<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26632
InterWest Bancorp, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1691216
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
- ------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 679-4181
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $278,281,920 based upon the closing price of the
Registrant's common stock as quoted on the Nasdaq National Market on December
20, 1999 of $17.50.
As of December 20, 1999, there were issued and outstanding 15,901,824
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Selected Consolidated Financial Data, Management Discussion and
Analysis and Consolidated Financial Statements included in the Annual Report to
Shareholders for the year ended September 30, 1999. (Part II).
2. Proxy Statement for the 2000 Annual Meeting of Shareholders ("Proxy
Statement"). (Part III).
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) (1) Consolidated Financial Statements
Independent Auditors' Report
(a) Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998
(b) Consolidated Statements of Income For the Years Ended
September 30, 1999, 1998 and 1997
(c) Consolidated Statements of Shareholders' Equity For the Years
Ended September 30, 1999, 1998 and 1997
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1999, 1998 and 1997
(e) Notes to Consolidated Financial Statements
</TABLE>
Notes to Consolidated Financial Statements
<TABLE>
<S> <C> <C>
(2) All required financial statement schedules are included in
the Notes to Consolidated Financial Statements.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
Consolidated Financial Statements and Notes to Consolidated
Financial Statements are included in Exhibit 13 herein.
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<S> <C>
Bancorp filed a Form 8-K dated September 14, 1999, to report the
entering of a definitive agreement to acquire Liberty Bay Financial
Corporation.
</TABLE>
<TABLE>
<S> <C> <C>
(c) EXHIBITS
(3.1) Articles of Incorporation of InterWest Bancorp, Inc.
(incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended September 30, 1998)
(3.2) Bylaws of InterWest Bancorp, Inc. (incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year
ended September 30, 1998)
(10.1) Employment Agreement with B. R. Beeksma (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995)
(10.2) Employment Agreement with Stephen M. Walden (incorporated
by reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995)
(10.3) Employment Agreement with H. Glenn Mouw (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995)
(10.4) Employment Agreement with Clark W. Donnell (incorporated by
reference to the Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995)
(10.5) Employment Agreement with Kenneth G. Hulett (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1995)
(10.6) 1984 Stock Option Plan (incorporated by reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-8
(File No. 33-99742))
(10.7) InterWest Bancorp, Inc. Amended and Restated 1993 Incentive
Stock Option Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended
September 30, 1998)
(10.8) Non-Incentive Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit 99.2 to the
Registrant's Registration Statement on Form S-8
(File No. 33-99742))
(10.9) Employment Agreement with Gary M. Bolyard (incorporated by
reference to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1996)
(10.10) Central Bancorporation 1992 Employee Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the
Registrant's Registration Statement on Forms S-8
(File No. 333-13191)).
(10.11) Central Bancorporation Director Stock Option Plan
(incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8
(File No. 333-13191)).
(10.12) 1996 Outside Directors Stock Options-for-Fees Plan
(incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8
(File No. 333-24525))
(10.13) Employment Agreement with Patrick M. Fahey (incorporate by
reference to Exhibit 10.2 to the Registrant's Registration
Statement on Form S-4 (File No. 333-49131))
(10.14) First National Bank of Port Orchard 1990 Employee and
Director Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-50685))
(10.15) Pacific Northwest Bank 1988 Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's
Registration Statement on Form S-8 (File No. 333-57679))
(10.16) Pioneer Bancorp, Inc. Amended and Restated Incentive Stock
Option Plan (incorporated by reference to Exhibit 99.2 to
the Registrant's Registration Statement on Form S-8
(File No. 333-57679))
(10.17) Kittitas Valley Bancorp 1996 Director Stock Option Plan
(incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8
(File No. 333-65839))
(10.18) Kittitas Valley Bancorp Employee Stock Option Plan
(incorporated by reference to Exhibits 99.2 and 99.3 to the
Registrant's Registration Statement on Form S-8
(File No. 333-65839))
(10.19) Form of Severance Pay Agreement entered into between
InterWest Bank and Stephen M. Walden, H. Glenn Mouw, Clark
W. Donnell and Kenneth G. Hulett
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C>
(13) Selected Consolidated Financial Data, Management Discussion
and Analysis and Consolidated Financial Statements included
in the 1999 Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors
(27) Financial Data Schedule
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, InterWest Bancorp, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
InterWest Bancorp, Inc.
Date: December 30, 1999 By: /s/ Stephen M. Walden
-------------------------------------
Stephen M. Walden
President and Chief Executive Officer
(Principal Executive Officer)
17
<PAGE>
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA, MANAGEMENT DISCUSSION AND ANALYSIS AND
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE 1999 ANNUAL REPORT TO
SHAREHOLDERS
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INTERWEST 99 AR
SELECTED CONSOLIDATED
FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS AS OF AND FOR THE YEAR ENDED SEPTEMBER 30, 1999 1998(1) 1997 1996(2) 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 179,659 $ 180,279 $ 165,206 $ 143,827 $ 119,731
Interest expense 95,480 101,483 91,081 77,127 65,119
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
losses on loans 84,179 78,796 74,125 66,700 54,612
Provision for losses on loans 2,000 2,807 1,508 2,452 929
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
losses on loans 82,179 75,989 72,617 64,248 53,683
Non-interest income 28,408 26,473 18,645 15,744 13,030
Non-interest expense 68,147 66,972 54,032 55,716 40,718
Income tax expense 14,585 12,848 12,681 7,785 8,721
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 27,855 $ 22,642 $ 24,549 $ 16,491 $ 17,274
====================================================================================================================================
Basic net income per share $ 1.78 $ 1.45 $ 1.58 $ 1.08 $ 1.13
Diluted net income per share 1.74 1.40 1.54 1.05 1.11
Cash dividends declared per share 0.56 0.50 0.33 0.29 0.19
STATEMENT OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $2,579,539 $2,447,848 $2,402,928 $2,016,085 $1,723,780
Loans receivable and loans held for sale 1,584,722 1,452,175 1,348,681 1,170,271 1,035,099
Deposits 1,578,949 1,564,825 1,468,460 1,389,402 1,260,946
Borrowings 817,910 682,390 755,968 466,693 321,932
Shareholders' equity 165,306 171,652 160,770 137,647 128,882
Book value per share $ 10.71 $ 10.97 $ 10.26 $ 8.93 $ 8.45
KEY OPERATING RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.12% 0.95% 1.15% 0.90% 1.10%
Return on average shareholders' equity 16.00% 13.58% 16.64% 12.13% 14.25%
Average shareholders' equity to average assets 7.02% 6.99% 6.89% 7.38% 7.73%
Net interest margin 3.64% 3.52% 3.70% 3.85% 3.70%
Ratio of non-performing assets to total assets(3) 0.56% 0.64% 0.52% 0.49% 0.41%
Dividend payout ratio 31.62% 33.98% 21.35% 26.97% 17.04%
</TABLE>
- --------------------------------
(1) 1998 results include non-recurring merger-related charges of $4.4 million
(net of tax) and a merger-related provision for losses on loans of $0.7
million (net of tax).
(2) 1996 results include non-recurring SAIF assessment of $3.6 million (net of
tax) and merger-related charges of $2.0 million (net of tax) and a
merger-related provision for losses on loans of $0.6 million (net of tax).
(3) Non-performing assets consist of non-performing loans (including
non-accrual loans certain other delinquent loans at the discretion of
management) and real estate held for sale.
<PAGE>
1999
INTERWEST BANCORP
FINANCIAL SECTION
<TABLE>
<CAPTION>
CONTENTS
<C> <S>
14) SELECTED CONSOLIDATED
FINANCIAL DATA
16) MANAGEMENT DISCUSSION AND ANALYSIS
39) REPORT OF MANAGEMENT TO SHAREHOLDERS
39) REPORT OF ERNST & YOUNG LLP.
INDEPENDENT AUDITORS
40) CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
41) CONSOLIDATED STATEMENTS OF INCOME
42) CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
43) CONSOLIDATED STATEMENTS OF CASH FLOWS
45) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
72) CORPORATE INFORMATION
</TABLE>
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INTERWEST 99 AR
MANAGEMENT DISCUSSION AND ANALYSIS
The following discussion is provided for the consolidated operations of
InterWest Bancorp, Inc. (InterWest Bancorp), which includes its wholly owned
subsidiaries (collectively InterWest). As of September 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. This discussion should be read along with the
consolidated financial statements (including notes thereto) for an
understanding of the following discussion and analysis.
During fiscal year 1999, InterWest has continued its strategy to increase
its emphasis on commercial banking and the goal of becoming a statewide
institution. InterWest is a financial services company that provides a
variety of products and services for both individual and business customers.
InterWest will continue to change the composition of the loan portfolio and
the deposit base. InterWest increased commercial real estate and commercial
loan balances outstanding during fiscal year 1999. Additionally, transaction
deposit balances outstanding increased while reducing reliance on
certificates of deposit for funding asset growth. These changes were designed
to have a positive impact on net interest income and service fee revenue
while meeting the needs of InterWest's customers.
InterWest has completed the acquisition of seven commercial banks since
1996. The acquisition of Central Bancorporation on August 31, 1996, was the
first of these acquisitions. Central's commercial banking subsidiaries,
Central Washington Bank and North Central Washington Bank, operated ten
offices in central Washington. At the acquisition date, Central had total
consolidated assets of $206.1 million, 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. Puget's commercial banking subsidiary,
First National Bank of Port Orchard, operated three offices in western
Washington. At the acquisition date, Puget had total consolidated assets of
$53.1 million, total loans receivable of $38.7 million, total deposits of
$45.6 million, and shareholders' equity of $5.9 million. On October 15, 1998,
First National Bank of Port Orchard was merged into Pacific Northwest Bank.
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. At the acquisition date, Pacific operated
four offices in the metropolitan Seattle area of western Washington and had
total assets of $200.2 million, total loans receivable of $150.1 million,
total deposits of $170.2 million, and shareholders' equity of $16.8 million.
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington. Pioneer's commercial banking subsidiary,
Pioneer National Bank, operated five offices in central Washington. At the
acquisition date, Pioneer had total consolidated assets of $q108.4 million,
total loans receivable of $63.4 million, total deposits of $87.2 million, and
shareholders' equity of $9.3 million. On January 22, 1999, Pioneer National
Bank was merged into Pacific Northwest Bank.
The acquisitions of Central, Puget, Pacific and Pioneer 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, q1998, InterWest Bancorp acquired Kittitas Valley Bancorp,
Inc. (Kittitas), of Ellensburg, Washington. Kittitas' commercial banking
subsidiary, Kittitas Valley Bank, N.A., operates offices in central
Washington. At the acquisition date, Kittitas had total consolidated assets
of $47.4 million, total loans receivable of $27.9 million, total deposits of
$39.2 million and shareholders' equity of $4.3 million. This acquisition has
been accounted for using the purchase method. An application has been filed
to merge Kittitas Valley Bank, N.A. into Pacific Northwest Bank. It is
anticipated that the merger will be completed during the second quarter of
fiscal year 2000, following the approval of applicable regulatory authorities.
Subsequent to fiscal year end on October 1, 1999, InterWest Bancorp
completed the acquisition of NBT Northwest Bancorp (NBT), of Tukwila,
Washington. NBT's commercial banking subsidiary, National Bank of Tukwila,
operates one office in south King County. Under the terms of this transaction,
NBT merged into InterWest Bancorp, with National Bank of Tukwila becoming a
wholly owned subsidiary of InterWest Bancorp. At the acquisition date, NBT had
total consolidated assets of $53.0 million, total loans receivable of $37.8
million, total deposits of $48.0 million and
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PAGE 17
INTERWEST 99 AR
shareholders' equity of $4.9 million. Each share of NBT common stock was
exchanged for 0.88 shares of InterWest Bancorp common stock. The transaction
resulted in the recording of approximately $9.7 million in goodwill by
InterWest Bancorp. This goodwill will be amortized using the straight-line
method over a period of twenty years. This acquisition was accounted for
using the purchase method and as such the accounts and operations of NBT and
National Bank of Tukwila have not been included in the September 30, 1999
consolidated financial statements.
The following table summarizes pertinent information related to the
completed acquisitions:
<TABLE>
<CAPTION>
TOTAL ASSETS AT ACQUISITION DATE COMMON SHARES
ACQUISITION 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(1)
October 1, 1999 NBT Northwest Bancorp 53,018 677,109
</TABLE>
- ------------------------
(1) Additionally, $6.4 million in cash was paid to Kittitas shareholders.
On September 14, 1999, InterWest Bancorp entered into a definitive
agreement to acquire Liberty Bay Financial Corporation (Liberty) of Poulsbo,
Washington. Liberty's commercial banking subsidiary, North Sound Bank,
operates eight offices on the Olympic Peninsula in Washington state. As of
September 30, 1999, Liberty had total consolidated assets of $187.9 million,
total loans receivable of $127.5 million, total deposits of $166.3 million
and shareholder's equity of $20.2 million. The transaction is structured such
that shareholders of Liberty will receive 11 shares of InterWest Bancorp
common stock for each share of Liberty common stock if the average price of
InterWest Bancorp common stock is more than $21 per share for a short period
prior to closing. If the average price of InterWest Bancorp common stock for
a short period before closing is between $20 and $21 per share, the
shareholders of Liberty will receive shares of InterWest Bancorp common stock
with a value of $231 for each share of Liberty common stock. If the average
price of InterWest Bancorp common stock for a short period before closing is
less than $20 per share, InterWest Bancorp has the option of adjusting the
exchange ratio such that Liberty shareholders will receive shares of
InterWest Bancorp common stock with an equivalent value of $231 for each
share of Liberty common stock or terminating the definitive agreement. It is
anticipated that the acquisition will be completed during the spring of 2000,
following the approval of applicable regulatory authorities and the
shareholders of Liberty. The transaction will be accounted for using the
purchase method.
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 a due diligence review
process to evaluate potential acquisitions and has established parameters for
potential acquisitions relating to market factors, financial performance and
certain non-financial 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.
Currently, InterWest conducts its business through 56 full-service
offices in western and central Washington state. Investments are available
through InterWest Financial Services, Inc. and insurance products are
available through InterWest Insurance Agency, Inc., wholly owned subsidiaries
of InterWest Bank.
RESULTS OF OPERATIONS
InterWest's net income was $27.9 million in 1999, compared to $22.6
million in 1998 and $24.5 million in 1997. Diluted net income per share was
$1.74 in 1999, compared to $1.40 in 1998 and $1.54 in 1997. InterWest's
return on average assets was 1.12 percent in 1999, compared to 0.95 percent
in 1998 and 1.15 percent in 1997. Return on average shareholders' equity was
16.00 percent in 1999, compared to 13.58 percent in 1998 and 16.64 percent in
1997.
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INTERWEST 99 AR
The results of operations for 1998 included non-recurring merger-related
charges of $5.1 million, net of tax. The following table summarizes net income,
net income per share and key financial ratios before and after non-recurring
expenses for fiscal years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
AFTER NON-RECURRING EXPENSES BEFORE NON-RECURRING EXPENSES
DOLLARS IN THOUSANDS, ---------------------------------- --------------------------------
EXCEPT PER SHARE AMOUNTS 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $27,855 $22,642 $24,549 $27,855 $27,719 $24,549
Basic net income per share $ 1.78 $ 1.45 $ 1.58 $ 1.78 $ 1.77 $ 1.58
Diluted net income per share $ 1.74 $ 1.40 $ 1.54 $ 1.74 $ 1.72 $ 1.54
Return on average shareholders' equity 16.00% 13.58% 16.64% 16.00% 16.62% 16.64%
Return on average assets 1.12% 0.95% 1.15% 1.12% 1.16% 1.15%
Efficiency ratio 60.53% 63.62% 58.24% 60.53% 58.40% 58.24%
</TABLE>
NET INTEREST INCOME InterWest's net income is significantly affected by changes
in net interest income, which is the difference between interest income received
on loans receivable and other interest-earning assets and interest paid on
deposits and borrowings. InterWest's operations are sensitive to changes in
interest rates and the resulting impact on net interest income.
Net interest income before the provision for losses on loans was $84.2
million in 1999, compared to $78.8 million in 1998 and $74.1 million in 1997.
The increase in net interest income from 1998 to 1999 was due to growth in
interest-earning assets and an increase in net interest margin. The increase in
net interest income from 1997 to 1998 was due to growth in interest-earning
assets that was partially offset by a decrease in net interest margin.
Despite decreasing yields and increased competition, net interest margin,
which is net interest income divided by average interest-earning assets,
increased for fiscal year 1999 compared to fiscal year 1998. Net interest margin
was 3.64 percent in 1999, compared to 3.52 percent in 1998 and 3.70 percent in
1997. The increase in net interest margin compared to the prior year was
primarily the result of a decrease in the cost of funds. 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. InterWest's
deposit base changed with increases in the average balances outstanding of
non-interest-bearing deposits of $41.3 million and interest-bearing transaction
deposit balances of $82.3 million and a decrease in the average balance
outstanding of certificates of deposit of $55.5 million. 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 compared to fiscal year 1998. The flat yield curve has continued to
decrease the yields earned and, as such, expansion of net interest margin.
Interest income was $179.7 million in 1999, compared to $180.3 million in
1998 and $165.2 million in 1997. Interest income decreased from 1998 to 1999,
due to a decrease in the yield earned partially offset by an increase in
interest-earning assets. Interest income increased from 1997 to 1998, due to
growth in interest-earning assets that was partially offset by a decrease in the
yield earned.
Interest expense was $95.5 million in 1999, compared to $101.5 million in
1998 and $91.1 million in 1997. Interest expense decreased from 1998 to 1999,
due to a decrease in the cost of funds that was partially offset by an increase
in interest-bearing liabilities. Interest expense increased from 1997 to 1998,
due to an increase in interest-bearing liabilities and an increase in the cost
of funds.
During the second half of fiscal year 1999, the overall interest rate
environment increased. In periods of rising interest rates, InterWest's net
interest income and net interest margin may decrease as a greater amount of
interest-bearing liabilities are subject to more rapid repricing than
interest-earning assets. InterWest is taking the following steps to offset
rising interest rates and increase net interest income and net interest margin:
increasing commercial lending, reducing dependence on single-family residential
mortgage loans, and increasing non-interest-bearing and interest-bearing
transaction deposits.
The following table presents, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yield and cost
ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for InterWest.
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INTERWEST 99 AR
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999 1998
------------------------------------------ -----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
DOLLARS IN THOUSANDS BALANCE INTEREST COST BALANCE INTEREST COST
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------------------------------------
Loans receivable and
loans held for sale(1) $1,432,273 $ 126,482 8.83% $1,406,307 $ 127,472 9.06%
Securities available for
sale and securities
held to maturity 824,699 50,398 6.11 773,631 49,591 6.41
Other interest-
earning assets 56,886 2,779 4.89 60,681 3,216 5.30
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 2,313,858 179,659 7.76 2,240,619 180,279 8.05
Non-interest-
earning assets 165,963 145,767
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $2,479,821 $2,386,386
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------------------------------------------------------------------------------------------------
Savings accounts and
money market accounts $ 377,459 $ 11,229 2.97% $ 321,520 $ 10,410 3.24%
Checking accounts 167,238 2,102 1.26 140,832 2,055 1.46
Certificates of deposit 811,117 42,085 5.19 866,602 48,376 5.58
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,355,814 55,416 4.09 1,328,954 60,841 4.58
FHLB advances,
securities sold under
agreements to
repurchase and
other borrowings 734,507 40,064 5.45 718,527 40,642 5.66
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,090,321 95,480 4.57 2,047,481 101,483 4.96
Non-interest-bearing
deposits 191,704 150,360
Other non-interest-
bearing liabilities 23,653 21,766
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 2,305,678 2,219,607
Shareholders' equity 174,143 166,779
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,479,821 $2,386,386
========== ==========
Net interest income $ 84,179 $ 78,796
========== ==========
Interest rate spread 3.19% 3.09%
Net interest margin 3.64% 3.52%
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 110.69% 109.43%
<CAPTION>
1997
------------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
- -----------------------------------------------------------------------------------
Loans receivable and
loans held for sale(1) $1,258,351 $ 115,053 9.14%
Securities available for
sale and securities
held to maturity 709,235 47,563 6.71
Other interest-
earning assets 38,486 2,590 6.73
- -----------------------------------------------------------------------------------
Total interest-
earning assets 2,006,072 165,206 8.24
Non-interest-
earning assets 134,860
- -----------------------------------------------------------------------------------
Total assets $ 2,140,932
=============
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -----------------------------------------------------------------------------------
Savings accounts and
money market accounts $ 294,112 $ 9,196 3.13%
Checking accounts 131,024 1,803 1.38
Certificates of deposit 893,244 50,008 5.60
- -----------------------------------------------------------------------------------
Total interest-bearing
deposits 1,318,380 61,007 4.63
FHLB advances,
securities sold under
agreements to
repurchase and
other borrowings 530,356 30,074 5.67
- -----------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,848,736 91,081 4.93
Non-interest-bearing
deposits 125,805
Other non-interest-
bearing liabilities 18,837
- -----------------------------------------------------------------------------------
Total liabilities 1,993,378
Shareholders' equity 147,554
- -----------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 2,140,932
=============
Net interest income $ 74,125
=========
Interest rate spread 3.31%
Net interest margin 3.70%
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 108.51%
</TABLE>
- --------------------
(1) Average balances do not include non-accrual loans.
<PAGE>
PAGE 20
INTERWEST 99 AR
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>
1999 VS 1998 1998 VS 1997
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN DUE TO CHANGES IN
--------------------------------- ---------------------------------
DOLLARS IN THOUSANDS RATE VOLUME TOTAL RATE VOLUME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Loans receivable and loans held for sale $(3,318) $2,328 $(990) $ (983) $ 13,402 $ 12,419
Securities available for sale, securities held to
maturity and other interest-earning assets (2,545) 2,915 370 (2,516) 5,170 2,654
- ---------------------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (5,863) 5,243 (620) (3,499) 18,572 15,073
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------------
Deposits (8,135) 2,710 (5,425) (2,108) 1,942 (166)
FHLB advances, securities sold under
agreements to repurchase and other borrowings (1,469) 891 (578) (75) 10,643 10,568
- ---------------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (9,604) 3,601 (6,003) (2,183) 12,585 10,402
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 3,741 $ 1,642 $ 5,383 $ (1,316) $ 5,987 $ 4,671
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR LOSSES ON LOANS The provision for losses on loans was $2.0 million
in 1999, compared to $2.8 million in 1998 and $1.5 million in 1997. The
provision for losses on loans for 1998 included a merger-related provision of
$1.1 million. The merger-related provision was the result of conforming the
allowance for losses on loans methodologies of the acquired companies to that of
InterWest.
NON-INTEREST INCOME Non-interest income was $28.4 million in 1999, compared to
$26.5 million in 1998 and $18.6 million in 1997. The increase in non-interest
income from 1998 to 1999 was due to several factors. Investment product fees and
insurance commissions earned by InterWest Bank's non-bank subsidiaries:
InterWest Financial Services, Inc. and InterWest Insurance Agency, Inc.
increased $1.0 million from 1998 to 1999. The acquisition of Kittitas Valley
Bank, N.A. (KVB) increased non-interest income $0.7 million.
Gains on the sale of loans were $8.1 million for 1999, compared to $10.4
million in 1998 and $4.2 million in 1997. In addition to loan sales, InterWest
sold the servicing rights for $530 million of fixed-rate single-family mortgage
loans that resulted in a gain of $2.8 million in 1999. These loan servicing
rights primarily related to loans sold by InterWest during 1998 and the first
half of 1999. The sale was initiated as a result of increasing long-term
interest rates and decreasing loan prepayment rates, which increased the value
of the servicing portfolio. The sale of loan servicing rights also created
servicing capacity for future loan growth.
During 1998 and the first half of 1999, the low long-term interest rate
environment resulted in increased fixed-rate single-family residential mortgage
loan refinances and opportunities to sell these loans on the secondary market
for a premium. During the second half of 1999, long-term interest rates
increased and single-family mortgage loan originations decreased, and as a
result, sales of single-family mortgage loans declined as compared to 1998 and
the first half of 1999. Based on the current interest rate environment,
InterWest anticipates that single-family mortgage loan sales will remain at low
levels during 2000 relative to 1998 and the first half of 1999.
The increase in non-interest income from 1997 to 1998 was primarily due
to an increase in the gain on sale of loans.
<PAGE>
PAGE 21
INTERWEST 99 AR
NON-INTEREST EXPENSE Non-interest expense was $68.1 million in 1999, compared to
$67.0 million in 1998 and $54.0 million in 1997. Non-interest expense for 1998
included $5.5 million of non-recurring merger-related charges. Excluding the
merger-related charges in 1998, non-interest expense increased $6.6 million from
1998 to 1999, representing an increase of 11 percent for 1999 compared to 1998
and 14 percent for 1998 compared to 1997, respectively.
Excluding the merger-related charges incurred in 1998, InterWest's
efficiency ratio was 60.53 percent in 1999, compared to 58.40 percent in 1998
and 58.24 percent in 1997.
The increase in non-interest expense for 1999 compared to 1998 was primarily
due to the acquisition of KVB and an increase in compensation and employee
benefits. Non-interest expense associated with KVB totaled $2.3 million
(including goodwill amortization) for 1999. Compensation and employee benefits
were $37.5 million in 1999, compared to $32.6 million in 1998 and $28.1 million
in 1997. The increase was primarily due to the increased focus on commercial
banking. Compensation expense also increased as a result of higher lending
volumes and transaction account deposit growth, which increased compensation
resulting from variable compensation plans.
The increase in non-interest expense for 1998 as compared to 1997 was
primarily due to activities to develop the resources and infrastructure for
commercial banking growth. Key elements of commercial banking growth were the
development of credit administration and commercial lending support, the
addition of commercial lending officers and several experienced commercial
banking management personnel.
As discussed previously, InterWest completed acquisitions of four commercial
banks during 1998 and an additional acquisition subsequent to end of 1999.
InterWest has not converted to a common data processing system nor have various
operating policies and procedures been integrated. Additionally, InterWest
currently conducts business using multiple names and bank charters. The
integration process has been delayed due to the focus of resources on Year 2000
issues and the process of selecting a common operating platform that will best
meet InterWest's future needs. It is anticipated that data and systems
conversions will commence in the latter part of fiscal year 2000. The
efficiencies available from eliminating duplication of administrative and
operational functions have not yet been realized from the acquisitions.
INCOME TAX EXPENSE Income tax expense was $14.6 million in 1999, compared to
$12.8 million in 1998 and $12.7 million in 1997. The effective tax rates were
34.4 percent in 1999, 36.2 percent in 1998 and 34.1 percent in 1997. The higher
effective tax rate in 1998 was primarily due to certain direct merger-related
expenses that are not deductible for federal income tax purposes.
REVIEW OF FINANCIAL CONDITION
InterWest's total consolidated assets were $2.580 billion as of September 30,
1999, compared to $2.448 billion as of September 30, 1998. This was an increase
of $132 million, or 5 percent.
SECURITIES AND OTHER INTEREST-EARNING ASSETS Securities and other
interest-earning assets, including securities available for sale, securities
held to maturity, FHLB stock, interest-bearing deposits in banks and federal
funds sold were $824.2 million as of September 30, 1999, compared to $826.4
million as of September 30, 1998. As of September 30, 1999, 91 percent of
InterWest's securities were classified as available for sale, an increase from
87 percent as of September 30, 1998. Management believes that a higher
percentage of securities classified as available for sale provides greater
flexibility to respond to interest rate changes and liquidity needs to fund loan
growth.
InterWest 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 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 affect liquidity levels.
<PAGE>
PAGE 22
INTERWEST 99 AR
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 amortized cost. Securities classified as
available for sale are reported at estimated fair value, with unrealized gains
and losses (net of income taxes) reported in accumulated other comprehensive
income, a separate component of shareholders' equity.
The gross unrealized loss on securities available for sale has increased to
$24.7 million as of September 30, 1999, compared to $1.1 million as of September
30, 1998. This increase was primarily due to increasing interest rates during
1999.
The following table sets forth the amortized cost and estimated fair values
of InterWest's securities held to maturity as of the dates indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 1998 1997
----------------------------- ------------------------------- -----------------------------------
ESTIMATED PERCENT ESTIMATED PERCENT ESTIMATED PERCENT
AMORTIZED FAIR OF PORT- AMORTIZED FAIR OF PORT- AMORTIZED FAIR OF PORT-
DOLLARS IN THOUSANDS COST VALUE FOLIO COST VALUE FOLIO COST VALUE FOLIO
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $ 24,878 $ 24,475 35.2% $ 27,084 $ 27,632 31.0% $ 54,905 $ 54,622 41.5%
Obligations of states
and political
subdivisions 2,397 2,396 3.4 2,756 2,799 3.2 10,841 10,992 8.2
Private mortgage-backed
and related securities 43,417 42,338 61.4 57,422 56,935 65.8 66,549 63,856 50.3
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 70,692 $ 69,209 $87,262 $87,366 $132,295 $129,470
================================================================================================================================
</TABLE>
The following table sets forth the contractual maturities and weighted average
yields of securities held to maturity as of September 30, 1999.
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
--------------------- --------------------- ---------------------- -----------------------
AMORTIZED AMORTIZED AMORTIZED AMORTIZED
DOLLARS IN THOUSANDS COST YIELD COST YIELD COST YIELD COST YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government
and agency securities $ -- --% $ 20 9.27% $24,857 6.50% $ 1 6.50%
Obligations of states
and political subdivisions 771 4.45 1,626 4.45 -- -- -- --
Private mortgage-backed
related securities -- -- 5,202 7.21 -- -- 38,215 6.17
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 771 4.45% $ 6,848 6.57% $24,857 6.50% $38,216 6.17%
=================================================================================================================================
</TABLE>
The following table sets forth InterWest's securities available for sale
portfolio as of the dates indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 1998 1997
---------------------------- --------------------------- -----------------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF ESTIMATED PERCENT OF
DOLLARS IN THOUSANDS FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $280,018 40.0% $398,868 69.5% $421,856 74.9%
SBA securities 34,962 5.0 48,370 8.4 61,160 10.8
Obligations of states and
political subdivisions 1,413 0.2 2,333 0.4 5,414 1.0
Private mortgage-backed
and related securities 359,997 51.4 99,735 17.4 73,864 13.1
Other securities 24,160 3.4 25,040 4.3 873 0.2
- -----------------------------------------------------------------------------------------------------------------------------
Total $700,550 $574,346 $ 563,167
=============================================================================================================================
</TABLE>
<PAGE>
PAGE 23
INTERWEST 99 AR
The following table sets forth the contractual maturities and weighted average
yields of InterWest's securities available for sale portfolio as of September
30, 1999.
<TABLE>
<CAPTION>
LESS THAN ONE YEAR ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS
---------------------- ---------------------- ---------------------- ---------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
DOLLARS IN THOUSANDS FAIR VALUE YIELD FAIR VALUE YIELD FAIR VALUE YIELD FAIR VALUE YIELD
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency securities $ 10,893 6.50% $131,871 5.83% $ 54,525 5.95% $ 82,729 6.09%
SBA securities -- -- 2,625 6.92 6,346 6.71 25,991 6.30
Obligations of states and
political subdivisions 460 4.71 761 4.95 192 5.40 -- --
Private mortgage-backed
and related securities -- -- -- -- 18,389 6.45 341,608 6.35
Other securities -- -- -- -- -- -- 24,160 6.32
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 11,353 6.43% $135,257 5.84% $ 79,452 6.12% $474,488 6.30%
===============================================================================================================================
</TABLE>
LOANS RECEIVABLE AND LOANS HELD FOR SALE Loans receivable increased by $203
million, or 15 percent, from $1.359 billion as of September 30, 1998, to $1.562
billion as of September 30, 1999. During the year ended September 30, 1999, the
principal balances outstanding of multi-family residential, commercial real
estate, real estate construction, consumer, commercial and agricultural loans
increased. These increases were partially offset by a decrease in single-family
residential mortgage loans outstanding as a result of loan sales during the
first half of 1999.
The acquisitions of Central, Pacific, Pioneer, Puget and Kittitas increased
InterWest's ability to originate commercial loans. 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 mortgage and commercial lending. Growth in
commercial lending should shorten duration risk, increase net interest margin,
create better protection from interest rate volatility and ultimately meet the
needs of InterWest's customers.
Single-family residential mortgage loans outstanding decreased $179.1
million from September 30, 1998, due to loan sales and increased emphasis on
commercial lending. As of September 30, 1999, single-family residential mortgage
loans totaled $448.1 million, or 27.9 percent of total gross loans, compared to
$627.2 million, or 42.5 percent of total gross loans, as of September 30, 1998.
Due primarily to rising interest rates, loan sales have declined during the
second half of 1999. Based on the current interest rate environment, InterWest
anticipates that sales of single-family mortgage loans will remain at low levels
during 2000 relative to 1998 and the first half of 1999.
Income property (multi-family residential and commercial real estate)
mortgage loans outstanding increased $155.9 million from September 30, 1998,
representing a growth rate of 48.6 percent. As of September 30, 1999,
outstanding income property loans totaled $476.8 million, or 29.6 percent of
total gross loans, compared to $320.9 million, or 21.8 percent of total gross
loans, as of September 30, 1998.
Real estate construction loans, which are primarily secured by single-family
and multi-family residential properties, increased $63.7 million from
September 30, 1998, representing a growth rate of 35.0 percent. As of
September 30, 1999, real estate construction loan balances outstanding were
$245.7 million, or 15.3 percent of total gross loans, compared to $182.0
million, or 12.3 percent of total gross loans, as of September 30, 1998.
Commercial loan balances outstanding increased $71.6 million from September
30, 1998, representing a growth rate of 32.9 percent. As of September 30, 1999,
outstanding commercial loans represented 18.0 percent of total gross loans,
compared to 14.8 percent as of September 30, 1998.
<PAGE>
PAGE 24
INTERWEST 99 AR
The following table sets forth the composition of InterWest's loan portfolio
by type of loan as of the dates indicated.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
AS OF SEPTEMBER 30, ------------- ------------ ------------- -------------- -----------------
DOLLARS IN THOUSANDS AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:(1)
Single-family residential $448,068 27.9% $627,191 42.5% $701,840 51.2% $630,147 52.9% $570,377 54.2%
Multi-family residential 74,223 4.6 62,948 4.3 58,137 4.2 55,256 4.6 53,608 5.1
Commercial 402,580 25.0 257,906 17.5 214,232 15.6 191,348 16.1 165,547 15.7
Real estate construction 245,690 15.3 182,020 12.3 136,580 10.0 114,698 9.6 105,212 10.0
Consumer loans 97,153 6.0 81,386 5.5 73,876 5.4 63,240 5.3 55,299 5.3
Commercial loans 289,185 18.0 217,546 14.8 155,265 11.4 122,275 10.3 87,788 8.3
Agricultural loans 51,961 3.2 45,637 3.1 30,491 2.2 14,007 1.2 14,878 1.4
- --------------------------------------------------------------------------------------------------------------------------------
Total gross loans 1,608,860 1,474,634 1,370,421 1,190,971 1,052,709
Less:
Loans held for sale 23,138 93,125 10,230 11,223 9,581
Allowance for losses
on loans 14,123 13,224 11,104 10,235 7,841
Deferred loan fees
and discounts 10,015 9,235 10,636 10,465 9,769
- --------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $1,561,584 $1,359,050 $1,338,451 $1,159,048 $1,025,518
================================================================================================================================
</TABLE>
(1) Includes construction loans converted to permanent loans.
The following table indicates the contractual maturity of InterWest's gross
loans as of September 30, 1999. Loans having no stated schedule of repayments
and no stated maturity are reported as due within one year. Loan balances do
not include deferred loan fees and discounts and the allowance for losses on
loans. The table does not reflect any estimate of prepayments, which
significantly shorten the average life of all loans and will cause
InterWest's accrual repayment experience to differ significantly from that
indicated below.
<TABLE>
<CAPTION>
AFTER ONE
WITHIN YEAR THROUGH AFTER
DOLLARS IN THOUSANDS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential $ 13,547 $25,589 $ 408,932 $ 448,068
Multi-family residential 742 3,958 69,523 74,223
Commercial 47,483 94,642 260,455 402,580
Real estate construction 73,497 46,022 126,171 245,690
Consumer loans 49,683 16,110 31,360 97,153
Commercial loans 126,857 75,903 86,425 289,185
Agricultural loans 38,036 8,480 5,445 51,961
- ----------------------------------------------------------------------------------------------
Total gross loans $349,845 $270,704 $988,311 $1,608,860
==============================================================================================
</TABLE>
<PAGE>
PAGE 25
INTERWEST 99 AR
The following table sets forth the dollar amount of all loans due one year
or more after September 30, 1999, that have fixed interest rates and have
floating or variable interest rates.
<TABLE>
<CAPTION>
FIXED FLOATING OR
DOLLARS IN THOUSANDS RATES VARIABLE RATES
- ---------------------------------------------------------------------------
<S> <C> <C>
Loans maturing in more than one year $463,548 $795,467
</TABLE>
The principal lending activity of InterWest Bank is the origination of
single-family residential mortgage loans and loans secured by income
property, consumer loans, commercial loans and agricultural loans. Pacific
Northwest Bank and Kittitas Valley Bank, N.A. have loan portfolios with a
greater percentage of commercial loans than InterWest Bank.
InterWest typically requires that mortgage loans be secured by first liens on
single-family, residential dwellings (one-to four-family units), land,
developed lots or commercial property. The purpose of the majority of real
estate mortgage loans has been for the purchase or construction of single-family
residential dwellings or refinancing of these properties, but some loans have
been for acquisition or development of residential lots or permanent loans
secured by multi-family residential and commercial properties.
SINGLE-FAMILY RESIDENTIAL MORTGAGE LOANS Prior to the acquisition of Central in
1996, the primary lending activity of InterWest was the origination of mortgage
loans to enable borrowers to refinance and purchase existing dwellings or to
construct new single-family dwellings on properties located within its primary
market area. Management believes that focusing on single-family residential
mortgage loans has been successful in contributing to interest income while
reducing overall credit and collateral risk. InterWest's single-family
residential loan portfolio also includes loans on two- to four-family dwellings
and manufactured homes.
InterWest presently originates both fixed-rate loans and adjustable-rate
mortgage loans ("ARMs") secured by single-family residential properties with
loan terms of up to 30 years. ARMs have interest rates that adjust based upon
changes in the predetermined index for a period matching the repricing period of
the loan. Borrower demand for ARMs versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the interest rates and loan
fees offered for fixed-rate mortgage loans and the rates and loan fees for
ARMs.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE MORTGAGE LOANS InterWest
originates mortgage loans on commercial real estate and multi-family residential
properties with terms of up to 30 years in its primary market area. These loans
are secured by improved property such as apartment buildings, condominium
projects, office buildings, small commercial business properties, churches,
subdivision developments and strip shopping centers.
Multi-family residential and commercial real estate mortgage loans generally
have larger balances outstanding and involve greater risks than residential
mortgage loans because payments on loans secured by income properties are
dependent on the successful operation or management of the properties. As a
result, repayment of such loans may be subject to conditions in the real estate
market or the economy to a greater extent than single-family residential real
estate loans. These loans may involve large loan balances to single borrowers or
groups of related borrowers.
REAL ESTATE CONSTRUCTION InterWest originates real estate construction loans to
residential owner-occupants (custom construction loans) and to contractors
building residential properties for resale, as well as construction loans for
condominiums, multi-family residential properties and land development on
properties located within its primary market area. Construction loans to
owner-occupants generally are converted to single-family residential mortgage
loans.
Real estate construction loans may involve additional risks because loan
funds are collateralized by the project under construction, which is of
uncertain value prior to completion. Delays may arise from labor problems,
material shortages may be experienced and other unpredictable contingencies may
occur. It is important to evaluate accurately the total loan funds required to
complete a project and related loan-to-value ratios. Because of these factors,
the analysis of prospective construction loan projects requires an expertise
that is different in significant respects from the expertise required for real
estate mortgage lending. Construction lending is generally considered to involve
a higher degree of collateral risk than long-term financing of residential
properties. InterWest's risk of loss on a construction loan is dependent largely
upon the
<PAGE>
PAGE 26
INTERWEST 99 AR
accuracy of the initial estimate of the property's value and marketability at
completion of construction or development and the estimated cost (including
interest) of construction. If the estimate of construction costs and the
marketability of the property upon completion of the project prove to be
inaccurate, InterWest may be required to advance additional funds to complete
development of the project.
InterWest's underwriting criteria are designed to evaluate and minimize the
risks of each real estate construction loan. Among other things, InterWest
considers evidence of the availability of permanent financing for the borrower,
the reputation of the borrower, the amount of the borrower's equity in the
project, the independent appraisal and review of cost estimates, the
pre-construction sale and leasing information, and the cash flow projections of
the borrower.
COMMERCIAL LOANS Commercial loans include a wide range of loan types to small
and medium-sized businesses. Commercial loans include commercial lines of credit
with variable rates and maturities of one year or less. Commercial loans also
include equipment and operational loans with terms generally not exceeding five
years. These loans are primarily secured by liens on real estate, capital
assets, accounts receivable and inventory, although certain loans are unsecured.
Commercial lending has increased risks as a result of dependence on income
production for future repayment, and in certain circumstances, the lack of
tangible collateral. Commercial loans are underwritten based on the financial
strength and repayment ability of the borrower, as well as the value of any
collateral securing the loans. Commercial lending operations rely on a strong
credit culture that combines prudent credit policies and individual lender
accountability.
AGRICULTURAL LOANS Agricultural loans include seasonal production loans secured
by crops and equipment. These loans generally have adjustable rates that are
renewed annually. Agricultural loans also include loans secured by farmland.
Most agricultural real estate loans have terms of less than five years and have
variable interest rates.
CONSUMER LOANS Consumer loans consist of automobile loans, home equity loans and
loans for other consumer purposes. Consumer lending may involve special risks,
including decreases in the value of collateral and transaction costs associated
with foreclosure and repossession.
LOANS HELD FOR SALE Loans held for sale were $23.1 million as of September 30,
1999, compared to $93.1 million as of September 30, 1998. This decrease
reflects declining loan sales during the second half of 1999. Loans intended for
sale in the secondary market are carried at the lower of cost or estimated fair
value in aggregate. Net unrealized losses are recognized in a valuation
allowance by charges to income. Loans that are held for sale are generally
fixed-rate single-family mortgage loans, sub-prime loans secured by
single-family residential real estate and loans originated under a Small
Business Administration program. Loans are typically sold to FHLMC and other
financial institutions. In connection with most loan 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
included in intangible assets and are amortized as an offset to service fees in
proportion to and over the period of servicing income, not to exceed 15 years.
Periodically, InterWest has sold loan servicing rights. During 1999, InterWest
sold the loan servicing rights for $530 million of single-family mortgage loans
resulting in a gain of $2.8 million.
NON-PERFORMING LOANS Loans are generally placed on non-accrual when they become
past due over 90 days or when the collection of interest or principal is
considered unlikely. InterWest does not return a loan to accrual status until it
is brought current with respect to both principal and interest and future
principal payments are no longer in doubt. When a
<PAGE>
PAGE 27
INTERWEST 99 AR
loan is placed on non-accrual status, any previously accrued and uncollected
interest is reversed from interest income. As of September 30, 1999 and 1998,
InterWest had $10.9 million and $8.2 million, respectively, of loans on
non-accrual status.
InterWest performs a review of its loan portfolio for weaknesses in credit
quality on an ongoing basis to identify potential problem loans. This review
process results in internal loan classifications based on risk characteristics
and loan performance. The overall objective of this review process is to
identify trends in the credit quality of the loan portfolio and to determine the
level of loss exposure to evaluate the need for an adjustment to the allowance
for losses on loans.
ALLOWANCE FOR LOSSES ON LOANS InterWest's allowance for losses on loans was
$14.1 million or 0.90 percent of loans receivable as of September 30, 1999,
compared to $13.2 million, or 0.96 percent of loans receivable as of September
30, 1998. Net loan charge-offs for 1999 were $1.1 million or 0.08 percent of the
average balance of loans outstanding during the year. Net loan charge-offs were
$0.9 million and $0.6 million in 1998 and 1997, respectively.
The allowance for losses on loans is maintained at an amount to sufficiently
provide for estimated losses based on evaluating known and inherent risks in the
loan portfolio. Management analyzes 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.
InterWest believes it has established its allowance for losses on loans in
accordance with generally accepted accounting principles. However, there can be
no assurance that in the future, regulators, when reviewing InterWest's loan
portfolio, will not request InterWest to increase its allowance for losses on
loans, thereby affecting InterWest's financial condition and results of
operations. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for losses on loans is adequate. Substantial increases
may be necessary should the quality of the loan portfolio deteriorate as a
result of the factors discussed above.
<PAGE>
PAGE 28
INTERWEST 99 AR
The following table presents activity in the allowance for losses on loans
for the periods indicated.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance as of beginning of year $13,224 $11,104 $10,235 $ 7,841 $7,233
Provision for losses on loans 2,000 1,707 1,508 1,552 929
Merger and acquisition activity:
Provision pursuant to acquisition - 1,100 - 900 -
Allowance acquired - 295 - - -
Pooling accounting adjustment - (76) - - -
Charge-offs:
Real estate mortgage loans:
Single-family residential 727 413 109 99 126
Multi-family residential - 100 - - 142
Commercial - 19 234 20 -
Real estate construction - 134 - - -
Consumer loans 337 428 449 304 314
Commercial loans 405 194 246 60 138
Agricultural loans 84 2 2 - -
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 1,553 1,290 1,040 483 720
Recoveries:
Real estate mortgage loans:
Single-family residential 245 61 39 6 20
Multi-family residential 38 - - - -
Commercial - 55 67 13 22
Consumer loans 83 176 162 118 152
Commercial loans 86 88 133 288 201
Agricultural loans - 4 - - 4
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 452 384 401 425 399
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,101) (906) (639) (58) (321)
- --------------------------------------------------------------------------------------------------------------------------
Allowance as of end of year $14,123 $13,224 $11,104 $10,235 $7,841
==========================================================================================================================
Ratio of allowance to total loans receivable
as of the end of the year 0.90% 0.96% 0.82% 0.88% 0.76%
Ratio of net charge-offs to average loans
outstanding during the year 0.08% 0.06% 0.05% 0.01% 0.03%
</TABLE>
InterWest maintains an estimated allowance for losses on loans based on the
analyses conducted by management and credit personnel. The allowance for losses
on loans is allocated to certain loan categories based on the relative risk
characteristics and actual loss experience of the loan portfolio. Management has
reviewed the allocations in the various loan categories and believes the
allowance for losses on loans was adequate at all times during the five-year
period ended September 30, 1999. Although the allocation of the allowance for
losses on loans is an important credit management tool, the entire allowance for
losses on loans is available for the entire loan portfolio.
<PAGE>
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INTERWEST 99 AR
The following table sets forth the allocation of the allowance for losses on
loans by loan category as of the dates indicated.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF SEPTEMBER 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Single-family residential $ 2,471 $ 3,288 $ 2,092 $ 1,611 $ 1,455
Multi-family residential 275 387 256 445 424
Commercial 1,250 1,491 742 1,685 1,365
Real estate construction 302 424 494 459 388
Consumer loans 1,441 996 1,012 1,047 904
Commercial loans 2,785 2,454 1,592 1,064 843
Agricultural loans 334 285 59 214 217
Unallocated 5,265 3,899 4,857 3,710 2,245
- -------------------------------------------------------------------------------------------------
Total $14,123 $13,224 $11,104 $10,235 $ 7,841
=================================================================================================
</TABLE>
REAL ESTATE HELD FOR SALE AND FOR DEVELOPMENT Real estate held for sale
includes property acquired by InterWest through foreclosure. The property is
carried at the lower of the estimated fair value or the principal balance of
the foreclosed loans. As of September 30, 1999, InterWest had foreclosed
properties totaling $3.6 million.
The real estate held for development portfolio of $4.7 million as of
September 30, 1999, primarily consists of one land development project.
NON-PERFORMING ASSETS InterWest's non-performing assets as of September 30,
1999, consisting of non-performing loans and real estate held for sale, totaled
$14.5 million or 0.56 percent of total assets. This is a decrease from $15.8
million or 0.64 percent of total assets as of September 30, 1998. Non-performing
loans increased to $10.9 million as of September 30, 1999, compared to $8.2
million as of September 30, 1998, and $5.5 million as of September 30, 1997.
Real estate held for sale was $3.6 million as of September 30, 1999, a decrease
from $7.6 million as of September 30, 1998.
The following table sets forth information with respect to InterWest's
non-performing assets and restructured loans as of the dates indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Real estate mortgage loans:
Single-family residential $ 4,125 $ 5,036 $ 3,181 $ 2,008 $ 985
Multi-family residential -- -- 407 -- 900
Commercial 792 557 805 1,323 308
Real estate construction 880 634 234 -- --
Consumer loans 507 174 417 208 132
Commercial loans 3,943 1,682 343 300 507
Agricultural loans 652 127 78 -- --
- --------------------------------------------------------------------------------------------------------------------------
Total 10,899 8,210 5,465 3,839 2,832
Real estate owned acquired through foreclosure 3,560 7,553 6,945 6,053 4,178
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $14,459 $15,763 $12,410 $ 9,892 $ 7,010
===========================================================================================================================
Restructured loans $ 798 $ 883 $ 1,403 $ 1,715 $ 1,958
Total non-performing loans to loans receivable 0.70% 0.60% 0.41% 0.33% 0.28%
Total non-performing loans to total assets 0.42% 0.34% 0.21% 0.19% 0.16%
Total non-performing assets to total assets 0.56% 0.64% 0.52% 0.49% 0.41%
</TABLE>
<PAGE>
PAGE 30
INTERWEST 99 AR
The level of non-performing loans relative to loans receivable has increased
each year since 1994. This trend may continue as InterWest expands its
commercial lending activities and expands into new geographic and product
markets. Interest income that would have been recorded for the year ended
September 30, 1999 had non-accrual loans been current in accordance with their
original terms amounted to approximately $729,000.
DEPOSITS InterWest offers various types of deposit accounts, including savings,
checking accounts, money market accounts and a variety of certificate of deposit
accounts. Deposit accounts vary as to terms, with the principal differences
being the minimum balance required, the time period the funds must remain on
deposit, the interest rate, and the deposit or withdrawal option. InterWest has
rarely relied on brokered deposits, but has generated deposits through a
marketing strategy that employs a sales staff responsible for establishing new
customer relationships.
Non-interest-bearing deposits increased to $197.7 million as of September
30, 1999, from $178.6 million as of September 30, 1998. Non-interest-bearing
deposits represented 12.5 percent of total deposits as of September 30, 1999,
compared to 11.4 percent as of September 30, 1998.
Interest-bearing transaction accounts (which includes interest-bearing
checking, money market and savings accounts) increased to $548.4 million as of
September 30, 1999, compared to $539.2 million as of September 30, 1998.
Interest-bearing transaction accounts represented 34.8 percent of total deposits
as of September 30, 1999, compared to 34.5 percent as of September 30, 1998.
Certificates of deposit decreased to $832.8 million as of September 30,
1999, compared to $847.0 million as of September 30, 1998. Certificates of
deposit represented 52.7 percent of total deposits as of September 30, 1999, a
decrease from 54.1 percent as of September 30, 1998.
Management is continuing to pursue initiatives to increase the percentage of
non-interest-bearing deposits and interest-bearing transaction deposits relative
to certificates of deposit. This activity should increase net interest income
and service fee revenue while building customer relationships. As of September
30, 1999, 47.3 percent of total deposits were transaction accounts, compared to
45.9 percent as of September 30, 1998.
The following table indicates the amount of the InterWest's certificates of
deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1999.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
MATURITY PERIOD AMOUNT
- -------------------------------------------------------------------------------------
<S> <C>
Three months or less $181,529
Three through six months 117,192
Six through twelve months 79,300
Greater than twelve months 23,942
- --------------------------------------------------------------------------------------
Total $401,963
======================================================================================
</TABLE>
The following table sets forth the balances and changes in dollar amounts of
deposits in the various types of accounts offered by InterWest as of the dates
indicated.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 1998 1997
------------------------------ --------------------------------- ---------------------
PERCENT INCREASE PERCENT INCREASE PERCENT
DOLLARS IN THOUSANDS AMOUNT OF TOTAL (DECREASE) AMOUNT OF TOTAL (DECREASE) AMOUNT OF TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
deposits $197,732 12.5% $19,107 $178,625 11.4% $28,197 $150,428 10.2%
Interest-bearing checking
accounts 171,578 10.9 9,527 162,051 10.4 25,649 136,402 9.3
Money market accounts 273,537 17.3 5,584 267,953 17.1 82,924 185,029 12.6
Savings accounts 103,306 6.6 (5,842) 109,148 7.0 (6,987) 116,135 7.9
Certificates of deposit 832,796 52.7 (14,252) 847,048 54.1 (33,418) 880,466 60.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,578,949 $14,124 $1,564,825 $96,365 $1,468,460
==================================================================================================================================
</TABLE>
<PAGE>
PAGE 31
INTERWEST 99 AR
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE AND OTHER
BORROWINGS InterWest borrows through advances from the Federal Home Loan Bank
(FHLB) and securities sold under agreements to repurchase with third parties.
These borrowing sources totaled $814.2 million as of September 30, 1999,
compared to $674.6 million as of September 30, 1998, and $753.6 million as of
September 30, 1997. The proceeds from these borrowings were used to fund growth
in loans receivable and securities.
The FHLB provides credit for member financial institutions. As members,
financial institutions 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 member financial
institutions pursuant to several different programs. These programs are
generally designed to meet the financial institution's needs while still
reflecting market terms and conditions. The subsidiary banks rely upon advances
from the FHLB to supplement funds available to lend and to meet liquidity
guidelines. Interest rates on these advances vary in response to general
economic conditions. The contractual maturities of InterWest's FHLB advances are
generally greater than one year; however, many of these advances have options
whereby the FHLB can call the borrowing due prior to the contractual maturity.
The amount of such advances with call options exercisable within one year was
$377 million as of September 30, 1999.
InterWest uses the securities market for borrowings by utilizing its
securities available for sale and securities held to maturity as collateral.
These borrowings are collateralized by securities with an estimated fair value
exceeding the face value of the borrowings. Certain securities sold under
agreements to repurchase contractually due beyond 90 days have an option whereby
the creditor can call the agreement due within 90 days. The amount of such
securities sold under agreements to repurchase with call options exercisable
within 90 days was $100 million as of September 30, 1999.
The following table sets forth certain information with respect to
borrowings by InterWest during the periods indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF OR FOR THE YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding at any month end during the period:
FHLB advances $718,709 $663,385 $494,948
Securities sold under agreements to repurchase 133,992 214,917 258,993
Average amount outstanding during the period:
FHLB advances 601,931 559,012 347,444
Securities sold under agreements to repurchase 131,723 157,898 183,246
Balance outstanding at end of period:
FHLB advances 682,238 546,033 494,648
Securities sold under agreements to repurchase 131,972 128,613 258,993
Weighted average rate paid during the period:
FHLB advances 5.38% 5.61% 5.64%
Securities sold under agreements to repurchase 5.77 5.81 5.66
Weighted average rate paid at end of period:
FHLB advances 5.41 5.40 5.68
Securities sold under agreements to repurchase 5.70 5.72 5.66
</TABLE>
<PAGE>
PAGE 32
INTERWEST 99 AR
CAPITAL
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. See Note 18 of the Consolidated
Financial Statements for details of regulatory capital ratios for InterWest
Bancorp and subsidiary banks.
On July 21, 1998, InterWest Bancorp announced a three-for-two common stock
split, which was distributed on August 17, 1998, to shareholders of record on
August 3, 1998. Common stock issued and outstanding, average shares outstanding
and net income per share for all periods presented prior to the common stock
split have been retroactively adjusted to give effect to this transaction.
On January 20, 1999, the Board of Directors of InterWest Bancorp authorized
the purchase of up to 5 percent of InterWest Bancorp's outstanding shares of
common stock in the open market over a twelve-month period. During 1999,
InterWest Bancorp repurchased 521,500 shares (3.3 percent of the total common
shares outstanding) at a total price of $11.9 million. This represents an
average price of $22.84 per common share repurchased.
InterWest's total shareholders' equity was $165.3 million as of September
30, 1999, a decrease of $6.4 million or 4 percent from $171.7 million as of
September 30, 1998.
Book value per share decreased to $10.71 as of September 30, 1999, from
$10.97 as of September 30, 1998. Shareholders' equity as a percentage of total
assets was 6.41 percent as of September 30, 1999, compared to 7.01 percent as of
September 30, 1998.
The decrease in shareholders' equity and book value per share was due to an
increase in the unrealized loss on securities available for sale, net of tax, of
$15.3 million, common stock repurchases of $11.9 million and dividends paid to
shareholders of $8.8 million. The increase in the unrealized loss on securities
available for sale was primarily due to rising interest rates during 1999. These
decreases in shareholders' equity were partially offset by net income of $27.9
million and proceeds received from the exercise of common stock options of $1.5
million.
During fiscal year 1999, InterWest Bancorp, Inc. declared cash dividends
totaling $0.56 per share, an increase from $0.52 per share for fiscal year 1998.
The amount of dividends reported in the consolidated statement of shareholders'
equity for 1998 varies from $0.52 due to the application of the
pooling-of-interests method of accounting to the financial statements for the
acquisitions of Pacific, Pioneer and Puget.
On November 15, 1999, $40 million of 9.875 percent Capital Securities were
issued by InterWest Capital Trust I (the Trust). The Trust is a business trust
organized in November 1999, and 100 percent of the common equity of the Trust is
owned by InterWest Bancorp.
The proceeds of the offering were invested by the Trust in junior
subordinated debentures of InterWest Bancorp. The debentures held by the Trust
are the sole assets of the Trust. Distributions on the capital securities issued
by the Trust are payable semiannually at 9.875 percent per annum, which is equal
to the interest rate being earned by the Trust on the debentures held by the
Trust. The capital securities are subject to mandatory redemption, in whole or
in part, upon repayment of the debentures. The debentures will not mature
earlier than November 15, 2009, and not later than November 15, 2029. InterWest
Bancorp has entered into agreements which, taken collectively, fully and
unconditionally guarantee the capital securities subject to the terms of each of
the guarantees.
InterWest Bancorp intends to use the net proceeds for general corporate
purposes. The capital securities will be included with borrowings as a separate
line item in the consolidated statements of financial condition and InterWest
will record distributions payable on the capital securities as interest expense
in the consolidated statements of income. The capital securities will qualify as
Tier 1 capital under the capital guidelines of the Federal Reserve Board.
On November 16, 1999, the Board of Directors of InterWest Bancorp authorized
the purchase of an additional 5 percent of InterWest Bancorp's outstanding
shares of common stock in the open market over a twelve-month period.
<PAGE>
PAGE 33
INTERWEST 99 AR
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
structures 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 (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, security
sales and mortgage-backed and related security repayments. Repayments on loans
and mortgage-backed and related securities and deposit inflows and outflows are
affected by changes in interest rates.
InterWest has the capacity to borrow additional funds from the FHLB through
pre-approved credit lines. These credit lines have pledge requirements whereby
InterWest must maintain unencumbered collateral with a par value at least equal
to the outstanding balance. As of September 30, 1999, the additional amount
available under credit lines from the FHLB was $232.3 million. InterWest uses
the securities market as a vehicle for borrowing by utilizing its securities
available for sale and securities held to maturity as collateral. These
borrowings are collateralized by securities with an estimated fair value
exceeding the face value of the borrowings. If the estimated fair value of the
securities were to decline as a result of an increase in interest rates or other
factors, InterWest would be required to pledge additional securities or cash as
collateral. As of September 30, 1999, InterWest had $277 million of available
credit from third parties to sell securities under agreements to repurchase.
The analysis of liquidity also includes a review of InterWest's consolidated
statement of cash flows for 1999. The consolidated statement of cash flows
details InterWest's operating, investing and financing activities during the
fiscal year. The most significant item under operating activities was net income
of $27.9 million. Investing activities included proceeds from the sale of
securities available for sale of $258.5 million, security maturities totaling
$420.6 million and purchases of securities available for sale of $923.9 million.
Investing activities also include a $592.5 million increase in loans receivable
and $419.1 million of proceeds from the sale of loans. During 1999, financing
activities included $135.9 million in borrowing proceeds, net of borrowing
repayments, a $28.4 million increase in deposits, a $14.3 million decrease in
certificates of deposit and a total of $8.8 million paid in cash dividends to
shareholders.
SUPERVISION AND REGULATION
InterWest Bancorp is a registered bank holding company under the Bank Holding
Company Act of 1956 (BHCA) and is subject to the supervision of, and regulation
by, the Board of Governors of the Federal Reserve System (FRB). Under the BHCA,
InterWest Bancorp files with the FRB annual reports of operations and such
additional information as the FRB may require. Under the BHCA, a bank holding
company may engage in banking, managing or controlling banks, furnishing or
performing services for banks it controls, and conducting activities that the
FRB has determined to be closely related to banking.
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. and National Bank of Tukwila are national
banking associations that are 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 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.
<PAGE>
PAGE 34
INTERWEST 99 AR
The enforcement powers available to banking regulators are substantial and
include, among other things, the ability to assess civil monetary penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, enforcement actions must be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions, or inactions, may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities. Applicable law also requires public
disclosure of final enforcement actions.
YEAR 2000 READINESS DISCLOSURES
InterWest has undertaken efforts to address the Year 2000 computer problem. Many
computer programs were 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 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 and testing of contingency plans. InterWest has determined that systems
are compliant with or has taken steps necessary to make them compliant.
Management believes that it has an effective program in place to resolve Year
2000 issues in a timely manner.
PROJECT MANAGEMENT Each subsidiary bank has implemented a process to address
Year 2000 issues. This process includes a project manager, senior management and
departmental representatives. There have been 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 have
been provided to each subsidiary bank's Board of Directors on the status of the
Year 2000 project. Additionally, the subsidiary banks have regularly reported to
InterWest Bancorp management and to the InterWest Bancorp Board of Directors.
ASSESSMENT InterWest's computer systems and applications were 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 were identified and the
majority of testing was completed as planned on mission-critical systems by
December 31, 1998. Additionally, InterWest has worked with significant borrowers
to assess the extent to which they may be affected by Year 2000 issues.
TESTING Updating and testing of InterWest's mission-critical systems and
secondary systems has been 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 and secondary systems.
REMEDIATION AND IMPLEMENTATION This phase involved obtaining and implementing
renovated system applications provided by InterWest's vendors. As renovated
systems or new applications were received and implemented, InterWest tested them
for Year 2000 compliance. As of June 30, 1999, updating for mission-critical
systems was completed. This phase continued throughout the remainder of 1999 for
some secondary systems.
<PAGE>
PAGE 35
INTERWEST 99 AR
CONTINGENCY PLANNING AND TESTING OF CONTINGENCY PLANS InterWest has developed
contingency plans related to processes and systems that could be impacted by
Year 2000 issues. During the second half of 1999 contingency plans were tested.
Based on management's assessments of the readiness of vendors, service providers
and substantial borrowers, InterWest modified contingency plans as necessary or
developed additional contingency plans. The review and testing of contingency
plans has been an ongoing process subjected to internal assessments, third party
and regulatory review. Additionally, specific timeframes were 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 Related to Year 2000 Issues" 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
issues have not had a material effect on the operations or financial condition
of InterWest. Many systems have been tested and any remediation necessary
performed by the already existing information systems staff. InterWest has been
and will continue to expense any costs associated with Year 2000 issues from
operations 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 issues 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 FHLB. 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 issues, 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 has worked with such borrowers to ascertain their levels of exposure to Year
2000 issues. 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 allowance 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 has monitored 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, material adverse impact on earnings,
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.
<PAGE>
PAGE 36
INTERWEST 99 AR
FORWARD-LOOKING STATEMENTS The disclosures related to Year 2000 issues include
certain "forward-looking statements" concerning the future operations of
InterWest. It is InterWest'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
Year 2000 disclosures. InterWest's ability to predict results or the effect of
future plans and events is inherently uncertain, and is subject to factors that
may cause actual results to differ materially from those projected. Factors that
could affect the actual results include the possibility that systems
modifications will not operate as intended, the possibility of unexpected costs,
and the uncertainty associated with the impact of the century change on
InterWest's customers, vendors and third party service providers. These factors
should be considered in evaluating the forward-looking statements and undue
reliance should not be placed on such statements.
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 origination of adjustable rate loans,
balloon mortgages, and short-term commercial and consumer loans. This 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 other
strategies to minimize the impact on net income due to significant changes in
interest rates. The strategies utilized by InterWest 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.
The table on the following page sets forth the balances of InterWest's
financial instruments at the expected maturity dates, as well as the estimated
fair value of those financial instruments as of September 30, 1999. The expected
maturities take into consideration estimated principal prepayments for loans and
mortgage-backed securities. Principal prepayments are the amounts of principal
reduction, over and above normal amortization.
The expected maturities for financial liabilities with no stated maturity
reflect assumptions based on estimated future roll-off rates. The roll-off rates
for non-interest-bearing deposits, interest-bearing checking accounts, money
market accounts and savings accounts are 14 percent, 20 percent, 33 percent and
20 percent, respectively. The weighted average interest rates for financial
instruments presented are actual as of September 30, 1999.
The estimated fair value amounts have been determined by InterWest using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data in the development
of the estimated fair value amounts. Accordingly, the estimated fair values
presented herein are not necessarily indicative of the amounts InterWest could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. The carrying value of cash and cash equivalents, federal funds
sold and accrued interest receivable is a reasonable estimate of the fair value
for such financial assets. The estimated fair values of securities available for
sale, securities held to maturity and loans held for sale are based on quoted
market rates and dealer quotes. The estimated fair value of loans receivable is
based on discounted future cash flows, using interest rates currently offered
for loans of similar characteristics. FHLB stock does not have a market and the
estimated fair value is unknown. As such, the carrying value is a reasonable
estimate of the fair value. The estimated fair value of deposits with no stated
maturity, such as checking accounts, money market accounts and savings accounts,
is equal to the amount payable on demand as of September 30, 1999. The estimated
fair value of certificates of
<PAGE>
PAGE 37
INTERWEST 99 AR
deposit is based on the present value of contractual cash flows using a discount
rate based on the current average rate for deposits of like maturities. The
estimated fair value of FHLB advances and securities sold under agreements to
repurchase is based on the present value of future cash flows using a discount
rate equal to the rate offered on similar borrowings with similar maturities as
of September 30, 1999. The estimated fair values presented are based on
information available as of September 30, 1999.
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
EXPECTED MATURITY DATE, THERE- ESTIMATED
YEAR ENDED SEPTEMBER 30, 2000 2001 2002 2003 2004 AFTER TOTAL FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET RISK
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents
Non-interest-bearing $ 70,623 $ -- $ -- $ -- $ -- $ -- $ 70,623 $ 70,623
Interest-bearing deposits
with banks 10,471 -- -- -- -- -- 10,471 10,471
Weighted average interest rate 5.21% -- -- -- -- -- 5.21%
Securities available for sale
Fixed rate 88,169 116,098 55,510 54,343 103,292 208,309 625,721 625,721
Weighted average interest rate 6.14% 6.00% 6.26% 6.11% 6.05% 6.21% 6.13%
Variable rate 16,359 12,269 9,470 7,417 5,695 23,619 74,829 74,829
Weighted average interest rate 7.66% 7.70% 7.61% 7.49% 7.35% 6.72% 7.32%
Securities held to maturity
Fixed rate 3,530 3,095 3,130 2,140 1,882 34,159 47,936 46,582
Weighted average interest rate 5.74% 5.73% 5.62% 6.03% 6.09% 6.02% 5.96%
Variable rate 4,729 3,927 3,391 3,017 2,757 4,935 22,756 22,627
Weighted average interest rate 7.72% 7.70% 7.55% 7.41% 7.29% 7.29% 7.50%
Loans receivable, net
Fixed rate 126,065 57,502 44,579 38,098 50,442 193,677 510,363 501,676
Weighted average interest rate 8.56% 8.23% 8.10% 7.85% 7.88% 7.59% 7.99%
Variable rate 522,749 155,510 89,967 65,183 50,742 167,070 1,051,221 1,055,481
Weighted average interest rate 9.05% 8.56% 8.47% 8.55% 8.64% 8.91% 8.85%
Loans held for sale 23,138 -- -- -- -- -- 23,138 23,478
Weighted average interest rate 9.91% -- -- -- -- -- 9.91%
Interest receivable 15,962 -- -- -- -- -- 15,962 15,962
Federal Home Loan Bank
(FHLB) stock -- -- -- -- -- 42,536 42,536 42,536
Weighted average interest rate -- -- -- -- -- 7.30% 7.30%
</TABLE>
<PAGE>
PAGE 38
INTERWEST 99 AR
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
EXPECTED MATURITY DATE, THERE- ESTIMATED
YEAR ENDED SEPTEMBER 30, 2000 2001 2002 2003 2004 AFTER TOTAL FAIR VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET RISK
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL LIABILITIES
Non-interest-bearing deposits $ 27,682 $ 23,807 $ 20,474 $17,608 $ 15,143 $ 93,018 $197,732 $197,732
Interest-bearing checking accounts 34,316 27,452 21,962 17,570 14,056 56,222 171,578 171,578
Weighted average interest rate 1.27% 1.27% 1.27% 1.27% 1.27% 1.27% 1.27%
Money market accounts 90,267 60,479 40,521 27,149 18,190 36,931 273,537 273,537
Weighted average interest rate 3.43% 3.43% 3.43% 3.43% 3.43% 3.43% 3.43%
Savings accounts 20,661 16,529 13,223 10,579 8,463 33,851 103,306 103,306
Weighted average interest rate 1.68% 1.68% 1.68% 1.68% 1.68% 1.68% 1.68%
Certificates of deposit
Fixed rate 705,327 56,100 18,114 4,710 3,555 1,059 788,865 789,413
Weighted average interest rate 5.20% 5.17% 5.41% 5.37% 4.92% 5.79% 5.21%
Variable rate 33,493 10,438 -- -- -- -- 43,931 43,931
Weighted average interest rate 4.87% 4.99% -- -- -- -- 4.90%
FHLB advances and other
borrowings
Fixed rate 115,505 25,005 160,405 142,005 50,005 150,067 642,992 640,731
Weighted average interest rate 5.65% 5.31% 5.47% 5.44% 4.81% 5.33% 5.40%
Variable rate 39,850 1,312 1,784 -- -- -- 42,946 42,800
Weighted average interest rate 5.88% 6.98% 6.13% -- -- -- 5.93%
Securities sold under agreements
to repurchase 8,972 -- 123,000 -- -- -- 131,972 130,082
Weighted average interest rate 4.74% -- 5.78% -- -- -- 5.70%
</TABLE>
While this table provides some information about InterWest's interest
sensitivity, it does not predict the trends of future earnings. For this reason,
InterWest uses financial modeling to forecast earnings under different interest
rate projections. While this modeling is helpful in managing interest rate risk,
it does require significant assumptions for the projection of loan prepayment
rates, loan origination volumes and liability funding sources that may prove to
be inaccurate.
FORWARD-LOOKING STATEMENTS In this Annual Report to Shareholders, InterWest has
included certain "forward-looking statements" concerning its future operations.
It is InterWest'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 Annual Report
to Shareholders. Sentences containing words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "should," "projected," or similar words may
constitute forward-looking statements. Although InterWest believes that the
expectations expressed in these forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, it is possible that actual results may differ materially from these
expectations. InterWest has used these statements to describe expectations and
estimates in various areas, including changes in the economy of the markets in
which it operates; interest rate movements; Year 2000 issues; data conversions
for acquired institutions; the impact of competitive products, services and
pricing; and legislative, regulatory and accounting changes affecting the
banking and financial services industry. Actual results could vary materially
from the future results covered in forward-looking statements. Factors such as
Year 2000 issues, interest rate trends and loan delinquency rates, as well as
the general state of the economy in Washington state and the United States as a
whole, could also cause actual results to vary materially from the future
results anticipated in such forward-looking statements. These factors should be
considered in evaluating the forward-looking statements and undue reliance
should not be placed on such statements.
<PAGE>
PAGE 39
INTERWEST 99 AR
REPORT OF MANAGEMENT TO SHAREHOLDERS
Management of InterWest Bancorp, Inc. is responsible for the preparation,
integrity and fair presentation of its published financial statements. The
consolidated financial statements included in this annual report have been
prepared in accordance with generally accepted accounting principles and, as
such, include judgments and estimates of management. InterWest Bancorp, Inc.
also prepared the other information included in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting. The internal control system
is supported by written policies and procedures and by audits performed by an
internal audit staff that reports to the Audit Committee of the Board of
Directors. Internal auditors monitor the operation of the internal control
system and report findings to management and the Audit Committee, and corrective
actions are taken to address identified control deficiencies and other
opportunities for improving the system. The Audit Committee, composed solely of
outside directors, provides oversight to the financial reporting process. There
are inherent limitations in the effectiveness of any system of internal control,
including the possibility of human error and circumvention or overriding of
controls. Accordingly, even an effective internal control system can provide
only reasonable assurance with respect to financial statement preparation. The
concept of reasonable assurance is based on the recognition that the costs of
such a system should not exceed the benefits to be received. Management believes
the system provides an appropriate cost/benefit balance.
Management assesses InterWest Bancorp, Inc.'s internal control structure
over financial reporting. Based on these assessments, management believes that
InterWest Bancorp, Inc. maintains an effective internal control system over
financial reporting.
STEPHEN M. WALDEN, PRESIDENT H. GLENN MOUW, EXECUTIVE VICE PRESIDENT
AND CHIEF EXECUTIVE OFFICER
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
InterWest Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
condition of InterWest Bancorp, Inc., and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 1999. These consolidated financial statements are the responsibility of
InterWest's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
InterWest Bancorp, Inc., and subsidiaries at September 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1999, in conformity with
generally accepted accounting principles.
As described in Note 2 to the consolidated financial statements, InterWest
Bancorp, Inc. adopted certain new accounting standards in fiscal years 1999 and
1998 as required by the Financial Accounting Standards Board.
SEATTLE, WASHINGTON
NOVEMBER 8, 1999, EXCEPT FOR NOTE 24
AS TO WHICH THE DATE IS NOVEMBER 16, 1999 /s/ Ernst & Young LLP
<PAGE>
PAGE 40
INTERWEST 99 AR
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
AS OF SEPTEMBER 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents
Non-interest-bearing $ 70,623 $ 74,018
Interest-bearing deposits with banks 10,471 107,404
Federal funds sold - 19,863
Securities available for sale, at estimated fair value 700,550 574,346
Securities held to maturity (estimated fair value: 1999 - $69,209 and 1998 - $87,366) 70,692 87,262
Loans receivable, net 1,561,584 1,359,050
Loans held for sale (estimated fair value: 1999 - $23,478 and 1998 - $95,626) 23,138 93,125
Interest receivable 15,962 14,991
Real estate held for sale and for development 8,260 11,996
Federal Home Loan Bank (FHLB) stock, at cost 42,536 37,496
Premises and equipment, net 54,132 50,314
Intangible assets 11,999 14,026
Other assets 9,592 3,957
- --------------------------------------------------------------------------------------------------------------------
Total assets $2,579,539 $2,447,848
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits $ 197,732 $ 178,625
Interest-bearing deposits 1,381,217 1,386,200
- --------------------------------------------------------------------------------------------------------------------
Total deposits 1,578,949 1,564,825
FHLB advances 682,238 546,033
Securities sold under agreements to repurchase 131,972 128,613
Other liabilities 17,374 28,981
Other borrowings 3,700 7,744
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 2,414,233 2,276,196
SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding: 1999 - 15,434,690 shares and 1998 - 15,651,345 shares - -
Paid-in capital 26,127 36,512
Retained earnings 158,828 139,781
Debt related to employee stock ownership plan (ESOP) (3,608) (3,935)
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale, net of tax (16,041) (706)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 165,306 171,652
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,579,539 $2,447,848
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
PAGE 41
INTERWEST 99 AR
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
Loans receivable and loans held for sale $126,482 $127,472 $115,053
Securities available for sale 45,403 43,996 35,201
Securities held to maturity 4,995 5,595 12,362
Other 2,779 3,216 2,590
- --------------------------------------------------------------------------------------------------------------------
179,659 180,279 165,206
INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------------
Deposits 55,416 60,841 61,007
FHLB advances and other borrowings 32,467 31,468 19,708
Securities sold under agreements to repurchase 7,597 9,174 10,366
- --------------------------------------------------------------------------------------------------------------------
95,480 101,483 91,081
Net interest income before provision for losses on loans 84,179 78,796 74,125
Provision for losses on loans 2,000 2,807 1,508
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 82,179 75,989 72,617
NON-INTEREST INCOME
- --------------------------------------------------------------------------------------------------------------------
Gain on sale of loans 8,095 10,421 4,209
Gain on sale of loan servicing rights 2,798 - -
Service fees 11,575 10,987 9,452
Investment product fees and insurance commissions 3,125 2,130 2,172
Gain on sale of securities available for sale 72 813 587
Gain on sale of real estate held for sale and for development 361 289 346
Other 2,382 1,833 1,879
- --------------------------------------------------------------------------------------------------------------------
28,408 26,473 18,645
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 37,486 32,636 28,112
General and administrative 15,580 14,225 14,135
Occupancy 9,595 8,893 7,665
Data processing 4,599 3,766 3,535
Loss from real estate write-downs and operations 887 1,957 585
Merger-related charges - 5,495 -
- --------------------------------------------------------------------------------------------------------------------
68,147 66,972 54,032
Income before income taxes 42,440 35,490 37,230
Income tax expense 14,585 12,848 12,681
- --------------------------------------------------------------------------------------------------------------------
Net income $ 27,855 $ 22,642 $ 24,549
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 1.78 $ 1.45 $ 1.58
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 1.74 $ 1.40 $ 1.54
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
PAGE 42
INTERWEST 99 AR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK, OTHER
NO PAR VALUE DEBT COMPRE-
DOLLARS IN THOUSANDS, ------------- PAID-IN RETAINED RELATED HENSIVE
EXCEPT SHARE DATA SHARES CAPITAL EARNINGS TO ESOP INCOME (LOSS) TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1996 15,410,127 $ 34,144 $ 106,739 $ (312) $ (2,924) $ 137,647
Dividends, $0.33 per share (5,224) (5,224)
Issuance of common stock:
Stock option and stock purchase plans 254,801 2,247 2,247
Purchase and retirement of common stock (35,780) (570) (570)
ESOP loan repayment 35,664 312 312
Comprehensive income:
Net income 24,549 24,549
Other comprehensive income-
Unrealized gain on securities
available for sale, net of taxes
of $966 and reclassification
adjustment for gains included in
net income of $382 1,809 1,809
----------
Total comprehensive income 26,358
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1997 15,664,812 35,821 126,064 -- (1,115) 160,770
Dividends, $0.50 per share (7,676) (7,676)
Issuance of common stock:
Stock option and stock purchase plans 134,397 725 725
Purchase and retirement of common stock (809) (34) (34)
Debt related to ESOP (147,055) (3,935) (3,935)
Pooling accounting adjustment (1,249) (1,249)
Comprehensive income:
Net income 22,642 22,642
Other comprehensive income-
Unrealized gain on securities
available for sale, net of taxes
of $204 and reclassification
adjustment for gains included in
net income of $528 409 409
----------
Total comprehensive income 23,051
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998 15,651,345 36,512 139,781 (3,935) (706) 171,652
Dividends, $0.56 per share (8,808) (8,808)
Issuance of common stock:
Stock option plans 285,900 1,525 1,525
Purchase and retirement of common stock (521,500) (11,910) (11,910)
ESOP loan repayment 18,945 327 327
Comprehensive income:
Net income 27,855 27,855
Other comprehensive loss-
Unrealized loss on securities
available for sale, net of taxes
of $8,253 and reclassification
adjustment for gains included in
net income of $47 (15,335) (15,335)
----------
Total comprehensive income 12,520
- ---------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 15,434,690 $ 26,127 $ 158,828 $(3,608) $(16,041) $165,306
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
PAGE 43
INTERWEST 99 AR
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 27,855 $ 22,642 $ 24,549
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,832 4,166 3,379
Amortization of intangible asset 1,539 771 402
Provision for losses on loans 2,000 2,807 1,508
Provision for losses on real estate held for sale and for development 663 1,595 196
Amortization and accretion of premiums and discounts, net 908 3,465 1,249
Gain on sale of loans (8,095) (10,421) (4,209)
Gain on sale of loan servicing rights (2,798) - -
Gain on sale of securities available for sale (72) (813) (587)
Gain on sale of real estate held for sale and for development (361) (289) (346)
Loan fees deferred, net of amortization 3,742 2,002 1,192
FHLB stock dividends (3,177) (2,526) (1,551)
Pooling accounting adjustment - (1,114) -
Changes in operating assets and liabilities:
Interest receivable (971) (440) (231)
Other assets (106) 867 (996)
Other liabilities (7,923) 10,841 (6,054)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,036 33,553 18,501
INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------
Proceeds from sale of securities available for sale 258,509 374,572 359,641
Purchases of securities available for sale (923,893) (903,174) (634,115)
Proceeds from maturing securities available for sale 420,188 413,334 113,433
Proceeds from maturing securities held to maturity 370 24,511 232,471
Purchases of securities held to maturity - (20) (118,673)
Principal repayments on securities available for sale 131,957 117,664 61,567
Principal repayments on securities held to maturity 15,970 11,210 7,259
Proceeds from sale of loans 419,079 362,724 87,807
Net increase in loans receivable (592,534) (439,047) (312,024)
Proceeds from sale of real estate held for sale and for development 8,954 4,603 4,064
Purchases of premises and equipment (9,171) (5,771) (12,797)
Purchases of FHLB stock (1,863) (7,102) (9,331)
Redemption of FHLB stock - - 6,400
Proceeds from sale of loan servicing rights 5,622 - -
Cash paid for acquisitions, net of cash received (589) (8,899) -
Improvements capitalized to real estate held for sale and for development (1,570) (1,395) (1,894)
Net decrease (increase) in federal funds sold 19,863 (7,638) (10,425)
Federal funds sold received in acquisition - 7,487 -
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (249,108) $ (56,941) $ (226,617)
- ------------------------------ continued on next page
See Notes to Consolidated Financial Statements
<PAGE>
PAGE 44
INTERWEST 99 AR
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
DOLLARS IN THOUSANDS
YEAR ENDED SEPTEMBER 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------
Net increase in deposits $ 28,376 $ 101,104 $ 47,753
Net increase (decrease) in certificates of deposit (14,252) (45,701) 31,305
Proceeds from FHLB advances, securities sold under agreements
to repurchase, and other borrowings 960,231 1,655,130 1,459,216
Repayment of FHLB advances, securities sold under agreements
to repurchase, and other borrowings (824,383) (1,735,966) (1,169,629)
Dividends paid (8,843) (6,441) (4,966)
Issuance of common stock from exercise of stock options 1,525 830 2,246
Purchase and retirement of common stock (11,910) (34) (570)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 130,744 (31,078) 365,355
Net increase (decrease) in cash and cash equivalents (100,328) (54,466) 157,239
CASH AND CASH EQUIVALENTS:
Beginning of year 181,422 235,888 78,649
- ----------------------------------------------------------------------------------------------------------------------
End of year $ 81,094 $ 181,422 $ 235,888
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 96,977 $ 104,537 $ 89,762
Income taxes 16,493 10,976 9,829
Non-cash investing and financing activities:
Loans receivable transferred to real estate held for sale 3,419 4,060 2,274
Premises and equipment transferred to real estate held for sale 532 - 1,179
Loans receivable securitized as securities available for sale 37,100 - 43,810
Transfer of securities from held to maturity to available for sale - 9,239 -
ESOP loan repayment 327 - 312
Debt related to ESOP - 3,935 -
</TABLE>
- ------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
PAGE 45
INTERWEST 99 AR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of InterWest Bancorp, Inc. (InterWest Bancorp), and its wholly owned
subsidiaries (collectively, InterWest). As of September 30, 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 in consolidation.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp, Inc.
(Puget) of Port Orchard, Washington, and its commercial banking subsidiary,
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, and its commercial banking subsidiary, Pioneer National Bank.
These transactions have been accounted for using the pooling-of-interests
method. Accordingly, InterWest's consolidated financial statements have been
restated to include the accounts and operations of Puget, Pacific and Pioneer
as if the companies were combined for all periods presented.
On August 31, 1998, InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas) and its commercial 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. On January 22, 1999, Pioneer National Bank was merged into Pacific.
USE OF ESTIMATES The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the consolidated
financial statements. Changes in these estimates and assumptions are
considered reasonably possible and may have a material impact on the
financial statements and thus actual results could differ from the amounts
reported and disclosed herein.
NATURE OF BUSINESS InterWest Bancorp is a multi-bank holding company
incorporated in Washington state. Through its subsidiaries, a wide range of
financial services are offered to individuals and businesses throughout
western and central Washington state. Financial services of InterWest include
the banking activities of accepting deposits from individuals and businesses
and originating residential loans, consumer loans, commercial real estate
loans, commercial loans and agricultural loans.
Investment products are available through InterWest Financial Services,
Inc. and insurance products are available through InterWest Insurance Agency,
Inc., wholly owned subsidiaries of InterWest Bank.
CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash
flows, InterWest considers all deposits and securities with an original term
to maturity of three months or less to be cash equivalents.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY Those
securities that InterWest has the positive intent and ability to hold to
maturity are classified as held to maturity and are carried at amortized
cost. Securities are adjusted to the lower of cost or estimated fair value
only when an other than temporary impairment in value occurs.
Those securities that are not classified as held to maturity are
classified as available for sale, and are carried at estimated fair value
with unrealized gains and losses excluded from net income and are reported,
net of tax, as accumulated other comprehensive income or loss, a component of
shareholders' equity. The basis of securities subsequently sold is determined
by the specific identification method.
<PAGE>
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INTERWEST 99 AR
The carrying value of securities held to maturity and securities
available for sale is adjusted for unamortized discounts and premiums.
Discounts are accreted and premiums are amortized using the effective yield
method to maturity of the securities. Such accretion and amortization is
included as interest income on securities.
LOANS RECEIVABLE Loans receivable are stated at the principal amount
outstanding, net of deferred loan fees, discounts and the allowance for
losses on loans. InterWest typically requires that mortgage loans be secured
by first liens on single-family dwellings, land, developed lots or commercial
property. Commercial loans can also be secured by capital assets, accounts
receivable and inventory, although certain loans are unsecured. Agricultural
loans are generally secured by farmland, crops and/or equipment.
LOANS HELD FOR SALE Loans intended for sale in the secondary market are
recorded at the lower of cost or estimated fair value in aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income.
LOAN FEE INCOME, INTEREST INCOME ON LOANS RECEIVABLE AND UNEARNED INTEREST
Loan origination fees and direct costs related to loan origination activities
are deferred and amortized into interest income over contractual or actual
loan lives as an adjustment to the loan yield. Deferred fees and costs
related to loans sold are recognized into income at the time the loans are
sold.
Interest is accrued on loans receivable until the loan is 90 days
delinquent or management doubts the collectibility of the loan or the unpaid
interest, at which time InterWest establishes a reserve for any accrued
interest. If management determines the ultimate collectibility of principal
is in doubt, cash receipts on non-accrual loans are applied to reduce the
principal balance.
ALLOWANCE FOR LOSSES ON LOANS The allowance for losses on loans is maintained
at a level sufficient to provide for estimated losses based on evaluating
known and inherent risks in the loan portfolio and upon management's
continuing analysis of the factors underlying the quality of the loan
portfolio. These factors include changes in the size and composition of the
loan portfolio, actual loan loss experience, current economic conditions, and
detailed analysis of individual loans for which full collectibility may not
be assured. The appropriate reserve level is estimated based upon factors and
trends identified by management at the time financial statements are prepared.
When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are charged off against the
allowance for losses on loans. The existence of some or all of the following
criteria will generally confirm that a loss has been incurred: the loan is
significantly delinquent and the borrower has not evidenced the ability or
intent to bring the loan current; InterWest has no recourse to the borrower,
or if it does, the borrower has insufficient assets to pay the debt; the
estimated fair value of the loan collateral is significantly below the
current loan balance, and there is little or no near-term prospect for
improvement.
All loans are periodically evaluated for impairment, except large groups
of smaller-balance homogenous loans that are collectively evaluated for
impairment, and loans that are measured at estimated fair value or at the
lower of cost or estimated fair value. InterWest considers all single-family
residential (including construction), consumer loans and certain commercial
loans to be smaller-balance homogenous loans. A loan is impaired when it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The valuation of impaired
loans is based on the present value of expected future cash flows discounted
at the loans effective interest rate or, as a practical expedient, at the
loan's observable market price, or the estimated fair value of the collateral
if the loan is collateral dependent. Generally, InterWest evaluates a loan
for impairment when it is placed on non-accrual status or if a loan is
internally risk rated as substandard or doubtful.
A provision for losses on loans, which is a charge against income, is
added to the allowance for losses on loans based on quarterly assessments of
the loan portfolio. While management has attributed the allowance for losses
on loans to various loan portfolio segments, the allowance is general in
nature and is available for the loan portfolio in its entirety.
The ultimate recovery of all loans is susceptible to future market
factors beyond InterWest's control. These factors may result in losses or
recoveries differing significantly from those provided in the financial
statements.
<PAGE>
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INTERWEST 99 AR
REAL ESTATE HELD FOR SALE AND REAL ESTATE HELD FOR DEVELOPMENT Real estate
held for sale and real estate held for development (collectively, real
estate) includes properties acquired through foreclosure and property
acquired with the intention of development. These properties are initially
recorded at the lower of cost or estimated fair value and are subsequently
evaluated to determine that the carrying value does not exceed the estimated
fair value of the property. Losses identified as a result of ongoing periodic
valuation of these properties are charged to operations in the period in
which they are identified and are included in loss from real estate
write-downs and operations in the consolidated statements of income.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost less
accumulated depreciation. Depreciation expense is computed on the
straight-line method over estimated useful lives of up to forty years for
bank buildings and three to twenty years for furniture and equipment.
INTANGIBLE ASSETS Intangible assets arising from acquisitions represent the
excess of the purchase price over estimated fair value of net assets
acquired. InterWest periodically evaluates these intangible assets for
impairment.
Loan servicing rights are capitalized when acquired either through the
purchase or origination of loans that are subsequently sold or securitized
with the servicing rights retained. InterWest evaluates loan servicing rights
for impairment based on the estimated fair value of those rights on a
periodic basis, using a valuation model which incorporates estimated future
servicing income, discount rates, prepayment speeds and default rates. Loan
servicing rights are included in intangible assets and are amortized as an
offset to services fees in proportion to and over the period of estimated net
servicing income.
Intangible assets are amortized using straight-line and accelerated
methods over periods not exceeding twenty years. The level of intangible
assets as of September 30, 1999, was supported by the estimated fair value
attributed to the operations acquired and loan servicing rights retained.
INCOME TAXES InterWest accounts for income taxes using the liability method.
Under the liability method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences
between the financial statement carrying amounts and tax basis of existing
assets and liabilities are expected to be reported in InterWest's income tax
returns. The deferred tax expense for the year is equal to the net change in
the deferred tax asset and liability accounts from the beginning to the end
of the fiscal year. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
NET INCOME PER SHARE Basic net income per share is calculated by dividing net
income by the weighted average number of common shares outstanding during the
year. Diluted net income per share is calculated by dividing net income by
diluted weighted average shares outstanding, which includes common stock
equivalent shares outstanding using the treasury stock method. Common stock
equivalents include shares issuable upon exercise of stock options.
Unallocated shares relating to the debt-leveraged money purchase employee
stock ownership plan debt obligation are deducted in the calculation of the
weighted average shares outstanding.
STOCK OPTIONS InterWest has adopted the disclosure only provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-based Compensation." Accordingly, employee stock options are accounted
for under Accounting Principle Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees." Stock options are granted at exercise prices not
less than the fair value of common stock on the date of grant. Under APB No.
25, no compensation expense is recognized pursuant to InterWest's stock
option plans.
RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and
1997 consolidated financial statements to conform to 1999 presentation. The
effects of the reclassifications are not considered material.
<PAGE>
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INTERWEST 99 AR
NOTE 2
ACCOUNTING CHANGES
On October 1, 1998, InterWest adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and disclosure of
comprehensive income and its components. 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 did not have a material impact on
InterWest's financial condition or results of operations. However, this
statement requires the classification of items of other comprehensive income
in the consolidated statements of shareholders' equity and the disclosure of
other comprehensive income as a separate component of shareholders' equity in
the consolidated statements of financial condition. All prior period amounts
have been restated to conform to this statement.
On October 1, 1998, InterWest adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards and requirements for public enterprises regarding
information about operating segments in annual financial statements. This
statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. Operating segments are
components of an enterprise that are evaluated regularly by the chief
executive officer in deciding how to allocate resources and in assessing
performance. The statement requires the disclosure of net income or net loss,
certain specific income and expense items, and assets of all operating
segments, with reconciliations to amounts presented in the consolidated
financial statements. The adoption of this statement did not have an impact
on InterWest's financial condition or results of operations. However, this
statement has affected the disclosures in InterWest's consolidated financial
statements.
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 previously
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 now 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 affect InterWest's financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at estimated fair value. In certain
defined conditions, a derivative may be specifically designated as a hedge
for a particular exposure. The accounting for derivatives depends on the
intended use of the derivatives and the resulting hedge designation. In June
1999, the FASB issued SFAS No. 137, which effectively delayed the
implementation of SFAS No.133 for a one-year period. This statement will be
adopted by InterWest during fiscal year 2001. Management does not expect the
adoption of this statement to have a material impact on InterWest's financial
condition or results of operations.
NOTE 3
BUSINESS COMBINATIONS
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 wholly
owned subsidiary of InterWest Bancorp. First National Bank of Port Orchard
operated three offices in western Washington. At the acquisition date, Puget
had total consolidated assets of $53,109,000, total loans receivable of
$38,731,000, total deposits of $45,602,000, and shareholders' equity of
$5,928,000. Each share of Puget common stock has been exchanged for 2.50
shares of InterWest Bancorp common stock. The total number of shares issued
was 586,420. Effective October 15, 1998, First National Bank of Port Orchard
was merged into Pacific Northwest Bank.
<PAGE>
PAGE 49
INTERWEST 99 AR
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific) of Seattle, Washington. Under the terms of this transaction,
Pacific became a wholly owned subsidiary of InterWest Bancorp. At the
acquisition date, Pacific operated four offices in the metropolitan Seattle
area of western Washington with total assets of $200,219,000, total loans
receivable of $150,125,000, total deposits of $170,210,000, and shareholders'
equity of $16,787,000. Each share of Pacific common stock was exchanged for
5.93 shares of InterWest Bancorp common stock. The total number of shares
issued was 2,346,081.
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National
Bank. Under the terms of this transaction, Pioneer merged into InterWest
Bancorp, with Pioneer National Bank becoming a wholly owned subsidiary of
InterWest Bancorp. Pioneer National Bank operated five offices in central
Washington. At the acquisition date, Pioneer had total consolidated assets of
$108,399,000, total loans receivable of $63,377,000, total deposits of
$87,213,000, and shareholders' equity of $9,337,000. Each share of Pioneer
common stock was exchanged for 2.01 shares of InterWest Bancorp common stock.
The total number of shares issued was 692,846. Effective January 22, 1999,
Pioneer National Bank was merged into Pacific Northwest Bank.
The acquisitions of Puget, Pacific and Pioneer have been accounted for
using the pooling-of-interests method. In accordance with generally accepted
accounting principles, prior period financial statements have been restated
as if the companies had been combined for all periods presented.
The consolidated financial statements have been adjusted to conform the
December 31 fiscal year end of Puget, Pacific and Pioneer to that of
InterWest's September 30 fiscal year end. In accordance with generally
accepted accounting principles, interest income of $7,185,000, net interest
income of $4,535,000 and net income of $1,249,000 for the period from October
1, 1997, to December 31, 1997, has been included in the consolidated
statements of income for both of the years ended September 30, 1998 and 1997.
Accordingly, $1,249,000 has been deducted from retained earnings in the
consolidated statement of shareholders' equity for the year ended September
30, 1998.
On August 31, 1998, InterWest Bancorp acquired Kittitas Valley Bancorp,
Inc. (Kittitas) and its commercial banking subsidiary, Kittitas Valley Bank,
N.A. of Ellensburg, Washington. Kittitas Valley Bank, N.A. operates three
offices in central Washington. Under the terms of this transaction, Kittitas
merged into InterWest Bancorp, with Kittitas Valley Bank, N.A. becoming a
wholly owned subsidiary of InterWest Bancorp. At the acquisition date,
Kittitas had total consolidated assets of $47,441,000, total loans receivable
of $27,945,000, total deposits of $39,239,000 and shareholders' equity of
$4,290,000. The transaction was completed through the payment of $6,436,000
in cash and the issuance of 229,831 shares of InterWest Bancorp common stock
to Kittitas shareholders. The shares issued to Kittitas shareholders were
purchased by InterWest Bancorp in the open market. The total acquisition
price was $12,284,000 and resulted in goodwill of $8,341,000 recorded by
InterWest Bancorp. This goodwill is being amortized using the straight-line
method over a period of twenty years. This acquisition has been accounted for
using the purchase method and as such the operations of Kittitas Valley Bank,
N.A. have been included in the consolidated financial statements for the
period subsequent to August 31, 1998. An application has been filed to merge
Kittitas Valley Bank, N.A. into Pacific Northwest Bank. It is anticipated
that the merger will be completed during the second quarter of fiscal year
2000, following the approval of applicable regulatory authorities.
On September 14, 1999, InterWest Bancorp entered into a definitive
agreement to acquire Liberty Bay Financial Corporation (Liberty) of Poulsbo,
Washington. Liberty's commercial banking subsidiary, North Sound Bank,
operates eight offices on the Olympic Peninsula in Washington state. As of
September 30, 1999, Liberty had total consolidated assets of $187,911,000,
total loans receivable of $127,509,000, total deposits of $166,268,000 and
shareholders' equity of $20,224,000. The transaction is structured such that
shareholders of Liberty will receive eleven shares of InterWest Bancorp
common stock for each share of Liberty common stock if the average price of
InterWest Bancorp common stock is more than $21 per share for a short period
prior to closing. If the average price of InterWest Bancorp common stock for
a short period before closing is between $20 and $21 per share, the
shareholders of Liberty will receive shares of InterWest common stock with a
value of $231 for each share of Liberty common stock. If the average price of
InterWest Bancorp common stock for a short period before closing is less than
$20 per share, InterWest Bancorp has the option of adjusting the exchange
ratio such that Liberty shareholders will receive shares of InterWest Bancorp
common stock with an equivalent value of $231 for each share of Liberty
common stock or terminating the definitive agreement. It is
<PAGE>
PAGE 50
INTERWEST 99 AR
anticipated that the acquisition will be completed during the spring of 2000,
following the approval of applicable regulatory authorities and the
shareholders of Liberty. The transaction will be accounted for using the
purchase method.
Subsequent to fiscal year end on October 1, 1999, InterWest Bancorp
completed the acquisition of NBT Northwest Bancorp (NBT) of Tukwila,
Washington. NBT's commercial banking subsidiary, National Bank of Tukwila,
operates one office in south King County. Under the terms of this
transaction, NBT merged into InterWest Bancorp with National Bank of Tukwila
becoming a wholly owned subsidiary of InterWest Bancorp. At the acquisition
date, NBT had total consolidated assets of $53,018,000, total loans
receivable of $37,780,000, total deposit of $47,953,000 and shareholders'
equity of $4,908,000. Each share of NBT common stock has been exchanged for
0.88 shares of InterWest Bancorp common stock. The total number of shares
issued was 677,109. The transaction resulted in goodwill of approximately
$9,700,000 recorded by InterWest Bancorp. This goodwill will be amortized
using the straight-line method over a period of twenty years. This
acquisition has been accounted for using the purchase method and as such the
accounts and operations of NBT and National Bank of Tukwila have not been
included in the September 30, 1999 consolidated financial statements.
NOTE 4
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at estimated fair value. The
amortized cost and estimated fair values of securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
U.S. treasury and agency securities $164,030 $ 40 $ 3,491 $160,579
Obligations of states and political subdivisions 1,409 5 1 1,413
Mortgage-backed and related securities 534,201 86 19,889 514,398
Other securities 25,606 3 1,449 24,160
- -------------------------------------------------------------------------------------------------------------------
Total $725,246 $ 134 $24,830 $700,550
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1998
U.S. treasury and agency securities $294,476 $ 883 $ 100 $295,259
Obligations of states and political subdivisions 2,280 53 - 2,333
Mortgage-backed and related securities 253,179 638 2,103 251,714
Other securities 25,519 1 480 25,040
- -------------------------------------------------------------------------------------------------------------------
Total $575,454 $1,575 $ 2,683 $574,346
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of securities available for sale as
of September 30, 1999, by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
DOLLARS IN THOUSANDS COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 9,078 $ 9,125
Due after one year but within five years 129,465 126,949
Due after five years but within ten years 26,690 25,754
Due after ten years 25,812 24,324
- --------------------------------------------------------------------------------------------
191,045 186,152
Mortgage-backed and related securities 534,201 514,398
- --------------------------------------------------------------------------------------------
Total $725,246 $700,550
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 51
INTERWEST 99 AR
Proceeds from the sale of securities available for sale during 1999, 1998 and
1997 were $258,509,000, $374,572,000 and $359,641,000, respectively. InterWest
realized gains of $238,000, $905,000, and $1,132,000 and losses of $166,000,
$92,000 and $545,000 on those sales during 1999, 1998 and 1997, respectively.
Upon acquisition of Pacific, Pioneer and Puget and to conform to the
InterWest investment policy, $9,239,000 of securities classified as held to
maturity were transferred to the available for sale portfolio during the year
ended September 30, 1998.
NOTE 5
SECURITIES HELD TO MATURITY
Securities held to maturity are carried at amortized cost. The amortized cost
and estimated fair value of securities held to maturity are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DOLLARS IN THOUSANDS COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Obligations of states and political subdivisions $ 2,397 $ - $ 1 $ 2,396
Mortgage-backed and related securities 68,295 15 1,497 66,813
- -------------------------------------------------------------------------------------------------------
Total $70,692 $ 15 $ 1,498 $69,209
=======================================================================================================
SEPTEMBER 30, 1998
Obligations of states and political subdivisions $ 2,756 $ 43 $ - $ 2,799
Mortgage-backed and related securities 84,506 568 507 84,567
- -------------------------------------------------------------------------------------------------------
Total $87,262 $ 611 $ 507 $87,366
=======================================================================================================
</TABLE>
The amortized cost and estimated fair value of securities held to maturity as of
September 30, 1999, by contractual maturity are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
DOLLARS IN THOUSANDS COST VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 771 $ 770
Due after one year but within five years 1,626 1,626
- -------------------------------------------------------------------------------------------------------
2,397 2,396
Mortgage-backed and related securities 68,295 66,813
- -------------------------------------------------------------------------------------------------------
Total $70,692 $69,209
=======================================================================================================
</TABLE>
<PAGE>
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INTERWEST 99 AR
NOTE 6
LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable and loans held for sale consisted of the following as of
September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans:
Single-family residential $ 448,068 $ 627,191
Multi-family residential 74,223 62,948
Commercial 402,580 257,906
Real estate construction 245,690 182,020
Consumer loans 97,153 81,386
Commercial loans 289,185 217,546
Agricultural loans 51,961 45,637
- -----------------------------------------------------------------------------------------------------------
1,608,860 1,474,634
Less:
Loans held for sale 23,138 93,125
Allowance for losses on loans 14,123 13,224
Deferred loan fees and discounts 10,015 9,235
- -----------------------------------------------------------------------------------------------------------
Total $1,561,584 $1,359,050
===========================================================================================================
</TABLE>
InterWest serviced loans, owned in whole or in part by others, of $260,821,000,
$511,331,000, and $365,876,000, as of September 30, 1999, 1998, and 1997,
respectively.
As of September 30, 1999, InterWest had $400,646,000 in real estate loan
commitments to extend credit. Other loan commitments to extend credit, which
include business and consumer credit lines, totaled $216,808,000 as of September
30, 1999. Outstanding commitments to extend credit under standby letters of
credit and commercial letters of credit totaled $2,962,000 and $1,640,000,
respectively, as of September 30, 1999.
Non-accrual loans totaled $10,899,000 and $8,210,000 as of September 30,
1999 and 1998, respectively. If interest on these loans had been recognized,
such income would have been $729,000 and $521,000 for the years ended September
30, 1999 and 1998, respectively.
InterWest originates loans primarily in the state of Washington. Although
InterWest has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economy of
Washington state.
<PAGE>
PAGE 53
INTERWEST 99 AR
NOTE 7
ALLOWANCE FOR LOSSES ON LOANS
The activity in the allowance for losses on loans for the year ended September
30 is summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $13,224 $11,104 $10,235
Provision for losses on loans 2,000 1,707 1,508
Merger and acquisition activity:
Provision pursuant to acquisition - 1,100 -
Allowance acquired - 295 -
Pooling accounting adjustment - (76) -
Recoveries 452 384 401
Charge-offs (1,553) (1,290) (1,040)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year $14,123 $13,224 $11,104
==================================================================================================================
</TABLE>
The following is a summary of loans considered to be impaired and the related
interest income as of and for the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Recorded investment in impaired loans $2,797 $2,448 $3,261
Average recorded investment in impaired loans 2,890 3,043 4,109
Interest income recognized on impaired loans 151 240 326
</TABLE>
The total allocated allowance for losses on loans for impaired loans was
$269,000, $404,000 and $92,000 as of September 30, 1999, 1998 and 1997,
respectively. Interest income on impaired loans is normally recognized on the
accrual basis, unless the loan is more than 90 days past due, in which case
interest income is recorded on a cash basis.
NOTE 8
REAL ESTATE HELD FOR SALE AND FOR DEVELOPMENT
Real estate held for sale and for development as of September 30 is summarized
as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned acquired through foreclosure $3,560 $ 7,553
Real estate held for development 4,700 4,443
- ------------------------------------------------------------------------------------------------
Total $8,260 $11,996
================================================================================================
</TABLE>
<PAGE>
PAGE 54
INTERWEST 99 AR
NOTE 9
PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buildings and leasehold improvements $40,395 $ 35,495
Furniture and equipment 31,384 28,485
- ------------------------------------------------------------------------------------------------------------------
71,779 63,980
Less accumulated depreciation (28,412) (24,536)
- ------------------------------------------------------------------------------------------------------------------
43,367 39,444
Land 10,765 10,870
- ------------------------------------------------------------------------------------------------------------------
Total $54,132 $ 50,314
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for 1999, 1998 and 1997 was $4,832,000, $4,166,000, and
$3,379,000, respectively.
InterWest leases certain premises under operating leases. Rental expense
for leased premises was $1,453,000, $1,372,000, and $1,417,000 for 1999, 1998
and 1997, respectively. Minimum rental commitments under non-cancelable
operating leases having an original or remaining term of more than one year
were as follows as of September 30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
YEAR ENDING SEPTEMBER 30: 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rental commitments $1,475 $1,439 $1,167 $1,055 $654 $3,099 $8,889
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10
INTANGIBLE ASSETS
Intangible assets consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ---------------------------------------------------------
<S> <C> <C>
Goodwill $ 9,468 $ 9,344
Core deposit intangible 817 992
Loan servicing intangibles 1,714 3,690
- ---------------------------------------------------------
Total $11,999 $14,026
- ---------------------------------------------------------
- ---------------------------------------------------------
</TABLE>
The changes in loan servicing intangible assets for the years ended September 30
are summarized as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $3,690 $1,983 $1,423
Additions 2,637 2,490 995
Less: Basis sold (3,203) - -
Amortization and write-downs (1,410) (783) (435)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year $1,714 $3,690 $1,983
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The estimated fair value of servicing intangible assets approximated the net
book value as of September 30, 1999, and 1998. The estimated fair value was
determined by using discounted estimated future cash flows from the servicing
assets, using discount rates that approximated market rates and using estimated
future prepayment rates.
<PAGE>
PAGE 55
INTERWEST 99 AR
NOTE 11
DEPOSITS
Deposits consisted of the following as of September 30:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
INTEREST RATE AS OF
DOLLARS IN THOUSANDS SEPTEMBER 30, 1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest-bearing deposits $ 197,732 $ 178,625
Interest-bearing checking accounts 1.27% 171,578 162,051
Money market accounts 3.43% 273,537 267,953
Savings accounts 1.68% 103,306 109,148
- ------------------------------------------------------------------------------------------------------------------
1.78% 746,153 717,777
- ------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Due within one year 738,820 634,483
After one year but within two years 66,538 172,839
After two years but within three years 18,114 26,104
After three years but within four years 4,710 8,086
After four years but within five years 3,555 4,628
After five years 1,059 908
- ------------------------------------------------------------------------------------------------------------------
Total certificates of deposit 5.19% 832,796 847,048
- ------------------------------------------------------------------------------------------------------------------
Total 3.58% $1,578,949 $1,564,825
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Deposits as of September 30, 1999 and 1998, included $111,402,000 and
$119,421,000, respectively, in public fund deposits. Securities with book values
of $13,330,000 and $17,475,000 were pledged as collateral on these deposits as
of September 30, 1999 and 1998, respectively, which exceeds the minimum
collateral requirements established by the Washington Public Deposit Protection
Commission.
Certificates of deposit greater than or equal to $100,000 included in
the above amounts totaled $401,963,000 and $369,573,000 as of September 30,
1999 and 1998, respectively.
Deposit interest expense by account type for the year ended September 30
was as follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other certificates of deposit $22,959 $27,890 $31,678
Certificates of deposit greater than or equal to $100,000 19,126 20,486 18,330
Money market accounts 9,392 7,955 6,316
Savings accounts 1,837 2,455 2,880
Interest-bearing checking accounts 2,102 2,055 1,803
- ------------------------------------------------------------------------------------------------------------------
Total $55,416 $60,841 $61,007
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 56
INTERWEST 99 AR
NOTE 12
FEDERAL HOME LOAN BANK ADVANCES
As of September 30, FHLB advances were scheduled to mature as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- -------------------------------------
DOLLARS IN THOUSANDS AMOUNT INTEREST RATES AMOUNT INTEREST RATES
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $154,038 4.68%-6.55% $ 50,501 5.53%-7.28%
One to two years 25,000 5.31% 7,332 4.68%-6.55%
Two to three years 161,200 5.30%-7.70% 60,000 5.31%-5.58%
Three to four years 142,000 5.20%-5.50% 161,200 5.39%-7.70%
Four to five years 50,000 4.69%-4.92% 142,000 5.19%-5.56%
Six to seven years 25,000 5.05% 25,000 4.98%
Eight to nine years 100,000 5.36%-5.56% - -
Nine to ten years 25,000 5.08% 100,000 5.36%-5.56%
- -------------------------------------------------------------------------------------------------------------------------------
Total $682,238 - $546,033 -
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FHLB advances are collateralized by FHLB stock owned by InterWest, deposits with
the FHLB and certain mortgages or deeds of trust securing such properties. As of
September 30, 1999, the minimum book value of eligible collateral pledged for
these borrowings was $818,686,000. As of September 30, 1999, the additional
amount available under credit lines from the FHLB was $232,331,000. Certain FHLB
advances contractually due beyond one year have an option whereby the FHLB can
call the advance due prior to the contractual maturity. The amount of such
advances with call options within one year was $377,000,000 as of September 30,
1999.
The maximum and average amount outstanding and weighted average interest
rates on advances from the FHLB were as follows during the year ended September
30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding as of any month end $718,709 $663,385
Average outstanding 601,931 559,012
Weighted average interest rates:
Annual 5.38% 5.61%
End of year 5.41% 5.40%
</TABLE>
NOTE 13
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
InterWest has sold certain securities of the U.S. government and its agencies
and other approved investments under agreements to repurchase. The carrying
value of the securities sold was $139,925,000 with an estimated fair value of
$136,438,000 as of September 30, 1999. As of September 30, 1999, InterWest had
$277,000,000 of available credit from third parties to sell securities under
agreements to repurchase.
As of September 30, securities sold under agreements to repurchase were
scheduled to mature as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ---------------------------
DOLLARS IN THOUSANDS AMOUNT INTEREST RATES AMOUNT INTEREST RATES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within 30 days $ 8,972 3.50%-5.03% $ 5,613 4.00%-5.03%
31 to 90 days - - - -
Over 90 days 123,000 5.59%-6.43% 123,000 5.03%-6.43%
- -------------------------------------------------------------------------------------------------
Total $131,972 - $128,613 -
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 57
INTERWEST 99 AR
Certain securities sold under agreements to repurchase contractually due
beyond 90 days have an option whereby the creditor can call the agreement due
within 90 days. The amount of such securities sold under agreements to
repurchase with call options within 90 days was $100,000,000 as of September
30, 1999.
The maximum and average amount outstanding and weighted average interest
rates on securities sold under agreements to repurchase were as follows
during the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Maximum outstanding as of any month end $133,992 $214,917
Average outstanding 131,723 157,898
Weighted average interest rates
Annual 5.77% 5.81%
End of year 5.70% 5.72%
</TABLE>
NOTE 14
SHAREHOLDERS' EQUITY
On July 21, 1998, InterWest Bancorp declared a three-for-two common stock
split, which was distributed on August 17, 1998, to shareholders of record on
August 3, 1998. Common stock issued and outstanding, average shares
outstanding and net income per share for all periods presented prior to the
three-for-two common stock split have been retroactively adjusted to give
effect to this transaction.
On January 20, 1999, the Board of Directors of InterWest Bancorp authorized
the purchase of up to 5 percent of InterWest Bancorp's outstanding shares of
common stock in the open market over a twelve-month period. During the year
ended September 30, 1999, InterWest Bancorp repurchased 521,500 shares (3.3
percent of the total common shares outstanding) at a total price of
$11,910,000. This represents an average price of $22.84 per common share
repurchased.
NOTE 15
MERGER-RELATED CHARGES
During the year ended September 30, 1998, InterWest incurred merger-related
charges totaling $5,495,000 in connection with the Pacific, Pioneer and Puget
acquisitions. Merger-related charges consisted of the following: $1,938,000
for professional fees, $1,468,000 for severance and other personnel expenses,
$1,382,000 for data and facilities conversions and $707,000 of other
expenses. The following table presents a summary of the activity in the
reserve for merger-related charges during the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,807 $ - $ 765
Merger-related charges - 5,495
-
Cash outlays and non-cash write-downs (1,799) (2,688) (765)
- --------------------------------------------------------------------------------
Balance, end of year $ 1,008 $ 2,807 $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 58
INTERWEST 99 AR
NOTE 16
INCOME TAXES
A reconciliation of income tax expense based on the statutory corporate tax
rate on pre-tax income and the amount of expense shown in the accompanying
consolidated statements of income for the year ended September 30 is as
follows:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rates $14,854 $12,421 $12,968
Tax effect of:
Goodwill amortization 146 - -
Non-deductible merger-related charges - 611 -
Tax-exempt interest (105) (140) (303)
Other, net (310) (44) 16
- -----------------------------------------------------------------------------------
Total $14,585 $12,848 $12,681
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
Current tax expense $14,775 $10,568 $14,192
Deferred tax expense (benefit) (190) 2,280 (1,511)
- -----------------------------------------------------------------------------------
Total $14,585 $12,848 $12,681
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
Tax effects of temporary differences that are elements of deferred tax assets
(liabilities) consisted of the following as of September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans $ 5,155 $ 2,946
Deferred compensation 749 971
Unrealized loss on securities available for sale 8,655 402
Loans held for sale 119 875
Other 1,688 908
- ---------------------------------------------------------------------------------------
Total deferred tax assets 16,366 6,102
Deferred tax liabilities:
Loan fees (3,721) (3,874)
FHLB stock dividends (3,948) (2,902)
Depreciation (2,213) (2,300)
Other (1,736) (721)
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities (11,618) (9,797)
- ---------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 4,748 $(3,695)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
The realization of deferred tax assets is dependent upon the ability to
generate taxable income in future periods. InterWest has evaluated available
evidence supporting the realization of its deferred tax assets and determined
it is more likely than not that deferred tax assets will be realized.
NOTE 17
EMPLOYEE BENEFITS
RETIREMENT AND SAVINGS PLANS InterWest has a debt-leveraged money purchase
employee stock ownership plan (ESOP) for employees. The ESOP is a
non-contributory stock ownership plan. InterWest makes monthly contributions
to the plan of 5 percent of qualified participants' compensation.
<PAGE>
PAGE 59
INTERWEST 99 AR
During 1998, the ESOP entered into a line of credit agreement with an
unrelated third party to borrow up to a total of $4,000,000 for the purpose
of acquiring InterWest Bancorp common stock. Interest on the line of credit
is computed at one-month LIBOR plus 1.8125 percent. Interest paid was
$284,000, $104,000, and $8,000 for the years ended September 30, 1999, 1998,
and 1997, respectively. The obligation is reduced, and shareholders' equity
increased, by the amount of any principal reduction on the line of credit by
the ESOP. During the year ended September 30, 1999, the ESOP made principal
repayments of $327,000 on the ESOP line of credit. Dividends paid on
unallocated shares of stock may be used to make payments on the line of
credit. Accordingly, $85,000, $31,000, and $35,000 of dividends were applied
toward loan payments during the years ended September 30, 1999, 1998, and
1997, respectively. The compensation of the leveraged shares is calculated by
taking the difference between the average fair value of the shares released
and the cost of the shares. Shares are released as the loan payments are made
on the ESOP line of credit. Leveraged ESOP shares during the years ended
September 30 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unallocated shares, beginning of year 147,055 - 23,776
Shares leveraged - 147,055 -
Shares released for allocation (18,945) - (23,776)
- --------------------------------------------------------------------------------------
Unallocated shares, end of year 128,110 147,055 -
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
The fair value of unallocated shares was $2,658,000, $3,364,000 and $0 as of
September 30, 1999, 1998 and 1997, respectively.
InterWest has a salary deferral 401(k) plan that is a defined
contribution plan. Employees can contribute to their deferred contribution
accounts on a pre-tax basis the maximum limit under the law. InterWest
matches a portion of the salary deferred by each participant according to the
schedule in the plan. Expenses of the ESOP and 401(k) plan were $1,575,000,
$1,302,000, and $1,042,000 for the years ended September 30, 1999, 1998 and
1997, respectively.
InterWest also maintains several unfunded, non-qualified deferred
compensation programs for certain executive officers.
STOCK OPTION PLANS During January 1993, the shareholders of InterWest
approved the addition of a qualified employee stock option plan (1993
incentive plan) and a non-qualified director stock option plan (1993
non-incentive plan). The awarding of stock options to certain employees of
InterWest is at the discretion of the Board of Directors. The term of the
options granted is generally five or ten years. Substantially all of the
options granted under the employees' stock option plan vest over a three to
five-year period. Under the 1993 non-incentive plan, each director was
granted 2,875 options with a term of ten years. These options were 100
percent vested at the date of the grant. This plan expired during 1997.
In January 1997, the shareholders of InterWest approved the non-qualified
1996 Outside Directors Stock Options-For-Fees Plan (1996 Director Plan).
Under the 1996 Director Plan, non-employee directors may elect to receive
stock options in lieu of fees otherwise due for board services and may
exercise those options after one year. Each option granted under the 1996
Director Plan has a five-year term.
InterWest had a qualified stock option plan prior to 1993 that provided
for the awarding of stock options to certain officers and employees of
InterWest at the discretion of the Board of Directors. The term of the stock
options granted ranged from four to ten years from the date of grant. This
plan expired during 1993; however, there are exercisable options outstanding
under the plan as of September 30, 1999.
Central, Puget, Pacific, Pioneer and Kittitas had stock option plans that
have been assumed by InterWest. The number of shares and exercise prices have
been appropriately adjusted to reflect the common stock exchange ratios for each
acquisition. All outstanding Central, Puget, Pacific, Pioneer and Kittitas stock
options became 100 percent vested and exercisable upon the consummation of the
respective acquisitions. No further awards will be granted under any of these
plans.
<PAGE>
PAGE 60
INTERWEST 99 AR
The exercise price of options granted under most of these plans was equal
to the fair value of the common stock on the date of the grant. Average
exercise price per share, number of shares authorized, available for grant,
granted, exercised, outstanding and currently exercisable reflect adjustments
for common stock splits.
Information with respect to options granted under all stock option plans is
as follows:
<TABLE>
<CAPTION>
AVERAGE OPTIONS OPTIONS
EXERCISE PRICE OUTSTANDING EXERCISABLE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE OCTOBER 1, 1996 $6.85 1,016,667 791,145
Options granted 15.89 89,127 -
Options exercised 8.30 (256,647) (256,647)
Options rescinded/expired 11.63 (17,340) (17,340)
Options vested - - 147,783
- -------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1997 7.27 831,807 664,941
Options acquired 11.14 46,227 46,227
Options granted 25.75 169,050 3,000
Options exercised 4.76 (132,971) (132,971)
Options rescinded/expired 16.97 (12,086) -
Options vested - - 89,699
- -------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1998 11.17 902,027 670,896
Options granted 20.80 202,610 3,250
Options exercised 5.65 (285,881) (285,881)
Options rescinded/expired 25.72 (22,880) -
Options vested - - 69,895
- -------------------------------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 1999 $15.30 795,876 458,160
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Additional financial data pertaining to outstanding stock options as of
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED AVERAGE
AVERAGE REMAINING WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE PRICE OF EXERCISABLE OF EXERCISABLE
EXERCISE PRICES OPTION SHARES LIFE (IN YEARS) OPTION SHARES OPTION SHARES OPTION SHARES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.85-$5.49 85,090 1.10 $ 4.53 85,090 $ 4.53
$6.75-$9.79 211,719 4.03 7.52 208,989 7.51
$10.47-$14.74 115,402 6.56 12.50 98,630 12.41
$20.75-$27.73 383,665 6.90 22.82 65,451 24.17
- -------------------------------------------------------------------------------------------------------------------------
Total 795,876 5.47 $15.30 458,160 $10.39
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1999, there were a total of 1,711,833 shares authorized
under all stock option plans and a total of 335,102 shares available for future
stock option grants.
SFAS No. 123, "Accounting for Stock-based Compensation," requires the
disclosure of pro forma net income and net income per share had InterWest
adopted the fair value method. Under this statement, the fair value of
stock-based awards is calculated through the use of option pricing models.
These models require the use of subjective assumptions, including stock price
volatility, dividend yield, risk-free interest rate and expected time to
exercise. The fair value of options granted under stock option plans is
estimated on the date of grant using the Black-Scholes option-pricing model.
Using the assumptions below, the weighted average estimated fair value of
options granted was $7.06 in 1999, $8.04 in 1998 and $5.21 in 1997.
<PAGE>
PAGE 61
INTERWEST 99 AR
The following weighted average assumptions were used in the computation of
the weighted average estimated fair value of stock options for the year ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility 37.4% 27.1% 17.4%
Expected dividend yield 2.4% 1.6% 1.5%
Risk-free interest rate 4.5% 5.7% 6.2%
Expected life (in years) 6.1 6.0 7.3
</TABLE>
If compensation expense for InterWest's stock option plans had been determined
using the fair value method defined in SFAS No. 123, InterWest's net income and
net income per share would have been the pro forma amounts indicated as follows
for the year ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $27,855 $22,642 $24,549
Pro forma 27,669 22,397 24,377
BASIC NET INCOME PER SHARE:
As reported $ 1.78 $ 1.45 $ 1.58
Pro forma 1.77 1.43 1.57
DILUTED NET INCOME PER SHARE:
As reported $ 1.74 $ 1.40 $ 1.54
Pro forma 1.74 1.39 1.53
</TABLE>
The compensation expense included in the pro forma net income and net income per
share is not likely to be representative of the effect on reported net income
for future years because stock options vest over several years and additional
option grants generally are made each year.
NOTE 18
REGULATORY CAPITAL
InterWest Bancorp and its banking subsidiaries are subject to risk-based capital
guidelines requiring minimum capital levels based on the credit risk of assets.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a material effect on InterWest's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
InterWest Bancorp and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
The regulations define the relevant capital levels for the five categories.
In general terms, the capital definitions are as follows:
<TABLE>
<CAPTION>
TOTAL CAPITAL TIER I TIER I
(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>
<PAGE>
PAGE 62
INTERWEST 99 AR
InterWest Bancorp is subject to risk-based capital guidelines issued by the
Federal Reserve Board (FRB), which establish a risk-adjusted ratio relating
capital to different categories of assets. InterWest Bancorp's Tier I capital
consists of shareholders' equity less certain intangibles, and excludes the
equity impact of adjusting securities available for sale to estimated fair
value. Total capital is Tier I capital and the allowance for losses on loans.
The FRB's risk-based capital rules have been supplemented by a leverage capital
ratio, defined as Tier I capital to adjusted quarterly average total assets. As
of September 30, 1999 and 1998, under the FRB's capital guidelines, InterWest
Bancorp's levels of consolidated regulatory capital exceeded the FRB's minimum
requirements.
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and
Pacific Northwest Bank as of September 30, 1999 and 1998 are presented in the
following table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ -------------------- ---------------------
DOLLARS IN THOUSANDS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1999
- ----------------------------------------------------------------------------------------------------------------------
INTERWEST BANCORP:
Total capital (to risk-weighted assets) $185,304 10.90% $136,015 8.0% $170,019 10.0%
Tier I capital (to risk-weighted assets) 171,181 10.07% 68,007 4.0% 102,011 6.0%
Tier I capital (to average assets) 171,181 6.83% 100,199 4.0% 125,248 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $141,897 10.95% $103,686 8.0% $129,607 10.0%
Tier I capital (to risk-weighted assets) 132,007 10.19% 51,843 4.0% 77,764 6.0%
Tier I capital (to average assets) 132,007 6.40% 82,504 4.0% 103,130 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $ 40,869 10.71% $30,521 8.0% $ 38,151 10.0%
Tier I capital (to risk-weighted assets) 37,020 9.70% 15,260 4.0% 22,891 6.0%
Tier I capital (to average assets) 37,020 8.69% 17,048 4.0% 21,310 5.0%
SEPTEMBER 30, 1998
- ----------------------------------------------------------------------------------------------------------------------
INTERWEST BANCORP:
Total capital (to risk-weighted assets) $174,997 11.96% $117,018 8.0% $146,272 10.0%
Tier I capital (to risk-weighted assets) 161,773 11.06% 58,509 4.0% 87,763 6.0%
Tier I capital (to average assets) 161,773 6.61% 97,845 4.0% 122,307 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $136,214 12.14% $89,789 8.0% $112,236 10.0%
Tier I capital (to risk-weighted assets) 127,269 11.34% 44,894 4.0% 67,342 6.0%
Tier I capital (to average assets) 127,269 6.20% 82,145 4.0% 102,681 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $ 19,112 10.32% $14,809 8.0% $ 18,511 10.0%
Tier I capital (to risk-weighted assets) 17,461 9.43% 7,404 4.0% 11,107 6.0%
Tier I capital (to average assets) 17,461 7.94% 8,800 4.0% 11,000 5.0%
</TABLE>
As of September 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 well-capitalized
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 well-capitalized capital requirements.
<PAGE>
PAGE 63
INTERWEST 99 AR
Currently, InterWest Bancorp pays quarterly dividends, which it intends
to continue to do. The funding source for dividends paid to shareholders is
dividends received from the subsidiary banks. The payment of dividends to
InterWest Bancorp from the subsidiary banks will be based on earnings and
financial condition and is subject to ongoing review by regulators and
various statutory limitations. Generally, InterWest is precluded from paying
dividends on its common stock if capital would be reduced to below regulatory
capital requirements at either the holding company or subsidiary bank level.
As of September 30, 1999, $49.3 million of retained earnings were available
for dividend distribution based on the capital levels and restrictions of
InterWest Bancorp and banking subsidiaries.
As discussed in Note 24, InterWest Bancorp has issued capital securities
subsequent to September 30, 1999 that will qualify as Tier I capital.
NOTE 19
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by InterWest using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret market data in the
development of the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts InterWest
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material impact on the
estimated fair value amounts. The following methods and assumptions were used
to estimate the fair value of each class of InterWest's financial instruments
as of September 30, 1999 and 1998:
CASH AND CASH EQUIVALENTS The carrying value is a reasonable estimate of the
fair value.
SECURITIES AVAILABLE FOR SALE, SECURITIES HELD TO MATURITY AND LOANS HELD FOR
SALE The estimated fair value of securities available for sale, securities
held to maturity and loans held for sale are based on quoted market rates and
dealer quotes.
LOANS RECEIVABLE The estimated fair value of loans receivable is based on
discounted cash flows, using estimated interest rates currently offered for
loans of similar characteristics.
No adjustment was made to the estimated interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management believes that the risk factor embedded in the estimated interest
rates, along with the allowance for losses on loans applicable to the loan
portfolio, results in a fair valuation of such loans.
FHLB STOCK FHLB stock does not have a market and the estimated fair value is
unknown. As such, the carrying value is a reasonable estimate of the fair
value.
DEPOSITS The estimated fair value of deposits with no stated maturity, such
as checking accounts, money market and savings accounts, is equal to the
amount payable on demand as of September 30, 1999 and September 30, 1998,
respectively. The estimated fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is
estimated using the current rate for certificates of deposit with similar
characteristics.
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS The fair value of FHLB advances, securities sold under agreements
to repurchase and other borrowings are estimated based on the present values
using a discount rate equal to the rate currently offered on similar
borrowings with similar maturities.
OTHER The carrying value of other financial instruments has been determined
to be a reasonable estimate of their fair value.
<PAGE>
PAGE 64
INTERWEST 99 AR
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
DOLLARS IN THOUSANDS VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 81,094 $ 81,094 $ 181,422 $ 181,422
Federal funds sold - - 19,863 19,863
Securities available for sale 700,550 700,550 574,346 574,346
Securities held to maturity 70,692 69,209 87,262 87,366
Loans receivable, net 1,561,584 1,557,157 1,359,050 1,363,200
Loans held for sale 23,138 23,478 93,125 95,626
FHLB stock 42,536 42,536 37,496 37,496
LIABILITIES
Non-interest-bearing deposits $ 197,732 $ 197,732 $ 178,625 $ 178,625
Interest-bearing checking accounts 171,578 171,578 162,051 162,051
Money market accounts 273,537 273,537 267,953 267,953
Savings accounts 103,306 103,306 109,148 109,148
Certificates of deposit 832,796 833,344 847,048 851,054
- ---------------------------------------------------------------------------------------------------------
Total deposits 1,578,949 1,579,497 1,564,825 1,568,831
FHLB advances and other borrowings 685,938 683,531 553,777 556,489
Securities sold under agreements to repurchase 131,972 130,082 128,613 130,844
OFF BALANCE SHEET LOAN COMMITMENTS:
Real estate loan commitments $ 400,646 $ 400,646 $ 271,706 $ 271,706
Other loan commitments 216,808 216,808 220,207 220,207
Standby letters of credit 2,962 2,962 1,631 1,631
Commercial letters of credit 1,640 1,640 1,109 1,109
</TABLE>
LIMITATIONS The estimated fair values presented herein are based on
information available to management as of September 30, 1999 and 1998. Since
September 30, 1999 and 1998, amounts have not been comprehensively revalued
for purposes of these financial statements and, therefore, current estimates
of fair value may differ from the amounts presented herein.
<PAGE>
PAGE 65
INTERWEST 99 AR
NOTE 20
CONTINGENCIES
At periodic intervals, the FDIC, the Washington Department of Financial
Institutions, Division of Banks, the Office of the Comptroller of Currency,
the FRB and other regulatory agencies (collectively the regulators), examine
InterWest Bancorp and its banking subsidiaries as part of the regulatory
oversight of the banking industry. Based on their examinations, the
regulators may direct InterWest Bancorp or a subsidiary bank to adjust
financial statements in accordance with their findings. A future examination
by the regulators could include a review of certain transactions or other
amounts reported in InterWest's 1999 consolidated financial statements. The
regulators have not proposed significant adjustments to InterWest's
consolidated financial statements in prior years and management is not aware
of any basis for any such adjustments for 1999. In view of the uncertain
regulatory environment in which InterWest operates, the extent, if any, to
which a forthcoming examination may ultimately result in regulatory
adjustments to the 1999 consolidated financial statements cannot presently be
determined.
In the normal course of business, InterWest has various legal claims and
other contingent matters outstanding. Management believes that any ultimate
liability arising from these actions will not have a material adverse impact
on InterWest's financial condition or results of operations.
The subsidiary banks are required to maintain balances with the Federal
Reserve Bank based on a percentage of deposit liabilities. The average
required reserve as of September 30, 1999 and 1998, was $9,911,000 and
$10,597,000, respectively.
During the year ended September 30, 1998, InterWest sold $26,709,000 of
single-family residential mortgage loans with recourse. As of September 30,
1999, $17,414,000 of these loans were outstanding.
<PAGE>
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INTERWEST 99 AR
NOTE 21
CONDENSED PARENT COMPANY FINANCIAL INFORMATION
INTERWEST BANCORP
Condensed financial information for InterWest Bancorp (parent company only) as
of and for the years ended September 30, is as follows:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 747 $ 268
Securities available for sale, at estimated fair value 300 -
Goodwill 7,924 8,341
Other assets 4,118 3,957
Investment in subsidiaries 159,930 169,368
- ------------------------------------------------------------------------------------------------------------------
Total $173,019 $181,934
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 4,105 $ 6,347
Other borrowings 3,608 3,935
Shareholders' equity 165,306 171,652
- ------------------------------------------------------------------------------------------------------------------
Total $173,019 $181,934
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income received from subsidiaries $ 25,000 $ 19,797 $ 5,865
- ------------------------------------------------------------------------------------------------------------------
Interest expense - 23 -
Non-interest expense 1,966 4,852 709
- ------------------------------------------------------------------------------------------------------------------
Total expenses 1,966 4,875 709
- ------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed net income from subsidiaries 23,034 14,922 5,156
Income tax benefit (691) (1,103) (227)
- ------------------------------------------------------------------------------------------------------------------
Net income before equity in undistributed net income from subsidiaries 23,725 16,025 5,383
- ------------------------------------------------------------------------------------------------------------------
Equity in undistributed net income from subsidiaries 4,130 6,617 19,166
- ------------------------------------------------------------------------------------------------------------------
Net income $ 27,855 $ 22,642 $ 24,549
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PAGE 67
INTERWEST 99 AR
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 27,855 $ 22,642 $ 24,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income from subsidiaries (29,130) (26,414) (25,031)
Cash dividends received from subsidiaries 25,000 19,797 5,865
Change in other assets and liabilities, net (2,135) 1,263 (650)
Amortization of goodwill 417 - -
Pooling accounting adjustment - (1,249) -
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,007 16,039 4,733
Cash flows from investing activities:
Investments in subsidiary banks (2,000) - -
Purchase of securities available for sale (300) - -
Cash paid for acquisition - (11,580) -
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,300) (11,580) -
Cash flows from financing activities:
Payment of dividends (8,843) (6,441) (4,967)
Purchase and retirement of common stock (11,910) (34) (570)
Net increase (decrease) in borrowings - (400) 400
Proceeds from stock option exercises 1,525 726 1,945
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (19,228) (6,149) (3,192)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 479 (1,690) 1,541
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 268 1,958 417
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 747 $ 268 $ 1,958
===========================================================================================================
</TABLE>
<PAGE>
PAGE 68
INTERWEST 99 AR
NOTE 22
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share for the years ended September 30:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator
Net income $ 27,855 $ 22,642 $ 24,549
===========================================================================================================
Denominator
Denominator for basic net income per share--
Weighted average shares 15,628,141 15,661,333 15,568,052
Effect of dilutive securities:
Stock options 355,002 496,008 410,994
- -----------------------------------------------------------------------------------------------------------
Denominator for diluted net income per share--
Weighted average shares and assumed conversion
of dilutive stock options 15,983,143 16,157,341 15,979,046
===========================================================================================================
Basic net income per share $ 1.78 $ 1.45 $ 1.58
===========================================================================================================
Diluted net income per share $ 1.74 $ 1.40 $ 1.54
===========================================================================================================
</TABLE>
NOTE 23
BUSINESS SEGMENT INFORMATION
Currently, InterWest is managed at the subsidiary bank level, not by line of
business. As of September 30, 1999, the subsidiary banks of InterWest Bancorp
were InterWest Bank, Pacific Northwest Bank and Kittitas Valley Bank, N.A. Each
of these subsidiary banks has a board of directors and an executive management
team that is responsible for the operation and performance of the respective
subsidiary bank. InterWest currently has two reportable segments: InterWest Bank
and Commercial Banks.
InterWest Bank is a state-chartered savings bank that was organized in 1956
as Island Savings and Loan Association in Oak Harbor, Washington, and
subsequently changed names to InterWest Bank. On July 18, 1995, InterWest Bank
completed a reorganization, in which InterWest Bank became a wholly owned
subsidiary of InterWest Bancorp. InterWest Bank is a community-oriented bank
which provides a wide range of financial services for individual and business
customers. InterWest Bank is currently in the process of transforming from a
traditional thrift to a full-service financial institution with commercial
banking in its portfolio of products. InterWest Bank conducts its business
through 40 full-service offices located in the western and north-central parts
of the state of Washington.
The segment of Commercial Banks is defined as the collective operations of
the banking subsidiaries acquired by InterWest Bancorp during fiscal year 1998:
Pacific Northwest Bank, First National Bank of Port Orchard, Pioneer National
Bank and Kittitas Valley Bank, N.A. First National Bank of Port Orchard, which
was acquired by InterWest Bancorp on January 15, 1998, was merged into Pacific
Northwest Bank on October 15, 1998. Pioneer National Bank, which was acquired by
InterWest Bancorp on June 16, 1998, was merged into Pacific Northwest Bank on
January 22, 1999.
Pacific Northwest Bank is a state-chartered commercial bank that was
acquired by InterWest Bancorp on June 15, 1998. Pacific Northwest Bank primarily
engages in commercial banking activities, serving small to medium-sized
businesses as well as individuals. Pacific Northwest Bank conducts its business
through 12 full-service offices located in the metropolitan Seattle area, the
Kitsap Peninsula and south-central parts of the state of Washington.
<PAGE>
PAGE 69
INTERWEST 99 AR
Kittitas Valley Bank, N.A. is a national bank that was acquired by
InterWest Bancorp on August 31, 1998. Kittitas Valley Bank, N.A. offers a
full line of commercial banking services to its customers providing financial
services to individuals and small businesses. Kittitas Valley Bank, N.A.
operates three offices located in central Washington.
The financial performance of each subsidiary bank is reviewed by
InterWest Bancorp's board of directors and executive management on a monthly
basis. The following table presents financial information for each segment
for the years ended September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------
INTERWEST COMMERCIAL CONSOLIDATED
DOLLARS IN THOUSANDS BANK BANKS OTHER* INTERWEST BANCORP
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Net interest income before provision for losses on loans $ 60,761 $ 23,418 $ - $ 84,179
Provision for losses on loans 1,695 305 - 2,000
Non-interest income 23,620 4,710 78 28,408
Non-interest expense 47,917 18,186 2,044 68,147
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 34,769 9,637 (1,966) 42,440
Income tax expense 11,987 3,289 (691) 14,585
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 22,782 $ 6,348 $ (1,275) $ 27,855
=============================================================================================================================
SEPTEMBER 30, 1998
Net interest income before provision for losses on loans $ 59,865 $ 18,950 $ (19) $ 78,796
Provision for losses on loans 1,100 1,707 - 2,807
Non-interest income 21,022 5,440 11 26,473
Non-interest expense 46,002 16,107 4,863 66,972
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 33,785 6,576 (4,871) 35,490
Income tax expense 11,759 2,192 (1,103) 12,848
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 22,026 $ 4,384 $ (3,768) $ 22,642
=============================================================================================================================
SEPTEMBER 30, 1997
Net interest income before provision for losses on loans $ 57,108 $ 17,017 $ - $ 74,125
Provision for losses on loans 1,000 508 - 1,508
Non-interest income 14,685 3,931 29 18,645
Non-interest expense 39,199 14,267 566 54,032
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,594 6,173 (537) 37,230
Income tax expense 10,985 1,923 (227) 12,681
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 20,609 $4,250 $ (310) $ 24,549
=============================================================================================================================
Total assets as of September 30, 1999 $2,123,354 $471,837 $(15,652) $2,579,539
Total assets as of September 30, 1998 1,992,096 443,464 12,288 2,447,848
Total assets as of September 30, 1997 2,044,849 356,223 1,856 2,402,928
</TABLE>
- ----------------------------
*Other includes intercompany eliminations and parent company amounts
<PAGE>
PAGE 70
INTERWEST 99 AR
NOTE 24
SUBSEQUENT EVENTS
On November 15, 1999, $40,000,000 of 9.875 percent Capital Securities were
issued by InterWest Capital Trust I (the Trust). The Trust is a business
trust organized in November 1999, and 100 percent of the common equity of the
Trust is owned by InterWest Bancorp.
The proceeds of the offering were invested by the Trust in junior
subordinated debentures of InterWest Bancorp. The debentures held by the
Trust are the sole assets of the Trust. Distributions on the capital
securities issued by the Trust are payable semiannually at 9.875 percent per
annum which is equal to the interest rate being earned by the Trust on the
debentures held by the Trust. The capital securities are subject to mandatory
redemption, in whole or in part, upon repayment of the debentures. The
debentures will not mature earlier than November 15, 2009, and not later than
November 15, 2029. InterWest Bancorp has entered into agreements which, taken
collectively, fully and unconditionally guarantee the capital securities
subject to the terms of each of the guarantees.
InterWest Bancorp intends to use the net proceeds for general corporate
purposes. The capital securities will be included with borrowings as a
separate line item in the consolidated statements of financial condition and
InterWest will record distributions payable on the capital securities as
interest expense in the consolidated statements of income. The capital
securities will qualify as Tier 1 capital under the capital guidelines of the
Federal Reserve Board.
On November 16, 1999, the Board of Directors of InterWest Bancorp
authorized the purchase of an additional 5 percent of InterWest Bancorp's
outstanding shares of common stock in the open market over a twelve-month
period.
<PAGE>
PAGE 71
INTERWEST 99 AR
NOTE 25
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOURTH THIRD SECOND FIRST
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999
Interest income $46,218 $43,703 $44,662 $45,076
Interest expense 24,275 23,059 23,662 24,484
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for losses on loans 21,943 20,644 21,000 20,592
Provision for losses on loans 502 500 500 498
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 21,441 20,144 20,500 20,094
Non-interest income 4,836 8,144 7,587 7,841
Non-interest expense 17,546 17,025 16,803 16,773
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 8,731 11,263 11,284 11,162
Income tax expense 2,941 3,929 3,921 3,794
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,790 $ 7,334 $ 7,363 $ 7,368
=============================================================================================================================
Basic net income per share $ 0.37 $ 0.47 $ 0.47 $ 0.47
=============================================================================================================================
Diluted net income per share $ 0.37 $ 0.46 $ 0.46 $ 0.46
=============================================================================================================================
YEAR ENDED SEPTEMBER 30, 1998
Interest income $45,934 $45,249 $44,200 $44,896
Interest expense 25,698 25,183 24,662 25,940
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for losses on loans 20,236 20,066 19,538 18,956
Provision for losses on loans 441 1,520 571 275
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 19,795 18,546 18,967 18,681
Non-interest income 7,906 5,915 6,568 6,084
Non-interest expense 16,179 18,934 16,901 14,958
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,522 5,527 8,634 9,807
Income tax expense 4,115 2,254 3,081 3,398
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 7,407 $ 3,273 $ 5,553 $ 6,409
=============================================================================================================================
Basic net income per share $ 0.47 $ 0.21 $ 0.35 $ 0.41
=============================================================================================================================
Diluted net income per share $ 0.46 $ 0.20 $ 0.35 $ 0.40
=============================================================================================================================
</TABLE>
Non-interest expense for the third quarter of 1998 includes $4,195,000 in
merger-related charges incurred in connection with the acquisitions of
Pacific and Pioneer. The provision for losses on loans for the third quarter
of 1998 includes a merger-related provision for losses on loans of
$1,000,000. Non-interest expense for the second quarter of 1998 includes
$1,300,000 in merger-related charges incurred in connection with the
acquisition of Puget. The acquisitions of Pacific, Pioneer and Puget
completed during 1998 have been accounted for using the pooling-of-interests
method; accordingly, quarterly financial data for the periods prior to the
acquisitions have been restated as if the companies were combined.
