<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
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(I.R.S. Employer Identification No.)
275 SOUTHEAST PIONEER WAY
OAK HARBOR, WASHINGTON
----------------------
(Address of principal executive offices)
98277
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---- ----
As of March 31, 1999, 15,607,748 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 MARCH 31, 1999 AND SEPTEMBER 30, 1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 1999
AND THE YEAR ENDED SEPTEMBER 30, 1998 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTH PERIODS ENDED
MARCH 31, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS MARCH 31, 1999 SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing $ 65,421 $ 74,018
Interest-bearing deposits in banks 67,225 107,404
Federal funds sold 14,439 19,863
Securities available for sale, at fair value 696,591 574,346
Securities held to maturity 76,613 87,262
Loans receivable, net 1,223,911 1,359,050
Loans held for sale 154,752 93,125
Interest receivable 13,674 14,991
Real estate held for sale and for development 10,297 11,996
Federal Home Loan Bank (FHLB) stock, at cost 41,030 37,496
Premises and equipment, net 52,714 50,314
Intangible assets 15,585 14,026
Other assets 3,545 3,957
-----------------------------------
Total assets $ 2,435,797 $ 2,447,848
-----------------------------------
-----------------------------------
LIABILITIES
Non-interest bearing deposits $ 181,774 $ 178,625
Interest-bearing deposits 1,361,785 1,386,200
-----------------------------------
Total deposits 1,543,559 1,564,825
FHLB advances 562,144 546,033
Securities sold under agreements to repurchase 128,745 128,613
Other liabilities 20,658 28,981
Other borrowings 8,541 7,744
-----------------------------------
Total liabilities 2,263,647 2,276,196
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding 15,607,748 and 15,651,345 -- --
Paid-in-capital 31,256 36,512
Retained earnings 150,091 139,781
Debt related to employee stock ownership plan (ESOP) (3,935) (3,935)
Net unrealized loss on
securities available for sale, net of tax (5,262) (706)
-----------------------------------
Total shareholders' equity 172,150 171,652
-----------------------------------
Total liabilities and shareholders' equity $ 2,435,797 $ 2,447,848
-----------------------------------
-----------------------------------
</TABLE>
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
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 $31,693 $31,685 $63,466 $62,613
Securities available for sale 11,208 10,904 21,670 22,319
Securities held to maturity 1,393 1,156 2,652 3,006
Other 368 455 1,950 1,159
----------------------------------------------------------
44,662 44,200 89,738 89,097
INTEREST EXPENSE
Deposits 13,502 14,956 28,166 30,367
FHLB advances and other borrowings 8,290 7,462 16,180 14,799
Securities sold under agreements to repurchase 1,870 2,244 3,800 5,437
----------------------------------------------------------
23,662 24,662 48,146 50,603
Net interest income before provision for
losses on loans 21,000 19,538 41,592 38,494
Provision for losses on loans 500 571 998 846
----------------------------------------------------------
Net interest income after provision for
losses on loans 20,500 18,967 40,594 37,648
NON-INTEREST INCOME
Gain on sale of loans 3,281 2,486 7,351 4,711
Service fees 2,839 2,674 5,500 5,341
Investment product fees and
insurance commissions 725 519 1,315 985
Gain (loss) on sale of securities available for sale 233 240 73 431
Other 509 649 1,189 1,183
----------------------------------------------------------
7,587 6,568 15,428 12,651
NON-INTEREST EXPENSE
Compensation and employee benefits 9,528 7,867 18,659 15,657
General and administrative 3,712 3,820 7,666 7,629
Occupancy 2,327 2,207 4,630 4,344
Data processing 1,203 989 2,287 1,892
Loss from real estate write-downs
and operations 33 718 334 1,036
Merger related charges -- 1,300 -- 1,300
----------------------------------------------------------
16,803 16,901 33,576 31,858
Income before income taxes 11,284 8,634 22,446 18,441
Income tax expense 3,921 3,081 7,715 6,479
----------------------------------------------------------
Net income $7,363 $5,553 $14,731 $11,962
----------------------------------------------------------
----------------------------------------------------------
Basic net income per share $0.47 $0.35 $0.94 $0.76
----------------------------------------------------------
----------------------------------------------------------
Diluted net income per share $0.46 $0.35 $0.92 $0.74
----------------------------------------------------------
----------------------------------------------------------
Dividends declared per share $0.14 $0.13 $0.28 $0.25
----------------------------------------------------------
----------------------------------------------------------
</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
Net income 22,642 22,642
Dividends, $0.50 per share (7,676) (7,676)
Issuance of common stock:
Stock option plans 132,993 706 706
Stock purchase plans 1,404 19 19
Purchase and retirement
of treasury stock (809) (323) 289 (34)
Debt related to ESOP (147,055) (3,935) (3,935)
Unrealized gain on
securities available
for sale, net of tax 409 409
Pooling accounting
adjustment (1,249) (1,249)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 15,651,345 $36,512 $139,781 $(706) $(3,935) $ -- $171,652
Net income 14,731 14,731
Dividends, $0.28 per share (4,421) (4,421)
Issuance of common stock:
Stock option plans 240,903 1,233 1,233
Purchase and retirement
of treasury stock (284,500) (6,489) (6,489)
Unrealized loss on
securities available
for sale, net of tax (4,556) (4,556)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 1999 15,607,748 $31,256 $150,091 $(5,262) $(3,935) $ -- $172,150
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended March 31,
DOLLARS IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 14,731 $ 11,962
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,187 2,127
Provision for losses on loans 998 846
Loss on real estate held for sale and for development 232 753
Accretion of premiums and discounts, net 308 735
Gain on sale of loans (7,351) (4,711)
Gain on sale of securities available for sale (73) (431)
Gain on sale of real estate held for sale and
for development (78) (247)
Loan fees deferred, net of amortization 1,218 568
FHLB stock dividends (1,671) (1,124)
Pooling accounting adjustment (1,146)
Cash provided (used) by changes in
operating assets and liabilities:
Interest receivable 1,317 (424)
Other assets 412 813
Other liabilities (5,667) (1,034)
-------------------------------
Net cash provided by operating activities $ 7,563 $ 8,687
INVESTING ACTIVITIES
Purchases of securities available for sale (770,888) (567,477)
Proceeds from maturing securities available for sale 301,820 224,174
Proceeds from sale of securities available for sale 261,597 229,828
Proceeds from maturing securities held to maturity 370 22,348
Principal repayments on securities available for sale 78,528 35,184
Principal repayments on securities held to maturity 10,139 4,893
Proceeds from sale of loans 367,337 126,612
Net increase in loans receivable (293,433) (187,872)
Proceeds from sale of real estate held for sale
and for development 4,367 2,298
Purchases of premises and equipment (4,735) (2,733)
Purchases of FHLB stock (1,863) (7,102)
Net decrease in federal funds sold 5,424 543
Cash paid for acquisition (300) --
Improvements capitalized to real estate held for sale
and for development (794) (506)
-------------------------------
Net cash used by investing activities $ (42,431) $(119,810)
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)
<TABLE>
<CAPTION>
Six months ended March 31,
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits (42) 9,217
Net increase (decrease) in certificates of deposit (21,224) 14,490
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 556,325 1,203,560
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (539,285) (1,243,786)
Dividends paid (4,426) (3,061)
Purchase and retirement of treasury stock (6,489) --
Issuance of common stock from exercise of stock options 1,233 334
-----------------------------------
Net cash used by financing activities (13,908) (19,246)
-----------------------------------
Net decrease in cash and cash equivalents (48,776) (130,369)
CASH AND CASH EQUIVALENTS
Beginning of period 181,422 235,888
-----------------------------------
End of period $ 132,646 $ 105,519
-----------------------------------
-----------------------------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid during the quarter for:
Interest $ 49,235 $ 50,932
Income taxes 7,214 7,760
Non-cash transaction
Loans receivable transferred to real estate held for sale 2,028 2,079
Securities held to maturity transferred to available
for sale -- 4,709
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 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 March 31, 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 (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 six month periods ended March 31, 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 six month
periods ended March 31, 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 six months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months Six months
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $ 7,363 $ 5,553 $ 14,731 $ 11,962
------------------------------------------------------------------------
DENOMINATOR:
Denominator for basic net income per share-
Weighted average shares 15,684,427 15,672,129 15,671,715 15,665,981
Effect of dilutive securities:
Stock options 343,491 416,334 415,924 422,038
------------------------------------------------------------------------
Denominator for diluted net income per share-
Weighted average shares assumed conversion
of stock options 16,027,918 16,088,463 16,087,639 16,088,019
------------------------------------------------------------------------
------------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.35 $ 0.94 $ 0.76
------------------------------------------------------------------------
------------------------------------------------------------------------
Diluted net income per share $ 0.46 $ 0.35 $ 0.92 $ 0.74
------------------------------------------------------------------------
------------------------------------------------------------------------
</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 March 31, Six months ended March 31,
DOLLARS IN THOUSANDS 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $7,363 $5,553 $14,731 $11,962
-----------------------------------------------------------
Other comprehensive income:
Unrealized gain (loss) on
securities available for sale (4,355) (280) (7,009) 438
-----------------------------------------------------------
Other comprehensive income
before income taxes (4,355) (280) (7,009) 438
Income tax benefit (expense)
on comprehensive income 1,524 98 2,453 (153)
-----------------------------------------------------------
Other comprehensive income
after income taxes (2,831) (182) (4,556) 285
-----------------------------------------------------------
Total comprehensive income $4,532 $5,371 $10,175 $12,247
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
Effective 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
7
<PAGE>
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 amends SFAS No. 65 to require that after securitization of mortgage
loans held for sale, InterWest 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 three months ended March 31,
1999, 284,500 shares (1.8 percent of the total outstanding) were repurchased at
a total cost of $6,489,000.
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 March 31,
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 transaction accounts while reducing reliance
on certificates of deposit. These changes are designed to have a positive impact
on net interest income, service fee revenue and market penetration while meeting
the needs of InterWest's customers.
The merger with Central Bancorporation (Central) on August 31, 1996 began this
process. Central's commercial banking subsidiary, Central Washington Bank,
operated ten offices in central Washington. At the merger date, Central had
total consolidated assets of $206.1 million, including total loans receivable of
$132.2 million, total deposits of $181.9 million and shareholders' equity of
$17.1 million.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp, Inc.
(Puget), of Port Orchard, Washington, the holding company of First National Bank
of Port Orchard. Under the terms of this transaction, Puget merged into
InterWest Bancorp, with First National Bank of Port Orchard becoming a
subsidiary of InterWest Bancorp. First National Bank of Port Orchard operated
three branch offices in western Washington. At the acquisition date, Puget had
total consolidated assets of $53.1 million, including total loans receivable of
$38.7 million, total deposits of $45.6 million, and shareholders' equity of $5.9
million. Each share of Puget common stock was exchanged for 2.50 shares of
InterWest Bancorp common stock.
On 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 has completed two internal mergers during the current fiscal
year to create cost savings and operating efficiencies. 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 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 $ 206,093 2,147,391
January 15, 1998 Puget Sound Bancorp, Inc. 53,109 586,420
June 15, 1998 Pacific Northwest Bank 200,219 2,346,081
June 16, 1998 Pioneer Bancorp, Inc. 108,399 692,846
August 31, 1998 Kittitas Valley Bancorp, Inc. 47,441 229,831*
</TABLE>
* 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 54 full-service branch offices in
western and central Washington State. These offices are located in towns, small
cities, suburbs and metropolitan markets. Investments are available through
InterWest Financial Services, Inc., a wholly owned subsidiary of InterWest Bank
and insurance products are available through InterWest Insurance Agency, Inc., a
majority-owned subsidiary of InterWest Bank.
RESULTS OF OPERATIONS
Net income was $7.4 million for the three months ended March 31, 1999, compared
to $5.6 million for the three months ended March 31, 1998. Basic and diluted net
income per share were $0.47 and $0.46, respectively for the three months ended
March 31, 1999, compared to $0.35 and $0.35, respectively for the
10
<PAGE>
three months ended March 31, 1998. Return on average shareholders' equity was
16.89 percent for the three months ended March 31, 1999, compared to 13.34
percent for the three months ended March 31, 1998.
Net income was $14.7 million for the six months ended March 31, 1999, compared
to $12.0 million for the six months ended March 31, 1998. Basic and diluted net
income per share were $0.94 and $0.92, respectively for the six months ended
March 31, 1999 compared to $0.76 and $0.74, respectively for the six months
ended March 31, 1998. Return on average shareholders' equity was 16.89 percent
for the six months ended March 31, 1999, compared to 14.59 percent for the six
months ended March 31, 1998.
The increase from the six month period one year ago was due to an increase in
mortgage banking and the resulting increase in the gain on sale of loans of $2.6
million and an increase in net interest income before the provision for losses
on loans of $3.1 million. These increases were partially offset by an increase
in noninterest expense of $1.7 million.
The results of operations for the three and six months ended March 31, 1998 were
impacted by nonrecurring merger related charges associated with the acquisition
of Puget on January 15, 1998 which totaled $1,045,000, 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 March 31, Six months ended March 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEFORE MERGER RELATED EXPENSES:
Net income $ 7,363 $ 6,598 $ 14,731 $ 13,007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.42 $ 0.94 $ 0.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted net income per share $ 0.46 $ 0.41 $ 0.92 $ 0.81
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Efficiency ratio 58.78% 59.76% 58.88% 59.75%
Return on average shareholders' equity 16.89% 15.85% 16.89% 15.86%
Return on average assets 1.18% 1.14% 1.19% 1.11%
AFTER MERGER RELATED EXPENSES:
Net income $ 7,363 $ 5,553 $ 14,731 $ 11,962
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic net income per share $ 0.47 $ 0.35 $ 0.94 $ 0.76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted net income per share $ 0.46 $ 0.35 $ 0.92 $ 0.74
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Efficiency ratio 58.78% 64.74% 58.88% 62.29%
Return on average shareholders' equity 16.89% 13.34% 16.89% 14.59%
Return on average assets 1.18% 0.96% 1.19% 1.02%
</TABLE>
NET INTEREST INCOME | InterWest's net income is significantly affected by
changes in net interest income, which is the difference between interest income
received on loans receivable and other interest-earning assets and
11
<PAGE>
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 $21.0
million for the three months ended March 31, 1999, compared to $19.5 million for
the three months ended March 31, 1998. Net interest income before provision for
losses on loans increased to $41.6 million for the six months ended March 31,
1999, compared to $38.5 million for the six months ended March 31, 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 second consecutive quarter to 3.60 percent for the
quarter ended March 31, 1999, compared to 3.58 percent for the three months
ended December 31, 1998 and 3.51 percent for the quarter ended September 30,
1998. InterWest's net interest margin was 3.59 percent for the six months ended
March 31, 1999, an increase from 3.50 percent for the six months ended March 31,
1998. Several factors have influenced the increase in net interest margin.
The primary reason for the increase in net interest margin was a reduction in
the cost of funds. The cost of funds decreased due to changes in the composition
of the deposit base, deposit product pricing initiatives and a decrease in the
cost of borrowed funds from the Federal Home Loan Bank. The deposit base changed
with increases in non-interest bearing and interest-bearing transaction deposits
and a decrease in certificates of deposit. During fiscal year 1999, management
has implemented several deposit pricing initiatives in response to market
conditions. During the six months ended March 31, 1999 a significant amount of
borrowed funds matured and new funds were borrowed at lower interest rates.
The decrease in the cost of funds was partially offset by a decrease in the
yield earned on loans, securities and other interest-earning assets. The primary
reason for the decrease in the yields earned was the continued flattening of the
yield curve. InterWest has continued to change the composition of the loan
portfolio and offset the impact of the flat yield curve through mortgage banking
activities to sell lower yielding single-family mortgage loans and increased
emphasis on higher yielding commercial lending.
Interest income for the three months ended March 31, 1999 was $44.7 million
compared to $44.2 million for the three months ended March 31, 1998. Interest
income for the six months ended March 31, 1999 was $89.7 million compared to
$89.1 million for the six months ended March 31, 1998. 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 7.66 percent for the three months ended March 31, 1999, compared to 8.12
percent for the three months ended March 31, 1998. The yield on interest-earning
assets was 7.74 percent for the six months ended March 31, 1999, compared to
8.11 percent for the six months ended March 31, 1998.
Interest expense for the three months ended March 31, 1999 was $23.7 million, a
decrease from $24.7 million for the three months ended March 31, 1998. Interest
expense decreased to $48.1 million for the six months ended March 31, 1999
compared to $50.6 million for the six months ended March 31, 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 March 31, 1999, compared to 4.63 percent
for the three months ended March 31, 1998. The cost of funds was 4.22 percent
for the six months ended March 31, 1999, a decrease from 4.70 percent for the
six months ended March 31, 1998.
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 March 31:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
Loans receivable and loans
held for sale $ 1,442,420 8.79% $1,393,536 9.09%
Securities available for sale,
securities held to maturity and
other interest-earning assets 890,839 5.82% 784,672 6.38%
Total interest-earnings assets 2,333,259 7.66% 2,178,208 8.12%
------------------------------------------------------------------
Deposits 1,534,843 3.52% 1,446,768 4.14%
FHLB advances, securities
sold under agreements
to repurchase and 765,669 5.31% 685,552 5.66%
other borrowings
Total interest-bearing liabilities 2,300,512 4.11% 2,132,320 4.63%
------------------------------------------------------------------
Net interest spread $ 32,747 3.55% $45,888 3.49%
------------------------------------------------------------------
------------------------------------------------------------------
Net interest margin 3.60% 3.59%
----- -----
----- -----
</TABLE>
The following table indicates the average balance and average interest rates
earned or paid, interest rate spread and net interest margin for the six months
ended March 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
Loans receivable and loans
held for sale $ 1,431,880 8.86% $1,380,686 9.07%
Securities available for sale,
securities held to maturity and
other interest-earning assets 885,474 5.93% 816,727 6.49%
Total interest-earnings assets 2,317,354 7.74% 2,197,413 8.11%
------------------------------------------------------------------
Deposits 1,543,378 3.65% 1,448,058 4.19%
FHLB advances, securities
sold under agreements
to repurchase and 737,940 5.42% 706,826 5.73%
other borrowings
Total interest-bearing liabilities 2,281,318 4.22% 2,154,884 4.70%
------------------------------------------------------------------
Net interest spread $ 36,036 3.52% $42,529 3.41%
------------------------------------------------------------------
------------------------------------------------------------------
Net interest margin 3.59% 3.50%
----- -----
----- -----
</TABLE>
13
<PAGE>
The following table provides information on
changes in net interest income for the periods which are attributable to changes
in interest rates and changes in volume:
<TABLE>
<CAPTION>
Three months March 31, 1999 vs 1998 Six months March 31, 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 $(1,084) $1,092 $ 8 $(1,436) $2,289 $ 853
Securities available for
sale, securities held
to maturity and other
interest-earning assets (1,149) 1,603 454 (2,347) 2,135 (212)
-------------------------------------------------------------------------------
Total net change in income
on interest-earning assets (2,233) 2,695 462 (3,783) 4,424 641
-------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits (2,325) 871 (1,454) (4,113) 1,912 (2,201)
FHLB advances, securities
sold under agreement to
repurchase and other
borrowings (634) 1,088 454 (1,125) 869 (256)
-------------------------------------------------------------------------------
Total net change in expense
on interest-bearing liabilities (2,959) 1,959 (1,000) (5,238) 2,781 (2,457)
-------------------------------------------------------------------------------
Net change in net
interest income $ 726 $ 736 $ 1,462 $ 1,455 $1,643 $ 3,098
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOSSES ON LOANS | The provision for losses on loans was $0.5
million for the three months ended March 31, 1999, compared to $0.6 million for
the three months ended March 31, 1998. The provision for losses on loans was
$1.0 million for the six months ended March 31, 1999, an increase from $0.8
million for the six months ended March 31, 1998. The provision for losses on
loans for the three and six months ended March 31, 1998 included a $0.1 million
merger-related provision.
NON-INTEREST INCOME | Noninterest income was $7.6 million for the three months
ended March 31, 1999, an increase from $6.6 million for the three months ended
March 31, 1998. Noninterest income was $15.4 million for the six months ended
March 31, 1999, compared to $12.7 million for the six months ended March 31,
1998. The increase in noninterest income from the three and six months ended
March 31, 1998 was primarily due to increases in mortgage banking and the
resulting gains on the sale of loans. The increase in mortgage banking
activities was due to the decrease in long-term interest rates as well as the
overall strategy of changing the composition of the loan portfolio with less
reliance on single-family residential mortgages and a greater emphasis on
commercial lending. During 1998 and 1999, the low interest rate environment
resulted in increased fixed-rate single-family residential mortgage loan
14
<PAGE>
originations. Currently, it is InterWest's strategy to securitize and sell
fixed-rate single-family mortgage loans on the secondary market while
retaining the right to service the loans. Changes in interest rates can
significantly affect the volume of single family loan originations and
refinances which could impact InterWest's mortgage banking revenue. InterWest
will continue to focus on commercial banking to increase net interest income
and service fee revenue while reducing the reliance on mortgage banking
revenue. The current level of the mortgage loan pipeline and recent trends in
interest rates indicate the level of mortgage loan refinances may decline
during the remainder of fiscal year 1999.
Service fees were $2.8 million for the three months ended March 31, 1999
compared to $2.7 million for the three months ended March 31, 1998. Service fees
were $5.5 million for the six months ended March 31, 1999 compared to $5.3
million for the six months ended March 31, 1998. Service fees decreased as a
result of the closing of the Cornerstone Home Loan Center Division of InterWest
Bank during the early part of fiscal year 1999. The decrease in service fees
from the Cornerstone Home Loan Center was offset by an increase in service fees
resulting from the growth in transaction deposit accounts and commercial banking
services. The acquisition of Kittitas Valley Bank, N.A. also increased service
fees.
NON-INTEREST EXPENSE | Noninterest expense was $16.8 million for the three
months ended March 31, 1999 compared to $15.6 million (excluding merger-related
charges of $1.3 million) for the three months ended March 31, 1998. Noninterest
expense was $33.6 million for the six months ended March 31, 1999, compared to
$30.6 million (excluding merger-related charges of $1.3 million) for the six
months ended March 31, 1998. The operating efficiency ratio was 58.9 percent for
the six months ended March 31, 1999, compared to 59.8 percent for the six months
ended March 31, 1998. The increase in noninterest expense for the three and six
months ended March 31, 1999 compared to the three and six months ended March 31,
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.
Compensation and employee benefits were $9.5 million for the three months ended
March 31, 1999 compared to $7.9 million for the three months ended March 31,
1998. Compensation and employee benefits were $18.7 million for the six months
ended March 31, 1999, an increase from $15.7 million for the six months ended
March 31, 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 March 31, 1999 compared to $3.1 million for the three months ended March
31, 1998. Income tax expense was $7.7 million for the six months ended March 31,
1999, compared to $6.5 million for the six months ended March 31, 1998. The
effective tax rates were 34.4 percent for the six months ended March 31, 1999,
compared to 35.1 percent for the six months ended March 31, 1998. The lower
effective tax rate for 1999 is 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 $2.436 billion as of March 31, 1999,
compared to $2.448 billion as of September 30, 1998.
SECURITIES | As of March 31, 1999, InterWest had $696.6 million of securities
available for sale, compared to $574.3 million as of September 30, 1998.
Securities held to maturity have decreased to $76.6 million as of March 31,
1999, compared to $87.3 million as of September 30, 1998. The overall increase
in securities reflects the investment of proceeds from the sale of single-family
residential mortgage loans. As of March 31, 1999, 90 percent of InterWest
securities were classified as available for sale, an increase from 87 percent as
of
15
<PAGE>
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 $1.22 billion
as of March 31, 1999, compared to $1.36 billion as of September 30, 1998. During
the six months ended March 31, 1999 the principal balances outstanding of
commercial real estate, real estate construction, commercial and agricultural
loans increased. These increases were offset by a decrease in single-family
residential mortgage loans outstanding.
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 to that of a financial institution that emphasizes both
real estate and commercial lending. Growth in commercial lending should shorten
duration risk, produce higher net interest margin, create better protection from
interest rate volatility and ultimately meet the needs of InterWest's customers.
The commercial loan portfolio totaled $240.0 million as of March 31, 1999, an
increase of $22.5 million from September 30, 1998, representing an annualized
growth rate of 21 percent. As of March 31, 1999, outstanding commercial loans
represent 17.1 percent of total gross loans compared to 14.8 percent as of
September 30, 1998. Commercial real estate mortgage loans totaled $291.2 million
as of March 31, 1999, an increase of $33.3 million from September 30, 1998,
representing an annualized growth rate of 26 percent. Real estate construction
loans outstanding totaled $196.3 million as of March 31, 1999, an increase of
$14.3 million from September 30, 1998, representing an annualized growth rate of
16 percent. Single-family residential mortgage loans totaled $478.6 million as
of March 31, 1999, a decrease of $148.6 million from September 30, 1998. This
decrease is due to mortgage banking activities and the increased emphasis on
commercial lending. During the six months ended March 31, 1999, InterWest
securitized and sold $332.7 million of single-family residential mortgage loans
on the secondary market.
Loans held for sale were $154.8 million as of March 31, 1999 compared to $93.1
million as of September 30, 1998. 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
16
<PAGE>
loans that are subsequently sold or securitized with the servicing rights
retained. Loan servicing rights are included in intangible assets and are
amortized as an offset to service fees in proportion to and over the period of
servicing income, not exceeding 15 years.
The following table sets forth the composition of InterWest's loan portfolio by
type as of the dates indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $478,600 $627,191
Multi-family residential 61,311 62,948
Commercial 291,167 257,906
Real estate construction 196,334 182,020
Consumer loans 82,484 81,386
Commercial loans 240,000 217,546
Agricultural loans 49,753 45,637
--------------------------------------
1,399,649 1,474,634
Less:
Loans held for sale 154,752 93,125
Allowance for losses on loans 13,506 13,224
Deferred loan fees and discounts 7,480 9,235
---------- ----------
$1,223,911 $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 nonaccrual loans. As
of March 31, 1999, non-accrual loans totaled $8.1 million, a decrease from $8.2
million as of September 30, 1998. Total non-performing assets, including
non-accrual loans and real estate owned through foreclosure, decreased to $14.2
million or 0.58 percent of total assets as of March 31, 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 March 31, 1999 and September 30,
1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NONACCRUAL LOANS
Real estate mortgage loans
Single-family residential $4,585 $5,036
Multi-family residential 176 --
Commercial 305 557
Real estate construction 583 634
Consumer loans 582 174
Commercial loans 1,531 1,682
Agricultural loans 354 127
----------------------------------
Total nonaccrual loans 8,116 8,210
REAL ESTATE OWNED THROUGH FORECLOSURE
Total real estate owned through foreclosure 6,091 7,553
----------------------------------
Total non-performing assets $14,207 $15,763
----------------------------------
----------------------------------
</TABLE>
17
<PAGE>
ALLOWANCE FOR LOSSES ON LOANS | The allowance for losses on loans was $13.5
million or 1.09 percent of total loans receivable as of March 31, 1999 compared
to $13.2 million or 0.96 percent of total loans receivable as of September 30,
1998. Net loan charge-offs were $716,000 or 0.05 percent of the average balance
of loans outstanding for the six months ended March 31, 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 six months ended March 31:
<TABLE>
<CAPTION>
Three months Six months
DOLLARS IN THOUSANDS 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $13,527 $11,009 $13,224 $11,104
Provision for losses on loans 500 571 998 846
Pooling accounting adjustment -- -- -- (75)
Recoveries 140 79 263 195
Charge-offs (661) (212) (979) (623)
--------------------------------------------------
Balance at end of period $13,506 $11,447 $13,506 $11,447
--------------------------------------------------
--------------------------------------------------
</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 March 31, 1999 and
September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 1999 September 30, 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 9,431 $ 9,344
Core Deposit Intangible 904 992
Loan Servicing Intangibles 5,250 3,690
-------------------------------------
$15,585 $14,026
------- -------
------- -------
</TABLE>
The change in the loan servicing intangible for the six months ended March 31,
1999 and the year ended September 30, 1998 is summarized as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
DOLLARS IN THOUSANDS March 31, 1999 September 30, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 3,690 $ 1,983
Additions 2,637 2,490
Less amortization and write-downs (1,077) (783)
---------------------------------------
$ 5,250 $ 3,690
------- -------
------- -------
</TABLE>
DEPOSITS | Noninterest bearing deposits increased to $181.8 million as of March
31, 1999 from $178.6 million as of September 30, 1998. Noninterest bearing
deposits represented 11.8 percent of total deposits as of March 31, 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 $536.0 million as of March 31, 1999 compared to $539.2
million as of September 30, 1998. Interest bearing transaction accounts
represented 34.7 percent of total deposits as of March 31, 1999, an increase
from 34.5 percent as of September 30, 1998.
Certificates of deposit decreased to $825.8 million as of March 31, 1999
compared to $847.0 million as of September 30, 1998. Certificates of deposit
represented 53.5 percent of total deposits as of March 31, 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 March 31, 1999, 46.5 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 in the various types of
accounts as of March 31, 1999 and September 30, 1998:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 1999 September 30, 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest bearing deposits $181,774 $178,625
Interest-bearing checking accounts 166,796 162,051
Money market accounts 261,811 267,953
Savings accounts 107,354 109,148
Certificates 825,824 847,048
------- -------
Total $1,543,559 $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 $562.1
million outstanding in FHLB advances as of March 31, 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 March 31, 1999, InterWest had $128.7 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 appropriate capital ratios and levels in
accordance with external regulations and capital guidelines established by the
Board of Directors of each institution.
Like many other companies, including financial institutions, the Board of
Directors of InterWest Bancorp believes that InterWest Bancorp common stock may
be undervalued and represents a good investment opportunity. 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. During the quarter ended March 31, 1999, InterWest Bancorp
purchased 284,500 shares, or 1.8 percent of the total number of shares
outstanding, at a total price of $6.5 million.
InterWest's total shareholders equity was $172.2 million as of March 31, 1999,
an increase of $0.5 million from $171.7 million as of September 30, 1998. The
increase in shareholders' equity is due to net income 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 $11.03
as of March 31, 1999, compared to $10.97 as of September 30, 1998. During the
six months ended March 31, 1999, InterWest Bancorp declared cash dividends
totaling $0.28 per share, an increase from $0.25 per share for the six months
ended March 31, 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. Kittitas Valley Bank
N.A. is a national banking association which is subject to regulation and
supervision by the Office of the Comptroller of Currency. InterWest Bank is a
state-chartered savings bank, and Pacific Northwest Bank is a state-chartered
commercial bank, both of which are subject to regulation and supervision by the
Washington Department of Financial
20
<PAGE>
Institutions Division of Banks. In practice, the primary regulator makes regular
examinations of each subsidiary bank subject to its regulatory review or
participates in joint examinations with other regulators. Areas subject to
regulation by federal or state authorities include the allowance for losses on
loans, investments, loans, mergers, issuance of securities, payment of
dividends, establishment of branches and other aspects of operations.
The enforcement powers available to banking regulators are substantial and
include, among other things, the ability to assess civil monetary penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, enforcement actions must be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions, or inactions, may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities. Applicable law also requires public
disclosure of final enforcement actions.
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 March 31, 1999, under the FRB's capital
guidelines, InterWest Bancorp's levels of consolidated regulatory capital exceed
the FRB's minimum requirements.
21
<PAGE>
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and Pacific
Northwest Bank as of March 31, 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) $180,058 11.18% $128,852 8.0% $161,065 10.0%
Tier I Capital
(to Risk Weighted Assets) 166,552 10.34% 64,426 4.0% 96,639 6.0%
Tier I Capital
(to Average Assets) 166,552 6.70% 74,620 3.0% 124,367 5.0%
INTERWEST BANK:
Total Capital
(to Risk Weighted Assets) $141,522 11.21% $100,953 8.0% $126,191 10.0%
Tier I Capital
(to Risk Weighted Assets) 132,200 10.48% 50,297 4.0% 75,715 6.0%
Tier I Capital
(to Average Assets) 132,200 6.39% 82,699 4.0% 103,374 5.0%
PACIFIC NORTHWEST BANK:
Total Capital
(to Risk Weighted Assets) $ 36,122 11.36% $ 25,435 8.0% $ 31,793 10.0%
Tier I Capital
(to Risk Weighted Assets) 32,276 10.15% 12,717 4.0% 19,076 6.0%
Tier I Capital
(to Average Assets) 32,276 8.51% 15,176 4.0% 18,970 5.0%
</TABLE>
As of March 31, 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.
22
<PAGE>
InterWest has additional capacity to borrow funds from the FHLB through a
pre-approved credit line. This credit line has a pledge requirement whereby
InterWest must maintain unencumbered collateral with a par value at least equal
to the outstanding balance. 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 six months ended March 31, 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 $14.7 million for the six months ended
March 31, 1999. Investing activities included proceeds from the sale of
securities available for sale of $301.8 million, security maturities totaling
$261.6 million and purchases of securities available for sale of $770.9 million.
Investing activities also included $293.4 million in loan originations, net of
principal repayments and $367.3 million of proceeds from the sale of loans.
During the period, financing activities included $17.0 million in borrowing
proceeds, net of borrowing repayments, a $21.2 million decrease in certificates
of deposit, $6.5 million in treasury stock purchases and a total of $4.4 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 and
implementation.
PROJECT 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. Periodic reports of testing results
and progress are provided to each subsidiary banks' Board of Directors on the
status of the Year 2000 project. Additionally, the subsidiary banks regularly
report to InterWest Bancorp management and to the InterWest Bancorp Board of
Directors.
ASSESSMENT. InterWest's mission-critical systems and secondary systems have been
identified. InterWest's primary software vendors were also assessed during this
phase, and vendors who provide support for mission-critical systems have been
contacted and a substantial portion of testing has been completed. InterWest
will continue to monitor and work with these vendors for the remainder of 1999.
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
initial testing, InterWest has been able to identify internal computer systems
that are non-compliant and further remediation and testing will continue during
1999.
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. This phase also involves upgrading and replacing
systems where appropriate, and will continue throughout 1999.
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. InterWest's systems are primarily being renovated and
tested 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. Year 2000 challenges facing
vendors of mission-critical software and systems, third-party service providers,
and customers, could have a material effect on the operations or financial
condition of InterWest, to the extent such parties are materially affected by
such challenges.
RISKS RELATED TO YEAR 2000 ISSUES/ The Year 2000 poses certain risks to
InterWest and its operations. Some of these risks are present because InterWest
purchases technology and information systems applications from other parties who
face Year 2000 challenges and relies on third party service providers for
processing data. In addition, other risks are inherent in the business of
banking or are risks faced by many companies. Although it is impossible to
identify all potential risks that InterWest may face moving into the millennium,
management has identified the following significant potential risks:
Commercial banks may experience a contraction in their deposit base, if a
significant amount of deposited funds are withdrawn by customers prior to the
Year 2000, and interest rates may increase as the millennium approaches. This
potential deposit contraction could make it necessary for InterWest to change
its sources of funding and could affect future earnings. InterWest has
established a contingency plan for addressing this situation, should it arise,
in its asset and liability management policies. The plan includes maintaining
the ability to borrow funds from correspondent banks and the Federal Home Loan
Bank of Seattle. Significant demand for funds from other banks could reduce the
amount of funds available for InterWest to borrow. If insufficient funds are
available from these sources, InterWest may also sell investment securities or
other liquid assets to meet liquidity needs.
InterWest originates loans to businesses in its marketing area. If these
businesses are adversely affected by Year 2000 problems, their ability to repay
loans could be impaired. This increased credit risk could adversely affect
InterWest's financial performance. During the assessment phase of InterWest's
Year 2000 program, InterWest identified substantial borrowers, and is working
with such borrowers to ascertain their levels of exposure to Year 2000 problems.
To the extent that InterWest is unable to assure itself of the Year 2000
readiness of such borrowers, it intends to apply additional risk assessment
criteria to the indebtedness of such borrowers and make any necessary related
adjustments to InterWest's provision for losses on loans.
InterWest's operations, like those of many other companies, can be adversely
affected by the Year 2000- triggered failures of other companies upon whom
InterWest depends for the functioning of its automated systems. Accordingly,
InterWest's operations could be materially affected if the operations of
mission-critical third party service providers are adversely affected. As
described previously, InterWest has identified its mission-critical vendors and
is monitoring their Year 2000 compliance programs.
INTERWEST'S CONTINGENCY PLANS/ InterWest has developed contingency plans related
to Year 2000 issues. As InterWest continues testing systems, and based on future
ongoing assessment of the readiness of vendors,
24
<PAGE>
service providers and substantial borrowers, InterWest will modify contingency
plans as necessary or develop additional contingency plans. The review of
contingency plans is an ongoing process subject to internal assessments, third
party and regulatory review. Additionally, specific timeframes have been
established for the monitoring and assessment of contingency planning as well as
"trigger" dates for implementing contingency plans. Certain circumstances, as
described above in "Risks" may occur for which there are no completely
satisfactory contingency plans.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of InterWest Bancorp
("Meeting") was held on January 20, 1999. The results of the
vote on the matters presented at the Meeting are as follows:
1. The following individuals were elected as directors, each
for a three-year term:
<TABLE>
<CAPTION>
Vote for Vote Withheld
-------- -------------
<S> <C> <C>
Gary M. Bolyard 12,272,058 156,367
Patrick M. Fahey 12,267,518 160,907
Clark H. Mock 12,304,621 123,804
Stephen M. Walden 12,306,813 121,612
</TABLE>
The terms of Directors Barney R. Beeksma, Larry Carlson, C.
Stephen Lewis, Russel E. Olson, Michael T. Crawford, Jean
Gorton and Vern Sims continued after the meeting.
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: May 13 ,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 six months
ended March 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 65,421
<INT-BEARING-DEPOSITS> 67,225
<FED-FUNDS-SOLD> 14,439
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 696,591
<INVESTMENTS-CARRYING> 76,613
<INVESTMENTS-MARKET> 76,078
<LOANS> 1,223,911
<ALLOWANCE> 13,506
<TOTAL-ASSETS> 2,435,797
<DEPOSITS> 1,543,559
<SHORT-TERM> 14,126
<LIABILITIES-OTHER> 20,658
<LONG-TERM> 685,304
0
0
<COMMON> 31,256
<OTHER-SE> 140,894
<TOTAL-LIABILITIES-AND-EQUITY> 2,435,797
<INTEREST-LOAN> 63,466
<INTEREST-INVEST> 24,322
<INTEREST-OTHER> 1,950
<INTEREST-TOTAL> 89,738
<INTEREST-DEPOSIT> 28,166
<INTEREST-EXPENSE> 48,146
<INTEREST-INCOME-NET> 41,592
<LOAN-LOSSES> 998
<SECURITIES-GAINS> 73
<EXPENSE-OTHER> 33,576
<INCOME-PRETAX> 22,446
<INCOME-PRE-EXTRAORDINARY> 14,731
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,731
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.92
<YIELD-ACTUAL> 3.59
<LOANS-NON> 8,116
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,224
<CHARGE-OFFS> 979
<RECOVERIES> 263
<ALLOWANCE-CLOSE> 13,506
<ALLOWANCE-DOMESTIC> 8,353
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,153
</TABLE>
