<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
/ / 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 March 31, 2000, 15,484,616 shares of common stock were outstanding with no
par value.
<PAGE>
INTERWEST BANCORP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
- ----- -------
<S> <C> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 2000 and September 30, 1999 1
Consolidated Statements of Income
for the three and six month periods ended
March 31, 2000 and 1999 2
Consolidated Statements of Shareholders' Equity
for the six month period ended March 31, 2000
and the year ended September 30, 1999 3
Consolidated Statements of Cash Flows for
the six month periods ended
March 31, 2000 and 1999 4-5
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations 11-26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 2000 September 30, 1999
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest-bearing $ 81,004 $ 70,623
Interest-bearing deposits with banks 21,655 10,471
Federal funds sold 11,025 --
Securities available for sale, at estimated fair value 729,408 700,550
Securities held to maturity 68,040 70,692
Loans receivable, net 1,732,764 1,561,584
Loans held for sale 20,714 23,138
Interest receivable 17,340 15,962
Real estate held for sale and for development 11,303 8,260
Federal Home Loan Bank (FHLB) stock, at cost 44,979 42,536
Premises and equipment, net 53,658 54,132
Intangible assets 21,474 11,999
Other assets 16,131 9,592
------------ ------------
Total assets $ 2,829,495 $ 2,579,539
============ ============
LIABILITIES
Non-interest-bearing deposits $ 242,954 $ 197,732
Interest-bearing deposits 1,365,317 1,381,217
------------ ------------
Total deposits 1,608,271 1,578,949
FHLB advances 716,529 682,238
Securities sold under agreements to repurchase 280,717 131,972
Guaranteed preferred beneficial interests in
subordinated debt 40,000 --
Other liabilities 17,337 17,374
Other borrowings 2,742 3,700
------------ ------------
Total liabilities 2,665,596 2,414,233
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized shares 30,000,000
Issued and outstanding 15,484,616 and 15,434,690 -- --
Paid-in-capital 27,261 26,127
Retained earnings 165,751 158,828
Debt related to employee stock ownership plan (ESOP) (2,652) (3,608)
Accumulated other comprehensive loss:
Unrealized loss on securities available
for sale, net of tax (26,461) (16,041)
------------ ------------
Total shareholders' equity 163,899 165,306
------------ ------------
Total liabilities and shareholders' equity $ 2,829,495 $ 2,579,539
============ ============
</TABLE>
1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable and loans held for sale $38,602 $31,693 $74,899 $63,466
Securities available for sale 12,993 11,208 25,257 21,670
Securities held to maturity 1,075 1,393 2,171 2,652
Other 474 368 1,198 1,950
----------------------------------------------------------
53,144 44,662 103,525 89,738
INTEREST EXPENSE
Deposits 14,210 13,502 29,001 28,166
FHLB advances and other borrowings 10,122 8,290 19,675 16,180
Securities sold under agreements to repurchase 4,276 1,870 6,721 3,800
Guaranteed preferred beneficial interests in
subordinated debt 988 -- 1,482 --
----------------------------------------------------------
29,596 23,662 56,879 48,146
Net interest income before provision
for losses on loans 23,548 21,000 46,646 41,592
Provision for losses on loans 550 500 1,100 998
----------------------------------------------------------
Net interest income after provision for
losses on loans 22,998 20,500 45,546 40,594
NON-INTEREST INCOME
Gain (loss) on sale of loans (24) 3,281 47 7,351
Service fees 2,752 2,839 5,496 5,500
Investment product fees
and insurance commissions 835 725 1,469 1,315
Gain on sale of securities available for sale 6 233 6 73
Gain (loss) on sale of real estate held for sale
and for development 115 (7) 208 79
Other 802 516 1,550 1,110
----------------------------------------------------------
4,486 7,587 8,776 15,428
NON-INTEREST EXPENSE
Compensation and employee benefits 9,783 9,528 20,002 18,659
General and administrative 4,639 3,712 9,026 7,666
Occupancy 2,482 2,327 4,998 4,630
Data processing 1,214 1,203 2,472 2,287
Loss from real estate write-downs
and operations 228 33 291 334
----------------------------------------------------------
18,346 16,803 36,789 33,576
Income before income taxes 9,138 11,284 17,533 22,446
Income tax expense 3,257 3,921 6,190 7,715
----------------------------------------------------------
Net income $5,881 $7,363 $11,343 $14,731
==========================================================
Basic net income per share $0.38 $0.47 $0.72 $0.94
==========================================================
Diluted net income per share $0.37 $0.46 $0.71 $0.92
==========================================================
Dividends declared per share $0.14 $0.14 $0.28 $0.28
==========================================================
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Debt
Common Stock, Other Related
DOLLARS IN THOUSANDS, no par value Paid-in Retained Comprehensive To
EXCEPT SHARE DATA Shares Capital Earnings Loss ESOP Total
- -------------------------------------------------------------------------------------------------------------------
<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: 285,900 1,525 1,525
Stock option plans
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 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, $0.28 per share (4,420) (4,420)
Issuance of common stock:
Stock option plans 90,320 545 545
Acquisitions 677,109 14,463 14,463
ESOP loan repayment 39,997 956 956
Purchase and retirement of
common stock (757,500) (13,874) (13,874)
Comprehensive income:
Net income 11,343 11,343
Other comprehensive loss-
Unrealized loss on (10,420) (10,420)
securities available for ---------
sale, net of tax benefit of
$5,611
Total comprehensive income 923
- -------------------------------------------------------------------------------------------------------------------
MARCH 31, 2000 15,484,616 $27,261 $165,751 $(26,461) $(2,652) $163,899
===================================================================================================================
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended March 31,
DOLLARS IN THOUSANDS 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,343 $ 14,731
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,566 2,342
Amortization of intangible assets 961 845
Provision for losses on loans 1,100 998
Loss on real estate held for sale and for development 170 232
Amortization and accretion of premiums and discounts, net 309 308
Gain on sale of loans (47) (7,351)
Gain on sale of securities available for sale (6) (73)
Gain on sale of real estate held for sale and
for development (208) (79)
Loan fees deferred, net of amortization 94 1,218
FHLB stock dividends (1,410) (1,671)
Changes in operating assets and liabilities:
Interest receivable (1,124) 1,317
Other assets (818) 412
Other liabilities 273 (5,666)
----------- -----------
Net cash provided by operating activities $ 13,203 $ 7,563
INVESTING ACTIVITIES
Purchases of securities available for sale (29,405) (770,888)
Proceeds from maturing and principal
repayments on securities available for sale 38,904 380,348
Proceeds from sale of securities available for sale 5,000 261,597
Proceeds from maturing and principal
repayments on securities held to maturity 2,622 10,509
Principal repayments on securities available for sale
Proceeds from sale of loans 57,597 367,337
Net increase in loans receivable (251,921) (293,433)
Proceeds from sale of real estate held for sale
and for development 2,722 4,367
Purchases of premises and equipment (2,206) (4,735)
Purchases of FHLB stock -- (1,863)
Net (increase) decrease in federal funds sold (11,025) 5,424
Cash paid for acquisitions, net of cash received -- (300)
Cash received in acquisitions 9,735 --
Improvements capitalized to real estate held for sale
and for development (307) (794)
----------- -----------
Net cash used in investing activities $ (178,284) $ (42,431)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Six months ended March 31,
DOLLARS IN THOUSANDS 2000 1999
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits 38,243 (42)
Net decrease in certificates of deposit (56,875) (21,224)
Proceeds from FHLB advances, securities sold under
agreements to repurchase, and other borrowings 970,535 556,325
Repayment of FHLB advances, securities sold under
agreements to repurchase and other borrowings (787,502) (539,285)
Proceeds from issuance of guaranteed preferred
beneficial interests in subordinated debt 40,000 --
Dividends paid to shareholders (4,426) (4,426)
Purchase and retirement of common stock (13,874) (6,489)
Issuance of common stock from exercise of stock options 545 1,233
---------- -------------
Net cash provided by financing activities 186,646 (13,908)
---------- -------------
Net increase (decrease) in cash and cash equivalents 21,565 (48,776)
CASH AND CASH EQUIVALENTS
Beginning of period 81,094 181,422
---------- -------------
End of period $ 102,659 $ 132,646
========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 50,443 $ 49,235
Income taxes 6,372 7,214
Non-cash investing and financing activities:
Loans receivable transferred to real estate held for sale 4,884 2,028
Premises and equipment transferred to real estate held for sale 279 --
Loans receivable securitized as securities available for sale 57,018 --
ESOP loan repayment 956 --
</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 March 31, 2000, InterWest Bancorp's wholly owned
subsidiaries were InterWest Bank, Pacific Northwest Bank, National Bank of
Tukwila and InterWest Capital Trust I. All material inter-company 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.
On January 3, 2000, Kittitas Valley Bank, N.A. was merged into Pacific Northwest
Bank.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 unaudited interim consolidated
financial statements. The consolidated statements of income for the three and
six month periods ended March 31, 2000 and 1999, 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 and six months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three months Six months
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income $5,881 $7,363 $11,343 $14,731
=============================================================
DENOMINATOR:
Denominator for basic net income per share-
Weighted average shares 15,653,079 15,684,427 15,828,447 15,671,715
Effect of dilutive securities:
Stock options 161,052 343,491 191,010 415,924
-------------------------------------------------------------
Denominator for diluted net income per share-
Weighted average shares and assumed conversion
of dilutive stock options 15,814,131 16,027,918 16,019,457 16,087,639
-------------------------------------------------------------
Basic net income per share $0.38 $0.47 $0.72 $0.94
-------------------------------------------------------------
Diluted net income per share $0.37 $0.46 $0.71 $0.92
=============================================================
</TABLE>
NOTE D GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT
On November 15, 1999, $40,000,000 of 9.875 percent Capital Securities was 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 six months ended March 31, 2000, InterWest Bancorp repurchased
757,500 shares (4.7 percent of the total common shares outstanding) at a total
price of $13.9 million. Approximately, 317,000 shares remain available to
repurchase under the current plan.
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 financial center 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.
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. The decision to terminate the definitive
agreement was based primarily on regulatory issues that would have required at
least one office to be divested of loans, deposits and facilities to another
financial institution in order for the acquisition to be approved by regulatory
agencies. The restrictions proposed for the approval of the acquisition were
more onerous than originally expected and would have limited InterWest's ability
to serve the Olympic Peninsula market as planned when the definitive agreement
was initially entered into. Costs incurred in conjunction with the potential
acquisition and subsequent termination of the definitive agreement were not
material and were expensed during the quarter ended March 31, 2000.
NOTE G BUSINESS SEGMENT INFORMATION
InterWest is managed at the subsidiary bank level, not by line of business. As
of March 31, 2000, the subsidiary banks of InterWest Bancorp were InterWest
Bank, Pacific Northwest Bank and National Bank of Tukwila. 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 is comprised of 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. 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 financial institution with
commercial banking in its portfolio of products. InterWest Bank conducts its
business through 40 financial centers located in the northwestern 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 since fiscal year 1998:
Pacific Northwest Bank, First National Bank of Port Orchard, Pioneer National
Bank, Kittitas Valley Bank, N.A and National Bank of Tukwila. 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 on June 16, 1998, was merged into
Pacific Northwest Bank on January 22, 1999. Kittitas Valley Bank, N.A. which was
acquired by InterWest Bancorp on August 31, 1998, was merged into Pacific
Northwest Bank on January 3, 2000.
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 individuals and small to medium-sized
businesses. Pacific Northwest Bank conducts its business through 14 financial
centers located in the metropolitan Seattle area, the Kitsap Peninsula and
south-central parts of the state of Washington.
8
<PAGE>
National Bank of Tukwila is a national bank that was acquired by InterWest
Bancorp on October 1, 1999. National Bank of Tukwila offers commercial banking
services to its customers providing financial services to individuals and small
businesses. National Bank of Tukwila operates one financial center located in
south King County, 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 three
and six months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Consolidated
InterWest Commercial InterWest
DOLLARS IN THOUSANDS Bank Banks Other Bancorp
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 2000
Net interest income before provision
for losses on loans $17,318 $7,218 $(988) $23,548
Provision for losses on loans 446 104 -- 550
Non-interest income 3,428 1,043 15 4,486
Non-interest expense 12,176 4,902 1,268 18,346
---------------------------------------------------------
Income before income taxes 8,124 3,255 (2,241) 9,138
Income tax expense 2,845 1,110 (698) 3,257
---------------------------------------------------------
Net income $5,279 $2,145 $(1,543) $5,881
=========================================================
THREE MONTHS ENDED MARCH 31, 1999
Net interest income before provision
for losses on loans $15,345 $5,655 $ -- $21,000
Provision for losses on loans 445 55 -- 500
Non-interest income 6,500 1,095 (8) 7,587
Non-interest expense 11,713 4,526 564 16,803
---------------------------------------------------------
Income before income taxes 9,687 2,169 (572) 11,284
Income tax expense 3,381 743 (203) 3,921
---------------------------------------------------------
Net income $6,306 $1,426 $(369) $7,363
=========================================================
</TABLE>
* Other includes intercompany eliminations, InterWest Capital Trust I and
holding company amounts
9
<PAGE>
<TABLE>
<CAPTION>
Consolidated
InterWest Commercial InterWest
DOLLARS IN THOUSANDS Bank Banks Other Bancorp
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED MARCH 31, 2000
Net interest income before provision
for losses on loans $33,841 $14,286 $(1,481) $46,646
Provision for losses on loans 814 286 -- 1,100
Non-interest income 6,736 2,008 32 8,776
Non-interest expense 24,483 9,881 2,425 36,789
----------------------------------------------------------
Income before income taxes 15,280 6,127 (3,874) 17,533
Income tax expense 5,295 2,085 (1,190) 6,190
----------------------------------------------------------
Net income $9,985 $4,042 $(2,684) $11,343
==========================================================
SIX MONTHS ENDED MARCH 31, 1999
Net interest income before provision
for losses on loans $30,190 $11,402 $ -- $41,592
Provision for losses on loans 820 178 -- 998
Non-interest income 12,946 2,455 27 15,428
Non-interest expense 23,540 8,988 1,048 33,576
----------------------------------------------------------
Income before income taxes 18,776 4,691 (1,021) 22,446
Income tax expense 6,508 1,599 (392) 7,715
----------------------------------------------------------
Net income $12,268 $3,092 $(629) $14,731
==========================================================
Total assets as of March 31, 2000 $2,253,739 $562,007 $13,749 $2,829,495
Total assets as of September 30, 1999 2,123,354 471,837 (15,652) 2,579,539
</TABLE>
* Other includes intercompany eliminations, InterWest Capital Trust I and
holding company amounts
NOTE H SUBSEQUENT EVENTS
On April 17, 2000, the Board of Directors of InterWest Bancorp appointed Patrick
M. Fahey to the positions of President and Chief Executive Officer of InterWest
Bancorp. On the same date, the Board of Directors of InterWest Bank appointed
Patrick M. Fahey to the positions of Chairman, President and Chief Executive
Officer of InterWest Bank. Patrick M. Fahey will also continue as Chairman,
President and Chief Executive Officer of Pacific Northwest Bank.
Also on April 17, 2000, Barney R. Beeksma has stepped down as Chairman of the
Board of InterWest Bancorp and InterWest Bank. Stephen M. Walden, who has served
as President and Chief Executive Officer of InterWest Bancorp and InterWest
Bank, has been appointed Chairman of the Board of InterWest Bancorp, and will
continue to serve InterWest Bank as a director in a non-executive capacity.
On May 2, 2000, InterWest Bancorp announced its plans to combine its three
separate banking affiliates into a single commercial bank. Under the terms of
the Plan of Merger, Pacific Northwest Bank and National Bank of Tukwila will
merge with and into InterWest Bank. As part of this consolidation, InterWest
Bank has applied with the appropriate bank regulators to convert from a
Washington state savings bank to a Washington state commercial bank. The Board
of Directors of the consolidated bank will consist of the same members as
InterWest Bank.
10
<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 March 31,
2000, InterWest Bancorp's wholly owned subsidiaries were InterWest Bank, Pacific
Northwest Bank, 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 six commercial banking institutions
since 1996 which has added a total of $668 million in assets as measured at the
respective acquisition dates.
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 financial center 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.
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.
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
11
<PAGE>
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 financial centers 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 $5.9 million for the three months ended March 31,
2000, compared to $7.4 million for the three months ended March 31, 1999.
Diluted net income per share was $0.37 for the three months ended March 31,
2000, compared to $0.46 for the three months ended March 31, 1999. InterWest's
return on average shareholders' equity was 13.85 percent for the three months
ended March 31, 2000, compared to 16.89 percent for the three months ended March
31, 1999. InterWest's return on average assets was 0.84 percent for the three
months ending March 31, 2000, compared to 1.18 percent for the three months
ended March 31, 1999.
Net income was $11.3 million for the six months ended March 31, 2000, compared
to $14.7 million for the six months ended March 31, 1999. Diluted net income per
share was $0.71 for the six months ended March 31, 2000, compared to $0.92 for
the six months ended March 31, 1999. Return on average shareholders' equity was
13.00 percent for the six months ended March 31, 2000, compared to 16.89 percent
for the six months ended March 31, 1999. Return on average assets was 0.82
percent for the six months ended March 31, 2000, compared to 1.19 percent for
the six months ended March 31, 1999.
The decrease in net income from the three month and six month periods ended
March 31, 1999, was primarily due to a decrease in the gain on sale of loans and
an increase in non-interest expense. This decrease in net income was partially
offset by an increase in net interest income and the impact of the acquisition
of National Bank of Tukwila.
The following table summarizes net income, net income per share and key
financial ratios:
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31,
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $5,881 $7,363 $11,343 $14,731
============================================================
Basic net income per share $0.38 $0.47 $0.72 $0.94
============================================================
Diluted net income per share $0.37 $0.46 $0.71 $0.92
============================================================
Return on average shareholders' equity 13.85% 16.89% 13.00% 16.89%
Return on average assets 0.84% 1.18% 0.82% 1.19%
Net interest margin 3.62% 3.60% 3.64% 3.59%
Efficiency ratio 65.44% 58.78% 66.38% 58.88%
</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.
12
<PAGE>
Net interest income before provision for losses on loans increased to $23.5
million for the three months ended March 31, 2000, compared to $21.0 million for
the three months ended March 31, 1999. Net interest income before provision for
losses on loans increased to $46.6 million for the six months ended March 31,
2000, compared to $41.6 million for the six months ended March 31, 1999. The
increase in net interest income is due to an increase in interest-earning
assets, an increase in net interest margin and the impact of the acquisition of
National Bank of Tukwila.
Interest income was $53.1 million for the three months ended March 31, 2000,
compared to $44.7 million for the three months ended March 31, 1999. Interest
income was $103.5 million for the six months ended March 31, 2000, compared to
$89.7 million for the six months ended March 31, 1999. 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 8.16 percent for the three months ended
March 31, 2000, compared to 7.66 percent for the three months ended March 31,
1999. The yield on interest earning assets increased to 8.09 percent for the six
months ended March 31, 2000, compared to 7.74 percent for the six months ended
March 31, 1999. 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 $29.6 million for the three months ended March 31, 2000,
compared to $23.7 million for the three months ended March 31, 1999. Interest
expense was $56.9 million for the six months ended March 31, 2000, compared to
$48.1 million for the six months ended March 31, 1999. 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 4.54 percent for the three months
ended March 31, 2000, compared to 4.11 percent for the three months ended March
31, 1999. The cost of funds was 4.45 percent for the six months ended March 31,
2000, compared to 4.22 percent for the six months ended March 31, 1999. The
increase in the cost of funds was primarily 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 with interest payable at 9.875 percent
during the on November 15, 1999, and an increase in interest rates on other
borrowing sources.
InterWest's net interest margin, which is net interest income divided by average
interest-earning assets, was 3.62 percent for the three months ended March 31,
2000, compared to 3.60 percent for the three months ended March 31, 1999. Net
interest margin was 3.64 percent for the six months ended March 31, 2000,
compared to 3.59 percent for the six months ended March 31, 1999. 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 March 31, 2000, 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.
13
<PAGE>
AVERAGE RATES AND BALANCES | The following table indicates the average balance
and average interest rates earned or paid, interest rate spread and net interest
margin for the three months ended March 31:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable and loans
held for sale $1,735,321 8.90% $1,442,420 8.79%
Securities available for sale,
securities held to maturity and
other interest-earning assets 867,964 6.70% 890,839 5.82%
-----------------------------------------------------------------
Total interest-earnings assets 2,603,285 8.16% 2,333,259 7.66%
-----------------------------------------------------------------
Deposits 1,570,901 3.62% 1,534,843 3.52%
FHLB advances, securities
sold under agreements
to repurchase and 1,035,513 5.94% 765,669 5.31%
other borrowings
-----------------------------------------------------------------
Total interest-bearing liabilities 2,606,414 4.54% 2,300,512 4.11%
-----------------------------------------------------------------
Net interest spread $ (3,129) 3.62% $ 32,747 3.55%
=================================================================
Net interest margin 3.62% 3.60%
===== =====
</TABLE>
The following table indicates the average balance and average interest rates
earned or paid, interest spread and net interest margin for the six months ended
March 31:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------
Average Average
DOLLARS IN THOUSANDS Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable and loans
held for sale $1,686,125 8.88% $1,431,880 8.86%
Securities available for sale,
securities held to maturity and
other interest-earning assets 873,872 6.55% 885,474 5.93%
-----------------------------------------------------------------
Total interest-earnings assets 2,559,997 8.09% 2,317,354 7.74%
-----------------------------------------------------------------
Deposits 1,604,751 3.61% 1,543,378 3.65%
FHLB advances, securities
sold under agreements
to repurchase and 954,110 5.84% 737,940 5.42%
other borrowings
-----------------------------------------------------------------
Total interest-bearing liabilities 2,558,861 4.45% 2,281,318 4.22%
-----------------------------------------------------------------
Net interest spread $ 1,136 3.64% $ 36,036 3.52%
=================================================================
Net interest margin 3.64% 3.59%
===== =====
</TABLE>
14
<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 March 31, 2000 vs 1999 Six months March 31, 2000 vs 1999
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 $ 398 $6,511 $ 6,909 $ 140 $11,293 $11,433
Securities available for
sale, securities held
to maturity and other
interest-earning assets 1,913 (340) 1,573 2,702 (348) 2,354
---------------------------------------------------------------------------------------
Total net change in income
on interest-earning assets 2,311 6,171 8,482 2,842 10,945 13,787
---------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits 387 321 708 (275) 1,110 835
FHLB advances, securities
sold under agreement to
repurchase and other
borrowings 1,325 3,901 5,226 1,679 6,219 7,898
---------------------------------------------------------------------------------------
Total net change in expense
on interest-bearing
liabilities 1,712 4,222 5,934 1,404 7,329 8,733
---------------------------------------------------------------------------------------
Net change in net
interest income $ 599 $1,949 $2,548 $1,438 $3,616 $5,054
=======================================================================================
</TABLE>
PROVISION FOR LOSSES ON LOANS | The provision for losses on loans was
$550,000 for the three months ended March 31, 2000, compared to $500,000 for
the three months ended March 31, 1999. The provision for losses on loans was
$1.1 million for the six months ended March 31, 2000, compared to $1.0
million for the six months ended March 31, 1999.
NON-INTEREST INCOME | Non-interest income was $4.5 million for the three
months ended March 31, 2000, compared to $7.6 million for the three months
ended March 31, 1999. Non-interest income was $8.8 million for the six months
ended March 31, 2000, compared to $15.4 million for the six months ended
March 31, 1999. The decrease in non-interest income from the three and six
months ended March 31, 1999, 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 other non-interest income and revenues from investment
product fees and insurance commissions.
During the first half of fiscal year 1999, the 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
15
<PAGE>
declined as compared to 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.
NON-INTEREST EXPENSE | Non-interest expense was $18.3 million for the three
months ended March 31, 2000, compared to $16.8 million for the three months
ended March 31, 1999. Non-interest expense was $36.8 million for the six
months ended March 31, 2000, compared to $33.6 million for the six months
ended March 31, 1999. The increase in non-interest expense for the three and
six months ended March 31, 2000, compared to the three and six months ended
March 31, 1999, was primarily due to the acquisition of National Bank of
Tukwila, severance contracts and expenses incurred for system conversions.
The total of all of these expenses was $0.8 million for the three months
ended March 31, 2000 and $1.8 million for the six months ended March 31,
2000. Excluding these expenses, non-interest expense has increased by four
percent compared to the three and six months ended March 31, 1999.
The efficiency ratio was 65.4 percent for the three months ended March 31,
2000, compared to 58.8 percent for the three months ended March 31, 1999. The
efficiency ratio was 66.4 percent for the six months ended March 31, 2000,
compared to 58.9 percent for the six months ended March 31, 1999. 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 $9.8 million for the three months
ended March 31, 2000, compared to $9.5 million for the three months ended
March 31, 1999. This increase is primarily due to the acquisition of National
Bank of Tukwila. Compensation and employee benefits were $20.2 million for
the six months ended March 31, 2000, compared to $18.7 million for the six
months ended March 31, 1999. The increase from the prior year 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 three 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 was intentionally
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 $3.3 million for the three months
ended March 31, 2000, compared to $3.9 million for the three months ended
March 31, 1999. Income tax expense was $6.2 million for the six months ended
March 31, 2000, compared to $7.7 million for the six months ended March 31,
1999. The effective tax rates was 35.3 percent for the six months ended March
31, 2000, compared to 34.4 percent for the six months ended March 31, 1999.
The higher effective tax rate for 2000 was primarily due to increased
goodwill amortization that is not deductible for income tax purposes.
REVIEW OF FINANCIAL CONDITION
InterWest's total consolidated assets were $2.83 billion as of March 31,
2000, compared to $2.58 billion as of September 30, 1999. This increase is
primarily due to increases in loans receivable and the acquisition of
National Bank of Tukwila.
16
<PAGE>
SECURITIES | As of March 31, 2000, InterWest had $729.4 million of securities
available for sale, compared to $700.6 million as of September 30, 1999.
Securities held to maturity have decreased to $68.0 million as of March 31,
2000, compared to $70.7 million as of September 30, 1999, as a result of
maturities and principal repayments on mortgage-backed securities. As of
March 31, 2000, 91.5 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.
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 $1.73
billion as of March 31, 2000, 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 six months ended March
31, 2000; however, $19.3 million of multi-family and $32.2 million of
commercial real estate mortgage loans were sold and $57.0 million of
single-family mortgages were securitized into securities available for sale
during the period.
The commercial bank acquisitions increased InterWest's ability to originate
commercial loans. These acquisitions, as well as the development of
commercial lending 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 $66.8 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 six months ended March 31, 2000. As of March 31, 2000,
single-family residential mortgage loans totaled $514.9 million, or 28.9
percent of 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 $340.6 million as of March 31, 2000, an
increase of $51.4 million from September 30, 1999. Commercial real estate
mortgage loans were $440.9 million as of March 31, 2000, an increase of $38.3
million from September 30, 1999. This increase would have been more
significant; however, $32.2 million of commercial real estate mortgage loans
were sold during the six months ended March 31, 2000. Commercial and
commercial real estate loans outstanding represented 43.9 percent of total
gross loans as of March 31, 2000, 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 $254.2 million as of March
31, 2000, an increase of $8.5 million from $245.7 million as of September 30,
1999.
17
<PAGE>
Loans held for sale were $20.7 million as of March 31, 2000 compared to $23.1
million as of September 30, 1999. Loans held for sale are generally 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
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 March 31, 2000 September 30, 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgage loans
Single-family residential $514,895 $448,068
Multi-family residential 62,666 74,223
Commercial 440,881 402,580
Real estate construction 254,240 245,690
Consumer loans 111,015 97,153
Commercial loans 340,617 289,185
Agricultural loans 54,495 51,961
----------------------------
1,778,809 1,608,860
Less:
Loans held for sale 20,714 23,138
Allowance for losses on loans 15,369 14,123
Deferred loan fees and discounts 9,962 10,015
---------- ----------
$1,732,764 $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 $12.0 million as of
March 31, 2000, compared to $10.9 million as of September 30, 1999. Real
estate owned through foreclosure was $6.9 million as of March 31, 2000,
compared to $3.6 million as of September 30, 1999. Total non-performing
assets, including non-accrual loans and real estate owned through
foreclosure, totaled $18.9 million or 0.67 percent of total assets as of
March 31, 2000, compared to $14.5 million or 0.56 percent of total assets as
of September 30, 1999. The increase in non-accrual loans is primarily due to
an increase in non-performing agricultural loans and several land development
loans offset by a decrease in non-performing single family residential
mortgage loans. The increase in real estate owned through foreclosure is
primarily due to the foreclosure on one commercial real estate property
during the six months ended March 31, 2000.
18
<PAGE>
The following table summarizes non-performing assets as of March 31, 2000, and
September 30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 2000 September 30, 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
NON-ACCRUAL LOANS
Real estate mortgage loans
Single-family residential $3,292 $4,125
Commercial 2,329 792
Real estate construction 1,471 880
Consumer loans 304 507
Commercial loans 3,518 3,943
Agricultural loans 1,091 652
----------------------------
Total non-accrual loans 12,005 10,899
Real estate owned through foreclosure 6,882 3,560
----------------------------
Total non-performing assets $18,887 $14,459
============================
</TABLE>
ALLOWANCE FOR LOSSES ON LOANS | The allowance for losses on loans was $15.4
million or 0.88 percent of loans receivable as of March 31, 2000, compared to
$14.1 million or 0.90 percent of total loans receivable as of September 30,
1999. Net loan charge-offs were $632,000 or 0.07 percent of the average
balance of loans outstanding for the six months ended March 31, 2000.
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.
19
<PAGE>
The following tables summarize the activity in allowance for losses on loans
during the three and six months ended March 31:
<TABLE>
<CAPTION>
Three months Six months
DOLLARS IN THOUSANDS 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance as of beginning of period $15,182 $13,527 $14,123 $13,224
Provision for losses on loans 550 500 1,100 998
Allowance acquired -- -- 778 --
Recoveries 83 140 188 263
Charge-offs (446) (661) (820) (979)
----------------------------------------------------------
Allowance as of end of period $15,369 $13,506 $15,369 $13,506
==========================================================
</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 intangible assets from September 30, 1999 to March 31, 2000
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 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 March 31 2000 and September
30, 1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 2000 September 30, 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $18,680 $ 9,468
Core deposit intangible 729 817
Loan servicing intangibles 2,065 1,714
------- -------
$21,474 $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.
20
<PAGE>
Non-interest-bearing deposits increased to $243.0 million as of March 31, 1999,
from $197.7 million as of September 30, 1999. The increase was due to the
acquisition of National Bank of Tukwila, increases in the number of accounts and
the timing of customer deposits and withdrawals. Non-interest-bearing deposits
represented 15.1 percent of total deposits as of March 31, 2000, 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 $577.7 million as of March 31, 2000, compared to $548.4
million as of September 30, 1999. Interest-bearing transaction accounts
represented 35.9 percent of total deposits as of March 31, 2000, an increase
from 34.8 percent as of September 30, 1999.
Certificates of deposit totaled $787.6 million as of March 31, 2000, compared to
$832.8 million as of September 30, 1999. Certificates of deposit represented
49.0 percent of total deposits as of March 31, 2000, 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 March 31,
2000, 51.0 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 March 31, 2000, and September 30,
1999:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS March 31, 2000 September 30, 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest-bearing deposits $ 242,954 $ 197,732
Interest-bearing checking accounts 172,488 171,578
Money market accounts 302,357 273,537
Savings accounts 102,882 103,306
Certificates of deposit 787,590 832,796
---------- ----------
Total $1,608,271 $1,578,949
========== ==========
</TABLE>
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.
Overall, borrowings have increased to $1.0 billion as of March 31, 2000,
compared to $817.9 million as of September 30, 1999. The increase in borrowings
has been used to fund loan growth. The increase in borrowings increases the cost
of funds and decreases net interest margin. It is management's intention to
increase deposits and reduce borrowings in the future.
InterWest had $716.5 million outstanding in FHLB advances as of March 31, 2000,
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 March 31, 2000, InterWest had
$280.7 million outstanding in securities sold under agreements to repurchase,
compared to $132.0 million as of September 30, 1999. This
21
<PAGE>
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 six months ended March 31, 2000, InterWest Bancorp repurchased
757,500 shares (4.7 percent of the total common shares outstanding) at a
total price of $13.9 million.
InterWest's total shareholders' equity was $163.9 million as of March 31,
2000, a decrease of $1.4 million from $165.3 million as of September 30,
1999. The decrease in shareholders' equity is due to common stock
repurchases, dividends to shareholders and the increase in the net unrealized
loss on securities available for sale, offset by capital issued to acquire
National Bank of Tukwila, net income and the issuance of common stock under
stock option plans. Book value per share was $10.58 as of March 31, 2000,
compared to $10.71 as of September 30, 1999. During the six months ended
March 31, 2000, InterWest Bancorp declared cash dividends totaling $0.28 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
22
<PAGE>
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>
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 March 31, 2000, under the FRB's capital
guidelines, InterWest Bancorp's levels of consolidated regulatory capital exceed
the FRB's well-capitalized requirements.
23
<PAGE>
The capital amounts and ratios for InterWest Bancorp, InterWest Bank and Pacific
Northwest Bank as of March 31, 2000, 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) $226,113 11.79% $153,408 8.0% $191,760 10.0%
Tier I capital (to risk-weighted assets) 210,744 10.99% 76,704 4.0% 115,056 6.0%
Tier I capital (to average assets) 210,744 7.58% 111,229 4.0% 139,036 5.0%
INTERWEST BANK:
Total capital (to risk-weighted assets) $164,496 11.65% $113,270 8.0% $141,588 10.0%
Tier I capital (to risk-weighted assets) 154,769 10.93% 56,635 4.0% 84,953 6.0%
Tier I capital (to average assets) 154,769 6.84% 90,443 4.0% 113,053 5.0%
PACIFIC NORTHWEST BANK:
Total capital (to risk-weighted assets) $54,668 11.36% $38,495 8.0% $48,119 10.0%
Tier I capital (to risk-weighted assets) 50,288 10.45% 19,247 4.0% 28,871 6.0%
Tier I capital (to average assets) 50,288 10.09% 19,923 4.0% 24,904 5.0%
</TABLE>
As of March 31, 2000, 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 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 six months ended March 31, 2000. The
consolidated statement of cash flows details InterWest's operating,
24
<PAGE>
investing and financing activities during the period. The most significant
item under operating activities was net income of $11.3 million for the six
months ended March 31, 2000. Investing activities included proceeds from the
maturing and principal repayments on securities available for sale of $38.9
million, purchases of securities available for sale of $29.4 million and
proceeds from the sale of securities available for sale of $5.0 million.
Investing activities also included a $251.9 million increase in loans
receivable and $57.6 million of proceeds from the sale of loans. During the
period, financing activities included $183.0 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 $56.9 million decrease in certificates of deposit,
a $38.2 million increase in deposits, $13.9 million in common stock
repurchases and a total of $4.4 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 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.
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.
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
25
<PAGE>
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.
26
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of InterWest Bancorp
("Meeting") was held on January 19, 2000. The results of the
vote on the matters presented at the Meeting are as follows:
1. The following individuals were elected as directors:
<TABLE>
<CAPTION>
Term to Expire Vote For Vote Withheld
-------------- ---------- -------------
<S> <C> <C> <C>
Barney R. Beeksma 2003 12,714,844 158,704
Larry Carlson 2001 12,820,574 52,974
C. Stephen Lewis 2003 12,810,032 63,516
Russel E. Olson 2003 12,808,770 64,778
</TABLE>
The terms of Directors Gary M. Bolyard, Patrick M. Fahey,
Clark H. Mock, Stephen M. Walden, Michael T. Crawford, Jean
Gorton and Vern Sims continued after the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) REPORTS ON FORM 8-K
InterWest Bancorp filed a Form 8-K dated January 18, 2000, to
report financial results for the quarter ended December 31,
1999.
InterWest Bancorp filed a Form 8-K dated February 9, 2000, to
report the termination of the agreement to acquire Liberty Bay
Financial Corporation.
EXHIBITS
<TABLE>
<S> <C>
(10.1) Form of Severance Pay Agreement entered into between
InterWest Bank and its Executive Officers
(10.2) Form of Change in Control Agreement entered into
between InterWest Bank and its Executive Officers
(27) Financial Data Schedule
</TABLE>
27
<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/ H. GLENN MOUW
-----------------------------
H. Glenn Mouw,
Executive Vice President
(Principal Financial Officer)
Dated: MAY 11 , 2000
--------------------------------------
28
<PAGE>
EXHIBIT 10.1 FORM OF SEVERANCE PAY AGREEMENT ENTERED INTO BETWEEN INTERWEST
BANK AND ITS EXECUTIVE OFFICERS
SEVERANCE PAY AGREEMENT
1. EMPLOYER: InterWest Bank (InterWest)
2. EMPLOYEE: < < NAME > > of InterWest Bank.
3. DUTIES: InterWest hereby agrees to continue the employment of Employee
as an Officer of InterWest with such duties and responsibilities as may
be determined from time to time by the Board of Directors and by Senior
Management of InterWest, subject to the terms hereof.
4. SUCCESSORS: This Agreement shall be binding upon InterWest and its
Successors and Assigns.
5. SEVERANCE PAY: Except as provided in Paragraph 8 below, if InterWest or
successor terminates Employee, Employee shall be entitled to receive
Severance Pay as follows:
5.1 Employee shall be entitled to a minimum of an amount equal to
six (6) months Total Compensation, and
5.2 After four (4) years employment, in addition to the six (6)
months total compensation Employee shall be entitled to an
amount equal to an additional one (1) month Total Compensation
for each additional twelve (12) months of employment by
Employee with InterWest and/or its successors, provided
however,
5.3. The total Severance Pay compensation shall not exceed an
amount equal to twelve (12) months Total Compensation.
6. CHANGE OF CONTROL.
6.1. In the event of a Change of Control, during the term of
Employment, Employee will be entitled to Severance Pay in an
amount equal to twelve (12) months Total Compensation,
provided however, Employee shall not be eligible for Severance
Pay if Employee is offered substantially equivalent employment
by a successor entity that includes the following:
6.1.1 Comparable salary and benefits, and
6.1.2. A comparable position of authority and
responsibility, and
6.1.3. Does not require Employee to relocate beyond a
reasonable commuting distance, which distance may,
but need not be, established by InterWest as a matter
of policy, and
6.1.4. The Employee is not permanently terminated by such
successor entity
<PAGE>
within one (1) year following such Change of Control.
6.2 For the purposes of this Agreement, the term "Change of
Control" shall mean the acquisition of InterWest, or a
substantial part thereof, by another company; the merger of
InterWest into another company with the other company
surviving; the sale of substantially all of the assets of
InterWest to another company; or a hostile acquisition of
substantially all of the stock of InterWest. For purposes of
Change of Control, the term InterWest includes InterWest Bank
and its holding company, InterWest Bancorp.
7. OTHER BENEFITS: The Severance Pay Compensation provided herein shall be
the exclusive provision regarding Severance Pay, but shall be in
addition to other benefits to which Employee may otherwise be entitled.
8. TERMINATION: Employee shall not be entitled to Severance Pay if the
Employment is terminated for any of the following reasons:
8.1. Employee may terminate employment upon thirty (30) days'
notice.
8.2. Employee shall not be entitled to any Severance Pay if
Employee's employment is terminated during the first ninety
(90) days of employment with InterWest.
8.3. InterWest may terminate Employee immediately without advance
notice for gross misconduct, which includes, but is not
limited to, drunkenness on the job; the use, sale or
possession of illegal drugs on the property of the Bank or its
subsidiaries; dishonesty; insubordination or willful failure
to discharge assigned duties; harassment of fellow employees
or customers of the Bank; violation of the conflict of
interest policy of the Bank or its subsidiaries; fighting or
assault; theft; possession of unauthorized weapons or firearms
(loaded or unloaded) on the premises of the Bank or its
subsidiaries; or conviction of a criminal offense.
8.4. The employment relationship shall terminate upon Employee's
death.
8.5. If Employee becomes totally disabled as defined in the Group
Insurance Policy providing Disability Income Benefits to
Employee.
8.6. If the Employee becomes so disabled that Employee is unable to
perform the material and substantial duties of the Employment
position Employee then holds, even with reasonable
accommodation by Employer.
<PAGE>
9. DEFINITIONS.
For the purposes of this Agreement, the term "Total Compensation" shall
mean the monthly average pay, including bonuses when applicable, paid
to Employee during the preceding twelve (12) months, or during the
preceding term of employment if the Employee has been employed for less
than twelve (12) months. Compensation shall include the Employee's base
salary, performance bonuses and incentive bonuses.
EMPLOYEE: INTERWEST BANK
By:
- ----------------------------------- -----------------------------
< < Name > > B. R. Beeksma, Chairman
< < Title > >
Date:
------------------------------ -----------------------------
Stephen M. Walden, President
-----------------------------
Margaret Mordhorst, Secretary
<PAGE>
EXHIBIT 10.2 FORM OF CHANGE IN CONTROL AGREEMENT ENTERED INTO BETWEEN
INTERWEST BANK AND ITS EXECUTIVE OFFICERS
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT made this day between INTERWEST BANK, a Washington corporation,
hereinafter referred to as "Employer" and < < Name > >, a senior officer of
Employer, hereinafter referred to as "Employee."
1. INTERWEST. Employer is a wholly owned subsidiary of InterWest Bancorp,
Inc., a Washington Corporation (hereinafter "InterWest").
2. PURPOSE. The purpose of this Agreement is to provide certain assurances
to Employee that in the event of a Change in Control or a substantial
change in ownership of InterWest stock that Employee shall either have
continued employment or, in the event of termination, severance pay.
EMPLOYER IS WILLING TO MAKE SUCH ASSURANCES TO EMPLOYEE TO ENCOURAGE EMPLOYEE TO
MAINTAIN CONTINUED EMPLOYMENT WITH EMPLOYER.
3. DEFINITION. Change in Control as provided herein shall include the
following:
3.1. Merger of InterWest into another financial institution or
entity, with such other entity being the surviving entity.
3.2. Acquisition of InterWest or Employer by another institution or
entity.
3.3. Sale of all or substantially all of the assets of InterWest or
Employer.
3.4. The acquisition of 25 percent or more of the beneficial
ownership of stock of InterWest by one or more related
entities or persons, excepting an InterWest or Employer
approved ESOP.
3.5. If during any period of two (2) years, individuals who at the
beginning of such period constitute the Board of Directors of
InterWest (the "Continuing Directors) cease for any reason to
constitute at least a majority of the Board of Directors of
InterWest unless the election of each Director who is not a
Continuing Director was approved by a vote of at least
two-thirds (2/3) of the Continuing Directors in office at the
time of the election of each such new Director.
Any one of the foregoing items may constitute a Change in Control
activating the employment contract and severance pay provision set
forth below. To prevent an unanticipated activation of the employment
contact and/or severance pay provisions set forth below, either
Employer or Employee must give written notice to the other of the
Change in Control thereby activating the employment contract and
severance pay provisions set forth below.
4. Upon such a "Change in Control" Employee shall have a four-year
employment contract with the successor entity as follows:
4.1. Employee shall retain a position of the same or similar
responsibility and authority and in the same geographical
location as prior thereto.
<PAGE>
4.2. The total annual compensation and other employee benefits
payable to Employee will equal or exceed the total annual
compensation and employee benefits available to Employee
during the prior twelve (12) months.
4.3. The successor entity may terminate employment prior to the
expiration of said four years and upon so doing shall be
obligated to pay to Employee an amount equal to the total
annual compensation payable for the prior two (2) calendar
years (such annual compensation shall include the Employee's'
base salary plus the incentive bonuses and/or performance
bonuses paid to Employee for each of such calendar years).
4.3.1. The payment provided herein shall be in addition to any
payment Employee is entitled to receive pursuant to a separate
"Severance Pay Agreement" entered into between Employee and
InterWest Bank, if severance pay is payable pursuant to such
Agreement.
4.3.2. For purposes of the Severance Pay Agreement (Paragraph 7
thereof) the payment provided herein shall be considered an
other benefit to which Employee may otherwise be entitled.
4.4. Notwithstanding the foregoing agreement, the successor entity
shall have the right to terminate Employee for gross
misconduct or criminal misconduct affecting the Employee's
ability to perform his/her normal duties, which termination
shall not give rise to an obligation to pay severance pay as
provided herein.
4.5. EMPLOYEE TERMINATION WINDOW. During the period commencing with
the 25th month of the term through the 30th month of the term,
Employee may terminate this Agreement by delivering written
notice to Employer or its successor entity. If Employee does
so regardless of whether Employee had good reason to terminate
the Agreement, Employer will pay Employee a single cash
payment in an amount equal to the total annual salary for the
prior calendar year plus year-end bonus, if one was paid.
DATED this day of March 2000.
------------------
INTERWEST BANK
(Employer)
By:
---------------------------------- -------------------------
< < Name > >
(Employee)
- -------------------------------------
- -------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF INTERWEST BANCORP, INC. AS OF AND FOR THE SIX MONTHS
ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 81,004
<INT-BEARING-DEPOSITS> 21,655
<FED-FUNDS-SOLD> 11,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 729,408
<INVESTMENTS-CARRYING> 68,040
<INVESTMENTS-MARKET> 65,554
<LOANS> 1,732,764
<ALLOWANCE> 15,369
<TOTAL-ASSETS> 2,829,495
<DEPOSITS> 1,608,271
<SHORT-TERM> 513,138
<LIABILITIES-OTHER> 17,337
<LONG-TERM> 526,850
0
0
<COMMON> 27,261
<OTHER-SE> 136,638
<TOTAL-LIABILITIES-AND-EQUITY> 2,829,495
<INTEREST-LOAN> 74,899
<INTEREST-INVEST> 27,428
<INTEREST-OTHER> 1,198
<INTEREST-TOTAL> 103,525
<INTEREST-DEPOSIT> 29,001
<INTEREST-EXPENSE> 56,879
<INTEREST-INCOME-NET> 46,646
<LOAN-LOSSES> 1,100
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 36,789
<INCOME-PRETAX> 17,533
<INCOME-PRE-EXTRAORDINARY> 11,343
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,343
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 3.64
<LOANS-NON> 12,005
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,123
<CHARGE-OFFS> 820
<RECOVERIES> 188
<ALLOWANCE-CLOSE> 15,369
<ALLOWANCE-DOMESTIC> 11,010
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,359
</TABLE>
