 969
</TABLE>
LIMITATIONS The fair value estimates presented herein are based on information
available to management as of September 30, 1998 and 1997. Since September 30,
1998 and 1997, amounts have not been comprehensively revalued for purposes of
these financial statements and, therefore, current estimates of fair value may
differ from the amounts presented herein.
NOTE 21
Contingencies
At periodic intervals, the FDIC, the Washington Department of Financial
Institutions, Division of Banks, the Office of the Comptroller of Currency, the
FRB and other regulatory agencies (collectively the regulators) examine
InterWest Bancorp and its banking subsidiaries as part of the regulatory
oversight of the banking industry. Based on their examinations, the regulators
may direct InterWest Bancorp or a bank subsidiary to adjust financial statements
in accordance with their findings. A future examination by the regulators could
include a review of certain transactions or other amounts reported in
InterWest's 1998 financial statements. The regulators have not proposed
significant adjustments to InterWest's financial statements in prior years and
management is not aware of any basis for any such adjustments for 1998. In view
of the uncertain regulatory environment in which InterWest operates, the extent,
if any, to which a forthcoming examination may ultimately result in regulatory
adjustments to the 1998 financial statements cannot presently be determined.
Page 068
<PAGE>
1998 Annual Report
In the normal course of business, InterWest has various legal claims and
other contingent matters outstanding. Management believes that any ultimate
liability arising from these actions will not have a material adverse impact
on InterWest's financial condition or results of operations.
The subsidiary banks are required to maintain balances with the Federal
Reserve Bank based on a percentage of deposit liabilities. The average
required reserve at September 30, 1998 and 1997, was $10,597,000 and
$13,259,000, respectively.
During the year ended September 30, 1998, InterWest sold $26,709,000 of
single-family residential mortgage loans with recourse. As of September 30,
1998, $23,864,000 of these loans remain outstanding.
NOTE 22
Condensed Parent Company Financial Information
InterWest Bancorp
Condensed financial information for InterWest Bancorp (parent company only) as
of and for the years ended September 30, is as follows:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 268 $ 1,958
Goodwill 8,341 --
Other assets 3,957 2,198
Investment in subsidiaries 165,433 159,441
- --------------------------------------------------------------------------------
Total $177,999 $163,597
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 6,347 $ 2,427
Other borrowings -- 400
Shareholders' equity 171,652 160,770
- --------------------------------------------------------------------------------
Total $177,999 $163,597
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income received from subsidiaries $19,797 $ 5,865 $ 7,562
- ---------------------------------------------------------------------------------------
Interest expense 23 -- 140
Non-interest expense 4,852 709 1,417
- ---------------------------------------------------------------------------------------
Total expenses 4,875 709 1,557
- ---------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed net income from subsidiaries 14,922 5,156 6,005
Income tax benefit (1,103) (227) (414)
- ---------------------------------------------------------------------------------------
Net income before equity in undistributed net
income from subsidiaries 16,025 5,383 6,419
- ---------------------------------------------------------------------------------------
Equity in undistributed net income from subsidiaries 6,617 19,166 10,072
- ---------------------------------------------------------------------------------------
Net income $22,642 $24,549 $16,491
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Page 069
<PAGE>
InterWest Bancorp
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,642 $ 24,549 $ 16,491
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income from subsidiaries (26,414) (25,031) (17,634)
Dividends received from subsidiaries 19,797 5,865 7,562
Change in other assets and liabilities, net 1,263 (650) (565)
Pooling accounting adjustment (1,249) -- (361)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,039 4,733 5,493
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (11,580) -- --
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities (11,580) -- --
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (6,441) (4,967) (3,987)
Purchase and retirement of treasury stock (34) (570) --
Net increase (decrease) in borrowings (400) 400 (2,200)
Proceeds from stock option plans 726 1,945 418
- ----------------------------------------------------------------------------------------------
Net cash used by financing activities (6,149) (3,192) (5,769)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,690) 1,541 (276)
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 1,958 417 693
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 268 $ 1,958 $ 417
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
NOTE 23
Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per share for the years ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR
Net income $ 22,642 $ 24,549 $ 16,491
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
DENOMINATOR
Denominator for basic net income per share--
Weighted average shares 15,661,333 15,568,052 15,326,825
Effect of dilutive securities:
Stock options 496,008 410,994 403,219
- -------------------------------------------------------------------------------------------------------------
Denominator for diluted net income per share--
Weighted average shares and assumed conversion of stock options 16,157,341 15,979,046 15,730,044
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.45 $ 1.58 $ 1.08
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.40 $ 1.54 $ 1.05
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Page 070
<PAGE>
1998 Annual Report
NOTE 24
Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1998
Interest income $45,934 $45,249 $44,200 $44,896
Interest expense 25,698 25,183 24,662 25,940
Net interest income before
provision for losses on loans 20,236 20,066 19,538 18,956
Provision for losses on loans 441 1,520 571 275
Net interest income after
provision for losses on loans 19,795 18,546 18,967 18,681
Non-interest income 7,906 5,915 6,568 6,084
Non-interest expense 16,179 18,934 16,901 14,958
Income before income taxes 11,522 5,527 8,634 9,807
Income tax expense 4,115 2,254 3,081 3,398
- ---------------------------------------------------------------------------------------------
Net income $ 7,407 $ 3,273 $ 5,553 $ 6,409
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.21 $ 0.35 $ 0.41
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Diluted net income per share $ 0.46 $ 0.20 $ 0.35 $ 0.40
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, 1997
Interest income $44,263 $41,778 $39,901 $39,264
Interest expense 25,069 23,175 21,545 21,292
Net interest income before
provision for losses on loans 19,194 18,603 18,356 17,972
Provision for losses on loans 275 303 512 418
Net interest income after
provision for losses on loans 18,919 18,300 17,844 17,554
Non-interest income 6,142 4,438 4,114 3,951
Non-interest expense 15,139 13,222 12,868 12,803
Income before income taxes 9,922 9,516 9,090 8,702
Income tax expense 3,446 3,171 3,144 2,920
- ---------------------------------------------------------------------------------------------
Net income $ 6,476 $ 6,345 $ 5,946 $ 5,782
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Basic net income per share $ 0.41 $ 0.41 $ 0.38 $ 0.37
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Diluted net income per share $ 0.40 $ 0.40 $ 0.37 $ 0.36
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Non-interest expense for the third quarter of 1998 includes $4,195,000 in
merger-related charges incurred in connection with the acquisitions of Pacific
and Pioneer. The provision for losses on loans for the third quarter of 1998
includes a merger-related provision for losses on loans of $1,000,000.
Non-interest expense for the second quarter of 1998 includes $1,300,000 in
merger-related charges incurred in connection with the acquisition of Puget. The
acquisitions of Pacific, Pioneer and Puget completed during 1998 have been
accounted for using the pooling-of-interests method, accordingly, quarterly
financial data for the periods prior to the respective acquisitions have been
restated as if the companies were combined.
Page 071
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
Parent
- ------
InterWest Bancorp, Inc.
<TABLE>
<CAPTION>
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership Incorporation
- ---------------- ------------ ---------------
<S> <C> <C>
InterWest Bank 100% Washington
Pacific Northwest Bank 100% Washington
Pioneer National Bank 100% Washington
Kittitas Valley Bank N.A. 100% Washington
InterWest Financial Services, Inc. (b) 100% Washington
InterWest Insurance Agency, Inc. (c) 70% Washington
InterWest Properties, Inc. (b) 100% Washington
I & B, Inc. (b) 100% Washington
</TABLE>
(a) The operation of InterWest Bancorp's wholly owned subsidiaries are
included in InterWest Bancorp's Financial Statements contained in the
Annual Report attached hereto as Exhibit 13.
(b) Wholly-owned subsidiary of InterWest Bank.
(c) Interest owned by InterWest Bank.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of InterWest Bancorp, Inc. and subsidiaries of our report dated October 30,
1998, included in the 1998 Annual Report to Shareholders of InterWest Bancorp,
Inc. and subsidiaries.
We also consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated October 30, 1998, with
respect to the consolidated financial statements of InterWest Bancorp, Inc. and
subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the
year ended September 30, 1998, filed with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Registration
Form Statement No. Purpose
- ---- ------------- -------
<S> <C> <C>
S-8 33-99742 InterWest Bank 1984 Stock Option Plan
S-8 33-99742 InterWest Bancorp, Inc. 1993 Incentive & Non-
Incentive
Stock Option Plans for Outside Directors
S-8 333-13191 Central Bancorporation 1992 Employee Stock Option
Plan & Central Bancorporation Director Stock Option
Plan
S-8 333-24525 InterWest Bancorp, Inc. 1996 Outside Directors
Option-for-Fees Plan
S-8 333-65839 Kittitas Valley Bancorp 1996 Director Stock Option
Plan & Kittitas Valley Bancorp Employee Stock Option
Plan
S-8 333-57679 Pacific Northwest Bank 1988 Stock Option Plan &
Pioneer Bancorp, Inc. Amended And Restated Incentive
Stock Option Plan
S-8 333-50685 First National Bank Of Port Orchard 1990 Employee &
Director Stock Option Plan
</TABLE>
Seattle, Washington
December 23, 1998
/s/ Ernst & Young LLP
<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 FORTHE YEAR ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 74,018
<INT-BEARING-DEPOSITS> 107,404
<FED-FUNDS-SOLD> 19,863
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 574,346
<INVESTMENTS-CARRYING> 87,262
<INVESTMENTS-MARKET> 87,366
<LOANS> 1,359,050
<ALLOWANCE> 13,224
<TOTAL-ASSETS> 2,447,848
<DEPOSITS> 1,564,825
<SHORT-TERM> 60,157
<LIABILITIES-OTHER> 28,981
<LONG-TERM> 622,233
0
0
<COMMON> 0
<OTHER-SE> 171,652
<TOTAL-LIABILITIES-AND-EQUITY> 2,447,848
<INTEREST-LOAN> 127,472
<INTEREST-INVEST> 49,591
<INTEREST-OTHER> 3,216
<INTEREST-TOTAL> 180,279
<INTEREST-DEPOSIT> 60,841
<INTEREST-EXPENSE> 101,483
<INTEREST-INCOME-NET> 78,796
<LOAN-LOSSES> 2,807
<SECURITIES-GAINS> 813
<EXPENSE-OTHER> 66,972
<INCOME-PRETAX> 35,490
<INCOME-PRE-EXTRAORDINARY> 22,642
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,642
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 3.52
<LOANS-NON> 8,210
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,104
<CHARGE-OFFS> 1,290
<RECOVERIES> 384
<ALLOWANCE-CLOSE> 13,224
<ALLOWANCE-DOMESTIC> 9,325
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,899
</TABLE>
