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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, 1998 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.
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(Exact name of registrant as specified in its charter)
Washington 91-1691216
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
275 Southeast Pioneer Way, Oak Harbor, Washington 98277
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (360) 679-4181
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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(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 $415,791,977 based upon the closing price of the
Registrant's common stock as quoted on the Nasdaq National Market on October 30,
1998 of $26.5625.
As of October 30, 1998, there were issued and outstanding 15,653,345
shares of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Selected Consolidated Financial Data, Management Discussion and
Analysis and Consolidated Financial Statements included in the Annual Report
to Shareholders for the year ended September 30, 1998. (Part II).
2. Proxy Statement for the 1999 Annual Meeting of Shareholders ("Proxy
Statement"). (Part III).
PART I
Item 1. Business
GENERAL
InterWest Bancorp, Inc. (InterWest Bancorp) is a multibank holding
company incorporated in the State of Washington in 1994. The consolidated entity
includes InterWest Bancorp and its wholly owned subsidiaries and is collectively
referred to as InterWest. As of September 30, 1998, InterWest Bancorp's wholly
owned subsidiaries were InterWest Bank, Pacific Northwest Bank, Pioneer National
Bank, First National Bank of Port Orchard and Kittitas Valley Bank, N.A.
On January 17, 1995, the shareholders of InterWest Bank approved a plan
to reorganize InterWest Bank into the holding company form of ownership. The
reorganization was completed on July 28, 1995, on which date InterWest Bank
became the wholly-owned subsidiary of InterWest Bancorp, and the shareholders of
InterWest Bank became shareholders of InterWest Bancorp. Subsequent to the
holding company reorganization, InterWest Bancorp has engaged in no significant
activity other than holding the stock of banking subsidiaries.
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 was 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 shareholders and board members. In March of 1987,
InterWest Bank acquired the assets of Home Savings and Loan Association. The
purchase added $150 million in assets and five branch offices. In November 1996,
the name InterWest Savings Bank was changed to InterWest Bank to reflect the
expansion of the business.
Through its banking subsidiaries, a wide range of financial services
are offered to individuals and businesses throughout Western and Central
Washington state. Financial services of InterWest include the banking activities
of accepting deposits from individuals and businesses and originating
residential loans, consumer loans and certain types of commercial real estate
loans. Recent acquisitions have provided InterWest with access to commercial
banking. InterWest is committed to growth in commercial banking and expansion in
Washington state.
The acquisition of Central Bancorporation (Central) on August 31, 1996
began this process. Central's commercial banking subsidiary, Central Washington
Bank, operated ten offices in central Washington. At the merger date, Central
had total consolidated assets of $206.1 million, including total loans
receivable of $132.2 million, total deposits of $181.9 million and shareholders'
equity of $17.1 million. Effective October 14, 1996, Central Washington Bank was
merged into InterWest Bank.
On January 15, 1998, InterWest Bancorp acquired Puget Sound Bancorp,
Inc. (Puget), of Port Orchard, Washington, the holding company of First National
Bank of Port Orchard. Under the terms of this transaction, Puget merged into
InterWest Bancorp, with First National Bank of Port Orchard becoming a
subsidiary of InterWest Bancorp. First National Bank of Port Orchard operated
three branch offices in western Washington. At the acquisition date, Puget had
total consolidated assets of $53.1 million, including total loans receivable of
$38.7 million, total deposits of $45.6 million, and shareholders' equity of $5.9
million. Each share of Puget common stock was exchanged for 2.50 shares of
InterWest Bancorp common stock. On October 15, 1998, First National Bank of Port
Orchard was merged into Pacific Northwest Bank. This internal merger was
completed to obtain operating efficiencies and cost savings.
On June 15, 1998, InterWest Bancorp acquired Pacific Northwest Bank
(Pacific), of Seattle, Washington. Under the terms of this transaction, Pacific
became a subsidiary of InterWest Bancorp. At the acquisition date, Pacific had
four offices in the metropolitan Seattle area of western Washington and total
assets of $200.2 million, including total loans receivable of $150.1 million,
total deposits of $170.2 million, and shareholders' equity of $16.8 million.
Each share of Pacific common stock was exchanged for 5.93 shares of InterWest
Bancorp common stock.
On June 16, 1998, InterWest Bancorp acquired Pioneer Bancorp, Inc.
(Pioneer), of Yakima, Washington, the holding company of Pioneer National Bank.
Under the terms of this transaction, Pioneer merged into InterWest
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Bancorp, and Pioneer National Bank became a subsidiary of InterWest Bancorp.
Pioneer National Bank operates five branch offices in central Washington. At the
acquisition date, Pioneer had total consolidated assets of $108.4 million,
including total loans receivable of $63.4 million, total deposits of $87.2
million, and shareholders' equity of $9.3 million. Each share of Pioneer common
stock was exchanged for 2.01 shares of InterWest Bancorp common stock. An
application has been filed with the appropriate banking regulators to merge
Pioneer National Bank into Pacific Northwest Bank. The merger is expected to
close in early calendar year 1999.
The acquisitions of Central, Puget, Pacific and Pioneer were accounted
for using the pooling-of-interests method of accounting. In accordance with
generally accepted accounting principles, prior period financial statements, as
well as management discussion and analysis have been restated as if the
companies were combined for all periods presented.
On August 31, 1998, InterWest Bancorp completed the acquisition of
Kittitas Valley Bancorp, Inc. (Kittitas), of Ellensburg, Washington, the holding
company of Kittitas Valley Bank, N.A. Under the terms of this transaction,
Kittitas merged into InterWest Bancorp, and Kittitas Valley Bank, N.A. became a
subsidiary of InterWest Bancorp. The acquisition was completed through the
payment of $6.4 million in cash and the issuance of 229,831 shares of InterWest
Bancorp common stock to Kittitas shareholders. The shares issued to Kittitas
shareholders were purchased by InterWest Bancorp in the open market. At the
acquisition date, Kittitas had total consolidated assets of $47.4 million and
shareholders' equity of $4.3 million. This acquisition has been accounted for
using the purchase method of accounting.
A source of future growth may be through acquisitions. InterWest
Bancorp believes that many other financial institutions are considering selling
their institutions for a variety of reasons, including lack of shareholder
liquidity, management succession issues, technology challenges and increasing
competition. InterWest Bancorp actively reviews proposals for various
acquisition opportunities. Successful completion of acquisitions by InterWest
Bancorp depends on several factors such as the availability of suitable
acquisition candidates, necessary regulatory and shareholder approval and
compliance with applicable capital requirements. Accordingly, no assurance can
be made that acquisition activity will continue in the future.
Presently, InterWest conducts its business through 55 full-service
branch offices in western and central Washington State. These offices are
located in towns, small cities, suburbs and metropolitan markets. Retail
non-deposit investment products are available through InterWest Financial
Services, Inc., a wholly-owned subsidiary of InterWest Bank and insurance is
available through InterWest Insurance Agency, Inc., a majority-owned subsidiary
of InterWest Bank.
KEY OPERATING RATIOS
The section "Selected Consolidated Financial Data" contained in the Annual
Report, which is listed as an exhibit under Item 14 herein, is incorporated
herein by reference.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
The section "Net Interest Income" contained in "Management Discussion and
Analysis" in the Annual Report, which is listed as an exhibit under Item 14 is
incorporated herein by reference.
INVESTMENT ACTIVITIES
The section "Securities and Other Interest-Earning Assets" contained in
"Management Discussion and Analysis" in the Annual Report, which is listed as an
exhibit under Item 14 is incorporated herein by reference.
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The following table presents the name of the issuer and the aggregate amortized
cost and aggregate estimated fair value of securities of each issuer for those
securities in InterWest's portfolio for which the aggregate amortized cost
exceeds 10 percent of InterWest's shareholders' equity as of September 30, 1998.
Estimated
Dollars in thousands Amortized Cost Fair Value
- -------------------- -------------- ----------
Chase Mortgage Finance Corporation ............... $19,165 $18,514
GE Capital Mortgage Services, Inc................. 52,741 52,350
LENDING ACTIVITIES
The section "Loans Receivable and Loans Held for Sale" contained in "Management
Discussion and Analysis" in the Annual Report, which is listed as an exhibit
under Item 14 is incorporated herein by reference.
ALLOWANCE FOR LOSSES ON LOANS
The section "Allowance for Losses on Loans" contained in "Management Discussion
and Analysis" in the Annual Report, which is listed as an exhibit under Item 14
is incorporated herein by reference.
NONPERFORMING ASSETS
The section "Nonperforming Assets" contained in "Management Discussion and
Analysis" in the Annual Report, which is listed as an exhibit under Item 14 is
incorporated herein by reference.
DEPOSITS
The section "Deposits" contained in "Management Discussion and Analysis" in the
Annual Report, which is listed as an exhibit under Item 14 is incorporated
herein by reference.
BORROWINGS
The section "FHLB Advances, Securities Sold Under Agreements to Repurchase and
Other Borrowings" contained in "Management Discussion and Analysis" in the
Annual Report, which is listed as an exhibit under Item 14 is incorporated
herein by reference.
PERSONNEL
As of September 30, 1998, InterWest Bancorp, including its
subsidiaries, had 864 full-time equivalent employees. InterWest believes that
employees play a vital role in the success of a service company such as
InterWest and that InterWest's relationship with its employees is good. The
employees are not represented by a collective bargaining unit.
COMPETITION
The banking industry is highly competitive. InterWest Bancorp's
subsidiary banks face strong competition in attracting deposits and in
originating loans. The most direct competition for deposits has historically
come from savings institutions, commercial banks and credit unions located in
the primary market area. As with all banking organizations, InterWest has
experienced increasing competition from nonbanking sources, including mutual
funds, corporate and governmental debt securities and other investment
alternatives. InterWest's competition for loans comes principally from savings
institutions, commercial banks, credit unions and mortgage banking companies.
Many of
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InterWest's competitors have more significant financial resources,
larger market share and greater name recognition than InterWest. The existence
of such competitors may make it difficult for InterWest to achieve its financial
goals.
InterWest 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. InterWest competes for
deposits by offering depositors a wide variety of savings accounts, checking
accounts, certificates 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 generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. They are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
may exist which apply to and regulate the banking industry, but are not
referenced below.
InterWest Bancorp is a bank holding company. Its wholly-owned
subsidiaries are InterWest Bank, Pacific Northwest Bank , Pioneer National Bank
and Kittitas Valley Bank, N.A. (collectively, the "Subsidiaries"). The Bank
Holding Company Act of 1956, as amended ("BHCA") subjects InterWest Bancorp and
the Subsidiaries to supervision and examination by the Federal Reserve Bank
("FRB"), and InterWest Bancorp files annual reports of operations with the FRB.
BANK HOLDING COMPANY REGULATION
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. 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 that results in
total ownership or control, directly or indirectly, of more than 5% of the
voting shares of such bank; (2) merge or consolidate with another bank holding
company; or (3) acquire substantially all of the assets of any additional banks.
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 both in-state and out-of-state banks.
Control of Nonbanks. With certain exceptions, the BHCA prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company that is not a bank or a bank holding company unless
the FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is
well-capitalized and meets certain criteria specified by the FRB, it may engage
de novo in certain permissible nonbanking activities without prior FRB approval.
Control Transactions. The Change in Bank Control Act of 1978, as
amended, requires a person (or group of persons acting in concert) acquiring
"control" of a bank holding company to provide the FRB with 60 days' prior
written notice of the proposed acquisition. Following receipt of this notice,
the FRB has 60 days within which 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 expiration of the disapproval period if
the FRB issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the FRB's approval before acquiring 25%
(5% if the "company" is a bank holding company) or more of the outstanding
shares or otherwise obtaining control over InterWest Bancorp.
5
TRANSACTIONS WITH AFFILIATES
InterWest Bancorp and the Subsidiaries are deemed affiliates within the
meaning of the Federal Reserve Act, and transactions between affiliates are
subject to certain restrictions. Accordingly, InterWest Bancorp and the
Subsidiaries must comply with Sections 23A and 23B of the Federal Reserve Act.
Generally, Sections 23A and 23B (1) limit the extent to which a 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 shareholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
TIE-IN ARRANGEMENTS
InterWest Bancorp and the Subsidiaries cannot engage 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 InterWest Bancorp nor the Subsidiaries 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.
The FRB has adopted significant amendments to its anti-tying rules
that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies
and their non-bank subsidiaries; (2) allow banks greater flexibility to package
products with their affiliates; and (3) establish a safe harbor from the trying
restrictions for certain foreign transactions. These amendments were designed to
enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. However, the impact of the amendments on InterWest Bancorp and the
Subsidiaries is unclear at this time.
STATE LAW RESTRICTIONS
As a Washington corporation, InterWest Bancorp may be subject to
certain limitations and restrictions as provided under applicable Washington
corporate law. InterWest Bank, a Washington state-charted savings bank, and
Pacific Northwest Bank, a Washington state-chartered commercial bank, are
subject to supervision and regulation by the Washington Department of Financial
Institutions (the "DFI").
THE SUBSIDIARIES
GENERAL
InterWest Bank and Pacific Northwest Bank are subject to extensive
regulation and supervision by both the Washington Department of Financial
Institutions and the Federal Deposit Insurance Corporation (the "FDIC"). Pioneer
National Bank and Kittitas Valley Bank, N.A., as national banking associations,
are subject to regulation and examination by the Office of the Comptroller of
Currency (the "OCC"). The federal laws that apply to the Subsidiaries
6
regulate, among other things, the scope of their business, their investments,
their 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 Subsidiaries generally have been promulgated to
protect depositors and not to protect shareholders of such institutions or their
holding companies.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the Federal Reserve or the FDIC evaluates the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those banks. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility.
INSIDER CREDIT TRANSACTIONS. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA"), each federal banking agency has prescribed, by
regulation, noncapital safety and soundness standards for institutions under its
authority. These standards cover internal controls, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution which
fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of InterWest Bancorp believes that the
Subsidiaries meet all such standards, and therefore, does not believe that these
regulatory standards materially affect InterWest Bancorp's business operations.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has "opted
out." The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
With regard to interstate bank mergers, Washington has "opted in" to
the Interstate Act and allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Washington law generally authorizes the
acquisition of an in-state bank by an out-of-state bank or bank holding company
through the acquisition of or a merger
7
with a financial institution that has been in existence for at least 5 years
prior to the acquisition. At this time, the full impact that the Interstate Act
might have on InterWest Bancorp is impossible to predict.
DEPOSIT INSURANCE
The deposits of the Subsidiaries are currently insured to a maximum of
$100,000 per depositor by the FDIC. All insured banks are required to pay
semi-annual deposit insurance premium assessments to the FDIC.
The FDICIA included provisions to reform the Federal Deposit Insurance
System, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources, or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on how much risk they present to the BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
DIVIDENDS
The principal source of InterWest Bancorp's cash revenues is dividends
received from the Subsidiaries. The payment of dividends is subject to
government regulation, in that regulatory authorities may prohibit banks and
bank holding companies from paying dividends which would constitute an unsafe or
unsound banking practice. In addition, a bank may not pay cash dividends if that
payment could reduce the amount of its capital below that necessary to meet
minimum applicable regulatory capital requirements. Other than the laws and
regulations noted above, which apply to all banks and bank holding companies,
neither InterWest Bancorp nor the Subsidiaries is currently subject to any
regulatory restrictions on its dividends.
CAPITAL ADEQUACY
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The FDIC and Federal Reserve use risk-based capital guidelines for
banks and bank holding companies. These are designed to make such capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I capital. Tier I capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
8
companies and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the FDIC, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier I risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which are
deemed to be "undercapitalized" depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions.
InterWest Bancorp does not believe that these regulations have any material
effect on their operations.
EFFECTS OF GOVERNMENT MONETARY POLICY
The earnings and growth of InterWest Bancorp are affected not only by
general economic conditions, but also by the fiscal and monetary policies of the
federal government, particularly the Federal Reserve. The Federal Reserve can
and does implement national monetary policy for such purposes as curbing
inflation and combating recession, but its open market operations in U.S.
government securities, control of the discount rate applicable to borrowings
from the Federal Reserve, and establishment of reserve requirements against
certain deposits, influence the growth of bank loans, investments and deposits,
and also affect interest rates charged on loans or paid on deposits. The nature
and impact of future changes in monetary policies and their impact on InterWest
Bancorp and the Subsidiaries cannot be predicted with certainty.
CHANGES IN BANKING LAWS AND REGULATIONS
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. This year, legislation was
proposed in Congress which contained proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. Although the legislation was not passed in the 1998 general
session of Congress, similar legislation may be proposed in the coming years
and, if enacted into law, such bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills may reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations of
bank holding companies, alter the extent to which banks could engage in
securities activities, and change the structure and jurisdiction of various
financial institution regulatory agencies. Whether or in what form such
legislation may be adopted, or the extent to which the business of InterWest
Bancorp might be affected thereby, cannot be predicted with certainty.
TAXATION
FEDERAL TAXATION
GENERAL. InterWest Bancorp and its subsidiaries report their income on
a fiscal year basis using the accrual method of accounting. Except for interest
expense rules pertaining to certain tax exempt income applicable to banks and
the recently repealed bad debt reserve deduction, InterWest is subject to
federal income tax, under existing provisions of the Internal Revenue Code of
1986, as amended, in generally the same manner as other corporations. 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
InterWest. InterWest has not been audited by the IRS during the past five years.
Reference is made to Note 17 of the Notes to Consolidated Financial Statements
contained in the Annual Report for additional information concerning the income
taxes.
TAX BAD DEBT RESERVE RECAPTURE. For taxable years beginning prior to
January 1, 1996, qualified thrift institutions such as InterWest Bank were
permitted to establish a reserve for bad debts based on InterWest's actual loss
9
experience or based on a percentage equal to 8 percent of InterWest Bank's
taxable income, computed with certain adjustments. Each year, InterWest Bank
selected the most favorable method for calculating the tax deduction
attributable to the tax bad debt reserve. The Small Business Job Protection Act
of 1996 requires that InterWest Bank recapture for federal income tax purposes
the portion of the balance of tax bad debt reserves that exceeds the year end
1987 balance, with certain adjustments. As a result of this legislation, the
recaptured amount are to be taken into taxable income ratably over a six-year
period beginning in fiscal year 2000. This legislation also requires InterWest
Bank to calculate the tax bad debt deduction based on actual current losses.
DIVIDENDS-RECEIVED DEDUCTION. InterWest Bancorp may exclude from its
income 100 percent of dividends received from subsidiary banks as a member of
the same affiliated group of corporations.
WASHINGTON STATE TAXATION
The state of Washington does not currently have a corporate income tax.
The subsidiary banks are subject to a business and occupation tax which is
imposed under Washington law at the rate of 1.50 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.
ITEM 2. PROPERTIES
The main office of InterWest Bancorp and InterWest Bank, which is owned
by InterWest Bank, is located in Oak Harbor, Washington. The subsidiary banks
operate a total of 55 branch offices, of which 45 are owned by the respective
subsidiary banks and ten are leased from third parties. InterWest Bank operates
40 branch offices, located in Western and Central Washington state. Pacific
Northwest Bank operates seven branch offices in Western Washington. The main
office of Pacific Northwest Bank is located in Seattle, Washington. Pioneer
National Bank operates 5 branch offices in Central Washington. The main office
of Pioneer National Bank is located in Yakima, Washington. Kittitas Valley Bank,
N.A. operates three branch offices in Central Washington. The main office of
Kittitas Valley Bank, N.A. and is located in Ellensburg, Washington. See Note 9
in the Notes to Consolidated Financial Statements for further information with
respect to Properties.
ITEM 3. LEGAL PROCEEDINGS
InterWest is not engaged in any legal proceedings of a material nature
at the present time. Periodically, there are various claims and lawsuits
involving InterWest Bancorp and its subsidiaries, principally as defendants,
such as claims to enforce liens, condemnation proceedings on properties in which
InterWest holds security interests, claims involving the making and servicing of
real property loans and other issues incident to InterWest's business. In the
opinion of management and InterWest'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
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
InterWest Bancorp's common stock trades on The Nasdaq Stock Market
under the symbol "IWBK". As of September 30, 1998, there were 15,651,345 shares
of common stock outstanding held by approximately 6,200 shareholders.
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 1998
First Quarter ....................... $27.42 $24.00 $0.12
Second Quarter ...................... 30.17 24.17 0.13
Third Quarter ....................... 31.50 27.83 0.13
Fourth Quarter ...................... 30.67 21.50 0.14
FISCAL YEAR 1997
First Quarter ....................... $22.25 $19.42 $0.09
Second Quarter ...................... 24.33 21.00 0.09
Third Quarter ....................... 26.75 18.33 0.10
Fourth Quarter ...................... 28.83 24.67 0.11
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the tables captioned "Selected
Consolidated Financial Data" 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" 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 "Market Risk" in "Management Discussion and Analysis"
in the Annual Report, which is listed under Item 14 herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated 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
None.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the sections captioned "Election of
Directors", "Management -- Executive Officers" and "Compliance with Section
16(A) of the Exchange Act" in InterWest Bancorp's Proxy Statement for the 1999
Annual Meeting of Shareholders ("Proxy Statement").
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 "Management --Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the section captioned "Management --Security Ownership of Certain
Beneficial Owners" of the Proxy Statement.
(c) Changes in Control
InterWest Bancorp is not aware of any arrangements, including any pledge
by any person of securities of InterWest Bancorp, the operation of which
may at a subsequent date result in a change in control of InterWest
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,
1998 and 1997
(b) Consolidated Statements of Income For the Years Ended
September 30, 1998, 1997 and 1996
(c) Consolidated Statements of
Shareholders' Equity For the Years Ended September 30, 1998, 1997
and 1996
(d) Consolidated Statements of Cash Flows For the Years Ended
September 30, 1998, 1997 and 1996
(e) Notes to Consolidated Financial Statements
12
Notes to Consolidated Financial Statements
(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) Reports on Form 8-K
InterWest Bancorp filed a Form 8-K dated June 15, 1998, which was
amended July 24, 1998 to report the completion of the acquisitions of
Pacific Northwest Bank and Pioneer Bancorp, Inc. Historical financial
statements and management discussion and analysis have been restated to
reflect these acquisitions.
InterWest Bancorp filed a Form 8-K dated July 21, 1998 to report the
impact of a three-for-two stock split on the pending acquisition of
Kittitas Valley Bancorp, Inc.
InterWest Bancorp filed a Form 8-K dated August 31, 1998 to report the
completion of the acquisition of Kittitas Valley Bancorp, Inc.
(c) Exhibits
(3.1) Restated Articles of Incorporation of InterWest Bancorp, Inc.
(3.2) First Amendment to the Articles of Incorporation of InterWest Bancorp,
Inc.
(3.3) Restated Bylaws of InterWest Bancorp, Inc.
(3.4) Third 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) InterWest Bancorp, Inc. Amended and Restated 1993 Incentive Stock Option
Plan
(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))
13
(10.13) Employment Agreement with Patrick M. Fahey (incorporate by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-4
(File No. 333-49131))
(10.14) First National Bank of Port Orchard 1990 Employee and Director Stock
Option Plan (incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8 (File No. 333-50685))
(10.15) Pacific Northwest Bank 1988 Stock Option Plan (incorporated by reference
to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8
(File No. 333-57679))
(10.16) Pioneer Bancorp, Inc. Amended and Restated Incentive Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Registrant's
Registration Statement on Form S-8 (File No. 333-57679))
(10.17) Kittitas Valley Bancorp 1996 Director Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-65839))
(10.18) Kittitas Valley Bancorp Employee Stock Option Plan (incorporated by
reference to Exhibits 99.2 and 99.3 to the Registrant's Registration
Statement on Form S-8 (File No. 333-65839))
(13) Selected Consolidated Financial Data, Management Discussion and Analysis
and Consolidated Financial Statements included in the 1998 Annual Report
to Shareholders
(21) Subsidiaries of the Registrant
(23.1) Consent of Independent Auditors
(27) Financial Data Schedule
14
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, InterWest Bancorp, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
InterWest Bancorp, Inc.
Date: December 15, 1998 By: /s/ Stephen M.Walden
-------------------------------------
Stephen M. Walden
President and Chief Executive Officer
(Principal Executive Officer)
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 this 15th day of December, 1998.
Signatures Titles
/s/ Stephen M. Walden Director, President and Chief Executive Officer
- ---------------------------
Stephen M. Walden
/s/ H. Glenn Mouw Executive Vice President (Principal Financial
- --------------------------- Officer)
H. Glenn Mouw
/s/ Eric Jensen Chief Accounting Officer (Principal Accounting
- --------------------------- Officer)
Eric Jensen
/s/ Barney R. Beeksma Chairman of the Board
- ---------------------------
Barney R. Beeksma
/s/ Gary M. Bolyard Director
- ---------------------------
Gary M. Bolyard
Director
- ---------------------------
Larry Carlson
/s/ Michael T. Crawford Director
- ---------------------------
Michael T. Crawford
/s/ Patrick M. Fahey Director
- ---------------------------
Patrick M. Fahey
/s/ Jean Gorton Director
- ---------------------------
Jean Gorton
/s/ C. Stephen Lewis Director
- ---------------------------
C. Stephen Lewis
/s/ Clark H. Mock Director
- ---------------------------
Clark H. Mock
/s/ Russel E. Olson Director
- ---------------------------
Russel E. Olson
/s/ Vern Sims Director
- ---------------------------
Vern Sims