<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, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period __________ from to __________
COMMISSION FILE NUMBER 0-26632
INTERWEST BANCORP, INC.
(Exact name of registrant as specified in its charter)
CHARTERED BY THE STATE OF WASHINGTON
(State or other jurisdiction of incorporation or organization)
91-1691216
(I.R.S. Employer Identification No.)
275 SOUTHEAST PIONEER WAY
OAK HARBOR, WASHINGTON
(Address of principal executive offices)
98277
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
----- -----
As of June 30, 1999, 15,643,233 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, 1999 AND SEPTEMBER 30, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1999
AND THE YEAR ENDED SEPTEMBER 30, 1998 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998 4-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $67,588 $74,018
Interest-bearing deposits in banks 6,079 107,404
Federal funds sold 17,800 19,863
Securities available for sale, at fair value 751,937 574,346
Securities held to maturity 72,869 87,262
Loans receivable, net 1,385,102 1,359,050
Loans held for sale 33,177 93,125
Interest receivable 15,034 14,991
Real estate held for sale and for development 9,663 11,996
Federal Home Loan Bank (FHLB) stock, at cost 41,773 37,496
Premises and equipment, net 54,516 50,314
Intangible assets 12,138 14,026
Other assets 6,482 3,957
------------------------------------
Total assets $2,474,158 $2,447,848
====================================
LIABILITIES
Non-interest bearing deposits $188,329 $178,625
Interest-bearing deposits 1,356,458 1,386,200
------------------------------------
Total deposits 1,544,787 1,564,825
FHLB advances 581,554 546,033
Securities sold under agreements to repurchase 131,472 128,613
Other liabilities 17,450 28,981
Other borrowings 22,349 7,744
------------------------------------
Total liabilities 2,297,612 2,276,196
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding 15,643,233 and 15,651,345 -- --
Paid-in-capital 31,435 36,512
Retained earnings 155,216 139,781
Debt related to employee stock ownership plan (ESOP) (3,935) (3,935)
Unrealized loss on securities available for sale,
net of tax (6,170) (706)
------------------------------------
Total shareholders' equity 176,546 171,652
------------------------------------
Total liabilities and shareholders' equity $2,474,158 $2,447,848
====================================
</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 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $30,190 $31,980 $93,656 $94,593
Securities available for sale 11,495 10,853 33,166 33,172
Securities held to maturity 1,247 1,552 3,899 4,558
Other 771 864 2,721 2,023
----------------------------------------------------------
43,703 45,249 133,442 134,346
INTEREST EXPENSE
Deposits 13,476 15,100 41,643 45,466
FHLB advances and other borrowings 7,705 8,234 23,885 23,033
Securities sold under agreements to repurchase 1,878 1,849 5,678 7,286
----------------------------------------------------------
23,059 25,183 71,206 75,785
Net interest income before provision for
losses on loans 20,644 20,066 62,236 58,561
Provision for losses on loans 500 1,520 1,498 2,366
----------------------------------------------------------
Net interest income after provision for
losses on loans 20,144 18,546 60,738 56,195
NON-INTEREST INCOME
Gain on sale of loans 407 1,930 7,758 6,641
Gain on sale of loan servicing rights 2,798 -- 2,798 --
Service fees 3,224 2,742 8,724 8,083
Investment product fees and
insurance commissions 850 589 2,166 1,574
Gain (loss) on sale of securities available for sale (2) 218 72 649
Gain on real estate held for sale
and for development 309 33 388 280
Other 558 403 1,666 1,339
----------------------------------------------------------
8,144 5,915 23,572 18,566
NON-INTEREST EXPENSE
Compensation and employee benefits 9,068 8,101 27,727 23,758
General and administrative 3,743 3,033 11,092 10,332
Occupancy 2,435 2,299 7,065 6,643
Data processing 1,111 958 3,399 2,850
FDIC premium assessment 157 164 474 495
Loss from real estate write-downs
and operations 511 184 844 1,220
Merger related charges -- 4,195 -- 5,495
----------------------------------------------------------
17,025 18,934 50,601 50,793
Income before income taxes 11,263 5,527 33,709 23,968
Income tax expense 3,929 2,254 11,644 8,733
----------------------------------------------------------
Net income $7,334 $3,273 $22,065 $15,235
==========================================================
Basic net income per share $0.47 $0.21 $1.41 $0.97
==========================================================
Diluted net income per share $0.46 $0.20 $1.38 $0.94
==========================================================
Dividends declared per share $0.14 $0.13 $0.42 $0.38
==========================================================
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized Loss Debt
on Securities Related
DOLLARS IN THOUSANDS, Common Stock Paid-in Retained Available For To Treasury
EXCEPT SHARE DATA # of Shares Capital Earnings Sale, Net of Tax ESOP Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1997 15,664,812 $36,110 $126,064 $(1,115) $ -- $(289) $160,770
Dividends, $0.50 per share (7,676) (7,676)
Issuance of common stock:
Exercise of stock options 132,993 706 706
Stock purchase plans 1,404 19 19
Purchase and retirement of (809) (323) 289 (34)
treasury stock
Debt related to ESOP (147,055) (3,935) (3,935)
Net income 22,642 22,642
Change in unrealized gain on 409 409
securities available for sale,
net of tax
Pooling accounting adjustment (1,249) (1,249)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 15,651,345 $36,512 $139,781 $ (706) $(3,935) $ -- $171,652
Dividends, $0.42 per share (6,630) (6,630)
Issuance of common stock:
Exercise of stock options 270,182 1,412 1,412
ESOP loan interest payment 6,206
Purchase and retirement of (284,500) (6,489) (6,489)
common stock
Net income 22,065 22,065
Change in unrealized loss on (5,464) (5,464)
securities available for sale,
net of tax
- ------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 15,643,233 $31,435 $155,216 $(6,170) $(3,935) $ -- $176,546
==============================================================================================================================
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended June 30,
DOLLARS IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $22,065 $15,235
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,632 3,514
Provision for losses on loans 1,498 2,366
Loss on real estate held for sale and for development 636 853
Accretion of premiums and discounts, net 910 2,746
Gain on sale of loans (7,758) (6,641)
Gain on sale of loan servicing rights (2,798) --
Gain on sale of securities available for sale (72) (649)
Gain on sale of real estate held for sale and
for development (388) (280)
Loan fees deferred, net of amortization 2,185 1,189
FHLB stock dividends (2,053) (1,836)
Pooling accounting adjustment -- (890)
Cash provided by (used in) changes in operating assets and liabilities:
Interest receivable (43) (4,275)
Other assets (433) 465
Other liabilities (7,635) 6,725
-----------------------------------
Net cash provided by operating activities $10,746 $18,522
INVESTING ACTIVITIES
Purchases of securities available for sale (921,953) (719,219)
Proceeds from matured securities available for sale 404,543 305,376
Proceeds from sale of securities available for sale 262,239 316,650
Proceeds from matured securities held to maturity 370 24,511
Purchases of securities held to maturity -- (20)
Principal repayments on securities available for sale 106,691 66,673
Principal repayments on securities held to maturity 13,828 7,542
Proceeds from sale of loans 402,402 230,469
Net increase in loans receivable (407,031) (324,471)
Proceeds from sale of loan servicing rights 2,216 --
Proceeds from sale of real estate held for sale
and for development 6,189 3,292
Purchases of premises and equipment (7,511) (4,090)
Purchases of FHLB stock (1,863) (7,103)
Net increase (decrease) in federal funds sold 2,063 (871)
Cash paid for acquisition (300) --
Improvements capitalized to real estate held for sale
and for development (1,309) (829)
-----------------------------------
Net cash used in investing activities $(139,426) $(102,090)
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)
<TABLE>
<CAPTION>
Nine months ended June 30,
DOLLARS IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits 26,391 42,085
Net decrease in certificates of deposit (46,422) (25,790)
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 671,800 1,363,043
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (619,135) (1,446,712)
Dividends paid (6,632) (4,672)
Purchase and retirement of common stock (6,489) --
Issuance of common stock from exercise of stock options 1,412 430
---------------------------------
Net cash provided by (used in) financing activities 20,925 (71,616)
---------------------------------
Net decrease in cash and cash equivalents (107,755) (155,184)
CASH AND CASH EQUIVALENTS
Beginning of period 181,422 235,888
---------------------------------
End of period $73,667 $ 80,704
=================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $72,125 $74,984
Income taxes 13,093 8,560
Non-cash transactions:
Loans receivable transferred to real estate held for sale 2,833 3,397
Loans receivable securitized and
transferred to securities available for sale 37,100 --
Securities held to maturity transferred to available
for sale -- 8,454
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED JUNE 30, 1999
NOTE A BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
InterWest Bancorp, Inc. (InterWest Bancorp) and its wholly owned
subsidiaries, (collectively InterWest). As of June 30, 1999, InterWest
Bancorp's wholly owned subsidiaries were InterWest Bank, Pacific Northwest
Bank and Kittitas Valley Bank, N.A. All material intercompany transactions
and balances have been eliminated.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp, Inc.
(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, Inc. (Pioneer) of Yakima, Washington, whose
subsidiary bank was Pioneer National Bank. These acquisitions 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 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. and its banking subsidiary, Kittitas Valley Bank, N.A.
of Ellensburg, Washington. This acquisition has been accounted for using the
purchase method.
On October 15, 1998, First National Bank of Port Orchard was merged into
Pacific Northwest Bank. On January 22, 1999, Pioneer National Bank was merged
into Pacific Northwest Bank. Former Pioneer National Bank branch offices
continue to operate under the Pioneer Bank name.
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 generally 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 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, 1999 and 1998,
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, 1998.
NOTE B 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 C NET INCOME PER SHARE
The diluted weighted average shares outstanding during the three and nine
month periods ended June 30, 1999 and 1998, 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
(ESOP) debt obligation are deducted in the calculation of weighted average
shares outstanding.
6
<PAGE>
The following table sets forth the computation of basic and diluted net
income per share for the three and nine months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Nine months
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $7,334 $3,273 $22,065 $15,235
========================================================
DENOMINATOR:
Denominator for basic net income per share-
Weighted average shares 15,629,830 15,662,471 15,657,753 15,661,629
Effect of dilutive securities:
Stock options 295,287 527,422 380,533 515,985
--------------------------------------------------------
Denominator for diluted net income per share-
Weighted average shares assumed conversion
of stock options 15,925,117 16,189,893 16,038,286 16,177,614
========================================================
Basic net income per share $0.47 $0.21 $1.41 $0.97
========================================================
Diluted net income per share $0.46 $0.20 $1.38 $0.94
========================================================
</TABLE>
NOTE D ACCOUNTING CHANGES
On October 1, 1998, InterWest adopted Statement of Financial Accounting
Standards (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 the 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. The
adoption of this statement does not have any impact on InterWest's financial
condition or results of operations. However, this statement does affect the
disclosures in InterWest's consolidated financial statements.
The following table summarizes comprehensive income for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
DOLLARS IN THOUSANDS 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 7,334 $3,273 $22,065 $15,235
-----------------------------------------------------------
Other comprehensive income:
Unrealized gain (loss) on
securities available for sale (1,397) (9) (8,406) 429
-----------------------------------------------------------
Other comprehensive income
before income taxes (1,397) (9) (8,406) 429
Income tax benefit (expense)
on comprehensive income 489 3 2,942 (150)
-----------------------------------------------------------
Other comprehensive income
after income taxes (908) (6) (5,464) 279
-----------------------------------------------------------
Total comprehensive income $ 6,426 $3,267 $16,601 $15,514
===========================================================
</TABLE>
7
<PAGE>
On October 1, 1998, InterWest adopted 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, InterWest
classify the resulting mortgage-backed security as a trading security. SFAS
No. 134 allows InterWest to classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those securities. The adoption of this statement did not materially impact
InterWest's financial condition or results of operations.
NOTE E SHAREHOLDERS' EQUITY
On January 20, 1999, the Board of Directors authorized the purchase of up to
5 percent of InterWest Bancorp's outstanding shares of common stock in the
open market over the next twelve months. During the nine months ended June
30, 1999, 284,500 shares (1.8 percent of the total common shares outstanding)
were repurchased at a total cost of $6,489,000. These repurchases were
completed during the quarter ended March 31, 1999, and no shares were
repurchased during the quarter ended June 30, 1999.
NOTE F PENDING ACQUISITION
On June 14, 1999, InterWest Bancorp announced the signing of a definitive
agreement to acquire NBT Northwest Bancorp (NBT) and its wholly owned
subsidiary, National Bank of Tukwila. National Bank of Tukwila operates one
branch office in south King County. As of June 30, 1999, NBT had total
consolidated assets of $47.9 million and shareholders' equity of $5.0
million. The transaction is structured such that shareholders of NBT will
receive between 0.84 and 0.88 shares of InterWest Bancorp common stock for
each share of NBT stock depending upon the price of InterWest common stock
for a brief period before closing. It is anticipated that the acquisition
will be completed as early as September 30, 1999, following approval of
applicable regulatory authorities and the shareholders of NBT. The
transaction will be accounted for using the purchase method.
8
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following discussion is provided for the consolidated financial condition
and results of operations of InterWest Bancorp, Inc. (InterWest Bancorp),
which includes its wholly owned subsidiaries (collectively InterWest). As of
June 30, 1999, InterWest Bancorp's wholly owned subsidiaries were InterWest
Bank, Pacific Northwest Bank 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.
ACQUISITIONS
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 growth in deposit 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 the
commitment to commercial banking. 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 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 Bancorp, and
Pioneer National Bank became a subsidiary of InterWest Bancorp. Pioneer
National Bank operated 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.
9
<PAGE>
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.
InterWest Bancorp completed two internal mergers during the current fiscal
year. On October 15, 1998, First National Bank of Port Orchard was merged
into Pacific Northwest Bank. On January 22, 1999, Pioneer National Bank was
merged into Pacific Northwest Bank. Former Pioneer National Bank branch
offices continue to operate under the Pioneer Bank name.
As discussed in Note F of the Unaudited Consolidated Financial Statements, on
June 14, 1999, InterWest Bancorp announced the signing of a definitive
agreement to acquire NBT Northwest Bancorp (NBT) and its wholly owned
subsidiary, National Bank of Tukwila.
The following table summarizes pertinent information related to the completed
mergers:
<TABLE>
<CAPTION>
Acquisition Total Assets At Merger Date Common Shares
Date Institution (dollars in thousands) Issued
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 31, 1996 Central Bancorporation (1) $ 206,093 2,147,391
January 15, 1998 Puget Sound Bancorp, Inc.(1) 53,109 586,420
June 15, 1998 Pacific Northwest Bank (1) 200,219 2,346,081
June 16, 1998 Pioneer Bancorp, Inc. (1) 108,399 692,846
August 31, 1998 Kittitas Valley Bancorp, Inc. (2) 47,441 229,831*
</TABLE>
(1) Pooling-of-interests method of accounting
(2) Purchase method of accounting
* 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, increasing
competition and potential changes with respect to the method of accounting
used for mergers and acquisitions. 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 its subsidiaries' 54
full-service branch offices in western and central Washington State.
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.
10
<PAGE>
RESULTS OF OPERATIONS
Net income was $7.3 million for the three months ended June 30, 1999,
compared to $3.3 million for the three months ended June 30, 1998. Basic and
diluted net income per share were $0.47 and $0.46, respectively for the three
months ended June 30, 1999, compared to $0.21 and $0.20, respectively for the
three months ended June 30, 1998. Return on average shareholders' equity was
16.81 percent for the three months ended June 30, 1999, compared to 7.75
percent for the three months ended June 30, 1998.
Net income was $22.1 million for the nine months ended June 30, 1999,
compared to $15.2 million for the nine months ended June 30, 1998. Basic and
diluted net income per share were $1.41 and $1.38, respectively for the nine
months ended June 30, 1999 compared to $0.97 and $0.94, respectively for the
nine months ended June 30, 1998. Return on average shareholders' equity was
16.85 percent for the nine months ended June 30, 1999, compared to 12.27
percent for the nine months ended June 30, 1998.
The results of operations for the three and nine months ended June 30, 1998,
were impacted by nonrecurring merger-related charges of $4.0 million and $5.1
million respectively, net of tax.
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 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEFORE MERGER RELATED EXPENSES:
Net income $7,334 $7,305 $22,065 $20,312
============================================================
Basic net income per share $0.47 $0.47 $1.41 $1.30
============================================================
Diluted net income per share $0.46 $0.45 $1.38 $1.26
============================================================
Efficiency ratio 59.14% 56.73% 58.97% 58.73%
Return on average shareholders' equity 16.81% 17.30% 16.85% 16.36%
Return on average assets 1.20% 1.22% 1.19% 1.15%
AFTER MERGER RELATED EXPENSES:
Net income $7,334 $3,273 $22,065 $15,235
============================================================
Basic net income per share $0.47 $0.21 $1.41 $0.97
============================================================
Diluted net income per share $0.46 $0.20 $1.38 $0.94
============================================================
Efficiency ratio 59.14% 72.87% 58.97% 65.86%
Return on average shareholders' equity 16.81% 7.75% 16.85% 12.27%
Return on average assets 1.20% 0.55% 1.19% 0.86%
</TABLE>
11
<PAGE>
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 provision for losses on loans increased to $20.6
million for the three months ended June 30, 1999, compared to $20.1 million
for the three months ended June 30, 1998. Net interest income before
provision for losses on loans increased to $62.2 million for the nine months
ended June 30, 1999, compared to $58.6 million for the nine months ended June
30, 1998. The increase in net interest income is due to an increase in
interest-earning assets and an increase in net interest margin.
Despite decreasing yields and increased competition, InterWest's net interest
margin increased for the third consecutive quarter to 3.63 percent for the
quarter ended June 30, 1999, compared to 3.60 percent for the quarter ended
March 31, 1999, and 3.56 percent for the quarter ended June 30, 1998.
InterWest's net interest margin was 3.60 percent for the nine months ended
June 30, 1999, an increase from 3.52 percent for the nine months ended June
30, 1998. Several factors have influenced the increase in net interest margin.
Net interest margin increased in part as a result of deposit composition
changes that resulted from focused sales efforts. The cost of funds was
reduced due to changes in the composition of the deposit base, deposit
product pricing initiatives and a decrease in the cost of borrowed funds. The
deposit base changed with increases in the balances of non-interest bearing
and interest-bearing transaction deposits and a decrease in balances of
certificates of deposit.
The effect that the decrease in the cost of funds had on net interest margin
was partially offset by a decrease in the yield earned on loans, securities
and other interest-earning assets. The flat yield curve has continued to
decrease the yields earned on interest-earning assets and as such restrict
net interest margin expansion. InterWest will continue to change the
composition of the loan portfolio and offset the impact of the flat yield
curve through increased emphasis on commercial lending. An increase in the
average balance of interest-earning assets has also partially offset the
impact of decreasing yields earned.
Interest income for the three months ended June 30, 1999 was $43.7 million
compared to $45.2 million for the three months ended June 30, 1998. Interest
income for the nine months ended June 30, 1999 was $133.4 million compared to
$134.3 million for the nine months ended June 30, 1998. The decrease is due
to a decrease in the yield earned, which is partially offset by growth in
interest-earning assets. The yield on interest-earning assets decreased to
7.69 percent for the three months ended June 30, 1999, compared to 8.03
percent for the three months ended June 30, 1998. The yield on
interest-earning assets was 7.73 percent for the nine months ended June 30,
1999, compared to 8.08 percent for the nine months ended June 30, 1998.
Interest expense for the three months ended June 30, 1999 was $23.1 million,
a decrease from $25.2 million for the three months ended June 30, 1998.
Interest expense decreased to $71.2 million for the nine months ended June
30, 1999 compared to $75.8 million for the nine months ended June 30, 1998.
This is due to a decrease in the cost of funds from the prior year, which is
partially offset by an increase in interest-bearing liabilities. The cost of
funds was 4.11 percent for the three months ended June 30, 1999, compared to
4.57 percent for the three months ended June 30, 1998. The cost of funds was
4.18 percent for the nine months ended June 30, 1999, a decrease from 4.65
percent for the nine months ended June 30, 1998.
During the quarter ended June 30, 1999, overall interest rates increased. In
periods of increasing interest rates, InterWest's net interest income and net
interest margin may decrease as a greater amount of liabilities are subject
to repricing than assets. InterWest attempts to offset this effect by
increasing adjustable rate mortgage lending, commercial lending and
short-term consumer lending. Sales of fixed-rate single-family mortgage loans
have also reduced the disparity between variable rate assets and liabilities.
12
<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>
1999 1998
------------------------- ----------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable and loans
held for sale $1,378,507 8.76% $1,400,714 9.13%
Securities available for sale,
securities held to maturity and
other interest-earning assets 895,517 6.04% 853,746 6.22%
------------------------------------------------
Total interest-earnings assets 2,274,024 7.69% 2,254,460 8.03%
------------------------------------------------
Deposits 1,538,619 3.50% 1,481,069 4.08%
FHLB advances, securities
sold under agreements
to repurchase and 707,047 5.42% 724,151 5.57%
other borrowings
------------------------------------------------
Total interest-bearing liabilities 2,245,666 4.11% 2,205,220 4.57%
------------------------------------------------
Net interest spread $ 28,358 3.58% $49,240 3.46%
================================================
Net interest margin 3.63% 3.56%
===== =====
</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>
1999 1998
---------------------- --------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable and loans
held for sale $1,414,085 8.83% $1,391,009 9.07%
Securities available for sale,
securities held to maturity and
other interest-earning assets 888,822 5.97% 826,223 6.42%
---------------------------------------------
Total interest-earnings assets 2,302,907 7.73% 2,217,232 8.08%
---------------------------------------------
Deposits 1,541,793 3.60% 1,459,265 4.15%
FHLB advances, securities
sold under agreements
to repurchase and 727,677 5.42% 713,276 5.67%
other borrowings
---------------------------------------------
Total interest-bearing liabilities 2,269,470 4.18% 2,172,541 4.65%
---------------------------------------------
Net interest spread $ 33,437 3.55% $44,691 3.43%
=============================================
Net interest margin 3.60% 3.52%
===== =====
</TABLE>
13
<PAGE>
The following table provides information on changes in net interest income
for the periods that are attributable to changes in interest rates and
changes in volume:
<TABLE>
<CAPTION>
Three months June 30, 1999 vs 1998 Nine months June 30, 1999 vs 1998
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 and
loans held for sale $(1,289) $(501) $(1,790) $(2,490) $1,553 $(937)
Securities available for
sale, securities held
to maturity and other
interest-earning assets (393) 637 244 (2,870) 2,903 33
---------------------------------------------------------------------------
Total net change in income
on interest-earning assets (1,682) 136 (1,546) (5,360) 4,456 (904)
---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits (2,193) 569 (1,624) (6,292) 2,469 (3,823)
FHLB advances, securities
sold under agreement to
repurchase and other
borrowings (265) (235) (500) (1,360) 604 (756)
---------------------------------------------------------------------------
Total net change in expense
on interest-bearing liabilities (2,458) 334 (2,124) (7,652) 3,073 (4,579)
---------------------------------------------------------------------------
Net change in net
interest income $776 $(198) $578 $2,292 $1,383 $3,675
===========================================================================
</TABLE>
PROVISION FOR LOSSES ON LOANS | The provision for losses on loans was $0.5
million for the three months ended June 30, 1999, compared to $1.5 million
for the three months ended June 30, 1998. The provision for losses on loans
was $1.5 million for the nine months ended June 30, 1999, a decrease from
$2.4 million for the nine months ended June 30, 1998. The provision for
losses on loans for the three and nine months ended June 30, 1998 included
$1.0 million and $1.1 million, respectively of merger-related provision.
NON-INTEREST INCOME | Non-interest income was $8.1 million for the three
months ended June 30, 1999, an increase from $5.9 million for the three
months ended June 30, 1998. Non-interest income was $23.6 million for the
nine months ended June 30, 1999, compared to $18.6 million for the nine
months ended June 30, 1998. The increase in non-interest income from the
three and nine months ended June 30, 1998, was primarily due to the sale of
mortgage servicing rights, increases in mortgage banking and the resulting
gains on the sale of loans and service fees.
During the quarter ended June 30, 1999, InterWest sold the mortgage servicing
rights for $530 million of fixed-rate single family mortgages and recognized
a gain of $2.8 million. These mortgage-servicing rights were primarily
related to loans sold by InterWest during the past two years. This sale was
initiated as a
14
<PAGE>
result of rising interest rates and decreasing prepayment rates, which
increased the value of the servicing portfolio. The sale of mortgage
servicing rights also created capacity for future loan growth.
Due to decreases in long-term interest rates as well as the overall strategy
of changing the composition of the loan portfolio, mortgage banking
activities increased during the first six months of fiscal year 1999 compared
to fiscal year 1998. During the quarter ended June 30, 1999, long-term
interest rates increased and single-family lending volumes decreased, and as
such mortgage banking activities have declined compared to recent periods.
InterWest will continue to focus on commercial banking to increase net
interest income and service fee revenue while reducing the reliance on
revenue from mortgage banking and sales of mortgage servicing rights. The
current level of the mortgage loan pipeline and recent trends in interest
rates indicate the level of mortgage banking activities may decline during
the remainder of fiscal year 1999.
NON-INTEREST EXPENSE | Non-interest expense was $17.0 million for the three
months ended June 30, 1999, compared to $14.7 million (excluding
merger-related charges of $4.2 million) for the three months ended June 30,
1998. Non-interest expense was $50.6 million for the nine months ended June
30, 1999, compared to $45.3 million (excluding merger-related charges of $5.5
million) for the nine months ended June 30, 1998. The increase in
non-interest expense for the three and nine months ended June 30, 1999,
compared to the three and nine months ended June 30, 1998, was due to the
activities to develop the resources and infrastructure for commercial banking
growth and the acquisition of Kittitas Valley Bank, N.A (KVB). Non-interest
expenses associated with KVB totaled $1.7 million (including goodwill
amortization) for the nine months ended June 30, 1999. Excluding KVB
expenses, non-interest expenses have increased by 7.9 percent for the nine
months ended June 30, 1999, compared to the nine months ended June 30, 1998.
Excluding merger-related charges incurred during fiscal year 1998, the
efficiency ratio was 59.1 percent and 59.0 percent for the three and nine
months ended June 30, 1999, compared to 56.7 percent and 58.7 percent for the
three and nine months ended June 30, 1998.
Compensation and employee benefits were $9.1 million for the three months
ended June 30, 1999, compared to $8.1 million for the three months ended June
30, 1998. Compensation and employee benefits were $27.7 million for the nine
months ended June 30, 1999, an increase from $23.8 million for the nine
months ended June 30, 1998. The increase from the respective periods one year
ago was primarily due to the focus on commercial banking growth and the
acquisition of Kittitas Valley Bank, N.A. Compensation expense also increased
due to higher lending volumes and transaction deposit growth, which increased
compensation resulting from variable compensation plans.
FEDERAL INCOME TAX | Income tax expense was $3.9 million for the three months
ended June 30, 1999, compared to $2.3 million for the three months ended June
30, 1998. Income tax expense was $11.6 million for the nine months ended June
30, 1999, compared to $8.7 million for the nine months ended June 30, 1998.
The effective tax rates were 34.5 percent for the nine months ended June 30,
1999, compared to 36.4 percent for the nine months ended June 30, 1998. The
higher effective tax rate for 1998 was due to certain merger-related charges
incurred during 1998 that were not deductible for federal income tax purposes.
REVIEW OF FINANCIAL CONDITION
InterWest's total consolidated assets were $2.47 billion as of June 30,
1999, compared to $2.45 billion as of September 30, 1998.
SECURITIES | As of June 30, 1999, InterWest had $751.9 million of securities
available for sale, compared to $574.3 million as of September 30, 1998.
Securities held to maturity have decreased to $72.9 million as of June 30,
1999, compared to $87.3 million as of September 30, 1998 as a result of
maturities and principal repayments on mortgage-backed securities. The
overall increase in securities reflects the investment of proceeds from the
sale of single-family residential mortgage loans and the investment of funds
that were held as interest-bearing deposits in banks as of September 30,
1998. As of June 30, 1999, 91 percent of InterWest
15
<PAGE>
securities were classified as available for sale, an increase from 87 percent
as of September 30, 1998. Management believes that a high 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 maintains liquidity in accordance with an internal liquidity
policy. 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. Management's projections as to the short-term demand
for funds to be used for loan originations and other activities can also
impact liquidity levels.
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.
Securities classified as available for sale are reported at fair value, with
unrealized gains and losses (net of deferred income taxes) reported as a net
amount in a separate component of shareholders' equity.
LOANS RECEIVABLE AND LOANS HELD FOR SALE | Loans receivable were $1.39
billion as of June 30, 1999, compared to $1.36 billion as of September 30,
1998. During the nine months ended June 30, 1999, the principal balances
outstanding of commercial real estate, real estate construction, consumer,
commercial and agricultural loans increased. These increases were offset by a
decrease in single-family residential mortgage loans outstanding as a result
of mortgage-banking activities.
The principal lending activity of InterWest Bank has historically been 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 and Kittitas Valley Bank, N.A.
have loan portfolios that have a greater percentage of commercial loans than
InterWest Bank.
The acquisitions of Central, Pacific, Pioneer and Puget 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. 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.
The commercial loan portfolio was $267.2 million as of June 30, 1999, an
increase of $49.7 million from September 30, 1998, representing an annualized
growth rate of 31 percent. As of June 30, 1999, outstanding commercial loans
represent 18.6 percent of total gross loans compared to 14.8 percent as of
September 30, 1998. Commercial real estate mortgage loans were $341.1 million
as of June 30, 1999, an increase of $83.2 million from September 30, 1998,
representing an annualized growth rate of 43 percent. Real estate
construction loans outstanding were $212.2 million as of June 30, 1999, an
increase of $30.1 million from September 30, 1998, representing an annualized
growth rate of 22 percent. Single-family residential mortgage loans were
$425.6 million as of June 30, 1999, a decrease of $201.6 million from
September 30, 1998. This decrease is due to mortgage banking activities and
the increased emphasis on commercial lending.
Loans held for sale were $33.2 million as of June 30, 1999 compared to $93.1
million as of September 30, 1998. This decrease reflects declining mortgage
banking activities during the quarter ended June 30, 1999. Loans held for
sale are generally single-family 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 sales,
InterWest retains the right to service the loans, 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
16
<PAGE>
included in intangible assets and are amortized as an offset to service fees
in proportion to and over the period of servicing income, not exceeding 15
years. Periodically, InterWest has sold mortgage servicing rights. During the
quarter ended June 30, 1999, InterWest sold the mortgage servicing rights for
$530 million of loans resulting in a gain of $2.8 million.
The following table sets forth the composition of InterWest's loan portfolio
by type as of the dates indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $425,623 $627,191
Multi-family residential 51,496 62,948
Commercial 341,077 257,906
Real estate construction 212,168 182,020
Consumer loans 89,592 81,386
Commercial loans 267,249 217,546
Agricultural loans 53,302 45,637
-----------------------------------
1,440,507 1,474,634
Less:
Loans held for sale 33,177 93,125
Allowance for losses on loans 13,803 13,224
Deferred loan fees and discounts 8,425 9,235
---------- ----------
$1,385,102 $1,359,050
========== ==========
</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, 1999, non-accrual loans totaled $10.5 million, an
increase from $8.2 million as of September 30, 1998. Total non-performing
assets, including non-accrual loans and real estate owned through
foreclosure, increased to $16.2 million or 0.65 percent of total assets as of
June 30, 1999, compared to $15.8 million or 0.64 percent of total assets as
of September 30, 1998. The following table summarizes non-performing assets
as of June 30, 1999, and September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS
Real estate mortgage loans
Single-family residential $5,133 $5,036
Multi-family residential 176 --
Commercial 1,389 557
Real estate construction 848 634
Consumer loans 608 174
Commercial loans 1,523 1,682
Agricultural loans 845 127
----------------------------------
Total nonaccrual loans 10,522 8,210
REAL ESTATE OWNED THROUGH FORECLOSURE
Total real estate owned through foreclosure 5,647 7,553
----------------------------------
Total non-performing assets $16,169 $15,763
==================================
</TABLE>
17
<PAGE>
ALLOWANCE FOR LOSSES ON LOANS | The allowance for losses on loans was $13.8
million or 0.99 percent of total loans receivable as of June 30, 1999,
compared to $13.2 million or 0.96 percent of total loans receivable as of
September 30, 1998. Net loan charge-offs were $919,000 or 0.06 percent of the
average balance of loans outstanding for the nine months ended June 30, 1999.
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.
The following tables summarize the activity in allowance for losses on loans
during the three and nine months ended June 30:
<TABLE>
<CAPTION>
Three months Nine months
DOLLARS IN THOUSANDS 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $13,506 $11,447 $13,224 $11,104
Provision for losses on loans 500 1,520 1,498 2,366
Pooling accounting adjustment -- -- -- (75)
Recoveries 66 130 329 325
Charge-offs (269) (347) (1,248) (970)
---------------------------------------------------------
Balance at end of period $13,803 $12,750 $13,803 $12,750
=========================================================
</TABLE>
INTANGIBLE ASSETS | Intangible assets arising from acquisitions represent the
excess of 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 loan servicing costs. Loan servicing
rights are included in intangible assets and are amortized as an offset to
service 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.
18
<PAGE>
Intangible assets consisted of the following as of June 30 1999, and
September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 9,310 $ 9,344
Core Deposit Intangible 860 992
Loan Servicing Intangibles 1,968 3,690
---------------------------------
$12,138 $14,026
======= =======
</TABLE>
The change in the loan servicing intangible for the nine months ended June 30,
1999, and the year ended September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Nine months ended Year ended
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 3,690 $ 1,983
Additions 2,637 2,490
Less: Basis sold (3,203) --
Amortization and write-downs (1,156) (783)
---------------------------------
$ 1,968 $ 3,690
======= =======
</TABLE>
DEPOSITS | Non-interest bearing deposits increased to $188.3 million as of
June 30, 1999, from $178.6 million as of September 30, 1998. Non-interest
bearing deposits represented 12.2 percent of total deposits as of June 30,
1999, an increase from 11.4 percent as of September 30, 1998. Interest
bearing transaction accounts (which includes interest-bearing checking, money
market and savings accounts) totaled $555.8 million as of June 30, 1999,
compared to $539.2 million as of September 30, 1998. Interest bearing
transaction accounts represented 36 percent of total deposits as of June 30,
1999, an increase from 34.5 percent as of September 30, 1998.
Certificates of deposit decreased to $800.6 million as of June 30, 1999,
compared to $847.0 million as of September 30, 1998. Certificates of deposit
represented 51.8 percent of total deposits as of June 30, 1999, which is a
decrease from 54.1 percent as of September 30, 1998.
Management is continuing to pursue initiatives to increase the percentage of
noninterest bearing deposits and interest bearing transaction deposits
relative to certificates of deposit. These initiatives include variable
compensation plans, product development and advertising campaigns. This
activity should increase net interest income, service fee revenue and
customer growth and retention. As of June 30, 1999, 48.2 percent of
InterWest's deposits were transaction accounts, which is an increase from
45.9 percent as of September 30, 1998.
The following table sets forth the balances of deposits by account type as of
June 30, 1999, and September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS June 30, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing deposits $188,329 $178,625
Interest-bearing checking accounts 163,985 162,051
Money market accounts 288,716 267,953
Savings accounts 103,131 109,148
Certificates 800,626 847,048
------- -------
Total $1,544,787 $1,564,825
========== ==========
</TABLE>
19
<PAGE>
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS | InterWest borrows through advances from the Federal Home Loan
Bank (FHLB) and securities sold under agreements to repurchase. InterWest had
$581.6 million outstanding in FHLB advances as of June 30, 1999, compared to
$546.0 million as of September 30, 1998.
The 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, certain home mortgages and other
assets (principally securities that are obligations of, or guaranteed by, the
United States). Advances are made to members pursuant to several different
programs. These programs are generally designed to meet 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,
provide funds to purchase securities 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. As of June 30, 1999, InterWest had $131.5 million outstanding in
securities sold under agreements to repurchase, compared to $128.6 million as
of September 30, 1998.
SHAREHOLDERS' EQUITY | InterWest Bancorp is committed to managing capital for
maximum shareholder 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 adequate capital ratios and
levels in accordance with external regulations and capital guidelines
established by the Board of Directors of each institution.
On January 20, 1999, the Board of Directors of InterWest Bancorp authorized
the purchase of up to 5 percent of InterWest Bancorp's common stock in the
open market over the next twelve months. InterWest Bancorp repurchased
284,500 shares, or 1.8 percent of the total number of shares outstanding, at
a total price of $6.5 million. All of these repurchases were during the
quarter ended March 31, 1999.
InterWest's total shareholders' equity was $176.5 million as of June 30,
1999, an increase of $4.8 million from $171.7 million as of September 30,
1998. The increase in shareholders' equity is due to net income and the
issuance of common stock under stock option plans offset by common stock
repurchases, dividends to shareholders and the increase in the net unrealized
loss on securities available for sale. Book value per share increased to
$11.29 as of June 30, 1999, compared to $10.97 as of September 30, 1998.
During the nine months ended June 30, 1999, InterWest Bancorp declared cash
dividends totaling $0.42 per share, an increase from $0.38 per share for the
nine months ended June 30, 1998.
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.
The subsidiary banks are members of the Federal Deposit Insurance Corporation
(FDIC), and as such, are subject to examination thereby. InterWest Bank is a
state-chartered savings bank, and Pacific Northwest Bank is a state-chartered
commercial bank, both of which are subject to regulation and supervision by
the Washington Department of Financial Institutions Division of Banks.
Kittitas Valley Bank N.A. is a national banking association that is subject
to regulation and supervision by the Office of the Comptroller of Currency.
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
20
<PAGE>
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.
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 (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 is subject to risk-based capital guidelines issued by the
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 June 30,
1999, under the FRB's capital guidelines, InterWest Bancorp's levels of
consolidated regulatory capital exceed the FRB's well-capitalized
requirements.
21
<PAGE>
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and
Pacific Northwest Bank as of June 30, 1999, 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:
Total Capital
(to Risk Weighted Assets) $186,151 11.81% $126,097 8.0% $157,622 10.0%
Tier I Capital
(to Risk Weighted Assets) 172,348 10.93% 63,049 4.0% 94,573 6.0%
Tier I Capital
(to Average Assets) 172,348 7.07% 73,182 3.0% 121,970 5.0%
INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $146,476 12.31% $95,174 8.0% $118,897 10.0%
Tier I Capital
(to Risk Weighted Assets) 136,924 11.51% 47,587 4.0% 71,381 6.0%
Tier I Capital
(to Average Assets) 136,924 6.82% 80,332 4.0% 100,415 5.0%
PACIFIC NORTHWEST BANK:
Total Capital
(to Risk Weighted Assets) $37,520 10.50% $28,594 8.0% $35,743 10.0%
Tier I Capital
(to Risk Weighted Assets) 33,631 9.41% 14,297 4.0% 21,446 6.0%
Tier I Capital
(to Average Assets) 33,631 8.36% 16,084 4.0% 20,105 5.0%
</TABLE>
As of June 30, 1999, 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.
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
impacted 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 value
22
<PAGE>
at least equal to the outstanding balance. 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.
The analysis of liquidity also includes a review of InterWest's consolidated
statement of cash flows for the nine months ended June 30, 1999. The
consolidated statement of cash flows details InterWest's operating, investing
and financing activities during the period. The most significant item under
operating activities was net income of $22.1 million for the nine months
ended June 30, 1999. Investing activities included proceeds from the sale of
securities available for sale of $262.2 million, security maturities totaling
$404.5 million and purchases of securities available for sale of $922
million. Investing activities also included $407 million in loan
originations, net of principal repayments and $402.4 million of proceeds from
the sale of loans. During the period, financing activities included $52.7
million in borrowing proceeds, net of borrowing repayments, a $46.4 million
decrease in certificates of deposit, a $26.4 million increase in deposits,
$6.5 million in treasury stock purchases and a total of $6.6 million paid in
cash dividends to shareholders.
YEAR 2000
InterWest has undertaken efforts to address the Year 2000 computer problem.
Many existing computer 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. If not properly addressed, the century date
change could potentially cause the production of erroneous data,
miscalculations, system failures and other operational problems.
INTERWEST'S STATE OF READINESS/ InterWest has been and will continue to be
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 process has included several phases,
including project management, assessment, testing, remediation,
implementation and contingency planning. Management believes that it has an
effective program in place to resolve Year 2000 issues in a timely manner.
MANAGEMENT. Each subsidiary bank has implemented 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. Outside specialists have
been utilized when necessary. Periodic reports of testing results and
progress are provided to each subsidiary bank's 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. Virtually all of InterWest's computer systems and applications
have been identified and assessed to prioritize testing, remediation and
contingency planning. InterWest's primary software vendors were also assessed
during this phase, and vendors who provide support for mission-critical
systems have been identified and the majority of testing was completed as
planned on mission-critical systems by December 31, 1998. Additionally,
InterWest has been working with significant borrowers to assess the extent to
which they may be affected by Year 2000 issues.
23
<PAGE>
TESTING. Updating and testing of InterWest's mission-critical systems and
secondary systems has been substantially completed. Based on the results of
testing, InterWest identified internal computer systems that were
non-compliant. As discussed below, efforts to remediate and implement
renovated system applications has been completed for mission-critical systems
and is in process for secondary systems.
REMEDIATION AND IMPLEMENTATION. This phase involves obtaining and
implementing renovated system applications provided by InterWest's vendors.
As renovated systems or new applications are received and implemented,
InterWest tests them for Year 2000 compliance. As of June 30, 1999, updating
for mission-critical systems was completed. This phase will continue
throughout 1999 for some secondary systems.
CONTINGENCY PLANNING. InterWest has developed contingency plans related to
processes and systems that could be impacted by Year 2000 issues. As
InterWest continues in the contingency planning phase, contingency plans will
be tested. Based on 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 and testing
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, assessment and testing of contingency
planning as well as "trigger" dates for implementing contingency plans.
Certain circumstances as described in "Risks" may occur for which there are
no completely satisfactory contingency plans.
ESTIMATED COSTS TO ADDRESS INTERWEST'S YEAR 2000 ISSUES/ Based on costs
incurred to date, expenses and required capital expenditures related to
meeting Year 2000 challenges have not had a material effect on the operations
or financial condition of InterWest. Many of InterWest's systems have been
tested and any remediation necessary performed by the already existing
information systems staff. Based on management's estimates at this time, it
is not anticipated that remaining expenses and capital expenditures to
address the Year 2000 will be material to InterWest's operations or financial
condition in future periods. InterWest has been and will continue to fund any
costs associated with Year 2000 projects from operations. Project costs are
expensed as incurred. 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
banking or are risks faced by many companies. Although it is impossible to
identify all potential risks that InterWest may face moving into the
millennium, management has identified the following significant potential
risks:
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 individuals and businesses in its marketing
area. If these customers 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
24
<PAGE>
assessment criteria to the indebtedness of such borrowers and make any
necessary related adjustments to InterWest's provision for losses on loans.
InterWest's operations, like those of many other companies, can be adversely
affected by the Year 2000 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 previously, InterWest has identified its mission-critical vendors
and is monitoring their Year 2000 compliance programs.
Based on InterWest's Year 2000 efforts, management presently believes the
Year 2000 will not result in significant operational problems. However, the
Year 2000 efforts of third parties are not within InterWest's control, and
their failure to address Year 2000 issues could result in among other things,
business disruption, operational problems, financial loss, increased credit
risk and legal liability for InterWest. While InterWest has developed
contingency plans to address temporary issues and disruptions caused by the
Year 2000, given the unprecedented nature of the Year 2000 computer problem,
there can be no assurance that Year 2000 issues will not arise, or that any
issues will be fully mitigated.
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 long-term, fixed-rate mortgage loans; growth in non-interest
bearing deposits; purchases of adjustable rate and callable agency securities
and short-term commercial lending.
FORWARD LOOKING STATEMENTS | In this document, InterWest has 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
the Year 2000 computer problem as well as 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 effect 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.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
None
EXHIBITS
(27) Financial Data Schedule
26
<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 11, 1999
27
<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, 1999, 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-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 67,588
<INT-BEARING-DEPOSITS> 6,079
<FED-FUNDS-SOLD> 17,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 751,937
<INVESTMENTS-CARRYING> 72,869
<INVESTMENTS-MARKET> 72,180
<LOANS> 1,418,279
<ALLOWANCE> 13,803
<TOTAL-ASSETS> 2,474,158
<DEPOSITS> 1,544,787
<SHORT-TERM> 44,576
<LIABILITIES-OTHER> 17,450
<LONG-TERM> 690,799
0
0
<COMMON> 31,435
<OTHER-SE> 145,111
<TOTAL-LIABILITIES-AND-EQUITY> 2,474,158
<INTEREST-LOAN> 93,656
<INTEREST-INVEST> 37,065
<INTEREST-OTHER> 2,721
<INTEREST-TOTAL> 133,442
<INTEREST-DEPOSIT> 41,643
<INTEREST-EXPENSE> 71,206
<INTEREST-INCOME-NET> 62,236
<LOAN-LOSSES> 1,498
<SECURITIES-GAINS> 72
<EXPENSE-OTHER> 50,293
<INCOME-PRETAX> 33,709
<INCOME-PRE-EXTRAORDINARY> 22,065
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,065
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 3.60
<LOANS-NON> 10,522
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,224
<CHARGE-OFFS> 1,248
<RECOVERIES> 329
<ALLOWANCE-CLOSE> 13,803
<ALLOWANCE-DOMESTIC> 8,570
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,233
</TABLE>
