<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period ________ from to ________
COMMISSION FILE NUMBER 0-26632
INTERWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
CHARTERED BY THE STATE OF WASHINGTON
------------------------------------
(State or other jurisdiction of incorporation or organization)
91-1691216
----------
(I.R.S. Employer Identification No.)
275 SOUTHEAST PIONEER WAY
OAK HARBOR, WASHINGTON
----------------------
(Address of principal executive offices)
98277
-----
(Zip Code)
Registrant's telephone number including area code: (360) 679-4181
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of December 31, 1999, 15,800,377 shares of common stock were outstanding with
no par value.
<PAGE>
INTERWEST BANCORP, INC
<TABLE>
<CAPTION>
INDEX PAGE
- ----- ----
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 1999 1
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1999 AND 1998 2
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1999
AND THE YEAR ENDED SEPTEMBER 30, 1999 3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTH PERIODS ENDED
DECEMBER 31, 1999 AND 1998 4-5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6-8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS December 31, 1999 September 30, 1999
- ----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest-bearing $104,415 $70,623
Interest-bearing deposits with banks 9,647 10,471
Securities available for sale, at estimated fair value 747,982 700,550
Securities held to maturity 68,896 70,692
Loans receivable, net 1,672,315 1,561,584
Loans held for sale 22,397 23,138
Interest receivable 16,781 15,962
Real estate held for sale and for development 8,955 8,260
Federal Home Loan Bank (FHLB) stock, at cost 44,347 42,536
Premises and equipment, net 53,847 54,132
Intangible assets 21,544 11,999
Other assets 11,442 9,592
------------------------------------------
Total assets $2,782,568 $2,579,539
======================================
LIABILITIES
Non-interest-bearing deposits $212,880 $197,732
Interest-bearing deposits 1,385,310 1,381,217
-----------------------------------
Total deposits 1,598,190 1,578,949
FHLB advances 670,234 682,238
Securities sold under agreements to repurchase 282,655 131,972
Guaranteed preferred beneficial interests in
subordinated debt 40,000 --
Other liabilities 15,399 17,374
Other borrowings 4,370 3,700
------------------------------------
Total liabilities 2,610,848 2,414,233
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding 15,800,377 and 15,434,690 -- --
Paid-in-capital 33,297 26,127
Retained earnings 162,043 158,828
Debt related to employee stock ownership plan (ESOP) (2,980) (3,608)
Accumulated other comprehensive loss:
Unrealized loss on securities available
for sale, net of tax (20,640) (16,041)
------------------------------------
Total shareholders' equity 171,720 165,306
------------------------------------
Total liabilities and shareholders' equity $2,782,568 $2,579,539
===================================
</TABLE>
1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended December 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $36,297 $31,773
Securities available for sale 12,264 10,462
Securities held to maturity 1,096 1,259
Other 724 1,582
-------------------------
50,381 45,076
INTEREST EXPENSE
Deposits 14,791 14,664
FHLB advances and other borrowings 9,553 7,890
Securities sold under agreements to repurchase 2,445 1,930
Guaranteed preferred beneficial interests in subordinated debt 494 --
-------------------------
27,283 24,484
Net interest income before provision for losses on loans 23,098 20,592
Provision for losses on loans 550 498
-----------------------
Net interest income after provision for losses on loans 22,548 20,094
NON-INTEREST INCOME
Gain on sale of loans 71 4,070
Service fees 2,744 2,661
Investment product fees and insurance commissions 634 590
Gain (loss) on sale of securities available for sale -- (160)
Other 841 680
----------------------
4,290 7,841
NON-INTEREST EXPENSE
Compensation and employee benefits 10,219 9,131
General and administrative 4,387 3,954
Occupancy 2,516 2,303
Data processing 1,258 1,084
Loss from real estate write-downs and operations 63 301
------------------------
18,443 16,773
Income before income taxes 8,395 11,162
Income tax expense 2,933 3,794
----------------------
Net income $5,462 $7,368
======================
Basic net income per share $0.34 $0.47
=======================
Diluted net income per share $0.34 $0.46
=======================
Dividends declared per share $0.14 $0.14
======================
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Debt
Other Related
Common Stock, Paid-in Retained Comprehensive To
DOLLARS IN THOUSANDS, EXCEPT no par value Capital Earnings Loss ESOP Total
SHARE DATA Shares
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OCTOBER 1, 1998 15,651,345 $36,512 $139,781 $(706) $(3,935) $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 (11,910) (11,910)
common stock (521,500)
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 tax benefit of (15,335) (15,335)
--------
$8,253 and
reclassification adjustment
for gains included in net
income of $47
Total comprehensive income 12,520
- -------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1999 15,434,690 26,127 158,828 (16,041) (3,608) 165,306
Dividends, $0.14 per share (2,247) (2,247)
Issuance of common stock:
Stock option plans 55,600 328 328
Acquisitions
677,109 14,463 14,463
ESOP loan repayment 25,478 628 628
Purchase and retirement of (392,500) (7,621) (7,621)
common stock
Comprehensive income:
Net income 5,462 5,462
Other comprehensive loss-
Unrealized loss on (4,599) (4,599)
securities available for -------
sale, net of tax benefit of
$2,476
Total comprehensive income 863
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 15,800,377 $33,297 $162,043 $(20,640) $(2,980) $171,720
===================================================================================================================
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended December 31,
DOLLARS IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $5,462 $7,368
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,149 1,233
Amortization of intangible assets 495 352
Provision for losses on loans 550 498
Loss on real estate held for sale and for development 10 232
Amortization and accretion of premiums and discounts, net 270 353
Gain on sale of loans (71) (4,070)
Loss on sale of securities available for sale -- 160
Gain on sale of real estate held for sale and
for development (103) (85)
Loan fees deferred, net of amortization 730 674
FHLB stock dividends (777) (734)
Changes in operating assets and liabilities:
Interest receivable (565) (805)
Other assets 393 (1,448)
Other liabilities (1,516) 1,407
-----------------------------------
Net cash provided by operating activities $6,027 $5,135
INVESTING ACTIVITIES
Purchases of securities available for sale (14,380) (624,823)
Proceeds from maturing securities available for sale 2,423 162,969
Proceeds from sale of securities available for sale -- 159,073
Proceeds from maturing securities held to maturity 770 370
Principal repayments on securities available for sale 17,867 48,481
Principal repayments on securities held to maturity 1,010 5,166
Proceeds from sale of loans 2,316 140,904
Net increase in loans receivable (134,868) (142,138)
Proceeds from sale of real estate held for sale
and for development 1,190 1,762
Purchases of premises and equipment (748) (2,255)
Purchases of FHLB stock -- (1,863)
Net decrease in federal funds sold -- 5,412
Cash received in acquisition 9,735 --
Improvements capitalized to real estate held for sale
and for development (168) (531)
--------------------------
Net cash used in investing activities $(114,853) $(247,473)
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(continued)
<TABLE>
<CAPTION>
Three months ended December 31,
DOLLARS IN THOUSANDS 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits 1,494 25,267
Net decrease in certificates of deposit (30,205) (50,002)
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 559,087 200,822
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (419,111) (26,477)
Proceeds from issuance of guaranteed preferred
beneficial interests in subordinated debt 40,000 --
Dividends paid to shareholders (2,178) (2,211)
Purchase and retirement of common stock (7,621) --
Issuance of common stock from exercise of stock options 328 203
---------------------------------
Net cash provided by financing activities 141,794 147,602
-------------------------------
Net increase (decrease) in cash and cash equivalents 32,968 (94,736)
CASH AND CASH EQUIVALENTS
Beginning of period 81,094 181,422
-------------------------------
End of period $114,062 $ 86,686
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $26,321 $25,446
Income taxes -- 7
Non-cash investing and financing activities:
Loans receivable transferred to real estate held for sale 1,355 1,194
Loans receivable securitized as securities available for sale 57,018 --
ESOP loan repayment 628 --
</TABLE>
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
InterWest Bancorp, Inc. (InterWest Bancorp) and its wholly owned subsidiaries
(collectively InterWest). As of December 31, 1999, InterWest Bancorp's wholly
owned subsidiaries were InterWest Bank, Pacific Northwest Bank, Kittitas Valley
Bank, N.A., National Bank of Tukwila and InterWest Capital Trust I. All material
intercompany transactions and balances have been eliminated.
On October 1, 1999, InterWest Bancorp completed the acquisition of NBT Northwest
Bancorp and its banking subsidiary National Bank of Tukwila of Tukwila,
Washington. This acquisition was accounted for using the purchase method.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the 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.
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.
The unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to the Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation
are reflected in the interim consolidated financial statements. The consolidated
statements of operations for the three-month periods ended December 31, 1999 and
1998 are not necessarily indicative of the operating results for the full year.
For further information, refer to the consolidated financial statements and
footnotes for the year ended September 30, 1999.
NOTE B RECLASSIFICATIONS
Certain reclassifications have been made to prior financial statements to
conform to current presentation. The effects of the reclassifications are not
considered material.
NOTE C 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 period. 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 weighted average shares outstanding.
6
<PAGE>
The following table sets forth the computation of basic and diluted net income
per share for the three months ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended December 31,
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NUMERATOR:
Net income $5,462 $7,368
========================
DENOMINATOR:
Denominator for basic net income per share-
Weighted average shares 16,001,909 15,659,278
Effect of dilutive securities:
Stock options 208,300 459,239
---------------------------------
Denominator for diluted net income per share-
Weighted average shares and assumed conversion
of dilutive stock options 16,210,209 16,118,517
==========================
Basic net income per share $0.34 $0.47
=============================
Diluted net income per share $0.34 $0.46
=============================
</TABLE>
NOTE D GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
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 InterWest Bancorp owns 100 percent of the common
equity of the Trust.
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 is using the proceeds for general corporate purposes including stock
repurchases and investment in the subsidiary banks. The capital securities are
included with borrowings as a separate line item in the consolidated statements
of financial condition and distributions payable on the capital securities as
interest expense in the consolidated statements of income. The capital
securities qualify as Tier I capital under the capital guidelines of the Federal
Reserve Board.
NOTE E SHAREHOLDERS' EQUITY
On November 16, 1999, the Board of Directors authorized the purchase of an
additional 5 percent of InterWest Bancorp's outstanding shares of common stock
in the open market over the next twelve months. The Board of Directors
previously approved a stock repurchase plan of 5 percent on January 20, 1999.
During the three months ended December 31, 1999, InterWest Bancorp repurchased
392,500 shares (2.4 percent of the total common shares outstanding) at a total
price of $7.6 million.
7
<PAGE>
NOTE F BUSINESS COMBINATIONS
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
shareholders' equity of $4.9 million. Each share of NBT common stock was
exchanged for 0.88 shares of InterWest Bancorp common stock. The total number of
shares issued was 677,109. This acquisition has been accounted for using the
purchase method and resulted in the recording of $9.7 million in goodwill by
InterWest Bancorp. This goodwill will be amortized using the straight-line
method over a period of twenty years.
NOTE G SUBSEQUENT EVENTS
On January 3, 2000, Kittitas Valley Bank, N.A. was merged into Pacific Northwest
Bank.
On February 9, 2000, InterWest Bancorp and Liberty Bay Financial Corporation
(Liberty) announced the termination of a definitive agreement to merge that was
entered into on September 14, 1999. Liberty's commercial banking subsidiary,
North Sound Bank, operates eight offices on the Olympic Peninsula in Washington
state. InterWest Bancorp's banking subsidiaries, InterWest Bank and Pacific
Northwest Bank, also presently operate eight offices on the Olympic Peninsula.
The decision to terminate the definitive agreement was based primarily on
regulatory approval issues that would require at least one office to be divested
of loans, deposits and facilities to another financial institution in order for
the acquisition to be approved. The restrictions proposed for the approval of
the acquisition were more onerous than originally expected and would limit
InterWest's ability to serve the Olympic Peninsula market as planned when the
definitive agreement was entered. Costs incurred to date are not material and
will be expensed during the quarter ended March 31, 2000.
8
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is provided for the consolidated financial condition
and results of operations of InterWest Bancorp, Inc. (InterWest Bancorp), which
includes its wholly owned subsidiaries (collectively InterWest). As of December
31, 1999, InterWest Bancorp's wholly owned subsidiaries were InterWest Bank,
Pacific Northwest Bank, Kittitas Valley Bank, N.A., National Bank of Tukwila and
InterWest Capital Trust I. 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 for an understanding of the following discussion and analysis.
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. These changes are
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
which has added a total of $668 million in assets as measured at the respective
acquisition dates. The acquisition of Central Bancorporation (Central) 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.
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. 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.
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. On January 22, 1999, Pioneer
National Bank was merged into Pacific Northwest Bank.
On August 31, 1998, InterWest Bancorp acquired Kittitas Valley Bancorp, Inc.
(Kittitas), of Ellensburg, Washington. Kittitas' commercial banking subsidiary,
Kittitas Valley Bank, N.A., operated three offices in central Washington. On
January 3, 2000, Kittitas Valley Bank, N.A. was merged into Pacific Northwest
Bank.
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. Each share
of NBT common stock was exchanged for 0.88 shares of InterWest Bancorp common
stock. 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 shareholders' equity of $4.9 million. The transaction resulted in
the recording of $9.7 million in goodwill by InterWest Bancorp. This goodwill
will be amortized using the straight-line method over a period of twenty years.
9
<PAGE>
The following table summarizes pertinent information related to the completed
acquisitions:
<TABLE>
<CAPTION>
Acquisition Total Assets At Acquisition Date Common Shares
Date Institution (dollars in thousands) Issued
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 31, 1996 Central Bancorporation (1) $ 206,093 2,147,391
January 15, 1998 Puget Sound Bancorp, Inc.(1) 53,109 586,420
June 15, 1998 Pacific Northwest Bank (1) 200,219 2,346,081
June 16, 1998 Pioneer Bancorp, Inc. (1) 108,399 692,846
August 31, 1998 Kittitas Valley Bancorp, Inc. (2) 47,441 229,831*
October 1, 1999 NBT Northwest Bancorp (2) 53,018 677,109
</TABLE>
(1) Pooling-of-interests method of accounting
(2) Purchase method of accounting
* Additionally, $6.4 million in cash was paid to Kittitas shareholders.
On February 9, 2000, InterWest Bancorp and Liberty Bay Financial Corporation
(Liberty) announced the termination of a definitive agreement to merge that was
entered into on September 14, 1999. Liberty's commercial banking subsidiary,
North Sound Bank, operates eight offices on the Olympic Peninsula in Washington
state. InterWest Bancorp's banking subsidiaries, InterWest Bank and Pacific
Northwest Bank, also presently operate eight offices on the Olympic Peninsula.
The decision to terminate the definitive agreement was based primarily on
regulatory approval issues that would require at least one office to be divested
of loans, deposits and facilities to another financial institution in order for
the acquisition to be approved. The restrictions proposed for the approval of
the acquisition were more onerous than originally expected and would limit
InterWest's ability to serve the Olympic Peninsula market as planned when the
definitive agreement was entered. Costs incurred to date are not material and
will be expensed during the quarter ended March 31, 2000.
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 pending
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 55 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 $5.5 million for the three months ended December 31,
1999, compared to $7.4 million for the three months ended December 31, 1998.
Diluted net income per share was $0.34 for the three months ended December 31,
1999, compared to $0.46 for the three months ended December 31, 1998. The
decrease in net income from the quarter ended December 31, 1998 was primarily
due to a decrease in the gain on sale of loans of $2.6 million, net of tax. This
decrease in net income was partially offset by an increase in net interest
income and the affect of the acquisition of National Bank of Tukwila.
10
<PAGE>
InterWest's return on average shareholders' equity was 12.25 percent for the
three months ended December 31, 1999, compared to 16.89 percent for the three
months ended December 31, 1998. InterWest's return on average assets was 0.81
percent for the three months ending December 31, 1999, compared to 1.20 percent
for the three months ended December 31, 1998.
The following table summarizes net income, net income per share and key
financial ratios:
<TABLE>
<CAPTION>
Three months ended December 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $5,462 $7,368
===========================================
Basic net income per share $0.34 $0.47
==========================================
Diluted net income per share $0.34 $0.46
==========================================
Return on average shareholders' equity 12.25% 16.89%
Return on average assets 0.81% 1.20%
Net interest margin 3.67% 3.58%
Efficiency ratio 67.34% 58.99%
</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 provision for losses on loans increased to $23.1
million for the three months ended December 31, 1999, compared to $20.6 million
for the three months ended December 31, 1998. The increase in net interest
income is due to an increase in interest-earning assets, an increase in net
interest margin and the affect of the acquisition of National Bank of Tukwila.
Interest income was $50.4 million for the three months ended December 31, 1999,
compared to $45.1 million for the three months ended December 31, 1998. The
increase was due to an increase in the yield earned and growth in
interest-earning assets. The yield on interest-earning assets increased to 8.01
percent for the three months ended December 31, 1999, compared to 7.83 percent
for the three months ended December 31, 1998. This increase was primarily due to
a change in the composition of average interest-earning assets with a greater
percentage comprised of loans receivable and in particular, higher yielding
commercial and commercial real estate loans. The yield on interest earning
assets also increased due to an overall increase in interest rates and the
resulting impact on adjustable rate loans and securities.
Interest expense was $27.3 million for the three months ended December 31, 1999,
compared to $24.5 million for the three months ended December 31, 1998. This
increase was due to an increase in interest-bearing liabilities to fund asset
growth and an increase in the cost of funds. The cost of funds was 4.35 percent
for the three months ended December 31, 1999, compared to 4.33 percent for the
three months ended December 31, 1998. The increase in the cost of funds was due
to an increase in the cost of borrowings and a greater percentage of
interest-bearing liabilities being comprised of borrowings. The cost of
borrowings increased due to the issuance of $40 million of trust preferred
securities at 9.875 percent during the quarter ended December 31, 1999, and an
increase in interest rates on other borrowing sources. The affect of the
increase in cost of borrowings was partially offset by a decrease in the cost of
deposits. The cost of deposits decreased due to increases in transaction deposit
balances and decreases in certificates of deposit.
11
<PAGE>
InterWest's net interest margin, which is net interest income divided by
average interest-earning assets, increased to 3.67 percent for the three
months ended December 31, 1999, compared to 3.58 percent for the three months
ended December 31, 1998. The increase in net interest margin was primarily
the result of an increase in the yield earned on interest-earning assets,
which was partially offset by an increase in the cost of funds.
During the quarter ended December 31, 1999, overall interest rates 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 mortgage loans, and increasing non-interest-bearing
and interest-bearing transaction deposits.
AVERAGE RATES AND BALANCES -- The following table indicates the average balance
and average interest rates earned or paid, interest rate spread and net interest
margin for the three months ended December 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- -----------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Loans receivable and loans
held for sale $1,636,804 8.87% $1,421,388 8.94%
Securities available for sale,
securities held to maturity and
other interest-earning assets 879,481 6.41% 879,975 6.05%
------------------------------------------------------------------
Total interest-earnings assets 2,516,285 8.01% 2,301,363 7.83%
------------------------------------------------------------------
Deposits 1,638,661 3.61% 1,552,374 3.78%
FHLB advances, securities
sold under agreements
to repurchase and 869,800 5.74% 710,286 5.53%
other borrowings
------------------------------------------------------------------
Total interest-bearing liabilities 2,508,461 4.35% 2,262,660 4.33%
------------------------------------------------------------------
Net interest spread $ 7,824 3.66% $ 38,703 3.50%
===================================================================
Net interest margin 3.67% 3.58%
===== =====
</TABLE>
12
<PAGE>
The following table provides information on changes in net interest income for
the periods that are attributable to changes in interest rates and changes in
volume:
<TABLE>
<CAPTION>
Three months December 31, 1999 vs 1998
Increase (Decrease)
Due to changes in
DOLLARS IN THOUSANDS Rate Volume Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans receivable and loans held for sale $ (255) $ 4,779 $ 4,524
Securities available for sale, securities held
to maturity and other interest-earning assets 788 (7) 781
----------------------------------------
Total net change in income on interest-earning assets 533 4,772 5,305
---------------------------------------
INTEREST-BEARING LIABILITIES
Deposits (668) 795 127
FHLB advances, securities sold under agreement to
repurchase and other borrowings 394 2,278 2,672
----------------------------------------
Total net change in expense on interest-bearing liabilities (274) 3,073 2,799
-----------------------------------------
Net change in net interest income $807 $1,699 $2,506
===========================================
</TABLE>
PROVISION FOR LOSSES ON LOANS -- The provision for losses on loans was
$550,000 for the three months ended December 31, 1999, compared to $498,000
for the three months ended December 31, 1998.
NON-INTEREST INCOME -- Non-interest income was $4.3 million for the three
months ended December 31, 1999, a decrease from $7.8 million for the three
months ended December 31, 1998. The decrease in non-interest income from the
three months ended December 31, 1998, was primarily due to a decrease in the
gain on sale of loans. The decrease in the gain on sale of loans was
partially offset by increases in services fees and other non-interest income.
During 1998 and the first half of fiscal year 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 residential mortgage loan originations decreased,
and as a result, sales of single-family mortgage loans declined as compared to
1998 and the first half of fiscal year 1999. Based on the current interest rate
environment, InterWest anticipates that single-family mortgage loan sales will
remain at low levels during the remainder of 2000 compared to the first half of
fiscal year 1999. It is currently InterWest's strategy to originate and
securitize single-family mortgage loans as securities available for sale. During
the quarter ended December 31, 1999, $57.0 million of single-family mortgage
loans were securitized as securities available for sale.
NON-INTEREST EXPENSE -- Non-interest expense was $18.4 million for the three
months ended December 31, 1999, compared to $16.8 million for the three
months ended December 31, 1998. This increase in non-interest expense was
primarily due to the acquisition of National Bank of Tukwila, which increased
non-interest expense by $0.5 million, including goodwill amortization, and
the accrual for severance contracts totaling
13
<PAGE>
$0.4 million. Excluding the National Bank of Tukwila expenses and severance
contracts, non-interest expense has increased by $0.7 million or four percent
compared to the prior year.
The efficiency ratio was 67.3 percent for the three months ended December 31,
1999, compared to 59.0 percent for the three months ended December 31, 1998. The
increase in the efficiency ratio was primarily due to an increase in
non-interest expense and a decrease in the gain on sale of loans. This was
partially offset by an increase in net interest income.
Compensation and employee benefits were $10.2 million for the three months ended
December 31, 1999, compared to $9.1 million for the three months ended December
31, 1998. The increase from the period one year ago was primarily due to the
acquisition of National Bank of Tukwila and the accrual for severance contracts.
Excluding National Bank of Tukwila compensation and severance contracts,
compensation and employee benefits increased $0.5 million or five percent
compared to the prior year.
As discussed previously, InterWest completed acquisitions of four commercial
banks during fiscal year 1998 and one during the quarter ended December 31,
1999. However, the efficiencies available from eliminating duplication of
administrative and operational functions have not been realized from the
acquisitions. InterWest has selected a data processing system and is planning
for a complete integration of various policies and procedures into a common
operating platform. This is part of an overall plan to merge multiple charters
that InterWest operates under and to be recognized and identified as one brand
within its markets. 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 best meets InterWest's future needs. The selection process has
been completed and it is anticipated that data and systems conversions will
commence during the second half of fiscal year 2000. It is the current plan to
have data and systems conversions completed and to have the banking subsidiaries
consolidated under one charter in calendar year 2001.
INCOME TAX EXPENSE --Income tax expense was $2.9 million for the three months
ended December 31, 1999, compared to $3.8 million for the three months ended
December 31, 1998. The effective tax rates were 34.9 percent for the three
months ended December 31, 1999, compared to 34.0 percent for the three months
ended December 31, 1998. The higher effective tax rate for 1999 is due to
increased goodwill amortization that is not deductible for income tax
purposes.
REVIEW OF FINANCIAL CONDITION
InterWest's total consolidated assets were $2.78 billion as of December 31,
1999, compared to $2.58 billion as of September 30, 1999. This increase is
primarily due to increases in loans receivable, securities available for sale
and the acquisition of National Bank of Tukwila.
CASH AND CASH EQUIVALENTS -- Non-interest-bearing cash increased to $104.4
million as of December 31, 1999, compared to $70.6 million as of September
30, 1999. This increase was due to the build-up of cash reserves for the Year
2000 event weekend.
SECURITIES -- As of December 31, 1999, InterWest had $748.0 million of
securities available for sale, compared to $700.6 million as of September 30,
1999. Securities held to maturity have decreased to $68.9 million as of
December 31, 1999, compared to $70.7 million as of September 30, 1999, as a
result of maturities and principal repayments on mortgage-backed securities.
The increase in securities available for sale is due to the fact that during
the quarter ended December 31, 1999; InterWest securitized $57.0 million of
single-family residential mortgage loans. It is currently InterWest's
strategy to originate and securitize single-family mortgage loans rather than
purchasing mortgage-backed securities. Management believes this will increase
yields, liquidity and reduce regulatory capital requirements. As of December
31, 1999, 91.6 percent of InterWest securities were classified as available
for sale. Management believes that a high percentage of securities classified
as available for sale provides greater flexibility to respond to interest
rate changes and liquidity needs to fund loan growth.
14
<PAGE>
InterWest maintains liquidity in accordance with an internal liquidity policy.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of the
yields then available in relation to other opportunities, and management's
expectation of the level of yield that will be available in the future.
Management's projections as to the short-term demand for funds to be used for
loan originations and other activities can also affect liquidity levels.
Securities are categorized as held to maturity or available for sale, based upon
management's intent as to the ultimate disposition of each security acquired.
InterWest does not currently trade securities. Securities classified as held to
maturity are stated at 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.
LOANS RECEIVABLE AND LOANS HELD FOR SALE -- Loans receivable were $1.67
billion as of December 31, 1999, compared to $1.56 billion as of September
30, 1999. This increase was primarily due to growth in the loan portfolios of
InterWest Bank and Pacific Northwest Bank and partially due to the
acquisition of National Bank of Tukwila. It is management's intention to
increase the loan portfolio, and in particular commercial lending, which
should have a positive impact on net interest income. Growth in the loan
portfolio would have been more significant during the quarter ended December
31, 1999, however, $57.0 million of single-family mortgages were securitized
into securities available for sale during the quarter.
The commercial bank acquisitions increased InterWest's ability to originate
commercial loans. These acquisitions, as well as the development of commercial
banking at InterWest Bank, have changed 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 increased $14.8 million
from September 30, 1999. This increase would have been more significant;
however, $57.0 million of single-family residential mortgages were securitized
during the quarter ended December 31, 1999. As of December 31, 1999,
single-family residential mortgage loans totaled $462.9 million, or 26.9 percent
to total gross loans, compared to $448.1 million, or 27.9 percent of total gross
loans, as of September 30, 1999.
The commercial loan portfolio was $310.1 million as of December 31, 1999, an
increase of $20.9 million from September 30, 1999. Commercial real estate
mortgage loans were $441.8 million as of December 31, 1999, an increase of $39.2
million from September 30, 1999. Commercial and commercial real estate loans
outstanding represented 43.7 percent of total gross loans as of December 31,
1999, an increase from 43.0 percent of total gross loans as of September 30,
1999. This increase was due to the acquisition of National Bank of Tukwila and
loan growth at InterWest Bank and Pacific Northwest Bank. Increases in
commercial lending increased the yield earned on the loan portfolio and net
interest income.
Real estate construction loans outstanding totaled $268.5 million as of December
31, 1999, an increase of $22.8 million from $245.7 million as of September 30,
1999.
Loans held for sale were $22.4 million as of December 31, 1999 compared to $23.1
million as of September 30, 1999. Loans held for sale are generally
single-family mortgage loans 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
15
<PAGE>
over the period of servicing income, not to exceed 15 years. Periodically,
InterWest has sold loan servicing rights.
The following table sets forth the composition of InterWest's loan portfolio by
type as of the dates indicated:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1999 SEPTEMBER 30, 1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $462,853 $448,068
Multi-family residential 78,340 74,223
Commercial 441,782 402,580
Real estate construction 268,483 245,690
Consumer loans 104,446 97,153
Commercial loans 310,059 289,185
Agricultural loans 54,071 51,961
--------------------------------------
1,720,034 1,608,860
Less:
Loans held for sale 22,397 23,138
Allowance for losses on loans 15,182 14,123
Deferred loan fees and discounts 10,140 10,015
---------- ----------
$1,672,315 $1,561,584
========== ==========
</TABLE>
NON-PERFORMING ASSETS -- 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 loan is placed on
non-accrual status, any previously accrued and uncollected interest is
reversed from interest income. Non-accrual loans totaled $11.0 million as of
December 31, 1999, compared to $10.9 million as of September 30, 1999. Total
non-performing assets, including non-accrual loans and real estate owned
through foreclosure, totaled $15.3 million or 0.55 percent of total assets as
of December 31, 1999, compared to $14.5 million or 0.56 percent of total
assets as of September 30, 1999. The following table summarizes
non-performing assets as of December 31, 1999, and September 30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1999 SEPTEMBER 30, 1999
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NON-ACCRUAL LOANS
Real estate mortgage loans
Single-family residential $3,207 $4,125
Multi-family residential -- --
Commercial 1,371 792
Real estate construction 880 880
Consumer loans 366 507
Commercial loans 5,038 3,943
Agricultural loans 88 652
---------------------------------
Total non-accrual loans 10,950 10,899
Real estate owned through foreclosure 4,313 3,560
--------------------------------
Total non-performing assets $15,263 $14,459
==================================
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS -- The allowance for losses on loans was $15.2
million or 0.90 percent of loans receivable as of December 31, 1999, compared
to $14.1 million or 0.90 percent of total loans receivable as of
16
<PAGE>
September 30, 1999. Net loan charge-offs were $269,000 or 0.07 percent of the
average balance of loans outstanding for the three months ended December 31,
1999.
InterWest's 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 amount
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 any loans deteriorate as a result of the
factors discussed above.
The following tables summarize the activity in allowance for losses on loans
during the three months ended December 31:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance as of beginning of period $14,123 $13,224
Provision for losses on loans 550 498
Allowance acquired 778 --
Recoveries 105 123
Charge-offs (374) (318)
----------------------------
Allowance as of end of period $15,182 $13,527
==============================
</TABLE>
INTANGIBLE ASSETS -- Intangible assets arising from acquisitions represent
the excess of the purchase price over the estimated fair value of net assets
acquired. InterWest periodically evaluates these intangible assets for
impairment.
The increase in goodwill from September 30, 1999 to December 31, 1999 was due to
the acquisition of National Bank of Tukwila which resulted in $9.7 million in
goodwill recorded by InterWest Bancorp.
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
17
<PAGE>
rights for impairment based on the estimated fair value of those rights on a
periodic basis, using a valuation model that incorporates estimated future
servicing income, discount rates, prepayment speeds and default rates. Loan
servicing rights are included in intangible assets and are amortized as an
offset to service fees in proportion to and over the period of estimated net
servicing income.
Intangible assets are amortized using the straight-line and accelerated methods
over periods not exceeding twenty years.
Intangible assets consisted of the following as of December 31 1999 and
September 30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1999 SEPTEMBER 30, 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $18,784 $ 9,468
Core deposit intangible 773 817
Loan servicing intangibles 1,987 1,714
-------------------------------------
$21,544 $11,999
======= =======
</TABLE>
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
relied on generating deposits through a marketing strategy that employs a
sales staff responsible for establishing new customer relationships.
Non-interest-bearing deposits increased to $212.9 million as of December 31,
1999, from $197.7 million as of September 30, 1999. The increase was primarily
due to the acquisition of National Bank of Tukwila. Non-interest-bearing
deposits represented 13.3 percent of total deposits as of December 31, 1999, an
increase from 12.5 percent as of September 30, 1999. Interest-bearing
transaction accounts (which includes interest-bearing checking, money market and
savings accounts) totaled $571.1 million as of December 31, 1999, compared to
$548.4 million as of September 30, 1999. Interest-bearing transaction accounts
represented 35.8 percent of total deposits as of December 31, 1999, an increase
from 34.8 percent as of September 30, 1999.
Certificates of deposit totaled $814.3 million as of December 31, 1999, compared
to $832.8 million as of September 30, 1999. Certificates of deposit represented
50.9 percent of total deposits as of December 31, 1999, a decrease from 52.7
percent as of September 30, 1999.
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 December
31, 1999, 49.1 percent of InterWest's deposits were transaction accounts,
compared to 47.3 percent as of September 30, 1999. The following table sets
forth the balances of deposits by account type as of December 31, 1999, and
September 30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS DECEMBER 31, 1999 SEPTEMBER 30, 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest-bearing deposits $212,880 $197,732
Interest-bearing checking accounts 173,751 171,578
Money market accounts 300,267 273,537
Savings accounts 97,035 103,306
Certificates of deposit 814,257 832,796
------- -------
Total $1,598,190 $1,578,949
========== ==========
</TABLE>
18
<PAGE>
FHLB ADVANCES, SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER
BORROWINGS -- InterWest borrows through advances from the Federal Home Loan
Bank (FHLB) and securities sold under agreements to repurchase with third
parties. InterWest had $670.2 million outstanding in FHLB advances as of
December 31, 1999, compared to $682.2 million as of September 30, 1999.
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 need 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.
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. As of December 31, 1999, InterWest
had $282.7 million outstanding in securities sold under agreements to
repurchase, compared to $132.0 million as of September 30, 1999. This increase
reflects changing economic conditions and interest rates and the corresponding
affect on borrowing source decisions by management.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBT -- 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 InterWest Bancorp owns 100 percent of the
common equity of the Trust.
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 is using the proceeds for general corporate purposes including stock
repurchases and investment in the subsidiary banks. The capital securities
qualify as Tier I capital under the capital guidelines of the Federal Reserve
Board.
SHAREHOLDERS' EQUITY -- InterWest Bancorp is committed to managing capital for
maximum shareholder benefit and maintaining strong protection for depositors and
creditors. InterWest manages various capital levels at both the holding company
and subsidiary bank level to maintain adequate capital ratios and levels in
accordance with external regulations and capital guidelines established by the
Board of Directors of each institution.
On November 16, 1999, the Board of Directors of InterWest Bancorp authorized the
purchase of an additional 5 percent of its outstanding shares of common stock in
the open market over the next twelve months. The Board of Directors previously
approved a stock repurchase plan of 5 percent on January 20, 1999. During the
three months ended December 31, 1999, InterWest Bancorp repurchased 392,500
shares (2.4 percent of the total common shares outstanding) at a total price of
$7.6 million.
19
<PAGE>
InterWest's total shareholders' equity was $171.7 million as of December 31,
1999, an increase of $6.4 million from $165.3 million as of September 30, 1999.
The increase in shareholders' equity is due to the acquisition of National Bank
of Tukwila, net income and the issuance of common stock under stock option plans
offset by common stock repurchases, dividends to shareholders and the increase
in the net unrealized loss on securities available for sale. Book value per
share was $10.87 as of December 31, 1999, compared to $10.71 as of September 30,
1999. During the three months ended December 31, 1999, InterWest Bancorp
declared cash dividends totaling $0.14 per share.
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. National Bank
of Tukwila is a national banking association that is subject to regulation and
supervision by the Office of the Comptroller of Currency. In practice, the
primary regulator makes regular examinations of each subsidiary bank subject to
its regulatory review or participates in joint examinations with other
regulators. Areas subject to regulation by federal or state authorities include
the allowance for losses on loans, investments, loans, mergers, issuance of
securities, payment of dividends, establishment of branches and other aspects of
operations.
The enforcement powers available to banking regulators are substantial and
include, among other things, the ability to assess civil monetary penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions
against banking organizations and institution-affiliated parties, as defined. In
general, enforcement actions must be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions, or inactions, may
provide the basis for enforcement action, including misleading or untimely
reports filed with regulatory authorities. Applicable law also requires public
disclosure of final enforcement actions.
InterWest Bancorp and its banking subsidiaries are subject to risk-based capital
guidelines requiring minimum capital levels based on the credit risk of assets.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a material effect on InterWest's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
InterWest Bancorp and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. The regulations
define the relevant capital levels for the five categories. In general terms,
the capital definitions are as follows:
<TABLE>
<CAPTION>
Total Capital Tier 1 Tier 1
(to Risk (to Risk (to Average
Weighted Assets) Weighted Assets) Assets)
---------------- ---------------- ------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized Below 8% Below 4% Below 4%
Significantly undercapitalized Below 6% Below 3% Below 3%
Critically undercapitalized - - 2% or less
</TABLE>
20
<PAGE>
InterWest Bancorp is subject to risk-based capital guidelines issued by the FRB,
which establish a risk-adjusted ratio relating capital to different categories
of assets. InterWest Bancorp's Tier I capital consists of shareholders' equity
and guaranteed preferred beneficial interests in subordinated debt 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 December 31, 1999, under the FRB's capital
guidelines, InterWest Bancorp's levels of consolidated regulatory capital exceed
the FRB's well-capitalized requirements.
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and Pacific
Northwest Bank as of December 31, 1999, are presented in the following table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Amount Adequacy Purposes Action Provisions
--------------------------------------------------------------
DOLLARS IN THOUSANDS Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERWEST BANCORP:
Total capital (to risk-weighted assets) $227,787 12.39% $147,106 8.0% $183,883 10.0%
Tier I capital (to risk-weighted assets) 212,604 11.56% 73,553 4.0% 110,330 6.0%
Tier I capital (to average assets) 212,604 7.93% 107,212 4.0% 134,015 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $160,495 11.63% $110,366 8.0% $137,958 10.0%
Tier I capital (to risk-weighted assets) 150,463 10.91% 55,183 4.0% 82,745 6.0%
Tier I capital (to average assets) 150,463 6.95% 86,580 4.0% 108,225 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $47,381 12.06% $31,430 8.0% $39,287 10.0%
Tier I capital (to risk-weighted assets) 43,422 11.05% 15,715 4.0% 23,572 6.0%
Tier I capital (to average assets) 43,422 9.99% 17,392 4.0% 21,740 5.0%
</TABLE>
As of December 31, 1999, all subsidiary banks were in compliance with the
well-capitalized capital requirements. Management believes that under the
current regulations the subsidiary banks will continue to meet 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.
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 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 funds from the FHLB through pre-approved
credit lines. These credit lines have pledge requirements whereby InterWest must
maintain unencumbered collateral with a value at
21
<PAGE>
least equal to the outstanding balance. InterWest uses the securities market
as a vehicle for borrowing by utilizing its securities available for sale and
securities held to maturity as collateral. These borrowings are
collateralized by securities with 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.
The analysis of liquidity also includes a review of InterWest's consolidated
statement of cash flows for the three months ended December 31, 1999. The
consolidated statement of cash flows details InterWest's operating, investing
and financing activities during the period. The most significant item under
operating activities was net income of $5.5 million for the three months ended
December 31, 1999. Investing activities included proceeds from the maturity of
securities available for sale of $2.4 million, purchases of securities available
for sale of $14.4 million and principal repayments on securities available for
sale of $17.9 million. Investing activities also included a $134.9 million
increase in loans receivable and $2.3 million of proceeds from the sale of
loans. During the period, financing activities included $140.0 million in
borrowing proceeds, net of borrowing repayments, and $40.0 million in proceeds
received from guaranteed preferred beneficial interests in subordinated debt.
Financing activities also included a $30.2 million decrease in certificates of
deposit, a $1.5 million increase in deposits, $7.6 million in common stock
repurchases and a total of $2.2 million paid in cash dividends to shareholders.
YEAR 2000
Problems associated with software and computer systems' use of two digits to
define the year, referred to as Year 2000 issues, could affect InterWest's
business. To date InterWest is not aware of any significant Year 2000 issues
relating to internally developed programs and systems, or systems provided by
others. Although January 1, 2000 is past, it is possible that problems have gone
undetected, or that other dates in the Year 2000, such as February 29, 2000, may
further affect computer software and systems. InterWest is currently unable to
assess completely whether all internal systems or the internal systems of
vendors of critical software and systems, third-party service providers, and
customers have been affected by the Year 2000 date change. Such systems may be
affected by other dates occurring after January 1, 2000.
These problems could disrupt business and require InterWest to incur
significant, unanticipated expenses to remedy them. They could also result in
claims and litigation against InterWest, which could subject InterWest to
significant costs and could require substantial attention from management.
Similarly, InterWest business could be severely affected if vendors of critical
software and systems, third-party service providers, and customers encounter
Year 2000 issues. Based on InterWest's Year 2000 efforts, management does not
believe the Year 2000 will result in significant operational problems.
MARKET RISK
InterWest's results of operations are largely dependent upon its ability to
manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on InterWest's
financial condition and results of operations. InterWest does not currently use
derivatives to manage market and interest rate risks.
InterWest is sensitive to the potential change in interest rates and the
resulting impact on net interest income. It has been an objective of management
to reduce this sensitivity through the use of adjustable rate loans, 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 additional
strategies to minimize the impact on net income during 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; and
short-term commercial lending.
22
<PAGE>
FORWARD LOOKING STATEMENTS -- In this quarterly report on Form 10-Q,
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 quarterly report on Form 10-Q. Sentences
contained 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; future
acquisition and growth strategies; 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.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
InterWest Bancorp filed a Form 8-K dated October 29, 1999, to
report preliminary financial results for the quarter and year
ended September 30, 1999.
InterWest Bancorp filed a Form 8-K dated November 15, 1999, to
report the completion of the issuance of $40.0 million in
9.875 percent capital securities.
EXHIBITS
(27) Financial Data Schedule
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERWEST BANCORP, INC.
By: /s/ Stephen M. Walden
---------------------
Stephen M. Walden,
President and Chief Executive Officer
Dated: February 14 ,2000
----------------------------------
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of InterWest Bancorp, Inc. as of and for the three months
ended December 31, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 104,415
<INT-BEARING-DEPOSITS> 9,647
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 747,982
<INVESTMENTS-CARRYING> 68,896
<INVESTMENTS-MARKET> 66,453
<LOANS> 1,672,315
<ALLOWANCE> 15,182
<TOTAL-ASSETS> 2,782,568
<DEPOSITS> 1,598,190
<SHORT-TERM> 319,978
<LIABILITIES-OTHER> 15,399
<LONG-TERM> 677,281
0
0
<COMMON> 33,297
<OTHER-SE> 162,043
<TOTAL-LIABILITIES-AND-EQUITY> 2,782,568
<INTEREST-LOAN> 36,297
<INTEREST-INVEST> 13,360
<INTEREST-OTHER> 724
<INTEREST-TOTAL> 50,381
<INTEREST-DEPOSIT> 14,791
<INTEREST-EXPENSE> 27,283
<INTEREST-INCOME-NET> 23,098
<LOAN-LOSSES> 550
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,443
<INCOME-PRETAX> 8,395
<INCOME-PRE-EXTRAORDINARY> 8,395
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,462
<EPS-BASIC> 0.34
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 3.67
<LOANS-NON> 10,950
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,123
<CHARGE-OFFS> 374
<RECOVERIES> 105
<ALLOWANCE-CLOSE> 15,182
<ALLOWANCE-DOMESTIC> 10,310
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,872
</TABLE>
