Firstbank NW Corporation
Filed 6/26/02
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22435
FIRSTBANK NW CORP.
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(Exact name of registrant as specified in its charter)
Washington 84-1389562
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
920 Main Street, Lewiston, Idaho 83501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 746-9610
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The Registrant's revenues for the year ended March 31, 2002 were $24.3
million.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was $14,848,309 based on the last reported sale price of the common
stock of the Registrant on the Nasdaq National Market on June 24, 2002. For
purposes of this disclosure, shares of common stock held by persons who hold
more than 5% of the outstanding common stock and by officers and directors of
the Registrant have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
As of June 26, 2002, there were 1,326,471 shares outstanding of the
Registrant's common stock.
Transitional Small Business Disclosure format (check one):
Yes [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's definitive proxy statement for its annual
meeting of stockholders to be held on July 17, 2002 are incorporated by
reference into Part III of this Form 10-KSB.
PART I
Item 1. Business
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General
FirstBank NW Corp. (formerly known as FirstBank Corp.) ("Company"), a
Washington corporation, was organized in Delaware in March of 1997 for the
purpose of becoming the holding company for FirstBank Northwest (formerly known
as First Federal Bank of Idaho, a Federal Savings Bank) ("Bank") upon the Bank's
conversion from a federally chartered mutual to a federally chartered stock
savings bank ("Conversion"). The Company completed its conversion and initial
public offering on July 1, 1997 through the sale of 1,983,750 shares of common
stock at $10.00 per share. On January 30, 1998, the Bank converted to a
Washington chartered savings bank.
The Bank, founded in 1920, is a Washington-chartered state savings bank
located in Lewiston, Idaho. The Bank, which was formed as an Idaho mutual
savings and loan association, converted to a federal mutual savings and loan
association in 1935 and adopted the federal mutual savings bank charter in 1990.
In July 1997, the Bank relocated its main office to Clarkston, Washington and on
January 30, 1998 converted to a Washington-chartered savings bank. The Bank is
currently regulated by the State of Washington, its primary regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The
Bank's deposits are insured by the FDIC's Savings Association Insurance Fund
("SAIF") and have been federally insured since 1933. The Bank has been a member
of the Federal Home Loan Bank ("FHLB") System since 1933.
The Bank is a community-oriented financial institution, operating in
one business segment, that engages primarily in the business of attracting
deposits from the general public and using those funds to originate residential
mortgage loans, commercial, and agricultural real estate loans within the Bank's
market area. The Bank also is active in originating construction, and consumer
and other non-real estate loans. The Bank has adopted a mortgage banking
strategy pursuant to which it generally sells a majority of the fixed-rate
residential mortgage loans with maturities in excess of 15 years that it
originates while retaining the servicing rights on most of the conventional
loans it sells.
Market Area
FirstBank's general market area includes Northern Idaho and Eastern
Washington. Administratively headquartered in Lewiston, Idaho, the Bank operates
eight full-service offices in Lewiston, Lewiston Orchards, Moscow, Grangeville,
Coeur d'Alene, and Post Falls, Idaho, and in Clarkston and Liberty Lake,
Washington. The Bank also operates four real estate loan production offices, in
Lewiston, Moscow, Coeur d'Alene and Boise, Idaho, and commercial and
agricultural production centers in Lewiston, Coeur d'Alene and Moscow, Idaho.
Most of the Bank's depositors reside in the communities surrounding the Bank's
offices. The vast majority of the Bank's loans are made to borrowers residing in
the counties in which the Bank's offices are located and in the surrounding
counties.
In general, the market areas served by the Bank are dependent on
agriculture, manufacturing, tourism and the forest products industry, and the
local economies reflect the health or weakness of those industries. Agricultural
activity in the Bank's market area is mainly dry land farming, the primary crop
being wheat. Other major crops are barley, peas, lentils, beans and grass seed.
Livestock production is also a major part of the region's economy. Lewiston is
the largest city in Northern Idaho and serves as the regional center for state
government. The economy of Lewiston, in Nez Perce County, is connected to that
of Clarkston, Washington, which is separated from Lewiston by the Snake River.
The Lewis-Clark Valley has a population of approximately 58,000. Forest products
and agriculture are the dominant industries in the Lewiston-Clarkston area.
Medical services, light manufacturing and tourism have helped maintain the
economy in recent years. Moscow, Idaho, in Latah County, has a population of
approximately 21,000 and the county itself has a population of approximately
34,000. Agriculture and higher education are the primary industries in Moscow.
The University of Idaho is located in Moscow and is the city's largest employer.
In addition, Washington State University is located eight miles west of Moscow
in Pullman, Washington. Grangeville, Idaho, in Idaho County, has an economy
based primarily on agriculture, the forest products industry and the U.S. Forest
Service. Declines in the forest products industry has resulted in a decline in
the population of Idaho County over the last decade. Tourism has become
increasingly important to the Grangeville economy in recent years. Coeur
d'Alene, Idaho, in Kootenai County, has a population of approximately 35,000 and
the county itself has approximately 110,000 residents. Healthcare,
manufacturing, construction, tourism, and forest products are the major
industries of this region. Coeur d'Alene has experienced significant growth in
the past ten years, primarily because of the healthcare, retail trade,
manufacturing, and tourism industries. Real estate activity has been high with a
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large amount of new home construction due to the increasing population. Liberty
Lake, Washington is located in the rapidly growing I-90 corridor between Coeur
d'Alene, Idaho and Spokane, Washington. The Bank's growth prospects throughout
that region are believed by management to be outstanding as more businesses and
technology firms locate there. In March 2002, the Bank expanded into the rapidly
growing Boise market by opening the Boise Residential Loan Center. The Boise MSA
(Metropolitan Statistical Area), which includes Ada and Canyon counties has a
population in excess of 400,000, the most densely populated area in the state of
Idaho. Boise is the capital of Idaho, the home of Boise State University, and
headquarters for a large number of national and international corporations. The
Bank's growth opportunity in the Boise market is believed by management to be
outstanding.
Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the fiscal years indicated.
At March 31,
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FINANCIAL CONDITION DATA: 2000 2001 2002
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(In Thousands)
Total assets $ 247,898 $ 281,062 $ 307,840
Loans receivable, net 187,664 219,151 238,136
Cash and cash equivalents 12,496 12,805 24,012
Investment securities available-for-sale 11,335 12,568 12,524
Mortgage-backed securities held-to-maturity 2,484 2,335 2,140
Mortgage-backed securities available-for-sale 18,741 17,704 9,293
Deposits 144,907 157,797 196,123
Advances from FHLB 74,578 90,917 79,722
Stockholders' equity 25,866 27,976 27,813
Year Ended March 31,
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2000 2001 2002
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SELECTED OPERATING DATA: (In Thousands, except per share data)
Interest income $ 16,979 $ 20,757 $ 20,248
Interest expense 8,437 11,617 9,992
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Net interest income 8,542 9,140 10,256
Provision for loan losses 287 303 1,064
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Net interest income after provision for loan losses 8,255 8,837 9,192
Non-interest income 2,426 2,594 4,015
Non-interest expenses 8,158 8,683 9,766
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Income before income tax expense 2,523 2,748 3,441
Income tax expense 818 866 1,065
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Net income $ 1,705 $ 1,882 $ 2,376
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Per Share Data:
Basic earnings per share $ 1.11 $ 1.34 $ 1.76
Diluted earnings per share $ 1.06 $ 1.30 $ 1.70
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Dividends per share $ 0.36 $ 0.38 $ 0.44
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At or For the
Year Ended March 31,
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2000 2001 2002
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KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1) 0.75% 0.71% 0.82%
Return on average equity (2) 6.36 7.07 8.47
Average equity to average assets (3) 11.82 10.00 9.73
Total equity to total assets at end of year 10.43 9.95 9.03
Interest rate spread (4) 3.46 3.21 3.44
Net interest margin (5) 4.15 3.83 3.96
Average interest-earning assets to average interest-bearing
liabilities 117.43 113.10 114.05
Non-interest expense as a percent of average assets 3.60 3.27 3.39
Efficiency ratio (6) 72.64 71.82 66.57
Dividend payout ratio 36.95 29.19 25.60
Equity Ratios:
Tier I capital to average assets 10.00 9.18 8.79
Tier I capital to risk-weighted assets 13.40 13.52 12.28
Total capital to risk-weighted assets 13.10 14.45 13.47
Asset Quality Ratios:
Nonaccrual and 90 days or more past due loans as a percent
of loans receivable, net 0.31 0.66 0.25
Nonperforming assets as a percent of total assets 0.33 0.53 0.36
Allowance for loan losses as a percent of total loans
receivable 0.83 0.78 1.04
Allowance for loan losses as a percent of nonperforming
loans 275.13 121.83 433.67
Net charge-offs to average outstanding loans 0.02 0.07 0.12
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Average equity divided by average assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income.
Lending Activities
General. The principal lending activity of the Bank is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one to four-family residential property. With the establishment
of the Commercial Loan Department in fiscal 1998, commercial real estate and
commercial non-real estate lending have become a significant portion of the
lending activities. The Bank is also active in originating construction and
agricultural real estate loans. The Bank to a lesser extent also originates home
equity and agricultural operating loans. The Bank's net loans receivable totaled
$238.1 million at March 31, 2002, representing 77.4% of consolidated total
assets. The Bank uses the FHLB twelve month advance rate as the index for
adjustable rate loans.
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Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio by type of loan for the years indicated. The Bank
had no concentration of loans exceeding 10.0% of total gross loans other than as
disclosed below.
At March 31,
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2000 2001 2002
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Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Real estate loans:
Residential $ 71,796 37.19% $ 74,892 33.35% $ 66,420 27.03%
Agricultural 16,003 8.29 15,383 6.85 16,264 6.62
Commercial 24,988 12.95 37,969 16.91 52,496 21.37
Construction 7,819 4.05 8,028 3.57 9,870 4.02
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Total real estate loans 120,606 62.48 136,272 60.68 145,050 59.04
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Consumer and other loans:
Commercial 32,800 16.99 41,789 18.61 55,568 22.62
Home equity 24,626 12.76 27,323 12.17 24,832 10.11
Other consumer 7,533 3.90 8,255 3.67 7,924 3.23
Agricultural operating 7,467 3.87 10,938 4.87 12,289 5.00
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Total consumer and other loans 72,426 37.52 88,305 39.32 100,613 40.96
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Total loans receivable 193,032 100.00% 224,577 100.00% 245,663 100.00%
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Less:
Loans in process 3,349 3,248 4,272
Unearned loan fees and discounts 415 420 692
Allowance for loan losses 1,604 1,758 2,563
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Loans receivable, net $ 187,664 $ 219,151 $ 238,136
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Residential Real Estate Lending. The Bank is active in the origination
of mortgage loans to enable borrowers to purchase or refinance existing
residential real estate. At March 31, 2002, $66.4 million, or 27.0%, of the
Bank's total gross loan portfolio consisted of loans secured by residential real
estate. The Bank presently originates both adjustable rate mortgage ("ARM")
loans and fixed-rate mortgage loans with maturities of up to 30 years.
Substantially all of the Bank's residential mortgage loans are secured by
property located in the Bank's primary market area. Very few of the properties
securing the Bank's residential mortgage loans are second homes or vacation
properties. The Bank's conventional mortgage loans are generally underwritten
and documented in accordance with the guidelines established by the Federal Home
Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage
Association ("Fannie Mae").
The Bank generally retains the conventional fixed-rate mortgages with
maturities of 15 years or less and sells all of the fixed-rate mortgage loans
with maturities in excess of 15 years that it originates. The Bank generally
retains all of the ARM loans it originates. A majority of the loans sold by the
Bank are sold to private investors. The remainder of loans sold are purchased by
Fannie Mae or Freddie Mac. The Bank sells loans to Freddie Mac and Fannie Mae on
a servicing-retained basis, while loans sold to private investors are sold
servicing-released. Generally, loans are sold without recourse, although on
occasion, in the past the Bank has sold loans with recourse. As of March 31,
2002, the Bank remains contingently liable for approximately $250,000 of loans
sold with recourse. The Bank's decision to hold or sell loans is based on its
asset/liability management policies and goals and the market conditions for
mortgages. See "Loan Originations, Sales and Purchases."
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The Bank offers ARM loans at rates and terms competitive with market
conditions. The Bank currently offers ARM products that adjust annually after an
initial fixed period of one, three or five years based on the One Year U.S.
Treasury Note Constant Maturity Rate. ARM loans held in the Bank's portfolio do
not permit negative amortization of principal and carry no prepayment
restrictions. The periodic interest rate cap (the maximum amount by which the
interest rate may be increased or decreased in a given period) on the Bank's ARM
loans is generally 2% per adjustment period and the lifetime interest rate cap
is generally 6% over the initial interest rate of the loan. The terms and
conditions of the ARM loans offered by the Bank, including the index for
interest rates, may vary from time to time. Borrower demand for ARM loans 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 initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
A significant portion of the Bank's ARM loans are not readily saleable
in the secondary market because they are not originated in accordance with the
purchase requirements of Freddie Mac or Fannie Mae. The Bank requires that
non-conforming loans demonstrate appropriate compensating factors that offset
their lack of conformity. Although such loans satisfy the Bank's underwriting
requirements, they are "non-conforming" because they do not satisfy property
limits, credit requirements, repayment capacities or various other requirements
imposed by Freddie Mac and Fannie Mae. Accordingly, the Bank's non-conforming
loans can be sold only to private investors on a negotiated basis. At March 31,
2002, the Bank's residential loan portfolio included $11.2 million of
non-conforming ARM loans. Generally, the Bank's non-conforming ARM loans bear a
higher rate of interest than similar conforming ARM loans. The Bank has
historically found that its origination of non-conforming loans has not resulted
in increased amounts of nonperforming loans.
The Bank also originates residential mortgage loans that are insured by
the Federal Housing Administration, or guaranteed by the Veterans Administration
or the United States Department of Agriculture Rural Development. These loans
are sold to private investors or to the Idaho Housing and Finance Agency. A
significant portion of the Bank's residential mortgage loan originations in
recent years has consisted of government insured and guaranteed loans. Most of
these loans have been originated in the Coeur d'Alene area, where there is a
significant amount of entry-level housing available. The Bank generally sells
the government insured loans that it originates to private investors on a
servicing-released basis.
The retention of ARM loans in the Bank's loan portfolio helps reduce
the Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to increased rates to be paid by the customer. It is possible that during
periods of rising interest rates the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
Furthermore, because the ARM loans originated by the Bank generally provide, as
a marketing incentive, for "teaser rates" (i.e., initial rates of interest below
the rates that would apply were the adjusted index plus the applicable margin
initially used for pricing), these loans are subject to increased risks of
default or delinquency. The Bank attempts to reduce the potential for
delinquencies and defaults on ARM loans by qualifying the borrower based on the
borrower's ability to repay the ARM loan assuming a rate of 200 basis points
above the initial interest rate or the fully indexed rate, whichever is higher.
Another consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds.
While one- to four-family residential real estate loans are generally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Bank's
loan portfolio contain due-on-sale clauses providing that the Bank may declare
the unpaid amount due and payable upon the sale of the property securing the
loan. Typically, the Bank enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
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The Bank generally obtains title insurance insuring the status of its
lien on all loans where real estate is the primary source of security. The Bank
also requires that fire and casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price, with the condition that
private mortgage insurance is generally required on loans with loan-to-value
ratios greater than 80%. Higher loan-to value ratios are available on certain
government insured programs.
Construction Lending. The Bank invests a portion of its loan portfolio
in residential construction loans. This activity has been prompted by favorable
economic conditions in Northern Idaho, especially in the area around Coeur
d'Alene, lower long-term interest rates and an increased demand for housing
units as a result of the population growth in Northern Idaho. At March 31, 2002,
construction loans totaled $9.9 million, or 4.0% of total loans. At such date,
the average amount of the Bank's construction loans was approximately $143,000.
The largest construction loan in the Bank's portfolio at March 31, 2002 was
$784,000. During the year ended March 31, 2002, construction loans constituted
7.4% of total loan originations. The Bank's recent entry into the Boise area
will offer an opportunity for increased construction loan activity.
The Bank originates construction loans to professional home builders
and to individuals building their primary residence. In addition, the Bank
occasionally makes loans to builders for the acquisition of building lots.
Construction loans made by the Bank to professional home builders include both
those with a sales contract or permanent financing in place for the finished
homes and those for which purchasers for the finished homes may be identified
either during or following the construction period (speculative loans). At March
31, 2002, speculative loans totaled $3.6 million, or 36.0% of the total
construction loan portfolio. Construction loans to individuals are generally
converted to permanent mortgage loans upon completion of the construction
period. At March 31, 2002, custom construction loans to individuals totaled $2.4
million or 24.8% of the total construction loan portfolio.
Construction lending provides the Bank with the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified (i.e., speculative loans) carry more
risk because the payoff for the loan is dependent on the builder's ability to
sell the property prior to the time that the construction loan is due. The Bank
has sought to address these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices. In addition, because much of
the Bank's construction lending is in the Coeur d'Alene area, changes in the
local economy and real estate market could adversely affect the Bank's
construction loan portfolio. Accordingly, the Bank closely monitors sales and
listings in the Coeur d'Alene real estate market and will limit the amount of
speculative loans if it perceives there are unfavorable market conditions.
Loans to builders for the construction of one-to-four family residences
are generally made for a term of 12 months. The Bank's loan policy includes a
maximum loan-to-value ratio of 75%. The Bank maintains a list of major builders
and establishes an aggregate credit limit for each major builder based on the
builder's financial strength, experience and reputation and monitors their
borrowings on a monthly basis. Each major builder is required to provide the
Bank with annual financial statements and other credit information. At March 31,
2002, the Bank had approved six major builders, the largest borrowing capacity
of which was approximately $3.5 million. At March 31, 2002, the Bank's major
builders had total loans of $1.7 million outstanding. For all other builders,
the Bank reviews the financial strength and credit of the builder on a loan by
loan basis.
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are based
on periodic on-site inspections by both Bank personnel and independent fee
inspectors. At inception, the Bank also requires the builder (other than
approved major builders) to deposit funds to the loans-in-process account
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covering the difference between the actual cost of construction and the loan
amount. Alternatively, the Bank may require that the borrower pay for the first
portion of construction costs before the loan proceeds are used. Major builders
are permitted to utilize the loan proceeds from the initiation of construction
and to carry the short-fall between construction costs and the loan amount,
based on their financial strength, until the property is sold.
Agricultural Lending. Agricultural lending has been an important part
of the Bank's lending strategy since the mid-1980s. The Chief Executive Officer
has 28 years of experience, the Chief Operating Officer has 22 years of
experience, and the Vice President of Agricultural Lending has 25 years of
experience in agricultural lending. The existing staff's experience maintains
the Bank as one of the most experienced agricultural lender in the area.
Agricultural Real Estate Lending. The Bank presently originates both
adjustable-rate and fixed-rate loans secured by farmland located in the Bank's
market area, primarily around Lewiston. The Bank offers adjustable-rate loans
that adjust annually after an initial fixed period of one, three or five years.
Such loans generally provide for up to a 25-year term. The Bank also offers
fixed-rate loans with a ten-year term and a ten-year amortization schedule. At
March 31, 2002, agricultural real estate loans totaled $16.3 million, or 6.6% of
the Bank's total loan portfolio.
Agricultural real estate loans generally are underwritten to Federal
Agricultural Mortgage Corporation ("Farmer Mac") standards so as to qualify for
sale in the secondary market, although the Bank currently retains most of these
loans for its portfolio. In originating an agricultural real estate loan, the
Bank considers the debt service coverage of the borrower's cash flow, the amount
of working capital available to the borrower, the financial history of the
farmer and the appraised value of the underlying property as well as the Bank's
experience with and knowledge of the borrower. An environmental assessment is
also performed. The maximum loan-to-value for agricultural real estate loans is
75%. At March 31, 2002, the largest agricultural real estate loan was $947,000,
which was performing according to its terms, and the Bank's average agricultural
real estate loan was approximately $137,000.
Agricultural real estate lending provides the Bank the opportunity to
earn yields higher than those generally available on standard conforming
residential real estate lending. However, agricultural real estate lending
involves a greater degree of risk than residential real estate loans. Payments
on agricultural real estate loans are dependent on the successful operation or
management of the farm property securing the loan. The success of the farm may
be affected by many factors outside the control of the farm borrower, including
adverse weather conditions that limit crop yields (such as hail, drought and
floods), declines in market prices for agricultural products and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. Farming in the Bank's market area is generally
dry-land farming, with wheat being the primary crop. Accordingly, adverse
circumstances affecting the area's wheat crop could have an adverse effect on
the Bank's agricultural loan portfolio.
The Bank is approved to originate agricultural real estate loans
qualifying for purchase by the Farmer Mac II program, which requires Farm
Service Agency guarantees up to a maximum of 90% of the principal and interest.
Once the guaranteed loan has been funded, the Bank generally sells the
guaranteed portion of the loan to Farmer Mac II, while retaining the servicing
rights on the entire loan.
Agricultural Operating Lending. At March 31, 2002, agricultural
operating loans totaled $12.3 million, or 5.0% of total loans. Agricultural
operating loans or lines of credit generally are made for a term of one to three
years and may be secured or unsecured. Such loans may be secured by a first or
second mortgage, or liens on property, vehicles, accounts receivable, crop held
or growing crop. Personal guarantees are frequently required for loans made to
corporations and their business entities. Payments on agricultural operating
loans depend on the successful operation of the farm, which may be adversely
affected by weather conditions that limit crop yields, fluctuations in market
prices for agricultural products, and changes in government regulations and
subsidies. Underwriting requires substantial cash working capital and annual
production income sufficient to meet payment obligations on an annual basis.
The risk of crop damage by weather conditions can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to obtain
multi-peril crop or hail insurance. Farmers may mitigate the effect of price
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declines through the use of futures contracts, options or forward contracts. The
Bank does not monitor or require the use of these instruments by its borrowers.
Commercial Real Estate Lending. Commercial real estate lending has
become a significant part of the Bank's lending strategy. At March 31, 2002, the
Bank's commercial real estate loan portfolio totaled $52.5 million, or 21.4% of
total loans. During the year ended March 31, 2002, originations of commercial
real estate loans totaled $25.9 million and constituted 11.0% of total loan
originations. In connection with the expansion of the Bank's community banking
activities, the Bank intends to continue commercial real estate lending, subject
to market conditions.
The Bank's commercial real estate loans include loans secured primarily
by owner-occupied buildings, storage facilities, manufactured home parks, small
office buildings, retail shops, multi-family residential properties and other
small commercial properties. The portfolio also contains a very limited amount
of specialty realty (i.e., restaurants, motels, etc.). Commercial real estate
loans in the Bank's portfolio primarily consists of loans originated by the
Bank. At March 31, 2002, the Bank's commercial real estate loan average size was
$338,000 and the largest loan was $2.5 million. Appraisals on properties that
secure commercial real estate loans are performed by an independent appraiser
engaged by the Bank before the loan is made. An environmental assessment is also
performed. Underwriting of commercial real estate loans includes a thorough
analysis of the cash flows generated by the real estate or the borrower's
business to support the debt service and the financial resources, experience,
and income level of the borrowers. Security debt coverage ratios, total debt
coverage ratios, and working capital assessments are key underwriting criteria.
Operating statements on most commercial loans are prepared and submitted to the
Bank on an annual basis.
Commercial Business Lending. Commercial lending has become increasingly
important to the Bank's lending strategy in recent years. The Bank's real estate
relationships have resulted in increased commercial lending opportunities with
these customers. This reflects the Bank's objective to provide its commercial
and small business customers with a complete lending and banking relationship.
The Company's staff of experienced lenders was able to increase nonresidential
commercial loans to 22.6% of the total loan portfolio as of March 31, 2002 from
18.6% of the total loan portfolio at March 31, 2001. The Bank presently
originates both adjustable-rate and fixed-rate loans secured by equipment,
accounts receivable and inventory. Loans secured by accounts receivable and
inventory are generally operating lines of credit renewed annually while
equipment secured loans are with terms of up to five years. Nonresidential
commercial lending has increased $13.8 million, from $41.8 million for the
fiscal year ended March 31, 2002 to $55.6 million for the fiscal year ended
2001. To more accurately reflect the overall interest rate environment, the Bank
has changed the index used for adjustable rate loans from the one year Treasury
constant maturity to the FHLB twelve month advance rate.
Commercial lending provides the Bank with an opportunity to receive
interest at rates higher than those generally available from residential
mortgage loans. However, the collateral for these loans is usually more
difficult to evaluate and monitor and, therefore, these loans involve a higher
degree of risk than commercial real estate or one-to-four family residential
mortgage loans. Because loan payments are dependent on cash flow and
profitability of the business, and require successful operation and management
of the business entity, repayment of such loans may be affected by adverse
conditions in the commercial real estate market or the economy. Accordingly,
management strength, performance history within the business sector and other
financial resources are included in underwriting criteria for commercial
business loans. In addition, personal guarantees are typically required to
assure those strengths are backing the credit relationship.
Of the commercial loan production in the fiscal year ended 2002,
operating loans represent 53.1%, equipment loans 16.3%, working capital loans
8.2%, letters of credit 5.5%, governmental and school districts loans 15.0%, and
small business and participation loans 1.9%. The Bank participates in small
business and industry guarantee programs that are designed to assist businesses
that cannot qualify for conventional financing.
Consumer and Other Lending. The Bank originates a variety of consumer
and other non-mortgage loans. Such loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. At March 31, 2002, the
Bank's consumer and other non-mortgage loans totaled approximately $32.8
million, or 13.3% of the Bank's total loans. The Bank's consumer loans consist
primarily of secured and unsecured consumer loans, automobile loans, boat loans,
recreation vehicle loans, home improvement and equity loans and deposit account
loans. The growth of the consumer loan portfolio in recent years has consisted
primarily of an increase in home equity loans, which the Bank has more
aggressively marketed.
9
At March 31, 2002, home equity loans totaled $24.8 million. The Bank
offers both home equity second mortgage loans and lines of credit. Substantially
all of the Bank's home equity loans are primarily secured by second mortgages on
residential real estate located in the Bank's primary market area. Home equity
second mortgage loans are generally offered with terms of five or ten years with
fixed interest rates and ten year term loans with adjustable interest rates.
Home equity lines of credit generally have adjustable interest rates based on
the prime rate. Home equity loans are generally underwritten at 80% loan to
value including the first mortgage with exceptions granted for demonstrated
exceptional financial strength.
Consumer and non-mortgage loans entail greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or secured
by rapidly depreciating assets such as automobiles and farm equipment. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. The application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 2002 regarding the dollar amount of principal
repayments for loans becoming due during the years indicated. All loans are
included in the year in which the final contractual payment is due. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due within one year. The table does not include any
estimate of prepayments which significantly shortens the average life of all
loans and may cause the Bank's actual repayment experience to differ from that
shown below.
One After 5 Years After 10 Years
Within Year Through Through Through Beyond
One Year 5 Years 10 Years 15 Years 15 Years Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Real estate loans:
Residential $ 93 $ 1,791 $ 15,262 $ 4,501 $ 44,773 $ 66,420
Construction 9,870 -- -- -- -- 9,870
Commercial 3,105 6,369 17,040 23,175 2,807 52,496
Agricultural 7,547 4,674 4,872 6,791 4,669 28,553
Commercial non-real estate 26,977 21,508 6,992 91 -- 55,568
Consumer and other loans 1,229 6,187 23,257 947 1,136 32,756
---------- ---------- ---------- ---------- ---------- ----------
Total loans receivable $ 48,821 $ 40,529 $ 67,423 $ 35,505 $ 53,385 $ 245,663
========== ========== ========== ========== ========== ==========
The following table sets forth the dollar amount of all loans due after
March 31, 2002, that have fixed interest rates and have floating or adjustable
interest rates.
Fixed Floating or
Rates Adjustable Rates
--------- ----------------
(In Thousands)
Real estate loans:
Residential $ 46,257 $ 20,163
Construction 8,575 1,295
Commercial 4,401 48,095
Agricultural 2,879 25,674
Commercial non-real estate 17,147 38,421
Consumer and other loans 23,861 8,895
--------- ------------
Total loans receivable $ 103,120 $ 142,543
========= ============
10
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
Loan Solicitation and Processing. Loan applicants come primarily
through referrals from existing customers, realtors and homebuilders, and
walk-ins. The Bank also uses radio and newspaper advertising to create awareness
of its loan products. In addition to originating loans through its branch
offices, the Bank operates four mortgage loan centers, located in Coeur d'Alene,
Lewiston, Moscow, and Boise, Idaho, to supplement residential real estate loan
originations. The Bank does not utilize any loan correspondents, mortgage
brokers or other forms of wholesale loan origination. Upon receipt of a loan
application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral generally is undertaken by a certified, independent fee appraiser.
Residential real estate loans up to $307,000 that qualify for sale in
the secondary market may be approved by the Bank's underwriters. All other
portfolio real estate loans up to $1.3 million must be approved by two members
of the management loan committee. Delegated loan approval authority to
residential lending centers is authorized within prescribed limits for approved
major builder loans. All other construction loans resulting in total extension
of credit to one borrower up to $1.3 million must be approved by two members of
the management loan committee. Any loan that would result in the total extension
of credit to one borrower to be in excess of $1.3 million or to a major builder
in excess of its maximum credit limit must be approved by the Board of Directors
Loan Committee. Consumer loans up to $50,000 and home equity loans up to
$150,000 may be approved by designated underwriters provided that the total loan
relationship is $200,000 or less. All other consumer and home equity loans must
be approved by two members of the management loan committee.
Loan Originations, Sales and Purchases. While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
is dependent upon relative customer demand for loans in its market. For the year
ended March 31, 2002, the Bank originated $234.5 million of loans. Residential
real estate loan originations totaled $95.5 million for the year ended March 31,
2002, which constituted 40.7% of total loan originations.
In the early 1990's, the Bank adopted a mortgage banking strategy
pursuant to which it seeks to generate income from the sale of loans (which may
be sold either servicing-retained or servicing-released) and from servicing fees
from loans sold on a servicing-retained basis. Generally, the level of loan sale
activity and, therefore, its contribution to the Bank's profitability depends on
maintaining a sufficient volume of loan originations. Changes in the level of
interest rates and the local economy affect the amount of loans originated by
the Bank and, thus, the amount of loan sales as well as origination and loan
fees earned. Gains on sales of loans totaled $843,000 and $1.8 million during
the years ended March 31, 2001 and 2002, respectively. The Bank sells loans on a
loan-by-loan basis. Generally a loan is committed to be sold and a price for the
loan is fixed at the time the interest rate on the loan is fixed, which may be
at the time the Bank issues a loan commitment or at the time the loan closes.
This eliminates the risk to the Bank that a rise in market interest rates will
reduce the value of a mortgage before it can be sold. Where a loan is committed
to be sold before it is closed, the Bank is subject to the risk that the loan
fails to close or that the closing of the loan is delayed beyond the specified
delivery date. In such event, the Bank may be required to compensate the
purchaser for failure to deliver the loan. Generally, loans are sold without
recourse, although in the past the Bank has sold loans with recourse. As of
March 31, 2002, the Bank remained contingently liable for approximately $250,000
of loans sold with recourse.
11
In the past, the Bank has purchased loans and loan participations in
its primary market during periods of reduced loan demand. However, in recent
years, because of strong loan demand, the Bank has purchased few loans. Through
a consortium of local financial institutions, the Bank occasionally purchases
participation interests in loans. Such loans include those secured by local
low-income housing projects, single family pre-sold and speculative housing, and
commercial loans. The Bank intends to supplement its origination of agricultural
and commercial real estate loans and agricultural operating and nonresidential
commercial loans by purchasing participations in such loans originated by other
community banks in Idaho and Eastern Washington. All such purchases will be made
in conformance with the Bank's underwriting standards. The Bank anticipates that
it will purchase only a small portion of any individual loan and that the
originating institution will retain a majority of the loan.
The following table shows total loans originated, purchased, sold and
repaid during the years indicated.
Year Ended March 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
(In Thousands)
Total loans receivable at beginning of year $ 179,769 $ 193,032 $ 224,577
--------- --------- ---------
Loans originated:
Real estate loans:
Residential 64,737 58,139 95,501
Construction 12,909 12,036 17,284
Agricultural 2,278 3,006 5,348
Commercial 8,661 16,914 25,895
Commercial non-real estate 38,620 42,019 58,932
Consumer and other loans 32,763 36,292 31,569
--------- --------- ---------
Total loans originated 159,968 168,406 234,529
--------- --------- ---------
Credit card advances 737 2,193 2,871
--------- --------- ---------
Loans originated, not funded (27,820) (56,813) (57,218)
--------- --------- ---------
Loans purchased:
Real estate loans:
Residential 940 10 107
Construction -- 703 581
Agricultural 1,980 2,212 4,450
Commercial 239 -- 690
Commercial non-real estate -- -- --
Consumer and other loans -- 1,900 --
--------- --------- ---------
Total loans purchased 3,159 4,825 5,828
--------- --------- ---------
Loans sold:
Servicing retained (40,239) (7,529) (31,303)
Servicing released (42,290) (41,842) (61,641)
--------- --------- ---------
Total loans sold (82,529) (49,371) (92,944)
--------- --------- ---------
Loan principal repayments (34,790) (30,803) (56,786)
--------- --------- ---------
Refinanced loans (5,462) (6,892) (15,194)
--------- --------- ---------
Change in total loans receivable 13,263 31,545 21,086
--------- --------- ---------
Total loans receivable at end of year $ 193,032 $ 224,577 $ 245,663
========= ========= =========
12
Loan Commitments. The Bank issues commitments to originate loans
conditioned upon the occurrence of certain events. Such commitments are made on
specified terms and conditions and are honored for up to 90 days from the date
of loan approval. The Bank had outstanding loan commitments of approximately
$39.6 million at March 31, 2002. In addition, the Bank had commitments to fund
outstanding credit lines of approximately $33.9 million and commitments to fund
credit card lines of approximately $3.8 million at March 31, 2002.
Loan Origination and Other Fees. The Bank, in some instances, receives
loan origination fees. Loan fees are a fixed dollar amount or a percentage of
the principal amount of the mortgage loan that is charged to the borrower for
funding the loan. The amount of fees charged by the Bank generally is 1% of the
loan amount. Current accounting standards require fees received (net of certain
loan origination costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net deferred fees or
costs associated with loans that are prepaid are recognized as income at the
time of prepayment. The Bank had $692,000 of unearned loan fees and discounts at
March 31, 2002 and $420,000 of unearned loan fees and discounts at March 31,
2001.
Loan Servicing. The Bank sells residential real estate loans to Freddie
Mac and Fannie Mae on a servicing-retained basis and receives fees in return for
performing the traditional services of collecting individual payments and
managing the loans. In the past, the Bank has sold agricultural real estate
loans to private investors on a servicing-retained basis. At March 31, 2002, the
Bank was servicing $138.2 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. In addition, the Bank retains certain
amounts in escrow for the benefit of the investor for which the Bank incurs no
interest expense but is able to invest. At March 31, 2002, the Bank held $1.4
million in escrow for its portfolio of loans serviced.
Delinquencies and Classified Assets
Delinquent Loans. When a mortgage loan borrower fails to make a
required payment when due, the Bank institutes collection procedures. If the
loan is within the first three months of the term, the borrower is contacted by
telephone approximately ten days after the payment is due in order to permit the
borrower to make the payment before the imposition of a late fee. The first
notice is mailed to the borrower when the payment is 16 days past due. Attempts
to contact the borrower by telephone generally begin when a payment becomes 25
days past due. If the loan has not been brought current by the 60th day of
delinquency, the Bank attempts to interview the borrower in person and to
physically inspect the property securing the loan.
In most cases, delinquencies are cured promptly; however, if by the
91st day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans delinquent over 90 days is reduced
by the full amount of accrued and uncollected interest.
13
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of generally
accepted accounting principles ("GAAP") at the years indicated. It is the policy
of the Bank to cease accruing interest on loans more than 90 days past due.
At March 31,
------------------------------
2000 2001 2002
------ ------ ------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 488 $ 308 $ 177
Construction -- 316 --
Agricultural -- 57 86
Commercial 29 -- --
Commercial non-real estate -- 226 89
Consumer and other loans 65 254 239
------ ------ ------
Total 582 1,161 591
------ ------ ------
Accruing loans which are contractually past
due 90 days or more:
Real estate loans:
Residential -- 125 --
Construction -- -- --
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- 157 --
Consumer and other loans -- -- --
------ ------ ------
Total -- 282 --
------ ------ ------
Total of nonaccrual and 90 days past
due loans 582 1,443 591
Real estate owned 44 33 424
------ ------ ------
Total nonperforming loans 626 1,476 1,015
Restructured loans $ 198 $ -- $ 107
------ ------ ------
Total nonperforming assets $ 824 $1,476 $1,122
====== ====== ======
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 0.31% 0.66% 0.25%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.23% 0.51% 0.19%
Nonperforming assets as a percent of
total assets 0.33% 0.53% 0.36%
Total nonperforming assets to total loans 0.43% 0.66% 0.46%
Interest income that would have been recorded for the year ended March
31, 2002 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $34,000. The amount of interest included in
interest income on such loans for the year ended March 31, 2002 amounted to
approximately $38,000.
14
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
("REO") until it is sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or 90 day liquidation value. Subsequent to foreclosure, REO
is carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At March 31, 2002, the Bank had $424,000 of REO.
Asset Classification. The State of Washington has adopted various
regulations regarding problem assets of savings institutions. The regulations
require that each insured institution review and classify its assets on a
regular basis. In addition, in connection with examinations of insured
institutions, State of Washington examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets 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. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are classified as special mention and
monitored by the Company.
At March 31, 2002, classified assets of the Company totaled $1.5
million. Assets classified as loss totaled $76,000 and consisted of overdrawn
negotiable order of withdrawal ("NOW") accounts totaling $5,000 and an
installment loans of $71,000. Assets classified as substandard totaled $1.4
million, which consisted of $283,000 of commercial loans, $248,000 of consumer
loans, $364,000 of residential loans, $86,000 of agricultural loans, and a
$424,000 REO. Of the substandard assets, 71.1% resulted from personal finance
problems and loss of income, and 28.9% resulted from unpredictable management
decisions and the decline in the logging, timber, and farming industries. The
aggregate amounts of the Bank's classified assets at the dates indicated were as
follows: At March 31,
2000 2001 2002
------ ------ ------
(In Thousands)
Loss $ 17 $ 26 $ 76
Doubtful -- -- --
Substandard 667 2,417 1,405
------ ------ ------
Total classified assets $ 684 $2,443 $1,481
====== ====== ======
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual 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 security for the loan. The Bank increases its allowance for loan
losses by charging provisions for loan losses against income.
15
The general allowance is maintained to cover losses inherent in the
portfolio of performing loans. Management's periodic evaluation of the adequacy
of the allowance is based on management's evaluation of probable losses in the
loan portfolio. The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process. This process includes information derived from
many factors: including historical loss trends, trends in classified assets,
trends in delinquency and nonaccrual loans, trends in portfolio volume,
diversification as to type of loan, size of individual credit exposure, current
and anticipated economic conditions, loan policies, collection policies and
effectiveness, quality of credit personnel, effectiveness of policies,
procedures and practices, and recent loss experience of peer banking
institutions. Specific valuation allowances are established to absorb losses on
loans for which full collectibility may not be reasonably assured, based upon,
among other factors, the estimated fair market value of the underlying
collateral and estimated holding and selling costs. Generally, a provision for
losses is charged against income on a quarterly basis to maintain the
allowances.
At March 31, 2002, the Bank had an allowance for loan losses of $2.6
million. The allowance for loan losses is maintained at an amount management
considers adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses 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. Any material increase in
the allowance for loan losses would adversely affect the Bank's financial
condition and results of operations.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the years indicated. Where specific loan loss reserves have been
established, any differences between the loss allowances and the amount of loss
realized has been charged or credited to current income.
Year Ended March 31,
----------------------------
2000 2001 2002
------ ------ ------
(Dollars in Thousands)
Allowance at beginning of year $1,361 $1,604 $1,758
Provision for loan losses(1) 287 303 1,064
Recoveries -- 6 7
Charge-offs:
Real estate loans:
Residential 3 44 41
Construction -- -- 12
Commercial non-real estate -- -- 16
Consumer and other loans 41 111 197
------ ------ ------
Total charge-offs 44 155 266
------ ------ ------
Net charge-offs 44 149 259
------ ------ ------
Balance at end of year $1,604 $1,758 $2,563
====== ====== ======
Allowance for loan losses as a percent of total
loans receivable 0.83% 0.78% 1.04%
Net charge-offs to average outstanding loans 0.02% 0.07% 0.12%
(1) See "Item 6. Management's Discussion and Analysis or Plan of Operation --
Comparison of Operating Results for the Years Ended March 31, 2001 and 2002
-- Provisions for Loan Losses" for a discussion of the factors contributing
to changes in the Bank's provision for loan losses between the years.
16
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the years indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any other category.
At March 31,
---------------------------------------------------------------
2000 2001 2002
-------------------- -------------------- -------------------
(Dollars in Thousands)
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------
Residential $ 273 37.19% $ 234 33.35% $ 268 27.03%
Construction 119 4.05 140 3.57 133 4.02
Agricultural 290 12.16 318 11.72 365 11.62
Commercial 655 29.94 882 35.52 1,571 43.99
Consumer and other loans 267 16.66 184 15.84 226 13.34
------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,604 100.00% $1,758 100.00% $2,563 100.00%
====== ====== ====== ====== ====== ======
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock.
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that investments be categorized as "held-to-maturity," "trading securities" or
"available-for-sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held-to-maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as
"held-to-maturity." Debt and equity securities held for current resale are
classified as "trading securities." Such securities are reported at fair value,
and unrealized gains and losses on such securities would be included in
earnings. Debt and equity securities not classified as either "held-to-maturity"
or "trading securities" are classified as "available-for-sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity. The unrealized gains and losses are also reported as a separate
component of the Statement of Other Comprehensive Income.
The Chief Executive Officer and the Chief Financial Officer determine
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. The Bank's investment policies generally
limit investments to FHLB obligations, certificates of deposit, U.S. Government
and agency securities, municipal bonds rated AAA, mortgage-backed securities and
certain types of mutual funds. The Bank does not purchase high-risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Bank's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Bank's credit and interest rate
risk, and risk-based capital is also given consideration during the evaluation.
17
Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage-backed securities during times of reduced
loan demand. The Bank's investments are primarily long term, insured Bank
Qualified State of Idaho Municipal Bonds. Most of the mortgage-backed securities
are longer-term Freddie Mac and Fannie Mae back securities.
The following table sets forth the composition of the Bank's investment
and mortgage-backed securities portfolios for the years indicated.
At March 31,
--------------------------------------------------------------------------------
2000 2001 2002
------------------------ ------------------------ ------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Available-for-sale:
Investment securities $ 11,335 34.81% $ 12,568 38.54% $ 12,524 52.28%
Mortgage-backed securities 18,741 57.56 17,704 54.30 9,293 38.79
---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale 30,076 92.37 30,272 92.84 21,817 91.07
---------- ---------- ---------- ---------- ---------- ----------
Held-to-maturity:
Mortgage-backed securities 2,484 7.63 2,335 7.16 2,140 8.93
---------- ---------- ---------- ---------- ---------- ----------
Total held-to-maturity 2,484 7.63 2,335 7.16 2,140 8.93
---------- ---------- ---------- ---------- ---------- ----------
Total $ 32,560 100.00% $ 32,607 100.00% $ 23,957 100.00%
========== ========== ========== ========== ========== ==========
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Bank's investment and
mortgage-backed securities at March 31, 2002.
Over Over
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
------------------ ------------------ ------------------ ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------- ------- ------- ------- ------- ------- -------
(Dollars in Thousands)
Investment Securities $ -- --% $ -- --% $ 523 7.71% $12,001 7.75%
Mortgage-backed
securities -- -- -- -- 14 5.96 11,419 7.00
--------- ------- ------- ------- ------- ------- ------- -------
Total $ -- --% $ -- --% $ 537 7.66% $23,420 7.38%
========= ======= ======= ======= ======= ======= ======= =======
Other Investment Activities. The Bank purchases bank owned life insurance
policies (`BOLI") to offset future employee benefit costs. The purchase of BOLI
policies, and its increase in cash surrender value, is classified as "bank owned
and cash surrender value of life insurance policies" in the Company's
consolidated statements of financial condition. The income related to the BOLI,
which is generated by the increase in the cash surrender value of the policy, is
classified in "other interest earning assets" in the Company's consolidated
statements of income.
18
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle are used
to compensate for reductions in the availability of funds from other sources.
The Company also maintains an additional credit facility with Wells Fargo Bank.
Deposit Accounts. Savings deposits are the primary source of funds for
the Bank's lending and investment activities and for its general business
purposes. Substantially all of the Bank's depositors are residents of Idaho and
Washington. Deposits are attracted from within the Bank's market area through
the offering of a broad selection of deposit instruments, including NOW
accounts, money market deposit accounts, regular savings accounts, certificates
of deposit and retirement savings plans. The Bank also offers "TT&L" (treasury,
taxes and loans) accounts for local businesses. Deposit account terms vary,
according to the minimum balance required, the time periods the funds must
remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, the Bank considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. The Bank reviews its deposit mix and pricing weekly.
Currently, the Bank accepts brokered deposits with maturities between ninety
days and five years. At March 31, 2002, the Bank had $19.1 million in brokered
deposits, which is 6.2% of total assets. At March 31, 2002, certificates of
deposit that are scheduled to mature in less than one year totaled $71.1
million. See "Item 6. Management's Discussion and Analysis or Plan of Operation
- -- Liquidity and Capital Resources."
19
The following table sets forth information concerning the Bank's
deposits at March 31, 2002.
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Savings Deposits Amount Balance Deposits
-------- -------------------------------- -------- -------- ----------
(In Thousands, except minimum amount)
0.20% NOW $ -- $ 49,446 25.21%
1.57 Money Market Deposit -- 21,069 10.74
0.50 Passbook -- 13,920 7.10
-------- ------
Total Checking & Passbook 84,435 43.05
-------- ------
Certificates of Deposit
1.72 7 days to 179 days 2,500 12,466 6.36
2.13 6 months to less than 1 year 2,500 16,432 8.38
2.85 1 year to less than 2 years 2,500 11,229 5.72
4.63 2 years to less than 3 years 2,500 6,745 3.44
5.32 New 2 years to 5 years - Add on 500 8,856 4.51
5.17 3 years to less than 4 years 2,500 1,546 0.79
5.20 4 years to less than 5 years 2,500 1,364 0.69
5.30 5 years to less than 10 years 2,500 4,488 2.29
2.77 IRA Variable 500 717 0.37
4.62 Brokered 100,000 19,005 9.69
5.10 Special, 1 year to less than 2 years 10,000 4,885 2.49
5.53 Special, 2 years to less than 3 years 10,000 18,351 9.36
5.16 Special, 4 years to less than 5 years 5,000 5,604 2.86
-------- ------
Total Certificates of Deposit 111,688 56.95
-------- ------
Total Deposits $196,123 100.00%
======== =======
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 2002.
Jumbo certificates of deposit are certificates in amounts of more than $100,000.
Maturity Period Amount
--------------- -------
(In Thousands)
Three months or less $ 16,356
Over three through six months 4,399
Over six through 12 months 5,510
Over 12 months 17,895
--------
Total jumbo certificates of deposit $ 44,160
========
20
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the years indicated.
At March 31,
--------------------------------------------------------------------------------------------
2000 2001 2002
------------------- -------------------------------- --------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
-------- ------- -------- ------- -------- -------- ------- --------
(Dollars in Thousands)
NOW accounts $ 33,986 23.45% $ 40,502 25.67% $ 6,516 $ 49,446 25.21% $ 8,944
Passbook accounts 17,501 12.08 12,349 7.83 (5,152) 13,920 7.10 1,571
Money market deposit
Accounts 14,245 9.83 15,033 9.53 788 21,069 10.74 6,036
Fixed-rate certificates
which mature:
Within 1 year 59,323 40.94 67,091 42.52 7,768 37,315 19.03 (29,776)
After 1 year, but within
2 years 8,723 6.02 17,978 11.39 9,255 18,114 9.24 136
After 2 years, but within
5 years 10,410 7.18 4,622 2.93 (5,788) 43,466 22.16 38,844
Certificates maturing
Thereafter 719 0.50 222 0.13 (497) 12,793 6.52 12,571
-------- ------- -------- ------- -------- -------- ------ --------
Total $144,907 100.00% $157,797 100.00% $ 12,890 $196,123 100.00% $ 38,326
======== ======= ======== ======= ======== ======== ====== ========
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank categorized by rates for the years indicated.
At March 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
(In Thousands)
0.0 - 2.99% $ 564 $ 90 $ 38,770
3.0 - 3.99% 88 7,375 3,274
4.0 - 4.99% 19,650 5,295 32,634
5.0 - 5.99% 48,655 38,581 26,240
6.0 - 6.99% 9,847 37,874 10,193
7.0 - 7.99% 337 663 532
8.0 - 8.99% 34 35 45
9% and over -- -- --
---------- ---------- ----------
Total $ 79,175 $ 89,913 $ 111,688
========== ========== ==========
21
The following table sets forth the amount and maturities of time
deposits at March 31, 2002.
Amount Due
----------
Percent
After After After of Total
Less Than 1 to 2 2 to 3 3 to 4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
0.0 - 2.99% $ 36,124 $ 2,530 $ 106 $ -- $ 10 $ 38,770 34.71%
3.0 - 3.99% 1,841 711 504 142 76 3,274 2.93
4.0 -4.99% 10,527 9,811 5,257 1,414 5,625 32,634 29.22
5.0 - 5.99% 13,382 2,638 1,108 445 8,667 26,240 23.49
6.0 - 6.99% 8,946 504 448 221 74 10,193 9.13
7.0 - 7.99% 225 291 16 -- -- 532 0.48
8.0 - 8.99% 39 6 -- -- -- 45 0.04
9% and over -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total $ 71,084 $ 16,491 $ 7,439 $ 2,222 $ 14,452 $111,688 100.00%
======== ======== ======== ======== ======== ======== ========
Deposit Activity. The following table sets forth the deposit activities
of the Bank for the years indicated.
Year Ended March 31,
--------------------------------
2000 2001 2002
-------- -------- --------
(In Thousands)
Beginning balance $133,278 $144,907 $157,797
-------- -------- --------
Net increase
before interest credited 6,189 6,821 32,640
Interest credited 5,440 6,069 5,686
-------- -------- --------
Net increase
in savings deposits 11,629 12,890 38,326
-------- -------- --------
Ending balance $144,907 $157,797 $196,123
======== ======== ========
22
Borrowings. The Bank utilizes advances from the FHLB-Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Seattle, the Bank is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
that are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. The Bank is currently
authorized to borrow from the FHLB up to an amount equal to 42% of total assets,
providing that the Bank holds sufficient collateral.
The following tables set forth certain information regarding borrowings
by the Bank for the years indicated:
At or For the
Year Ended March 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
(Dollars in Thousands)
Maximum amount of FHLB advances outstanding
at any month end during the year $ 74,578 $ 96,580 $ 93,837
Approximate average FHLB advances
outstanding during the year 54,242 86,089 83,395
Balance of FHLB advances outstanding
at end of year 74,578 90,917 79,722
Weighted average rate paid on
FHLB advances at end of year 6.05% 5.57% 4.91%
Approximate weighted average rate paid on
FHLB advances during the year 5.59% 6.31% 5.19%
One Year Five Years to
Less than to Less than Less than Ten Greater than
One Year Five Years Years Ten Years
----------- ----------- ---------- ----------
Maturities of advances from FHLB $ 14,090 $ 52,182 $ 12,179 $ 1,271
Range of interest rates 1.94% - 6.59% 4.40% - 6.62% 4.57% - 6.21% 6.66%
Weighted average interest rate 3.02% 5.36% 5.01% 6.66%
Percentage of total advances 17.67% 65.46% 15.28% 1.59%
The Company also maintains additional credit with Wells Fargo Bank,
available funds totaling $7.0 million. There were no outstanding advances under
this facility at March 31, 2002.
Competition
The Bank operates in a competitive market for the attraction of savings
deposits (its primary source of lendable funds) and in the origination of loans.
Its most direct competition for savings deposits has historically come from
commercial banks, credit unions and other thrifts operating in its market area.
The Bank's competitors include large regional and superregional banks. These
institutions are significantly larger than the Bank and therefore have greater
financial and marketing resources than the Bank's. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes from commercial
banks and other thrifts operating in its market as well as from mortgage bankers
and brokers, consumer finance companies, and, with respect to agricultural
loans, government sponsored lending programs. Such competition for deposits and
the origination of loans may limit the Bank's growth and profitability in the
future.
23
Subsidiary Activities
The Bank has one subsidiary, Tri-Star Financial who sells life
insurance and tax deferred annuities on an agency basis. At March 31, 2002, the
Bank's equity investment in its subsidiary was $51,000.
Personnel
As of March 31, 2002, the Bank had 127 full-time and 13 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank believes its relationship with its employees to be good.
REGULATION
FirstBank Northwest
General. As a state-chartered, federally insured depository
institution, the Bank is subject to extensive regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The Bank is
regularly examined by the FDIC and the Washington Department of Financial
Institutions, Division of Banks ("Division") and files periodic reports
concerning the Bank's activities and financial condition with its regulators.
The Bank's relationship with depositors and borrowers also is regulated to a
great extent by both federal law and the laws of the State of Washington,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
State Regulation and Supervision. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington State law and the
regulations of the Division adopted thereunder. Washington State law and
regulations govern the Bank's ability to take deposits and pay interest thereon,
to make loans on or invest in residential and other real estate, to make
consumer loans, to invest in securities, to offer various banking services to
its customers, and to establish branch offices. 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 subject to periodic
examination and reporting requirements by and of the Division.
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of depository
institutions. The FDIC currently maintains two separate insurance funds: the
Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit accounts are
insured by the SAIF to the maximum extent permitted by law. As insurer of the
Bank's deposits, the FDIC has examination, supervisory and enforcement authority
over the Bank.
The FDIC has established a risk-based system for setting deposit
insurance assessments. Under the risk-based assessment system, an institution's
insurance assessment varies according to the level of capital the institution
holds on the balance of insured deposits during the preceding two quarters, and
the degree to which it is the subject of supervisory concern. In addition,
regardless of the potential risk to the insurance fund, federal law requires the
ratio of reserves to insured deposits at $1.25 per $100. Both funds currently
meet this reserve ratio. Since 1997, the assessment rate for both SAIF and BIF
deposits ranged from zero to 0.27% of covered deposits. As a well capitalized
bank, the Bank is qualified for the lowest rate on its deposits for 2002.
24
In addition to deposit insurance assessments, the FDIC is authorized to
collect assessments against insured deposits to be paid to the Financing
Corporation ("FICO") to service FICO debt incurred in the 1980s to help fund the
thrift industry cleanup. The FICO assessment rate is adjusted quarterly.
Prior to 2000, the FICO assessment rate for BIF-insured deposits was
one-fifth the rate applicable to deposits insured by the SAIF. Beginning in
2000, SAIF- and BIF-insured deposits were assessed at the same rate by FICO. As
a result, BIF FICO assessments will be higher than in previous periods while
SAIF FICO assessments will be lower. For the first quarter of 2002, the
annualized rate was $1.82 per $100 of insured deposits.
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, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Prompt Corrective Action. The FDIC is required to take certain
supervisory actions against undercapitalized savings institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets
of less than 4%, or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating) is considered to
be undercapitalized. An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be significantly undercapitalized and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be critically undercapitalized. Subject to a narrow exception, the
FDIC is required to appoint a receiver or conservator for a savings ___
institution that is critically undercapitalized. FDIC regulations also require
that a capital restoration plan be filed with the FDIC within 45 days of the
date a savings institution receives notice that it is undercapitalized,
significantly undercapitalized or critically undercapitalized. Compliance with
the plan must be guaranteed by any parent holding company in an amount of up to
the lesser of 5% of the institution's assets or the amount which would bring the
institution into compliance with all capital standards. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The FDIC also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At March 31, 2002, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the FDIC determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. FDIC regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Capital Requirements. FDIC regulations recognize two types or tiers of
capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock, less most intangible assets. Tier 2 capital, which is
limited to 100 percent of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that may
be included in Tier 2 capital is limited to 50 percent of Tier 1 capital.
25
The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total
assets. Most banks are required to maintain a minimum leverage ratio of at least
4% to 5% of total assets. The FDIC retains the right to require a particular
institution to maintain a higher capital level based on an institution's
particular risk profile. The Bank calculated their leverage ratio to be 8.8% as
of March 31, 2002.
FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight -- 0%, 20%, 50% or 100%-- based
on the relative risk of that category. In addition, certain off-balance-sheet
items are converted to balance-sheet credit equivalent amounts, and each amount
is then assigned to one of the four categories. Under the guidelines, the ratio
of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets
must be at least 8%, and the ratio of Tier 1 capital to risk-weighted assets
must be at least 4%. The Bank has calculated their total risk-based ratio to be
13.5%, as of March 31, 2002, and their Tier 1 risk-based capital ratio to be
12.3%. In evaluating the adequacy of a bank's capital, the FDIC may also
consider other factors that may affect a bank's financial condition. Such
factors may include interest rate risk exposure, liquidity, funding and market
risks, the quality and level of earnings, concentration of credit risk, risks
arising from nontraditional activities, loan and investment quality, the
effectiveness of loan and investment policies, and management's ability to
monitor and control financial operating risks.
Federal statutes establish a supervisory framework based on five
capital categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. An institution's
category depends upon where its capital levels are in relation to relevant
capital measure, which include a risk-based capital measure, a leverage ratio
capital measure, and certain other factors. The federal banking agencies have
adopted regulations that implement this statutory framework. Under these
regulations, an institution is treated as well capitalized if its ratio of total
capital to risk-weighted assets is 10% or more, its ratio of core capital to
risk-weighted assets is 6% or more, its ratio of core capital to adjusted total
assets is 5% or more, and it is not subject to any federal supervisory order or
directive to meet a specific capital level. In order to be adequately
capitalized, an institution must have a total risk-based capital ratio of not
less than 8%, a Tier 1 risk-based capital ratio of not less than 4%, and a
leverage ratio of not less than 4%. Any institution which is neither well
capitalized nor adequately capitalized will be considered undercapitalized.
Undercapitalized institutions are subject to certain prompt corrective
action requirements, regulatory controls and restrictions which become more
extensive as an institution becomes more severely undercapitalized. Failure by
the Bank to comply with applicable capital requirements would, if unremedied,
result in restrictions on its activities and lead to enforcement actions
including, but not limited to, the issuance of a capital directive to ensure the
maintenance of required capital levels. Banking regulators will take prompt
corrective action with respect to depository institutions that do not meet
minimum capital requirements. Additionally, approval of any regulatory
application filed for their review may be dependent on compliance with capital
requirements.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At March 31, 2002, the Bank had a Tier 1
capital to average assets ratio of 8.8%, a Tier 1 capital to risk-weighted
assets ratio of 12.3%, and a Total capital to risk-weighted assets ratio of
13.5%.
26
The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as a downturn in
the economy in areas where the Bank has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet its
capital requirements.
Activities and Investments of Insured State-Chartered Banks. Federal
law generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
Bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
Federal law provides that an insured state-chartered bank may not,
directly, or indirectly through a subsidiary, engage as "principal" in any
activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the insurance fund of
which it is a member and the bank is in compliance with applicable regulatory
capital requirements. Any insured state-chartered bank directly or indirectly
engaged in any activity that is not permitted for a national bank must cease the
impermissible activity.
Federal Home Loan Bank System. The FHLB - Seattle serves as a reserve
or central bank for the member institutions within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB. It makes loans (i.e., advances) to members in accordance with
policies and procedures established by the Federal Housing Finance Board and the
Board of Directors of the FHLB - Seattle. As a member, the Bank is required to
purchase and hold stock in the FHLB - Seattle in an amount equal to the greater
of 1% of their aggregate unpaid home loan balances at the beginning of the year
or an amount equal to 5% of FHLB advances outstanding. As of March 31, 2002, the
Bank held stock in the FHLB of Seattle in the amount of $5.4 million and had
advances totaling $79.7 million, which mature in 2002 through 2027 at interest
rates ranging from 1.94% to 6.66%. See "Business -- Deposit Activities and Other
Sources of Funds -- Borrowings."
Federal Reserve System. The Federal Reserve Board requires under
Regulation D that all depository institutions, including savings banks, maintain
reserves on transaction accounts or non-personal time deposits. These reserves
may be in the form of cash or non-interest-bearing deposits with the regional
Federal Reserve Bank. Negotiable order of withdrawal accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank. Under
Regulation D, a bank must maintain reserves against net transaction accounts in
the amount of 3% on amounts of $41.3 million or less, plus 10% on amounts in
excess of $41.3 million. In addition, a bank may designate and exempt $5.7
million of certain reservable liabilities from these reserve requirements. These
amounts and percentages are subject to adjustment by the Federal Reserve. The
reserve requirement on non-personal time deposits with original maturities of
less than 1.5 years is 0%. As of March 31, 2002, the Bank's deposit with the
Federal Reserve Bank and vault cash exceeded its respective reserve
requirements.
Affiliate Transactions. Various legal limitations restrict the Bank
from lending or otherwise supplying funds to the Company, generally limiting
such transactions with the Company to 10% of the Bank's capital and surplus and
limiting all such transactions to 20% of the Bank's capital and surplus. Such
transactions, including extensions of credit, sales of securities or assets and
provision of services, also must be on terms and conditions consistent with safe
and sound banking practices, including credit standards, that are substantially
the same or at least as favorable to the Bank as those prevailing at the time
for transactions with unaffiliated companies.
27
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Community Reinvestment Act. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977, which requires the appropriate federal
bank regulatory agency, in connection with its regular examination of a bank, to
assess the bank's record in meeting the credit needs of the community serviced
by the bank, including low and moderate income neighborhoods. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required of any bank which has applied, among other
things, to establish a new branch office that will accept deposits, relocate an
existing office or merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution.
Dividends. Dividends from the Bank constitute the major source of funds
for dividends which may be paid by the Company. The amount of dividends payable
by the Bank to the Company depend upon the Bank's earnings and capital position,
and is limited by federal and state laws, regulations and policies. 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 (i) the amount
required for liquidation accounts or (ii) 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.
The amount of dividends actually paid during any one period will be
strongly affected by the Bank's management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The Home Owners Loan Act ("HOLA") and
Office of Thrift Supervision ("OTS") regulations issued thereunder, generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association or
savings and loan holding company or controlling the assets thereof. They also
prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under the
HOLA. If the Company acquires control of a savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. The HOLA provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
28
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that fails the qualified thrift lender ("QTL") test must,
within one year after the date on which the Bank ceases to be a QTL, register as
and be deemed a bank holding company subject to all applicable laws and
regulations. Currently, the QTL test requires that either an institution qualify
as a domestic building and loan association under the Internal Revenue Code or
that 65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 2002, the Bank was in compliance with the QTL test.
Gramm-Leach-Bliley Financial Services Modernization Act. On November
12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
was signed into law. The purpose of this legislation was to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act:
o repealed the historical restrictions and eliminated many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
o provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
o broadened the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
o provided an enhanced framework for protecting the privacy of consumer
information;
o adopted a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the FHLB system;
o modified the laws governing the implementation of the CRA, and
o addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
The USA Patriot Act. In response to the events of September 11th,
President George W. Bush signed into the law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA Patriot Act, on October 26, 2001. The USA
Patriot Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers,
increased information sharing, and broadened anti-money laundering requirements.
By way of amendments to the Bank Secrecy Act, Title III of the USA Patriot Act
takes measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA Patriot Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an
anti-money laundering compliance officer, (iii) ongoing employee
training programs, and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards with
respect to customer identification at the time new accounts are opened.
29
o Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
o Effective December 25, 2001, financial institutions are prohibited from
establishing ,maintaining, administering or managing correspondent
accounts for foreign shell banks (foreign banks that do not have a
physical presence in any country), and will be subject to certain
recordkeeping obligations with respect to correspondent accounts of
foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank merger Act applications.
During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and
interim regulations to implement the provisions of Sections 312 and 352
of the USA Patriot Act. To date, it has not been possible to predict
the impact the USA Patriot Act and its implementing regulations may
have on the Company and the Bank.
Item 2. Description of Properties
- ----------------------------------
The Bank operates eight full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville, Coeur d'Alene, and Post Falls, Idaho, and
Clarkston and Liberty Lake, Washington. The Company owns the Lewiston, Lewiston
Orchards, Moscow, Grangeville, and Coeur d'Alene facilities, leases the
Clarkston building on a month-to-month tenancy which began July 1, 1997, and
leases the in-store location of the Post Falls branch on a five year term with
Tidyman's LLC which began March 1, 1999. In November 1999, the Bank opened the
newly constructed Liberty Lake branch, which is located on leased land. The
lease is a ten-year lease. The Bank operates four loan production offices. The
loan production offices in Coeur d'Alene and Moscow, Idaho are located in the
same facility as its full-service office. The loan production office in
Lewiston, Idaho is a leased building adjacent to the Lewiston facilities. The
loan production office in Boise is an office space leased for three years, ten
and one-half months commencing on April 15, 2002. A portion of the Coeur d'Alene
facility is leased to an unaffiliated brokerage firm for a period of ten years
expiring in 2006. At March 31, 2002, the net book value of the properties
(including land and buildings) and the Bank's fixtures, furniture and equipment
was $5.5 million. The Company believes that its existing facilities are adequate
for the current level of operations.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving the
Bank, mainly as a defendant, 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 the Bank's business. The Company and the Bank are not a party to any
pending legal proceedings that it believes would have a material adverse effect
on the financial condition or operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2002.
30
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The common stock of the Company is traded on the Nasdaq National Market
under the symbol "FBNW". The table below reflects the high, low, and closing
market prices of our common stock based on the end of the day closing price,
cash dividends paid per share, and book value for the last two fiscal years. The
common stock began trading on July 2, 1997. At March 31, 2002 there were 277
record holders of common stock of the Company.
High Low Close Dividends Book Value*
----------- ----------- ---------- --------- -----------
2002 $ 18.409 $ 13.030 $ 18.150 $ 0.44 $ 20.72
- ------
First Quarter 16.000 13.030 0.10 19.62
Second Quarter 17.900 15.410 0.10 20.23
Third Quarter 17.950 16.250 0.12 20.36
Fourth Quarter 18.409 16.500 0.12 20.72
2001 $ 14.875 $ 9.875 $ 13.313 $ 0.38 $ 19.39
- ------
First Quarter 12.875 9.875 0.09 17.39
Second Quarter 12.813 11.000 0.09 18.14
Third Quarter 12.000 11.375 0.10 18.95
Fourth Quarter 14.875 12.125 0.10 19.39
2000 $ 20.375 $ 8.500 $ 10.500 $ 0.36 $ 17.30
- ------
1999 $ 24.000 $ 12.690 $ 14.000 $ 0.34 $ 16.29
- ------
1998 $ 21.125 $ 15.250 $ 20.000 $ 0.14 $ 16.36
- ------
*Book value is computed using actual shares outstanding, excluding unallocated
ESOP shares and including undisbursed MRDP shares.
The payment of dividends on the common stock is subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the continued payment thereof will
depend upon various factors at the intended time of declaration and payment,
including the Bank's profitability and liquidity, alternative investment
opportunities, and regulatory restrictions on dividend payments and on capital
levels applicable to the Bank. Accordingly, there can be no present assurance
that any dividends will be paid. Periodically, the Board of Directors, if
market, economic and regulatory conditions permit, may combine or substitute
periodic special dividends with or for regular dividends. In addition, since the
Company has no significant source of income other than dividends from the Bank
and earnings from investment of the net proceeds of the Conversion retained by
the Company, the payment of dividends by the Company depends in part upon the
amount of the net proceeds from the Conversion retained by the Company and the
Company's earnings thereon and the receipt of dividends from the Bank, which are
subject to various tax and regulatory restrictions on the payment of dividends.
Dividend payments by the Company are subject to regulatory restriction under
Federal Reserve policy as well as to limitation under applicable provisions of
Washington corporate law.
31
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-------------
General
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
Management's discussion and analysis of financial condition and results
of operations and other portions of this annual report contain certain
"forward-looking statements" concerning the future operations of the Company.
Management desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is including this statement
for the express purpose of availing the Company of the protections of such safe
harbor with respect to all "forward-looking statements" contained in its Annual
Report. The Bank has used "forward-looking statements" to describe future plans
and strategies, including expectations of the Company's future financial
results. Management's ability to predict results or the effect of future plans
or strategies is inherently uncertain. Factors which could affect the results
include interest rate trends, the general economic climate in the Company's
market area and the country as a whole, the ability of the Company to control
costs and expenses, competition and pricing, loan delinquency rates, and changes
in federal and state regulation. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should not be
placed on such statements. The Company does not undertake to update any
forward-looking statements.
The profitability of the Company's operations depends primarily on its
net interest income, its non-interest income (principally from mortgage banking
activities) and its non-interest expense. Net interest income is the difference
between the income the Company receives on its loan and investment portfolio and
its cost of funds, which consists of interest paid on deposits and borrowings.
Net interest income is a function of the Company's interest rate spread, which
is the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to the average balance of
interest-bearing liabilities. Non-interest income is comprised of income from
mortgage banking activities, gain on the occasional sale of assets and
miscellaneous fees and income. Mortgage banking generates income from the sale
of mortgage loans and from servicing fees on loans serviced for others. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in market interest
rates and the local and national economy. The Company's profitability is also
affected by the level of non-interest expense. Non-interest expenses include
compensation and benefits, occupancy and maintenance expenses, deposit insurance
premiums, data servicing expenses, advertising expenses, supplies and postage,
and other operating costs. Additional expenses that will be incurred in fiscal
2003 include establishing a new loan production office and related personnel in
Boise, Idaho and Spokane, Washington, data processing conversion to Windows
2000, a new Clarkston, Washington branch and branch refurbishment in Lewiston
and Lewiston Orchards, Idaho. The Company's results of operations may be
adversely affected during periods of reduced loan demand to the extent that
non-interest expenses associated with mortgage banking activities are not
reduced commensurate with the decrease in loan originations.
Critical Accounting Policies
Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, we have identified three policies that,
due to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of our financial statements. These policies relate
to the valuation of our Mortgage Servicing Rights, the methodology for the
determination of our allowance for loan losses and the valuation of real estate
held for sale. These policies and the judgments, estimates and assumptions are
described in greater detail in the consolidated financial statements included
herein. In particular, the "Summary of Significant Accounting Policies"
describes generally our accounting policies. We believe that the judgments,
estimates and assumptions used in the preparation of our Consolidated Financial
Statements are appropriate given the factual circumstances at the time. However,
given the sensitivity of our Consolidated Financial Statements to these critical
accounting policies, the use of other judgments, estimates and assumptions could
result in material differences in our results of operations or financial
condition.
32
Operating Strategy
The Company's primary goal has been to improve the Company's
profitability while maintaining a sound capital position. To accomplish this
goal, the Company has employed an operating strategy that includes: (1)
originating for its portfolio, residential mortgage loans, primarily with
adjustable interest rates or with fixed interest rates with terms of 15 years or
less, secured by properties located in its primary market area; (2) enhancing
net income and controlling interest rate risk by originating fixed-rate
residential mortgage loans for sale in the secondary market, as market
conditions permit, as a means of generating current income through the
recognition of cash gains on loan sales and loan servicing fees; (3) increasing
its average yield on interest-earning assets by originating for portfolio
higher-yielding construction, commercial real estate, nonresidential commercial
and agricultural real estate loans; and (4) controlling asset growth to a level
sustainable by the Company's capital position. The Company has adopted a
community banking strategy pursuant to which it will expand the products and
services it offers within its primary market area in order to improve market
share and increase the average yield of its interest-earning assets.
Specifically, the Company intends to continue to expand its agricultural real
estate and commercial real estate lending activities. The Company also intends
to pursue the expansion of its non-mortgage lending activities by increasing its
emphasis on originating agricultural operating loans and commercial business
loans. These loans offer the Company the opportunity to achieve higher interest
rates with shorter terms to maturity than residential mortgage loans but involve
greater credit risk. The commercial banking segment of the Bank continues to
strengthen its presence by adding experienced loan officers in the Moscow, Coeur
d'Alene and Liberty Lake branches. There can be no assurances that the Company
will be successful in its efforts to increase its originations of these types of
loans. Management anticipates that the Company will incur significant other
expenses in connection with the implementation and maintenance of its online
banking programs, and as various programs and services, such as its commercial
real estate and business lending operations, are expanded. These expenses could
reduce earnings for a period of time while income from new programs and services
increases to a level sufficient to cover the additional expenses.
Comparison of Financial Condition at March 31, 2001 and March 31, 2002
Total assets increased $26.7 million, or 9.5%, from $281.1 million at
March 31, 2001 to $307.8 million at March 31, 2002. The growth in assets was due
to the increase in the loan portfolio and federal funds sold. Net loans
receivable increased from $219.2 million at March 31, 2001 to $238.1 million at
March 31, 2002. The mix of loans has changed reflecting the Company's community
banking strategy. In real estate loans, residential mortgage loans decreased
from 33.4% to 27.0% of total loans, construction loans increased from 3.6% to
4.0%, agricultural loans decreased from 6.9% to 6.6% and commercial real estate
loans increased from 16.9% in fiscal 2001 to 21.4% in fiscal 2002. In non-real
estate loans, home equity lines decreased from 12.2% to 10.1%, agricultural
operating lines increased from 4.9% to 5.0%, commercial business loans increased
from 18.6% to 22.6% and other consumer loans decreased from 3.7% to 3.2%,
respectively, between these periods. Cash and cash equivalents increased from
$12.8 million to $24.0 million. This increase was mostly due to a $6.2 million
increase in fed funds sold. Mortgage-backed securities decreased from $20.0
million to $11.4 million. This $8.6 million decrease was due to $5.3 million in
the sale of securities and $3.1 in payments received on the mortgage-backed
securities.
Total liabilities increased from $253.1 million at March 31, 2001 to
$280.0 million at March 31, 2002. The growth in liabilities was due to deposit
growth, which was part of management's focus in fiscal year 2002. Deposits
increased $38.3 million from $157.8 million at March 31, 2001 to $196.1 million
at March 31, 2002. Of the $38.3 million increase, $21.7 million was in
certificate of deposit accounts and $16.6 million was in core deposit accounts.
Presently 34.6% of checking accounts are non-interest bearing. FHLB advances
decreased from $90.9 million at March 31, 2001 to $79.7 million at March 31,
2002.
Comparison of Operating Results for the Years Ended March 31, 2001 and 2002
General. Net income increased $495,000, from $1.9 million ($1.34 per
share - basic, $1.30 per share -diluted) for the year ended March 31, 2001 to
$2.4 million ($1.76 per share - basic, $1.70 per share - diluted) for the year
ended March 31, 2002. The Company experienced an increase in net interest income
and non-interest income in fiscal 2002 compared to fiscal 2001. The increase in
non-interest income is mostly attributable to increase in gain on sale of loans.
The majority of the non-interest expense increase is due to compensation and
related benefits expense.
33
Net Interest Income. Net interest income increased $1.1 million, or
12.2%, from $9.1 million for the year ended March 31, 2001 to $10.3 million for
the year ended March 31, 2002. The increase is due to the combination of
increased loan originations and loans receivable with reduced rates on advances
from FHLB and deposits. The yield on interest-earning assets decreased from
8.51% to 7.67% in fiscal years end March 31, 2001 and 2002. The yield on
interest-bearing liabilities decreased from 5.30% to 4.23% in fiscal years end
March 31, 2001 and 2002, resulting mostly from decreases in rates paid to
deposit holders and advances from FHLB. The Company's interest rate spread
between the yield on interest-earning assets and the rate paid on
interest-bearing liabilities increased from 3.21% for fiscal 2001 to 3.44% for
fiscal 2002.
Total interest income decreased $509,000 from $20.8 million for the
year ended March 31, 2001 to $20.2 million for the year ended March 31, 2002.
Interest income on loans receivable decreased $105,000, or 0.6%, from $18.0
million for fiscal 2001 to $17.9 million for fiscal 2002. The decrease was the
result of lower yields on loans. Interest income on mortgage-backed securities
decreased $512,000 from fiscal 2001 to fiscal 2002 primarily as a result from
the sale of mortgage-backed securities in fiscal 2002.
Interest expense decreased by $1.6 million, from $11.6 million for the
year ended March 31, 2001 to $10.0 million for the year ended March 31, 2002.
Interest expense on deposits decreased $345,000, or 5.7%, from fiscal 2001 to
fiscal 2002. The average balance of deposits increased $22.0 million from fiscal
2001 to fiscal 2002 and the average rate paid on deposits decreased from 4.60%
to 3.71%. Interest expense on advances from FHLB and other borrowings decreased
$1.3 million from $5.6 million in fiscal 2001 to $4.3 million in fiscal 2002 as
a result of a lower average balance of outstanding borrowings in fiscal 2002 and
the decreased rate on advances from FHLB and other borrowings. The average yield
on advances from FHLB and other borrowings in fiscal year ended March 31, 2002
was 5.19% and 6.32% in fiscal year ended March 31, 2001.
The net interest margin increased 13 basis points from 3.83% in fiscal
2001 to 3.96% in fiscal 2002. This increase was due to an increase in the
average balance on the commercial and construction loan portfolio with an
overall higher portfolio yield, an increase in the average balance of deposits
with a lower yield than fiscal year 2001, and a lower yield on advances from
FHLB.
Provision for Loan Losses. The provision for loan losses was $303,000
for the year ended March 31, 2001 compared to $1.1 million for the year ended
March 31, 2002. Management continues to increase the allowance for loan losses
as a result of the growth experienced in the loan portfolio, specifically the
growth of commercial and agricultural operating loans, which generally are
riskier than residential mortgage loans. The Company's allowance for loan losses
was $2.6 million or 1.04% of total loans receivable, at March 31, 2002, compared
to $1.8 million, or 0.80% of total loans receivable, at March 31, 2001. The
allowance for loan losses increased 45.8% from the prior year, which consists of
an increase in residential, agricultural, commercial consumer and other
allowance for loan losses of 50.8% and a decrease in construction allowance for
loan losses of 5.0%. Net loan charge-offs increased from $149,000 during fiscal
2001 to $259,000 during fiscal 2002, 0.12% of average outstanding loans for the
year.
Non-interest Income. The following table summarizes the components of
non-interest income for the fiscal years ended March 31, 2002 and 2001.
2001 2002
------ ------
(In Thousands)
Gain on sale of loans $ 843 $1,782
Gain on sale of securities, net -- 194
Mortgage servicing fees 272 243
Service fees and charges 1,349 1,671
Commissions and other 130 125
------ ------
Total non-interest income $2,594 $4,015
====== ======
Total non-interest income increased $1.4 million, or 54.8%, from fiscal 2001 to
fiscal 2002. Income on gain on sale of loans increased $939,000, or 111.3%, from
fiscal 2002 to fiscal 2001 because of a larger volume of sold loans that were
originated during the year. Gain on sale of securities increased $194,000 due to
the sale of mortgage-backed securities. Service fees and charges increased
$322,000 due to fees charged on visa check cards, automatic teller machine fees,
and merchant bank cards offered at the end of fiscal year 2001.
34
Non-interest Expense. Total non-interest expense increased $1.1
million, or 12.5%, from $8.7 million for the year ended March 31, 2001 to $9.8
million for the year ended March 31, 2002. Compensation and related benefits
increased $845,000, or 16.6%, from fiscal 2001 to fiscal 2002. This increase was
a result of additional compensation and commission expenses from the average
number of full-time equivalent employees for the fiscal year 2002 increasing
over fiscal year 2001 and commissions from incentives. Occupancy expense
increased $28,000. Bankcard and visa card expenses increased $110,000, which is
a result of increased utilization. Bankcard and visa card income increased
$130,000. Marketing expense increased $39,000, which was a result of the Company
increasing their exposure through effective marketing. Consulting expense
decreased $57,000 due to a smaller demand in outside consulting because of
increased internal expertise and a relatively stable fiscal year in regard to
property growth. Realty tax service fees decreased $33,000 because we performed
this service in fiscal 2002 instead of outsourcing this service as in fiscal
2001. All other non-interest expenses remained relatively consistent between
fiscal years 2001 and 2002.
Income Taxes. Income taxes were $1.1 million for the year ended March
31, 2002 compared with $866,000 for the year ended March 31, 2001. The increase
was a result of an increase in taxable income before income tax expense. The
effective tax rates for the years ended March 31, 2002 and 2001 were 30.94% and
31.52%, respectively.
35
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the years
indicated 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 and average tax
effected yields and costs. Such yields and costs for the years indicated are
derived by dividing tax effected income or expense by the average daily balance
of assets or liabilities, respectively, for the years presented.
Years Ended March 31,
------------------------------------------------------------------------------------------------
2000 2001 2002
------------------------------ ------------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
--------- --------- ---- --------- --------- ---- --------- --------- ----
Cost
(Dollars in Thousands)
Interest-earning assets (1):
Loans receivable:
Mortgage loans receivable $ 70,306 $ 5,434 7.73% $ 72,629 $ 5,700 7.85% $ 71,426 $ 5,415 7.58%
Commercial loans receivable 47,301 4,012 8.69 66,492 6,106 9.35 87,022 6,658 7.74
Construction loans receivable 6,806 655 9.62 5,485 581 10.59 6,659 692 10.39
Consumer loans receivable 29,454 2,570 8.73 34,677 3,097 8.93 34,657 2,917 8.42
Agricultural loans receivable 25,178 2,277 9.04 27,258 2,542 9.33 27,748 2,238 8.07
Unearned loan fees and
discounts and allowance
for loan losses (1,700) - - (2,095) - - (2,659) - -
--------- ------- ---- --------- -------- ---- --------- ------- ----
Loans receivable, net 177,345 14,948 8.48 204,446 18,026 8.87 224,853 17,920 8.00
Mortgage-backed securities 15,874 981 6.18 20,279 1,439 7.10 14,036 927 6.60
Investment securities 8,437 461 7.41 11,901 614 7.19 12,448 611 6.84
Other earning assets 10,482 588 5.61 11,479 678 5.91 17,886 789 4.89
--------- ------- --------- -------- --------- -------
Total interest-earning assets 212,138 16,978 8.13 248,105 20,757 8.51 269,223 20,247 7.67
------- -------- -------
Non-interest-earning assets 14,561 17,802 19,110
--------- --------- ---------
Total assets $ 226,699 $ 265,907 $ 288,333
========= ========= =========
Interest-earning liabilities:
Passbook, NOW and money
market accounts $ 46,367 1,258 2.71 $ 46,945 1,186 2.53 $ 53,960 916 1.70
Certificates of deposit 80,039 4,123 5.15 83,670 4,823 5.76 98,701 4,747 4.81
--------- ------- --------- -------- --------- -------
Total deposits 126,406 5,381 4.26 130,615 6,009 4.60 152,661 5,663 3.71
Advances from FHLB and
other 54,242 3,055 5.63 88,747 5,608 6.32 83,395 4,328 5.19
--------- ------- --------- -------- --------- -------
Total interest-bearing
liabilities 180,648 8,436 4.67 219,362 11,617 5.30 236,056 9,991 4.23
------- -------- -------
Total non-interest-bearing
deposits 15,863 16,541 19,752
Non-interest-bearing
liabilities 3,393 3,408 4,467
--------- --------- ---------
Total liabilities 199,904 239,311 260,275
Total stockholders' equity 26,795 26,596 28,058
--------- --------- ---------
Total liabilities and
total stockholders' equity $ 226,699 $ 265,907 $ 288,333
========= ========= =========
Net interest income $ 8,542 $ 9,140 $10,256
======= ======== =======
Interest rate spread 3.46% 3.21% 3.44%
==== ==== ====
Net interest margin 4.15% 3.83% 3.96%
======= ======== =======
Ratio of average interest-
earning assets to average
interest- bearing liabilities 117.43% 113.10% 114.05%
======= ======== =======
(1) Does not include interest on loans 90 days or more past due.
36
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on the interest income and interest expense of the Company. Information
is provided with respect to: (i) effects attributable to changes in rate
(changes in rate multiplied by prior volume); (ii) effects attributable to
changes in volume (changes in volume multiplied by prior rate); (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume); and (iv) the net change (the sum of the prior columns).
Year Ended March 31, 2001 Year Ended March 31, 2002
Compared to Year Ended Compared to Year Ended
March 31, 2000 March 31, 2001
--------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------- -----------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
------- ------- ------- ------- ------- ------- ------- -------
(In Thousands)
Interest-earning assets:
Loans receivable (1) $ 590 $ 2,299 $ 90 $ 2,979 $(1,732) $ 1,799 $ (173) $ (106)
Mortgage-backed securities 145 273 40 458 (100) (443) 31 (512)
Investment securities (26) 189 (10) 153 (30) 28 (1) (3)
Other earning assets 31 56 3 90 (172) 379 (96) 111
------- ------- ------- ------- ------- ------- ------- -------
Total net change in income
on interest-earning assets 740 2,817 123 3,680 (2,034) 1,763 (239) (510)
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Passbook, NOW and money
market accounts (95) 25 (2) (72) (108) (178) 16 (270)
Certificates of deposit 491 187 22 700 (799) 866 (143) (76)
FHLB advances and other 1,074 1,497 684 3,255 (1,002) (338) 60 (1,280)
------- ------- ------- ------- ------- ------- ------- -------
Total net change in expense
on interest-bearing liabilities 1,470 1,709 704 3,883 (1,909) 350 (67) (1,626)
------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in net
interest income $ (730) $ 1,108 $ (581) $ (203) $ (125) $ 1,413 $ (172) $ 1,116
======= ======= ======= ======= ======= ======= ======= =======
(1) Does not include interest on loans 90 days or more past due.
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Company has sought to reduce exposure of its earnings to changes in market
interest rates by attempting to manage the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of the Company's interest-earning
assets by retaining for its portfolio shorter term loans and loans with interest
rates subject to periodic adjustment to market conditions and by selling
substantially all of its longer term, fixed-rate residential mortgage loans. The
Company has historically relied on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered deposits,
reduce the effects of interest rate fluctuations because they generally
represent a more stable source of funds. As part of its interest rate risk
management strategy, the Company promotes non-interest-bearing transaction
accounts and certificates of deposit with longer maturities (up to five years)
to reduce the interest sensitivity of its interest-bearing liabilities.
37
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. The Company's primary
market risk exposure is interest rate risk. The on-going monitoring and
management of the risk is an important component of the Company's
asset/liability management process, which is governed by policies established by
its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out the asset/liability
management policies to the Asset/Liability Committee ("ALCO"). In this capacity
ALCO develops guidelines and strategies impacting the Company's asset/liability
management related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet as well as for
off-balance-sheet derivative financial instruments, if any. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII exposure over a one year horizon, assuming no balance sheet
growth, given both a 200 basis point (bp) upward and downward shift in interest
rates. A parallel and pro rata shift in rates over a 12-month period is assumed.
The following reflects the Company's NII sensitivity analysis as of March 31,
2002 and 2001 as compared to the 10.00% Board approved policy limit.
March 31, 2002: -200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $ 11,317 $ 11,549 $ 11,851
NII $ Change ( 232) -- 302
NII % Change -2.01% -- 2.61%
March 31, 2001: -200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $ 10,183 $ 10,278 $ 10,279
NII $ Change (95) -- 1
NII % Change -0.92% -- 0.01%
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected future
operating results. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows, and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.
38
Liquidity and Capital Resources
The Company's primary recurring sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans, maturing securities and FHLB advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At March 31, 2002, cash and cash
equivalents totaled $24.0 million, or 7.8% of total assets. In addition, the
Company maintains a credit facility with the FHLB-Seattle, which provides for
immediately available advances. Advances under this credit facility totaled
$79.7 million at March 31, 2002. The Company also maintains additional credit
with Wells Fargo Bank, available funds totaling $7.0 million. There were no
outstanding advances under this facility at March 31, 2002.
The primary investing activity of the Company is the origination of
mortgage loans. During the years ended March 31, 2001 and 2002, the Company
originated loans in the amounts of $168.4 million and $234.5 million,
respectively. At March 31, 2002, the Company had loan commitments totaling $39.6
million, undisbursed lines of credit totaling $33.9 million, credit card
available balances of $3.8 million and undisbursed loans in process totaling
$4.3 million. The Company anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Certificates of
deposit that are scheduled to mature in less than one year from March 31, 2002
totaled $71.1 million. Historically, the Company has been able to retain a
significant amount of its deposits as they mature. In addition, management of
the Company believes that it can adjust the offering rates of savings
certificates to retain deposits in changing interest rate environments.
The Bank is required to maintain specific amounts of capital pursuant
to the FDIC and the State of Washington requirements. As of March 31, 2002, the
Bank was in compliance with all regulatory capital requirements which were
effective as of such date with Tier 1 Capital to average assets, Tier 1 Capital
to risk-weighted assets and total capital to risk-weighted assets of 8.8%,
12.3%, and 13.5%, respectively. For a detailed discussion of regulatory capital
requirements, see "Regulation -- State Regulation and Supervision" and "--
Capital Requirements."
Impact of New Accounting Standards
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 requires companies to recognize all derivative
contracts as either assets or liabilities in the balance sheet and to measure
them at fair value. In June 2000, FASB issued SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized as income in
the period of change. SFAS 133 and 138 are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 and 138
as of the beginning of the fiscal year 2002. The adoption of SFAS 133 and 138
did not have any initial material impact on its consolidated financial
statements.
In June 2001, FASB approved for issuance SFAS 141, "Business Combinations." This
standard eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The Company's adoption of SFAS 141 did not have a material effect on
the Company's financial position or results of operations.
39
In June 2001, FASB approved for issuance SFAS 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually and also
in the event of an impairment indicator. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. The Company does not expect the adoption of
SFAS 142 to have any effect on the Company's financial position or results of
operations.
In June 2001, FASB approved for issuance SFAS 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting for legal obligations
associated with the retirement of tangible long-lived assets. Under SFAS 143,
the fair value of a liability for an asset retirement obligation shall be
recognized in the period in which the obligation is incurred. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company does not expect SFAS 143 to have a material effect on the
Company's financial position or results of operations.
In August 2001, FASB approved for issuance SFAS 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS 144 was issued to resolve
implementation issues that had been created under SFAS 121. Under SFAS 144, one
accounting model is required to be used for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired, and certain
additional disclosures are required. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 31, 2001. The
Company does not expect SFAS 144 to have a material effect on the Company's
financial position or results of operations.
On April 30, 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement 13, and Technical Corrections." SFAS 145
updates, clarifies and simplifies existing accounting pronouncements, by
rescinding SFAS 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Accounting Principles
Board Opinion 30 will now be used to classify those gains and losses.
Additionally, SFAS 145 amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Finally,
SFAS 145 also makes technical corrections to existing pronouncements. Management
currently believes that the adoption of SFAS 145 will not have a material impact
on the Company's financial position or results of operations.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
40
Item 7. Financial Statements
- -----------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
FirstBank NW Corp. and Subsidiaries
Clarkston, Washington
We have audited the accompanying consolidated statements of financial condition
of FirstBank NW Corp. and Subsidiaries as of March 31, 2002 and 2001, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FirstBank NW Corp. and Subsidiaries as of March 31, 2002 and 2001 and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
April 18, 2002
41
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
March 31, March 31,
2002 2001
------------ ------------
Cash and cash equivalents:
Non-interest bearing cash deposits ............... $ 10,841,708 $ 8,013,411
Interest bearing deposits ........................ 3,318,476 1,166,117
Federal funds sold ............................... 9,851,718 3,625,320
------------ ------------
Total cash and cash equivalents .............. 24,011,902 12,804,848
Investment securities (Note 1):
Available-for-sale ............................... 12,523,641 12,568,249
Mortgage-backed securities (Note 1):
Held-to-maturity ................................. 2,140,478 2,335,433
Available-for-sale ............................... 9,292,604 17,703,893
Loans receivable, net (Notes 2, 8 and 13) ............. 238,136,158 219,150,826
Accrued interest receivable (Note 3) .................. 1,913,222 2,301,830
Stock in FHLB, at cost (Note 13) ...................... 5,379,875 5,031,875
Premises and equipment, net (Note 4) .................. 5,506,770 5,988,987
Bank owned and cash surrender value of life
insurance policies (Note 9) ....................... 6,849,783 1,744,457
Mortgage servicing rights ............................. 1,016,953 866,489
Other assets .......................................... 1,069,058 565,396
------------ ------------
Total Assets .......................................... $307,840,444 $281,062,283
============ ============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
42
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, March 31,
2002 2001
------------- -------------
Liabilities:
Deposits (Note 5) ..................................................... $ 196,122,514 $ 157,797,123
Advances from borrowers for taxes and insurance ....................... 1,395,685 1,400,630
Advances from FHLB (Note 13) .......................................... 79,722,443 90,917,023
Deferred income taxes (Note 6) ........................................ 185,000 772,000
Accrued expenses and other liabilities (Note 9) ....................... 2,602,118 2,199,164
------------- -------------
Total liabilities ................................................. 280,027,760 253,085,940
------------- -------------
Commitments and contingencies (Notes 9, 10 and 16)
Stockholders' equity (Notes 10, 11 and 15):
Preferred stock, $.01 par value, 500,000 shares authorized, no shares
issued or outstanding .................................................. -- --
Common stock, $.01 par value, 5,000,000 shares authorized, 1,440,072
and 1,550,633 shares issued, 1,314,304 and 1,400,345 shares
outstanding ............................................................ 14,400 15,506
Additional paid-in capital .............................................. 10,842,691 12,666,185
Unearned ESOP shares (Note 10) .......................................... (969,580) (1,053,130)
Deferred compensation (Note 12) ......................................... (393,020) (629,381)
Retained earnings, substantially restricted (Notes 7 and 15) ............ 18,144,686 16,376,831
Accumulated other comprehensive income .................................. 173,507 600,332
------------- -------------
Total stockholders' equity ........................................ 27,812,684 27,976,343
------------- -------------
Total Liabilities and Stockholders' Equity ................................. $ 307,840,444 $ 281,062,283
============= =============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
43
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31,
----------------------------
2002 2001
------------ ------------
Interest income:
Loans receivable ...................................................... $ 17,920,163 $ 18,025,403
Mortgage-backed securities ............................................ 927,190 1,439,289
Investment securities ................................................. 610,944 613,730
Other interest earning assets ......................................... 789,264 678,322
------------ ------------
Total interest income ............................................. 20,247,561 20,756,744
------------ ------------
Interest expense:
Deposits (Note 5) ..................................................... 5,663,684 6,008,923
Advances from FHLB and other borrowings ............................... 4,327,952 5,607,930
------------ ------------
Total interest expense ............................................ 9,991,636 11,616,853
------------ ------------
Net interest income ........................................................ 10,255,925 9,139,891
Provision for loan losses (Note 2) ......................................... (1,063,920) (303,172)
------------ ------------
Net interest income after provision for loan losses ........................ 9,192,005 8,836,719
------------ ------------
Non-interest income:
Gain on sale of loans ................................................. 1,781,782 843,274
Service fees and charges .............................................. 1,914,044 1,620,986
Commissions and other ................................................. 319,081 130,094
------------ ------------
Total non-interest income ......................................... 4,014,907 2,594,354
------------ ------------
Non-interest expenses:
Compensation and related benefits (Notes 9 and 10) .................... 5,922,109 5,077,370
Occupancy ............................................................. 1,209,182 1,237,018
Supplies and postage .................................................. 343,885 327,721
Data processing ....................................................... 358,611 335,453
Professional fees ..................................................... 219,010 265,843
Advertising ........................................................... 287,281 248,326
Deposit insurance premiums ............................................ 30,000 30,000
Other ................................................................. 1,396,098 1,161,624
------------ ------------
Total non-interest expense ........................................ 9,766,176 8,683,355
------------ ------------
Income before income tax expense ........................................... 3,440,736 2,747,718
Income tax expense (Note 6) ................................................ 1,064,440 866,104
------------ ------------
Net income ................................................................. $ 2,376,296 $ 1,881,614
============ ============
Basic earnings per share.............................................. $ 1.76 $ 1.34
============ ============
Diluted earnings per share (Note 12).................................. $ 1.70 $ 1.30
============ ============
Weighted average common shares outstanding - basic .................... 1,351,705 1,404,935
============ ============
Weighted average common shares outstanding - diluted .................. 1,400,658 1,447,966
============ ============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
44
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended March 31,
----------------------------
2002 2001
------------ ------------
Net income $ 2,376,296 $ 1,881,614
- ------------
Other comprehensive income (loss):
Change in unrealized gains or losses on
securities available-for-sale ........................................ (703,083) 1,875,499
Less deferred income tax benefit (provision) ............................ 276,258 (727,094)
------------ ------------
Net other comprehensive income (loss) ...................................... (426,825) 1,148,405
------------ ------------
Comprehensive income........................................................ $ 1,949,471 $ 3,030,019
============ ============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
45
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional Unearned
------------------------ Paid-In ESOP
Shares Amount Capital Shares
------------ ---------- ------------ ------------
Balance, April 1, 2000 ............................. 1,616,633 $ 16,166 $ 13,439,372 $ (1,219,800)
Purchase and retirement of stock ................... (66,000) (660) (799,590) --
Amortization of deferred compensation (Note 12) ... -- -- -- --
Dividends paid ..................................... -- -- -- --
Change in unrealized gain (loss) on
securities available-for-sale, net of tax ....... -- -- -- --
ESOP shares released (Note 10) ..................... -- -- 26,403 166,670
Net income ......................................... -- -- -- --
------------ ---------- ------------ ------------
Balance, March 31, 2001 ............................ 1,550,633 15,506 12,666,185 (1,053,130)
Purchase and retirement of stock ................... (114,761) (1,148) (1,936,676) --
Amortization of deferred compensation (Note 12) .... -- -- -- --
Dividends paid ..................................... -- -- -- --
Change in unrealized gain (loss) on
securities available-for-sale, net of tax ....... -- -- -- --
ESOP shares released (Note 10) ..................... -- -- 46,822 83,550
Options exercised .................................. 4,200 42 66,360 --
Net income ......................................... -- -- -- --
------------ ---------- ------------ ------------
Balance, March 31, 2002 ............................ 1,440,072 $ 14,400 $ 10,842,691 $ (969,580)
============ ========== ============ ============
Accumulated
Retained Other
Earnings, Comprehensive Total
Deferred Substantially Income Stockholders'
Compensation Restricted (Loss) Equity
------------ ------------ ------------ ------------
Balance, April 1, 2000 ............................. $ (865,742) $ 15,044,540 $ (548,073) $ 25,866,463
Purchase and retirement of stock ................... -- -- -- (800,250)
Amortization of deferred compensation (Note 12) ... 236,361 -- -- 236,361
Dividends paid ..................................... -- (549,323) -- (549,323)
Change in unrealized gain (loss) on
securities available-for-sale, net of tax ....... -- -- 1,148,405 1,148,405
ESOP shares released (Note 10) ..................... -- -- -- 193,073
Net income ......................................... -- 1,881,614 -- 1,881,614
------------ ------------ ------------ ------------
Balance, March 31, 2001 ............................ (629,381) 16,376,831 600,332 27,976,343
Purchase and retirement of stock ................... -- -- -- (1,937,824)
Amortization of deferred compensation (Note 12) .... 236,361 -- -- 236,361
Dividends paid ..................................... -- (608,441) -- (608,441)
Change in unrealized gain (loss) on
securities available-for-sale, net of tax ....... -- -- (426,825) (426,825)
ESOP shares released (Note 10) ..................... -- -- -- 130,372
Options exercised .................................. -- -- -- 66,402
Net income ......................................... -- 2,376,296 -- 2,376,296
------------ ------------ ------------ ------------
Balance, March 31, 2002 ............................ $ (393,020) $ 18,144,686 $ 173,507 $ 27,812,684
============ ============ ============ ============
See accompanying summary of accounting policies and
notes to consolidated financial statements.
46
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Year Ended March 31,
-----------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income .............................................................. $ 2,376,296 $ 1,881,614
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 673,733 704,015
Provision for loan losses ............................................. 1,063,920 303,172
Gain on sale of loans ................................................. (1,781,782) (843,274)
Other gains, net ...................................................... (195,155) (16,602)
Deferred income taxes ................................................. (310,742) (7,906)
FHLB stock dividends .................................................. (348,000) (292,300)
Deferred compensation expense ......................................... 370,981 311,876
ESOP compensation expense ............................................. 130,372 193,073
Changes in assets and liabilities:
Accrued interest receivable and other assets .......................... 38,861 (348,687)
Income taxes receivable (payable) ..................................... 81,549 24,124
Accrued expenses and other liabilities ................................ 268,334 984,431
------------- -------------
Net cash provided by operating activities .................................. 2,368,367 2,893,536
------------- -------------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities
available-for-sale .................................................... 2,940,792 2,021,620
Proceeds from sale of mortgage-backed securities
available-for-sale .................................................... 5,271,715 --
Purchases of investment securities available-for-sale ................... (1,382,393) (335,000)
Proceeds from sale of investment securities
available-for-sale .................................................... 1,119,268 --
Decrease in loans receivable from loans sold ............................ 92,943,745 82,782,777
Other net change in loans receivable .................................... (111,773,671) (114,049,524)
Purchases of premises and equipment ..................................... (187,394) (466,127)
Net increase in bank owned and cash surrender value of life insurance
(185,287) (80,786)
Purchase of bank owned life insurance ................................... (4,920,039) --
Proceeds from disposition of assets ..................................... 177,681 263,831
Purchases of FHLB stock ................................................. -- (774,400)
Proceeds from maturities of mortgage-backed securities
held-to-maturity ...................................................... 188,267 142,720
------------- -------------
Net cash used in investing activities ...................................... (15,807,316) (30,494,889)
------------- -------------
See accompanying summary of accounting policies and
notes to consolidated financial statements.
47
FIRSTBANK NW CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
-----------------------------
Year Ended March 31,
-----------------------------
2002 2001
------------- -------------
Cash flows from financing activities:
Net increase in deposits ................................................ 38,325,391 12,890,175
Net increase (decrease) in advances from borrowers for taxes and
insurance ............................................................. (4,945) 30,742
Advances from FHLB and other borrowers .................................. 134,605,500 975,908,596
Repayments on advances from FHLB and other borrowers .................... (145,800,080) (959,569,679)
Purchase of stock ....................................................... (1,937,824) (800,250)
Cash dividends paid on common stock ..................................... (608,441) (549,323)
Proceeds from stock option purchases .................................... 66,402 --
------------- -------------
Net cash provided by financing activities .................................. 24,646,003 27,910,261
------------- -------------
Net increase in cash and cash equivalents .................................. 11,207,054 308,908
Cash and cash equivalents, beginning of year ............................... 12,804,848 12,495,940
------------- -------------
Cash and cash equivalents, end of year ..................................... $ 24,011,902 $ 12,804,848
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................................. $ 9,729,529 $ 11,422,564
Income taxes .......................................................... $ 1,294,530 $ 849,143
Non-cash investing and financing activities:
Unrealized gain (loss) on securities available-for-sale, net of tax ... $ (426,825) $ 1,148,405
Loan receivable charged to allowance for loan losses .................. $ 266,654 $ 149,393
Transfer from loans receivable to real estate acquired through
foreclosure ......................................................... $ 562,456 $ 320,182
See accompanying summary of accounting policies and
notes to consolidated financial statements.
48
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Organization and Principles of Consolidation
FirstBank NW Corp. (the Holding Company) is a Delaware Corporation organized on
March 12, 1997 to acquire all of the capital stock of FirstBank Northwest (the
Bank) as part of its conversion from a federally chartered mutual savings bank
to a federally chartered stock savings bank (the Conversion) and to complete an
initial public offering of Holding Company common stock. The Holding Company is
the parent company of the Bank and of Tri Star Financial Corporation (Tri Star),
which are collectively referred to as the Company and constitute these
consolidated financial statements. On January 30, 1998, the Bank converted to a
Washington Chartered savings bank. All significant intercompany transactions and
balances are eliminated in consolidation.
Nature of Business and Concentration of Credit Risk
The Holding Company's principal business consists of the operations of the Bank
and Tri Star which operate in one business segment. The Bank's operations
consist of attracting deposits from the general public through a variety of
deposit products and investing these, together with funds from on-going
operations, in the origination of residential mortgage and commercial loans and,
to a lesser extent, construction, agricultural, consumer and other loans. The
Bank primarily originates residential loans to customers located in Central and
North Idaho and Southeast Washington.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material ___
estimates that are susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses and the calculation of the
deferred tax assets and liabilities.
Cash and Cash Equivalents
Cash equivalents are any highly liquid debt instrument with a remaining maturity
of three months or less at the date of purchase. Cash and cash equivalents are
on deposit with other banks and financial institutions in amounts that
periodically exceed the federal insurance limit. FirstBank evaluates the credit
quality of these banks and financial institutions to mitigate its credit risk.
Investments and Mortgage-Backed Securities
The Company accounts for securities according to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Investments
in securities are to be classified as either held-to-maturity,
available-for-sale or trading.
Held-to-Maturity - Investments in debt securities classified as held-to-maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts using the effective interest method. The Company has the ability and
49
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
the intention to hold these investment and mortgage backed securities to
maturity and, accordingly, they are not adjusted for temporary declines in their
fair value.
Available-for-Sale - Investments in debt and equity securities classified as
available-for-sale are stated at fair value. Unrealized gains and losses are
recognized (net of tax effect) as a separate component of stockholders' equity.
Trading - Investments in debt and equity securities classified as trading are
stated at fair value. Realized and unrealized gains and losses for trading
securities are included in income.
Realized gains and losses on the sale of securities are determined using the
specific identification method.
Loans Receivable
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, and net deferred loan origination fees and discounts. Deferred loan
origination fees and discounts are amortized over the contractual life of the
loan using the level-yield method.
The allowance for loan losses is established based on management's evaluation of
probable losses in its loan portfolio. An allowance for loss on specific
impaired loans for which collectibility may not be reasonably assured is
established based upon, among other factors, the estimated fair market values of
the underlying collateral and estimated holding and selling costs.
The Company accounts for loan impairment according to the provisions of SFAS
114, "Accounting by Creditors for Impairment of a Loan," and SFAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," which amended SFAS 114. These statements define the recognition
criteria for loan impairment and the measurement methods for certain impaired
loans and loans for which terms have been modified in troubled-debt
restructurings (a restructured loan). Specifically, a loan is considered
impaired when it is probable a creditor will be unable to collect all amounts
due, including both principal and interest, according to the contractual terms
of the loan agreement. When measuring impairment, the expected future cash flows
of an impaired loan is required to be discounted at the loan's effective
interest rate. Alternatively, impairment can be measured by reference to an
observable market price, if one exists, or the fair value of the collateral for
a collateral-dependent loan. Regardless of the historical measurement method
used, SFAS 114 requires a creditor to measure impairment based on the fair value
of the collateral when the creditor determines foreclosure is probable.
Additionally, impairment of a restructured loan is measured by discounting the
total expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement.
The Company applies the recognition criteria of SFAS 114 to impaired
multi-family residential, commercial real estate, agriculture and restructured
loans. Smaller balance, homogeneous loans, including one-to-four family
residential loans and consumer loans, are collectively evaluated for impairment.
SFAS 118 amends SFAS 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans. The Company has elected to
continue to use its existing nonaccrual methods for recognizing interest on
impaired loans. Interest accruals on loans that are more than ninety days
delinquent are suspended. Suspended interest ultimately collected is credited to
interest income in the period of recovery.
50
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
Any unamortized discounts, premiums or fees on loans repaid or sold are
recognized as income in the year of repayment or sale.
Stock in Federal Home Loan Bank
Federal law requires a member institution of the Federal Home Loan Bank (FHLB)
System to hold common stock of its district FHLB according to predetermined
formulas. No readily determinable market exists for such stock and it has no
quoted market value. Accordingly, the Company reports its investment in FHLB
stock at cost.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Expenditures for
new properties and equipment and major renewals or betterments are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon sale or retirement, the cost and related accumulated depreciation are
removed from the respective property or equipment accounts and the resulting
gains or losses are reflected in operations.
Income Taxes
The Company accounts for income taxes according to the provisions of SFAS 109,
"Accounting for Income Taxes," which requires the use of the liability method of
accounting for deferred income taxes. Under SFAS 109, deferred income taxes are
provided for temporary differences between the financial reporting and tax basis
of assets and liabilities using the enacted tax rate expected to apply to the
taxable income of the period in which the deferred tax liability or asset is
expected to be settled or realized. Tax credits are accounted for as a reduction
of income taxes in the year in which the credit originates.
Real Estate Owned
Real estate acquired in settlement of loans is initially recorded at fair value
less cost to sell at the date of foreclosure. Costs relating to development and
improvement of property are capitalized to the extent that carrying value does
not exceed estimated fair market value, less estimated cost to sell, whereas
costs relating to holding the property are charged to expense.
Valuations are periodically performed by the Company, and losses are recognized
by a charge to income if the carrying value of a property exceeds its estimated
fair value less cost to sell.
Mortgage Servicing Rights
The Company accounts for mortgage servicing rights according to the provisions
of SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which applies to transactions involving sales or
securitizations of financial assets, such as mortgage loans, and the liquidation
of financial liabilities. In October 2000, the Financial Accounting Standards
Board (FASB) issued SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which replaced SFAS 125.
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
SFAS 140 is effective for transfers and servicing of financial assets and
51
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
extinguishment of liabilities occurring after March 31, 2001. Other than the
disclosure requirements, there was no effect on the consolidated financial
statements or on the manner in which the mortgage servicing rights are accounted
for from the implementation of SFAS 140.
The Company's mortgage servicing rights represent the unamortized cost of
originated contractual rights to service mortgages for others in exchange for a
servicing fee. Mortgage servicing rights are amortized over the period of
estimated net servicing income and are periodically adjusted for actual and
anticipated prepayments of the underlying mortgage loans.
Employee Stock Ownership Plan
The Company sponsors an Employee Stock Ownership Plan (the ESOP). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants Statement of Position 93-6, "Employer's Accounting for Employee
Stock Ownership Plans." Accordingly, the shares held by the ESOP are reported as
unearned shares issued to the ESOP in the statements of financial condition. As
shares are released from collateral, compensation expense is recorded equal to
the then current market price of the shares, and the shares become outstanding
for earnings per share calculations.
Stock and cash dividends on allocated shares are recorded as a reduction of
retained earnings and paid or distributed directly to participants' accounts.
Stock and cash dividends on unallocated shares are recorded as a reduction of
debt and accrued interest.
Stock Based Compensation
SFAS 123, "Accounting for Stock-Based Compensation," encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and to furnish the pro forma disclosures
required under SFAS 123. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Earnings Per Share
The Company reports earnings per shares (EPS) in accordance with SFAS 128,
"Earnings per Share." SFAS 128 establishes standards for computing and
presenting EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS 128 also
requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
ESOP shares which are unallocated and not yet committed to be released are
excluded from the weighted average shares outstanding calculation. See Note 12.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS 130 "Reporting Comprehensive
Income." SFAS 130 established disclosure standards for reporting comprehensive
income in a full set of general-purpose financial statements. Comprehensive
52
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
income is the total of reported net income and all other revenues, expenses,
gains and losses that under generally accepted accounting principles in the
United States of America bypass reported net income.
Reclassifications
Certain amounts in the notes to the 2001 consolidated financial statements have
been reclassified to conform to the presentation in the 2002 consolidated
financial statements. These reclassifications did not effect the basic financial
statements.
New Accounting Pronouncements
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 requires companies to recognize all derivative
contracts as either assets or liabilities in the balance sheet and to measure
them at fair value. In June 2000, FASB issued SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." If certain conditions
are met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized as income in
the period of change. SFAS 133 and 138 are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Bank adopted SFAS 133 and 138 as
of the beginning of the fiscal year 2002. The adoption of SFAS 133 and 138 did
not have any initial material impact on its consolidated financial statements.
In June 2001, FASB approved for issuance SFAS 141, "Business Combinations." This
standard eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001. In addition, SFAS 141 addresses the accounting
for intangible assets and goodwill acquired in a business combination. This
portion of SFAS 141 is effective for business combinations completed after June
30, 2001. The Bank's adoption of SFAS 141 did not have a material effect on the
Company's financial position or results of operations.
In June 2001, FASB approved for issuance SFAS 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and intangible
assets. Under SFAS 142, goodwill and intangible assets with indefinite lives
will no longer be amortized, but will be tested for impairment annually and also
in the event of an impairment indicator. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. The Holding Company does not expect the
adoption of SFAS 142 to have any effect on the Bank's financial position or
results of operations.
In June 2001, FASB approved for issuance SFAS 143, "Accounting for Asset
Retirement Obligations," which addresses the accounting for legal obligations
associated with the retirement of tangible long-lived assets. Under SFAS 143,
the fair value of a liability for an asset retirement obligation shall be
recognized in the period in which the obligation is incurred. SFAS 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Bank does not expect SFAS 143 to have a material effect on the
Bank's financial position or results of operations.
53
FIRSTBANK NW CORP. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
In August 2001, FASB approved for issuance SFAS 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS 144 was issued to resolve
implementation issues that had been created under SFAS 121. Under SFAS 144, one
accounting model is required to be used for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired, and certain
additional disclosures are required. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 31, 2001. The Bank
does not expect SFAS 144 to have a material effect on the Bank's financial
position or results of operations.
On April 30, 2002, FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement 13, and Technical Corrections." SFAS 145
updates, clarifies and simplifies existing accounting pronouncements, by
rescinding SFAS 4, which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Accounting Principles
Board Opinion 30 will now be used to classify those gains and losses.
Additionally, SFAS 145 amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Finally,
SFAS 145 also makes technical corrections to existing pronouncements. Management
currently believes that the adoption of SFAS 145 will not have a material impact
on the Bank's financial position or results of operations.
54
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Securities
The amortized cost and fair value of securities, with gross unrealized gains and
losses, are as follows:
March 31, 2002
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Securities Available-for-Sale
U.S. Government and federal agency ........ $12,496,149 $ 192,546 $ (165,054) $12,523,641
Mortgage-backed ........................... 9,034,491 261,162 (3,049) 9,292,604
----------- ----------- ----------- -----------
Total securities available-for-sale ....... $21,530,640 $ 453,708 $ (168,103) $21,816,245
=========== =========== =========== ===========
Securities Held-to-Maturity
U.S. Government and federal agency ........ $ 1,432,279 $ 50,130 $ -- $ 1,482,409
Mortgage-backed ........................... 708,199 4,337 (20,662) 691,874
----------- ----------- ----------- -----------
Total securities held-to-maturity ......... $ 2,140,478 $ 54,467 $ (20,662) $ 2,174,283
=========== =========== =========== ===========
March 31, 2001
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
Securities Available-for-Sale
U.S. Government and federal agency ........ $12,213,821 $ 375,093 $ (20,665) $12,568,249
Mortgage-backed ........................... 17,069,632 656,649 (22,388) 17,703,893
----------- ----------- ----------- -----------
Total securities available-for-sale ....... $29,283,453 $ 1,031,742 $ (43,053) $30,272,142
=========== =========== =========== ===========
Securities Held-to-Maturity
U.S. Government and federal agency ........ $ 1,449,434 $ 1,705 $ -- $ 1,451,139
Mortgage-backed ........................... 885,999 3,308 (30,187) 859,120
----------- ----------- ----------- -----------
Total securities held-to-maturity ......... $ 2,335,433 $ 5,013 $ (30,187) $ 2,310,259
=========== =========== =========== ===========
55
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of U.S. Government, federal agency and
mortgage-backed securities by contractual maturity at March 31, 2002, are as
follows:
Available-for-Sale Held-to-Maturity
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
After 5 years through 10 years ......... $ 513,864 $ 523,491 $ -- $ --
Over 10 years .......................... 11,982,285 12,000,150 1,432,279 1,482,409
----------- ----------- ----------- -----------
12,496,149 12,523,641 1,432,279 1,482,409
Mortgage-backed securities ............. 9,034,491 9,292,604 708,199 691,874
----------- ----------- ----------- -----------
$21,530,640 $21,816,245 $ 2,140,478 $ 2,174,283
=========== =========== =========== ===========
For the years ended March 31, 2002 and 2001, proceeds from sales of securities
available for sale amounted to approximately $6,391,000 and $0, respectively.
Gross realized gains amounted to approximately $194,000 and $0, respectively.
The tax provision applicable to these net realized gains amounted to
approximately $66,000 and $0, respectively.
2. Loans Receivable
Loans receivable at March 31 consists of the following:
2002 2001
------------ ------------
Real estate loans:
Residential ......................... $ 66,420,336 $ 74,892,160
Commercial .......................... 52,495,723 37,968,941
Agricultural ........................ 16,263,924 15,383,011
Construction ........................ 9,869,760 8,028,182
Other loans:
Commercial (non-real estate) ........ 55,568,478 41,788,884
Other consumer ...................... 7,924,176 8,255,142
Home equity ......................... 24,831,875 27,322,297
Agricultural operating .............. 12,288,953 10,938,342
------------ ------------
Total loans receivable 245,663,225 224,576,959
----------------------------------------
Less:
Loans in process .................... 4,272,302 3,248,216
Unearned loan fees and discounts .... 692,008 419,654
Allowance for loan losses ........... 2,562,757 1,758,263
------------ ------------
Loans receivable, net ............... $238,136,158 $219,150,826
============ ============
56
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total loans receivable consist of approximately $89,853,000 and $99,270,000 in
one-to-four family residential real estate loans at March 31, 2002 and 2001,
respectively. Loans held for sale carried at lower of aggregate cost or market
value were $3,740,000 and $2,466,000 at March 31, 2002 and 2001, respectively.
At March 31, 2002, the contractual principal payments due on outstanding loans
receivable are shown below. Actual payments may differ from expected payments
because borrowers have the right to prepay loans, with or without prepayment
penalties.
Amount
------------
2003 ............................................................ $ 47,647,181
2004 ............................................................ 15,989,411
2005 ............................................................ 8,419,930
2006 ............................................................ 5,207,425
2007 ............................................................ 12,086,132
Thereafter ...................................................... 156,313,146
------------
$245,663,225
============
The following summarizes the changes in the allowance for loan losses at March
31:
2002 2001
----------- -----------
Allowance for loan losses, beginning of year ..... $ 1,758,263 $ 1,604,484
Provision for loan losses ........................ 1,063,920 303,172
Charge-offs, net ................................. (259,426) (149,393)
----------- -----------
Allowance for loan losses, end of year ........... $ 2,562,757 $ 1,758,263
=========== ===========
As of March 31, 2002 and 2001, loans on a nonaccrual status totaled
approximately $591,000 and $1,443,000, respectively. The effect of not
recognizing interest income on nonaccrual loans in accordance with the original
terms totaled approximately $38,000 during 2002 and $59,000 during 2001. The
following information at March 31 relates to the Bank's impaired loans which
includes troubled debt restructurings that meet the definition of impaired
loans:
2002 2001
------------ ------------
Impaired loans with a specific allowance ......... $ 76,237 $ 26,222
Impaired loans with no specific allowance ........ 980,510 2,440,446
------------ ------------
Total impaired loans ............................. $ 1,056,747 $ 2,466,668
============ ============
Total allowance related to impaired loans ........ $ 91,564 $ 189,397
Average aggregate balance of impaired loans for
the year .................................... $ 1,335,305 $ 2,115,858
Interest income recognized on impaired loans ..... $ 73,571 $ 11,087
57
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding commitments of the Bank to originate loans as of March 31, 2002 were
as follows:
Fixed Variable
Rate Rate Total
------------ ----------- -----------
First mortgage loans.................... $ 19,534,394 $ 374,800 $19,909,194
Other loans ............................ 1,729,600 17,916,800 19,646,400
------------ ----------- -----------
Outstanding loan commitments............ $ 21,263,994 $18,291,600 $39,555,594
============ =========== ===========
Interest rates on fixed rate loan commitments range from 5.25% to 8.50% and are
committed through June 23, 2002. Fees received in connection with these
outstanding loan commitments are deferred and will be recognized in income over
the life of the related loan after funding of the loan. In addition, the Bank
had commitments to fund outstanding credit lines of approximately $33,878,000
and commitments to fund credit card lines of approximately $3,840,000 at March
31, 2002. Commitments to extend credit may involve elements of interest rate
risk in excess of the amount recognized in the balance sheets. Interest rate
risk on commitments to extend credit results from the possibility that interest
rates may have moved unfavorably from the position of the Bank since the time
the commitment was made.
The Bank remains contingently liable for $250,416 of loans sold with recourse as
of March 31, 2002. Loans serviced for others (including contract collections)
are not included in the consolidated statements of financial condition. The
unpaid principal balances of these loans at March 31 are as follows:
2002 2001
------------ ------------
Loan portfolios serviced for:
FNMA .............................................. $ 19,831,161 $ 26,987,840
FHLMC ............................................. 111,983,887 105,147,907
Others ............................................ 6,424,985 6,047,358
------------ ------------
$138,240,033 $138,183,105
============ ============
3. Accrued Interest Receivable
Accrued interest receivable at March 31 consists of the following:
2002 2001
----------- -----------
Investment securities ................................. $ 142,869 $ 149,031
Mortgage-backed securities ............................ 73,480 141,859
Loans receivable ...................................... 1,696,873 2,010,940
----------- -----------
Accrued interest receivable ........................... $ 1,913,222 $ 2,301,830
=========== ===========
58
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Premises and Equipment
Premises and equipment at March 31 consists of the following:
2002 2001
------------ ------------
Land, buildings and building improvements ............. $ 5,665,838 $ 5,632,627
Furniture, fixtures and equipment ..................... 4,853,422 4,820,341
Construction in progress .............................. 65,784 82,552
------------ ------------
10,585,044 10,535,520
Accumulated depreciation .............................. (5,078,274) (4,546,533)
------------ ------------
Premises and equipment, net ........................... $ 5,506,770 $ 5,988,987
============ ============
5. Deposits
Deposits and the related weighted average interest rates at March 31 consist of
the following:
2002 2001
------------ ------------
Deposit accounts:
NOW accounts (0.27% and 0.34%) .................... $ 9,446,173 $ 40,501,830
Passbook accounts (0.50% and 1.99%) ............... 13,919,906 12,348,892
Money market accounts
(1.57% and 3.69%) ............................... 21,068,571 15,033,027
------------ ------------
84,434,650 67,883,749
------------ ------------
Certificates of deposit:
0.00% to 1.99% .................................... 24,977,839 12,635
2.00% to 2.99% .................................... 13,792,497 77,264
3.00% to 3.99% .................................... 3,273,940 7,375,176
4.00% to 4.99% .................................... 32,634,440 5,295,080
5.00% to 5.99% .................................... 26,239,456 38,581,121
6.00% to 6.99% .................................... 10,192,630 37,873,874
7.00% to 7.99% .................................... 531,984 662,753
8.00% to 8.99% .................................... 45,078 35,471
------------ ------------
111,687,864 89,913,374
------------ ------------
$196,122,514 $157,797,123
============ ============
59
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The scheduled maturities of certificates of deposit at March 31, 2002 are as
follows:
Year ending March 31, Amount
------------
2003 .................................................. $ 71,084,249
2004 .................................................. 16,491,189
2005 .................................................. 7,438,821
2006 .................................................. 2,221,448
2007 .................................................. 14,172,020
Thereafter ............................................ 280,137
------------
Total ................................................. $111,687,864
============
Interest expense on deposits consists of the following:
Year ended March 31,
---------------------------
2002 2001
------------ ------------
NOW and money market ................... $ 706,420 $ 918,133
Passbook savings ....................... 210,232 268,269
Certificates of deposit ................ 4,747,032 4,822,521
------------ ------------
Interest expense ....................... $ 5,663,684 $ 6,008,923
============ ============
Certificates of deposit of $100,000 or more totaled approximately $44,160,000
and $20,874,000 at March 31, 2002 and 2001, respectively. Deposit balances in
excess of $100,000 totaled approximately $73,046,000 and $21,461,000 at March
31, 2002 and 2001, respectively, are not insured by the Federal Deposit
Insurance Corporation (FDIC).
6. Income Taxes
The components of income tax expense are summarized as follows:
Year ended March 31,
--------------------------
2002 2001
------------ ------------
Current ................................ $ 1,375,182 $ 874,010
Deferred ............................... (310,742) (7,906)
------------ ------------
Income tax expense ..................... $ 1,064,440 $ 866,104
============ ============
60
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax liabilities and assets at March 31 consist of the following:
2002 2001
----------- -----------
Deferred tax liabilities:
FHLB stock dividends ............... $ (746,000) $ (610,000)
Loan loss reserves ................. (80,000) 121,000)
Mortgage servicing rights .......... (397,000) (338,000)
Depreciation ....................... (335,000) (292,000)
Unrealized gain on securities ...... (112,000) (386,000)
Other .............................. (22,000) (143,000)
----------- -----------
Total deferred tax liabilities ......... (1,692,000) (1,890,000)
----------- -----------
Deferred tax assets:
Unearned loan fees ................. 21,000 27,000
Allowance for loan losses .......... 1,235,000 820,000
Deferred compensation .............. 198,000 243,000
Other .............................. 53,000 28,000
----------- -----------
Total deferred tax assets .............. 1,507,000 1,118,000
----------- -----------
Net deferred income tax liability ...... $ (185,000) $ (772,000)
=========== ===========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
2002 2001
------------------------ ------------------------
Amount Percent Amount Percent
----------- --------- ----------- ----------
Income tax expense at statutory rates .. $ 1,169,850 34.0% $ 934,224 34.0%
Increase (decrease) resulting from:
Permanent differences ............... (269,897) (7.8) (328,482) (12.0)
State income taxes, net of
federal benefit ................... 182,029 5.2 140,133 5.1
Other, net .......................... (17,542) (0.5) 120,229 4.4
----------- ------- ----------- -------
$ 1,064,440 30.9% $ 866,104 31.5%
=========== ======= =========== =======
61
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Equity
The Holding Company is not subject to capital adequacy requirements by its
primary regulator, the Office of Thrift Supervision. The Bank, however, is
subject to various regulatory capital requirements administered by the
Washington Department of Financial Institutions (the Department) and the FDIC,
(collectively referred to as the regulators). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of March 31, 2002, that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 4, 2001, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the table below
(dollars in thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- -------
As of March 31, 2002
Tier 1 Capital (to average assets) ............. $26,360 8.8% $11,994 4.0% $14,992 5.0%
Tier 1 Capital (to risk-weighted assets) ....... $26,360 12.3% $ 8,589 4.0% $12,884 6.0%
Total Capital (to risk-weighted assets) ........ $28,923 13.5% $17,178 8.0% $21,473 10.0%
As of March 31, 2001
Tier 1 Capital (to average assets) ............. $25,582 9.2% $11,147 4.0% $13,933 5.0%
Tier 1 Capital (to risk-weighted assets) ....... $25,582 13.5% $ 7,567 4.0% $11,351 6.0%
Total Capital (to risk-weighted assets) ........ $27,340 14.5% $15,134 8.0% $18,918 10.0%
The Bank may not declare or pay a cash dividend if such declaration and payment
would violate regulatory requirements. Unlike the Bank, the Holding Company is
not subject to these regulatory restrictions on the payment of dividends to its
stockholders. However, the source of its future corporate dividends may depend
upon dividends from the Bank.
62
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Related Party Transactions
The following schedule summarizes the activity in loans to directors and
officers at March 31:
2002 2001
----------- -----------
Balance, beginning of year ............. $ 1,277,130 $ 687,420
Additions .......................... 1,178,029 637,998
Repayments and sales proceeds ...... (843,959) (48,288)
----------- -----------
Balance, end of year ................... $ 1,611,200 $ 1,277,130
=========== ===========
9. Employee Benefit Plans
During 1995, the Bank established a profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code (Code), whereby participants may contribute
a percentage of compensation, but not in excess of the maximum allowed under the
Code. The plan was amended during 1998, whereby contributions by the Bank are
discretionary. Approximately $113,000 and $15,000 were contributed by the
Company to the plan for the years ended March 31, 2002 and 2001, respectively.
The Company has entered into a salary continuation agreement with certain
employees. This program was funded by purchasing single premium life insurance
contracts. The program provides for aggregate continued annual compensation for
all participants totaling $143,500 for life on the insured and a guarantee
period ranging from fifteen to twenty years for the beneficiaries. Participants
vest ratably each plan year until retirement, termination, death or disability.
The Company is recording the salary obligation over the estimated remaining
service lives of the participants. Expenses related to this program were
approximately $134,000 and $75,000 for the years ended March 31, 2002 and 2001,
respectively. At March 31, 2002, an obligation of $493,765 and cash value of
life insurance of $1,817,302 were recorded. At March 31, 2001, an obligation of
$359,414 and cash value of life insurance of $1,744,457 were recorded. During
the year ended March 31, 2002, the Bank purchased certain additional policies on
various members of management and of the Board of Directors. Total purchases of
this bank owned life insurance was approximately $4,920,000. Net earnings on all
of the life insurance contracts were approximately $185,000 and $80,000 for the
years ended March 31, 2002 and 2001, respectively.
The Company entered into three year employment agreements with certain officers
which may be extended by the Board for an additional year at each anniversary
date. The agreements provide for severance payments and other benefits in the
event of termination without cause and termination of employment in connection
with any change in control of the Company of up to 2.99 times the officer's
average annual compensation during the preceding five years. The employment
agreements provide for termination by the Company for cause at any time.
63
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Employee Stock Ownership Plan
The Bank established for eligible employees an ESOP and related trust in
connection with the stock conversion consummated on July 1, 1997. Eligible
employees of the Bank as of June 30, 1997 and eligible employees of the Company
and the Bank employed after such date who have been credited with at least 1,000
hours during a 12-month period and are age 21 will become participants. The ESOP
borrowed $1,587,000 from the Holding Company in order to purchase 158,700 shares
of common stock of the Holding Company. The loan will be repaid principally from
the Bank's contributions to the ESOP over a period of twenty-five years, as
amended during fiscal 1999, and the collateral for the loan will be the
unreleased, restricted common stock purchased by the ESOP. Contributions to the
ESOP will be discretionary; however, the Bank intends to make annual
contributions to the ESOP in an aggregate amount at least equal to the principal
and interest requirements of the debt. The stated interest rate for the loan is
8.5%.
The cost of shares acquired by the ESOP is considered unearned compensation and,
as such, is recorded as a reduction of the Company's stockholders' equity.
Shares purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is repaid. Contributions to the ESOP and shares
released from the suspense account are allocated among the participants on the
basis of compensation in the year of allocation. Participants generally become
100% vested in their ESOP account after five years of credited service or if
their service was terminated due to death, permanent disability or a change in
control. Prior to the completion of four years of credited service, a
participant who terminates employment for reasons other than death, disability,
or change in control of the Company will not receive any benefit. Forfeitures
will be reallocated among remaining participating employees, in the same
proportion as contributions. Benefits are payable upon death, retirement,
disability or separation from service. The contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Compensation expense is recorded equal to the fair value of shares held by the
ESOP which are deemed committed to be released. ESOP compensation expense was
approximately $130,000 and $193,000 for the years ended March 31, 2002 and 2001,
respectively. As of March 31, 2002, the Company has allocated or committed to be
released to the ESOP 62,832 earned shares and has 95,868 unearned, restricted
shares remaining to be released. The market value of unearned, restricted shares
held by the ESOP trust was approximately $1,720,000 at March 31, 2002.
11. Stock Award Plans
Stock Option Plan
On July 22, 1998, the shareholders of the Company voted to approve the 1998
Stock Option Plan (the SOP) for employees, officers and directors of the
Company. The SOP is administered by the Board of Directors. Under the SOP, a
maximum of 198,375 shares were approved to be granted. Generally, the SOP
provides that the terms under which options may be granted are to be determined
by a Committee subject to certain requirements as follows: (1) the exercise
price will not be less than 100% of the market price per share of the common
stock of the Company at the time stock option is granted, and (2) the option
purchase price will be paid in full on the date of purchase. The SOP provides
that options may be transferred only by will or by laws of descent and
distribution and may be exercised during the optionee's lifetime only by the
optionee or by the optionee's guardian or legal representative.
64
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option transactions for the above described plan is summarized as follows:
Weighted
Average Exercise
Number Exercise Price
Of Shares Price Per Share
--------- --------- ---------
Balance, April 1, 2000 ............ 159,200 $ 15.81 $ 15.81
Options canceled/expired ...... (3,050) 15.81 15.81
--------
Balance, March 31, 2001 ........... 156,150 15.81 15.81
Options granted ............... 7,000 15.82 15.82
Options exercised ............. (4,200) 15.81 15.81
Options canceled/expired ...... (7,750) 15.81 15.81
--------
Balance, March 31, 2002 ........... 151,200 $ 15.81 $ 15.81
======= ========= =========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the fiscal 2002 grant:
2002
--------
Dividend yield............................................... 8%
Expected volatility.......................................... 25%
Risk free interest rates .................................... 5%
Expected option lives ....................................... 7 years
The following table presents information about the options as of March 31, 2002:
Total Outstanding Exercisable
------------------------------------ --------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Exercise Remaining Number Exercise
Price of Shares Price Life (Years) of Shares Price
---------- --------- ----------- ----------- --------- ---------
$ 15.81 144,200 $ 15.81 6.8 84,840 $ 15.81
$ 15.82 7,000 15.82 9.2 -- --
-------- ----------- ------- --------- ---------
151,200 $ 15.81 6.9 84,840 $ 15.81
======== =========== ======= ========= =========
65
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value at the date of grant for options granted to
employees in 2002 was $1.80 per option. If compensation cost had been measured
under the accounting provisions of SFAS No. 123, the Company's net income and
income per share for the years ended March 31, 2002 and 2001 would have been
adjusted to the pro forma amounts indicated below:
Year Ended March 31,
------------------------------
2002 2001
------------- -------------
Net income:
As reported ................................... $ 2,376,296 $ 1,881,614
Pro forma ..................................... $ 2,342,559 $ 1,847,870
Basic earnings per share:
As reported ................................... $ 1.76 $ 1.34
Pro forma ..................................... $ 1.73 $ 1.31
Diluted earnings per share:
As reported ................................... $ 1.70 $ 1.30
Pro forma ..................................... $ 1.67 $ 1.27
Restricted Stock
During fiscal 1999, the shareholders of the Company approved the Management
Recognition and Development Plan (MRDP). Under the MRDP, the Company is
authorized to grant up to 79,350 shares of restricted stock to employees,
officers and directors of the Company. During fiscal 1999, 79,350 shares of
restricted stock was awarded to the deferred compensation plan. The fair market
value at the date of award was $15.81 per share. These awards vest ratably over
a five-year period. Deferred compensation resulting from these awards is
amortized as a charge to expense over the five-year period; expense recognized
by the Company was $236,361 for both of the years ending March 31, 2002 and
2001. The balance of deferred compensation is shown as a reduction of
stockholders' equity.
12. Earnings Per Share
Information used to calculate earnings per share was as follows:
Year Ended March 31,
------------------------------
2002 2001
------------- -------------
Net income ..................................... $ 2,376,296 $ 1,881,614
============= =============
Basic weighted average number of common shares
outstanding ................................. 1,351,705 1,404,935
Dilutive effect of potential common shares ..... 49,727 43,031
------------- -------------
Diluted weighted average number of common shares
outstanding ................................. 1,401,432 1,447,966
============= =============
Net income per common share
Basic ....................................... $ 1.76 $ 1.34
Diluted ..................................... $ 1.70 $ 1.30
During the year ended March 31, 2002 and 2001, stock options to purchase
approximately 151,200 and 157,300 shares with a weighted average exercise price
of $15.81 per share were outstanding, but not included in the computation of
diluted earnings per share because the exercise price of the options was greater
than the average market price of the common stock through-out the year.
66
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Advances from FHLB
Advances from FHLB had weighted average interest rates at March 31, 2002 and
2001 of 4.91% and 5.57%, respectively. Maturity dates of advances at March 31
were as follows:
2002 2001
----------- -----------
Advances from FHLB due:
Less than 1 year ......... $14,090,000 $48,372,055
1 to 2 years ............. 11,551,600 2,500,000
2 to 3 years ............. 12,572,900 6,521,000
3 to 4 years ............. 16,111,000 5,269,000
4 to 5 years ............. 11,947,204 9,660,000
More than 5 years ........ 13,449,739 18,594,968
----------- -----------
79,722,443 $90,917,023
=========== ===========
Pursuant to collateral requirements of the FHLB, advances are secured by stock
in FHLB and qualifying first mortgage loans. During 2001, the Company from time
to time made certain short-term borrowings from other governmental lending
entities. All such borrowings were repaid as of March 31, 2001.
14. Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate that
value. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value estimates presented do not reflect the underlying fair value of the
Company. Although management is not aware of any factors that would materially
affect the estimated fair value amounts presented, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and, therefore, estimates of fair value subsequent to that date may differ
significantly from the amounts presented as follows.
67
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 March 31, 2001
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ---------- ------------ ----------
Financial assets:
Cash and cash equivalents ....... $ 24,011,902 24,011,902 $ 12,804,848 12,804,848
Investment securities:
Available-for-sale ............. 12,523,641 12,523,641 12,568,249 12,568,249
Mortgage-backed securities:
Held-to-maturity ............... 2,140,478 2,174,283 2,335,433 2,310,259
Available-for-sale ............. 9,292,502 9,292,502 17,703,893 17,703,893
Loans receivable ................ 238,136,158 238,724,000 219,150,826 219,691,909
Stock in FHLB ................... 5,379,875 5,379,875 5,031,875 5,031,875
Cash surrender value of life
insurance policies ............. 6,849,783 6,849,783 1,744,457 1,744,457
Financial liabilities:
Deposits ........................ 196,122,514 196,495,000 157,797,133 158,096,939
Advances from FHLB .............. 79,722,443 83,313,235 90,917,023 92,005,884
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - The carrying amount of these items is a reasonable
estimate of their fair value.
Investment securities and mortgage-backed securities available-for-sale and
held-to-maturity - The fair value of investment securities is based on quoted
market prices or dealer estimates. Estimated fair value for mortgage-backed
securities issued by quasi-governmental agencies is based on quoted market
prices. The fair value of all other mortgage-backed securities is based on
dealer estimates.
Loans receivable - For certain homogeneous categories of loans, such as fixed
and variable rate residential mortgages, fair value is estimated using quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value of other loan types is estimated by
discounting the future cash flows and estimated prepayments using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining term. Some loan types were valued at carrying
value because of their floating rate or expected maturity characteristics.
Cash surrender value of bank owned and other life insurance policies - The
carrying amount of these policies approximate their fair value.
Stock in FHLB - The fair value is based upon the redemption value of the stock
which equates to its carrying value.
Deposits - The fair value of demand deposits, savings accounts, and money market
accounts is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the
estimated future cash flows using the rates currently offered for deposits with
similar remaining maturities.
Advances from FHLB - The fair value of FHLB advances and other borrowings is
estimated by discounting the estimated future cash flows using rates currently
available to the Bank for debt with similar remaining maturities.
68
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Off-balance sheet instruments - The fair value of a loan commitment is
determined based on the fees currently charged to enter into similar agreements,
taking into account the remaining length of the commitment period and the
present creditworthiness of the counterparties. Neither the fees earned during
the year on these instruments nor their value at year-end are significant to the
Company's consolidated financial position.
15. Liquidation Account
At the time of the Conversion, the Bank established a liquidation account in an
amount equal to its equity as reflected in the latest statement of financial
condition used in the final conversion prospectus. The liquidation account will
be maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at the Bank
after the Conversion. The liquidation account will be reduced annually to the
extent that eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or supplemental eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held.
16. Commitments and Contingencies
Periodically, there have been various claims and lawsuits involving the Bank,
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 the Bank's business. The
Company and the Bank are not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Company.
The Company also maintains additional credit facilities with Wells Fargo Bank,
available funds totaling $7.0 million and the Federal Reserve Bank of San
Francisco with available funds totaling $16.0 million. There were no outstanding
advances under these facilities at either March 31, 2002 or 2001.
69
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company rents branch and office space under various operating leases. Total
rent expense recognized during the years ended March 31, 2002 and 2001 was
$120,379 and $117,104, respectively. Future minimum rental payments under the
operating lease agreements are:
Year ending March 31, Amount
----------
2003 ........................................ $ 151,846
2004 ........................................ 92,709
2005 ........................................ 87,570
2006 ........................................ 40,752
----------
Total ....................................... $ 372,877
==========
The Company subleases portions of its branch facilities under non-cancelable
operating lease agreements. Total sublease income recognized during the years
ended March 31, 2002 and 2001 was $95,450 and $89,721, respectively. Future
minimum rental payments due to the Company under subleases are as follows:
Year ending March 31, Amount
----------
2003 ........................................ $ 98,928
2004 ........................................ 98,928
2005 ........................................ 98,928
2006 ........................................ 98,928
2007 ........................................ 65,952
----------
Total ....................................... $ 461,664
==========
70
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Parent Company Financial Information
FirstBank NW Corp.
Statements of Financial Condition
March 31,
---------------------------
2002 2001
------------ ------------
Assets
Cash and cash equivalents ....................... $ 111,926 $ 54,389
Loan receivable from ESOP ....................... 970,511 1,020,679
Investment in subsidiaries ...................... 26,613,992 26,181,842
Certificates of deposit ......................... -- 712,429
Other assets .................................... 118,360 48,118
------------ ------------
Total assets .................................... $ 27,814,789 $ 28,017,457
============ ============
Liabilities and Stockholders' Equity
Liabilities ..................................... $ 2,105 $ 41,114
Stockholders' equity ............................ 27,812,684 27,976,343
------------ ------------
Total liabilities and stockholders' equity ...... $ 27,814,789 $ 28,017,457
============ ============
FirstBank NW Corp.
Statements of Income
Year ended March 31,
---------------------------
2002 2001
------------ ------------
Interest income:
Certificates and time deposits ................ $ 5,355 $ 34,312
Loans receivable .............................. -- 11,344
ESOP loan ..................................... 83,209 96,095
Cash and cash equivalents ..................... 3,730 4,106
Other income:
Equity in undistributed income of subsidiaries,
net of taxes ................................ 2,595,418 1,955,996
------------ ------------
2,687,712 2,101,853
Other expense:
Compensation, payroll taxes and fringe benefits 72,652 106,644
Other expense ................................. 176,967 161,713
------------ ------------
Income before income tax expense (benefit) ...... 2,438,093 1,833,496
Income tax expense (benefit) .................... 61,797 (48,118)
------------ ------------
Net income ...................................... $ 2,376,296 $ 1,881,614
============ ============
71
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FirstBank NW Corp.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Year ended March 31,
--------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income ......................................... $ 2,376,296 $ 1,881,614
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Equity in undistributed earnings of
subsidiaries, net of taxes .................... (2,595,418) (1,955,996)
(Increase) decrease in other assets ............. 309,336 (83,751)
Increase (decrease) in liabilities .............. (39,009) (17,644)
----------- -----------
Net cash provided by (used in) operating activities ... 51,205 (175,777)
----------- -----------
Cash flows from investing activities:
Maturities of certificates of deposit .............. 712,429 105,220
Dividends received from subsidiaries ............... 1,790,000 460,000
Principal repayments on loan to the Bank ........... -- 500,000
Principal repayments on ESOP loan .................. 50,168 162,273
----------- -----------
Net cash provided by investing activities ............. 2,552,597 1,227,493
----------- -----------
Cash flows from financing activities:
Purchase of stock .................................. (1,937,824) (800,250)
Dividends paid ..................................... (608,441) (549,322)
----------- -----------
Net cash used in financing activities ................. (2,546,265) (1,349,572)
----------- -----------
Net increase (decrease) in cash and cash equivalents .. 57,537 (297,856)
Cash and cash equivalents, beginning of year .......... 54,389 352,245
----------- -----------
Cash and cash equivalents, end of year ................ $ 111,926 $ 54,389
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ......................................... $ -- $ --
Income taxes ..................................... $ -- $ --
Non-cash investing and financing activities:
ESOP shares committed to be released ............. $ 46,822 $ 26,403
72
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------
The Company filed a current report on Form 8-K on January 25, 2002
announcing a change in the Company's accountants from the firm of BDO Seidman,
LLP to Moss-Adams, LLP, such report is incorporated herein by reference.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The information concerning the Company's directors required by this
Item is incorporated by reference from the information set forth under the
caption "Proposal 1 - Election of Directors" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Stockholders to be held on July 17,
2002 (the "2002 Proxy Statement").
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, required by this Item is
incorporated by reference to the information set forth under the caption
"Compliance with Section 16(a) of the Exchange Act" in the 2002 Proxy Statement.
Executive Officers of the Company and Bank
Age at
March 31, Position
Name 2002 Company Bank
- ---- ---- ------- ----
Clyde E. Conklin 50 President, Chief Executive Chief Executive Officer and Director
Officer, and Director
Larry K. Moxley 51 Executive Vice President, Chief Financial Officer ,
Chief Financial Officer, Secretary/Treasurer and Director
Corporate Secretary, and
Director
Terence A. Otte 45 -- Senior Vice President, Chief Operating
Officer
Donn L. Durgan 48 -- Senior Vice President, Chief Lending Officer
Richard R. Acuff 41 -- Senior Vice President, Management Information
Systems Manager
Biographical Information
Clyde E. Conklin, who joined the Bank in 1987, has served as the Chief
Executive Officer of the Bank since February 1996 and as President and Chief
Executive Officer of the Company since its formation in 1997. From September
1994 to February 1996, Mr. Conklin served as Senior Vice President - Lending. In
1993, Mr. Conklin became Vice President - Lending. Prior to that time, Mr.
Conklin served as the Agricultural Lending Manager.
Larry K. Moxley, who joined the Bank in 1973, currently serves as Chief
Financial Officer of the Bank, which position he has held since February 1996.
Mr. Moxley has served as Executive Vice President, Chief Financial Officer and
Secretary/Treasurer of the Company since its formation in 1997. Mr. Moxley
served as Senior Vice President - Finance from 1993 to February 1996 and as Vice
President - Finance from 1984 to 1993.
73
Terence A. Otte joined the Bank in June 1989 as an Agricultural Loan
Officer, and currently serves as Vice President, Chief Operating Officer. From
1991 to 1994, he served as manager of the Bank's Moscow, Idaho branch. In 1994
he became Vice President-Lending and Agricultural Lending Manager and in 1996
became Senior Vice President, Agricultural and Consumer Lending and Compliance
Officer.
Donn L. Durgan, who joined the Bank in February 1996, currently serves
as Senior Vice President, Chief Lending Officer. Prior to that time, Mr. Durgan
was employed by First Security Bank, now known as Wells Fargo Bank, for 11 years
in various positions in commercial and residential real estate lending.
Richard R. Acuff, who joined the Bank in February of 1983, currently
serves as Senior Vice President of Management Information Systems. From 1983 to
1992, he served as staff accountant, assistant controller, and asset and
liability manager. From 1992 to 2001, he served as Manager, Assistant Vice
President, and Vice President of Management Information Systems.
Item 10. Executive Compensation
- --------------------------------
The information required by this Item is incorporated by reference to
the information under the captions "Directors' Compensation" and "Executive
Compensation" in the 2002 Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the 2002 Proxy Statement.
Equity compensation Plan Information. The following table sets forth
certain information with respect to securities to be issued under the Company's
equity compensation plans as or March 31, 2002.
(a) (b) (c)
Number of Weighted- Number of
securities to be average securities remaining
issued upon exercise price available for
exercise of of outstanding future issuance under
outstanding options, equity compensation plans
options, warrants warrants and (excluding securities
Plan category and rights rights reflected in column (a))
- ------------------------------------- ------------------- ---------------- --------------------------
Equity compensation plans
approved by security holders:
Management Recognition and
Development Plan $ 79,350 $ 15.81 0
1998 Stock Option Plan 151,200 $ 15.81 47,175
Equity compensation plans not
approved by security holders: N/A N/A N/A
--- --- ---
Total $ 230,550 $ 15.81 47,175
========= ======= ======
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated by reference to
the information under the caption "Transactions with Management" in the 2002
Proxy Statement.
74
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -----------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 (a) Bylaws of the Registrant*
3.2 (b) Bylaws Amendment adopted by the Board of Directors on
May 23, 2002.
10.1 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Clyde E. Conklin**
10.2 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Larry K. Moxley**
10.3 Salary Continuation Agreement between First Federal Bank
of Idaho, F.S.B. and Clyde E. Conklin**
10.4 Salary Continuation Agreement between First Federal Bank
of Idaho, F.S.B. and Larry K. Moxley**
10.5 Management Recognition and Development Plan***
10.6 1998 Stock Option Plan***
16 Letter on change in Certifying Accountants****
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
- -------------------
* Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-KSB for the year ended March 31, 2000.
** Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 333-23395).
*** Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-8 filed on September 28, 1998.
**** Incorporated by reference to exhibit 16 to the Registrant's Current
Report on Form 8-K filed on January 25, 2002.
(b) Reports on Form 8-K
Item 4. The Company filed a current report on From 8-K on
January 25, 2002 announcing a change in the Company's
accountants.
75
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTBANK CORP.
Date: June 26, 2002 By: /s/ CLYDE E. CONKLIN
-------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to 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.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ CLYDE E. CONKLIN President, Chief June 26, 2002
- --------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)
/s/ LARRY K. MOXLEY Executive Vice President, June 26, 2002
- --------------------------- Chief Financial Officer,
Larry K. Moxley and Director (Principal
Financial Officer)
/s/ CYNTHIA M. MOORE Controller June 26, 2002
- --------------------------- (Principal Accounting Officer)
Cynthia M. Moore
/s/ WILLIAM J. LARSON Director June 26, 2002
- ---------------------------
William J. Larson
/s/ STEVE R. COX Director June 26, 2002
- ---------------------------
Steve R. Cox
/s/ ROBERT S. COLEMAN, SR. Director June 26, 2002
- ---------------------------
Robert S. Coleman, Sr.
/s/ JAMES N. MARKER Director June 26, 2002
- ---------------------------
James N. Marker
/s/ W. DEAN JURGENS Director June 26, 2002
- ---------------------------
W. Dean Jurgens
76
EX-3.2
3
ex3_2b.txt
EXHIBIT 3.2
Exhibit 3.2 (b)
RESOLUTIONS
I, the undersigned Secretary of FirstBank NW Corp, do hereby certify
that the following resolution was adopted by unanimous vote of the Board of
Directors at a meeting of said Board held on the 23rd day of May, 2002, a quorum
being present.
WHEREAS, the Board of Directors has determined that it would be
beneficial to allow shareholders to vote their shares electronically at
shareholder meetings in order to provide the opportunity for increased
shareholder participation and to reduce postage and mailing costs; now,
therefore, be it
RESOLVED, that Article II, Section 9 of the Bylaws of the Company be
revised as follows:
SECTION 9. Proxies. At all meetings of shareholders, a
shareholder may vote by proxy executed in writing by the
shareholder or by his duly authorized attorney in fact, however,
electronic transmission of proxies is allowed to the full extent
permitted by Washington law. Proxies solicited on behalf of
management shall be voted as directed by the shareholder or, in
the absence of such direction, as determined by a majority of the
board of directors. All proxies shall be filed with the secretary
of the corporation before or at the commencement of meetings. No
proxy may be effectively revoked until notice in writing of such
revocation has been given to the secretary of the corporation by
the shareholder (or his duly authorized attorney in fact, as the
case may be) granting the proxy. No proxy shall be valid after
eleven months from the date of its execution unless it is coupled
with an interest.
I, the undersigned Secretary of FirstBank NW Corp, do hereby certify
that the above resolution was adopted by unanimous vote of the Board of
Directors of the Company.
Date: May 23, 2002
EX-21
4
ex_21.txt
EXHIBIT 21
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
FirstBank Corp.
- ---------------
Percentage Jurisdiction or
Subsidiaries (1) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
FirstBank Northwest, 100% Washington
with its subsidiary:
Tri-Star Financial Corporation 100% Idaho
(1) These subsidiaries were acquired by the parent effective July 1, 1997.
The operations of the Registrant's subsidiaries are included in the
Registrant's consolidated financial statements.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (registration statement numbers 333-30519 and 333-64445)
of FirstBank NW Corp. of our report dated April 18, 2002 relating to the
consolidated financial statements of FirstBank NW Corp., which appears in
FirstBank NW Corp.'s Annual Report on Form 10-KSB as of and for the year ended
March 31, 2002.
/s/ BDO Seidman, LLP
Spokane, Washington
June 18, 2002