Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26632
InterWest Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1691216
- ---------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
- -------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360)679-4181
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.20 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $321,144,597 based upon the closing price of the Registrant's
common stock as quoted on the Nasdaq National Market on December 2, 1997 of
$39.875.
As of December 2, 1997, there were issued and outstanding 8,053,783
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Financial Highlights, Management Discussion and Analysis and
Consolidated Financial Statements included in the Annual Report to Stockholders
for the year ended September 30, 1997. (Part II).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders ("Proxy
Statement"). (Part III).
2
PART I
ITEM 1. BUSINESS
GENERAL
InterWest Bancorp, Inc. ("Bancorp") was incorporated in the State of
Washington in 1994 for the purpose of becoming a bank holding company for
InterWest Bank (the "Bank"). On January 17, 1995, the stockholders of the Bank
approved a plan to reorganize the Bank into the holding company form of
ownership. The reorganization was completed on July 28, 1995, on which date the
Bank became the wholly-owned subsidiary of Bancorp, and the stockholders of the
Bank became stockholders of Bancorp. Prior to completion of the reorganization,
Bancorp had no material assets or liabilities and engaged in no business
activities. Subsequent to the acquisition of the Bank, Bancorp has engaged in no
significant activity other than holding the stock of the Bank.
InterWest Bank was organized in 1956 as Island Savings and Loan
Association by two local business people who recognized the need to create a new
business to help families obtain homes in the growing community of Oak Harbor on
Whidbey Island. On July 5, 1957 Island Savings began operations as the first
state-chartered stock savings and loan association in the State of Washington.
By 1984, the name Island Savings and Loan Association had been outgrown both as
a geographic description and as an indicator of the scope of the company's
products and services. On May 30, 1984, the name InterWest Savings Bank was
ratified unanimously by stockholders and board members. In March of 1987, the
Bank acquired the assets of Home Savings and Loan Association. The purchase
added $150 million in assets and five branch offices to the Bank's holdings.
Effective August 31, 1996, Bancorp consummated the acquisition of
Central Bancorporation ("Central"), Wenatchee, Washington, and its wholly-owned
subsidiary, Central Washington Bank. The acquisition was accounted for by
Bancorp as a pooling of interests. The acquisition of Central added 10 new
branches in central Washington and provided Bancorp with an entrance into the
business of commercial banking. This acquisition represented the initial steps
of transforming Bancorp from a traditional thrift to a financial institution
with business banking in its portfolio of products. In November 1996, the Bank
changed its name from InterWest Savings Bank to InterWest Bank to reflect the
expansion of its business.
Continuing its commitment to commercial banking, on September 18, 1997
Bancorp entered into a definitive agreement to acquire Puget Sound Bancorp of
Port Orchard, Washington. Puget Sound Bancorp is the holding company for First
National Bank of Port Orchard which operates three commercial banking branch
offices in western Washington. Puget Sound Bancorp had approximately $52.8
million of total assets as of September 30, 1997. It is anticipated that the
merger will be completed during the first quarter of calendar year 1998,
following the approval of the applicable regulatory authorities and the
shareholders of Puget Sound Bancorp. It is planned that the merger will be
accounted for as a pooling of interests by Bancorp under generally accepted
accounting principles.
A source of future growth will be through acquisitions. Bancorp believes
it is in a unique position to acquire and effectively operate other financial
institutions because of its management experience and its ability to provide
centralized administrative services. Bancorp believes that many stockholders of
other financial institutions are seeking to sell their institutions for a
variety of reasons, including lack of stockholder liquidity, management
succession problems, the difficulty of compliance with current banking
regulations and increasing competition. Bancorp actively reviews proposals for
various acquisition opportunities. Bancorp has established a due diligence
review process to evaluate potential acquisitions and has
2
3
established parameters for potential acquisitions relating to market factors,
financial performance and certain nonfinancial factors. Successful completion of
acquisitions by Bancorp depends on several factors such as the availability of
suitable acquisition candidates, necessary regulatory and stockholder approval
and compliance with applicable capital requirements.
Today the Bank conducts its business through 39 full-service branch
offices in 13 counties in western and central Washington State. These offices
are located in towns, small cities, suburbs and metropolitan markets. The towns
and small cities traditionally served by the Bank are generally outside
Washington's most densely populated cities, such as Seattle and Spokane.
Management believes it is easier to develop long-term customer relationships in
outlying areas and that such relationships lead to increased repeat business and
greater customer loyalty. The Bank has several initiatives designed to maintain
high levels of customer service, including customer service monitoring and
follow-up procedures. Management believes the Bank has developed such long-term
relationships and that these relationships have resulted in increased
profitability. Results from recent penetration into suburbs and markets
indicates an acceptance of the Bank's product lines and delivery system in what
has not been the Bank's "traditional" small city and town market.
Investments are available through InterWest Financial Services, Inc., a
wholly-owned subsidiary of the Bank and insurance is available through InterWest
Insurance Agency, Inc., a partially-owned subsidiary of the Bank. Brokered loan
products are available through Cornerstone Northwest Mortgage, Inc., a
wholly-owned subsidiary of the Bank.
NEW BRANCH OPENINGS. During the year ended September 30, 1997 the
Bank opened new branches in Lake Stevens and Kirkland, Washington.
KEY OPERATING RATIOS FOR INTERWEST BANCORP, INC. The table below sets
forth certain performance ratios for the periods indicated.
Year Ended September 30,
--------------------------------------------------
1997 1996(2) 1995 1994 1993
---- ------- ---- ---- ----
KEY OPERATING RATIOS:
Return on average assets ............. 1.12% 0.82% 1.08% 1.19% 1.31%
Return on average stockholders' equity 16.98 11.48 14.37 15.26 16.32
Average stockholders' equity to
average assets ...................... 6.60 7.12 7.52 7.77 8.03
Net interest margin .................. 3.35 3.53 3.37 3.88 4.22
Ratio of non-performing assets
to total assets(1) .................. 0.58 0.54 0.45 0.61 0.82
Dividend payout ratio ................ 23.40 32.25 18.60 18.54 15.73
(1) Non-performing assets consist of non-performing loans (including nonaccrual
loans and certain other delinquent loans at the discretion of management) and
real estate held for sale.
(2) Includes impact of nonrecurring SAIF assessment of $5.5 million and special
charges primarily incurred in connection with the Central merger of $3.1
million.
3
4
NEW ACCOUNTING STANDARD
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share".
This statement provides standards for computing net income per share and makes
them comparable to international earnings per share standards. It requires dual
presentation of basic and diluted net income per share on the face of the income
statement. Basic net income per share will exclude dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net income per share
will reflect the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the net income of
the entity. This statement is effective for financial statements issued for
periods ending after December 15, 1997; earlier application is not permitted.
Following the requirements of SFAS No. 128, Bancorp's basic net income per share
was $2.53, $1.62 and $1.83 for the years ended September 30, 1997, 1996 and
1995, respectively. Diluted net income per share was $2.48, $1.58 and $1.80 for
the years ended September 30, 1997, 1996 and 1995, respectively. See Note 2 of
the Consolidated Financial Statements for a discussion of other new accounting
standards that will have an impact on Bancorp.
YIELDS EARNED AND RATES PAID
Bancorp's net income is significantly impacted by net interest income,
which is the difference between the interest income received on interest-earning
assets and interest paid on interest-bearing liabilities. Another indicator of
an institution's net interest income is its "net interest margin" which is net
interest income divided by average interest-earning assets.
Historically, the Bank has had a mismatch between the maturities of its
assets and liabilities because its customers have traditionally preferred
short-term deposits and long-term loans. The Bank 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 assets which enables the Bank to better match the duration of
its deposit base with these types of assets. In addition to adjustable rate
loans, the Bank uses a number of additional strategies to minimize the impact on
earnings during significant changes in interest rates. The strategies utilized
by the Bank to achieve this goal include: origination of short-term consumer and
business loans; emphasis on issuing intermediate to long-term fixed rate
certificates of deposit; sales of fixed-rate mortgage loans; efforts to increase
non-interest bearing checking accounts; and purchases of adjustable rate and
callable agency securities.
The following table presents for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities, resulting yield and cost
ratios, interest rate spread, ratio of interest-earning assets to
interest-bearing liabilities and net interest margin for Bancorp. Average
balances for the period have been calculated using the average of month-end
balances during the years ended September 30, 1996 and 1995. Average balances
for the year ended September 30, 1997 have been calculated using daily average
balances. The difference between using daily average balances and the average of
month-end balances is not material.
4
5
Year Ended September 30,
----------------------------------------------------------------------
1997 1996
----------------------------- ---------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- -------- ---------- ---------- --------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)..................... $1,041,835 $ 92,899 8.92% $ 907,494 $ 82,925 9.14%
Securities available for sale and
securities held to maturity........... 637,349 43,334 6.80 530,451 35,186 6.63
Interest-earning deposits in banks...... 24,034 1,778 7.40 38,430 2,802 7.29
---------- -------- ---------- ---------
Total interest-earning
assets............................... 1,703,218 138,011 8.10 1,476,375 120,913 8.19
Non-interest earning assets.............. 109,088 86,316
---------- ----------
Total Assets............................. $1,812,306 $1,562,691
========== ==========
Interest-bearing liabilities:
Savings accounts........................ 95,460 2,340 2.45 102,120 2,569 2.52
Checking accounts(2).................... 164,423 1,377 0.84 161,506 1,867 1.16
Money market accounts................... 119,256 4,201 3.52 95,782 3,854 4.02
Certificates of deposit................. 782,427 43,788 5.60 706,250 39,876 5.65
---------- -------- --------- --------
Total Deposits........................ 1,161,566 51,706 4.45 1,065,658 48,166 4.52
FHLB advances, securities sold
under agreements to repurchase
and other borrowings................... 515,144 29,197 5.67 372,200 20,642 5.55
---------- -------- --------- --------
Total interest-bearing
liabilities............................ 1,676,710 80,903 4.83 1,437,858 68,808 4.79
-------- --------
Non-interest bearing
liabilities............................ 16,069 13,566
---------- ----------
Total liabilities.................... 1,692,779 1,451,424
Stockholders' equity..................... 119,527 111,267
---------- ----------
Total liabilities and
stockholders' equity................... $1,812,306 $1,562,691
========== ==========
Net interest income...................... $ 57,108 $52,105
======== =======
Interest rate spread...................... 3.27 3.40
Net interest margin ...................... 3.35 3.53
Ratio of average interest-earning
assets to average interest-
bearing liabilities...................... 101.58% 102.68%
Year Ended September 30,
-------------------------------------
1995
-------------------------------------
Average Average
Balance Interest Yield/Cost
--------- --------- ------------
Interest-earning assets:
Loans receivable(1)..................... $ 814,898 $ 70,803 8.69%
Securities available for sale and
securities held to maturity........... 421,351 28,166 6.68
Interest-earning deposits in banks...... 20,957 1,295 6.17
---------- --------
Total interest-earning
assets............................... 1,257,206 100,264 7.98
Non-interest earning assets.............. 72,609
----------
Total Assets............................. $1,329,815
==========
Interest-bearing liabilities:
Savings accounts........................ $ 111,538 3,275 2.94
Checking accounts(2).................... 143,122 2,031 1.42
Money market accounts................... 89,183 3,398 3.81
Certificates of deposit................. 654,395 37,248 5.69
---------- --------
Total Deposits........................ 998,238 45,952 4.60
FHLB advances, securities sold
under agreements to repurchase
and other borrowings................... 222,605 11,974 5.38
---------- --------
Total interest-bearing
liabilities............................ 1,220,843 57,926 4.74
--------
Non-interest bearing
liabilities............................ 9,021
----------
Total liabilities.................... 1,229,864
Stockholders' equity..................... 99,951
----------
Total liabilities and
stockholders' equity................... $1,329,815
==========
Net interest income...................... $ 42,338
========
Interest rate spread...................... 3.24
Net interest margin ...................... 3.37
Ratio of average interest-earning
assets to average interest-
bearing liabilities...................... 102.98%
- ---------------
(1) Does not include interest on loans 90 days or more past due.
(2) Includes average non-interest bearing deposits of $60.5 million, $49.9 and
$43.1 million for the years ended September 30, 1997, 1996 and 1995,
respectively.
5
6
LENDING ACTIVITIES
General. The principal lending activity of the Bank is the origination
of single-family residential mortgage loans and, to a lesser extent, loans
secured by income property, consumer loans, commercial loans and agricultural
loans. The Bank typically requires that mortgage loans be secured by first liens
on single-family, residential dwellings (one- to-four family units), land,
developed lots and income property. The purpose of most real estate mortgage
loans has been for the purchase or construction of single-family residential
dwellings or refinancing of these properties, but some loans have been for
acquisition or development of residential lots or permanent loans secured by
income properties.
As of September 30, 1997, $681.0 million, or 55.81 percent of the Bank's
loan portfolio (before the deduction of undisbursed loan proceeds, deferred loan
fees and discounts and allowance for losses on loans), consisted of loans
secured by one-to-four family residential properties and $220.2 million, or
18.05 percent of total loans, consisted of income property loans (multi-family
residential and commercial real estate loans). Real estate construction loans,
which are primarily secured by one-to-four family residential properties, were
$197.4 million or 16.18 percent of total loans as of September 30, 1997.
The merger with Central provided the Bank with access to commercial
lending. This initiated the process of changing the composition of the Bank's
loan portfolio to that of a financial institution with less reliance on
single-family lending as the primary loan product. The Bank will continue to
focus loan origination efforts in commercial, agricultural and consumer lending.
Growth in commercial, agricultural and consumer loans should shorten duration
risk, produce higher net interest margin, create better protection from interest
rate volatility and ultimately meet the needs of the Bank's individual and
business customers.
6
7
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Bank's loan portfolio by type of loan as of the dates indicated.
At September 30,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- -------- -------- -------- ------- -------- ------
(Dollars in Thousands)
Type of Loan:
Real estate mortgage loans:
Single-family residential(1) $ 681,012 55.82% $ 613,220 58.19% $552,845 59.34% $495,954 60.00% $447,559 61.78%
Multi-family residential ... 54,674 4.48 52,683 5.00 51,515 5.53 38,567 4.67 32,853 4.53
Commercial ................. 165,591 13.57 146,115 13.87 118,229 12.69 99,426 12.03 93,576 12.92
Real estate construction ..... 197,445 16.18 151,194 14.35 128,544 13.80 126,455 15.30 103,526 14.29
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total ..................... 1,098,722 90.05 963,212 91.41 851,133 91.36 760,402 92.00 677,514 93.52
Consumer loans .............. 63,133 5.18 54,109 5.13 45,996 4.96 34,946 4.22 28,929 3.99
Commercial loans ............ 28,729 2.35 23,580 2.24 20,571 2.21 18,398 2.23 11,167 1.54
Agricultural loans .......... 29,549 2.42 12,873 1.22 13,659 1.47 12,801 1.55 6,856 0.95
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total other loans ......... 121,411 9.95 90,562 8.59 80,226 8.64 66,145 8.00 46,952 6.48
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total gross loans ......... 1,220,133 100.00% 1,053,774 100.00% 931,359 100.00% 826,547 100.00% 724,466 100.00%
========= ====== ========= ====== ======= ====== ======= ====== ======= ======
Less:
Undisbursed loan proceeds.... (86,677) (60,187) (38,305) (49,217) (40,785)
Allowance for losses
on loans................... (8,667) (8,074) (6,078) (5,663) (4,444)
Deferred loan fees
and discounts.............. (10,078) (9,542) (8,886) (8,676) (7,628)
--------- -------- -------- -------- --------
Total loans receivable, net $1,114,711 $975,971 $878,090 $762,991 $671,609
========== ======== ======== ======== ========
- ---------------
(1) Includes construction loans converted to permanent loans.
7
8
LOAN MATURITY AND REPRICING
The following table shows the contractual maturity of the Bank's gross
loans at September 30, 1997. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. Loan balances do not include undisbursed loan proceeds, deferred
loan fees and discounts and allowance for losses on loans. The table does not
reflect any estimate of prepayments, which significantly shorten the average
life of all loans and may cause the Bank's actual repayment experience to differ
from that shown below.
After
Within One Year
One Through After
Year 5 Years 5 Years Total
---------- ---------- ---------- ----------
(In Thousands)
Real estate mortgage loans:
Single-family residential $ 5,757 $ 35,481 $ 639,774 $ 681,012
Multi-family residential 2,336 1,323 51,015 54,674
Commercial .............. 20,004 45,900 99,687 165,591
Real estate construction .. 51,770 32,352 113,323 197,445
Consumer loans ............ 32,412 16,499 14,222 63,133
Commercial loans .......... 16,506 9,537 2,686 28,729
Agricultural loans ........ 24,353 3,395 1,801 29,549
---------- ---------- ---------- ----------
Total loans ............. $ 153,138 $ 144,487 $ 922,508 $1,220,133
========== ========== ========== ==========
The following table sets forth the dollar amount of all loans due one
year or more after September 30, 1997 which have fixed interest rates and have
floating or adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
Real estate mortgage loans:
Single-family residential $370,921 $304,334
Multi-family residential 1,249 51,089
Commercial .............. 21,031 124,556
Real estate construction .. 68,874 76,801
Consumer loans ............ 20,274 10,447
Commercial loans .......... 5,807 6,416
Agricultural loans ........ 2,557 2,639
-------- --------
Total ................... $490,713 $576,282
======== ========
Real Estate Mortgage Loans
Single-Family Residential Loans. The primary lending activity of the
Bank has been the granting of mortgage loans to enable borrowers to refinance
and purchase existing dwellings or to construct new single-family dwellings on
properties located within its primary market area. Management believes that
focusing on single-family residential mortgage loans has been successful in
contributing to interest income while keeping delinquencies and losses to a
minimum. The Bank's single-family residential
8
9
loan portfolio also includes loans on two- to four-family dwellings and
manufactured homes.
The Bank presently originates both fixed-rate loans and adjustable-rate
mortgage loans ("ARMs") secured by one- to four-family properties with loan
terms of up to 30 years. ARMs originated since 1988 have interest rates that
adjust based upon changes in the pre-determined index for a period matching the
repricing period of the loan. The majority of these loans provide that the
amount of any increase or decrease in the interest rate is limited to one
percentage point (upward or downward) per adjustment period which is typically
six months and generally limited to four and one-half percentage points over the
life of the loan. Borrower demand for ARMs versus fixed-rate mortgage loans is a
function of the level of interest rates, the expectations of changes in the
level of interest rates and the difference between the interest rates and loan
fees offered for fixed-rate mortgage loans and the rates and loan fees for ARMs.
Commercial real estate and multi-family residential mortgage ("income
property") loans. The Bank originates permanent loans on commercial real estate
and multi-family residences with terms of up to 30 years. Currently, the Bank
originates income property loans in its primary market area. The Bank's
permanent income property loans are secured by improved property such as
multi-family properties, office buildings and small commercial business
properties, condominiums, churches, subdivision developments and strip shopping
centers.
Income property loans in the portfolio are generally made in amounts
between $250,000 and $2.5 million. Commercial real estate and multi-family
residential mortgage loans secured by income properties are generally larger and
involve greater risks than residential mortgage loans because payments on loans
secured by income properties are dependent on the successful operation or
management of the properties. As a result, repayment of such loans may be
subject to conditions in the real estate market or the economy to a greater
extent than single-family residential real estate loans.
Real Estate Construction. The Bank originates residential construction
mortgage loans to residential owner-occupants (custom construction loans) and to
contractors building residential properties for resale, as well as construction
loans for condominiums, multi-family residential properties and land development
on properties located within its primary market area. Of the total construction
loans outstanding at September 30, 1997, $80.5 million was construction loans to
builders and $116.9 million was construction loans to owner-occupants.
Construction loans to owner-occupants generally have a term of six months and
then are converted to single-family residential mortgage loans. Construction
loans to builders generally are in amounts below $250,000 and are made with a
terms of twelve to eighteen months. The Bank's construction loans to builders
bear variable interest rates. Commitments to provide additional construction
loan funds at September 30, 1997 totaled $86.7 million.
The Bank's underwriting criteria are designed to evaluate and minimize
the risks of each construction loan. Among other things, the Bank considers
evidence of the availability of permanent financing for the borrower, the
reputation of the borrower, the amount of the borrower's equity in the project,
the independent appraisal and review of cost estimates, the pre-construction
sale and leasing information, and the cash flow projections of the borrower. In
addition, most of the construction loans granted by the Bank are secured by
property in the Bank's local market area.
The Bank's primary focus is on the origination of construction loans to
owner-occupants. However, the Bank also focuses on making construction loans to
builders with whom the Bank has an established relationship. Some of the
construction loans made to
9
10
builders are speculative loans, meaning that at the time the loan is made, the
builder has not identified a purchaser for the finished home.
Other Loans
Management intends to increase the commercial, agricultural and consumer
loan portfolios relative to real estate mortgage loans. To accomplish this
strategy the Bank has added several experienced commercial banking management
personnel to develop credit administration, consumer and business lending
support, and added business relationship officers. This strategy should shorten
duration risk, produce higher net interest margin, create better protection from
interest rate volatility and ultimately meet the needs of the Bank's individual
and business customers.
Commercial Loans. Commercial loans include a wide range of loan types to
small and medium sized businesses. A portion of these loans are commercial lines
of credit with adjustable rates and maturities of less than one year. The
remaining commercial loans include equipment and operational loans with terms
generally not exceeding five years.
These loans are primarily secured by capital assets and inventory, although
certain loans are unsecured.
Agricultural Loans. Agricultural loans include seasonal production loans
secured by crops and equipment. These loans generally have adjustable rates and
maturities of less than one year. Agricultural loans also include loans secured
by farmland. The majority of these loans have terms of less than five years and
have adjustable rates.
Consumer Loans. As of September 30, 1997, consumer loans, consisting of
savings account loans, automobile loans, home equity loans and loans for other
consumer purposes were approximately $63.1 million, or 5.2 percent of the Bank's
total gross loan portfolio.
Certain Underwriting Risks. Loans that are not secured by single family
residences are integral to the Bank's asset and liability management program and
reduce exposure to interest rate changes, such loans may entail additional risks
compared to residential mortgage lending. Commercial real estate and real estate
construction mortgage loans may involve large loan balances to single borrowers
or groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the properties and thus may be subject to a greater extent to
adverse conditions in the real estate market or in the economy generally. Real
estate construction loans may involve additional risks because loan funds are
advanced upon the security of the project under construction which is of
uncertain value prior to the completion, delays may arise from labor problems,
material shortages may be experienced and other unpredictable contingencies may
occur. It is extremely important to evaluate accurately the total loan funds
required to complete a project and related loan-to-value ratios. Because of
these factors, the analysis of prospective construction loan projects requires
an expertise that is different in significant respects from the expertise
required for residential real estate mortgage lending.
Construction lending is generally considered to involve a higher degree
of collateral risk than long-term financing of residential properties. The
Bank's risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value and marketability at
completion of construction or development and the estimated cost (including
interest) of construction. If the estimate of construction costs and the
marketability of the property upon completion of the project prove to be
inaccurate, the Bank may be required to advance additional funds to complete the
development. Speculative construction loans have the added risk that if
10
11
the borrower is unable to sell the completed project in a timely manner or
obtain adequate proceeds to repay the loan, the loan may become nonperforming.
Furthermore, if the estimate of value proves to be inaccurate, the Bank may have
a loan on a project with a value insufficient to assure full repayment.
Commercial and agricultural lending have increased risks as a result of
dependence on income production for future repayment, and in certain
circumstances, the lack of tangible collateral.
Consumer lending may involve special risks, including decreases in the
value of collateral and transaction costs associated with foreclosure and
repossession.
Mortgage Loan Solicitation, Processing and Underwriting. Loan
originations are derived from a number of sources such as branch staff,
builders, existing customers and referrals. Upon receipt of a loan application,
a credit report and other information is ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. In the
case of most real estate loans, an appraisal of the real estate intended to
secure the proposed loan is undertaken by the Bank's appraisal staff or other
qualified fee appraisers. Appraisals done by other qualified fee appraisers are
selectively reviewed by the Bank's staff appraisers. Residential real estate
mortgage loan documents used by the Bank conform to standards imposed by the
Federal National Mortgage Association ("FNMA") and the FHLMC.
The Bank's policy is to require borrowers to obtain certain types of
insurance to protect its interest in the collateral securing the loan. The Bank
requires a title insurance policy insuring that the Bank has a valid lien on the
real estate. Fire and casualty insurance, as well as flood insurance, if
applicable, also is required on collateral for loans.
The Bank's lending practices limit the maximum loan to value ratio on
conventional residential mortgage loans to 95 percent of either the appraised
value of the property as determined by an qualified appraiser or the purchase
price, whichever is less. The Bank, typically, requires private mortgage
insurance on any home loans in excess of 80 percent of appraised value.
The Board of Directors approves aggregate credit requests over $2.5
million. The Bank's loan committee, with two Board members, reviews applications
for loans from $1.5 million to $2.5 million. A loan committee consisting of
executive and senior officers reviews applications for loans up to $1.5 million.
The Chairman of the Board, President, Chief Financial Officer and the
Senior Vice President/Credit Administrator may approve loans up to $1.0 million.
The Vice Chairman-Commercial Banking, Chief Lending Officer and Chief
Administrative Officer may approve credits up to $500,000.
Loan Originations, Purchases and Sales. Substantially all of the loans
in the Bank's portfolio were originated by the Bank or its mortgage subsidiary,
Cornerstone Northwest Mortgage, Inc. Mortgage loans are sold for cash on a
non-recourse basis. During 1997, the Bank securitized and sold $86.9 million in
fixed-rate mortgage loans. Of these loan securitizations, $43.1 million were
sold immediately and $43.8 million were held for a period of time as securities
available for sale. The Bank has infrequently purchased loans.
In connection with such sales, the Bank generally retains the right to
service the loans (i.e., collection of principal and interest payments), for
which it generally receives a fee based on the difference between the rate paid
to the investor and that
11
12
collected from the borrower, which generally ranges from 1/4 percent to 1/2
percent of the unpaid balance of each loan. In accordance with SFAS No. 125
"Accounting for Transfers and Servicing of Assets and Extinguishments of
Liabilities", the Bank capitalizes mortgage servicing rights when acquired
either through the purchase or origination of mortgage loans that are
subsequently sold or securitized with the servicing rights retained. Mortgage
servicing rights are included in intangible assets and are amortized as an
offset to services fees in proportion to and over the period of estimated net
servicing income not to exceed 15 years.
Loan Origination and Other Fees. On most real estate mortgage loans, the
Bank receives loan origination fees and discount. Loan fees and discount are a
percentage of the principal amount of the mortgage loan which are charged to the
borrower for funding the loan. The Bank usually charges origination fees of 1.0
percent to 2.5 percent on one- to four-family residential real estate loans.
Loan origination fees on long-term commercial real estate and real estate
construction loans are usually 1.5 percent to 3.0 percent. Accounting standards
require fees received and costs incurred for originating loans to be deferred
and amortized into interest income over the contractual life of the loan.
Deferred fees and costs associated with loans that are sold are recognized as
gain on sale of loans at the time of sale. The Bank had $10.1 million of net
deferred loan fees and discounts at September 30, 1997.
Loan origination fee income varies with the volume and type of loans made
and purchased and with competitive conditions in mortgage markets, which in turn
tend to vary in response to the demand and availability of money.
The Bank also receives other fees and charges relating to existing
loans, which include prepayment penalties, late charges and fees collected in
connection with a change in borrower or other loan modifications. These fees and
charges have not constituted a material source of income.
Loan Servicing. The Bank sells loans to FHLMC and other financial
institutions on a servicing-retained basis and receives fees in return for
performing the traditional services of collecting payments and managing the
loans. At September 30, 1997, the Bank was servicing $301.9 million of loans for
others. Loan servicing includes processing payments, accounting for loan funds
and collecting and paying real estate taxes, hazard insurance and other
loan-related items, such as private mortgage insurance. When the Bank receives
the gross mortgage payment from individual borrowers, it remits to the investor
in the mortgage a predetermined net amount based on the yield on that mortgage.
The difference between the coupon on the underlying mortgage and the
predetermined net amount paid to the investor is the gross loan servicing fee.
Loan Commitments. The Bank issues commitments to make loans conditioned
upon the occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 30 days after approval,
depending on the type of transaction. The Bank had unfunded commitments to
originate real estate mortgage loans aggregating $209.9 million at September 30,
1997. Unfunded commitments on business and consumer credit lines totaled $42.3
million at September 30, 1997.
Delinquent and Nonperforming Loans. 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; the Bank has no
recourse to the borrower, or if it does, 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
12
13
prospect for improvement. A provision for losses on loans, which is a charge
against operations, is added to the allowance for losses on loans based on
ongoing assessments of credit risk in the loan portfolio.
The Bank's procedures provide that when a loan becomes delinquent 15 days
or more the borrower is given notice of such delinquency in writing. If the loan
remains delinquent, the borrower is contacted, usually by phone, within 15 to 30
days. When the loan is over 30 days delinquent, the borrower is contacted in
writing. Typically, the Bank will put a loan on non-accrual and initiate
foreclosure action against the borrower when principal and interest become 90
days or more delinquent. The Bank develops an internal list as a management tool
to help focus attention and efforts where they are needed most and to facilitate
the evaluation of the adequacy of the allowance for losses on loans. This list
of loans requiring special attention is reported to the Board of Directors on a
periodic basis. As of September 30, 1997 and 1996, the Bank had $4.9 million and
$3.2 million, respectively, of loans on nonaccrual.
Real estate held for sale. Real estate held for sale includes property
acquired by the Bank through foreclosure. The property is carried at the lower
of its fair market value or the principal balance of the foreclosed loan. At
September 30, 1997, the Bank had 27 foreclosed properties totaling $6.9 million,
the largest of which was a 148-room motel property located in Columbia, South
Carolina. The second largest foreclosed property is a land development project
located in Fountain, Colorado. During the years ended September 30, 1997 and
1996, portions of this project were sold and gains of $210,000 and $302,000 were
recorded, respectively.
Real estate held for development. In 1989, the Bank granted a loan
secured by approximately 80 acres of land in Mount Vernon, Washington, to
finance the sale of property the Bank had acquired for development in 1978. In
March 1990, the borrowers discovered two dump sites approximately one and
one-half acres in total size. These dump sites were owned and operated by the
City of Mount Vernon as a burning dump in the 1930's and 1940's. The Bank
cooperated with the City of Mount Vernon in having all required environmental
tests performed on the site to ascertain the level of toxicity that might be
present. The findings of the reports indicated that there was a low level of
toxicity. Due to the delays in development, the borrowers, Mount Vernon and
Associates, and the Bank agreed to rescind the sale. The Bank took title to the
entire 80-acre parcel by deed in lieu of foreclosure. The Bank has cooperated
with the City of Mount Vernon, Skagit County Health Department and the
Washington Department of Ecology to develop an independent remediation plan for
the dump sites and has implemented that plan. The material from the smaller dump
site was removed and consolidated with the materials from the larger dump site
and the City of Mount Vernon now has title to the larger dump site and all of
the area where the contaminants were located. The Bank has obtained the approval
and permits to develop the remaining property in four phases consisting of a
total of 248 dwelling units. At this time the construction of the first phase
consisting of 64 single-family lots is complete and the lots are for sale on the
real estate market. The third phase of the project is currently on the market as
a multi-family building site. The second and fourth phases of the project
consisting of 9 and 19 single family lots, respectively, are being held for
future development. As of September 30, 1997, the property was estimated to have
a fair value of $5.3 million using a discounted cash flow projection based on
expected lot sales and future development costs. At September 30, 1997, the book
value of the property was $5.1 million.
13
14
The following table sets forth information with respect to the Bank's
non-performing assets and restructured loans at the dates indicated.
At September 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
Loans accounted for on a
nonaccrual basis:
Real estate mortgage loans:
Single-family residential .......... $ 3,181 $ 1,965 $ 985 $ 708 $ 1,024
Multi-family residential ........... 407 -- 900 -- --
Commercial ......................... 484 791 308 624 315
Real estate construction ............. 123 -- -- 3 --
Consumer loans ....................... 411 184 109 122 144
Commercial loans ..................... 173 225 71 84 79
Agricultural loans ................... 78 -- -- 123 123
------- ------- ------- ------- -------
Total ............................ 4,857 3,165 2,373 1,664 1,685
Accruing loans which are contractually
past due 90 days or more:
Agricultural ....................... -- -- -- 129 --
Consumer ........................... -- -- -- 1 17
------- ------- ------- ------- -------
Total ............................ -- -- -- 130 17
Real estate owned .................... 6,945 6,053 4,178 5,926 6,332
------- ------- ------- ------- -------
Total nonperforming assets ........... $11,802 $ 9,218 $ 6,551 $ 7,720 $ 8,034
======= ======= ======= ======= =======
Restructured loans ................... $ 948 $ 1,715 $ 1,958 $ -- $ --
Total loans delinquent
90 days or more to
net loans ........................... 0.44% 0.32% 0.27% 0.22% 0.25%
Total loans delinquent
90 days or more to
total assets ........................ 0.24% 0.18% 0.16% 0.13% 0.17%
Total nonperforming assets
to total assets ..................... 0.58% 0.54% 0.45% 0.61% 0.82%
Interest income that would have been recorded for the year ended
September 30, 1997 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $354,000.
The Bank utilizes four categories for problem loans: Special Mention,
Substandard, Doubtful and Loss. The Bank uses a Special Mention category,
described as loans which do not currently expose the Bank to a sufficient degree
of risk to warrant classification but do possess certain credit deficiencies or
potential weaknesses deserving management's close attention. Substandard loans
have one or more defined weaknesses and are characterized by the possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful loans have the weaknesses of Substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable and there
is a high possibility of loss. A loan classified as Loss is the
14
15
portion of the loan considered uncollectible. Amounts classified as Loss are
charged- off immediately to the allowance for losses on loans. Assets classified
as Substandard or Doubtful may require the institution to establish specific
reserves as part of determining the allowance for losses on loans.
The Bank's Substandard loans at September 30, 1997 totaled $9.8 million.
Substandard loans are comprised of $5.5 million in single-family residential
loans, $400,000 in multi-family residential loans, $1.6 million in commercial
real estate loans, $300,000 in real estate construction loans, $400,000 in
consumer loans, $1.0 million in commercial loans and $600,000 in agricultural
loans. No loans were classified as Doubtful or Loss at September 30, 1997.
Analysis of Allowance for Losses on Loans. In originating loans, the
Bank recognizes that losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan, general economic conditions and, in
the case of a secured loan, the quality of the collateral securing the loan.
The allowance for losses on loans is maintained at a level sufficient to
provide for estimated losses based on evaluating known and inherent risks in the
loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. These factors include changes in
the size and composition of the loan portfolio, delinquency levels, actual loan
loss experience, current economic conditions, and detailed analysis of
individual loans for which full collectibility may not be assured. The
appropriate level of the allowance for losses on loans is estimated based upon
factors and trends identified by management.
While the Bank believes it has established its allowance for losses on
loans in accordance with generally accepted accounting principles, there can be
no assurance that in the future, regulators, when reviewing the Bank's loan
portfolio, will not request the Bank to increase its allowance for losses on
loans thereby impacting the Bank's financial condition and results of
operations. In addition, because future events impacting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for losses on loans is adequate or that substantial
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above.
15
16
The following table sets forth an analysis of the Bank's allowance for
losses on loans for the periods indicated.
Year Ended September 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in Thousands)
Allowance at beginning of period .. $ 8,074 $ 6,078 $ 5,663 $ 4,444 $ 3,643
Provision for losses on loans ..... 1,000 1,060 720 900 1,399
Provision pursuant to acquisition . -- 900 -- -- --
Provision acquired ................ -- -- -- 393 --
Charge-offs:
Real estate mortgage loans:
Single-family residential ....... 109 99 126 164 428
Multi-family residential ........ -- -- 142 -- --
Commercial ...................... 80 2 -- -- 115
Real estate construction ......... -- -- -- -- --
Consumer loans ................... 429 228 276 142 280
Commercial loans ................. 142 31 61 15 76
Agricultural loans ............... 2 -- -- 5 13
------- ------- ------- ------- -------
Total charge-offs .............. 762 360 605 326 912
Recoveries:
Real estate mortgage loans:
Single-family residential ..... 39 6 20 84 15
Commercial .................... 46 13 22 -- --
Consumer loans ................. 138 90 60 36 9
Commercial loans ............... 132 287 194 127 116
Agricultural loans ............. -- -- 4 5 174
------- ------- ------- ------- -------
Total recoveries ............. 355 396 300 252 314
------- ------- ------- ------- -------
Net recoveries (charge-offs) . (407) 36 (305) (74) (598)
------- ------- ------- ------- -------
Balance at end of period ..... $ 8,667 $ 8,074 $ 6,078 $ 5,663 $ 4,444
======= ======= ======= ======= =======
Ratio of allowance to total
loans outstanding at the
end of the period .............. 0.77% 0.82% 0.69% 0.74% 0.66%
Ratio of net charge-offs
to average loans outstanding
during the period .............. 0.04% 0.00% 0.04% 0.01% 0.10%
16
17
The following table sets forth the allocation of the allowance for losses
on loans by loan category for the periods indicated.
September 30,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ------------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Real estate mortgage loans:
Single-family residential... $1,919 55.82% $1,457 58.19% $1,314 59.34% $1,178 60.00% $1,063 61.78%
Multi-family residential.... 221 4.48 413 5.00 404 5.53 302 4.67 258 4.53
Commercial.................. 265 13.57 1,200 13.87 971 12.69 817 12.03 769 12.92
Real estate construction...... 380 16.18 321 14.35 273 13.80 268 15.30 220 14.29
Consumer loans................ 935 5.18 981 5.13 834 4.96 634 4.22 524 3.99
Commercial loans.............. 710 2.35 350 2.24 308 2.21 233 2.23 398 1.54
Agricultural loans............ 49 2.42 200 1.22 205 1.47 158 1.55 113 0.95
Unallocated................... 4,188 N/A 3,152 N/A 1,769 N/A 2,073 N/A 1,099 N/A
------ --- ------ ------- ------ ------ ------ ----- ------ ------
Total allowance
for losses on loans........ $8,667 100.00% $8,074 100.00% $6,078 100.00% $5,663 100.00% $4,444 100.00%
====== ======= ====== ======= ====== ====== ====== ====== ====== ======
17
18
INVESTMENT ACTIVITIES
Under Washington State law, savings banks are permitted to own government
and government agency obligations, commercial paper, corporate debt, mutual fund
shares, debt and equity obligations issued by creditworthy entities, whether
traded on public securities exchanges or privately placed for investment
purposes.
The FDIC has adopted the Federal Financial Institutions Examination
Council statement of policy on securities activities and accounting procedures.
This policy requires that institutions establish prudent policies and strategies
for securities activities, identify certain securities trading practices that
are unsuitable for an investment portfolio, recommends procedures for selection
of a securities dealer, and limits investment in high risk mortgage securities
and disproportionately large holdings of long-term zero coupon bonds.
The policy addresses concerns about speculative or other non-investment
activities in the securities investment portfolios of depository institutions.
Speculative securities activities can impair earnings or capital and, in some
cases, may cause the failure of the institution. The policy establishes a
framework for structuring securities activities and clarifies various accounting
issues concerning investment accounts versus trading accounts.
The Bank has generally maintained liquidity in excess of regulatory
guidelines. 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,
management's expectation of the level of yield that will be available in the
future as well as management's projections as to the short term demand for funds
to be used in the Bank's loan origination and other activities.
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. The Bank does not actively trade securities. Securities classified as
held to maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts over the terms of the securities, while securities
classified as available for sale are reported at fair value, with unrealized
gains and losses (net of deferred income taxes) reported as a net amount in a
separate component of stockholders' equity. See Notes 3 and 4 to Consolidated
Financial Statements regarding the Bank's securities available for sale and
securities held to maturity.
18
19
Securities Held to Maturity. The following table sets forth carrying
values and estimated fair values for the Bank's securities held to maturity at
the dates indicated.
September 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- -------------------------------- ----------------------------------
Estimated Estimated Estimated
Amortized Fair Percent of Amortized Fair Percent of Amortized Fair Percent of
Cost Value Portfolio Cost Value Portfolio Cost Value Portfolio
--------- ---------- ---------- --------- ---------- ---------- --------- ---------- -----------
(Dollars in Thousands)
U.S. Government
and Agency
securities (1) ..... $ 49,738 $ 49,492 41.45% $146,817 $146,044 61.84% $ 52,952 $ 52,471 16.00%
Obligations of states
and political
subdivisions ....... 3,706 3,723 3.09 3,802 3,808 1.60 5,341 5,387 1.61
Other securities .... 66,549 63,856 55.46 86,817 81,044 36.56 272,684 266,947 82.39
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ...... $119,993 $117,071 100.00% $237,436 $230,896 100.00% $330,977 $324,805 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
The following table sets forth the maturities and weighted average yields of the
securities held to maturity at September 30, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
---------------- ---------------- ------------------ -------------------
Amortized Amortized Amortized Amortized
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------ --------- ----- --------- ----- --------- ------
(Dollars in Thousands)
U.S. Government
and Agency
securities (1) ..... $ 300 5.19% $20,093 6.59% $ -- --% $29,345 6.42%
Obligations of states
and political
subdivisions ....... 936 3.79 2,562 4.42 208 5.36 -- --
Other securities .... -- -- -- -- -- 66,549 6.51
------- ------- ------ -------
Total ...... $ 1,236 4.12 $22,655 6.33 $ 208 5.36 $95,894 6.47
======= ======= ====== =======
19
20
Securities Available for Sale. The following table sets forth the Bank's
securities available for sale portfolio at the dates indicated.
September 30,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- -------------------------
Estimated Estimated Estimated
Fair Percent of Fair Percent of Fair Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ---------- ---------- ---------- ---------- ---------
(Dollars in Thousands)
U.S. Government and
Agency Securities............... $375,708 73.47% $93,902 25.51% $25,738 18.22%
SBA Certificates................. 61,160 11.96 71,037 19.30 71,286 50.46
Obligations of states and
political subdivisions.......... 681 0.13 5,115 1.39 102 0.07
Other securities................. 73,805 14.44 198,069 53.80 44,146 31.25
-------- ------ -------- ------ -------- -----
Total......................... $511,354 100.00% $368,123 100.00% $141,272 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the maturities and weighted average yields
of the Bank's securities available for sale portfolio at September 30, 1997.
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------- ------------------ ------------------ -------------------
Estimated Estimated Estimated Estimated
Fair Fair Fair Fair
Value Yield Value Yield Value Yield Value Yield
--------- ----- --------- ----- ---------- ----- --------- ------
(Dollars in Thousands)
U.S. Government and
Agency Securities................. $ -- --% $262,182 6.54% $10,219 6.33% $103,307 6.71%
SBA Certificates................... -- -- -- -- 11,683 8.33 49,477 7.89
Obligations of states and
political subdivisions............ 512 4.90 65 5.86 -- -- 104 5.37
Other securities................... -- -- -- -- 3,245 7.40 70,560 6.58
---- -------- ------- --------
Total........................... $512 4.90 $262,247 6.53 $25,147 7.35 $223,448 6.91
==== ======== ======= ========
20
21
The following table presents the name of the issuer and the aggregate
amortized cost and aggregate estimated fair value of the securities of each
issuer for those securities in the Bank's portfolio whereby the aggregate
amortized cost exceeds 10 percent of Bancorp's stockholders' equity as of
September 30, 1997.
Estimated
Amortized Cost Fair Value
-------------- ----------
(In Thousands)
Chase Mortgage Finance Corporation................. $21,631 $20,896
DLJ Mortgage Acceptance Corporation................ 18,208 18,153
GE Capital Mortgage Services, Inc.................. 56,827 53,899
Greenwich Capital Acceptance Inc................... 13,606 13,621
DEPOSIT ACTIVITIES AND BORROWINGS
Deposits. The Bank offers various types of deposit accounts, including savings,
checking accounts, money market type accounts and a variety of certificate
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. The Bank has
rarely relied on brokered deposits, but has relied on generating deposits
through a marketing strategy that employs a sales staff responsible for
generating deposits as well as fee products. Transaction deposit accounts offer
the Bank an opportunity to market other products to these customers.
The following table indicates the amount of the Bank's certificates of
deposit with balances equal to or greater than $100,000 classified by time
remaining until maturity as of September 30, 1997.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In Thousands)
Three months or less............................ $125,961
Three through six months........................ 41,182
Six through twelve months....................... 66,099
Over twelve months.............................. 59,943
--------
Total....................................... $293,185
========
21
22
The following table sets forth the balances and changes in dollar
amount of deposits in the various types of accounts offered by the Bank at the
dates indicated.
At September 30,
--------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- ------------------------------- --------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
---------- ------- ---------- ---------- ------- ---------- ---------- -------
(Dollars in Thousands)
Non-interest bearing deposits........ $66,205 5.65% $8,625 $ 57,580 5.14% $10,390 $ 47,190 4.54%
Interest bearing checking accounts... 103,301 8.82 4,029 99,272 8.85 (1,193) 100,465 9.66
Money market accounts................ 128,008 10.93 15,394 112,614 10.05 12,561 100,053 9.62
Savings accounts..................... 94,686 8.08 (5,316) 100,002 8.92 (1,875) 101,877 9.79
Certificates......................... 779,240 66.52 27,965 751,275 67.04 60,550 690,725 66.39
---------- ------ ------- ---------- ------ ------- ---------- -------
Total........................... $1,171,440 100.00% $50,697 $1,120,743 100.00% $80,433 $1,040,310 100.00%
========== ======= ======= ========== ====== ======= ========== ======
22
23
Borrowings. The Federal Home Loan Bank ("FHLB") functions as a central
reserve bank providing credit for member financial institutions. As a member,
the Bank is required to own capital stock in the FHLB, and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally securities that are obligations of, or
guaranteed by, the United States) provided certain standards related to
creditworthiness have been met. Advances are made to members pursuant to several
different programs. These programs are generally tailored to the institution's
need while still reflecting market terms and conditions. The Bank relies upon
advances from the FHLB to supplement its supply of lendable funds and to meet
liquidity guidelines. The rates on these advances vary from time to time in
response to general economic conditions. At September 30, 1996, the Bank had
advances totaling $470.2 million from the FHLB at interest rates ranging from
4.36 percent to 6.40 percent.
The Bank uses the securities market as a vehicle for borrowing by
utilizing its securities available for sale and securities held to maturity as
collateral. At September 30, 1997, the Bank has $259.0 million outstanding in
securities sold under agreement to repurchase at interest rates ranging from
5.03 percent to 6.43 percent. These borrowings are collateralized by securities
with a fair value exceeding the face value of the borrowings.
The following table sets forth certain information regarding borrowings
by the Bank during the periods indicated:
At or For the
Year Ended
September 30,
------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
Maximum amount outstanding at any
month end during the period:
FHLB advances ........................... $470,172 $378,499 $268,256
Securities sold under agreements
to repurchase .......................... 258,993 119,945 41,090
Approximate average amount outstanding
during the period:
FHLB advances ........................... 332,682 310,897 190,944
Securities sold under agreements
to repurchase .......................... 183,246 56,285 26,434
Balance outstanding at end of period:
FHLB advances ........................... 470,172 336,839 268,256
Securities sold under agreements
to repurchase .......................... 258,993 119,945 40,734
Approximate weighted average rate paid
during the period:
FHLB advances ........................... 5.64% 5.52% 5.23%
Securities sold under agreements
to repurchase .......................... 5.66 5.67 5.94
Weighted average rate paid at end of period:
FHLB advances ........................... 5.68 5.50 5.61
Securities sold under agreements
to repurchase .......................... 5.66 5.45 5.84
23
24
PERSONNEL
As of September 30, 1997, Bancorp, including its subsidiaries, had 621
full-time equivalent employees. Bancorp believes that employees play a vital
role in the success of a service company such as Bancorp and that Bancorp's
relationship with its employees is excellent. Executive management has worked
together as a team for more than 20 years and turnover among management
employees is minimal. Employees enjoy a responsive work environment with a wide
range of benefits including child care reimbursement, medical and dental
insurance, access to retirement plans, and continuing education.
All of Bancorp's employees are able to earn incentives, rewards, and
recognition for performance in sales and service. Management believes that
quality service backed by extensive training in sales, technical skills, product
knowledge, and motivation is the primary reason for Bancorp's continued growth
and profitability. All personnel within Bancorp have immediate access to senior
management for concerns, ideas, and suggestions, and are encouraged to
communicate regularly. The employees are not represented by a collective
bargaining unit.
COMPETITION
At September 30, 1997, Bancorp was the second largest bank holding
company with headquarters located in the State of Washington based on total
assets. The Bank faces strong competition in attracting deposits and in
originating real estate loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area. As with all banking organizations, the
Bank has experienced increasing competition from nonbanking sources, including
mutual funds, corporate and governmental debt securities and other investment
alternatives. The Bank's competition for loans comes principally from other
savings institutions, commercial banks, credit unions and mortgage banking
companies. Many of the Bank's competitors have more significant financial
resources, larger market share and greater name recognition than the Bank. The
existence of such competitors may make it difficult for Bancorp to achieve its
financial goals.
The Bank competes for loans principally through the efficiency and
quality of the services it provides borrowers, real estate brokers and home
builders and the interest rates and loan fees it charges. It competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts and other services. Deposit relationships are actively solicited
through a sales and service system.
Competition has further increased as a result of Washington banking
laws which permit statewide branching of Washington-domiciled financial
institutions and out-of-state holding companies acquiring Washington-based
financial institutions.
SUPERVISION AND REGULATION
INTRODUCTION
The following refers to certain statutes and regulations affecting the
banking industry. These references are only intended to provide brief summaries
and therefore, are not complete and are qualified by the statutes and
regulations referenced. In addition, due to the numerous statutes and
regulations which apply to and regulate the operation of the banking industry,
many are not referenced below.
24
25
BANCORP
GENERAL. Bancorp is a bank holding company by virtue of its ownership of
InterWest Bank, and is registered as such with the Federal Reserve Bank ("FRB").
As a bank holding company, Bancorp is subject to the Bank Holding Company Act
("BHCA"), which governs and subjects Bancorp and the Bank to supervision and
examination by the FRB. Under the BHCA, Bancorp files with the FRB an annual
report of its operations and such additional information as the FRB may require.
BANK HOLDING COMPANY STRUCTURE. In general, the BHCA limits bank holding
company business to owning or controlling banks and engaging in other
banking-related activities. Certain recent legislation designed to expand
interstate branching and relax federal restrictions on interstate banking may
expand opportunities for bank holding companies (see below under "Regulation of
Banking Subsidiaries - Recent Federal Legislation - Interstate Banking and
Branching"). However, the impact that this legislation may have on Bancorp and
the Bank is unclear at this time.
FRB REGULATION. Bank holding companies must obtain the FRB's approval
before they: (1) acquire direct or indirect ownership or control of any voting
shares of any bank if, after such acquisition, they would own or control,
directly or indirectly, more than 5% of the voting shares of such bank; (2)
merge or consolidate with another bank holding company; and (3) acquire
substantially all of the assets of any additional banks. Until September of
1995, the BHCA also prohibited bank holding companies from acquiring any such
interest in any bank or bank holding company located in a state other than the
state in which the bank holding company was located, unless the laws of both
states expressly authorized the acquisition. Now, subject to certain state laws,
such as age and contingency laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of an out-of-state
bank.
CONTROL OF NONBANKS. With certain exceptions, the BHCA also prohibits
bank holding companies from acquiring direct or indirect ownership or control of
voting shares in any company other than a bank or a bank holding company unless
the FRB finds Bancorp's business to be incidental to the business of banking.
When making this determination, the FRB in part considers whether allowing a
bank holding company to engage in those activities would offer advantages to the
public that would outweigh possible adverse effects.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("Economic Growth Act") amended the BHCA to eliminate the requirement that a
bank holding company seek FRB approval before engaging de novo in permissible
nonbanking activities, if the holding company is well capitalized and meets
certain other criteria specified in the statute. A bank holding company meeting
the specifications is now required only to notify the FRB within 10 business
days after the activity has begun. The FRB has issued a final rule incorporating
the changes enacted by the Economic Growth Act, and as of April 21, 1997, a
well-run bank holding company, without any prior notice or FRB approval, may
commence immediately any activity that is currently or at the time of
commencement included in the FRB's list of acceptable nonbanking activities.
Acceptable nonbanking activities include: (1) operating an industrial
loan company, mortgage company, finance company, trust company, or credit card
company; (2) performing certain data processing operations; and (3) providing
investment and financial advice. In contrast, prohibited nonbanking activities
include real estate
25
26
brokerage and syndication, land development, property management, and the
underwriting of life insurance not related to credit transactions. From time to
time, the FRB may add to or delete from the list of activities permissible for
bank holding companies.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, requires a person or group of persons acquiring "control" of a bank
holding company to provide the FRB with at least 60 days' prior written notice
of the proposed acquisition. Following receipt of this notice, the FRB has 60
days to issue a notice disapproving the proposed acquisition, but the FRB may
extend this time period for up to another 30 days. An acquisition may be
completed before the disapproval period expires if the FRB issues written notice
of its intent not to disapprove the action. Under a rebuttable presumption
established by the FRB, the acquisition of 10% or more of a class of voting
stock of a bank holding company with a class of securities registered under
Section 12 of the Exchange Act would, under the circumstances set forth in the
presumption, constitute the acquisition of control. In addition, any "company"
would be required to obtain the approval of the FRB under the BHCA before
acquiring 25% (5% if the "company" is a bank holding company) or more of the
outstanding shares of Bancorp, or otherwise obtain control over Bancorp.
TRANSACTIONS WITH AFFILIATES. Bancorp and the Bank are deemed affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. These restrictions apply to
Bancorp and the Bank through the BHCA, which provide that transactions between
an insured subsidiary of a holding company and its affiliates are subject to the
restrictions applicable to transactions between banks that are members of the
Federal Reserve System and their affiliates in accordance with Sections 23A and
23B of the Federal Reserve Act. Generally, Sections 23A and 23B: (1) limit the
extent to which the financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, to an amount equal to 10%
of such institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus, and (2) require all transactions with an affiliate, whether or not
"covered transactions," to be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
REGULATION OF MANAGEMENT. Federal law: (1) sets forth the circumstances
under which officers or directors of a financial institution may be removed by
the institution's federal supervisory agency; (2) places restraints on lending
by an institution to its executive officers, directors, principal stockholders,
and their related interests; and (3) prohibits management personnel from serving
as a director or in other management positions of another financial institution
whose assets exceed a specified amount or which has an office within a specified
geographic area.
FIRREA. The Financial Institution Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") became effective on August 9, 1989. Among other things, this
far-reaching legislation (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other federal services from their local Federal Home Loan
Banks; and (5) greatly enhanced the regulators' enforcement powers by removing
procedural barriers and sharply increasing the civil and criminal penalties for
violating statutes and regulations.
26
27
TIE-IN ARRANGEMENTS. Bancorp and the Bank, are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, neither Bancorp, nor the Bank may condition an extension of credit
on either (1) a requirement that the customer obtain additional services
provided by it or (2) an agreement by the customer to refrain from obtaining
other services from a competitor. Effective April, 1997, the FRB has adopted
significant amendments to its anti-tying rules that: (1) remove FRB-imposed
anti-tying restrictions on bank holding companies and their non-bank
subsidiaries; (2) create exemptions from the statutory restriction on bank tying
arrangements to allow banks greater flexibility to package products with their
affiliates; and (3) establish a safe harbor from the tying restrictions for
certain foreign transactions. These amendments are designed to enhance
competition in banking and nonbanking products and allow banks and their
affiliates to provide more efficient and lower-cost service to customers.
However, the impact of the amendments on Bancorp and the Bank is unclear at this
time.
STATE LAW RESTRICTIONS. As a corporation chartered under the laws of the
State of Washington, Bancorp may be subject to certain limitations and
restrictions as provided under applicable Washington corporate laws.
SECURITIES REGISTRATION AND REPORTING. Bancorp Common Stock is
registered as a class with the SEC under the Securities Exchange Act of 1934 and
thus is subject to the periodic reporting and proxy solicitation requirements
and the insider-trading restrictions of that Act. The periodic reports, proxy
statements, and other information filed by Bancorp under that Act can be
inspected and copied at or obtained from the Washington, D.C., office of the
SEC. In addition, the securities issued by Bancorp are subject to the
registration requirements of the Securities Act of 1933 and applicable state
securities laws unless exemptions are available.
THE BANK
GENERAL. Applicable federal and state statutes and regulations governing
a bank's operations relate, among other matters, to capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
certain interest rates payable, mergers and consolidations, borrowings, issuance
of securities, payment of dividends (see below), establishment of branches, and
dealings with affiliated persons. The FDIC has authority to prohibit banks under
their supervision from engaging in what they consider to be an unsafe and
unsound practice in conducting their business.
InterWest Bank is a state-chartered savings bank subject to extensive
regulation and supervision by the Washington Department of Financial
Institutions Division of Banks (the "Division"), and under state law, savings
banks in Washington also generally have all of the powers that federal mutual
savings banks have under federal laws and regulations. The Bank is also subject
to regulation and examination by the FDIC, which insures the deposits of the
Bank to the maximum extent permitted by law and by requirements established by
the FRB. The federal laws that apply to the Bank regulate, among other things,
the scope of its business, its investments, its reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for loans. The laws and regulations governing the Bank generally have
been promulgated to protect depositors and not to protect stockholders of such
institutions or their holding companies.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking regulators to adopt regulations or
guidelines in a number of
27
28
areas to ensure bank safety and soundness, including: internal controls; credit
underwriting; asset growth; management compensation; ratios of classified assets
to capital; and earnings. FDICIA also contains provisions which are intended to
change independent auditing requirements; restrict the activities of
state-chartered insured banks; amend various consumer banking laws; limit the
ability of "undercapitalized banks" to borrow from the FRB's discount window;
and require regulators to perform annual on-site bank examinations and set
standards for real estate lending.
FORMAL SUPERVISORY ACTION. A compliance examination of the Bank
performed by the FDIC as of July 15, 1996 disclosed reimbursable violations of
the Truth in Lending Act and resulted in a less than satisfactory compliance
rating. As a result of this examination and in an effort to address these
matters, the Bank and its Board of Directors of the Bank entered into a
Memorandum of Understanding ("MOU") with the FDIC dated as of February 10, 1997.
The Board of Directors of the Bank has taken actions to comply with the
terms and provisions of the MOU that included the hiring of a Compliance Officer
and the development of a formal Compliance Policy. Monetary restitution (which
in the aggregate, was not material) has been made to customers for Truth in
Lending violations and procedures have been implemented to prevent reoccurrence
of further violations. The Bank has provided quarterly written reports detailing
the actions taken to comply with the MOU. Results from a recent FDIC review in
July 1997 confirmed that significant progress has been made towards compliance
with the terms of the MOU. The next FDIC compliance examination will occur
during calendar year 1998.
LOANS-TO-ONE BORROWER. The Bank is subject to limitations on the
aggregate amount of loans that it can make to any one borrower, including
related entities. Applicable regulations generally limit loans-to-one borrower
to 15 to 20% of unimpaired capital and surplus. As of September 30, 1997, the
Bank was in compliance with applicable loans-to-one borrower requirements.
FDIC INSURANCE. Generally, customer deposit accounts in banks are
insured by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted
a risk-based insurance assessment system under which depository institutions
contribute funds to the Bank Insurance Fund ("BIF") and/or the Savings
Association Insurance Fund ("SAIF"), as applicable, based on their risk
classification.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits.
The one-time assessment was designed to place the SAIF at its 1.25 reserve ratio
goal.
The Funds Act, for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 basis points)
imposed on SAIF insured deposits (approximately 6.5 basis points). Beginning in
the year 2000, BIF insured institutions will be required to pay the FICO
obligations on a pro-rata basis with all thrift institutions; annual assessments
are expected to equal approximately 2.4 basis points until 2017, to be phased
out completely by 2019.
For the remainder of 1997 and until further action by the FDIC, BIF
premiums will be maintained at their current level.
28
29
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. The Funds Act also provides for the merger of the BIF and SAIF
on January 1, 1999, only if no thrift institutions exist on that date. It is
expected that Congress will continue to address comprehensive legislation on the
merger of the funds and elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law. The insurance may be
terminated permanently, if the institution has no tangible capital. If deposit
insurance is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, will continue to be insured for a
period of six months to two years, as determined by the FDIC.
CAPITAL ADEQUACY REQUIREMENTS. The FRB and the FDIC (collectively, the
"Agencies") have adopted risk-based capital guidelines for banks and bank
holding companies that are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies
and account for off-balance sheet items. The guidelines are minimums, and the
federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios in excess of the
minimums. Failure to achieve and maintain adequate capital levels may give rise
to supervisory action through the issuance of a capital directive to ensure the
maintenance of required capital levels.
The current guidelines require all federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common stockholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and the allowance for losses on loans. Total capital includes the excess of any
preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and the allowance for losses on loans up to 1.25% of
risk-weighted assets. The Bank has not received any notice indicating that it
will be subject to higher capital requirements.
Under these guidelines, banks' assets are given risk-weights of 0%,
20%, 50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans (both carry a 50% rating).
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government Agencies (which have a 0% rating).
The Agencies have also implemented a leverage ratio, which is equal to
Tier 1 capital as a percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The principal objective of
the leverage ratio is to limit the maximum degree to which a bank may leverage
its equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an additional
cushion of at least 100 to 200 basis
29
30
points. Any institution operating at or near the 3% level is expected to have
well-diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity and good earnings, and in general, to be a strong
banking organization without any supervisory, financial or operational
weaknesses or deficiencies. Any institutions experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
PROMPT CORRECTIVE ACTION. Regulations adopted by the Agencies as
required by FDICIA impose even more stringent capital requirements. The
regulators require the FDIC and other Federal Banking Agencies to take certain
"prompt corrective action" when a bank fails to meet certain capital
requirements. The regulations establish and define five capital levels: (1)
"well-capitalized," (2) "adequately capitalized," (3) "undercapitalized," (4)
"significantly undercapitalized" and (5) "critically undercapitalized." To
qualify as "well-capitalized," an institution must maintain at least 10% total
risk-based capital, 6% Tier 1 risk-based capital, and a leverage ratio of no
less than 5%. Increasingly severe restrictions are imposed on the payment of
dividends and management fees, asset growth and other aspects of the operations
of institutions that fall below the category of being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital, and a leverage ratio of at least 4%). Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of the date of this filing, neither Bancorp, nor the Bank were subject to any
regulatory order, agreement, or directive to meet and maintain a specific
capital level for any capital measure.
In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. Dividends paid to Bancorp by the
Bank are a material source of Bancorp's cash flow. Various federal and state
statutory provisions limit the amount of dividends the Bank is permitted to pay
to Bancorp without regulatory approval. FRB policy further limits the
circumstances under which bank holding companies may declare dividends. For
example, a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset qualify, and overall financial condition.
If, in the opinion of the applicable federal banking agency, a
depository institution under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the institution, could include the payment of dividends), the
agency may require, after notice and hearing, that such institution cease and
desist from such practice. In addition, the FRB and the FDIC have issued policy
statements which provide that insured banks and bank holding companies should
generally pay dividends only out of current operating earnings.
30
31
According to Washington law, the Bank may not declare or pay a cash
dividend on its capital stock if it would cause its net worth to be reduced
below (1) the amounts required for liquidation accounts or (2) the net worth
requirements, if any, imposed by the Director of the Division. Dividends on the
Bank's capital stock may not be paid in an aggregate amount greater than the
aggregate retained earnings of the Bank, without the approval of the Director of
the Division.
FEDERAL RESERVE SYSTEM. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts) and non-personal time deposits. Currently, reserves of 3% must be
maintained against total transaction accounts of $49.8 million or less (after a
$4.2 million exemption), and an initial reserve of 10% (subject to adjustment by
the FRB to a level between 8% and 14%) must be maintained against that portion
of total transaction accounts in excess of such amount. On September 30, 1997,
the Bank was in compliance with applicable requirements.
The balances maintained to meet the reserve requirements imposed by the
FRB may be used to satisfy applicable liquidity requirements. Because required
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce the earning assets the Bank.
RECENT FEDERAL LEGISLATION
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 ("Interstate Act") generally permits
nationwide interstate banking and branching by relaxing federal law restrictions
on interstate banking and providing general authorization for interstate
branching. Subject to certain state laws, such as age and contingency laws, the
Interstate Act allows adequately capitalized and adequately managed bank holding
companies to purchase the assets of out-of-state banks. Additionally, since June
1, 1997, the Interstate Act permits interstate bank mergers, subject to these
state laws, unless the home state of either merging bank has "opted-out" of
these provisions by enacting "opt-out" legislation. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
In 1996, Washington enacted "opting in" legislation authorizing
interstate mergers pursuant to the Interstate Act. Accordingly, as of June 6,
1996, an out-of-state bank holding company may now acquire more than 5% of the
voting shares of a Washington-based bank, regardless of reciprocity, provided
such bank or its predecessor has been doing business for at least five years
prior to the acquisition. Further, an out-of-state bank may engage in banking in
Washington if the requirements of Washington's interstate banking statute are
met, and the bank either (1) was lawfully engaged in banking in Washington on
June 6, 1996, (2) resulted from an interstate combination pursuant to Washington
law, (3) resulted from a relocation of a head office of a state bank or a main
office of a national bank pursuant to federal law, or (4) resulted from the
establishment of a savings bank branch in compliance with applicable Washington
law. Additionally, the Director of the Division may approve interstate
combinations if the basis for such approval does not discriminate against
out-of-state banks, out-of-state holding companies, or their subsidiaries.
31
32
REGULATORY IMPROVEMENT. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act"), with
the intent of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax certain regulatory compliance requirements. In addition, the
Regulatory Improvement Act specifically directs each federal banking agency to
review and streamline its regulations and written supervisory policies.
At this time, the full impact that the Interstate Act and the Regulatory
Improvement Act might have on Bancorp is impossible to predict.
REGULATORY ENFORCEMENT AUTHORITY
The enforcement powers available to federal 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 by the federal
banking agencies.
TAXATION
FEDERAL TAXATION
GENERAL. Bancorp and the Bank report their income on a fiscal year basis
using the accrual method of accounting and will be subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or Bancorp. The Bank has not been audited by the IRS during the past five
years. Reference is made to Note 14 of the Notes to the Consolidated Financial
Statements contained in the Annual Report for additional information concerning
the income taxes payable by Bancorp.
TAX BAD DEBT RESERVES. For taxable years beginning prior to January 1,
1996, savings institutions such as the Bank which met certain definitional tests
primarily relating to their assets and the nature of their business ("qualifying
thrifts") were permitted to establish a reserve for bad debts and to make annual
additions thereto, which additions may, within specified formula limits, have
been deducted in arriving at their taxable income. The Bank's deduction with
respect to "qualifying loans," which are generally loans secured by certain
interests in real property, may have been computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8 percent of the Bank's
taxable income, computed with certain modifications and reduced by the amount of
any permitted additions to the nonqualifying reserve. The Bank's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allowed a deduction based on the Bank's actual loss experience over
a period of several years. Each year the Bank selected the most favorable way to
calculate the deduction attributable to an addition to the tax bad debt reserve.
Legislation enacted repealed the reserve method of accounting for bad
debt reserves for tax years beginning after December 31, 1995. As result,
savings
32
33
institutions will no longer be able to calculate their deduction for bad
debts using the percentage-of-taxable-income method. Instead, savings
institutions will be required to compute their deduction based on specific
charge-offs during the taxable year or, if the savings institution or its
controlled group had assets of less than $500 million, based on actual loss
experience over a period of years. This legislation also requires savings
institutions to recapture into income over a six-year period their post-1987
additions to their bad debt tax reserves, thereby generating additional tax
liability. At September 30, 1997 the Bancorp's post-1987 reserves totaled
approximately $6.0 million. The recapture may be suspended for up to two years
if, during those years, the institution satisfies a residential loan
requirement. The Bank anticipates that it will meet the residential loan
requirement for the taxable year ending September 30, 1998.
Under prior law, if the Bank failed to satisfy the qualifying thrift
definitional tests in any taxable year, it would be unable to make additions to
its bad debt reserve. Instead, the Bank would be required to deduct bad debts as
they occur and would additionally be required to recapture its bad debt reserve
deductions ratably over a multi-year period. At September 30, 1997, the Bank's
total bad debt reserve for tax purposes was approximately $17.4 million. Among
other things, the qualifying thrift definitional tests required the Bank to hold
at least 60 percent of its assets as "qualifying assets." Qualifying assets
generally include cash, obligations of the United States or any agency or
instrumentality thereof, certain obligations of a state or political subdivision
thereof, loans secured by interests in improved residential real property or by
savings accounts, student loans and property used by the Bank in the conduct of
its banking business. Under current law, a savings institution will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to Bancorp that are considered as made: (i) from the reserve for
losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method; or (ii) from the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed will be included
in the Bank's taxable income. Nondividend distributions include distributions in
excess of the Bank's current and accumulated earnings and profits, distributions
in redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
dividends to Bancorp that would reduce amounts appropriated to the Bank's bad
debt reserve and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income attributable to
an Excess Distribution is an amount that, when reduced by the tax attributable
to the income, is equal to the amount of the distribution. Thus, if the Bank
makes a "nondividend distribution," then approximately one and one-half times
the amount so used would be includable in gross income for federal income tax
purposes, assuming a 35 percent corporate income tax rate (exclusive of state
and local taxes). See "Regulation" for limits on the payments of dividends by
the Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code (the
"Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate
of 20 percent. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. In addition, only 90 percent of AMTI can be
offset by net operating loss carryovers. AMTI is increased by an amount equal to
75 percent of the amount by which the Bank's adjusted current earnings
33
34
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12 percent of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
Bancorp, including the Bank, whether or not an Alternative Minimum Tax ("AMT")
is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. Bancorp may exclude from
its income 100 percent of dividends received from the Bank as a member of the
same affiliated group of corporations. The corporate dividends-received
deduction is generally 70 percent in the case of dividends received from
unaffiliated corporations with which Bancorp and the Bank will not file a
consolidated tax return, except that if Bancorp or the Bank owns more than 20
percent of the stock of a corporation distributing a dividend, then 80 percent
of any dividends received may be deducted.
WASHINGTON STATE TAXATION
The Bank is subject to a business and occupation tax which is imposed
under Washington law at the rate of 1.60 percent of gross receipts; however,
interest received on loans secured by mortgages or deeds of trust on residential
properties is not subject to such tax. Washington's Department of Revenue
completed a Business and Occupation Tax Audit on the Bank for the period January
1, 1988 to April 30, 1992 in September 1992.
ITEM 2. PROPERTIES
Bancorp's main office, which is owned by Bancorp, is located in Oak
Harbor, Washington. At September 30, 1997, the Bank had 39 branch offices, all
of which are located in the State of Washington. These offices are located in
Anacortes, Bellingham, Brewster, Burien, Cashmere, Chelan, Clinton, Coupeville,
East Wenatchee(2), Everett, Ferndale, Freeland, Friday Harbor, Kent, Kirkland,
Lake Stevens, Lakewood, Leavenworth, Lynden, Lynnwood, Manson, Marysville,
Mercer Island, Mount Vernon, Oak Harbor (2), Omak, Oroville, Port Angeles, Port
Townsend, Poulsbo, Redmond, Sedro-Woolley, Sequim, Silverdale, Stanwood,
Tonasket and Wenatchee. All of its branches are located in owned properties
except for the Cashmere and one East Wenatchee branch office. The lease for the
East Wenatchee branch expires in August 1998 and the lease for the Cashmere
branch expires July 2003. The total net book value for the Bank's investment in
premises and equipment at September 30, 1997 totaled $41.3 million.
ITEM 3. LEGAL PROCEEDINGS
Bancorp is not engaged in any legal proceedings of a material nature at
the present time. Periodically, there are various claims and lawsuits involving
Bancorp and its subsidiaries, principally as defendants, such as claims to
enforce liens, condemnation proceedings on properties in which the Bank holds
security interests, claims involving the making and servicing of real property
loans and other issues incident to Bancorp's business. In the opinion of
management and Bancorp's legal counsel, no significant loss is expected from any
of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
34
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bancorp's common stock trades on The Nasdaq Stock Market under the
symbol "IWBK". As of September 30, 1997, there were 8,050,266 shares of common
stock outstanding held by approximately 5,500 stockholders.
Set forth in the following table are the high and low sales prices as
reported on The Nasdaq Stock Market and the dividends declared on common stock
for each quarter.
Sales Price Dividends
High Low Declared
------- ------- ---------
Fiscal Year 1997
First Quarter ............... $ 33.00 $ 29.12 $ 0.14
Second Quarter .............. 36.25 31.75 0.14
Third Quarter ............... 39.50 27.62 0.15
Fourth Quarter .............. 43.25 37.00 0.16
Fiscal Year 1996
First Quarter ............... $ 20.37 $ 15.25 $ 0.10
Second Quarter .............. 21.87 19.62 0.12
Third Quarter ............... 25.12 21.37 0.13
Fourth Quarter .............. 29.87 24.00 0.13
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the tables captioned "Financial Highlights"
contained in the Annual Report, which is listed under Item 14 herein, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by
reference to the section captioned "Management Discussion and Analysis of
Financial Condition and Results of Operations for Fiscal Year 1997" in the
Annual Report, which is listed under Item 14 herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section caption "Management Discussion and Analysis of
Financial Condition and Results of Operations for Fiscal Year 1997" in the
Annual Report, which is listed under Item 14 herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the Annual Report, which are
listed under Item 14 herein, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I --
Election of Directors" in Bancorp's Proxy Statement for the 1998 Annual Meeting
of Stockholders ("Proxy Statement").
The executive officers of Bancorp are as follows:
Age at Position
September 30, -------------------------------------------------------
Name 1997 Bancorp The Bank
- ---- ------------- ------- --------
Stephen M. Walden 54 Director, President and Director, President and
Chief Executive Officer Chief Executive Officer
H. Glenn Mouw 44 Executive Vice President Executive Vice President
and Chief Financial
Officer
Kenneth G. Hulett 50 Executive Vice President Executive Vice President
and Chief Lending
Officer
Clark W. Donnell 42 Executive Vice President Executive Vice President
and Chief Administrative
Officer
Gary M. Bolyard 61 Director, Vice Chairman/ Director, Vice Chairman/
Commercial Banking Commercial Banking
The principal occupation of each executive officer for the last five
years is set forth below.
STEPHEN M. WALDEN is President and Chief Executive Officer of Bancorp and the
Bank. Mr. Walden started his career at the Bank in 1966 and became Vice
President in 1974, Senior Vice President in 1977, Executive Vice President in
1984, President and Chief Operating Officer in 1988 and President and Chief
Executive Officer in January 1990.
H. GLENN MOUW is Executive Vice President of Bancorp. He is also Executive Vice
President and Chief Financial Officer of the Bank, a position he has held since
1988. He served as Senior Vice President and Treasurer of the Bank from 1987 to
1988 and Vice President and Treasurer of the Bank from 1981 to 1988.
KENNETH G. HULETT is Executive Vice President of Bancorp. He is also Executive
Vice President and Chief Lending Officer of the Bank, a position he has held
since 1988. He served as Vice President of the Bank from 1977 to 1987.
CLARK W. DONNELL is Executive Vice President of Bancorp. He is also Executive
Vice President and Chief Administrative Officer of the Bank, a position he has
held since 1988. He served as Vice President of the Bank from 1984 to 1987 and
as Senior Vice President of the Bank from 1987 to 1988.
36
37
GARY M. BOLYARD is Vice Chairman/Commercial Banking and a director of Bancorp
and the Bank, positions he has held since August 1996. Prior to that time, Mr.
Bolyard was President, Chief Executive Officer and a Director of Central
Bancorporation and Central Washington Bank and a Director of North Central
Washington Bank.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section captioned - "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
(c) Changes in Control
Bancorp is not aware of any arrangements, including any pledge by any
person of securities of Bancorp, the operation of which may at a
subsequent date result in a change in control of Bancorp.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the sections captioned "Transactions with
Management" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) Consolidated Financial Statements
Independent Auditors' Report
(a) Consolidated Statements of Financial Condition as of September
30, 1997 and 1996
(b) Consolidated Statements of Income For the Years Ended September
30, 1997, 1996 and 1995
(c) Consolidated Statements of Stockholders' Equity For the Years
Ended September 30, 1997, 1996 and 1995
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1997, 1996 and 1995
(e) Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
37
38
(2) All required financial statement schedules are included in the
Notes to Consolidated Financial Statements.
Consolidated Financial Statements and Notes to Consolidated
Financial Statements are included in Exhibit 13 herein.
(b) Bancorp did not file a Form 8-K during the year ended September 30, 1997.
(c) Exhibits
(3.1) Articles of Incorporation of InterWest Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated July 28, 1995)
(3.2) Bylaws of InterWest Bancorp, Inc.
(3.3) First Amendment to the Bylaws of InterWest Bancorp, Inc.
(3.4) Second Amendment to the Bylaws of InterWest Bancorp, Inc.
(10.1) Employment Agreement with B. R. Beeksma (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.2) Employment Agreement with Stephen M. Walden (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.3) Employment Agreement with H. Glenn Mouw (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.4) Employment Agreement with Clark W. Donnell (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.5) Employment Agreement with Kenneth G. Hulett (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1995)
(10.6) 1984 Stock Option Plan (incorporated by reference to Exhibit 99.1
to the Registrant's Registration Statement on Form S-8 (File No.
33-99742))
(10.7) 1993 Incentive Stock Option Plan (incorporated by reference to
Exhibit 99.3 to the Registrant's Registration Statement on Form
S-8 (File No. 33-99742))
(10.8) Non-Incentive Stock Option Plan for Outside Directors
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No. 33-99742))
(10.9) Employment Agreement with Gary M. Bolyard(incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
year ended September 30, 1996)
(10.10) Central Bancorporation 1992 Employee Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Forms S-8 (File No. 333-13191)).
(10.11) Central Bancorporation Director Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-13191)).
(10.12) 1996 Outside Directors Stock Options-for-Fees Plan (incorporated
by reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-24525))
(10.13) Agreement and Plan of Merger with Puget Sound Bancorp, Inc.
(incorporated by reference to Appendix A to the Registrant's
Registration Statement on Form S-4 (File No. 333-39329))
38
39
(13) Financial Highlights, Management Discussion and Analysis and
Consolidated Financial Statements included in the 1997 Annual
Report to Stockholders.
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors, Ernst & Young LLP
(23.2) Consent of Independent Auditors for Central Bancorporation,
Deloitte & Touche LLP
(27) Financial Data Schedule
(99.1) Independent Auditors' Report for Central Bancorporation
39
40
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the bank has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
InterWest Bancorp, Inc.
Date: December 15, 1997 By: /s/ Stephen M. Walden
----------------------------
Stephen M. Walden
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Stephen M. Walden By: /s/ Clark H. Mock
------------------------------ ---------------------------
Stephen M. Walden Clark H. Mock
President, Chief Executive Director
Officer and Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ H. Glenn Mouw By: /s/ Vern Sims
------------------------------ ---------------------------
H. Glenn Mouw Vern Sims
Chief Financial Officer Director
(Principal Financial Officer)
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Eric Jensen By: /s/ C. Stephen Lewis
------------------------------ ---------------------------
Eric Jensen C. Stephen Lewis
Chief Accounting Officer Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Barney R. Beeksma By: /s/ Russel E. Olson
------------------------------ ---------------------------
Barney R. Beeksma Russel E. Olson
Chairman of the Board Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Jean Gorton By: /s/ Henry Koetje
------------------------------ ---------------------------
Jean Gorton Henry Koetje
Director Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Michael T. Crawford By: /s/ Gary M. Bolyard
------------------------------ ---------------------------
Michael T. Crawford Gary M. Bolyard
Director Director
Date: December 15, 1997 Date: December 15, 1997
By: /s/ Larry Carlson
------------------------------
Larry Carlson
Director
Date: December 15, 1997
41