<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
-------------
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------- ----------
COMMISSION FILE NUMBER 0-26632
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INTERWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
CHARTERED BY THE STATE OF WASHINGTON
------------------------------------
(State or other jurisdiction of incorporation or organization)
91-1691216
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(I.R.S. Employer Identification No.)
275 SOUTHEAST PIONEER WAY
OAK HARBOR, WASHINGTON
-----------------------
(Address of principal executive offices)
98277
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(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES x NO
----- -----
As of June 30, 1998, 15,667,982 shares of common stock were outstanding with no
par value.
<PAGE>
INTERWEST BANCORP, INC
<TABLE>
<CAPTION>
INDEX PAGE
- ----- -----
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1998 AND SEPTEMBER 30, 1997 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
JUNE 30, 1998 AND 1997 2
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1998
AND THE YEAR ENDED SEPTEMBER 30, 1997 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTH PERIOD ENDED JUNE 30, 1998 AND 1997 4-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-7
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $66,322 $68,953
Interest-bearing deposits in banks 14,382 166,935
Federal funds sold 13,096 12,225
Securities available for sale, at fair value 600,576 563,167
Securities held to maturity
(fair value: $89,384 and $129,470) 91,042 132,295
Loans receivable, net 1,399,407 1,338,451
Loans held for sale (fair value: $41,408 and
$10,451) 40,988 10,230
Accrued interest receivable 18,826 14,551
Real estate held for sale and for development 12,776 12,414
Federal Home Loan Bank (FHLB) stock, at cost 36,150 27,211
Premises and equipment, net 48,288 47,381
Intangible assets 5,158 4,413
Other assets 4,237 4,702
----------------------------
Total assets $2,351,248 $2,402,928
----------------------------
----------------------------
LIABILITIES
Non-interest bearing deposits $157,580 $150,428
Interest-bearing deposits 1,327,175 1,318,032
----------------------------
Total deposits 1,484,755 1,468,460
FHLB advances 543,556 494,648
Securities sold under agreements to repurchase 128,643 258,993
Accrued expenses and other liabilities 24,213 17,730
Other borrowings 2,083 2,327
----------------------------
Total liabilities 2,183,250 2,242,158
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized 30,000,000 shares
Issued and outstanding 15,667,982
and 15,664,812 -- --
Paid-in-capital 36,522 36,110
Treasury stock (289) (289)
Retained earnings 134,584 126,064
Debt related to employee stock ownership
plan (ESOP) (1,983) --
Net unrealized loss on
securities available for sale, net of tax (836) (1,115)
----------------------------
Total stockholders' equity 167,998 160,770
----------------------------
Total liabilities and stockholders' equity $2,351,248 $2,402,928
----------------------------
----------------------------
</TABLE>
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $31,980 $29,392 $94,593 $84,340
Securities available for sale 10,853 9,165 33,172 24,508
Securities held to maturity 1,552 2,619 4,558 10,087
Other 864 602 2,023 2,006
---------------------------------------------------
45,249 41,778 134,346 120,941
INTEREST EXPENSE
Deposits 15,100 15,522 45,466 45,291
FHLB advances and other borrowings 8,234 5,006 23,033 13,376
Securities sold under agreements to repurchase 1,849 2,647 7,286 7,346
---------------------------------------------------
25,183 23,175 75,785 66,013
Net interest income before provision for
losses on loans 20,066 18,603 58,561 54,928
Provision for losses on loans 1,520 303 2,366 1,233
---------------------------------------------------
Net interest income after provision for
losses on loans 18,546 18,300 56,195 53,695
NONINTEREST INCOME
Gain on sale of loans 1,930 528 6,641 2,028
Service fees 2,742 2,546 8,083 6,973
Investment product fees and
insurance commissions 589 596 1,574 1,631
Gain on sale of securities available for sale 218 111 649 407
Gain on real estate held for sale
and for development 33 89 280 275
Other 403 568 1,339 1,192
---------------------------------------------------
5,915 4,438 18,566 12,506
NONINTEREST EXPENSE
Compensation and employee benefits 8,101 7,010 23,758 20,428
General and administrative 3,033 3,154 10,332 9,749
Occupancy 2,299 1,985 6,643 5,617
Data processing 958 820 2,850 2,555
FDIC premium assessment 164 170 495 266
Merger related charges 4,195 -- 5,495 --
Loss from real estate write-downs
and operations 184 83 1,220 275
---------------------------------------------------
18,934 13,222 50,793 38,890
Income before income taxes 5,527 9,516 23,968 27,311
Income tax expense 2,254 3,171 8,733 9,239
---------------------------------------------------
NET INCOME $3,273 $6,345 $15,235 $18,072
---------------------------------------------------
---------------------------------------------------
Basic net income per share $0.21 $0.41 $0.97 $1.16
---------------------------------------------------
---------------------------------------------------
Diluted net income per share $0.20 $0.40 $0.94 1.13
---------------------------------------------------
---------------------------------------------------
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized loss
DOLLARS IN THOUSANDS, on securities Debt
EXCEPT SHARE DATA Common Stock Paid-in Retained available for Related Treasury
# of Shares Capital Earnings sale, net of tax to Stock Total
ESOP
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 15,410,127 $34,433 $106,739 $(2,924) $ (312) $(289) $137,647
Net income 24,549 24,549
Dividends, $0.33 per share (5,224) (5,224)
Proceeds from exercise of
common stock options 236,013 2,053 2,053
Proceeds from sale of common
stock 18,788 194 194
Common stock repurchased and
retired (35,780) (570) (570)
ESOP loan repayment
35,664 312 312
Unrealized gain on securities
available for sale, net of 1,809 1,809
tax
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 15,664,812 $36,110 $126,064 $(1,115) $ -- $(289) $160,770
Net income 15,235 15,235
Dividends, $0.35 per share (5,466) (5,466)
Proceeds from exercise of 76,662 411 411
common stock options
Proceeds from sale of common
stock 1,404 18 18
Debt related to ESOP (74,556) (1,983) (1,983)
Fractional shares (340) (17) (17)
Unrealized gain on securities 279 279
available for sale, net of
tax
Pooling accounting adjustment (1,249) (1,249)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1998 15,667,982 $36,522 $134,584 $(836) $(1,983) $(289) $167,998
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
DOLLARS IN THOUSANDS 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $15,235 $18,072
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,514 2,051
Provision for losses on loans 2,366 1,233
Loss on real estate held for sale 853 --
Accretion of premiums and discounts, net 2,746 986
Gain on sale of loans (6,641) (2,028)
Gain on sale of securities available for sale (649) (407)
Gain on sale of real estate held for sale and
for development (280) (275)
Amortization of deferred loan fees, net 1,189 (773)
FHLB stock dividends (1,836) (1,068)
Cash provided (used) by changes in
operating assets and liabilities:
Accrued interest receivable (4,275) (2,982)
Other assets 465 (292)
Accrued expenses and other liabilities 6,725 (6,791)
Pooling accounting adjustment (890) --
-------------------
Net cash provided by operating activities, $18,522 $7,726
INVESTING ACTIVITIES
Purchase of securities available for sale (719,219) (360,238)
Proceeds from matured securities available for sale 305,376 35,227
Proceeds from sale of securities available for sale 316,650 249,149
Proceeds from matured securities held to maturity 24,511 176,350
Purchase of securities held to maturity (20) (85,000)
Principal repayments securities available for sale 66,673 49,271
Principal repayments from securities held to maturity 7,542 4,845
Proceeds from sale of loans 230,469 39,024
Net increase in loans receivable (324,471) (237,221)
Proceeds from sale of real estate held for sale
and for development 3,292 2,742
Purchases of premises and equipment (4,090) (9,467)
Purchase of FHLB stock (7,103) (6,054)
Redemption of FHLB stock -- 6,000
Net increase in federal funds sold (871) (15,205)
Improvements capitalized to real estate held for sale (829) (1,713)
-------------------
Net cash used by investing activities $(102,090) $(152,290)
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)
<TABLE>
<CAPTION>
Nine months ended June 30,
DOLLARS IN THOUSANDS 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in transaction account deposits 42,085 30,892
Net increase in certificates of deposit (25,790) 63,057
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 1,363,043 872,901
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (1,446,712) (799,340)
Dividends paid (4,672) (4,160)
Issuance of common stock 430 1,899
-----------------------
Net cash provided (used) by financing activities (71,616) 165,249
-----------------------
Net change in cash and cash equivalents (155,184) 20,685
CASH AND CASH EQUIVALENTS
Beginning of period 235,888 78,649
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End of period $80,704 $99,334
-----------------------
-----------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $74,984 $63,012
Income taxes 8,560 6,096
Noncash transaction
Loans transferred to real estate held for sale, net 3,397 1,349
Transfer of premises to real estate held for sale -- 1,179
Loans securitizied as mortgage-backed and related
securities -- 43,810
Securities held to maturity transferred to available
for sale 8,454 --
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 1998
NOTE A BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
InterWest Bancorp, Inc. and its wholly owned banking subsidiaries, which is
collectively defined as InterWest. The wholly-owned subsidiaries of InterWest
Bancorp, Inc. as of June 30, 1998 are InterWest Bank, Pacific Northwest Bank,
Pioneer National Bank and First National Bank of Port Orchard. All material
intercompany transactions and balances have been eliminated.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that impact 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.
The unaudited consolidated financial statements have been prepared in accordance
with general accepted accounting principles for interim financial information
and with the instructions to the Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation are reflected in the
interim consolidated financial statements. The consolidated statements of
operations for the three and nine month periods ended June 30, 1998 and 1997 are
not necessarily indicative of the operating results for the full year. For
further information, refer to the consolidated financial statements and
footnotes for the year ended September 30, 1997.
NOTE B NET INCOME PER SHARE
The diluted weighted average shares outstanding during the three and nine month
periods ended June 30, 1998 and 1997 includes common equivalent shares
outstanding using the treasury stock method. Common stock equivalents include
shares issuable upon exercise of stock options. Unallocated shares relating to
the Employee Stock Ownership Plan (ESOP) debt obligation are deducted in the
calculation of weighted average shares outstanding.
NOTE C BUSINESS COMBINATIONS
On January 15, 1998, InterWest Bancorp, Inc. acquired Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First
National Bank of Port Orchard. Under the terms of the merger agreement, Puget
merged into InterWest Bancorp, Inc., with First National Bank of Port Orchard
becoming a subsidiary of InterWest Bancorp, Inc. First National Bank of Port
Orchard operates 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 stockholders' equity of $5.9 million. Each share of Puget common
stock has been exchanged for 2.5 shares of InterWest common stock. The total
number of shares issued was approximately 586,000.
On June 15,1998, InterWest Bancorp, Inc. acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of the merger agreement,
Pacific has become a subsidiary of InterWest Bancorp, Inc. 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
stockholders' equity of $16.8 million. Each share of Pacific common stock
has been exchanged for 5.92 shares of InterWest Bancorp, Inc. common stock.
The total number of shares issued was approximately 2,346,000.
6
<PAGE>
On June 16, 1998, InterWest Bancorp, Inc. acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National
Bank. Under the terms of the merger agreement, Pioneer merged into InterWest
Bancorp, Inc., with Pioneer National Bank becoming a subsidiary of InterWest
Bancorp, Inc. Pioneer National Bank operates five 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 stockholders' equity of $9.3 million. Each
share of Pioneer common stock has been exchanged for 2.01 shares of InterWest
Bancorp, Inc. common stock. The total number of shares issued was
approximately 693,000.
The acquisitions have been accounted for using the pooling-of-interests
method. In accordance with generally accepted accounting principles, prior
period consolidated financial statements have been restated as if the
companies had been combined for all periods presented. In accordance with
generally accepted accounting principles, the December 31 fiscal year ends of
Pacific, Pioneer and Puget have been restated to conform with InterWest's
September 30 fiscal year end.
On April 20, 1998 InterWest Bancorp, Inc. signed a definitive agreement to
acquire Kittitas Valley Bancorp, Inc. (Kittitas) and its banking subsidiary,
Kittitas Valley Bank, of Ellensburg, Washington. The transaction is
structured such that, within certain limitations, stockholders of Kittitas
can elect to receive either cash, or a fixed number of shares of InterWest
Bancorp, Inc. common stock for each share of Kittitas common stock. The
transaction provides that, in the aggregate, fifty percent of the shares of
Kittitas common stock will be exchanged for cash and fifty percent of the
shares of Kittitas common stock will be exchanged for InterWest Bancorp, Inc.
common stock. The transaction is valued at approximately $13.0 million and
will result in the issuance of approximately 230,000 shares of InterWest
Bancorp, Inc. common stock. As of June 30, 1998, Kittitas had total
consolidated assets of $47.1 million and stockholders' equity of $4.1
million. Kittitas Valley Bank operates three branch offices in Kittitas
County. The acquisition of Kittitas is expected to be completed on August
31, 1998 following approval of the shareholders of Kittitas.
NOTE D RECLASSIFICATIONS
Certain reclassifications have been made to prior financial statements to
conform with current presentation. The effects of the reclassifications are not
considered material.
NOTE E ACCOUNTING CHANGES
On December 31, 1997, InterWest adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "EARNINGS PER SHARE" which provides standards for
computing net income per share. It requires dual presentation of basic and
diluted net income per share on the face of the income statement. Basic net
income per share excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock.
NOTE F SUBSEQUENT EVENTS
On July 21, 1998, InterWest announced a three shares for two common stock
split payable on August 17, 1998 to stockholders 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. Shares of common stock issued for
completed or pending acquisitions have also been adjusted to reflect the
stock split.
7
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE PERIOD ENDED JUNE 30, 1998
BASIS OF PRESENTATION
The following discussion is provided for the consolidated financial condition
and results of operations of InterWest Bancorp, Inc., which includes its
wholly-owned subsidiaries (collectively InterWest). InterWest Bancorp, Inc.'s
wholly owned subsidiaries are InterWest Bank, Pacific Northwest Bank, Pioneer
National Bank and First National Bank of Port Orchard. The purpose of this
discussion is to focus on significant factors concerning InterWest's financial
condition and results of operations.
OVERVIEW
InterWest is continuing to implement its 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 in consumer and commercial
lending will continue to change the composition of its loan portfolio.
InterWest also intends to change the funding sources for asset growth.
InterWest is emphasizing higher growth in transaction accounts relative to
certificates of deposit and borrowings. This is 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 on August 31, 1996 began this process.
Central's subsidiary bank, 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 stockholders' equity of $17.1 million.
Continuing its commitment to commercial banking, InterWest acquired three
commercial banking institutions subsequent to September 30, 1997 and signed a
definitive agreement to acquire a fourth prior to the end of fiscal year 1998.
On January 15, 1998, InterWest Bancorp, Inc. acquired Puget Sound Bancorp, Inc.
(Puget), of Port Orchard, Washington, the holding company of First National
Bank of Port Orchard. Under the terms of the merger agreement, Puget merged into
InterWest Bancorp, Inc., with First National Bank of Port Orchard becoming a
wholly-owned subsidiary of InterWest Bancorp, Inc. First National Bank of Port
Orchard operates 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
stockholders' equity of $5.9 million. Each share of Puget common stock has been
exchanged for 2.5 shares of InterWest common stock.
On June 15, 1998, InterWest Bancorp, Inc. acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of the merger agreement,
Pacific became a wholly-owned subsidiary of InterWest Bancorp, Inc. 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
stockholders' equity of $16.8 million. Each share of Pacific common stock has
been exchanged for 5.92 shares of InterWest Bancorp, Inc. common stock.
On June 16, 1998, InterWest Bancorp, Inc. acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National Bank.
Under the terms of the merger agreement, Pioneer merged into InterWest Bancorp,
Inc., with Pioneer National Bank becoming a wholly-owned subsidiary of InterWest
Bancorp, Inc. 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 stockholders' equity of $9.3 million. Each share
of Pioneer common stock has been exchanged for 2.01 shares of InterWest Bancorp,
Inc. common stock.
These mergers have been 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.
8
<PAGE>
RESULTS OF OPERATIONS
Net income was $3.3 million for the three months ended June 30, 1998, compared
to $6.3 million for the three months ended June 30, 1997. Basic and diluted net
income per share were $0.21 and $0.20 for the three months ended June 30, 1998
compared to $0.41 and $0.40, respectively for the three months ended June 30,
1997. For the nine months ended June 30, 1998 net income was $15.2 million
compared to $18.1 million for the nine months ended June 30, 1997. Basic and
diluted net income per share were $0.97 and $0.94 for the nine months ended June
30, 1998 compared to $1.16 and $1.13, respectively for the nine months ended
June 30, 1997.
The results of operations for the three and nine month periods ended June 30,
1998 have been impacted by nonrecurring merger related charges associated with
the mergers with Puget, Pacific and Pioneer. Net income before nonrecurring
merger related charges was $7.3 million and $20.3 million for the three and nine
month periods ended June 30, 1998, respectively. Basic and diluted net income
per share before merger related charges were $0.47 and $0.45 for the three
months ended June 30, 1998, and $1.30 and $1.26 for the nine months ended June
30, 1998.
Merger related charges incurred during the three and nine month periods ended
June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS Three Months Nine Months
- ------------------------------------------------------------------------
<S> <C> <C>
Professional fees $1,541 $1,938
Severance and other personnel 1,006 1,468
Data and facilities conversion 1,113 1,382
Other 535 707
--------------------
4,195 5,495
Merger related provision for losses on loans 1,000 1,100
--------------------
Total merger related expenses 5,195 6,595
Income tax benefit (1,163) (1,518)
---------------------
Merger related expenses, net of tax $4,032 $5,077
---------------------
---------------------
</TABLE>
The following table summarizes net income, net income per share and key
financial ratios before and after nonrecurring merger related expenses:
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
BEFORE MERGER RELATED EXPENSES:
<S> <C> <C> <C> <C>
Net income $7,305 $6,345 $20,312 $18,072
---------------------------------------------------
---------------------------------------------------
Basic net income per share $0.47 $0.41 $1.30 $1.16
--------------------------------------------------
--------------------------------------------------
Diluted net income per share $0.45 $0.40 $1.26 $1.13
--------------------------------------------------
--------------------------------------------------
Efficiency ratio 56.73% 57.38% 58.73% 57.67%
Return on average stockholders' equity 17.30% 16.81% 16.36% 16.58%
Return on average assets 1.22% 1.17% 1.15% 1.15%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
AFTER MERGER RELATED EXPENSES:
<S> <C> <C> <C> <C>
Net income $3,273 $6,345 $15,235 $18,072
---------------------------------------------------
---------------------------------------------------
Basic net income per share $0.21 $0.41 $0.97 $1.16
--------------------------------------------------
--------------------------------------------------
Diluted net income per share $0.20 $0.40 $0.94 $1.13
--------------------------------------------------
--------------------------------------------------
Efficiency ratio 72.87% 57.38% 65.86% 57.67%
Return on average stockholders' equity 7.55% 16.81% 12.27% 16.58%
Return on average assets 0.55% 1.17% 0.86% 1.15%
</TABLE>
NET INTEREST INCOME | Net interest income before provision for losses on loans
increased to $20.1 million for the three months ended June 30, 1998, compared to
$18.6 million for the three months ended June 30, 1997. For the nine months
ended June 30, 1998 net interest income before provision for losses on loans was
$58.6 million, an increase from $54.9 million for the nine months ended June 30,
1997. The increase in net interest income is due to an increase in
interest-earning assets which is partially offset by a decrease in the margin
earned on those assets.
InterWest's net interest margin was 3.56 percent for the three months ended June
30, 1998, a decrease from 3.59 percent for the three months ended March 31, 1998
and 3.67 percent for the three months ended June 30, 1997. For the nine months
ended June 30, 1998 net interest margin was 3.52 percent, a decrease from 3.74
percent for the nine months ended June 30, 1997.
Net interest margin decreased in the current three month and nine month periods
compared to previous comparable periods primarily as a result of the continued
flat yield curve. In an interest rate environment with a flat yield curve, the
margin earned on mortgage lending has decreased due to the compression of the
interest rate spread between short-term deposit and borrowing rates and lending
rates. InterWest focused on originating adjustable-rate loans, increasing
short-term business and consumer loans and selling fixed-rate mortgage loans in
the secondary market to offset the impact of a flat yield curve.
Interest income for the three months ended June 30, 1998 was $45.2 million
compared to $41.8 million for the three months ended June 30, 1997. For the
nine months ended June 30, 1998, interest income was $134.3 million compared to
$120.9 million for the nine months ended June 30, 1997. The increase is due to
growth in interest-earning assets, which is partially offset by a decrease in
the yield earned on those assets. The yield on interest-earning assets
decreased to 8.03 percent and 8.08 percent for the three and nine months ended
June 30, 1998, compared to 8.12 percent and 8.23 percent for the three and nine
months ended June 30, 1997.
Interest expense increased to $25.2 million for the three months ended June 30,
1998 compared to $23.2 million for the three months ended June 30, 1997. For
the nine months ended June 30, 1998 interest expense was $75.8 million compared
to $66.0 million for the nine months ended June 30, 1997. This is due to an
increase in the balance of interest-bearing liabilities from the prior year.
Interest-bearing liabilities increased to fund the growth in interest-earning
assets. The cost of funds for the three months ended June 30, 1998 was 4.57
percent, a decrease from 4.65 percent for the three months ended June 30, 1997.
The cost of funds for the nine months ended June 30, 1998 was 4.65 percent, an
increase from 4.56 percent for the nine months ended June 30, 1997.
10
<PAGE>
AVERAGE RATES AND BALANCES | The following table indicates the average balance
and average interest rates earned or paid, interest rate spread and net interest
margin for the three months ended June 30:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable, net and loans
held for sale $ 1,400,714 9.13% $1,288,770 9.12%
Securities available for sale,
securities held to maturity and
other interest-earning assets 853,746 6.22% 738,932 6.70%
-------------------------------------------------------
Total interest-earnings assets 2,254,460 8.03% 2,027,702 8.24%
-------------------------------------------------------
Deposits 1,481,069 4.08% 1,457,681 4.26%
FHLB advances, securities
sold under agreements
to repurchase and 724,151 5.57% 537,836 5.69%
other borrowings
-------------------------------------------------------
Total interest-bearing liabilities 2,205,220 4.57% 1,995,517 4.65%
-------------------------------------------------------
Net interest spread $ 49,240 3.46% $32,185 3.60%
-------------------------------------------------------
-------------------------------------------------------
Net interest margin 3.56% 3.67%
----- -----
----- -----
</TABLE>
The following table indicates the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the nine
months ended June 30:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable, net and loans
held for sale $ 1,391,009 9.07% $1,232,147 9.13%
Securities available for sale,
securities held to maturity and
other interest-earning assets 826,223 6.42% 726,384 6.72%
-------------------------------------------------------
Total interest-earnings assets 2,217,232 8.08% 1,958,531 8.23%
-------------------------------------------------------
Deposits 1,459,265 4.15% 1,436,990 4.20%
FHLB advances, securities
sold under agreements
to repurchase and 713,276 5.67% 491,834 5.62%
other borrowings
-------------------------------------------------------
Total interest-bearing liabilities 2,172,541 4.65% 1,928,824 4.56%
-------------------------------------------------------
Net interest spread $ 44,691 3.43% $29,707 3.67%
-------------------------------------------------------
-------------------------------------------------------
Net interest margin 3.52% 3.74%
----- -----
----- -----
</TABLE>
11
<PAGE>
Net interest income is impacted by changes in both interest rates and changes in
interest-earning assets and interest-bearing liabilities. The table presented
below are an analysis of these changes for the three months and nine months
ended June 30, 1998 as compared to the three months and nine months ended June
30, 1997:
<TABLE>
<CAPTION>
Three months 1998 vs 1997 Nine months 1998 vs 1997
Increase (Decrease) Increase (Decrease)
Due to changes in Due to changes in
DOLLARS IN THOUSANDS Rate Volume Total Rate Volume Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable, net
and loans held for sale $32 $2,556 $2,588 $(546) $10,799 $10,253
Securities available for
sale, securities held
to maturity and other
interest-earning assets (778) 1,661 883 (1,541) 4,693 3,152
---------------------------------------------------------------------
Total net change in income
on interest-earning assets (746) 4,217 3,471 (2,087) 15,492 13,405
---------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits (677) 255 (422) (496) 671 175
FHLB advances, securities
sold under agreement to
repurchase and other
borrowings (160) 2,590 2,430 186 9,411 9,597
---------------------------------------------------------------------
Total net change in expense
on interest-bearing liabilities (837) 2,845 2,008 (310) 10,082 9,772
---------------------------------------------------------------------
Net change in net
interest income $ 91 $1,372 $1,463 $(1,777) $5,410 $3,633
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
PROVISION FOR LOSSES ON LOANS | The provision for losses on loans was $1.5
million for the three months and $2.4 million for the nine months ended June 30,
1998, an increase from $571,000 and $1.2 million for the respective periods of
fiscal year 1997. The increase in the provision is primarily due to a merger
related provision for losses on loans of $1 million for the three months and
$1.1 million for the nine months ended June 30, 1998 to conform the allowance
for losses on loans practices of Pioneer National Bank and First National Bank
of Port Orchard with InterWest.
NONINTEREST INCOME | Noninterest income for the three months ended June 30, 1998
was $5.9 million, an increase from $4.4 million for the three months ended June
30, 1997. This is primarily due to increased gains on the sale of loans of $1.4
million and an increase in service fee revenue of $200,000. The increase in
service fee revenue is primarily due to growth in transaction deposit accounts
and the development of new business and consumer banking products. Noninterest
income was $18.6 million for the nine months ended June 30, 1998, an increase
from $12.5 million for the nine months ended June 30, 1997. Consistent with the
quarterly increase, this is primarily due to an increase in the gain on sale of
loans of $4.6 million and an increase in service fee revenue of $1.1 million.
12
<PAGE>
NONINTEREST EXPENSE | Excluding nonrecurring merger related charges, noninterest
expenses were $14.7 million for the three months ended June 30, 1998, compared
to $15.6 million for the three months ended March 31, 1998 and $13.3 million for
the three months ended June 30, 1997. Excluding merger related charges, the
operating efficiency ratio was 56.73 percent for the three months ended June 30,
1998 as compared to 59.76 percent for the three months ended March 31, 1998 and
57.38 percent for the three months ended June 30, 1997. For the nine months
ended June 30, 1998 noninterest expenses were $45.3 million and the efficiency
ratio was 58.73 percent before merger related charges, compared to noninterest
expenses of $38.9 million and an efficiency ratio of 57.67 percent for the nine
months ended June 30, 1997.
The increase in noninterest expenses from the respective periods one year ago is
due to bank expansion, product diversification and enhanced focus on the growth
of consumer and commercial banking. Key elements of the consumer and commercial
banking growth were: the development of credit administration, commercial and
consumer lending support, business relationship officers and the addition of
several experienced commercial banking management personnel. The decrease in
noninterest expenses from the quarter ended March 31, 1998 was due to a decrease
in real estate write-downs and a decrease in general and administrative
expenses. During the three months ended March 31, 1998, InterWest recorded an
expense of $550,000 associated with fair value adjustments on certain properties
in the real estate held for development portfolio. The decrease in general and
administrative expenses was primarily due to the timing of certain advertising
campaigns and consulting projects.
FEDERAL INCOME TAX | Income tax expense was $2.3 million and $8.7 million for
the three months and nine months ended June 30, 1998, compared to $3.2 million
and $9.2 million for the three months and nine months ended June 30, 1997,
respectively. The effective tax rates were 40.8 percent and 36.4 percent for the
three months and nine months ended June 30, 1998, compared to 33.3 percent and
33.8 percent for the three months and nine months ended June 30, 1997. The
higher effective tax rates in 1998 is due to certain merger expenses that are
not deductible for federal income tax purposes.
REVIEW OF FINANCIAL CONDITION
Total assets were $2.35 billion as of June 30, 1998, compared to $2.4 billion as
of September 30, 1997. The loan portfolio, including loans held for sale, has
increased 6.7 percent from $1.349 billion as of September 30, 1997, to $1.440
billion as of June 30, 1998. Other interest-earning assets, which includes
securities available for sale, securities held to maturity, FHLB stock and
interest-bearing deposits in banks, decreased 16.3 percent from $901.8 million
as of September 30, 1997 to $755.2 million as of June 30, 1998.
SECURITIES AND OTHER INTEREST-EARNING ASSETS | As of June 30, 1998, InterWest
had $600.6 million or 87 percent of its securities classified as available for
sale. The available for sale portfolio is required to be carried at fair value,
thus its carrying value fluctuates with changes in market conditions. As of June
30, 1998, InterWest had an unrealized loss on securities available for sale of
$1.3 million as compared to an unrealized loss of $1.7 million as of September
30, 1997. The remaining $91.0 million or 13 percent of securities are
classified as held to maturity. As permitted by SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities", upon the acquisitions of
Puget, Pacific and Pioneer and subsequent restructuring of the acquired
subsidiary bank investment portfolios, $8.5 million of securities classified as
held to maturity have been transferred to the available for sale portfolio.
LOANS RECEIVABLE AND LOANS HELD FOR SALE | Principal balances outstanding in the
loan portfolio, including loans held for sale, increased $91.0 million from
September 30, 1997. Commercial loan balances outstanding increased $44.1
million from September 30, 1997. As of June 30, 1998, outstanding commercial
loans represent 13.6 percent of the total loan portfolio compared to compared to
11.8 percent and 11.3 percent, respectively, as of March 31, 1998 and September
30, 1997. The mergers with Pacific Northwest Bank and Pioneer National Bank
resulted in an increase in the percentage of commercial loans relative to the
total loan portfolio from 4.4 percent to 13.6 percent. InterWest will continue
to implement a strategy of changing the
13
<PAGE>
composition of the loan portfolio with emphasis on commercial and commercial
real estate mortgage loan growth.
Commercial real estate mortgage loans increased $19.8 million, representing an
annualized growth rate of 12.3 percent, during the nine months ended June 30,
1998 and real estate construction loans outstanding have increased by $29
million for the same period.
During the three month and nine month periods ended June 30, 1998, InterWest
originated $154.1 million and $415.3 million of single-family residential loans
(including single-family construction loans), an increase from $113.6 million
and $286.4 million for the three month and nine month periods ended June 30,
1997. However, there is not a corresponding growth in single-family residential
real estate mortgage loan balances due to mortgage banking activities to sell
fixed rate mortgage loans and high prepayment rates compared to prior periods.
During the three month and nine month periods ended June 30, 1998 InterWest sold
$87.4 million and $195.6 million of single family residential real estate
mortgage loans, an increase from $5.3 million and $61.7 million for the three
month and nine month periods ended June 30, 1997. Continued low interest rates
may result in single-family residential real estate mortgage loan originations,
prepayments and mortgage banking activities at high levels for the remainder of
fiscal year 1998.
The following table indicates the loan portfolio mix as of June 30, 1998, and
September 30, 1997:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $689,157 $701,840
Multi-family residential 58,774 58,137
Commercial 234,007 214,232
Real estate construction 165,603 136,580
Consumer loans 78,666 73,876
Commercial loans 199,380 155,265
Agricultural loans 37,165 30,491
---------- ----------
1,462,752 1,370,421
Less:
Allowance for losses on loans 12,750 11,104
Deferred loan fees and discounts 9,607 10,636
---------- ----------
$1,440,395 $1,348,681
---------- ----------
---------- ----------
</TABLE>
Interest is accrued on loans receivable until the loan is 90 days delinquent or
management doubts the collectibility of the loan or the unpaid interest, at
which time InterWest establishes a reserve for any accrued interest. All loans
on which interest is not being accrued are referred to as non-accrual loans. As
of June 30, 1998, non-accrual loans totaled $8.0 million, an increase from $5.5
million as of September 30, 1997. Total non-performing assets, including
non-accrual loans and real estate owned through foreclosure, increased to $15.8
million or 0.67 percent of total assets as of June 30, 1998, compared to $12.4
million or 0.52 percent of total assets as of September 30, 1997.
14
<PAGE>
The following table summarizes non-performing assets as of June 30, 1998 and
September 30, 1997:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1998 September 30, 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS
Real estate mortgage loans
Single-family residential $3,952 $3,181
Multi-family residential -- 407
Commercial 1,479 805
Real estate construction 944 234
Consumer loans 172 417
Commercial loans 1,305 343
Agricultural loans 140 78
-----------------------
Total nonaccrual loans 7,992 5,465
REAL ESTATE OWNED THROUGH FORECLOSURE
Single-family residential 2,717 2,100
Multi-family residential 578 --
Commercial 4,476 4,845
-----------------------
Total real estate owned through foreclosure 7,771 6,945
-----------------------
Total non-performing assets $15,763 $12,410
-----------------------
-----------------------
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS | The allowance for losses on loans totaled $12.8
million (0.88 percent of loans) as of June 30, 1998 compared to $11.1 million
(0.82 percent of loans) as of September 30, 1997. Net loan charge-offs were
$645,000 or 0.05 percent of the average balance of loans outstanding for the
nine months ended June 30, 1998. InterWest assesses the risk level inherent in
the loan portfolio to provide adequate reserves to meet these risks as a part of
the ongoing review of the loan portfolio. Non-performing assets and delinquency
trends are key elements in determining the allowance for losses on loans. The
allowance for losses on loans is also determined by taking into consideration
general economic conditions in the market InterWest serves, historical loss
experience, individual loan review findings, loan mix and the level of loans
relative to the allowance for losses on loans. The following tables summarize
the activity in allowance for losses on loans during the three month and nine
month periods ended June 30:
<TABLE>
<CAPTION>
Three months Nine months
DOLLARS IN THOUSANDS 1998 1997 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $11,447 $10,987 $11,104 $10,235
Provisions 1,520 303 2,366 1,233
Pooling adjustment (75)
Recoveries 130 112 325 290
Charge-offs (347) (332) (970) (688)
-----------------------------------
Balance at end of period $12,750 $11,070 $12,750 $11,070
--------------------------------------
--------------------------------------
</TABLE>
15
<PAGE>
Total liabilities were $2.183 billion as of June 30, 1998, compared to $2.242
billion as of September 30, 1997.
DEPOSITS | Noninterest bearing deposits have increased to $157.6 million as of
June 30, 1998 from $146.8 million as of March 31, 1998 and $150.4 million as of
September 30, 1997. The mergers with Pacific Northwest Bank and Pioneer
National Bank resulted in an increase in the percentage of noninterest bearing
deposits relative to total deposits from 7.0 percent to 10.6 percent.
Interest bearing transaction accounts (which includes interest bearing checking,
money market and savings accounts) increased to $472.5 million as of June 30,
1998 compared to $450.4 million as of March 31, 1998 and $437.6 million as of
September 30, 1997. Transaction accounts currently represent 31.8 percent of
total deposits, an increase from 30.2 percent as of March 31, 1998 and 29.8
percent as of September 30, 1997. Money market and interest bearing checking
account balances increased by $19.1 million and $3.8 million, respectively, from
March 31, 1998. This represents annualized growth rates of 39 percent and 11
percent for money market and interest bearing checking account balances from
March 31, 1998, respectively.
Certificates of deposit decreased to $854.7 million as of June 30, 1998 compared
to $894.9 million as of March, 31, 1998 and $880.5 million as of September 30,
1997. Certificates of deposit currently represent 57.6 percent of total
deposits which is a decrease from 60.0 percent as of March 31, 1998 and
September 30, 1997.
Management is continuing to implement its strategy to increase the percentage of
noninterest bearing deposits and interest bearing transaction deposits relative
to certificates of deposit. This should have a positive impact on net interest
income, service fee revenue and market penetration.
The following table indicates the deposit mix as of June 30, 1998 and September
30, 1997:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1998 September 30, 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing deposits $157,580 $150,428
Interest-bearing checking accounts 146,528 136,402
Money market accounts 216,153 185,029
Savings accounts 109,818 116,135
Certificates 854,676 880,466
------- -------
Total $1,484,755 $1,468,460
---------- ----------
---------- ----------
</TABLE>
STOCKHOLDERS' EQUITY | InterWest declared on July 21, 1998 a three-for-two split
of InterWest Bancorp, Inc. common stock. InterWest stockholders will receive
one additional share for every two shares of InterWest common stock held. The
distribution date for the stock split will be August 17, 1998 to stockholders of
record on August 3, 1998. Common stock issued and outstanding, average shares
outstanding, net income per share and shares issued through acquisitions for all
periods presented have been retroactively adjusted to give effect to this
transaction. InterWest's total stockholders' equity was $168.0 million as of
June 30, 1998, an increase of $7.3 million from $160.8 million as September 30,
1997. For the quarter ended June 30, 1998 InterWest declared dividends of $0.13
per share. Book value per share was $10.72 as of June 30, 1998, which was an
increase from $10.66 as of March 31, 1998 and $10.26 as of September 30, 1997.
Stockholders' equity as a percentage of total assets increased from 6.69 percent
as of September 30, 1997 and 6.98 percent as of March 31, 1998, to 7.15 percent
as of June 30, 1998.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Management of liquidity focuses on the need to meet both short-term funding
requirements and InterWest's long-term strategies and goals. Specifically, the
objective of liquidity management is to ensure the continuous availability of
funds to meet the demands of depositors, creditors and borrowers. Management has
structured the balance sheet to meet these needs. InterWest desires to attract
and retain consumer and business customer relationships with a focus on
transaction accounts and short-term business and consumer lending. InterWest
also uses wholesale funds through advances from the Federal Home Loan Bank of
Seattle (FHLB) and the sale of securities under agreements to repurchase them to
fund asset growth. Other sources of funds for liquidity include loan
repayments, loan sales, securities sales and mortgage-backed and related
security repayments. Repayments on loans and mortgage-backed and related
securities and deposit inflows and outflows can be significantly impacted by
interest rates.
InterWest has additional capacity to borrow funds from the FHLB through a
preapproved credit line. This credit line has a pledge requirement whereby
InterWest must maintain unencumbered collateral with a par value at least equal
to the outstanding balance. As of June 30, 1998, InterWest has $543.6 million
outstanding in advances from the FHLB. InterWest uses the securities market as a
vehicle for borrowing by utilizing its securities available for sale and
securities held to maturity as collateral. As of June 30, 1998, InterWest has
$128.6 million outstanding in securities sold under agreement to repurchase.
These borrowings are collateralized by securities with a market value exceeding
the face value of the borrowings. If the market value of the securities were to
decline as a result of an increase in interest rates or other factors, InterWest
would be required to pledge additional securities or cash as collateral.
InterWest is committed to managing capital for maximum stockholder benefit and
maintaining strong protection for depositors and creditors. InterWest manages
various capital levels at both the holding company and subsidiary Bank level to
maintain appropriate capital ratios and levels in accordance with external
regulations and capital guidelines established by the Board of Directors.
InterWest Bancorp, Inc. and it's subsidiaries, InterWest Bank, Pacific Northwest
Bank, Pioneer National Bank and First National Bank of Port Orchard, are subject
to risk-based capital guidelines requiring minimum capital levels based on the
perceived credit risk of assets.
FDIC regulations establish the amount of capital for each of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA) established categories of
institutions. The regulations define the relevant capital levels for the five
categories In general terms, the capital definitions are as follows:
<TABLE>
<CAPTION>
Total Capital Tier 1 Tier 1
(to Risk (to Risk (to Average
Weighted Assets) Weighted Assets) Assets)
---------------- ---------------- -------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized - - 2% or less
</TABLE>
InterWest Bancorp, Inc. is subject to risk-based capital guidelines issued by
the Federal Reserve Board (FRB) which establish a risk-adjusted ratio relating
capital to different categories of assets. InterWest's Tier I capital is
comprised of stockholders' equity less certain intangibles, and excludes the
equity impact of adjusting securities available for sale to fair value. Total
capital is Tier I capital and the allowance for losses on loans. The FRB's
risk-based capital rules have been supplemented by a leverage capital ratio,
defined as Tier I capital to adjusted quarterly average total assets. As of
June 30, 1998, under the FRB's capital guidelines, InterWest's levels of
consolidated regulatory capital exceed the FRB's minimum requirements.
17
<PAGE>
The capital amounts and ratios as of June 30, 1998 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
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANCORP, INC.
Total Capital
(to Risk Weighted Assets) $179,321 13.24% $108,370 8.0% $135,462 10.0%
Tier I Capital
(to Risk Weighted Assets) 166,571 12.30% 54,185 4.0% 81,277 6.0%
Tier I Capital
(to Average Assets) 166,571 6.95% 71,939 3.0% 119,898 5.0%
INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $144,217 13.52% $85,310 8.0% $106,640 10.0%
Tier I Capital
(to Risk Weighted Assets) 135,295 12.69% 42,655 4.0% 63,983 6.0%
Tier I Capital
(to Average Assets) 135,295 6.62% 81,714 4.0% 102,142 5.0%
PACIFIC NORTHWEST BANK:
Total Capital
(to Risk Weighted Assets) $18,148 10.35% $14,027 8.0% $17,533 10.0%
Tier I Capital
(to Risk Weighted Assets) 16,571 9.45% 7,014 4.0% 10,520 6.0%
Tier I Capital
(to Average Assets) 16,571 8.50% 7,799 4.0% 9,749 5.0%
PIONEER NATIONAL BANK:
Total Capital
(to Risk Weighted Assets) $9,169 12.96% $5,662 8.0% $7,077 10.0%
Tier I Capital
(to Risk Weighted Assets) 8,274 11.69% 2,831 4.0% 4,246 6.0%
Tier I Capital
(to Average Assets) 8,274 7.87% 4,208 4.0% 5,260 5.0%
FIRST NATIONAL BANK OF PORT ORCHARD:
Total Capital
(to Risk Weighted Assets) $6,384 15.29% $3,341 8.0% $4,176 10.0%
Tier I Capital
(to Risk Weighted Assets) 5,886 14.10% 1,671 4.0% 2,505 6.0%
Tier I Capital
(to Average Assets) 5,886 10.79% 2,182 4.0% 2,728 5.0%
</TABLE>
As of June 30, 1998, InterWest Bancorp, Inc., InterWest Bank, Pacific Northwest
Bank, Pioneer National Bank and First National Bank of Port Orchard were in
compliance with the well-capitalized capital requirements. Management believes
that under the current regulations InterWest Bancorp, Inc. and subsidiaries will
continue to meet minimum capital requirements in the foreseeable future.
However, events beyond the control of InterWest, such as a downturn in the
economy in areas where InterWest has most of
18
<PAGE>
their loans, could adversely affect future earnings and, consequently, the
ability of InterWest to meet future minimum capital requirements.
Currently, InterWest 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 and is restricted by federal and state tax laws and by tax
considerations related to financial institutions. Generally, InterWest is
precluded from paying dividends on its common stock if capital would be reduced
to below regulatory capital requirements at either the holding company or
subsidiary bank level. InterWest is also restricted by income appropriated to
allowance for losses on loans and deducted for federal income taxes.
YEAR 2000 ISSUES | The century date change for the Year 2000 is a serious issue
that may impact virtually every organization, including InterWest. The
challenge is especially important to financial institutions since many
processes, such as interest accruals and payments, are date sensitive and
InterWest has interaction with numerous customers, vendors and third party
service providers whom must also address the century date change issue.
InterWest has developed a plan, is developing contingency plans and has
performed assessments on its systems. As part of InterWest's process to address
the Year 2000 issue, InterWest has implemented a program to monitor Year 2000
efforts of its suppliers, service providers and large customers. Testing on
systems identified as critical to validate upgrades, vendor certification and
other changes necessary is expected to begin in 1998. Current estimates
indicate renovation costs will not be material to InterWest's results of
operations. Costs incurred related to renovating and testing will be expensed
in the period incurred. InterWest could possibly be impacted by the century
change to the extent other entities not affiliated with InterWest are
unsuccessful in addressing this issue.
FORWARD LOOKING STATEMENTS | In this document, InterWest has included certain
"forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing InterWest of the protections of such safe harbor with respect to all
"forward looking statements". InterWest has used "forward looking statements"
to describe future plans and strategies including expectations of InterWest's
future financial results. Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain. Factors that could effect
results include interest trends, the general economic climate in Washington
state and the country as a whole, loan delinquency rates, and changes in federal
and state regulation. These factors should be considered in evaluating the
"forward looking statements" and undue reliance should not be placed on such
statements.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
InterWest Bancorp, Inc. filed a Form 8-K dated April 20, 1998 to
report the signing of a definitive agreement to acquire Kittitas
Valley Bancorp, Inc.
InterWest Bancorp, Inc. filed a Form 8-K dated June 15, 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, Inc. 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.
(b) EXHIBITS
(27) Financial Data Schedule
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERWEST BANCORP, INC.
By: /s/ Stephen M. Walden
---------------------
Stephen M. Walden,
President and Chief Executive Officer
Dated: August 12 ,1998
---------------------------
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of InterWest Bancorp, Inc. as of and for the nine months
ended June 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 66,322
<INT-BEARING-DEPOSITS> 14,382
<FED-FUNDS-SOLD> 13,096
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 600,576
<INVESTMENTS-CARRYING> 91,042
<INVESTMENTS-MARKET> 89,384
<LOANS> 1,440,395
<ALLOWANCE> 12,750
<TOTAL-ASSETS> 2,351,248
<DEPOSITS> 1,484,755
<SHORT-TERM> 382,539
<LIABILITIES-OTHER> 24,213
<LONG-TERM> 291,743
0
0
<COMMON> 2,103
<OTHER-SE> 165,895
<TOTAL-LIABILITIES-AND-EQUITY> 2,351,248
<INTEREST-LOAN> 94,593
<INTEREST-INVEST> 37,730
<INTEREST-OTHER> 2,023
<INTEREST-TOTAL> 134,346
<INTEREST-DEPOSIT> 45,466
<INTEREST-EXPENSE> 75,785
<INTEREST-INCOME-NET> 58,561
<LOAN-LOSSES> 2,366
<SECURITIES-GAINS> 649
<EXPENSE-OTHER> 50,793
<INCOME-PRETAX> 23,968
<INCOME-PRE-EXTRAORDINARY> 15,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,235
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 3.52
<LOANS-NON> 7,992
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,104
<CHARGE-OFFS> 970
<RECOVERIES> 325
<ALLOWANCE-CLOSE> 12,750
<ALLOWANCE-DOMESTIC> 8,083
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,667
</TABLE>
