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Filed pursuant to Rule 424(b)(3)
Registration No. 333-23395
PROSPECTUS SUPPLEMENT
FIRSTBANK CORP.
FIRSTBANK NORTHWEST
401(k) PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the FirstBank Northwest 401(k) Plan (the "Plan" or the
"401(k) Plan") of participation interests and shares of FirstBank Corp. common
stock, par value $.01 per share (the "Common Stock"), as set forth herein.
In connection with the proposed conversion of FirstBank Northwest (the
"Bank" or "Employer") from a federally chartered mutual savings bank to a
federally chartered stock savings bank (and, thereafter, to a Washington-
chartered savings bank), a holding company, FirstBank Corp. (the "Holding
Company"), has been formed. The simultaneous conversion of the Bank to stock
form, the issuance of the Bank's common stock to the Holding Company and the
offer and sale of the Holding Company's Common Stock to the public are herein
referred to as the "Conversion." Applicable provisions of the 401(k) Plan
permit the investment of the Plan assets in Common Stock of the Holding Company
at the direction of a Plan Participant. This Prospectus Supplement relates to
the election of a Participant to direct the purchase of Common Stock in
connection with the Conversion.
The Prospectus dated May 14, 1997 of the Holding Company (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operation and business of the Bank and the Holding Company. This
Prospectus Supplement, which provides detailed information with respect to the
Plan, should be read only in conjunction with the Prospectus. Terms not
otherwise defined in this Prospectus Supplement are defined in the Plan or the
Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion. See "THE CONVERSION" and "-- Limitations
on Purchases of Shares" in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY
OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus Supplement is May 14, 1997.
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No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
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TABLE OF CONTENTS
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PAGE
<S> <C>
The Offering
Securities Offered................................................... S-1
Election to Purchase Common Stock in the Conversion.................. S-1
Value of Participation Interests..................................... S-1
Method of Directing Transfer......................................... S-2
Time for Directing Transfer.......................................... S-2
Irrevocability of Transfer Direction................................. S-2
Direction to Purchase Common Stock After the Conversion.............. S-2
Purchase Price of Common Stock....................................... S-2
Nature of a Participant's Interest in the Holding Company Common
Stock............................................................... S-3
Voting and Tender Rights of Common Stock............................. S-3
Description of the Plan
Introduction......................................................... S-3
Eligibility and Participation........................................ S-4
Contributions Under the Plan......................................... S-4
Limitations on Contributions......................................... S-5
Investment of Contributions.......................................... S-7
The Employer Stock Fund.............................................. S-8
Benefits Under the Plan.............................................. S-9
Withdrawals and Distributions from the Plan.......................... S-9
Administration of the Plan........................................... S-10
Reports to Plan Participants......................................... S-11
Plan Administrator................................................... S-11
Amendment and Termination............................................ S-11
Merger, Consolidation or Transfer.................................... S-11
Federal Income Tax Consequences...................................... S-11
Restrictions on Resale............................................... S-14
Legal Opinions............................................................ S-15
Investment Form........................................................... 1
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THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to 110,000 shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Bank and their beneficiaries
may participate in the Plan. Information with regard to the Plan is contained
in this Prospectus Supplement and information with regard to the Conversion and
the financial condition, results of operation and business of the Bank and the
Holding Company is contained in the attached Prospectus. The address of the
principal executive office of the Bank is 920 Main Street, Lewiston, Idaho
83501. The Bank's telephone number is (208) 746-9610.
Election to Purchase Common Stock in the Conversion
In connection with the Bank's Conversion, each Participant in the 401(k)
Plan may direct the trustees of the Plan (the "Trustees") to transfer up to 100%
of a Participant's beneficial interest in the assets of the Plan at June 2, 1997
to a newly created Employer Stock Fund and to use such funds to purchase Common
Stock issued in connection with the Conversion. Amounts transferred will
include salary deferral, Employer matching, profit sharing contributions and
account balances transferred from the First Federal Bank of Idaho, FSB Defined
Benefit Pension Plan and Trust, which was terminated on March 31, 1996. The
Employer Stock Fund will consist of investments in the Common Stock made on or
after the effective date of the Conversion. Funds not transferred to the
Employer Stock Fund will be invested at the Participant's discretion in the
other investment options available under the Plan. See "DESCRIPTION OF THE PLAN
- -- Investment of Contributions" below. A Participant's ability to transfer
funds to the Employer Stock Fund in the Conversion is subject to the
Participant's general eligibility to purchase shares of Common Stock in the
Conversion. For general information as to the ability of the Participants to
purchase shares in the Conversion, see "THE CONVERSION -- The Subscription,
Direct Community and Syndicated Community Offerings" in the attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on an
annual basis. This value represents the market value of past contributions to
the Plan by the Bank and by the Participants and earnings thereon, less previous
withdrawals, and transfers from the Savings Fund.
S-1
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Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the Participant should indicate that
decision in Part 2 of the Investment Form. If a Participant does not wish to
make such an election, he or she does not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is June 6, 1997. The Investment Form should be returned to Patty
Mincher at the Bank no later than the close of business on such date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.
Direction to Purchase Common Stock After the Conversion
After the Conversion, a Participant will be able to direct that a certain
percentage of such Participant's interests in the trust assets ("Trust") be
transferred to the Employer Stock Fund and invested in Common Stock, or to the
other investment funds available under the Plan. Alternatively, a Participant
may direct that a certain percentage of such Participant's interest in the
Employer Stock Fund be transferred from the Employer Stock Fund to other
investment funds available under the Plan. Participants will be permitted to
direct that future contributions made to the Plan by or on their behalf be
invested in Common Stock. Following the initial election, the allocation of
Participant's interest in the Employer Stock Fund may be changed by the
Participant on a quarterly basis. Special restrictions may apply to transfers
directed by those Participants who are executive officers, directors and
principal stockholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustees to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.
S-2
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Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant will be
held in the name of the Trustees of the Plan in the Employer Stock Fund. Any
earnings, losses or expenses with respect to the Holding Company Stock,
including dividends and appreciation or depreciation in value, will be credited
or debited to the account and will not be credited to or borne by any other
accounts.
Voting and Tender Rights of Common Stock
The Trustees generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Bank adopted the Plan effective January 1, 1994. The Plan is a cash or
deferred arrangement established in accordance with the requirement under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code").
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations. The Bank
has received a determination from the Internal Revenue Service ("IRS") that the
Plan is qualified under Section 401(a) of the Code and that it satisfies the
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan). The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA. Neither the
funding requirements contained in Title IV
S-3
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of ERISA nor the plan termination insurance provisions contained in Title IV
will be extended to Participants or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT
RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Bank is eligible to participate and will become a
Participant in the Plan following completion of a minimum of 1,000 hours of
service with the Bank within a consecutive 12 month period of employment and the
attainment of age 21. The Plan fiscal year is the calendar year ("Plan Year").
Directors who are not employees of the Bank are not eligible to participate in
the Plan.
During 1996, approximately 48 employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation" means a
Participant's total amount of earnings reportable W-2 wages for federal income
tax withholding purposes plus a Participant's elective deferrals pursuant to a
salary reduction agreement under the Plan or any elective deferrals to a Section
125 plan. Due to recent statutory changes, the annual Compensation of each
Participant taken into account under the Plan is limited to $160,000 as adjusted
periodically (adjusted as permitted by the Code). A Participant may elect to
modify the amount contributed to the Plan under the participant's salary
reduction agreement during the Plan Year. Deferral contributions are
transferred by the Bank to the Trustees of the Plan on a periodic basis.
S-4
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Employer Contributions. The Bank currently makes a discretionary matching
contribution to the Plan in an amount equal to a percentage of each
Participant's annual salary reduction contributions.
Discretionary Contributions. The Bank may also make discretionary
nonmatching contributions to the Plan for each Plan Year. Participants who are
in service on the last day of the Plan Year and have completed 1,000 hours of
service during the Plan Year are eligible to share in the allocation of the
discretionary contributions (if any) for the Plan Year. The Bank's
discretionary contributions are allocated among Participants eligible to share
in the allocation according to the relationship of each such Participant's
Compensation for the Plan Year to the total Compensation of all such
Participants for such Plan Year. In addition, the Bank may make discretionary
contributions on behalf of certain non-highly compensated employees to the
extent necessary to satisfy the Code's nondiscrimination requirements (see
below).
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted periodically as permitted by the Code). A Participant's "Section 415
Compensation" is a Participant's Compensation, excluding any amount contributed
to the Plan under a salary reduction agreement or any employer contribution to
the Plan or to any other plan or deferred compensation or any distributions from
a plan of deferred compensation. In addition, annual additions are limited to
the extent necessary to prevent the limitations for the combined plans of the
Bank from being exceeded. To the extent that these limitations would be
exceeded by reason of excess annual additions to the Plan with respect to a
Participant, the excess must be reallocated to the remaining Participants who
are eligible for an allocation of Employer contributions for the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $9,500 (as adjusted periodically
as permitted by the Code). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross federal income tax
purposes in the year they are made. In addition, any such excess deferral will
again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan
S-5
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in any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amount of deferred compensation contributed by or on behalf of
all other employees eligible to participate in the Plan. Specifically, the
actual deferral percentage for a Plan Year (i.e., the average of the ratios,
----
calculated separately for each eligible employee in each group, by dividing the
amount of salary reduction contributions credited to the salary reduction
contribution account of such eligible employee by such employee's compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (a) 125% of the actual deferred percentage of all other eligible
employees, or (b) the lesser of (i) 200% of the actual deferred percentage of
all other eligible employees, or (ii) the actual deferral percentage of all
other eligible employees plus two percentage points. In addition, the actual
contribution percentage for a Plan Year (i.e., the average of the ratios
----
calculated separately for each eligible employee in each group, by dividing the
amount of employer contributions credited to the Matching contributions account
of such eligible employee by each eligible employee's compensation for the Plan
Year) of the Highly Compensated Employees may not exceed the greater of (a) 125%
of the actual contribution percentage of all other eligible employees, or (b)
the lesser of (i) 200% of the actual contributions percentage of all other
eligible employees, or (ii) the actual contribution percentage of all other
eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
----
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted periodically as permitted by the
Code) and, if elected by the Bank, was in the top paid group of employees for
such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Bank will be subject to a 10%
excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Bank
with respect to any excess aggregate contributions, unless such amounts, plus
any income allocable thereto, are distributed within 2 1/2 months following the
close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions
S-6
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would apply with respect to the combination of annual additions to the Plan and
projected annual benefits under any defined plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees"
generally include any employee, who at any time during the Plan Year or any
other the four preceding Plan Years, if (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the employer,
(3) a 5% owner of the employer (i.e., owns directly or indirectly more than 5%
----
of the stock of the employer, or stock possessing more than 5% of the total
combined voting power of all stock of the employer), or (4) a 1% of owner of the
employer having compensation in excess of $150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustees. The Trustees are appointed by
the Bank's Board of Directors. The Plan provides that a Participant may direct
the Trustees to invest all or a portion of his or her Accounts in various
managed investment portfolios, as described below. A Participant may
periodically elect to change his or her investment directions with respect to
both past contributions and for more additions to the Participant's accounts
invested in these investment alternatives.
Under the Plan, prior to the effective date of the Conversion, the
Accounts of Participant held in the Trust will be invested by the Trustees at
the direction of the Participant in the following investment options:
1 - Vanguard MMR Fed Portfolio
2 - Vanguard Wellington Fund
3 - Vanguard Wellesley Fund
4 - Vanguard Windsor II Fund
5 - Vanguard International Growth Fund
6 - Vanguard Fixed Income Securities Fund
7 - Vanguard Primecap Fund
8 - FirstBank Northwest Savings Accounts/Certificates of Deposit
S-7
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For additional information concerning these investment options, please
contact Patty Mincher. Effective upon the Conversion, a Participant may invest
all or a portion of his or her Accounts in the investment options described
above and in the fund, described below:
9 - Employer Stock Fund which invests in the common stock of FirstBank
Corp.
A Participant may elect to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other managed portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in a FirstBank Northwest passbook account.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined monthly on a quarterly basis. For
purposes of such allocation, all assets of the Trust are valued at their fair
market value.
The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. In connection with the
Conversion, pursuant to the attached Investment Form, Participants will be able
to change their investments at a time other than the normal election intervals.
Any cash dividends paid on Common Stock held in the Employer Stock Fund will be
credited to a cash dividend subaccount for each Participant investing in the
Employer Stock Fund. The Trustees will, to the extent practicable, use all
amounts held by it in the Employer Stock Fund (except the amounts credited to
cash dividend subaccounts) to purchase shares of Common Stock. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances, the Trustees may be required to limit the daily volume of shares
purchased. Pending investment in Common Stock, assets held in the Employer
Stock Fund will be placed in bank deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account will be adjusted to reflect changes in the value
of shares of Common Stock resulting from stock dividends, stock splits and
similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase. Following the conversion, the Board of the Holding Company may
consider a policy of paying dividends on the Common Stock, however, no decision
has been made by the Board of the Holding Company regarding the amount or timing
of dividends, if any.
S-8
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As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" on pages 1 through 7 in the
Prospectus.
Benefits Under the Plan
Vesting. A Participant has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her matching
contributions account and employer discretionary contributions after the
completion of five years of service under the Plan's vesting schedule (40%
vested upon completion of four years of service, 100% after five years of
service).
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an in-
kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefit payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2 (if the Participant is retired). However, if the
vested portion of the Participant's Account balances exceeds $3,500, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special
restrictions may apply to the distribution of Common Stock of the Holding
Company to those Participants who are executive officers, directors and
principal shareholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Exchange Act.
S-9
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Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of
a married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustees. The Trustees with respect to the Plan are currently Larry K.
Moxley, Patty Mincher, Mary K. Barker, G.J. Cole, Rocky Dover and Dona M.
Miller.
Pursuant to the terms of the Plan, the Trustees receive and hold
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom. The Trustees
have the authority to invest and reinvest the Trust and may sell or otherwise
dispose of Trust investments at any time and may hold trust funds uninvested.
The Trustees have the authority to invest the assets of the Trust in "any type
of property, investment or security" as defined under ERISA.
The Trustees have full power to vote any corporate securities in the Trust
in person or by proxy; provided, however, that the Participants will direct the
Trustees as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
The Trustees are not compensated for their services. The expenses incurred
in the administration of the Trust are paid out of the Trust except to the
extent such expenses are paid by the Employer.
The Trustees must render at least annual reports to the Bank and to the
Participants in such form and containing information that the Trustees deem
necessary.
S-10
<PAGE>
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
semiannually showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
Plan Administrator
Mr. Larry K. Moxley, the Bank's Chief Financial Officer and Ms. Patty
Mincher, have been designated by the Board of Directors of the Bank to act on
the Bank's behalf as the Plan Administrator. The Plan Administrator is
responsible for the administration of the Plan, interpretation of the provisions
of the Plan, prescribing procedures for filing applications for benefits,
preparation and distribution of information explaining the Plan, maintenance of
plan records, books of account and all other data necessary for the proper
administration of the Plan, and preparation and filing of all returns and
reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Bank may terminate the Plan at any time. If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each employee
who ceases to be a Participant shall have a fully vested interest in his or her
Account. The Bank reserves the right to make, from time to time, any amendment
or amendments to the Plan which do not cause any part of the Trust to be used
for, or diverted to, any purpose other than the exclusive benefit of the
Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
S-11
<PAGE>
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Bank expects to timely adopt any
amendments to the Plan that may be necessary to maintain the qualified status of
the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution that
includes Common Stock or qualified as a "Lump Sum Distribution" (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance to the
credits of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Bank. The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes (the "total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Bank which is included in such distribution.
S-12
<PAGE>
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution (the "ordinary income portion") will be taxable generally as
ordinary income for federal income tax purposes. However, for distributions
occurring prior to January 1, 2000, a Participant who has completed at least
five years of participation in the Plan before the taxable year in which the
distribution is made, or a beneficiary who receives a Lump Sum Distribution on
account of the Participant's death (regardless of the period of the
Participant's participation in the Plan or any other profit sharing plan
maintained by the Employer), may elect to have the ordinary income portion of
such Lump Sum Distribution taxed according to a special averaging rule ("five-
year averaging"). The election of the special averaging rules may apply only to
one Lump Sum Distribution received by the Participant or beneficiary, provided
such amount is received on or after the Participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule. The
special five-year averaging rule has been repealed for distributions occurring
after December 31, 1999. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule (if available) or the prior law ten-year
averaging rule. Such individuals also may elect to have that portion of the
Lump Sum Distribution attributable to the Participant's pre-1974 participation
in the Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustees transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA. If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan of to an IRA, the
S-13
<PAGE>
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount distributed from the Plan except: (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
----
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled onto an IRA or another qualified plan or the distribution
is (i) made to a beneficiary (or to the estate of a Participant) on or after the
death of the Participant, (ii) attributable to the Participant's being disabled
within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and his or her beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Bank or the Holding Company as the term "affiliate" is used
in Rules 144 and 405 under the Securities Act of 1933, as amended ("Securities
Act") (e.g., directors, officers and substantial shareholders of the Bank) may
reoffer or resell such shares only pursuant to a registration statement filed
under the Securities Act (the Holding Company and the Bank having no obligation
to file such registration statement) or, assuming the availability thereof,
pursuant to Rule 144 or some other exemption from the registration requirements
of the Securities Act. Any person who may be an "affiliate" of the Bank or the
Holding Company may wish to consult with
S-14
<PAGE>
counsel before transferring any Common Stock owned by him or her. In addition,
Participants are advised to consult with counsel as to the applicability of the
reporting and short-swing profit liability rules of Section 16 of the Exchange
Act which may affect the purchase and sale of the Common Stock if acquired under
the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon
by Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel
for the Holding Company in connection with the Bank's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank and the concurrent formation of the Holding Company.
S-15
<PAGE>
Investment Form
(Employer Stock Fund)
FIRSTBANK NORTHWEST
401(k) PLAN
Name of Participant:________________________________
Social Security Number:_____________________________
1. Instructions. In connection with the proposed conversion of
FirstBank Northwest (the "Bank") to a stock savings bank and the simultaneous
formation of a holding company (the "Conversion"), participants in the FirstBank
Northwest 401(k) Plan (the "Plan") may elect to direct the investment of up to
100% of their June 2, 1997 account balances into the Employer Stock Fund (the
"Employer Stock Fund"). Amounts transferred at the direction of Participants
into the Employer Stock Fund will be used to purchase shares of the common stock
of FirstBank Corp. (the "Common Stock"), the proposed holding company for the
Bank. A Participant's eligibility to purchase shares of Common Stock is subject
to the Participant's general eligibility to purchase shares of Common Stock in
the Conversion and the maximum and minimum limitations set forth in the Plan of
Conversion. See the Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to Patty Mincher at the Bank, no later than the close of
business on June 6, 1997. The Bank will keep a copy of this form and return a
copy to you. (If you need assistance in completing this form, please contact
Patty Mincher.)
2. Transfer Direction. I hereby direct the Plan Administrator to
transfer $__________ (in increments of $10) from my existing Plan investments to
the Employer Stock Fund. Please transfer this amount from the following
investments in the amounts indicated:__________________________________________.
3. Additional Instructions. If applicable, please select one or more
of the following by initialing the space provided:
a. _____ To the extent that my Plan subscription order is not
filled, I hereby direct the Trustee of the Plan to
apply the excess funds to the purchase of Common Stock
in the open market following the closing of the
Conversion. I understand that all purchases of Common
Stock made after the Conversion will be at prevailing
market prices, which may be higher or lower than the
initial offering price of $10.00 per share, and that
any commissions associated with such purchases will
also be charged against my account. Please note that
if you do not initial this section or section (c)
below, any excess funds will be returned to a Bank
passbook account pending receipt of your instructions.
Page 1 of 2
<PAGE>
b. _____ In addition to this Plan subscription order, I have
submitted a separate subscription order with personal
funds obtained from sources other than the Plan. In
the event that my combined order is not filled in its
entirety, I direct that my separate subscription order
be filled prior to this Plan subscription order.
Please note that if you do not initial this section,
this Plan subscription order will be filled prior to
the separate subscription order you submit.
c. _____ If my subscription order is not filled in its
entirety, please contact me for further instructions
regarding the investment of the excess funds. I
understand that after I have been contacted, I must
provide such instructions in writing no later than two
business days thereafter or my excess funds will be
returned to a Bank passbook account.
4. Effectiveness of Direction. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion. I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.
___________________________________ ______________________
Participant Signature Date
* * * * *
5. Acknowledgement of Receipt. This Investment Form was received by
the Plan Administrator (or its designee) and will become effective on the date
noted below.
___________________________________ ______________________
Plan Administrator (or designee) Date
Page 2 of 2
<PAGE>
PROSPECTUS
[LOGO OF FIRSTBANK CORP. APPEARS HERE]
(PROPOSED HOLDING COMPANY FOR FIRSTBANK NORTHWEST)
1,725,000 SHARES OF COMMON STOCK
FirstBank Corp. (the "Holding Company"), a Delaware corporation, is offering
between 1,275,000 and 1,725,000 shares of its common stock, $0.01 par value
per share (the "Common Stock"), in connection with the conversion of FirstBank
Northwest (formerly known as First Federal Bank of Idaho, a Federal Savings
Bank) (the "Bank") from a federally chartered mutual savings bank to a
federally chartered capital stock savings bank and the simultaneous issuance
of the Bank's capital stock to the Holding Company. The conversion of the Bank
to a capital stock savings bank and the acquisition of the Bank by the Holding
Company are collectively referred to herein as the "Stock Conversion."
Following consummation of the Stock Conversion, the Bank intends to relocate
its main office to Clarkston, Washington and convert from a federally
chartered stock savings bank to a Washington-chartered savings bank (the
"Charter Conversion"). The closing of the Stock Conversion is not contingent
upon the closing of the Charter Conversion. See "FIRSTBANK NORTHWEST" and "THE
CONVERSION--Purposes of Conversion." In connection with the Charter
Conversion, the Holding Company anticipates becoming a bank holding company
under the Bank Holding Company Act of 1956, as amended ("BHCA"). The Stock
Conversion and the Charter Conversion are referred to herein collectively as
the "Conversion" and are being undertaken pursuant to a plan of conversion
adopted by the Board of Directors of the Bank ("Plan" or "Plan of
Conversion"). In certain circumstances, the Holding Company may increase the
amount of Common Stock offered hereby to 1,983,750 shares. See Footnote 3 to
the table below.
(cover continued on following page)
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT
BE INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"),
THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION
INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS,
THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING
PURCHASE COMMISSIONS AND OTHER ESTIMATED NET
PRICE(1) FEES AND EXPENSES(2) PROCEEDS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share............ $10.00 $0.49 $9.51
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Midpoint Per Share........... $10.00 $0.44 $9.56
- -------------------------------------------------------------------------------
Maximum Per Share............ $10.00 $0.40 $9.60
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Maximum Per Share, as adjust-
ed(3)....................... $10.00 $0.35 $9.65
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Minimum Total(4)............. $12,750,000 $625,000 $12,125,000
- -------------------------------------------------------------------------------
Midpoint Total(5)............ $15,000,000 $656,000 $14,344,000
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Maximum Total(6)............. $17,250,000 $687,000 $16,563,000
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Maximum Total, as adjust-
ed(3)(7).................... $19,837,500 $697,000 $19,140,500
</TABLE>
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- -------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC. ("RP Financial") as of February 28, 1997 which states that
the estimated aggregate pro forma market value of the Holding Company and
the Bank, as converted, ranged from $12,750,000 to $17,250,000, with a
midpoint of $15,000,000 ("Estimated Valuation Range"). RP Financial's
appraisal is based upon estimates and projections that are subject to
change, and the valuation must not be construed as a recommendation as to
the advisability of purchasing such shares or that a purchaser will
thereafter be able to sell such shares at or above the Purchase Price. See
"THE CONVERSION--Stock Pricing and Number of Shares to be Issued."
(2) Consists of estimated costs to the Holding Company and the Bank arising
from the Conversion, including fees to be paid to Sandler O'Neill &
Partners, L.P. ("Sandler O'Neill") in connection with the Offerings. Such
fees may be deemed to be underwriting fees and Sandler O'Neill may be
deemed to be an underwriter. The Holding Company and the Bank have agreed
to indemnify Sandler O'Neill against certain liabilities, including
liabilities that may arise under the Securities Act of 1933, as amended
("Securities Act"). See "USE OF PROCEEDS" and "THE CONVERSION--Marketing
and Underwriting Arrangements."
(3) Gives effect to the sale of up to an additional 15% of the shares offered,
without the resolicitation of subscribers or any right of cancellation,
due to an increase in the pro forma market value of the Holding Company
and the Bank, as converted. The ESOP shall have a first priority right to
subscribe for such additional shares up to an aggregate of 8% of the
Common Stock issued in the Conversion. See "THE CONVERSION--Stock Pricing
and Number of Shares to be Issued."
(4) Assumes the issuance of 1,275,000 shares at $10.00 per share.
(5) Assumes the issuance of 1,500,000 shares at $10.00 per share.
(6) Assumes the issuance of 1,725,000 shares at $10.00 per share.
(7) Assumes the issuance of 1,983,750 shares at $10.00 per share.
---------------
SANDLER O'NEILL & PARTNERS, L.P.
---------------
THE DATE OF THIS PROSPECTUS IS MAY 14, 1997.
<PAGE>
Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Bank as of
December 31, 1995 ("Eligible Account Holders"), (ii) the Bank's employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii)
depositors with $50.00 or more on deposit at the Bank as of March 31, 1997
("Supplemental Eligible Account Holders"), and (iv) depositors of the Bank as
of April 30, 1997 ("Voting Record Date") and borrowers of the Bank with loans
outstanding as of April 25, 1990 which continue to be outstanding as of the
Voting Record Date ("Other Members"), subject to the priorities and purchase
limitations set forth in the Plan of Conversion ("Subscription Offering").
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS") OR ANOTHER
AGENCY OF THE U.S. GOVERNMENT. See "THE CONVERSION--The Subscription, Direct
Community and Syndicated Community Offerings" and "--Limitations on Purchases
of Shares."
Concurrently, but subject to the prior rights of holders of Subscription
Rights, the Holding Company is offering the Common Stock to certain members of
the general public through a direct community offering ("Direct Community
Offering") with preference being given to natural persons and trusts of
natural persons who are permanent residents of NezPerce, Latah, Kootenai, or
Idaho Counties of Idaho ("Local Community"), subject to the right of the
Holding Company to accept or reject orders in the Direct Community Offering in
whole or in part. The Subscription Offering and the Direct Community Offering
are referred to herein as the "Subscription and Direct Community Offering." It
is anticipated that shares of Common Stock not subscribed for or purchased in
the Subscription and Direct Community Offering will be offered to eligible
members of the general public in a syndicated offering ("Syndicated Community
Offering") (the Subscription Offering, Direct Community Offering and
Syndicated Community Offering are referred to collectively as the
"Offerings").
With the exception of the ESOP, which is expected to purchase 8% of the
shares of Common Stock issued in the Conversion, NO PERSON OR ENTITY MAY
PURCHASE MORE THAN $125,000 OF COMMON STOCK (OR 12,500 SHARES BASED ON THE
PURCHASE PRICE); AND NO PERSON OR ENTITY, TOGETHER WITH ASSOCIATES OF AND
PERSONS ACTING IN CONCERT WITH SUCH PERSON OR ENTITY, MAY PURCHASE IN THE
AGGREGATE MORE THAN $250,000 OF COMMON STOCK (OR 25,000 SHARES BASED ON THE
PURCHASE PRICE). Under certain circumstances, the maximum purchase limitation
may be increased or decreased at the sole discretion of the Bank and the
Holding Company subject to any required regulatory approval. See "THE
CONVERSION--The Subscription, Direct Community and Syndicated Community
Offerings," "--Limitations on Purchases of Shares" and "--Procedure for
Purchasing Shares in the Subscription and Direct Community Offering" for other
purchase and sale limitations. The minimum order is 25 shares.
THE SUBSCRIPTION OFFERING WILL EXPIRE AT 12:00 NOON, PACIFIC TIME, ON JUNE
20, 1997 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE BANK AND THE HOLDING
COMPANY FOR UP TO 13 DAYS WITH APPROVAL OF THE OTS, IF NECESSARY. THE DIRECT
COMMUNITY OFFERING WILL ALSO TERMINATE AT 12:00 NOON, PACIFIC TIME, ON THE
EXPIRATION DATE UNLESS EXTENDED BY THE HOLDING COMPANY AND THE BANK, WITH
APPROVAL OF THE OTS, IF NECESSARY. The Holding Company must receive a properly
completed and signed stock order form ("Order Form") and certification along
with full payment (or appropriate instructions authorizing a withdrawal of the
full payment from a deposit account at the Bank) of $10.00 per share for all
shares subscribed for or ordered. Funds so received will be placed in a
segregated account created for this purpose at the Bank, and interest will be
paid at the Bank's passbook rate from the date payment is received until the
Stock Conversion is consummated or terminated; these funds will be otherwise
unavailable to the depositor until such time. Payments authorized by
withdrawals from deposit accounts will continue to earn interest at the
contractual rate until the Stock Conversion is consummated or terminated,
although such funds will be unavailable for withdrawal until the Stock
Conversion is consummated or terminated. ONCE TENDERED, SUBSCRIPTION ORDERS
CANNOT BE REVOKED OR MODIFIED WITHOUT THE CONSENT OF THE BANK AND THE HOLDING
COMPANY. The Holding Company is not obligated to accept orders submitted on
photocopied or telecopied
<PAGE>
Order Forms. If the Conversion is not consummated within 45 days after the last
day of the Subscription Offering and the OTS consents to an extension of time to
complete the Conversion, subscribers will be given the right to increase,
decrease or rescind their orders. Such extensions may not go beyond June 23,
1999.
The Bank and the Holding Company have engaged Sandler O'Neill to consult
with and advise them in the sale of the Common Stock in the Offerings. In
addition, in the event the Common Stock is not fully subscribed for in the
Subscription and Direct Community Offering, Sandler O'Neill will manage the
Syndicated Community Offering. Neither Sandler O'Neill nor any other
registered broker-dealer is obligated to take or purchase any shares of Common
Stock in the Offerings. The Holding Company and the Bank reserve the right, in
their absolute discretion, to accept or reject, in whole or in part, any or
all orders in the Direct Community or Syndicated Community Offerings either at
the time of receipt of an order or as soon as practicable following the
termination of the Offerings. See "THE CONVERSION--Marketing and Underwriting
Arrangements."
Prior to the Offerings, the Holding Company has not issued any capital stock
and accordingly there has been no market for the shares offered hereby. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be maintained. The Holding Company
has received conditional approval to have its Common Stock listed on the
Nasdaq National Market under the symbol "FBNW." Sandler O'Neill has advised
the Holding Company that it intends to act as a market maker for the Common
Stock following consummation of the Conversion. See "RISK FACTORS--Absence of
Active Market for the Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
[MAP APPEARS HERE]
[LOGO OF FIRSTBANK APPEARS HERE]
<TABLE>
<CAPTION>
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Branch Locations
----------------
<S> <C> <C> <C> <C>
Lewiston Office Orchards Office Moscow Office Grangeville Office Coeur d'Alene Office
921 "F" Street 444 Thain Road 201 S. Jackson St. 108 S. Mill Street Ironwood at NW Blvd.
Lewiston, ID 83501 Lewiston, ID 83501 Moscow, ID 83843 Grangeville, ID 83530 Coeur d'Alene, ID 83814
<CAPTION>
Residential Loan Centers General Offices
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<S> <C> <C>
Lewiston Mortgage Center Coeur d'Alene Mortgage Center 920 Main Street
920 Main Street Ironwood Drive at Northwest Blvd. PO Box 996
Lewiston, ID 83501 Coeur d'Alene, ID 83814 Lewiston, ID 83501
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE BANK'S PLAN OF
CONVERSION BY ITS ELIGIBLE VOTING MEMBERS, THE SALE OF AT LEAST 1,275,000
SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF CONVERSION,
AND RECEIPT OF ALL REGULATORY APPROVALS.
<PAGE>
- --------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE BIF, THE SAIF OR ANY OTHER GOVERNMENT
AGENCY.
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See
"RISK FACTORS."
FirstBank Corp.
The Holding Company is a Delaware corporation organized in March 1997 at
the direction of the Bank for the purpose of serving as the holding company of
the Bank upon consummation of the Stock Conversion. The Holding Company has not
engaged in any significant business to date. The Holding Company has received
the approval of the OTS to become a savings and loan holding company and to
acquire 100% of the capital stock of the Bank. The Holding Company intends to
apply for approval of the Board of Governors of the Federal Reserve System
("Federal Reserve") to become a bank holding company under the BHCA through the
continued ownership of the Bank following the Charter Conversion. The Holding
Company expects to receive such approval. Immediately following the Stock
Conversion, the only significant assets of the Holding Company will be the
capital stock of the Bank, that portion of the net proceeds of the Offerings
permitted by the OTS to be retained by the Holding Company and a note receivable
from the ESOP evidencing a loan from the Holding Company to fund the Bank's
ESOP. The Holding Company has received approval from the OTS to retain 50% of
the net proceeds of the Offerings. Funds retained by the Holding Company will be
used for general business activities, including a loan by the Holding Company
directly to the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued in the Conversion. See "USE OF PROCEEDS." Management believes that the
holding company structure and retention of proceeds may facilitate the expansion
and diversification of its operations, should it decide to do so. The holding
company structure will also enable the Holding Company to repurchase its stock
without adverse tax consequences, subject to applicable regulatory restrictions
and waiting periods. There are no present plans, arrangements, agreements, or
understandings, written or oral, regarding any such activities or repurchases.
The main office of the Holding Company is located at 920 Main Street, Lewiston,
Idaho 83501, and its telephone number is (208) 746-9610.
FirstBank Northwest
The Bank, founded in 1920, is a federally chartered mutual 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 April 1997, in anticipation of the Charter Conversion, the Bank changed its
name from "First Federal Bank of Idaho, a Federal Savings Bank" to "FirstBank
Northwest." In connection with the Stock Conversion, the Bank will convert to a
federally chartered capital stock savings bank and will become a subsidiary of
the Holding Company. The Bank is currently regulated by the OTS, its primary
regulator, and the 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. At December 31, 1996, the Bank had total
assets of $133.2 million, total deposits of $105.3 million and total equity of
$10.8 million on a consolidated basis. In connection with the Charter
Conversion, the Bank will relocate its main office to Clarkston, Washington and
convert to a Washington-chartered savings bank.
The Bank is a community-oriented financial institution that engages
primarily in the business of attracting deposits from the general public and
using those funds to originate residential mortgage loans within the Bank's
market area. At December 31, 1996, one- to four-family residential mortgage
loans totalled $72.7 million, or 61.3%
(i)
<PAGE>
of total loans receivable. The Bank also is active in originating construction
and agricultural real estate loans. At December 31, 1996, construction loans
totalled $14.9 million, or 12.6% of total loans receivable, and agricultural
real estate loans totalled $11.9 million, or 10.0% of total loans receivable. To
a lesser extent, the Bank also originates commercial real estate and consumer
and other non-real estate loans, although it intends to increase its
originations of these types of loans, subject to market conditions and other
factors. See "BUSINESS OF THE BANK -- Lending Activities." The Bank has adopted
a mortgage banking strategy pursuant to which it generally sells a majority of
the fixed-rate residential mortgage loans that it originates while retaining the
servicing rights on most of the conventional loans it sells. At December 31,
1996, the Bank serviced $131.5 million of loans for others. The administrative
office of the Bank is located at 920 Main Street, Lewiston, Idaho, 83501, and
its telephone number is (208) 746-9610. The Bank operates five full-service
offices in Lewiston, Lewiston Orchards, Moscow, Grangeville and Coeur d'Alene,
Idaho and two loan production offices in Lewiston and Coeur d'Alene, Idaho.
As part of its asset/liability management, subsequent to December 31, 1996,
the Bank intends to retain for its portfolio $5.0 million of 30-year, fixed-rate
conventional mortgage loans and to purchase $5.0 million of short-term mortgage-
backed securities. These investments will be funded with additional FHLB
advances, which may be retired with the proceeds of the Offerings. See "USE OF
PROCEEDS."
Following the Stock Conversion, the Bank will relocate its main office to
Clarkston, Washington, which is adjacent to Lewiston, Idaho across the Snake
River, and convert to a Washington-chartered savings bank. The main office
relocation will be accomplished by opening a full-service office in Clarkston,
Washington and designating that office as the Bank's main office. The Bank's
administrative offices will remain in their present location. The Bank is in the
process of evaluating locations for its Clarkston, Washington office and expects
that the Charter Conversion will not be completed until several months after the
consummation of the Stock Conversion, or longer in the event that the Bank has
difficulty locating suitable office space in Clarkston. The Board of Directors
believes that conversion to a Washington-chartered savings bank is in the best
interests of the Bank, its members and the communities it serves. As a
Washington-chartered savings bank with offices in Washington and Idaho, the Bank
will have the flexibility to expand in Washington and Idaho, should it decide to
do so, through branch acquisitions, opening new branches, or acquiring other
institutions. While the current federal thrift charter permits nationwide
branching, the possible elimination of the federal thrift charter in favor of a
common charter for federal thrifts and banks may limit the Bank's branching
authority in the future. See "RISK FACTORS -- Potential Operational Restrictions
Associated with Regulatory Oversight." Furthermore, the Washington savings bank
charter will provide the Bank with the authority to pursue its community banking
strategy.
The Bank, as a Washington-chartered savings bank, will succeed to all of
the assets and liabilities of the Bank as a federally chartered savings bank. In
anticipation of the Charter Conversion, the Bank has adopted a community banking
strategy pursuant to which it intends to expand the products and services it
offers in order to improve market share and increase the average yield of its
interest-earning assets. Specifically, the Bank intends to expand its
agricultural real estate and commercial real estate lending activities. The Bank
also intends to expand its non-mortgage lending activities by increasing its
emphasis on originating agricultural operating loans and commercial business
loans. Management anticipates that the Bank will incur initial start-up and
ongoing expenses in connection with the opening of its Clarkston, Washington
office and as various programs and services, such as its commercial real estate
and business lending operations, are introduced or expanded. These expenses
could reduce earnings for a period of time while income from new programs and
services increases to a degree sufficient to cover the additional expenses.
Following the Charter Conversion, the deposits of the Bank will continue to
be insured by the SAIF of the FDIC. In addition, following the Charter
Conversion, the Bank will not be regulated and supervised by the OTS, but rather
by the Washington Department of Financial Institutions, Division of Banks
("Department") and the FDIC. The Bank intends to remain a member of the FHLB-
Seattle.
(ii)
<PAGE>
The Conversion
The Bank is in the process of converting from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank and, in
connection with the Conversion, has formed the Holding Company. Following
consummation of the Stock Conversion, the Bank intends to relocate its main
office to Clarkston, Washington and convert to a Washington-chartered savings
bank. The closing of the Stock Conversion is not contingent upon the closing of
the Charter Conversion. As a result of the Charter Conversion, the Holding
Company intends to become a bank holding company under the BHCA. As part of the
Stock Conversion, the Bank will issue all of its capital stock to the Holding
Company in exchange for 50% of the net proceeds of the Offerings.
Simultaneously, the Holding Company will sell its Common Stock in the Offerings.
After consummation of the Stock Conversion, depositors and borrowers of the Bank
will have no voting rights in the Holding Company unless they become
stockholders.
Consummation of the Stock Conversion is subject to the approval of the Plan
of Conversion by the Bank's members and approval by the OTS of the Plan of
Conversion and the Holding Company's acquisition of the Bank. Consummation of
the Charter Conversion is subject to approval by the OTS and the Department and
approval by the Federal Reserve of the Holding Company's continued ownership of
the Bank.
The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Bank as converted. RP Financial has advised the Bank that in its opinion, at
February 28, 1997, the aggregate estimated pro forma market value of the Holding
Company and the Bank as converted ranged from $12,750,000 to $17,250,000. The
appraisal of the pro forma market value of the Holding Company and the Bank as
converted is based on a number of factors and should not be considered a
recommendation to buy shares of the Common Stock or any assurance that after the
Stock Conversion shares of Common Stock will be able to be resold at or above
the Purchase Price. The appraisal will be updated or confirmed prior to
consummation of the Conversion.
The Board of Directors and management believe that the Conversion is in the
best interests of the Bank's members and its communities. The Conversion is
intended: (i) to improve the competitive position of the Bank in its market
area and support possible future expansion and diversification of operations
(currently, there are no specific plans, arrangements or understandings, written
or oral, regarding any such activities); (ii) to afford members of the Bank and
others the opportunity to become stockholders of the Holding Company and thereby
participate more directly in, and contribute to, any future growth of the
Holding Company and the Bank; and (iii) to provide future access to capital
markets. See "THE CONVERSION."
The Subscription, Direct Community and Syndicated Community Offerings
The Holding Company is offering up to 1,725,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Bank's ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Members. In the event the number of
shares offered in the Stock Conversion is increased above the maximum of the
Estimated Valuation Range, the Bank's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock issued in the Offerings.
Concurrently, but subject to the prior rights of holders of Subscription Rights,
the Holding Company is offering the Common Stock in the Direct Community
Offering to certain members of the general public with preference being given to
natural persons and trusts of natural persons who are permanent residents of the
Bank's Local Community. Once tendered, subscription orders cannot be revoked or
modified without the consent of the Bank and the Holding Company. The Bank has
engaged Sandler O'Neill to consult with and advise the Holding Company and the
Bank in the Offerings, and Sandler O'Neill has agreed to use its best efforts to
assist the Holding Company with the solicitation of subscriptions and purchase
orders for shares of Common Stock in the Offerings. Sandler O'Neill is not
obligated to take or purchase any shares of Common Stock in the Offerings. If
all shares of Common Stock to be issued in the Stock Conversion are not sold
through the Subscription and Direct Community Offering, then the Holding Company
expects to offer the
(iii)
<PAGE>
remaining shares in a Syndicated Community Offering managed by Sandler O'Neill,
which would occur as soon as practicable following the close of the Subscription
and Direct Community Offering. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the Subscription
and Direct Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." The
Subscription Offering will expire at 12:00 Noon, Pacific Time, on the Expiration
Date, unless extended by the Bank and the Holding Company with approval of the
OTS, if necessary. The Direct Community Offering will also terminate on the
Expiration Date unless extended by the Holding Company and the Bank to no later
than 45 days after the expiration of the Subscription Offering, unless further
extended with the consent of the OTS. The Syndicated Community Offering, if one
is held, will terminate no later than 45 days after the expiration of the
Subscription Offering, unless extended with the consent of the OTS.
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no prospectus will be mailed any
later than five days prior to the Expiration Date or hand delivered any later
than two days prior to such date. Execution of the Order Form will confirm
receipt of the Prospectus in accordance with Rule 15c2-8. Order Forms will only
be distributed with a prospectus. The Bank is not obligated to accept for
processing orders not submitted on original Order Forms. Order Forms
unaccompanied by an executed certification form will not be accepted. Payment
by check, money order, bank draft, cash or debit authorization to an existing
account at the Bank must accompany the order and certification forms. No wire
transfers will be accepted. The Bank is prohibited from lending funds to any
person or entity for the purpose of purchasing shares of Common Stock in the
Conversion. See "THE CONVERSION -- Procedure for Purchasing Shares in
Subscription and Direct Community Offering."
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of December 31, 1995 (the "Eligibility Record
Date"), March 31, 1997 (the "Supplemental Eligibility Record Date") or April 30,
1997 ("Voting Record Date") and borrowers with loans outstanding on April 25,
1990 which continue to be outstanding as of the Voting Record Date must list all
deposit and/or loan accounts on the Order Form, giving all names on each account
and the account numbers. Failure to list all account numbers may result in the
inability of the Holding Company or the Bank to fill all or part of a
subscription order. In addition, registration of shares in a name or title
different from the names or titles listed on the account may adversely affect
such subscriber's purchase priority. See "THE CONVERSION -- Procedure for
Purchasing Shares in Subscription and Direct Community Offering."
Restrictions on Transfer of Subscription Rights
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the Subscription Rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Each person exercising Subscription Rights will be required to certify that a
purchase of Common Stock is solely for the purchaser's own account and that
there is no agreement or understanding regarding the sale or transfer of such
shares. The Holding Company and the Bank will pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
Subscription Rights and will not honor orders known by them to involve the
transfer of such rights.
Purchase Limitations
With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Conversion, no person or entity may
purchase more than $125,000 of Common Stock (or 12,500 shares based on the
Purchase Price); and no person or entity, together with associates of and
persons acting in concert with such person or entity, may purchase in the
aggregate more than $250,000 of Common Stock (or 25,000 shares based on the
Purchase Price). This maximum purchase limitation may be increased or decreased
as consistent with OTS regulations in the sole discretion of the Holding Company
and the Bank subject to any required
(iv)
<PAGE>
regulatory approval. The minimum purchase is 25 shares. In addition, stock
orders received either through the Direct Community Offering or the Syndicated
Community Offering, if held, may be accepted or rejected, in whole or in part,
at the discretion of the Holding Company and the Bank. See "THE CONVERSION --
Limitations on Purchases of Shares." If an order is rejected in part, the
purchaser does not have the right to cancel the remainder of the order. In the
event of an oversubscription, shares will be allocated in accordance with the
Plan of Conversion. See "THE CONVERSION -- The Subscription, Direct Community
and Syndicated Community Offerings."
Stock Pricing and Number of Shares to be Issued in the Conversion
The Purchase Price in the Offerings is a uniform price for all subscribers,
including members of the Holding Company's and the Bank's Boards of Directors,
their management and tax-qualified employee plans, and was set by the Board of
Directors. The number of shares to be offered at the Purchase Price is based
upon an independent appraisal of the aggregate pro forma market value of the
Holding Company and the Bank as converted. The aggregate pro forma market value
was estimated by RP Financial to range from $12,750,000 to $17,250,000 as of
February 28, 1997. See "THE CONVERSION -- Stock Pricing and Number of Shares to
be Issued." The appraisal of the pro forma value of the Holding Company and the
Bank as converted will be updated or confirmed at the completion of the
Offerings. The maximum of the Estimated Valuation Range may be increased by up
to 15% to $19,837,500 and the number of shares of Common Stock to be issued in
the Conversion may be increased to 1,983,750 shares due to material changes in
the financial condition or performance of the Bank or changes in market
conditions or general financial and economic conditions. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the Common
Stock are less than the minimum or more than 15% above the maximum of the
current Estimated Valuation Range. The appraisal is not intended to be and
should not be construed as a recommendation of any kind as to the advisability
of purchasing Common Stock in the Offerings nor can assurance be given that
purchasers of the Common Stock in the Offerings will be able to sell such shares
after consummation of the Stock Conversion at a price that is equal to or above
the Purchase Price. Furthermore, the pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.
Use of Proceeds
The net proceeds from the sale of the Common Stock are estimated to range
from $12.1 million to $16.6 million, or up to $19.1 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company has received the
approval of the OTS to purchase all of the capital stock of the Bank to be
issued in the Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately $6.1
million to $8.3 million of the net proceeds, or up to $9.6 million if the
Estimated Valuation Range is increased by 15%, and the Bank receiving an equal
amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities. The Bank will use the funds contributed to it for
general corporate purposes, including increased local lending, the establishment
of its Clarkston, Washington office, the expansion of its community banking
activities and possible future acquisitions of branches or banks. The Bank may
also use a portion of the funds contributed to it to retire outstanding FHLB
advances. Pending deployment of funds, the Bank plans initially to invest the
net proceeds in short-term U.S. Government and agency securities. Shares of
Common Stock may be purchased with funds on deposit at the Bank, which will
reduce deposits by the amounts of such purchases. As a result, the net amount
of funds available to the Bank for investment following receipt of the
Conversion proceeds will be reduced by the amount of deposit withdrawals used to
fund stock purchases.
A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the ESOP to enable it to purchase 8% of the
shares of Common Stock issued in the Conversion. Such
(v)
<PAGE>
loan would fund the entire purchase price of the ESOP shares ($1,380,000 at the
maximum of the Estimated Valuation Range) and would be repaid principally from
the Bank's contributions to the ESOP and from dividends payable on the Common
Stock held by the ESOP. The remaining proceeds retained by the Holding Company
initially will be invested in short-term U.S. Government and agency securities.
Such proceeds will be available for additional contributions to the Bank in the
form of debt or equity, to support future growth and diversification activities,
as a source of dividends to the stockholders of the Holding Company and for
future repurchases of Common Stock (including possible repurchases to fund stock
benefit plans or to provide shares to be issued upon exercise of stock options)
to the extent permitted under Delaware law and OTS regulations (following the
Charter Conversion, dividend payments will be regulated by Delaware law and the
regulations and policies of the Federal Reserve). Currently, as discussed below
under "USE OF PROCEEDS," there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any of such activities.
Market for Common Stock
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market under the symbol "FBNW." Although under no obligation to
do so, Sandler O'Neill has indicated its intention to act as a market maker for
the Holding Company's Common Stock following consummation of the Conversion. No
assurance can be given that an active and liquid trading market for the Common
Stock will develop. Further, no assurance can be given that purchasers will be
able to sell their shares at or above the Purchase Price after the Conversion.
See "RISK FACTORS -- Absence of Active Market for the Common Stock" and "MARKET
FOR COMMON STOCK."
Dividends
The Board of Directors of the Holding Company has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the future.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the Bank's
and the Holding Company's financial condition and results of operations, tax
considerations and general economic conditions. No assurances can be given that
any dividends will be declared or, if declared, what the amount of dividends
will be or whether such dividends, once declared, will continue. The Holding
Company may pay stock dividends in lieu of or in addition to cash dividends, or
may combine periodic special dividends with regular dividends. See "DIVIDEND
POLICY."
Officers' and Directors' Common Stock Purchases and Beneficial Ownership
Officers and directors of the Bank (12 persons) are expected to subscribe
for an aggregate of approximately 162,500 shares of Common Stock, or 12.8% and
9.4% of the shares based on the minimum and the maximum of the Estimated
Valuation Range, respectively. See "THE CONVERSION -- Shares to be Purchased by
Management Pursuant to Subscription Rights." In addition, purchases by the
ESOP, allocations of stock under the Management Recognition Plan ("MRP"), and
the exercise of stock options issued under the Stock Option Plan ("Stock Option
Plan"), will increase the number of shares beneficially owned by officers,
directors and employees. See "RISK FACTORS -- Antitakeover Effects of Governing
Documents, Delaware and Federal Law, Control by Insiders and Employment
Agreements -- Voting Control by Insiders." The MRP and Stock Option Plan are
subject to approval by the stockholders of the Holding Company at a meeting to
be held no earlier than six months following consummation of the Conversion.
See "MANAGEMENT OF THE BANK -- Benefits."
Risk Factors
See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.
(vi)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Bank and its
subsidiary at the dates and for the periods indicated. This information is
qualified in its entirety by reference to the detailed information contained in
the Consolidated Financial Statements and Notes thereto presented elsewhere in
this Prospectus. Information as of December 31, 1996 and for the nine months
ended December 31, 1995 and 1996 is unaudited but, in the opinion of management,
reflects all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation of the results at such date and for such
periods.
<TABLE>
<CAPTION>
At March 31, At
-------------------------------------------- December 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................. $95,951 $96,816 $102,223 $104,121 $129,832 $133,194
Loans receivable, net........................ 60,711 77,574 76,217 82,777 93,817 111,085
Cash and cash equivalents.................... 9,042 3,988 12,754 4,172 13,581 5,765
Investment securities available for sale..... 1,353 1,414 1,335 1,289 1,328 --
Investment securities held to maturity....... 3,236 2,692 4,110 6,732 10,545 5,189
Mortgage-backed securities held to maturity.. 6,776 5,013 3,446 2,840 2,488 2,343
Deposits..................................... 86,941 83,182 91,858 88,787 115,324 105,349
Borrowings................................... 544 4,044 -- 4,000 2,304 15,060
Total equity................................. 6,634 7,807 8,797 9,504 10,356 10,818
<CAPTION>
Nine
Months Ended
Year Ended March 31, December 31,
-------------------------------------------- ----------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income.............................. $ 7,726 $ 7,335 $ 7,418 $ 7,658 $ 9,552 $ 7,025 $ 7,640
Interest expense............................. 5,104 3,928 3,625 3,596 5,158 3,672 4,014
------- ------- -------- -------- -------- -------- --------
Net interest income.......................... 2,622 3,407 3,793 4,062 4,394 3,353 3,626
Provision for loan losses.................... 82 267 79 27 150 78 194
------- ------- -------- -------- -------- -------- --------
Net interest income
after provision for loan losses............. 2,540 3,140 3,714 4,035 4,244 3,275 3,432
Non-interest income.......................... 1,037 2,116 2,740 1,737 1,980 1,507 1,680
Non-interest expense......................... 2,624 3,367 4,310 4,567 5,261 3,555 4,539
------- ------- -------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of accounting change................. 953 1,889 2,144 1,205 963 1,227 573
Income taxes................................. 361 797 963 452 375 428 150
------- ------- -------- -------- -------- -------- --------
Income before cumulative effect
of accounting change........................ 592 1,092 1,181 753 588 799 423
Cumulative effect of accounting change(1).... -- -- (116) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income................................... $ 592 $ 1,092 $ 1,065 $ 753 $ 588 $ 799 $ 423
======= ======= ======== ======== ======== ======== ========
</TABLE>
- -------------
(1) Reflects adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(vii)
<PAGE>
<TABLE>
<CAPTION>
At March 31, At
---------------------------------------- December 31,
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding...................... 1,423 1,581 1,440 1,425 1,456 1,470
Deposit accounts................................... 15,379 15,205 15,730 16,303 18,206 18,099
Full-service offices............................... 4 4 5 5 5 5
</TABLE>
<TABLE>
<CAPTION>
At or for
At or For the the Nine Months
Year Ended March 31, Ended December 31,
-------------------------------------------- ------------------
1992 1993 1994 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
KEY FINANCIAL RATIOS:
Performance Ratios (1):
Return on average assets (2)........................ 0.64% 1.15% 1.05% 0.74% 0.50% 0.95% 0.44%
Return on average equity (3)........................ 9.40 15.28 12.48 8.19 5.81 10.70 5.25
Average total equity to average assets (4).......... 6.85 7.51 8.43 9.03 8.55 8.85 8.32
Total equity to total assets at end of
period............................................. 6.91 8.06 8.61 9.13 7.98 7.78 8.12
Interest rate spread (5)............................ 2.72 3.64 3.61 3.87 3.61 3.88 3.68
Net interest margin (6)............................. 2.97 3.80 3.88 4.15 3.89 4.17 3.93
Average interest-earning assets
to average interest-bearing
liabilities...................................... 104.30 103.54 107.27 107.44 106.09 106.46 105.67
Non-interest expense as a
percent of average total assets................... 2.85 3.54 4.26 4.49 4.44 4.22 4.68
Efficiency ratio (7)................................ 71.71 60.96 65.97 78.75 82.54 73.15 85.54
Equity Ratios:
Core capital........................................ 6.91 8.06 8.61 9.13 7.98 7.78 8.12
Tangible capital.................................... 6.91 8.06 8.61 9.13 7.98 7.78 8.12
Risk-based capital.................................. 11.64 14.02 15.42 15.66 14.14 14.04 13.27
Asset Quality Ratios:
Nonaccrual and 90 days or more past due
loans as a percent of loans
receivable, net.................................. 3.02 0.99 0.28 0.64 0.74 0.68 0.91
Nonperforming assets as a
percent of total assets........................... 4.41 0.95 0.21 0.51 0.59 0.55 0.90
Allowance for loan losses as a
percent of total loans receivable................. 0.48 0.56 0.66 0.62 0.70 0.63 0.74
Allowance for loan losses as a
percent of nonperforming loans.................... 16.34 59.61 252.38 104.32 101.30 85.62 87.48
Net charge-offs to average
outstanding loans................................. 0.02 0.15 0.01 0.00 0.00 0.00 0.01
- ------------------
</TABLE>
(1) Ratios for the nine-month periods are annualized.
(2) Net earnings divided by average total assets.
(3) Net earnings divided by average equity.
(4) Average total equity divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income.
(viii)
<PAGE>
RECENT DEVELOPMENTS
The following tables sets forth selected financial condition data for the
Bank at March 31, 1996, December 31, 1996 and March 31, 1997, selected operating
data for the Bank for the three months and the years ended March 31, 1996 and
1997 and selected financial ratios for the Bank at and for the three months and
the years ended March 31, 1996 and 1997. The selected financial and operating
data and financial ratios at and for the three months and years ended March 31,
1996 and 1997 are derived from the unaudited consolidated financial statements
of the Bank, which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
At At At
March 31, December 31, March 31,
1996 1996 1997
--------- ----------- --------
(In Thousands)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets................................ $129,832 $133,194 $137,652
Loans receivable, net....................... 93,817 111,085 113,053
Cash and cash equivalents................... 13,581 5,765 5,303
Investment securities available
for sale................................... 1,328 -- --
Investment securities held to
maturity................................... 10,545 5,189 5,199
Mortgage-backed securities
available for sale......................... -- -- 2,599
Mortgage-backed securities held
to maturity................................ 2,488 2,343 2,281
Deposits.................................... 115,324 105,349 107,596
Borrowings.................................. 2,304 15,060 13,922
Total equity................................ 10,356 10,818 11,011
</TABLE>
<TABLE>
<CAPTION>
Three Months Year
Ended March 31, Ended March 31,
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income............................. $2,527 $ 2,552 $ 9,552 $ 10,192
Interest expense............................ 1,486 1,324 5,158 5,338
------ -------- -------- --------
Net interest income......................... 1,041 1,228 4,394 4,854
Provision for loan losses................... 72 116 150 310
------ -------- -------- --------
Net interest income after
provision for loan losses................. 969 1,112 4,244 4,544
Non-interest income......................... 473 565 1,980 2,245
Non-interest expense........................ 1,706 1,338 5,261 5,877
------ -------- -------- --------
Income (loss) before income taxes........... (264) 339 963 912
Income taxes................................ (53) 113 375 263
------ -------- -------- --------
Net income (loss)........................... $ (211) $ 226 $ 588 $ 649
====== ======== ======== ========
</TABLE>
(ix)
<PAGE>
<TABLE>
<CAPTION>
At or For the At or For the
Three Months Year
Ended March 31, Ended March 31,
------------------ ----------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
KEY FINANCIAL RATIOS:
Performance Ratios (1):
Return on average assets (2).. (0.64)% 0.68% 0.50% 0.50%
Return on average equity (3).. (8.07) 8.15 5.81 5.99
Average total equity to
average assets (4)........... 7.92 8.40 8.55 8.34
Total equity to total
assets at end of period...... 7.98 8.00 7.98 8.00
Interest rate spread (5)...... 3.04 3.67 3.61 3.68
Net interest margin (6)....... 3.30 3.91 3.89 3.92
Average interest-earning
assets to average interest-
bearing liabilities.......... 105.48 105.53 106.09 105.62
Non-interest expense as a
percent of average total
assets....................... 5.17 4.05 4.44 4.52
Efficiency ratio (7).......... 112.68 74.62 82.54 82.79
Equity Ratios:
Core capital.................. 7.98 8.02 7.98 8.02
Tangible capital.............. 7.98 8.02 7.98 8.02
Risk-based capital............ 14.14 13.59 14.14 13.59
Asset Quality Ratios:
Nonaccrual and 90 days or
more past due loans as a
percent of loans receivable,
net.......................... 0.74 1.00 0.74 1.00
Nonperforming assets as a
percent of total assets...... 0.59 0.99 0.59 0.99
Allowance for loan losses
as a percent of total loans
receivable................... 0.70 0.82 0.70 0.82
Allowance for loan losses
as a percent of nonperforming
loans........................ 101.30 86.58 101.30 86.58
Net charge-offs to average
outstanding loans............ 0.00 0.02 0.00 0.03
- ------------------
</TABLE>
(1) Ratios for the three-month periods are annualized.
(2) Net income (loss) divided by average total assets.
(3) Net income (loss) divided by average equity.
(4) Average equity divided by average total assets.
(5) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income.
(x)
<PAGE>
Comparison of Financial Condition at December 31, 1996 and March 31, 1997
Total assets increased $4.5 million, or 3.4%, from $133.2 million at
December 31, 1996 to $137.7 million at March 31, 1997. The growth in assets is
primarily attributable to an increase in loans receivable and mortgage-backed
securities available for sale. Net loans receivable increased from $111.1
million at December 31, 1996 to $113.1 million at March 31, 1997. Between
December 31, 1996 and March 31, 1997, the Bank decreased its cash and cash
equivalents from $5.8 million to $5.3 million. Investment securities remained
essentially unchanged from December 31, 1996 to March 31, 1997. Mortgage-backed
securities held to maturity decreased slightly as a result of principal
repayments. In the three months ended March 31, 1997, the Bank purchased $2.6
million of mortgage-backed securities available for sale as part of its
asset/liability management.
Nonperforming assets increased from $1.2 million, or 0.9% of total assets,
at December 31, 1996 to $1.4 million, or 1.0% of total assets, at March 31,
1997. Nonaccrual loans increased from $1.0 million to $1.1 million. At March
31, 1997, nonaccrual loans consisted of $526,000 of residential real estate
loans, $595,000 of construction loans and $4,000 of consumer loans. Real estate
owned increased from $196,000 at March 31, 1996 to $234,000 at March 31, 1997.
Total liabilities increased from $122.4 million at December 31, 1996 to
$126.6 million at March 31, 1997. Deposits increased $2.3 million from $105.3
million at December 31, 1996 to $107.6 million at March 31, 1997. FHLB advances
decreased from $15.1 million at December 31, 1996 to $13.9 million at March 31,
1997.
Comparison of Operating Results for the Three Months Ended March 31, 1996 and
1997
General. Net income increased from a loss of $211,000 for the three months
ended March 31, 1996 to net income of $226,000 for the three months ended March
31, 1997.
Net Interest Income. Net interest income increased by $187,000, or 18.0%,
from $1.0 million for the three months ended March 31, 1996 to $1.2 million for
the three months ended March 31, 1997. This increase resulted from the growth
of the Bank and the maturity of promotional certificates of deposit in fiscal
1996.
Total interest income increased $25,000 between the periods. Interest
income on loans receivable increased $287,000 from $2.1 million for the three
months ended March 31, 1996 to $2.4 million for the three months ended March 31,
1997. This was primarily offset by a decrease in interest income on investment
securities and other interest-earning assets. Interest income on loans
increased primarily as a result of a larger average balance of loans in 1997
while interest income on investment securities and other interest-earning assets
decreased primarily as a result of a smaller average balance in 1997.
Total interest expense decreased $162,000 between the periods. Interest
expense on deposits decreased $303,000 from $1.4 million for the three months
ended March 31, 1996 to $1.1 million for the three months ended March 31, 1997.
The decrease was primarily the result of a decrease of $294,000 in interest paid
on certificates of deposit. In late 1995, the Bank offered a 75-day certificate
of deposit at an above-market interest rate to promote the Bank's 75th
anniversary. The effect of the promotional certificate of deposit is reflected
in the higher interest expense for the three months ended March 31, 1996.
Interest paid on FHLB advances increased between the periods from $43,000 to
$184,000 because of an increase in average borrowings.
Provision for Loan Losses. Provisions for loan losses totalled $116,000
during the three months ended March 31, 1997 compared to $72,000 during the same
period in 1996. The Bank made larger provisions in 1997 after considering the
growth of its loan portfolio, including the growth of its commercial real estate
and consumer loans, which generally are riskier than residential mortgages.
Non-interest Income. Total non-interest income increased $92,000, from
$473,000 for the three months ended March 31, 1996 to $565,000 for the three
months ended March 31, 1997. Income on gain on sales of loans
(xi)
<PAGE>
decreased $16,000, or 6.3%, between the periods. The decrease was primarily the
result of a decrease in loans originated for sale servicing-released. This was
offset by a $70,000, or 32.4%, increase in service fees and charges and a
$38,000 increase in commissions. Service fees and charges increased as a result
of an increase in mortgage loans serviced, while commissions increased as a
result of higher annuity sales by the Bank's subsidiary.
Non-interest Expense. Total non-interest expense decreased $368,000 from
$1.7 million for the three months ended March 31, 1996 to $1.3 million for the
three months ended March 31, 1997. Compensation and related benefits decreased
$133,000, or 14.5%, between the periods primarily as a result of the termination
in 1996 of a defined benefit pension plan. Deposit insurance premiums decreased
from $80,000 to $3,000 between the periods as a result of the change in the
deposit premium schedule for savings associations following the recapitalization
of the SAIF. Included in the total for the 1996 period is a charge of $200,000
relating to the impairment in value of a mutual fund held by the Bank. There
was no similar charge in the 1997 period.
Income Taxes. Income taxes were $113,000 for the three months ended March
31, 1997 compared to a tax benefit of $53,000 for the three months ended March
31, 1996. The increase in income taxes was due to pre-tax income in 1997
compared to a pre-tax loss in 1996.
Comparison of Operating Results for the Years Ended March 31, 1996 and 1997
General. Net income increased $61,000, or 10.4%, from $588,000 for the
year ended March 31, 1996 to $649,000 for the year ended March 31, 1997. The
Bank experienced greater net interest income and non-interest income in fiscal
1997 compared to fiscal 1996. However, these gains were partially offset by
greater non-interest expense and increased provisions for loan losses. Non-
interest expense for the year ended March 31, 1997 included a one-time, special
assessment of $584,000 for the purpose of recapitalizing the SAIF. Excluding
the special assessment and related tax effects, net income would have been
$1,004,000 for fiscal 1997.
Net Interest Income. Net interest income increased $460,000, or 10.5%,
from $4.4 million for the year ended March 31, 1996 to $4.9 million for the year
ended March 31, 1997. The Bank's spread between the yield on interest-earning
assets and the rate paid on interest-bearing liabilities increased from 3.61%
for fiscal 1996 to 3.68% for fiscal 1997.
Total interest income increased $640,000 from $9.6 million for the year
ended March 31, 1996 to $10.2 million for the year ended March 31, 1997.
Interest income on loans receivable increased $841,000, or 10.0%, from $8.4
million for fiscal 1996 to $9.2 million for fiscal 1997. The increase was the
result of a larger average balance of loans in fiscal 1997, offset slightly by a
decrease in the average yield on the loan portfolio. Interest income on
mortgage-backed and related securities decreased $10,000 from fiscal 1996 to
fiscal 1997 primarily as a result of a smaller average balance in fiscal 1997.
Interest income on investment securities increased $77,000 from fiscal 1996 to
fiscal 1997 as a result of a larger average balance in fiscal 1997, which was
partially offset by a decrease in the average yield. Interest income on other
interest-earning assets decreased $268,000 from fiscal 1996 to fiscal 1997 as a
result of a smaller average balance in fiscal 1997.
Interest expense increased by $180,000, from $5.2 million for the year
ended March 31, 1996 to $5.3 million for the year ended March 31, 1997.
Interest expense on deposits increased $46,000, or 1.0%, from fiscal 1996 to
fiscal 1997. The average balance of deposits increased from fiscal 1996 to
fiscal 1997. However, this was partially offset by a decrease in the average
rate paid on deposits. Interest expense on FHLB advances increased $134,000
from $365,000 in fiscal 1996 to $499,000 in fiscal 1997 as a result of a larger
average balance of borrowings in fiscal 1997.
Provision for Loan Losses. The provision for loans losses was $310,000 for
the year ended March 31, 1997 compared to $150,000 for the year ended March 31,
1996. Management increased the provision for loan losses in fiscal 1997 after
considering the growth of the loan portfolio, including the growth of commercial
real estate and consumer loans, which generally are riskier than residential
mortgage loans. The Bank's allowance for loan losses
(xii)
<PAGE>
was $974,000, or 0.82% of total loans receivable, at March 31, 1997, compared to
$701,000, or 0.70% of total loans receivable, at March 31, 1996. Net loan
charge-offs were $37,000 during fiscal 1997 compared to $4,000 during fiscal
1996.
Non-interest Income. Total non-interest income increased $265,000, or
13.4%, from fiscal 1996 to fiscal 1997. Income on gain on sales of loans
increased $61,000, or 5.4%, from fiscal 1996 to fiscal 1997. The increase was
the result of the adoption of SFAS No. 122 combined with a smaller volume of
loans sold servicing-released in fiscal 1997. Service fees and charges
increased $147,000 and commissions increased $57,000. Service fees and charges
increased as a result of an increase in mortgage loans serviced, while
commissions increased as a result of higher annuity sales by the Bank's
subsidiary.
Non-interest Expense. Total non-interest expense increased $616,000, or
11.7%, from $5.3 million for the year ended March 31, 1997 to $5.9 million for
the year ended March 31, 1996. The increase in non-interest expense is
primarily the result of the payment of the one-time, industry wide special
assessment to recapitalize the SAIF. The Bank's assessment was $584,000.
Compensation and related benefits increased $63,000, or 2.1%, from fiscal 1996
to 1997. Occupancy expenses increased $26,000, or 3.9%, advertising expenses
increased $38,000, or 31.1%, and data processing expenses increased $70,000, or
79.5%, between the periods while supplies and postage expenses decreased
$10,000, or 3.7%, and other expenses decreased $36,000, or 4.4%. Included in
the total for fiscal 1996 is a charge of $200,000 relating to the impairment in
value of a mutual fund held by the Bank. There was no similar charge in fiscal
1997.
Income Taxes. Income taxes were $263,000 for the year ended March 31, 1997
compared with $375,000 for the year ended March 31, 1996. The decrease in income
tax expense in fiscal 1997 was primarily the result of an underaccrual of prior
year income taxes receivable.
(xiii)
<PAGE>
RISK FACTORS
Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.
Diversified Lending Risks
Risks of Construction Lending. At December 31, 1996, construction loans
totalled $14.9 million, or 12.6% of the Bank's total loan portfolio. During the
year ended March 31, 1996 and the nine months ended December 31, 1996,
construction loans constituted 24.5% and 23.8%, respectively, of total loan
originations. Construction loans are generally considered to involve a higher
degree of risk than single-family permanent mortgage lending because of (i) the
concentration of principal among relatively few borrowers, (ii) the increased
difficulty at the time the loan is made of accurately estimating total building
costs and the eventual selling price of the residence to be built, (iii) the
increased difficulty and costs of monitoring the loan, (iv) the higher degree of
sensitivity to increases in market rates of interest, and (v) the increased
difficulty of working out problem loans. Speculative construction loans, which
constituted 35.5% of the total construction loan portfolio at December 31, 1996,
have the added risk associated with identifying an end-purchaser for the
finished home. Additionally, working out of problem construction loans is
complicated by the fact that in-process homes are difficult to sell and
typically must be completed in order to be sold. This may require the Bank to
advance additional funds and contract with another builder to complete the
residence. 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 the Coeur d'Alene real estate market and will limit the
amount of speculative loans if it perceives there are unfavorable market
conditions. The Bank has sought to address the foregoing risks of its
construction lending by developing and adhering to underwriting policies,
disbursement procedures, and monitoring practices. See "BUSINESS OF THE BANK --
Lending Activities -- Construction Lending."
Risks of Agricultural Lending. At December 31, 1996, agricultural real
estate loans totalled $11.9 million, or 10.0% of the Bank's total loan
portfolio. 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. The primary crop in the Bank's market area is wheat. Accordingly,
adverse circumstances affecting the area's wheat crop could have an adverse
effect on the Bank's agricultural real estate loan portfolio. The Bank also
originates agricultural operating loans. At December 31, 1996, such loans
totalled $1.0 million. As with agricultural real estate loans, the repayment of
operating loans is dependent on the successful operation or management of the
farm property. Agricultural operating 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 farm equipment. In such
cases, any repossessed collateral for a defaulted 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. In connection with the
adoption of its community banking strategy, the Bank intends to expand its
agricultural lending activities. See "BUSINESS OF THE BANK -- Lending
Activities -- Agricultural Lending" and "-- Lending Activities -- Consumer and
Other Lending."
Reliance on Mortgage Banking Operations
Mortgage banking activities significantly influence the Bank's results of
operations. The Bank's mortgage banking operations involve the origination and
sale of mortgage loans for the purpose of generating income from the sale of
mortgage loans and from servicing fees (from loans sold on a servicing-retained
basis). Income from the sale of mortgage loans is derived primarily from the
sale of government insured loans, which are sold on a servicing-
1
<PAGE>
released basis, whereas servicing fees are derived primarily from conventional
mortgage loans sold on a servicing-retained basis. The profitability of
mortgage banking operations depends primarily on managing the volume of loan
originations and sales and the expenses associated with loan originations so
that gains on the sale of loans together with fee income exceeds the costs of
this activity. Changes in the level of interest rates and the condition of the
local and national economies affect the amount of loans originated by the Bank
and demanded by investors to whom the loans are sold. Generally, the Bank's
loan origination and sale activity and, therefore, its results of operations,
may be adversely affected by an increasing interest rate environment to the
extent such environment results in decreased loan demand by borrowers and/or
investors. Accordingly, the volume of loan originations and the profitability
of this activity can vary significantly from period to period. Furthermore, the
Bank's mortgage banking activities have been dependent on the growth of the
Coeur d'Alene area in recent years and the high volume of construction and real
estate activity there. Changes in the Coeur d'Alene economy or a decrease in
real estate activity there could adversely affect the Bank's volume of loan
originations and sales. In addition, the Bank's results of operations are
affected by the amount of non-interest expenses associated with mortgage-banking
activities, such as compensation and benefits, occupancy and equipment expenses,
and other operating costs. During periods of reduced loan demand, the Bank's
results of operations may be adversely affected to the extent that it is unable
to reduce expenses commensurate with the decline in loan originations.
The Bank's loan servicing portfolio consists of retained loan servicing
rights that relate to loans originated by the Bank and sold to investors. In a
decreasing interest rate environment the Bank may experience a higher volume of
prepayments as borrowers refinance their loans, which would reduce the size and
adversely impact the income received from the loan servicing portfolio. See
"BUSINESS OF THE BANK -- Lending Activities -- Loan Servicing."
Risks of Dependence on Local Economy
The Bank has been and intends to continue to operate as a community-
oriented financial institution, with a focus on servicing customers in its
market area. Although the Bank has experienced strong loan demand in recent
years, because the Bank operates in a market area with a small population, the
Bank's ability to achieve loan and deposit growth may be limited. Future growth
opportunities for the Bank depend largely on market area growth and the Bank's
ability to compete effectively within its market area. As a result of limited
growth opportunities in Lewiston, the Bank expanded into Coeur d'Alene, Idaho in
1992. At December 31, 1996, most of the Bank's loan portfolio consisted of
loans made to borrowers and collateralized by properties located in its market
area. As a result of this concentration, a downturn in the economy of the
Bank's market area could increase the risk of loss associated with the Bank's
loan portfolio.
Risks of Community Banking Strategy
The Bank's lending strategy involves a shift from a primary focus on
residential and construction lending to a community banking approach. As part
of the expansion of its community banking activities, the Bank intends to
increase its efforts to originate commercial real estate loans, agricultural
real estate and operating loans and commercial business loans. The Bank's
community banking strategy may take a period of time to implement fully and may
require the incurrence of additional expenses to originate the desired volume of
non-residential loans. There can be no assurances that the Bank will meet its
objectives in increasing the size of its non-mortgage loan portfolio. Factors
that may effect the ability of the Bank to increase its originations of such
loans include the demand for such loans, interest rates and the state of the
local and national economy.
Commercial lending affords the Bank an opportunity to originate loans that
contain interest rates that are higher than those generally available from
residential mortgage loans. However, loans secured by commercial real estate
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial properties are
often dependent on the successful operation and management of the properties,
repayment of such loans may be affected by adverse conditions in the real estate
market or the economy. While commercial business
2
<PAGE>
loans are often collateralized by equipment, inventory, accounts receivable or
other business assets, the liquidation of collateral in the event of a borrower
default may be an insufficient source of repayment because accounts receivable
may be uncollectible and inventories and equipment may be obsolete or of limited
use, among other things.
Low Return on Equity After Conversion
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. From fiscal year 1993
through fiscal year 1996, the Bank's return on equity declined from 15.28% to
5.81%. During the same period, the Bank's efficiency ratio (which is non-
interest expense as a percentage of the sum of net interest income and non-
interest income) increased from 60.96% to 82.54%. The decline in return on
equity and the increase in the efficiency ratio have resulted from non-interest
expenses increasing at a faster rate than income. The Bank's non-interest
expenses have been higher than the average expenses of institutions of
comparable size because of the greater resources required for the Bank's
mortgage banking operations, diversified lending activities and branch network.
The Holding Company's post-Conversion return on equity will continue to be less
than the average return on equity for publicly traded thrift institutions and
their holding companies because of the increase in consolidated equity of the
Holding Company that will result from the net proceeds of the Offerings. See
"SELECTED CONSOLIDATED FINANCIAL INFORMATION" for numerical information
regarding the Savings Bank's historical return on equity and "CAPITALIZATION"
and "PRO FORMA DATA" for a discussion of the Holding Company's estimated pro
forma consolidated capitalization as a result of the Conversion. The Holding
Company intends to deploy the net proceeds of the Offerings as discussed under
"USE OF PROCEEDS" to increase earnings per share with the goal of achieving a
return on equity comparable to the average for publicly traded thrift
institutions and their holding companies without assuming undue risk. This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can be attained. Consequently, for the foreseeable future,
investors should not expect a return on equity that will meet or exceed the
average return on equity for publicly traded thrift institutions or their
holding companies.
Competition Within Market Area
The Bank faces competition both in originating loans and attracting
deposits. 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. In recent years,
the Bank has experienced an increased level of competition for deposits from
securities firms, insurance companies and other investment vehicles, such as
money market and mutual funds. This competition could adversely affect the
Bank's future growth prospects. 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. Because the
profitability of mortgage banking operations generally depends on maintaining a
sufficient volume of loan originations, such competition may limit the Bank's
profitability in the future. See "BUSINESS OF THE BANK -- Market Area" and "--
Competition."
Anti-takeover Effects of Governing Documents, Delaware and Federal Law, Control
by Insiders and Employment Agreements
Provisions in the Holding Company's Governing Instruments and Delaware and
Federal Law. Certain provisions included in the Holding Company's Certificate
of Incorporation and in the Delaware General Corporation Law ("DGCL") might
discourage potential proxy contests and other potential takeover attempts,
particularly those that have not been negotiated with the Board of Directors.
As a result, these provisions might preclude takeover attempts that certain
stockholders may deem to be in their best interest and might tend to perpetuate
existing management. These provisions include, among other things, a provision
limiting voting rights of beneficial owners of more than 10% of the Common
Stock, supermajority voting requirements for certain business combinations,
3
<PAGE>
staggered terms for directors, non-cumulative voting for directors, the removal
of directors without cause only upon the vote of holders of 80% of the
outstanding voting shares, limitations on the calling of special meetings, and
specific notice requirements for stockholder nominations and proposals. Certain
provisions of the Certificate of Incorporation of the Holding Company cannot be
amended by stockholders unless an 80% stockholder vote is obtained. The
existence of these anti-takeover provisions could result in the Holding Company
being less attractive to a potential acquiror and in stockholders receiving less
for their shares than otherwise might be available in the event of a takeover
attempt. Furthermore, federal regulations prohibit for three years after
consummation of the Conversion the ownership of more than 10% of the Bank or the
Holding Company without prior OTS approval. Federal law also requires
regulatory approval prior to the acquisition of "control" (as defined in federal
regulations) of an insured institution. For a more detailed discussion of these
provisions, see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
Voting Control by Insiders. Directors and officers of the Bank and the
Holding Company expect to purchase 162,500 shares of Common Stock, or 12.8% and
9.4% of the shares issued in the Offerings at the minimum and the maximum of the
Estimated Valuation Range, respectively. Directors and officers are also
expected to control indirectly the voting of approximately 8% of the shares of
Common Stock issued in the Conversion through the ESOP. Under the terms of the
ESOP, the unallocated shares will be voted by the ESOP trustees in the same
proportion as the votes cast by participants with respect to the allocated
shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Stock Conversion, the Holding Company expects
to seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Bank. Assuming the receipt of stockholder approval, the
Holding Company expects to acquire common stock of the Holding Company on behalf
of the MRP in an amount equal to 4% of the Common Stock issued in the
Conversion, or 51,000 and 69,000 shares at the minimum and the maximum of the
Estimated Valuation Range, respectively. These shares will be acquired either
through open market purchases or from authorized but unissued shares of Common
Stock. Under the terms of the MRP, the MRP committee or the MRP trustees will
have the power to vote unallocated and unvested shares. The Holding Company
also intends to seek approval of the Stock Option Plan at a meeting of
stockholders to be held no earlier than six months following the consummation of
the Stock Conversion. The Holding Company intends to reserve for future
issuance pursuant to the Stock Option Plan a number of authorized shares of
Common Stock equal to 10% of the Common Stock issued in the Conversion (127,500
and 172,500 shares at the minimum and the maximum of the Estimated Valuation
Range, respectively).
Assuming (i) the receipt of stockholder approval for the MRP and the Stock
Option Plan, (ii) the open market purchase of shares on behalf of the MRP, (iii)
the purchase by the ESOP of 8% of the Common Stock sold in the Offerings, and
(iv) the exercise of stock options equal to 10% of the number of shares of
Common Stock issued in the Conversion, directors, officers and employees of the
Holding Company and the Bank would have voting control, on a fully diluted
basis, of 31.6% and 28.6% of the Common Stock, based on the issuance of Common
Stock at the minimum and maximum of the Estimated Valuation Range, respectively.
Management's potential voting control alone, as well as together with additional
stockholder support, might preclude or make more difficult takeover attempts
that certain stockholders deem to be in their best interest and might tend to
perpetuate existing management.
Severance Payments Upon Change in Control. The proposed employment
agreements with the Chief Executive Officer and Chief Financial Officer provide
for cash severance payments in the event of a change in control of the Holding
Company or the Bank. Such agreements also provide for the continuation of
certain employee benefits following the change in control. Assuming these
agreements had been entered into and a change in control occurred as of December
31, 1996, the aggregate amounts payable under these agreements would have been
approximately $450,000. These provisions may have the effect of increasing the
cost of acquiring the Holding Company, thereby discouraging future attempts to
take over the Holding Company or the Bank.
See "MANAGEMENT OF THE BANK -- Benefits," "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY."
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Interest Rate Risk Exposure
The financial condition and operations of the Bank, and of savings
institutions in general, are influenced significantly by general economic
conditions, by the related monetary and fiscal policies of the federal
government and by the regulations of the OTS and the FDIC. The Bank's
profitability, like that of most financial institutions, is dependent to a large
extent on its net interest income, which is the difference between its interest
income on interest-earning assets, such as loans and investments, and its
interest expense on interest-bearing liabilities, such as deposits and
borrowings. The interest earned by the Bank on such loans and paid by the Bank
on such accounts are significantly impacted by market interest rates.
Accordingly, the Bank's results of operations are significantly influenced by
movements in market interest rates and the Bank's ability to manage its assets
and liabilities in response to such movements.
To manage the impact of changes in interest rates, the Bank has sought to
improve the match between asset and liability maturities or repricing periods
and rates by emphasizing the origination of adjustable-rate mortgage ("ARM")
loans and shorter term consumer loans, offering certificates of deposit with
terms of up to five years and selling most of the fixed-rate loans that it
originates. At December 31, 1996, out of total gross loans of $118.6 million,
the Bank had $62.3 million of ARM loans in its loan portfolio. However, the
Bank originates ARM loans at initial "teaser" rates below the rate that would
prevail were the market rate index used for repricing applied initially.
Furthermore, the Bank's ARM loans contain periodic and lifetime interest rate
adjustment limits which, in a rising interest rate environment, may prevent such
loans from repricing to market interest rates. While management anticipates
that the Bank's ARM loans will better offset the adverse effects of an increase
in interest rates as compared to fixed-rate mortgages, the increased mortgage
payments required of ARM borrowers in a rising interest rate environment could
potentially cause an increase in delinquencies and defaults. The Bank has not
historically had an increase in such delinquencies and defaults on ARM loans,
but no assurance can be given that such delinquencies or defaults would not
occur in the future. The marketability of the underlying property also may be
adversely affected in a high interest rate environment. Moreover, the Bank's
ability to originate ARM loans may be affected by changes in the level of
interest rates and by market acceptance of the terms of such loans. For further
information regarding the Bank's asset and liability management, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management."
Changes in the level of interest rates affect the market value of the
Bank's investment securities and other interest-earning assets. Changes in
interest rates also can affect the average life of loans. Decreases in interest
rates may result in increased prepayments of loans, as borrowers refinance to
reduce borrowing costs. Under these circumstances, the Bank is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates that are comparable to the rates on the maturing loans or securities.
Moreover, volatility in interest rates also can result in disintermediation, or
the flow of funds away from savings institutions into direct investments, such
as U.S. Government and corporate securities and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally pay higher rates of return than savings institutions.
Absence of Active Market for the Common Stock
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "FBNW," there can be no assurance that the Holding
Company will meet Nasdaq National Market listing requirements, which include a
minimum market capitalization, at least two market makers and a minimum number
of holders of record. Although under no obligation to do so, Sandler O'Neill
has indicated its intention to act as a market maker. While Sandler O'Neill will
assist the Holding Company in encouraging another market maker to establish and
maintain a market in the Common Stock, there can be assurance that another
market maker will make a market in the Common Stock. Making a market in
securities involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
The development of a public
5
<PAGE>
trading market depends upon the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the Bank or
any market maker. Accordingly, there can be no assurance that an active and
liquid trading market for the Common Stock will develop, or once developed, will
continue. Furthermore, there can be no assurance that purchasers will be able
to sell their shares at or above the Purchase Price. See "MARKET FOR COMMON
STOCK."
Possible Dilutive Effect of Benefit Programs
At a meeting to be held no earlier than six months following consummation
of the Stock Conversion, the Holding Company intends to seek stockholder
approval of the MRP. If approved, the MRP intends to acquire an amount of
Common Stock of the Holding Company equal to 4% of the shares issued in the
Conversion. Such shares of Common Stock of the Holding Company may be acquired
by the Holding Company in the open market or from authorized but unissued shares
of Common Stock of the Holding Company. In the event that the MRP acquires
authorized but unissued shares of Common Stock from the Holding Company, the
voting interests of existing stockholders will be diluted and net income per
share and stockholders' equity per share will be decreased. See "PRO FORMA
DATA" and "MANAGEMENT OF THE BANK -- Benefits -- Management Recognition Plan."
At a meeting to be held no earlier than six months following consummation
of the Stock Conversion, the Holding Company intends to seek stockholder
approval of the Stock Option Plan. If approved, the Stock Option Plan will
provide for options for up to a number of shares of Common Stock of the Holding
Company equal to 10% of the shares issued in the Conversion. Such shares may be
authorized but unissued shares of Common Stock of the Holding Company and, upon
exercise of the options, will result in the dilution of the voting interests of
existing stockholders and may decrease net income per share and stockholders'
equity per share. See "MANAGEMENT OF THE BANK -- Benefits -- Stock Option
Plan."
If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership
Plan."
Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank are deemed
to have an ascertainable value, receipt of such rights may be a taxable event
(either as capital gain or ordinary income) to those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who receive and/or
exercise the Subscription Rights in an amount equal to such value.
Additionally, the Bank could be required to recognize a gain for tax purposes on
such distribution. Whether Subscription Rights are considered to have
ascertainable value is an inherently factual determination. The Bank has been
advised by RP Financial that such rights have no value; however, RP Financial's
conclusion is not binding on the Internal Revenue Service ("IRS"). The letter
from RP Financial is filed as an exhibit to the Registration Statement. See
"ADDITIONAL INFORMATION" and "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank -- Tax Effects."
Possible Increase in Estimated Price Range and Number of Shares Issued
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Direct Community Offering. In the event that the Estimated
Price Range is so increased, it is expected that the Holding Company will issue
up to 1,983,750 shares of Common Stock at the Purchase Price for an aggregate
price of up to $19,837,500. An increase in the number of shares will decrease
pro forma net earnings per share and stockholders' equity per share and will
increase the Holding Company's pro forma
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<PAGE>
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
Potential Operational Restrictions Associated with Regulatory Oversight
The Bank is, and the Holding Company upon consummation of the Conversion
will be, subject to extensive government regulation and oversight. Such
regulation and supervision govern the activities in which an institution can
engage and is designed primarily to protect the federal deposit insurance fund
and depositors. Regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including the imposition of
restrictions on the operation of an institution, the classification of assets by
the institution and the determination of the adequacy of an institution's
allowance for loan losses. See "REGULATION." Such regulation often has a
material impact on the Bank's financial condition and results of operations.
The Deposit Insurance Funds Act of 1996 ("DIF Act") required the Bank to pay a
one-time assessment of $584,000 to the FDIC to recapitalize the SAIF. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Comparison of Operating Results for the Nine Months Ended
December 31, 1996 and 1995."
The U.S. Congress is expected to consider legislation that may eliminate
the thrift industry as a separate industry. The DIF Act provides that the SAIF
will be merged with the BIF on January 1, 1999, but only if there are no thrift
institutions in existence. The DIF Act requires the Treasury Department to
study the development of a common charter for banks and thrifts and to submit a
report of its findings to Congress. The Bank cannot predict what the attributes
of such common charter would be or whether any legislation will result from this
study. If developed, the common charter may not offer all the advantages that a
federal savings association now enjoys (e.g., unrestricted nationwide
----
branching). Furthermore, holding companies for institutions with the common
charter may not have the same advantages as a unitary savings and loan holding
company now possesses (e.g., the absence of non-banking activities
----
restrictions). Because of the uncertainties with regard to the future of the
thrift industry, the Bank has determined to undertake the Charter Conversion.
See "THE CONVERSION -- Purposes of Conversion." If Congress fails to create a
common charter, or does not act otherwise to end the thrift industry's separate
existence, the merger of the SAIF and BIF contemplated by the DIF Act would not
likely occur. Although the SAIF currently meets its statutory reserve ratios,
there can be no assurance that it will continue to do so. The financial burden
of any future recapitalization would likely fall on a smaller assessment base,
potentially increasing the burden on individual institutions, including the
Bank.
FIRSTBANK CORP.
The Holding Company is a Delaware corporation organized in March 1997 at
the direction of the Bank for the purpose of serving as the holding company of
the Bank upon consummation of the Stock Conversion. The Holding Company has not
engaged in any significant business to date. The Holding Company has received
the approval of the OTS to become a savings and loan holding company and to
acquire 100% of the capital stock of the Converted Bank. Immediately following
the Stock Conversion, the only significant assets of the Holding Company will be
the capital stock of the Bank, that portion of the net proceeds of the Offerings
permitted by the OTS to be retained by the Holding Company and a note receivable
from the ESOP evidencing a loan from the Holding Company to fund the Bank's
ESOP. See "BUSINESS OF THE HOLDING COMPANY."
The Holding Company intends to apply for approval of the Federal Reserve to
become a bank holding company under the BHCA through the continued ownership of
the Bank following the Charter Conversion. The Holding Company expects to
receive such approval. However, if there is a significant delay in obtaining
the approval of the Federal Reserve for the Holding Company to become a bank
holding company or if the Federal Reserve seeks to impose conditions on its
approval that the Holding Company and the Bank believe would adversely affect
the Holding Company and the Bank, the Holding Company may elect to be regulated
by the OTS as a savings and loan holding company following completion of the
Charter Conversion.
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<PAGE>
The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Bank. Management believes that
the holding company structure and retention of a portion of the proceeds of the
Offerings will facilitate the expansion and diversification of its operations.
The holding company structure also will enable the Holding Company to repurchase
its stock without adverse tax consequences. There are no present plans,
arrangements, agreements, or understandings, written or oral, regarding any
such activities or repurchases. See "REGULATION -- Bank Holding Company
Regulation."
FIRSTBANK NORTHWEST
The Bank, founded in 1920, is a federally chartered mutual 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 April 1997, in anticipation of the Charter Conversion, the Bank changed its
name from "First Federal Bank of Idaho, a Federal Savings Bank" to "FirstBank
Northwest." In connection with the Stock Conversion, the Bank will convert to a
federally chartered capital stock savings bank and will become a subsidiary of
the Holding Company. The Bank is currently regulated by the OTS, its primary
regulator, and the FDIC, the insurer of its deposits. The Bank's deposits are
insured by the SAIF and have been federally insured since 1933. The Bank has
been a member of the FHLB System since 1933. At December 31, 1996, the Bank had
total assets of $133.2 million, total deposits of $105.3 million and total
equity of $10.8 million on a consolidated basis. In connection with the Charter
Conversion, the Bank will relocate its main office to Clarkston, Washington and
convert to a Washington-chartered savings bank.
The Bank is a community-oriented financial institution that engages
primarily in the business of attracting deposits from the general public and
using those funds to originate residential mortgage loans within the Bank's
market area. At December 31, 1996, one- to four-family residential mortgage
loans totalled $72.7 million, or 61.3% of total loans receivable. The Bank also
is active in originating construction and agricultural real estate loans. At
December 31, 1996, construction loans totalled $14.9 million, or 12.6% of total
loans receivable, and agricultural real estate loans totalled $11.9 million, or
10.0% of total loans receivable. To a lesser extent, the Bank also originates
commercial real estate and consumer and other non-real estate loans, although it
intends to increase its originations of these types of loans, subject to market
conditions and other factors. See "BUSINESS OF THE BANK -- Lending Activities."
The Bank has adopted a mortgage banking strategy pursuant to which it generally
sells a majority of the fixed-rate residential mortgage loans that it originates
while retaining the servicing rights on most of the conventional loans it sells.
At December 31, 1996, the Bank serviced $131.5 million of loans for others.
As part of its asset/liability management, subsequent to December 31, 1996,
the Bank intends to retain for its portfolio $5.0 million of 30-year, fixed-rate
conventional mortgage loans and to purchase $5.0 million of short-term mortgage-
backed securities. These investments will be funded with additional FHLB
advances, which may be retired with the proceeds of the Offerings. See "USE OF
PROCEEDS."
Following the Stock Conversion, the Bank will relocate its main office to
Clarkston, Washington, which is adjacent to Lewiston, Idaho across the Snake
River, and convert to a Washington-chartered savings bank. The main office
relocation will be accomplished by opening a full-service office in Clarkston,
Washington and designating that office as the Bank's main office. The Bank's
administrative offices will remain in their present location. The Bank is in
the process of evaluating locations for its Clarkston, Washington office and
expects that the Charter Conversion will not be completed until several months
after the consummation of the Stock Conversion, or longer in the event that the
Bank has difficulty locating suitable office space in Clarkston. The Board of
Directors believes that conversion to a Washington-chartered savings bank is in
the best interests of the Bank, its members and the communities it serves. As a
Washington-chartered savings bank with offices in Washington and Idaho, the Bank
will have the flexibility to expand in Washington and Idaho, should it decide to
do so, through branch acquisitions, opening new branches, or acquiring other
institutions. While the current federal thrift charter permits nationwide
branching, the possible elimination of the federal thrift charter in favor of a
common charter for federal thrifts and banks may limit the Bank's branching
authority in the future. See "RISK FACTORS -- Potential
8
<PAGE>
Operational Restrictions Associated with Regulatory Oversight." Furthermore,
the Washington savings bank charter will provide the Bank with the authority to
pursue its community banking strategy.
The Bank, as a Washington-chartered savings bank, will succeed to all of
the assets and liabilities of the Bank as a federally chartered savings bank.
In anticipation of the Charter Conversion, the Bank has adopted a community
banking strategy pursuant to which it intends to expand the products and
services it offers in order to improve market share and increase the average
yield of its interest-earning assets. Specifically, the Bank intends to expand
its agricultural real estate and commercial real estate lending activities. The
Bank also intends to expand its non-mortgage lending activities by increasing
its emphasis on originating agricultural operating loans and commercial business
loans. Management anticipates that the Bank will incur initial start-up and
ongoing expenses in connection with the opening of its Clarkston, Washington
office and as various programs and services, such as its commercial real estate
and business lending operations, are introduced or expanded. These expenses
could reduce earnings for a period of time while income from new programs and
services increases to a degree sufficient to cover the additional expenses.
Following the Charter Conversion, the deposits of the Bank will continue to
be insured by the SAIF of the FDIC. In addition, following the Charter
Conversion, the Bank will not be regulated and supervised by the OTS, but rather
by the Department and the FDIC. The Bank intends to remain a member of the
FHLB-Seattle.
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $12.1 million to $16.6 million, or up to $19.1 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has
received the approval of the OTS to purchase all of the capital stock of the
Bank to be issued in the Conversion in exchange for 50% of the net proceeds of
the Offerings. This will result in the Holding Company retaining approximately
$6.1 million to $8.3 million of net proceeds, or up to $9.6 million if the
Estimated Valuation Range is increased by 15%, and the Bank receiving an equal
amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities. The Bank will use the funds contributed to it for
general corporate purposes, including increased local lending, the establishment
of its Clarkston, Washington office, the expansion of its community banking
activities and possible future acquisitions of branches or banks. The Bank may
also use a portion of the funds contributed to it to retire outstanding FHLB
advances, depending on market conditions, the cost of other sources of funds and
other factors. Pending deployment of funds, the Bank plans initially to invest
the net proceeds in short-term U.S. Government and agency securities. Shares of
Common Stock may be purchased with funds on deposit at the Bank, which will
reduce deposits by the amount of such purchases. As a result, the net amount of
funds available to the Bank for investment following receipt of the Conversion
proceeds will be reduced by the amount of deposit withdrawals used to fund stock
purchases.
In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Conversion. The Holding Company's loan
to fund the ESOP may range from $1,020,000 to $1,380,000 based on the sale to
the ESOP of 102,000 shares (at the minimum of the Estimated Valuation Range) and
138,000 shares (at the maximum of the Estimated Valuation Range), respectively,
at $10.00 per share. If 15% above the maximum of the Estimated Valuation Range,
or 1,983,750 shares, are sold in the Conversion, the Holding Company's loan to
the ESOP would be approximately $1,587,000. It is anticipated that the ESOP
loan will have a seven-year term with interest payable at the prime rate as
published in The Wall Street Journal on the closing date of the Conversion. The
loan will be repaid principally from the Bank's contributions to the ESOP and
from any dividends paid on shares of Common Stock held by the ESOP.
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<PAGE>
The remaining proceeds retained by the Holding Company initially will be
invested in short-term U.S. Government and agency securities. Such proceeds
will be available for additional contributions to the Bank in the form of debt
or equity, to support future diversification or acquisition activities, as a
source of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock to the extent permitted under Delaware law and
federal regulations. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any diversification
activities.
Following consummation of the Conversion, the Board of Directors will have
the authority to adopt plans for repurchases of Common Stock or other returns of
capital to stockholders, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there currently is
insufficient information upon which an intention to repurchase stock could be
based. The facts and circumstances upon which the Board of Directors may
determine to repurchase stock in the future may include but are not limited to:
(i) market and economic factors, such as the price at which the stock is trading
in the market, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and the ability to improve the Holding Company's
return on equity; (ii) the avoidance of dilution to stockholders by not having
to issue additional shares to cover the exercise of stock options or to fund
employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases or return of capital will be subject to a
determination by the Board of Directors that both the Holding Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases or return of capital and that capital will be
adequate, taking into account, among other things, the level of nonperforming
and classified assets, the Holding Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. See "THE CONVERSION --
Restrictions on Repurchase of Stock."
DIVIDEND POLICY
General
The Board of Directors of the Holding Company has not formulated a dividend
policy, but intends to consider a policy of paying cash dividends in the future.
The payment of dividends on the Common Stock will be subject to the requirements
of applicable law and the determination by the Board of Directors of the Holding
Company that the net income, capital and financial condition of the Holding
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the initial or 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 Holding Company initially will have 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 Holding Company, the payment of
dividends by the Holding Company will depend in part upon the amount of the net
proceeds from the Conversion retained by the Holding Company and the Holding
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 Holding Company are subject to regulatory restriction
under Federal Reserve policy as well as to limitation under applicable
provisions of Delaware corporate law. Under Delaware law, dividends may be paid
either out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
For additional information, see "REGULATION -- Bank Holding Company Regulation
- -- Dividends."
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<PAGE>
Current Regulatory Restrictions
Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Bank because the Holding Company initially will have no
source of income other than dividends from the Bank and earnings from the
investment of the net proceeds from the Offerings retained by the Holding
Company. OTS regulations require federal savings associations to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The OTS imposes certain limitations on the payment of dividends
which utilizes a three-tiered approach that permits various levels of
distributions based primarily upon a savings association's capital level. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank's Plan of Conversion. The Bank currently meets the criteria to be
designated a Tier 1 association, as hereinafter defined, and consequently could
at its option (after prior notice to and no objection made by the OTS)
distribute up to 100% of its net income during the calendar year plus 50% of its
surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. See "REGULATION -- Federal
Regulation of Savings Associations -- Limitations on Capital Distributions,"
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank -- Liquidation Account" and Note 15 of Notes to the
Consolidated Financial Statements included elsewhere herein. After the Charter
Conversion, dividends from the Bank to the Holding Company will be subject to
the requirements of Washington law. Under 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 the amount required for the liquidation account or net
worth requirements, if any, imposed by the Department. See "REGULATION --
Regulation of Washington Savings Banks -- Dividends."
Additionally, in connection with the Conversion, the Holding Company and
the Bank have committed to the OTS that during the one-year period following
consummation of the Stock Conversion, the Holding Company will not take any
action, including any preliminary action, to declare an extraordinary dividend
to stockholders that would be treated by recipients as a tax-free return of
capital for federal income tax purposes.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "FBNW," there can be no assurance that the Holding
Company will meet Nasdaq National Market listing requirements, which include a
minimum market capitalization, at least two market makers and a minimum number
of record holders. Although under no obligation to do so, Sandler O'Neill has
indicated its intention to make a market for the Holding Company's Common Stock
following consummation of the Conversion and will assist the Holding Company in
seeking to encourage at least one additional market maker to establish and
maintain a market in the Common Stock. Making a market involves maintaining bid
and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. While the Holding Company anticipates that
prior to the completion of the Conversion it will be able to obtain the
commitment from at least one additional broker-dealer to act as market maker for
the Common Stock, there can be no assurance that there will be two or more
market makers for the Common Stock. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the Bank or
any market maker. There can be no assurance that an active and liquid trading
market for the Common Stock will develop or that, if developed, it will
continue. The number of active buyers and sellers of the Common Stock at any
particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Commmon Stock as a short-term investment. Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market as contemplated.
11
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
December 31, 1996, and the pro forma consolidated capitalization of the Holding
Company after giving effect to the assumptions set forth under "PRO FORMA DATA,"
based on the sale of the number of shares of Common Stock set forth below in the
Conversion at the minimum, midpoint and maximum of the Estimated Valuation
Range, and based on the sale of 1,983,750 shares (representing the shares that
would be issued in the Conversion after giving effect to an additional 15%
increase in the maximum valuation in the Estimated Valuation Range, subject to
receipt of an updated appraisal confirming such valuation and OTS approval).
A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY
AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
--------------------------------------------------------------
1,275,000 1,500,000 1,725,000 1,983,750
Capitalization Shares at Shares at Shares at Shares at
as of $10.00 $10.00 $10.00 $10.00
December 31, 1996 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
----------------- ------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)............................ $105,349 $105,349 $105,349 $105,349 $105,349
Advances from FHLB..................... 15,060 15,060 15,060 15,060 15,060
-------- -------- -------- -------- --------
Total deposits and advances from FHLB.. $120,409 $120,409 $120,409 $120,409 $120,409
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
500,000 shares, $.01
par value per share,
authorized; none issued
or outstanding...................... $ -- $ -- $ -- $ -- $ --
Common Stock:
5,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(4)...................... -- 13 15 17 20
Additional paid-in capital........... -- 12,112 14,329 16,546 19,121
Retained earnings(5)................. 10,818 10,818 10,818 10,818 10,818
Less:
Common Stock acquired
by ESOP(6)......................... -- (1,020) (1,200) (1,380) (1,587)
Common Stock to be acquired
by MRP(7).......................... -- (510) (600) (690) (794)
-------- -------- -------- -------- --------
Total stockholders' equity............. $ 10,818 $ 21,413 $ 23,362 $ 25,311 $ 27,578
======== ======== ======== ======== ========
</TABLE>
(footnotes on following page)
12
<PAGE>
_______________
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or performance of the
Bank or changes in market conditions or general financial and economic
conditions, or the issuance of additional shares under the Stock Option
Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range. See
"PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) The Bank's authorized capital will consist solely of 1,000 shares of common
stock, par value $1.00 per share, 1,000 shares of which will be issued to
the Holding Company, and 9,000 shares of preferred stock, no par value per
share, none of which will be issued in connection with the Conversion.
(5) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Bank will be prohibited from paying
any dividend that would reduce its regulatory capital below the amount in
the liquidation account, which will be established for the benefit of the
Bank's Eligible Account Holders and Supplemental Eligible Account Holders
at the time of the Conversion and adjusted downward thereafter as such
account holders reduce their balances or cease to be depositors. See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank -- Liquidation Account."
(6) Assumes that 8% of the Common Stock sold in the Conversion will be acquired
by the ESOP in the Conversion with funds borrowed from the Holding Company.
In accordance with generally accepted accounting principles ("GAAP"), the
amount of Common Stock to be purchased by the ESOP represents unearned
compensation and is, accordingly, reflected as a reduction of capital. As
shares are committed to be released to ESOP participants' accounts, a
corresponding charge to compensation expense and reduction in the charge
against capital will occur. Since the funds are borrowed from the Holding
Company, the borrowing will be eliminated in consolidation and no liability
will be reflected in the consolidated financial statements of the Holding
Company. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock
Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed MRP, of a number of shares equal to 4% of the shares of Common
Stock issued in the Conversion at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. The issuance of an
additional 4% of the shares of Common Stock for the MRP from authorized but
unissued shares of Holding Company Common Stock would dilute the voting and
ownership interest of stockholders by 3.85%. The shares are reflected as a
reduction of stockholders' equity. See "RISK FACTORS -- Possible Dilutive
Effect of Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE BANK
-- Benefits -- Management Recognition Plan." The MRP is subject to
stockholder approval, which is expected to be sought at a meeting to be
held no earlier than six months following consummation of the Stock
Conversion.
13
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The Bank is currently subject to OTS regulatory capital requirements.
After the Charter Conversion, the Bank will be required to satisfy FDIC
regulatory capital requirements. The following table presents the Bank's
historical and pro forma capital position relative to the OTS equal requirements
at December 31, 1996. The amount of capital infused into the Bank for purposes
of the following table is 50% of the net proceeds of the Offerings. For purposes
of the table below, the amount excepted to be borrowed by the ESOP and the cost
of the shares expected to be acquired by the MRP are deducted from pro forma
regulatory capital. For a discussion of the assumptions underlying the pro forma
capital calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION"
and "PRO FORMA DATA." The definitions of the terms used in the table are those
provided in the capital regulations issued by the OTS. For a discussion of the
capital standards applicable to the Bank, see "REGULATION - Federal Regulation
of Savings Associations -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1996
------------------------------------------------
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
---------------------- ------------------------
1,275,000 Shares 1,500,000 Shares
December 31, 1996 at $10.00 Per Share at $10.00 Per Share
--------------------- ---------------------- ------------------------
Percent of Percent of Percent of
Total Total Total
Amount Assets(1) Amount Assets (1) Amount Assets (1)
-------- ---------- -------- ----------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital.......................... $10,818 8.12% $ 15,351 11.06% $ 16,190 11.58%
======= ==== ======== ===== ======== =====
Tangible capital...................... $10,818 8.12% $ 15,351 11.06% $ 16,190 11.58%
Tangible capital requirement.......... 1,998 1.50 2,081 1.50 2,096 1.50
------- ---- -------- ----- -------- -----
Excess................................ $ 8,820 6.62% $ 13,270 9.56% $ 14,094 10.08%
======= ==== ======== ===== ======== =====
Core capital.......................... $10,818 8.12% $ 15,351 11.06% $ 16,190 11.58%
Core capital requirement(2)........... 3,996 3.00 4,162 3.00 4,193 3.00
------- ---- -------- ----- -------- -----
Excess................................ $ 6,822 5.12% $ 11,189 8.06% $ 11,997 8.58%
======= ==== ======== ===== ======== =====
Risk-based capital(3)................. $11,698 13.27% $ 16,231 17.85% $ 17,070 18.67%
Risk-based
capital requirement.................. 7,052 8.00 7,274 8.00 7,315 8.00
------- ---- -------- ----- -------- -----
Excess................................ $ 4,646 5.27% $ 8,957 9.85% $ 9,755 10.67%
======= ==== ======== ===== ======== =====
<CAPTION>
PRO FORMA AT DECEMBER 31, 1996
------------------------------------------------
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
---------------------- ------------------------
1,725,000 Shares 1,983,750 Shares
at $10.00 Per Share at $10.00 Per Share
---------------------- ------------------------
Percent of Percent of
Total Total
Amount Assets (1) Amount Assets (1)
-------- ----------- -------- -----------
(Dollars in Thousands)
<S>................................... <C> <C> <C> <C>
GAAP capital.......................... $ 17,030 12.10% $ 18,008 12.68%
======== ===== ======== =====
Tangible capital...................... $ 17,030 12.10% $ 18,008 12.68%
Tangible capital requirement.......... 2,112 1.50 2,130 1.50
-------- ----- -------- -----
Excess................................ $ 14,918 10.60% $ 15,878 11.18%
======== ===== ======== =====
Core capital.......................... $ 17,030 12.10% $ 18,008 12.68%
Core capital requirement(2)........... 4,224 3.00 4,259 3.00
-------- ----- -------- -----
Excess................................ $ 12,806 9.10% $ 13,749 9.68%
======== ===== ======== =====
Risk-based capital(3)................. $ 17,910 19.48% $ 18,888 20.41%
Risk-based
capital requirement.................. 7,356 8.00 7,403 8.00
-------- ----- -------- -----
Excess................................ $ 10,554 11.48% $ 11,485 12.41%
======== ===== ======== =====
</TABLE>
- -----------------------
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as percentage of total adjusted assets. Risk based
capital levels are shown as a percentage of risk-weighted assets.
(2) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3) Assumes net proceeds are invested in assets that carry a 50%
risk-weighting.
14
<PAGE>
The following table presents the Bank's historical and pro forma capital
position relative to FDIC capital requirements at December 31, 1996. The amount
of capital infused into the Bank for purposes of the following table is 50% of
the net proceeds of the Offerings. For purposes of the table below, the amount
expected to be borrowed by the ESOP and the cost of the shares expected to be
acquired by the MRP are deducted from pro forma regulatory capital. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO FORMA DATA."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the FDIC. For a discussion of the capital standards
applicable to the Bank following the Charter Conversion, see "REGULATION --
Regulation of Washington Savings Banks -- Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1996
------------------------------------------------------------------------------------
15% above
Minimum of Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
-------------------- --------------------- ------------------- ---------------------
1,275,000 Shares 1,500,000 Shares 1,725,000 Shares 1,983,750 Shares
December 31, 1996 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------ -------------------- --------------------- ------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Total Total Total Total Total
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1) Amounts Assets
------ ---------- ------ ----------- ------ ---------- ------ ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital.............. $10,818 8.12% $15,351 11.06% $16,190 11.58% $17,030 12,10% $18,008 12.68%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tier I (leverage) capital. $10,818 8.12% $15,351 11.06% $16,190 11.58% $17,030 12,10% $18,008 12.68%
Tier I (leverage)
capital requirement(2).. 5,328 4.00 5,550 4.00 5,591 4.00 5,631 4.00 5,679 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................... $ 5,490 4.12% $ 9,801 7.06% $10,599 7.58% $11,399 8.10% $12,329 8.68%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tier I risk-based
capital(3)............... $10,818 12.27% $15,351 16.88% $16,190 17.71% $17,030 18.52% $18,008 19.46%
Tier I risked-based
capital requirement..... 3,526 4.00 3,637 4.00 3,657 4.00 3,678 4.00 3,702 4.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................... 7,292 8.27% $11,714 12.88% $12,533 13.71% $13,352 14.52% $14,306 15.46%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total risk-based
capital(3)............... $11,698 13.27% $16,231 17.85% $17,070 18.67% $17,910 19.48% $18,888 20.41%
Total risked-based
capital requirement....... 7,052 8.00 7,274 8.00 7,315 8.00 7,356 8.00 7,403 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess......................$ 4,646 5.27% $ 8,957 9.85% $ 9,755 10.67% $10,554 11.48% $11,485 12.41%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ------------------
(1) Tier I capital levels are shown as a percentage of tangible assets. Tier I
risk-based capital levels and Total risk-based capital levels are shown as
a percentage of risk-weighted assets.
(2) The FDIC requires state-chartered savings banks to have a minimum leverage
ratio of Tier I capital to total assets of as least 3%, provided, however,
that all institutions, other than those receiving the highest rating during
the examination process and not anticipating any significant growth, are
required to maintain a ratio of 1% to 2% above the stated minimum, with an
absolute minimum leverage ratio of at least 4%. For purposes of this table,
it has been assumed that the leverage capital requirement is 4% of total
average assets.
(3) Assumes net proceeds are invested in assets that carry a 50% risk-
weighting.
15
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at an aggregate
price equal to the estimated pro forma market value of the Holding Company and
the Bank as converted, based upon an independent valuation. The Estimated
Valuation Range as of February 28, 1997 is from a minimum of $12,750,000 to a
maximum of $17,250,000 with a midpoint of $15,000,000 or, at a price per share
of $10.00, a minimum number of shares of 1,275,000, a maximum number of shares
of 1,725,000 and a midpoint number of shares of 1,500,000. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. However, net proceeds set forth on the following table
are based upon the following assumptions: (i) Sandler O'Neill will receive a fee
equal to 1.5% of the aggregate Purchase Price of shares sold in the Subscription
and Direct Community Offering, excluding shares purchased by directors,
officers, employees and any immediate family member thereof, and the ESOP,
subject to a maximum fee equal to 1.5% of the aggregate gross proceeds at the
midpoint of the Estimated Valuation Range; (ii) all of the Common Stock will be
sold in the Subscription and Direct Community Offerings; and (iii) Conversion
expenses, excluding the fees paid to Sandler O'Neill, will total approximately
$472,000. Actual expenses may vary from those estimated.
The pro forma consolidated net income of the Bank for the year ended
March 31, 1996 and the nine months ended December 31, 1996 has been calculated
as if the Conversion had been consummated at the beginning of each such period
and the estimated net proceeds received by the Holding Company and the Bank had
been invested at 5.68% at the beginning of each period, which represents the one
year U.S. Treasury Bill yield as of December 31, 1996. While OTS regulations
provide for the use of a yield representing the arithmetic average of the
weighted average yield earned by the Bank on its interest-earning assets and the
rates paid on its deposits, the Holding Company believes that the U.S. Treasury
Bill represents a more realistic yield on the Bank's investments. As discussed
under "USE OF PROCEEDS," the Holding Company expects to retain 50% of the net
proceeds of the Offerings from which it will fund the ESOP loan. A pro forma
after-tax return of 3.52% is used for both the Holding Company and the Bank for
the year ended March 31, 1996 and the nine months ended December 31, 1996, after
giving effect to an incremental combined federal and state tax rate of 38%.
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the number of shares of Common Stock
indicated in the footnotes to the table. Per share amounts have been computed as
if the Common Stock had been outstanding at the beginning of the period or at
the dates indicated, but without any adjustment of per share historical or pro
forma stockholders' equity to reflect the earnings on the estimated net
proceeds.
The following tables summarize the historical net income and retained
earnings of the Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range. No effect has
been given to: (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Conversion; (ii) withdrawals from deposit accounts for the purpose of purchasing
Common Stock in the Conversion; (iii) the issuance of shares from authorized but
unissued shares to the MRP, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Conversion; or (iv) the establishment of a liquidation account for the benefit
of Eligible Account Holders and Supplemental Eligible Account Holders. See
"MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plan" and "THE CONVERSION --
Stock Pricing and Number of Shares Issued." Shares of Common Stock may be
purchased with funds on deposit at the Bank, which will reduce deposits by the
amounts of such purchases. Accordingly, the net amount of funds available for
investment will be reduced by the amount of deposit withdrawals used to fund
stock purchases.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GAAP. STOCKHOLDERS'
16
<PAGE>
EQUITY HAS NOT BEEN INCREASED OR DECREASED TO REFLECT THE DIFFERENCE BETWEEN THE
CARRYING VALUE OF LOANS AND OTHER ASSETS AND MARKET VALUE. STOCKHOLDERS' EQUITY
IS NOT INTENDED TO REPRESENT FAIR MARKET VALUE NOR DOES IT REPRESENT AMOUNTS
THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF
LIQUIDATION.
<TABLE>
<CAPTION>
At or For the Year Ended March 31, 1996
-----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ----------------
1,275,000 1,500,000 1,725,000 1,983,750(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- ---------- ---------- ----------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds............................... $12,750 $15,000 $17,250 $19,838
Less: estimated expenses..................... 625 656 687 697
------- ------- ------- -------
Estimated net proceeds....................... 12,125 14,344 16,563 19,141
Less: Common Stock acquired by ESOP.......... (1,020) (1,200) (1,380) (1,587)
Less: Common Stock to be acquired by MRP..... (510) (600) (690) (794)
------- ------- ------- -------
Net investable proceeds................... $10,595 $12,544 $14,493 $16,760
======= ======= ======= =======
Consolidated net income:
Historical................................... $588 $588 $588 $588
Pro forma income on net proceeds(2).......... 373 442 510 590
Pro forma ESOP adjustments(3)................ (90) (106) (122) (141)
Pro forma MRP adjustments(4)................. (63) (74) (86) (98)
------- ------- ------- -------
Pro forma net income........................ $808 $850 $890 $939
======= ======= ======= =======
Consolidated net income per share(5)(6):
Historical................................... $0.50 $0.42 $0.36 $0.32
Pro forma income on net proceeds............. 0.31 0.32 0.32 0.32
Pro forma ESOP adjustments(3)................ (0.08) (0.08) (0.08) (0.08)
Pro forma MRP adjustments(4)................. (0.05) (0.05) (0.05) (0.05)
------- ------- ------- -------
Pro forma net income per share.............. $0.68 $0.61 $0.55 $0.51
======= ======= ======= =======
Consolidated stockholders' equity (book value):
Historical................................... $10,356 $10,356 $10,356 $10,356
Estimated net proceeds....................... 12,125 14,344 16,563 19,141
Less: Common Stock acquired by ESOP.......... (1,020) (1,200) (1,380) (1,587)
Less: Common Stock to be acquired by MRP(4).. (510) (600) (690) (794)
------- ------- ------- -------
Pro forma stockholders' equity(7)........... $20,951 $22,900 $24,849 $27,116
======= ======= ======= =======
Consolidate stockholders' equity per share(6)(8):
Historical(6)................................ $8.12 $6.90 $6.00 $5.22
Estimated net proceeds....................... 9.51 9.57 9.61 9.65
Less: Common Stock acquired by ESOP.......... (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4).. (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma stockholders' equity per share(9). $16.43 $15.27 $14.41 $13.67
======= ======= ======= =======
Purchase Price as a multiple of pro forma
net income per share......................... 14.71x 16.39x 18.18x 19.61x
Purchase Price as a percentage of pro forma
stockholders' equity per share............... 60.86% 65.48% 69.40% 73.15%
</TABLE>
(footnotes on page 19)
17
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended December 31, 1996
----------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
---------- ---------- ---------- ---------------
1,275,000 1,500,000 1,725,000 1,983,750(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
---------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross Proceeds.................................... $12,750 $15,000 $17,250 $19,838
Less: estimated expenses.......................... 625 656 687 697
------- ------- ------- -------
Estimated net proceeds............................ 12,125 14,344 16,563 19,141
Less: Common Stock acquired by ESOP............... (1,020) (1,200) (1,380) (1,587)
Less: Common Stock to be acquired by MRP.......... (510) (600) (690) (794)
------- ------- ------- -------
Net investable proceeds...................... $10,595 $12,544 $14,493 $16,760
======= ======= ======= =======
Consolidated net income:
Historical....................................... $423 $423 $423 $423
Pro forma income on net proceeds(2).............. 280 331 383 443
Pro forma ESOP adjustments(3).................... (68) (80) (92) (105)
Pro forma MRP adjustments(4)..................... (47) (56) (64) (74)
---- ---- ---- ----
Pro forma net income............................ $588 $618 $650 $687
==== ==== ==== ====
Consolidated net income per share(5)(6):
Historical....................................... $0.36 $0.30 $0.26 $0.23
Pro forma income on net proceeds................. 0.23 0.24 0.24 0.24
Pro forma ESOP adjustments(3).................... (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustments(4)..................... (0.04) (0.04) (0.04) (0.04)
----- ----- ----- -----
Pro forma net income per share.................. $0.49 $0.44 $0.40 $0.37
===== ===== ===== =====
Consolidated stockholders' equity (book value):
Historical....................................... $10,818 $10,818 $10,818 $10,818
Estimated net proceeds........................... 12,125 14,344 16,563 19,141
Less: Common Stock acquired by ESOP.............. (1,020) (1,200) (1,380) (1,587)
Less: Common Stock to be acquired by MRP(4)...... (510) (600) (690) (794)
------- ------- ------- -------
Pro forma stockholders' equity(7).............. $21,413 $23,362 $25,311 $27,578
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6).................................... $8.48 $7.21 $6.27 $5.45
Estimated net proceeds........................... 9.51 9.56 9.60 9.65
Less: Common Stock acquired by ESOP.............. (0.80) (0.80) (0.80) (0.80)
Less: Common Stock to be acquired by MRP(4)...... (0.40) (0.40) (0.40) (0.40)
------- ------ ------ ------
Pro forma stockholders' equity per share(9).... $16.79 $15.57 $14,65 $13.90
======= ====== ====== ======
Purchase Price as a multiple of pro forma
net income per share(10)......................... 16.39x 18.18x 20.00x 21.74x
Purchase Price as a percentage of pro forma
stockholders' equity per share................... 59.56% 64.23% 68.26% 71.94%
</TABLE>
(footnotes on following page)
18
<PAGE>
- ---------------
(1) Gives effect to the sale of an additional 258,750 shares in the Conversion,
which may be issued to cover an increase in the pro forma market value of
the Holding Company and the Bank as converted, without the resolicitation
of subscribers or any right of cancellation. The issuance of such
additional shares will be conditioned on a determination of the independent
appraiser that such issuance is compatible with its determination of the
estimated pro forma market value of the Holding Company and the Bank as
converted. See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the prime
rate as published in The Wall Street Journal on the closing date of the
Conversion, which rate is currently 8.50%) from the net proceeds from the
Offerings retained by the Holding Company. The amount of this borrowing has
been reflected as a reduction from gross proceeds to determine estimated
net investable proceeds. The Bank intends to make contributions to the ESOP
in amounts at least equal to the principal and interest requirement of the
debt. The Bank's payment of the ESOP debt is based upon equal installments
of principal over a seven-year period, assuming a combined federal and
state tax rate of 38%. Shares purchased by the ESOP with the proceeds of
the loan will be held in a suspense account and released on a pro rate
basis as the loan is repaid. Interest income earned by the Holding Company
on the ESOP debt offsets the interest paid by the Bank on the ESOP loan. No
reinvestment is assumed on proceeds contributed to fund the ESOP. The ESOP
expense reflects adoption of Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans," which will
require recognition of expense based upon shares committed to be released
and the exclusion of unallocated shares from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year, which,
for purposes of this calculation, was assumed to be equal to the $10.00 per
share Purchase Price. See "MANAGEMENT OF THE BANK -- Benefits -- Employee
Stock Ownership Plan."
(4) Gives effect to the MRP expected to be adopted by the Holding Company
following the Conversion. If the MRP is approved by stockholders, the MRP
intends to acquire an amount of Common Stock equal to 4% of the shares of
Common Stock issued in the Conversion either through open market purchases
or from authorized but unissued shares of Common Stock. In calculating the
pro forma effect of the MRP, it is assumed that the required stockholder
approval has been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the Purchase
Price and that 20% of the amount contributed was an amortized expense
during such period. The issuance of authorized but unissued shares of the
Common Stock instead of open market purchases would dilute the voting and
ownership interests of existing stockholders by approximately 3.85% and pro
forma net income per share would be $0.65, $0.58, $0.53 and $0.47 at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, for the year ended March 31, 1996, and
$0.47, $0.42, $0.39 and $0.34 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively, for the
nine months ended December 31, 1996, and pro forma stockholders' equity per
share would be $15.80, $14.67, $13.85 and $12.66 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, at March 31, 1996 and $16.14, $14.97, $14,11 and $12.87 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, for the nine months ended December 31, 1996.
Shares issued under the MRP vest over a five-year period at 20% per year
and, for purposes of this table, compensation expense is recognized on a
straight-line basis over each vesting period. In the event the fair market
value per share is greater than $10.00 per share on the date of stockholder
approval of the MRP, total MRP expense would increase. No effect has been
given to the shares reserved for issuance under the proposed Stock Option
Plan. If stockholders approve the Stock Option Plan following the
Conversion, the Holding Company will have reserved for issuance under the
Stock Option Plan authorized but unissued shares of Common Stock
representing an amount of shares equal to 10% of the shares sold in the
Conversion. If all of the options were to be exercised utilizing these
authorized but unissued shares rather than treasury shares which could be
acquired, the voting and ownership interests of existing stockholders would
be
19
<PAGE>
diluted by approximately 9.1%. See "MANAGEMENT OF THE BANK -- Benefits --
Stock Option Plan" and "-- Management Recognition Plan" and "RISK FACTORS
-- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 1,187,571,
1,397,143, 1,606,714 and 1,847,721 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively, for
the year ended March 31, 1996 and 1,192,429, 1,402,857, 1,613,286 and
1,855,279 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, respectively, for the nine months ended
December 31, 1996, which includes the shares of Common Stock sold in the
Conversion less the number of shares assumed to be held by the ESOP not
committed to be released within the first year following the Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment of
historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
Conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account which will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Bank's special bad debt reserves for income tax purposes
which would be required in the unlikely event of liquidation. See "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" and "TAXATION." The amounts shown for book value do
not represent fair market values or amounts distributable to stockholders
in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 1,275,000, 1,500,000
1,725,000 and 1,983,750 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
(10) Annualized.
20
<PAGE>
FIRST FEDERAL BANK OF IDAHO, A FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of First Federal Bank of
Idaho, a Federal Savings Bank (now known as "FirstBank Northwest") and
Subsidiary for the fiscal years ended March 31, 1995 and 1996 have been audited
by BDO Seidman, LLP, Spokane, Washington, independent auditors, whose report
thereon appears elsewhere in this Prospectus. These statements should be read in
conjunction with the Consolidated Financial Statements and related Notes
included elsewhere herein. The Consolidated Statements of Income for the nine
months ended December 31, 1995 and 1996 are unaudited but, in the opinion of
management, reflect all adjustments consisting only of normal recurring
adjustments necessary for a fair presentation of the results of such periods.
The results for the nine month period ended December 31, 1996 are not
necessarily indicative of the results of the Bank that may be expected for the
entire fiscal year.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
------------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans receivable............................... $6,825,840 $8,407,900 $6,324,493 $6,878,474
Mortgage backed and related securities......... 135,654 156,879 117,219 101,322
Investment securities.......................... 501,505 456,907 340,724 506,202
Other interest earnings assets................. 195,209 530,207 242,260 154,418
--------- --------- --------- ---------
Total interest income......................... 7,658,208 9,551,893 7,024,696 7,640,416
Interest Expense:
Deposits (Note 6).............................. 3,494,263 4,792,837 3,349,758 3,698,993
Advances from FHLB............................. 101,552 365,093 321,994 315,383
--------- --------- --------- ---------
Total interest expense........................ 3,595,815 5,157,930 3,671,752 4,014,376
Net interest income........................... 4,062,393 4,393,963 3,352,944 3,626,040
Provision for loan losses (Note 3).............. 27,453 150,000 78,312 193,619
--------- --------- --------- ---------
Net interest income after
provision for loan losses..................... 4,034,940 4,243,963 3,274,632 3,432,421
--------- --------- --------- ---------
Non-interest Income:
Gain on sale of loans.......................... 890,831 1,138,352 882,973 959,716
Service fees and charges....................... 782,490 812,751 596,804 673,953
Commissions.................................... 63,951 28,838 27,147 46,607
--------- --------- --------- ---------
Total non-interest income..................... 1,737,272 1,979,941 1,506,924 1,680,276
Non-interest Expense:
Compensation and related benefits
(Notes 10 and 11).............................. 2,708,441 3,048,163 2,131,225 2,327,006
Occupancy...................................... 661,654 671,258 490,060 504,181
Deposit insurance premiums..................... 206,400 234,728 154,800 696,925
Advertising.................................... 103,326 122,162 73,442 123,352
Data processing................................ 83,603 88,432 66,768 93,940
Supplies and postage........................... 207,040 270,525 192,578 196,630
Other.......................................... 596,359 825,851 445,527 597,278
--------- --------- --------- ---------
Total non-interest expense.................... 4,566,823 5,261,119 3,554,400 4,539,312
Income before income tax expense.............. 1,205,389 962,785 1,227,156 573,385
Income tax expense (Note 7)..................... 452,226 375,000 427,826 150,675
--------- --------- --------- ---------
Net income................................... $ 753,163 $ 587,785 $ 799,330 $ 422,710
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
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 Bank. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying Notes thereto and the other sections contained in this Prospectus.
The profitability of the Bank'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 Bank 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 Bank'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 Bank'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 Bank's profitability is also affected by the level of
non-interest expense. Non-interest expenses include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums, data servicing
expenses, advertising expenses, supplies and postage, and other operating costs.
The Bank'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.
Operating Strategy
The Bank's primary goal has been to improve the Bank's profitability while
maintaining a sound capital position. To accomplish this goal, the Bank has
employed an operating strategy that includes: (1) originating for its portfolio
residential mortgage loans, primarily with adjustable rates or with fixed 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 and agricultural
real estate loans; and (4) controlling asset growth to a level sustainable by
the Bank's capital position. In anticipation of the Charter Conversion, the
Bank 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 Bank intends to expand its agricultural real estate
and commercial real estate lending activities. The Bank also intends to expand
its non-mortgage lending activities by increasing its emphasis on originating
agricultural operating loans and commercial business loans. These loans afford
the Bank the opportunity to achieve higher interest rates with shorter terms to
maturity than residential mortgage loans. See "RISK FACTORS -- Diversified
Lending Risks -- Risks of Agricultural Lending" and "-- Risks of Community
Banking Strategy" for a discussion of the risks associated with this type of
lending. As part of this strategy, the Bank recently hired an experienced
commercial loan officer. There can be no assurances that the Bank will be
successful in its efforts to increase its originations of these types of loans.
Management anticipates that the Bank will incur initial start-up and ongoing
expenses in connection with the opening of its Clarkston, Washington office and
as various programs and services, such as its commercial real estate and
business lending operations, are introduced or 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.
22
<PAGE>
Comparison of Financial Condition at December 31, 1996 and March 31, 1996
Total assets increased $3.4 million, or 2.6%, from $129.8 million at March
31, 1996 to $133.2 million at December 31, 1996. The growth in assets is
primarily attributable to an increase in loans receivable, which was partially
offset by a decrease in cash and securities. Net loans receivable increased
from $93.8 million at March 31, 1996 to $111.1 million at December 31, 1996.
During the nine months ended December 31, 1996, the Bank retained for its
portfolio some fixed-rate mortgage loans with terms of 15 years or less.
Adjustable-rate mortgage loans that adjust after a fixed period of three or five
years, which the Bank retains for its portfolio, were in higher demand by
borrowers during this period. Between March 31, 1996 and December 31, 1996, the
Bank decreased its cash and cash equivalents and investment and mortgage-backed
securities. Cash and cash equivalents decreased from $13.6 million to $5.8
million and investment securities decreased from $11.9 million to $5.2 million
as the Bank used available cash and the proceeds from the sale and maturity of
investment securities to fund loan originations and deposit withdrawals.
Mortgage-backed securities decreased from $2.5 million to $2.3 million as a
result of principal repayments. Included among the assets of the Bank is the
cash surrender value of life insurance policies, which totalled $1.3 million at
March 31, 1996 and December 31, 1996. Such policies were purchased in 1995 in
connection with the implementation of salary continuation agreements with senior
executive officers of the Bank.
Total liabilities increased from $119.5 million at March 31, 1996 to $122.4
million at December 31, 1996. Deposits decreased $10.0 million from $115.3
million at March 31, 1996 to $105.3 million at December 31, 1996. In late 1995,
the Bank offered a 75-day certificate of deposit with a 7.5% interest rate to
promote the Bank's 75th anniversary. This promotion attracted approximately $20
million in new deposits. Upon the expiration of the promotional certificates of
deposit in early 1996, most of the funds were rolled over into six month or two
year certificates of deposit. The decrease in deposits from March 31, 1996 to
December 31, 1996 reflects the withdrawal of funds following the maturity of
these six month certificates as well as withdrawals following the maturity of
some higher yielding five-year certificates of deposit. FHLB advances increased
from $2.3 million at March 31, 1996 to $15.1 million at December 31, 1996.
Because of the decrease in deposits, the Bank increased its use of borrowings to
fund asset growth.
Comparison of Operating Results for the Nine Months Ended December 31, 1995 and
1996
Net Income. Net income decreased $376,000, or 47.1%, from $799,000 for the
nine months ended December 31, 1995 to $423,000 for the nine months ended
December 31, 1996. The Bank experienced greater net interest income during
1996, but this was more than offset by increases in non-interest expense and the
provision for loan losses. Non-interest expense for the nine months ended
December 31, 1996 included a one-time, special assessment of $584,000 for the
purpose of recapitalizing the SAIF. Excluding the special assessment and
related tax effects, net income would have been $778,000 for the nine months
ended December 31, 1996.
Net Interest Income. Net interest income increased by $273,000, or 8.1%,
from $3.4 million for the nine months ended December 31, 1995 to $3.6 million
for the nine months ended December 31, 1996. This increase resulted from the
growth of the Bank, as the average balance of interest-earning assets increased
$15.8 million, or 14.8%, between the periods. This growth was partially offset
by a 20 basis point decrease in the spread between the yield on interest-earning
assets and the rate paid on interest-bearing liabilities from 3.88% for the nine
months ended December 31, 1995 to 3.68% for the same period in 1996.
Total interest income increased $616,000, or 8.8%, from $7.0 million for
the nine months ended December 31, 1995 to $7.6 million for the nine months
ended December 31, 1996. Interest income on loans receivable increased $554,000
from $6.3 million to $6.9 million as a result of an increase in the average
balance of loans from $90.9 million for the nine months ended December 31, 1995
to $103.4 million for the nine months ended December 31, 1996. The Bank
increased its loan portfolio by offering ARM loans that adjust after a fixed
period of three or five years and by retaining some fixed-rate mortgage loans in
its portfolio. The increase in the average balance of loans was partially
offset by a decrease in the average yield on the loan portfolio from 9.28% to
8.87%. Interest income on mortgage-backed and related securities decreased
$16,000 between the periods primarily as a result of a smaller average balance
in 1996. Interest income on investment securities increased $166,000 between
the periods
23
<PAGE>
as a result of a larger average balance in 1996, which was partially offset by a
decrease in the average yield. Interest income on other interest-earning assets
decreased $88,000 between the periods primarily as a result of the decrease in
the average yield on such assets from 4.50% to 3.05%.
Total interest expense increased $343,000, or 9.3%, from $3.7 million for
the nine months ended December 31, 1995 to $4.0 million for the nine months
ended December 31, 1996. Interest expense on deposits increased $350,000
between the periods from $3.3 million for the nine months ended December 31,
1995 to $3.7 million for the nine months ended December 31, 1996. Interest paid
on transaction accounts decreased $49,000 between the periods as a result of a
decrease in the average rate paid from 2.49% to 2.27%. The decrease in the
average rate paid on transaction accounts was partially offset by a $559,000
increase in the average balance of such accounts. Interest paid on certificates
of deposit increased $399,000 between the periods. This increase was the result
of an increase in the average balance of certificate accounts from $58.5 million
to $74.1 million, which was partially offset by a decrease in the average rate
paid from 6.12% to 5.55%. In late 1995, the Bank offered a 75-day certificate
of deposit to promote the Bank's 75th anniversary, which resulted in the receipt
of $20 million of new deposits. Much of this amount remained on deposit with
the Bank at lower rates after the maturity of the promotional certificate of
deposit. Interest paid on FHLB advances decreased $7,000 between the periods as
a $349,000 decrease in the average balance of advances was partially offset by a
21 basis point increase in the average rate paid.
Provision for Loan Losses. Provisions for loan losses are charged to
operations to bring the total allowance for loan losses to a level considered by
management to be adequate to provide for estimated losses based on management's
evaluation of the portfolio, past experience, prevailing market conditions and
other relevant factors. Management also reviews individual loans for which full
collectibility may not be reasonably assured and considers, among other factors,
the present value of expected future cash flows, including the estimated fair
value of the underlying collateral. Provisions for loan losses totalled
$194,000 during the nine months ended December 31, 1996 compared to provisions
of $78,000 during the nine months ended December 31, 1995. The Bank made larger
provisions in 1996 after considering the growth of its loan portfolio, including
the growth of its commercial real estate and consumer loans, which generally are
riskier than residential mortgage loans.
The Bank's allowance for loan losses was $880,000, or 0.74% of total loans
receivable, at December 31, 1996, compared to $631,000, or 0.63% of total loans
receivable, at December 31, 1995. Net loan charge-offs during the nine months
ended December 31, 1996 were $15,000 compared to $2,000 during the same period
in 1995. Based on the level of the allowance for loan losses in relation to
loans receivable and delinquent loans, management believes the allowance for
loan losses was adequate at December 31, 1996. Although management uses the
best information available, future adjustments to the allowance may be necessary
due to economic, operating, regulatory and other conditions that may be beyond
the Bank's control. While the Bank maintains its allowance for loan losses at a
level which it considers to be adequate to provide for losses, there can be no
assurance that further additions will not be made to the allowance for loan
losses and that actual losses will not exceed the estimated amounts. Management
anticipates making additional provisions for loan losses in future periods as
the Bank increases the amount of its agricultural real estate, commercial real
estate and non-real estate loans.
Non-interest Income. Total non-interest income increased $173,000, from
$1.5 million for the nine months ended December 31, 1995 to $1.7 million for the
nine months ended December 31, 1996. Income on gain on sales of loans, which is
derived primarily from the sale of government insured loans on a servicing-
released basis, increased $77,000 between the periods as a result of the
adoption of Statement of Financial Accounting Standard ("SFAS") No. 122 combined
with a smaller volume of loans sold on a servicing-released basis in 1996.
Total loans sold servicing-released decreased from $38.0 million during the nine
months ended December 31, 1995 to $26.0 million during the nine months ended
December 31, 1996. Service fees and charges increased $77,000 and commissions
increased $20,000. Service fees and charges increased as a result of the growth
of the amount of loans serviced for others and increased fees on transaction
accounts, while commissions increased as a result of higher annuity sales by the
Bank's subsidiary.
Pursuant to SFAS No. 122, since April 1, 1996, the Bank has been required
to recognize as separate assets servicing rights that were generated by the Bank
through the sale of loans on a servicing retained basis. As a result,
24
<PAGE>
when a loan is sold servicing-retained, the Bank recognizes additional gain
during the period in which loan is sold for the capitalized cost of those
mortgage servicing rights. Furthermore, SFAS No. 122 requires the Bank to
periodically evaluate all capitalized mortgage servicing rights for impairment
based upon the current fair value of these rights. Accordingly, future changes
in the fair value of the Bank's capitalized mortgage servicing rights may
require the Bank to reduce the carrying value of these rights by taking a charge
against earnings. As a result of the adoption of SFAS No. 122, from time to
time the Bank may reassess its practice of selling loans on a servicing-retained
basis.
Non-interest Expense. Total non-interest expense increased $1.0 million,
or 27.7%, from $3.5 million for the nine months ended December 31, 1995 to $4.5
million for the nine months ended December 31, 1996. Deposit insurance premiums
increased from $155,000 for the nine months ended December 31, 1995 to $697,000
for the nine months ended December 31, 1996. Included in deposit insurance
premiums for the 1996 period is a one-time, special assessment of $584,000.
Pursuant to legislation enacted in September 1996, the FDIC imposed a special
assessment on each depository institution with SAIF-assessable deposits which
resulted in the SAIF achieving its designated reserve ratio. In connection
therewith, the FDIC reduced deposit insurance premiums. As a result, the Bank's
deposit insurance assessment rate has decreased from 0.23% of deposits to
0.0648% beginning January 1, 1997. Compensation and related benefits increased
$196,000, or 9.2%, between the periods as a result of an increase in the number
of employees and a contribution of $130,000 in connection with the termination
of a defined benefit pension plan that was suspended in 1995. Occupancy expense
increased $14,000, or 2.9%, between the periods as a result of opening of the
Coeur d'Alene branch in November 1995. Other non-interest expenses increased
$233,000, or 30.0%, primarily due to a loss of $90,000 on the sale of mutual
funds, an increase of $50,000 in advertising expenses and an increase of $27,000
in data processing costs. The Bank's non-interest expenses are higher than the
average expenses of institutions of comparable size because of the greater
resources required for the Bank's mortgage banking operations, diversified
lending activities and branch network. The Bank expects to incur additional
expenses in connection with the opening and operation of its Clarkston,
Washington office. In addition, the Bank expects to experience increased costs
following consummation of the Conversion because of expenses associated with the
ESOP and the other stock benefit plans as well as the additional costs of
operating as a public company.
Income Taxes. Income taxes were $428,000 for the nine months ended
December 31, 1995 (resulting in an effective tax rate of 34.9%) compared with
$150,000 for the nine months ended December 31, 1996 (resulting in an effective
tax rate of 26.3%). The decrease of $278,000 in tax expense is principally
attributable to a decrease in pre-tax income between the periods.
Comparison of Operating Results for the Years Ended March 31, 1995 and 1996
Net Income. Net income decreased $165,000, or 22.0%, from $753,000 for the
year ended March 31, 1995 to $588,000 for the year ended March 31, 1996. The
Bank experienced greater net interest income and non-interest income in fiscal
1996 compared to fiscal 1995. However, these gains were more than offset by
increases in non-interest expense and the provision for loan losses.
Net Interest Income. Net interest income increased by $332,000, or 8.2%,
from $4.1 million for the year ended March 31, 1995 to $4.4 million for the year
ended March 31, 1996. This increase resulted from the growth of the Bank's
assets as the average balance of interest-earning assets increased $15.1
million, or 15.4%, from fiscal 1995 to fiscal 1996. The Bank's spread between
the yield on interest-earning assets and the rate paid on interest-bearing
liabilities decreased 26 basis points from 3.87% for the year ended March 31,
1995 to 3.61% for the year ended March 31, 1996.
Total interest income increased $1.9 million, or 24.7%, from $7.7 million
for the year ended March 31, 1995 to $9.6 million for the year ended March 31,
1996. The increase in interest income between the periods was primarily the
result of an increase in interest income on loans, which increased by $1.6
million, or 23.2%, from $6.8 million during fiscal 1995 to $8.4 million during
fiscal 1996. The average balance of loans grew from $79.9 million in fiscal
1995 to $91.8 million in fiscal 1996. Most of the increase was in the Bank's
residential loan portfolio. The growth of the loan portfolio was funded with
FHLB advances and a decrease in cash and cash equivalents. In
25
<PAGE>
addition, the average yield on the loan portfolio increased from 8.54% to 9.15%
as a result of upward adjustments on ARM loans and the retention of 15-year
fixed-rate loans and ARM loans with initial fixed periods of three and five
years. Interest income on mortgage-backed and related securities increased
$21,000 due to upward adjustments on adjustable-rate securities. Interest
income on investment securities decreased by $45,000 as a result of a smaller
average balance in fiscal 1996, which was partially offset by a higher average
yield. Interest income on other interest-earning assets increased $335,000 as a
result of an increase in the average balance of such assets and an increase in
the average yield from 2.79% to 4.41%. The average balance of other interest-
earning assets increased from $7.0 million for fiscal 1995 to $12.0 million for
fiscal 1996 as a result of the funds received from the 75th anniversary
certificate of deposit promotion being invested in cash and cash equivalents.
Interest expense increased by $1.6 million, or 43.4%, from $3.6 million for
the year ended March 31, 1995 to $5.2 million for the year ended March 31, 1996.
The increase in interest expense was due to an increase in both interest paid on
deposits and interest paid on FHLB advances. Interest expense on deposits
increased $1.3 million, or 37.2%, from $3.5 million for fiscal 1995 to $4.8
million for fiscal 1996 primarily as a result of the increase in the average
balance of deposits. The average balance of transaction accounts decreased by
$4.5 million and the average cost of such accounts decreased from 2.62% to
2.50%, resulting in a decrease in interest expense of $160,000. However, the
decrease in interest expense on transaction accounts was more than offset by an
increase in interest expense on certificates of deposit. The average balance of
certificates of deposit increased by $15.7 million and the average cost of such
accounts increased from 4.88% to 5.93%, resulting in an increase in interest
expense on certificates of deposit of $1.5 million. The increase in the average
balance of certificates of deposit and in the average rate paid on such accounts
was due, in part, to the promotion in late 1995 of a 75-day, 7.5% certificate of
deposit in honor of the Bank's 75th anniversary. The promotion attracted $25
million, of which $20 million were new deposits. As a result of strong loan
demand, the Bank utilized FHLB advances to a greater extent during fiscal 1996,
which increased interest expense on FHLB advances by $263,000, from $102,000 in
fiscal 1995 to $365,000 in fiscal 1996.
Provision for Loan Losses. The provision for loan losses was $150,000 for
the year ended March 31, 1996 compared to $27,000 for the year ended March 31,
1995. Management increased the provision for loan losses in fiscal 1996 as a
result of the growth of the loan portfolio and the increased emphasis on
commercial and agricultural real estate loans, which generally are riskier than
residential real estate loans. The Bank's allowance for loan losses was
$701,000, or 0.70% of total loans receivable, at March 31, 1996, compared to
$555,000, or 0.62% of total loans receivable, at March 31, 1995. Net loan
charge-offs were $4,000 during fiscal 1996 compared to $3,000 during fiscal
1995.
Non-interest Income. Total non-interest income increased $243,000, or
14.0%, from fiscal 1995 to fiscal 1996. The Bank experienced increased income
from gain on sales of loans and from service fees and charges while income from
commissions decreased. Loans sold servicing-released increased from $24.6
million for the year ended March 31, 1995 to $48.6 million for the year ended
March 31, 1996. As a result, gain on sales of loans increased $248,000 from
$891,000 during fiscal 1995 to $1.1 million in fiscal 1996. Service fees and
charges increased $30,000 between the periods, primarily as a result of a larger
balance of loans serviced for others. Commission income decreased $35,000
between the periods because of decreased annuity sales by the Bank's subsidiary.
Non-interest Expense. Total non-interest expense increased $694,000 from
$4.6 million for the year ended March 31, 1995 to $5.3 million for the year
ended March 31, 1996. During fiscal 1996, compensation and related benefits
increased by $340,000, or 12.6%, over fiscal 1995 primarily as a result of an
increase in the number of employees and an increase in commissions paid, which
are tied directly to increased loan originations. Included in compensation
expense for fiscal 1995 is a charge of $96,000 relating to the suspension of a
defined benefit pension plan. Occupancy costs remained steady, increasing by
$10,000, or 1.5%, between the periods. Deposit insurance increased by $28,000
between the periods as a result of greater deposit balances in fiscal 1996.
Other non-interest expenses increased by $317,000, or 32.0%, as a result of
increased expenses associated with operational audits and consulting services
and a charge of $200,000 for the impairment of mutual funds owned by the Bank.
26
<PAGE>
Income Taxes. Income taxes were $452,000 for the year ended March 31, 1995
(resulting in an effective tax rate of 37.5%) compared with $375,000 for the
year ended March 31, 1996 (resulting in an effective tax rate of 38.9%). The
decrease of $77,000 in tax expense is principally attributable to a decrease in
pre-tax income between the periods.
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
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 yields and
costs. Such yields and costs for the periods indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------
1995 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable..................... $ 79,912 $6,826 8.54% $ 91,849 $8,408 9.15%
Mortgage-backed securities........... 2,981 136 4.56 2,622 157 5.99
Investment securities................ 8,075 501 6.20 6,553 457 6.97
Other earning assets................. 6,986 195 2.79 12,026 530 4.41
-------- ------- -------- ---------
Total interest-earning
assets............................. 97,954 7,658 7.82 113,050 9,552 8.45
------- ---------
Non-interest-earning
assets............................... 3,873 5,460
-------- --------
Total assets....................... $101,827 $118,510
======== ========
Interest-earning
liabilities:
Passbook, NOW and money
market accounts.................... $ 39,546 1,036 2.62 $ 35,072 876 2.50
Certificates of deposit.............. 50,319 2,458 4.88 66,066 3,917 5.93
-------- ------- -------- ------
Total deposits..................... 89,865 3,494 3.89 101,138 4,793 4.74
Advances from FHLB................... 1,305 102 7.82 5,419 365 6.74
-------- ------- -------- ------
Total interest-bearing
liabilities....................... 91,170 3,596 3.95 106,557 5,158 4.84
------- ------
Non-interest-bearing
liabilities.......................... 1,458 1,826
-------- --------
Total liabilities.................. 92,628 108,383
-------- --------
Total equity.......................... 9,199 10,127
-------- --------
Total liabilities and
total equity...................... $101,827 $118,510
======== ========
Net interest income................... $4,062 $4,394
====== ======
Interest rate spread.................. 3.87% 3.61%
==== ====
Net interest margin................... 4.15% 3.89%
==== ====
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities.................. 107.44% 106.09%
======= =======
<CAPTION>
Nine Months Ended December 31,
-----------------------------------------------------------------
1995(2) 1996(2)
------------------------------- -------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable..................... $ 90,916 $6,325 9.28% $103,407 $6,878 8.87%
Mortgage-backed securities........... 2,658 117 5.87 2,381 101 5.66
Investment securities................ 6,450 341 7.05 10,466 506 6.45
Other earning assets................. 7,168 242 4.50 6,783 155 3.05
-------- ------- -------- ------
Total interest-earning
assets............................. 107,192 7,025 8.74 123,037 7,640 8.28
------- ------
Non-interest-earning
assets...............................
5,247 6,173
Total assets....................... -------- --------
$112,439 $129,210
======== ========
Interest-earning
liabilities:
Passbook, NOW and money
market accounts.................... $ 35,551 665 2.49 $ 36,110 615 2.27
Certificates of deposit.............. 58,538 2,685 6.12 74,074 3,084 5.55
-------- ------ -------- ------
Total deposits..................... 94,089 3,350 4.75 110,184 3,699 4.48
Advances from FHLB................... 6,599 322 6.51 6,250 315 6.72
--------- ------ -------- ------
Total interest-bearing
liabilities....................... 100,688 3,672 4.86 116,434 4,014 4.60
------ ------
Non-interest-bearing
liabilities.......................... 1,796 2,027
-------- --------
Total liabilities.................. 102,484 118,461
-------- --------
Total equity.......................... 9,955 10,749
-------- --------
Total liabilities and
total equity...................... $112,439 $129,210
======== ========
Net interest income................... $3,353 $3,626
====== ======
Interest rate spread.................. 3.88% 3.68%
==== ====
Net interest margin................... 4.17% 3.93%
====== ======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities.................. 106.46% 105.67%
======== ========
</TABLE>
- ----------------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Yields and ratios for the nine-month periods are annualized.
28
<PAGE>
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the date indicated the weighted average yields earned on the Bank's
assets and the weighted average interest rates paid on the Bank's liabilities,
together with the net yield on interest-earning assets. Amounts for the nine
month periods are annualized.
<TABLE>
<CAPTION>
Year Nine Months Ended
Ended March 31, December 31, At
--------------- ----------------- December
31,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Weighted average yield
earned on:
Loans receivable........ 8.54% 9.15% 9.28% 8.87% 8.43%
Mortgage-backed
securities............. 4.56 5.99 5.87 5.66 6.03
Investment securities... 6.20 6.97 7.05 6.45 6.14
All interest-earning
assets................. 7.82 8.45 8.74 8.28 8.29
Weighted average rate paid
on:
Passbook, NOW and money
market accounts........ 2.62 2.50 2.49 2.27 2.26
Certificates of deposit. 4.88 5.93 6.12 5.55 5.60
FHLB advances........... 7.82 6.74 6.51 6.72 5.88
All interest-bearing
liabilities............ 3.95 4.84 4.86 4.60 4.52
Interest rate spread
(spread between
weighted average yield
earned on all
interest-earning assets
and weighted average
rate paid on all
interest-bearing
liabilities)........... 3.87 3.61 3.88 3.68 3.77
Net interest margin (net
interest income
as a percentage of
average
interest-earning
assets)................ 4.15 3.89 4.17 3.93 3.92
</TABLE>
29
<PAGE>
Rate/Volume Analysis
The following table sets forth the effects of changing rates and volumes on
the interest income and interest expense of the Bank. 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); and (iii) effects attributable to
changes in rate/volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Year Ended March 31, Nine Months Ended December 31,
1996 Compared to Year Ended 1996 Compared to Nine Months Ended
March 31, 1995 December 31, 1995
------------------------------------------ ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------- -------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ----- ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)....... $489 $1,020 $ 73 $1,582 $(277) $ 869 $(38) $554
Mortgage-backed securities 42 (16) (5) 21 (4) (12) -- (16)
Investment securities..... 62 (94) (12) (44) (28) 212 (18) 166
Other earning assets...... 113 141 81 335 (78) (14) 4 (88)
---- ------ ---- ------ ----- ------ ---- ----
Total net change in income
on interest-earning assets 706 1,051 137 1,894 (387) 1,055 (52) 616
---- ------ ---- ------ ----- ------ ---- ----
Interest-bearing liabilities:
Passbook, NOW and money
market accounts......... (48) (117) 5 (160) (59) 11 (1) (49)
Certificates of deposit... 525 769 164 1,458 (248) 713 (66) 399
FHLB advances............. (14) 322 (44) 264 11 (18) -- (7)
---- ------ ---- ------ ----- ------ ---- ----
Total net change in expense
on interest-bearing
liabilities.............. 463 974 125 1,562 (296) 706 (67) 343
---- ------ ---- ------ ----- ------ ---- ----
Net increase (decrease) in
net interest income.......... $243 $ 77 $ 12 $ 332 $ (91) $ 349 $ 15 $273
==== ====== ==== ====== ===== ====== ==== ====
</TABLE>
- ---------------
(1) Does not include interest on loans 90 days or more past due.
Asset and Liability Management
The Bank's principal financial objective is to achieve long-term profitability
while reducing its exposure to fluctuating interest rates. The Bank 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 Bank'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 Bank 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 Bank promotes
non-interest-bearing
30
<PAGE>
transaction accounts and certificates of deposit with longer maturities (up to
five years) to reduce the interest sensitivity of its interest-bearing
liabilities.
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data from the Bank's quarterly reports to the
OTS, the Bank receives a report which measures interest rate risk by modeling
the change in Net Portfolio Value ("NPV") over a variety of interest rate
scenarios. This procedure for measuring interest rate risk was developed by the
OTS to replace the "gap" analysis (the difference between interest-earning
assets and interest-bearing liabilities that mature or reprice within a specific
time period). NPV is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The calculation is intended to
illustrate the change in NPV that will occur in the event of an immediate change
in interest rates of at least 200 basis points with no effect given to any steps
that management might take to counter the effect of that interest rate movement.
Under proposed OTS regulations, an institution with a greater than "normal"
level of interest rate risk will be subject to a deduction from total capital
for purposes of calculating its risk-based capital. An institution with a
"normal" level of interest rate risk is defined as one whose "measured interest
rate risk" is less than 2.0%. Institutions with assets of less than $300
million and a risk-based capital ratio of more than 12.0% are exempt. The Bank
meets these qualifications and therefore is exempt. Assuming this proposed rule
was in effect at December 31, 1996 and the Bank was not exempt from the rule,
the Bank's level of interest rate risk would not have caused it to be treated as
an institution with greater than "normal" interest rate risk.
The following table is provided by the OTS and illustrates the change
in NPV at December 31, 1996, based on OTS assumptions, that would occur in the
event of an immediate change in interest rates, with no effect given to any
steps that management might take to counter the effect of that interest rate
movement.
<TABLE>
<CAPTION>
Net Portfolio as % of
Net Portfolio Value Portfolio Value of Assets
------------------------------------ ---------------------------------
Basis Point ("bp")
Change in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(bp)(3)
- ------------------- -------- ----------- --------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
400 11,802 (4,815) (29) 8.99 (298)
300 13,362 (3,254) (20) 10.01 (196)
200 14,769 (1,847) (11) 10.90 (107)
100 15,903 (714) (4) 11.58 (39)
0 16,617 -- -- 11.97 --
(100) 16,784 168 1 12.01 4
(200) 16,440 (177) (1) 11.73 (24)
(300) 16,222 (395) (2) 11.52 (45)
(400) 16,485 (132) (1) 11.62 (35)
</TABLE>
- --------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the portfolio value of total
assets ("PV").
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
31
<PAGE>
The following table is provided by the OTS and is based on the calculations
in the above table. It sets forth the interest rate risk capital component that
will be deducted from risk-based capital in determining the level of risk-based
capital. At December 31, 1996, the change in NPV as a percentage of portfolio
value of total assets is negative 1.33%, which is less than negative 2.0%,
indicating that the Bank has a "normal" level of interest rate risk.
<TABLE>
<CAPTION>
At At At
December 31, September 30, December 31,
1995 1996 1996
------------ ------------- ------------
<S> <C> <C> <C>
RISK MEASURES: 200 BP RATE
SHOCK:
Pre-Shock NPV Ratio: NPV as %
of PV of Assets................. 10.92% 12.25% 11.97%
Exposure Measure: Post-Shock
NPV Ratio....................... 10.61% 11.14% 10.90%
Sensitivity Measure: Change in
NPV Ratio....................... (31)bp (111)bp (107)bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of
Assets.......................... (0.36)% (1.36)% (1.33)%
Interest Rate Risk Capital
Component (1)................... -- -- --
</TABLE>
- ------------------------
(1) No amounts are shown on the interest rate risk capital component line
because the Bank is exempt from the interest rate risk capital component.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Liquidity and Capital Resources
The Bank's primary 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 Bank 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 Bank generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At December 31, 1996, cash and
cash equivalents totalled $5.8 million, or 4.3% of total assets, and investment
securities that matured in one year or less totalled $500,000, or 0.4% of total
assets. The Bank did not hold any securities classified as available for sale
at December 31, 1996. In addition, the Bank maintains a credit facility with
the FHLB-Seattle, which provides for immediately available advances. Advances
under this credit facility totalled $15.1 million at December 31, 1996.
The OTS requires a savings institution to maintain an average daily balance
of liquid assets (cash and eligible investments) equal to at least 5.0% of the
average daily balance of its net withdrawable deposits and short-
32
<PAGE>
term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus short-term
borrowings. The Bank's actual long- and short-term liquidity ratios at December
31, 1996 were 5.32% and 1.03%, respectively.
The primary investing activity of the Bank is the origination of mortgage
loans. During the years ended March 31, 1995 and 1996, and the nine months
ended December 31, 1996, the Bank originated loans in the amounts of $89.8
million, $120.9 million, and $97.4 million, respectively. At December 31, 1996,
the Bank had loan commitments totalling $16.4 million and undisbursed lines of
credit totalling $4.9 million and undisbursed loans in process totalling $6.2
million. The Bank 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 December 31, 1996 totalled $49.2
million. Historically, the Bank has been able to retain a significant amount of
its deposits as they mature. In addition, management of the Bank 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
OTS requirements. As of December 31, 1996, the Bank was in compliance with all
regulatory capital requirements which were effective as of such date with
tangible, core and risk-based capital ratios of 8.12%, 8.12% and 13.27%,
respectively. For a detailed discussion of regulatory capital requirements, see
"REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements." See also "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE."
Impact of New Accounting Standards
Accounting for the Impairment of Long-Lived Assets. In March 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 applies prospectively in fiscal years beginning after
December 31, 1995, and establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. SFAS No. 121 became effective for the Bank
for the fiscal year beginning April 1, 1996. The adoption of SFAS No. 121 has
not had a material impact on the Bank's results of operations or financial
position.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122
eliminates distinctions between servicing rights that were purchased and those
that were retained upon the sale of loans. The statement requires mortgage
servicers to recognize as separate assets rights to service loans, no matter how
the rights were acquired. Institutions that sell loans and retain the servicing
rights will be required to allocate the total cost of the loans to servicing
rights and loans based on their relative fair values if that value can be
estimated. Furthermore, SFAS No. 122 requires that all capitalized mortgage
servicing rights be periodically evaluated for impairment based upon the current
fair value of these rights. SFAS No. 122 became effective for the Bank for the
fiscal year beginning April 1, 1996. The effect of adopting SFAS No. 122 was to
increase income before income taxes for the nine months ended December 31, 1996,
approximately $204,000.
Accounting for Stock-Based Compensation. In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial
accounting and reporting standards for stock-based employee compensation plans.
This statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995; however, companies are required
to disclose information for awards granted in their first fiscal year beginning
after December 15, 1994. Management of the Bank has not completed an analysis
of the potential effects of this statement on its financial condition or results
of operations.
33
<PAGE>
Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities. This
statement supersedes SFAS No. 122 and applies prospectively in fiscal years
beginning after December 31, 1996, and establishes new standards that focus on
control whereas, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. The Bank does not expect adoption
of SFAS No. 125 to have a material impact on the Bank's results of operations or
financial position.
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 Bank'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.
BUSINESS OF THE HOLDING COMPANY
General
The Holding Company was organized as a Delaware business corporation at the
direction of the Bank in March 1997 for the purpose of becoming a holding
company for the Bank upon completion of the Stock Conversion. Upon completion
of the Stock Conversion, the Bank will be a wholly-owned subsidiary of the
Holding Company.
Business
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon completion of the Conversion, the Holding
Company's sole business activity will be the ownership of the stock of the Bank
and investment of the net proceeds of the Offerings retained by it. In the
future, the Holding Company may acquire or organize other operating
subsidiaries, although there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Bank with the
payment of appropriate rental fees, as required by applicable law.
Since the Holding Company will only hold the capital stock of the Bank, the
competitive conditions applicable to the Holding Company will be the same as
those currently confronting the Bank. See "BUSINESS OF THE BANK --
Competition."
BUSINESS OF THE BANK
General
The Bank is a community oriented financial institution that engages
primarily in the business of attracting deposits from the general public in the
areas surrounding its branch offices and using those funds, together with funds
34
<PAGE>
generated from operations and borrowings, to originate residential mortgage
loans within the Bank's market area. The Bank also is active in originating
construction and agricultural real estate loans. To a lesser extent, the Bank
originates commercial real estate, 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 that it originates
while retaining the servicing rights on the conventional loans it sells.
Market Area
The Bank is headquartered in Lewiston, Idaho and operates five full-service
offices in Lewiston, Lewiston Orchards, Moscow, Grangeville and Coeur d'Alene,
Idaho. The Bank also operates two loan production offices, one in Lewiston and
one in Coeur d'Alene. Most of the Bank's depositors reside in the communities
surrounding the Bank's offices. Most 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, mining, tourism and the forest products industry, and the local
economies reflect the health or weakness of those industries. Agriculture in
the Bank's market area is dry land farming. The primary crop is wheat. Other
major crops are barley, peas, lentils, beans and grass seed. Livestock is also
raised in the Bank's market area. Lewiston is the largest city in northern
Idaho and serves as the regional center for state government. The economy of
Lewiston, in NezPerce 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 50,000. Forest products and agriculture are the
dominant industries in the Lewiston-Clarkston area. Medical services, light
manufacturing and tourism have helped keep the economy stable in recent years.
Moscow, Idaho, in Latah County, has a population of 20,000. The county
population is approximately 30,000. 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. Both universities
have been expanding in recent years, which resulted in increased demand for
housing. The growth of the universities has slowed recently, which has caused
some slow down in the real estate market. Grangeville, Idaho, in Idaho County,
has an economy based mostly on agriculture, the forest products industry and the
U.S. Forest Service. Declines in the forest products industry has resulted in a
decline in population in 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 25,000 in
a county with almost 70,000 residents. Tourism, forest products, mining and
agriculture are the major industries of this region. Coeur d'Alene has
experienced significant growth in the past ten years, primarily because of the
expanding tourism industry and migration from more populous parts of the western
and northwestern United States. As a result, real estate activity has been high
with a large amount of new home construction.
The Bank faces competition from many financial institutions for deposits
and loan originations. See "--Competition" and "RISK FACTORS -- Competition
Within Market Area."
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. The Bank also is active in
originating construction and agricultural real estate loans. To a lesser
extent, the Bank also originates commercial real estate and consumer and other
non-real estate loans, although it intends to increase its originations of these
types of loans. The Bank's net loans receivable totalled $111.1 million at
December 31, 1996, representing 83.5% of consolidated total assets.
35
<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition of
the Bank's loan portfolio by type of loan at the dates indicated. The Bank had
no concentration of loans exceeding 10% of total gross loans other than as
disclosed below.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------------------------------
1995 1996 1996
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential................ $53,307 60.02% $ 62,818 62.41% $ 72,656 61.26%
Construction............... 12,259 13.80 13,832 13.74 14,945 12.60
Agricultural............... 11,887 13.39 11,945 11.87 11,876 10.01
Commercial................. 5,068 5.71 4,036 4.01 6,007 5.07
------- ------ -------- ------ -------- ------
Total real estate loans.. 82,521 92.92 92,631 92.03 105,184 88.94
Consumer and other loans:
Home equity................ 3,826 4.31 5,229 5.20 9,721 8.20
Agricultural operating..... 561 0.63 589 0.58 1,024 0.86
Other consumer............. 1,902 2.14 2,206 2.19 2,368 2.00
------- ------ -------- ------ -------- ------
Total consumer and
other loans............. 6,289 7.08 8,024 7.97 13,113 11.06
------- ------ -------- ------ -------- ------
Total loans receivable... 88,810 100.00% 100,655 100.00% 118,597 100.00%
------- ====== -------- ====== -------- ======
Less:
Loans in process........... 5,052 5,726 6,224
Unearned loan fees and
discounts................ 426 411 408
Allowance for loan losses.. 555 701 880
------- -------- --------
Loans receivable, net.... $82,777 $ 93,817 $111,085
======= ======== ========
</TABLE>
Residential Real Estate Lending. The principal lending activity of the Bank
is the origination of mortgage loans to enable borrowers to purchase existing
residential real estate. At December 31, 1996, $72.7 million, or 61.3%, of the
Bank's total gross loan portfolio consisted of loans secured by residential real
estate. The Bank presently originates both 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").
The Bank generally retains all of 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, although in the nine
months ended December 31, 1996 the Bank retained some 30-year, fixed-rate loans
for its portfolio. The Bank generally retains all of the ARM loans that it
originates. Most of the loans sold by the Bank are sold to Freddie Mac. The
remainder of loans sold are purchased by the Federal National Mortgage
Association ("Fannie Mae") or private investors. 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, all loans are sold
without recourse, although in the past the Bank has sold loans with recourse.
As of December 31, 1996, the Bank remains contingently liable for approximately
$1.8 million 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 "-- Lending Activities -- Loan
Originations, Sales and Purchases."
36
<PAGE>
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.
The Bank also originates residential mortgage loans that are insured by the
Federal Housing Administration, the Veterans Administration, the Farm Home
Administration or the Idaho Housing Authority. A significant portion of the
Bank's residential mortgage loan originations in recent years has consisted of
government insured loans. Most of these loans have been originated in the Coeur
d'Alene area, where there has been a significant increase in entry-level
housing. The Bank generally sells the government insured loans that it
originates to private investors on a servicing-released basis.
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 bases. At December
31, 1996, the Bank's residential loan portfolio included $24.0 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 high amounts of nonperforming loans.
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. See "RISK FACTORS -- Interest Rate Risk Exposure." 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 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 normally
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
37
<PAGE>
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.
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 90% 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 significant proportion 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 December 31, 1996, construction loans totalled $14.9 million, or 12.6% of
total loans. At such date, the average amount of the Bank's construction loans
was approximately $112,000, which reflects that much of the construction in the
Coeur d'Alene area is of entry-level housing. The largest construction loan in
the Bank's portfolio at December 31, 1996 was $332,000. During the year ended
March 31, 1996 and the nine months ended December 31, 1996, construction loans
constituted 24.5% and 23.8%, respectively, of total loan originations.
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 loan 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 December
31, 1996, speculative loans totalled $5.3 million, or 35.5% of the total
construction loan portfolio. Construction loans to individuals generally
convert to permanent mortgage loans upon completion of the construction period.
At December 31, 1996, custom construction loans to individuals totalled $1.5
million, or 10.0% of the total construction loan portfolio.
Construction lending affords the Bank 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 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
38
<PAGE>
to provide the Bank with annual financial statements and other credit
information. At December 31, 1996, the Bank had approved five major builders,
the largest borrowing capacity of which was approximately $1.3 million. At
December 31, 1996, the Bank's major builders had total loans of $2.4 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
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 real estate lending has been an
important part of the Bank's lending strategy since the mid-1980s. The Chief
Executive Officer has 24 years of experience and the Vice President,
Agricultural and Consumer Lending has 18 years of experience in agricultural
real estate lending. See "MANAGEMENT OF THE BANK." At December 31, 1996,
agricultural real estate loans totalled $11.9 million, or 10.0% of the Bank's
total loan portfolio.
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. The Bank also makes agricultural
operating loans. See "-- Consumer and Other Lending."
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 December 31, 1996, the largest agricultural real estate loan was
$620,000 and the average amount of the Bank's agricultural real estate loans was
approximately $100,000.
The Bank is approved to originate agricultural real estate loans qualifying
for purchase by the Farmer Mac II program, which requires Farm House
Administration 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 real estate lending affords the Bank the opportunity to earn
yields higher than those obtainable on 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.
39
<PAGE>
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 procure multi-
peril crop or hail insurance. Farmers may mitigate the effect of price declines
through the use of futures contracts, options or forward contracts. The Bank
does not monitor or require the use by borrowers of these instruments.
Commercial Real Estate Lending. Commercial real estate lending has been a
minor part of the Bank's lending strategy in recent years. At December 31,
1996, the Bank's commercial real estate loan portfolio totalled $6.0 million, or
5.1% of total loans. The Bank has been more active in originating commercial
real estate loans in recent periods. During the year ended March 31, 1996 and
the nine months ended December 31, 1996, originations of commercial real estate
loans totalled $1.5 million and $3.4 million, respectively. In connection with
the expansion of the Bank's community banking activities, the Bank intends to
further increase its emphasis on commercial real estate lending. However, there
can be no assurances that the Bank will meet its objectives in increasing the
size of its commercial real estate portfolio.
The Bank's commercial real estate loans include loans secured by a storage
facility, a manufactured home park, small office buildings, retail shops, a
multi-family residential property and other small commercial properties.
Commercial real estate loans in the Bank's portfolio include loans originated by
the Bank and participation interests in loans originated by other institutions.
At December 31, 1996, the average size of the Bank's commercial real estate
loans was $122,000 and the largest was a $1.8 million loan secured by a storage
facility near Seattle, Washington. This loan was restructured in 1992 and is
performing according to its terms. 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. Annual operating statements on each
commercial real estate loan are required and reviewed by management.
In addition to loans secured by commercial properties, the Bank's
commercial real estate portfolio includes loans for the development of
residential subdivisions . Such loans totalled $489,000 at December 31, 1996.
During the year ended March 31, 1996 and the nine months ended December 31,
1996, originations of loans for the development of residential subdivisions
totalled $411,000 and $1.2 million, respectively.
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from residential
mortgage loans. However, loans secured by such properties usually are greater
in amount, more difficult to evaluate and monitor and, therefore, involve a
greater degree of risk than one- to four-family residential mortgage loans.
Because payments on loans secured by commercial properties are often dependent
on the successful operation and management of the properties, repayment of such
loans may be affected by adverse conditions in the real estate market or the
economy. The Bank seeks to minimize these risks by limiting the maximum loan-
to-value ratio to 75% and strictly scrutinizing the financial condition of the
borrower, the quality of the collateral and the management of the property
securing the loan. The Bank also obtains loan guarantees from financially
capable parties based on a review of personal financial statements.
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 December 31, 1996, the Bank's
consumer and other non-mortgage loans totalled approximately $8.4 million, or
7.1% 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
Bank also originates a small amount of agricultural operating loans and
equipment 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.
40
<PAGE>
At December 31, 1996, home equity loans totalled $9.7 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 and only with fixed interest rates. Home equity lines of
credit generally have adjustable interest rates based on the prime rate.
At December 31, 1996, agricultural operating loans totalled $1.0 million.
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 other business entities.
As part of the expansion of its community banking activities, the Bank
intends to increase its efforts to originate agricultural operating loans and
commercial business loans. The Bank has established a commercial loan
department and recently hired a loan officer with 18 years of commercial lending
experience as part of this effort. The Bank is also implementing a VISA credit
card program, which initially will be marketed to existing customers. However
there can be no assurances that the Bank will meet its objectives in increasing
the size of its non-mortgage loan portfolio. Factors that may effect the
ability of the Bank to increase its originations in this area include the demand
for such loans, interest rates and the state of the local and national economy.
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. Similarly, 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.
Furthermore, 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. At December 31, 1996, the Bank had $28,000 of
consumer and non-mortgage loans accounted for on a nonaccrual basis.
41
<PAGE>
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of principal
repayments for loans becoming due during the periods indicated. All loans are
included in the period 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 shorten the average life of all
loans and may cause the Bank's actual repayment experience to differ from that
shown below.
<TABLE>
<CAPTION>
After After After After 10
One Year 3 Years 5 Years Years
Within Through Through Through Through Beyond
One Year 3 Years 5 Years 10 Years 15 Years 15 Years Total
-------- ------- ------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............. $ 276 $1,506 $3,897 $ 3,573 $12,059 $51,345 $ 72,656
Construction............ 14,945 -- -- -- -- -- 14,945
Commercial.............. 412 394 2,005 529 519 2,148 6,007
Agricultural............ -- 110 102 1,078 2,618 7,968 11,876
Consumer and other loans.. 2,849 1,295 1,883 6,628 239 219 13,113
------- ------ ------ ------- ------- ------- --------
Total gross loans..... $18,482 $3,305 $7,887 $11,808 $15,435 $61,680 $118,597
======= ====== ====== ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1997, that have fixed interest rates and have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In Thousands)
<S> <C> <C>
Real estate loans:
Residential............. $33,712 $38,668
Construction............ -- --
Commercial.............. 2,575 3,020
Agricultural............ 699 11,177
Consumer and other loans.. 3,151 7,113
------- -------
Total gross loans.... $40,137 $59,978
======= =======
</TABLE>
42
<PAGE>
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 existing customers, referrals by 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 two mortgage loan centers, one in Coeur d'Alene and one in
Lewiston, 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 $214,600 that qualify for sale in
the secondary market may be approved by the Bank's underwriters. All other
portfolio real estate loans up to $500,000 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 $500,000 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 $500,000 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 $25,000 and home equity loans up to
$100,000 may be approved by designated underwriters. 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, 1996, and the nine months ended December 31, 1996, the
Bank originated $120.9 million and $97.4 million of loans, respectively.
Residential real estate loan originations totalled $83.6 million for the year
ended March 31, 1996 and $64.9 million for the nine months ended December 31,
1996. Of the $97.4 million of loans originated during the nine months ended
December 31, 1996, 16.2% were adjustable-rate loans and 83.8% were fixed-rate
loans.
In the early 1990s 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 totalled $891,000, $1.1 million and
$960,000 during the years ended March 31, 1995 and 1996 and the nine months
ended December 31, 1996, respectively. See "RISK FACTORS -- Reliance on Mortgage
Banking Operations" and "-- Competition Within Market Area." 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, all loans are sold
without recourse, although in the past the Bank has sold loans with recourse. As
of December 31, 1996, the Bank remained contingently liable for approximately
$1.8 million of loans sold with recourse.
43
<PAGE>
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 secured by local low-income housing projects.
The Bank intends to supplement its origination of agricultural and commercial
real estate loans and agricultural operating and commercial business loans by
purchasing participations in such loans originated by other community banks in
northern 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 periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
-------------------- ------------------
1995 1996 1995 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Total loans receivable at
beginning of period.............. $ 80,780 $ 88,810 $ 88,810 $100,655
-------- -------- -------- --------
Loans originated:
Real estate loans:
Residential..................... 61,030 83,551 63,030 64,912
Construction.................... 22,385 29,569 23,341 23,153
Agricultural.................... 2,402 1,023 692 798
Commercial...................... -- 1,481 1,202 3,419
Consumer and other loans......... 3,957 5,270 4,366 5,147
-------- -------- -------- --------
Total loans originated........ 89,774 120,894 92,631 97,429
-------- -------- -------- --------
Loans purchased:
Real estate loans:
Residential..................... 88 25 25 43
Construction.................... -- -- -- --
Agricultural.................... -- -- -- --
Commercial...................... -- -- -- --
Consumer and other loans......... -- -- -- --
-------- -------- -------- --------
Total loans purchased......... 88 25 25 43
-------- -------- -------- --------
Loans sold:
Servicing retained............... (26,996) (21,219) (14,339) (20,377)
Servicing released............... (24,570) (48,550) (38,037) (26,030)
-------- -------- -------- --------
Total loans sold.............. (51,566) (69,769) (52,376) (46,407)
Loan principal repayments......... (26,199) (32,112) (25,138) (25,818)
Other(1).......................... (4,067) (7,193) (3,973) (7,305)
-------- -------- -------- --------
Change in total loans receivable.. 8,030 11,845 11,169 17,942
-------- -------- -------- --------
Total loans receivable
at end of period................. $ 88,810 $100,655 $ 99,979 $118,597
======== ======== ======== ========
- -----------
</TABLE>
(1) Consists of refinanced loans.
44
<PAGE>
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
$16.4 million at December 31, 1996.
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 $408,000 of net deferred loan
fees at December 31, 1996.
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 December 31, 1996,
the Bank was servicing $131.5 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. For a discussion of the
adoption SFAS No. 122, See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Comparison of Operating Results for the
Nine Months Ended December 31, 1995 and 1996 -- Non-interest Income." 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
December 31, 1996, the Bank held $734,000 in escrow for its portfolio of loans
serviced for others.
Delinquencies and Classified Assets
Delinquent Loans. When a mortgage loan borrower fails to make a
required payment when due, the Bank institutes collection procedures. During the
first three months of the term of a loan, 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 is reduced by the full amount of
accrued and uncollected interest.
45
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of SFAS No. 15 at
the dates indicated. It is the policy of the Bank to cease accruing interest on
loans more than 90 days past due.
<TABLE>
<CAPTION>
At March 31, At December 31,
----------------------
1995 1996 1996
------------- ------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential....................... $ 407 $ 399 $ 189
Construction...................... -- 194 789
Agricultural...................... -- -- --
Commercial........................ -- -- --
Consumer and other loans........... -- -- 28
------ ------ ------
Total........................... 407 593 1,006
------ ------ ------
Accruing loans which are
contractually
past due 90 days or more:
Real estate loans:
Residential....................... 4 97 --
Construction...................... 119 -- --
Agricultural...................... -- -- --
Commercial........................ -- -- --
Consumer and other loans........... 2 2 --
------ ------ ------
Total........................... 125 99 --
------ ------ ------
Total of nonaccrual and 90 days past
due loans.......................... 532 692 1,006
Real estate owned.................... -- 76 196
------ ------ ------
Total nonperforming assets........ $ 532 $ 768 $1,202
====== ====== ======
Restructured loans................... $3,333 $1,760 $1,746
Nonaccrual and 90 days or more past
due loans as a percentage of net
loans............................. 0.64% 0.74% 0.91%
Nonaccrual and 90 days or more past
due loans as a percentage of total
assets............................ 0.51 0.53 0.76
Total nonperforming assets to
total assets....................... 0.51 0.59 0.90
</TABLE>
Interest income that would have been recorded for the year ended March
31, 1996 and the nine months ended December 31, 1996 had nonaccruing loans been
current in accordance with their original terms amounted to approximately
$24,000 and $59,000, respectively. The amount of interest included in interest
income on such loans for the year ended March 31, 1996 and the nine months
ended December 31, 1996 amounted to approximately $64,000 and $33,000,
respectively.
46
<PAGE>
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 fair market value. Subsequent to foreclosure, REO is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At December 31, 1996, the Bank had $196,000 of REO, which
consisted of two building lots and one single family residence.
Asset Classification. The OTS 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, OTS 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 Bank.
At December 31, 1996, classified assets totalled $2.4 million. Assets
classified as loss totalled $16,000 and consisted of one construction loan in
the amount of $10,000 and overdrawn NOW accounts totalling $6,000. Assets
classified as substandard totalled $1.7 million and consisted of REO totalling
$196,000, one consumer loan in the amount of $5,000, five construction loans
totalling $736,000, 11 residential real estate loans totalling and $699,000 and
overdrawn NOW accounts totalling $35,000. Assets designated as special mention
totalled $753,000 and consisted of five residential real estate loans totalling
$191,000, two agricultural real estate loans totalling $548,000 and one consumer
loan in the amount of $14,000. The aggregate amounts of the Bank's classified
assets at the dates indicated were as follows:
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------
1995 1996 1996
------ ------ --------
<S> <C> <C> <C>
(In Thousands)
Loss...................... $ 4 $ 2 $ 16
Doubtful.................. -- -- --
Substandard............... 846 1,219 1,671
Special mention........... 246 342 753
------ ------ ------
Total classified assets.. $1,096 $1,563 $2,440
====== ====== ======
</TABLE>
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.
47
<PAGE>
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. 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 December 31, 1996, the Bank had an allowance for loan losses of
$880,000. 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 may adversely affect the Bank's financial
condition and results of operations.
48
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses at and for the periods 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.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
-------------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period.. $ 530 $ 555 $ 555 $ 701
Provision for loan losses(1)...... 28 150 78 194
Recoveries........................ -- -- -- --
Charge-offs:
Real estate loans:
Residential.................... -- -- -- 14
Construction................... -- -- -- --
Agricultural................... -- -- -- --
Commercial..................... -- -- -- --
Consumer and other loans........ 3 4 2 1
----- ----- ----- -----
Total charge-offs............ 3 4 2 15
----- ----- ----- -----
Net charge-offs.............. 3 4 2 15
----- ----- ----- -----
Balance at end of period..... $ 555 $ 701 $ 631 $ 880
===== ===== ===== =====
Ratio of allowance to total
loans outstanding
at the end of the period......... 0.62% 0.70% 0.63% 0.74%
Ratio of net charge-offs to
average loans outstanding
during the period................ -- -- -- 0.01%
- -----------
</TABLE>
(1) See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Comparison of Operating Results for the Nine Months Ended
December 31, 1995 and 1996 -- Provisions for Loan Losses" and "-- Comparison
of Operating Results for the Years Ended March 31, 1995 and 1996 --
Provisions for Loan Losses" for a discussion of the factors responsible for
changes in the Bank's provision for loan losses between the periods.
49
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. 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.
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------------------------------
1995 1996 1996
----------------- ------------------ ------------------
% of % of % of
Loans in Loans in Loans in
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential............. $117 60.02% $375 62.41% $304 61.26%
Construction............ 136 13.80 135 13.74 206 12.60
Agricultural............ 119 13.39 119 11.87 191 10.01
Commercial.............. 108 5.71 -- 4.01 100 5.07
Consumer and other loans.. 75 7.08 72 7.97 79 11.06
---- ------ ---- ------ ----- ------
Total allowance for
loan losses.......... $555 100.00% $701 100.00% $880 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
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. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets. See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
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. At December 31, 1996, all of the Bank's investments were classified as
held to maturity.
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
50
<PAGE>
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's
investment policy does not permit engaging directly in hedging activities or
purchasing 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.
Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage-backed securities only during times of
reduced loan demand. Because the Bank has experienced strong loan demand in
recent years, it has not purchased any mortgage-backed securities recently.
However, the Bank has entered into a commitment to purchase $1.6 million of a
collateralized mortgage obligation ("CMO") to be issued and guaranteed by the
Idaho Housing Authority. This purchase, which is expected to occur in June 1997,
will be funded through an advance from the FHLB-Seattle pursuant to its
Community Investment Program. The CMO will represent an interest in a loan
secured by a low-income, multi-family housing project located in Lewiston.
The following table sets forth the composition of the Bank's
investment and mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------------------------------------
1995 1996 1996
---------------------- ---------------------- ---------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Mutual funds................. $ 1,289 11.87% $ 1,328 9.25% $ -- --%
Held to maturity:
U.S. Government and federal
agency obligations......... 6,732 61.98 10,545 73.43 5,189 68.89
Mortgage-backed securities... 2,840 26.15 2,488 17.32 2,343 31.11
------- ------ ------- ------ ------ ------
Total held to maturity.. 9,572 88.13 13,033 90.75 7,532 100.00
Total.................... $10,861 100.00% $14,361 100.00% $7,532 100.00%
======= ====== ======= ====== ====== ======
</TABLE>
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 December 31, 1996.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal
agency obligations......... $500 5.64% $4,689 6.21% $-- --% $ -- --%
Mortgage-backed securities... 7 7.12 14 7.06 -- -- 2,322 6.02
---- ------ ------
Total.................... $507 5.66 $4,703 6.21 -- -- $2,322 6.02
==== ====== ======
</TABLE>
51
<PAGE>
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. Presently, the
Bank has no other borrowing arrangements.
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 the States 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 does not accept brokered deposits, nor has it
aggressively sought jumbo certificates of deposit, although the Bank has in the
past accepted brokered certificates of deposit. At December 31, 1996, the Bank
had one brokered deposit in the amount of $1.1 million. At December 31, 1996,
certificates of deposit that are scheduled to mature in less than one year
totalled $49.2 million. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
The Bank currently offers certificates of deposit for terms not exceeding
60 months. As a result, the Bank believes that it is better able to match the
repricing of its liabilities to the repricing of its loan portfolio. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability Management."
In the unlikely event the Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts prior to
any payment being made to the Holding Company, as the sole stockholder of the
Bank.
52
<PAGE>
The following table sets forth information concerning the Bank's deposits at
December 31, 1996.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
- ------------- ------ ----------------------------- ------ ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1.23% -- NOW $ -- $ 15,211 14.44%
3.00 -- Money Market Deposit -- 13,456 12.77
3.03 -- Passbook -- 7,428 7.05
Certificates of Deposit
-----------------------------
4.25 7 days to 179 days Fixed term, fixed rate 2,500 5,306 5.04
5.46 11 months special/non-renewable Fixed term, fixed rate 500 2,979 2.83
5.27 6 months to less than 1 year Fixed term, fixed rate 1,000 14,577 13.84
5.58 14 months special/non-renewable Fixed term, fixed rate 500 4,856 4.61
5.29 1 year to less than 2 years Fixed term, fixed rate 500 8,237 7.82
5.75 27 months special/non-renewable Fixed term, fixed rate 500 1,646 1.56
6.20 2 years to less than 3 years Fixed term, fixed rate 500 15,151 14.38
5.96 New 2 years to 5 years - add on Fixed term, fixed rate 100 4,530 4.30
5.65 3 years to less than 4 years Fixed term, fixed rate 500 2,578 2.45
5.85 4 years to less than 5 years Fixed term, fixed rate 500 1,229 1.16
6.09 5 years to less than 10 years Fixed term, fixed rate 500 7,239 6.87
5.45 IRA Variable Fixed term, adjustable rate -- 926 0.88
-------- ------
Total $105,349 100.00%
======== ======
</TABLE>
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of December 31, 1996. Jumbo
certificates of deposit are certificates in amounts of $100,000 or more.
<TABLE>
<CAPTION>
Maturity Period Amount
- --------------- ----------
(In Thousands)
<S> <C>
Three months or less $4,029
Over three through six months 2,032
Over six through 12 months 1,767
Over 12 months 1,558
------
Total jumbo certificates
of deposit $9,386
======
</TABLE>
53
<PAGE>
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 dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
------------------------------------------------- ------------------------------
1995 1996 1996
----------------- ------------------------------ ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------- -------- -------- -------- ---------- -------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts......................... $13,146 14.81% $ 14,617 12.67% $ 1,471 $ 15,211 14.44% $ 594
Passbook accounts.................... 15,610 17.58 13,861 12.02 (1,749) 13,456 12.77 (405)
Money market deposit accounts........ 8,932 10.06 7,167 6.21 (1,765) 7,428 7.05 261
Fixed-rate certificates which
mature:
Within 1 year...................... 13,506 15.21 52,692 45.69 39,186 49,235 46.74 (3,457)
After 1 year, but within 2 years... 16,621 18.72 16,329 14.16 (292) 12,240 11.62 (4,089)
After 2 years, but within 5 years.. 18,834 21.21 10,639 9.23 (8,195) 7,779 7.38 (2,860)
Certificates maturing thereafter... 2,138 2.41 19 .02 (2,119) -- -- (19)
------- ------ -------- ------ ------- -------- ------ -------
Total........................... $88,787 100.00% $115,324 100.00% $26,537 $105,349 100.00% $(9,975)
======= ====== ======== ====== ======= ======== ====== =======
</TABLE>
54
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits in
the Bank categorized by rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------------
1995 1996 1996
------ ------ ---------------
(In Thousands)
<S> <C> <C> <C>
3.20 - 4.19%... $ 5,798 $ 1,786 $ 1,079
4.20 - 5.19%... 16,001 13,854 24,586
5.20 - 6.19%... 18,689 50,332 32,929
6.20 - 7.19%... 6,674 10,300 9,752
7.20 - 8.19%... 3,349 2,814 453
8.20 - 11.19%.. 588 593 455
------- ------- -------
Total.......... $51,099 $79,679 $69,254
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time deposits at
December 31, 1996.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
3.20 - 4.19%... $ 1,079 $ -- $ -- $ -- $ -- $ 1,079 1.55%
4.20 - 5.19%... 24,176 409 1 -- -- 24,586 35.50
5.20 - 6.19%... 14,897 11,029 4,796 793 1,414 32,929 47.55
6.20 - 7.19%... 9,075 677 -- -- -- 9,752 14.08
7.20 - 8.19%... -- 110 230 3 110 453 0.66
8.20 - 11.19%.. 8 15 432 -- -- 455 0.66
------- ------- ------ ------ ------- ------- ------
Total.......... $49,235 $12,240 $5,459 $796 $1,524 $69,254 100.00%
======= ======= ====== ====== ======= ======= ======
</TABLE>
55
<PAGE>
Deposit Activity. The following table sets forth the deposit activities of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
--------------------- -------------------
1995 1996 1995 1996
---------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Beginning balance........... $91,858 $ 88,787 $ 88,787 $115,324
------- -------- -------- --------
Net increase (decrease)
before interest credited.. (6,557) 21,769 27,175 (13,699)
Interest credited........... 3,486 4,768 3,343 3,724
------- -------- -------- --------
Net increase (decrease)
in savings deposits....... (3,071) 26,537 30,518 (9,975)
------- -------- -------- --------
Ending balance.............. $88,787 $115,324 $119,305 $105,349
======= ======== ======== ========
</TABLE>
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 20% of total assets. The Bank intends to
increase the amount of its FHLB advances in order to fund certain investments as
part of its asset/liability management. See "FIRSTBANK NORTHWEST"
The following tables sets forth certain information regarding borrowings by
the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or For the Nine
At or For the Months Ended
Year Ended March 31, December 31,
--------------------- ----------------
1995 1996 1995 1996
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Maximum amount of FHLB
advances outstanding
at any month end during
the period.............. $4,900 $9,688 $9,688 $15,060
Approximate average FHLB
advances
outstanding during the
period.................. 1,150 4,862 5,696 8,272
Balance of FHLB advances
outstanding
at end of period......... 4,000 2,304 2,467 15,060
Weighted average rate paid
on
FHLB advances at end of
period.................. 6.74% 6.03% 6.04% 6.06%
Approximate weighted
average rate paid on
FHLB advances during the
period.................. 6.68% 6.19% 6.25% 5.94%
</TABLE>
56
<PAGE>
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. 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.
Subsidiary Activities
The Bank has one subsidiary, Tri-Star Financial Corporation, which was
created in 1985 and whose activities consist primarily of selling life insurance
and tax deferred annuities on an agency basis. At December 31, 1996, the Bank's
equity investment in its subsidiary was $20,000.
Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that any amount in excess of 2% is used
primarily for community, inner-city and community development projects. The
Bank's investment in its subsidiary did not exceed these limits at
December 31, 1996.
Personnel
As of December 31, 1996, the Bank had 75 full-time and eight 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.
Legal Proceedings
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. In the opinion of management, the Bank is 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 Bank.
Properties
The Bank operates five full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville and Coeur d'Alene, Idaho, all of which it owns.
The Bank also operates one loan production office in Lewiston and one in Coeur
d'Alene, Idaho, which is located in the same facility as its full-service
office. 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 December 31,
1996, the net book value of the properties (including land and buildings) and
the Bank's fixtures, furniture and equipment was $4.8 million.
57
<PAGE>
<TABLE>
<CAPTION>
Net Book Value Deposits
Location Year Acquired at December 31, 1996 at December 31, 1996
- -------- ------------- -------------------- --------------------
(In Thousands)
<S> <C> <C> <C>
Administrative Office
- ---------------------
920 Main Street 1978 $ 213,000 N/A
Lewiston, Idaho 83501
Full-Service Office
- -------------------
921 F Street 1960 123,000 $40,119
Lewiston, Idaho 83501
444 Thain Road 1974 63,000 16,161
Lewiston, Idaho 83501
201 S. Jackson Street 1989 437,000 28,329
Moscow, Idaho 83843
108 S. Mill Street 1977 47,000 10,607
Grangeville, Idaho 83530
1233 Northwood Center Court 1995 1,738,000 10,132
Coeur d'Alene, Idaho 83814
Residential Loan Centers
- ------------------------
1233 Northwood Center Court 1995 -- N/A
Coeur d'Alene, Idaho 83814
108 10th Street 1978 -- N/A
Lewiston, Idaho 83501
Other
- -----
unimproved lot 1993 336,000 N/A
Coeur d'Alene, Idaho
</TABLE>
58
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company consists of seven persons
divided into three classes, each of which contains approximately one third of
the Board. The Directors shall be elected by the stockholders of the Holding
Company for staggered three-year terms, or until their successors are elected
and qualified. One class of Directors, consisting of Messrs. William J. Larson
and Larry K. Moxley, has a term of office expiring at the first annual meeting
of stockholders, a second class, consisting of Messrs. James N. Marker and
Robert S. Coleman, Sr., has a term of office expiring at the second annual
meeting of stockholders, and a third class, consisting of Messrs. Clyde E.
Conklin, W. Dean Jurgens and Steve R. Cox, has a term of office expiring at the
third annual meeting of stockholders. The executive officers of the Holding
Company are elected annually and hold office until their respective successors
have been elected and qualified or until death, resignation or removal by the
Board of Directors.
The following individuals hold the offices set forth opposite their names
below.
Name Position held with Holding Company
---- ----------------------------------
Clyde E. Conklin President and Chief Executive Officer
Larry K. Moxley Executive Vice President, Chief Financial Officer
and Corporate Secretary
Cynthia M. Moore Controller and Assistant Corporate Secretary
Since the formation of the Holding Company, none of the executive officers,
directors or other personnel has received remuneration from the Holding Company.
Information concerning the principal occupations, employment and compensation of
the directors and executive officers of the Holding Company during the past five
years is set forth under "MANAGEMENT OF THE BANK -- Biographical Information."
MANAGEMENT OF THE BANK
Directors and Executive Officers
The Board of Directors of the Bank is presently composed of seven members
who are elected for terms of three years, approximately one third of whom are
elected annually in accordance with the Bylaws of the Bank. The Board of
Directors of the Bank following the Stock Conversion will be composed of nine
members and will include all of the current Directors of the Bank plus Messrs.
Conklin and Moxley. The executive officers of the Bank are elected annually by
the Board of Directors and serve at the Board's discretion. The following table
sets forth information with respect to the Directors and executive officers of
the Bank.
Directors
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Bank Since Expires
- ---- ------- ------------------ -------- -------
<S> <C> <C> <C> <C>
Steve R. Cox 50 Chairman 1986 2000
James N. Marker 60 First Vice Chairman 1974 1999
Robert S. Coleman, Sr. 69 Second Vice Chairman 1978 1999
Dr. L. Glen Carlson 73 Director 1977 1998
William J. Larson 66 Director 1973 1998
F. Ron McMurray 56 Director 1986 1999
W. Dean Jurgens 64 Director 1969 2000
</TABLE>
59
<PAGE>
Executive Officers
<TABLE>
<CAPTION>
Name Age (1) Position with Bank
- ---- ------- ------------------
<S> <C> <C>
Clyde E. Conklin 45 Chief Executive Officer
Larry K. Moxley 46 Chief Financial Officer and Secretary/Treasurer
Terence A. Otte 40 Vice President, Agricultural and Consumer Lending
Donn L. Durgan 42 Vice President, Residential Lending
Douglas R. Ax 41 Vice President, Commercial Lending
- ---------------------
</TABLE>
(1) As of December 31, 1996.
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Bank. Unless otherwise stated, each Director and
executive officer has held his current occupation for the last five years.
Steve R. Cox is the President and a shareholder of Randall, Blake & Cox,
P.A., a law firm in Lewiston, Idaho, and is a non-practicing certified public
accountant.
James N. Marker is general manager and part owner of Idaho Truck Sales Co.,
Inc., a heavy duty truck dealership.
Robert S. Coleman, Sr., a retired businessman, is the former President and
co-owner of Coleman Oil, Co., a petroleum distributor.
Dr. L. Glen Carlson, a native of the area, is a retired dentist. He
developed the Bryden Canyon Center, a complex of medical and dental offices. Dr.
Carlson is trustee of family owned farmland at Nez Perce, Idaho.
William J. Larson is a partner in the Quality Inn and Convention Center in
Clarkston, Washington and other various real estate development projects. Prior
to 1993, he was a partner in Houser & Son, Inc., a livestock and farming
operation.
F. Ron McMurray has been the manager of Inland 465, a warehouse
distribution center, since 1994. From 1990 to 1994, Mr. McMurray was the manager
of the Port of Lewiston, a municipal corporation. Prior to that time, Mr.
McMurray was the owner and operator of Fairley's Flowers, a flower and gift
store.
W. Dean Jurgens is the President and part owner of Jurgens & Co., P.A.,
certified public accountants.
Clyde E. Conklin, who joined the Bank in 1987, has served as the Chief
Executive Officer of the Bank since February 1996. 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 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 served as Senior Vice President - Finance from 1993 to February 1996
and as Vice President - Finance from 1984 to 1993.
Terence A. Otte joined the Bank in June 1989 as an Agricultural Loan
Officer. From 1991 to 1994, he served as manager of the Bank's Moscow, Idaho
branch. In 1994 he became Vice President-Lending and
60
<PAGE>
Agricultural Lending Manager and in 1996 became Vice President, Agricultural and
Consumer Lending and Compliance Officer.
Donn L. Durgan, who joined the Bank in February 1996, currently serves as
Vice President, Residential Lending. Prior to that time, Mr. Durgan was employed
by First Security Bank for 11 years in various positions in commercial and
residential real estate lending.
Douglas R. Ax, who joined the Bank in January 1997, currently serves as
Vice President, Commercial Lending. Prior to that time, Mr. Ax was employed by
West One Bank (which became U.S. Bank) for over nine years in various positions
in commercial lending, most recently as a Vice President and Commercial Loan
Officer.
Meetings and Committees of the Board of Directors
The business of the Bank is conducted through meetings and activities of
the Board of Directors and its committees. During the fiscal year ended March
31, 1996, the Board of Directors held 20 meetings. No director attended fewer
than 75% of the total meetings of the Board of Directors and of committees on
which such director served.
The Audit Committee, consisting of the entire Board of Directors, meets
with the Bank's outside auditor to discuss the results of the annual audit. The
Audit Committee met one time during the fiscal year ended March 31, 1996 .
Directors' Compensation
Directors currently receive an annual retainer of $10,600. The Chairman of
the Board receives an additional $6,000 annually. In December 1996, when the
current compensation for directors was established, the Board determined to pay
Mr. Larson and Mr. Jurgens, who each previously served as Chairman of the Board,
$15,000 and $50,000, respectively. These amounts represent the difference
between the $6,000 annual fee currently paid to the Chairman and the $1,000
annual fee previously paid, multiplied by the number of years each person served
as Chairman of the Board. In addition, Mr. Cox was awarded an additional $10,000
in recognition of the additional time devoted and responsibility assumed during
1996. It is currently anticipated that, after completion of the Conversion,
directors' fees will continue to be paid by the Bank and no separate fees will
be paid for service on the Board of Directors of the Holding Company. Employee
directors of the Bank will receive an annual retainer of $8,480.
Executive Compensation
Summary Compensation Table. The following information is furnished for the
Chief Executive Officer of the Bank for the year ended March 31, 1997. No other
executive officers of the Bank received salary and bonus in excess of $100,000
during the year ended March 31, 1997.
61
<PAGE>
<TABLE>
Annual Compensation(1)
------------------------------------------------
Name and Other Annual All Other
Position Year Salary($) Bonus($) $Compensation($)(2) Compensation($)(3)
- -------- ---- --------- -------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
Clyde E. Conklin 1997 $75,500 $24,842 -- 3,011
Chief Executive
Officer
</TABLE>
- ---------------------------------------
(1) Compensation information for fiscal years ended March 31, 1996 and 1995 has
been omitted as the Bank was not a public company nor a subsidiary thereof
at such time.
(2) The aggregate amount of perquisites and other personal benefits was less
than 10% of the total annual salary and bonus reported.
(3) Includes employer contribution to 401(k) plan.
Employment Agreements. In connection with the Conversion, the Holding
Company and the Bank (collectively, the "Employers") will enter into three-year
employment agreements with Mr. Conklin and Mr. Moxley. Under the agreements the
initial salary level for Mr. Conklin will be $88,000 and for Mr. Moxley will be
$85,000, which amounts will be paid by the Bank and may be increased at the
discretion of the Board of Directors or an authorized committee of the Board.
On each anniversary of the commencement date of the agreements, the term of the
agreements may be extended for an additional year. The agreements are
terminable by the Employers at any time, or by Mr. Conklin or Mr. Moxley if
either executive is assigned duties inconsistent with his initial position,
duties, responsibilities and status, or upon the occurrence of certain events
specified by federal regulations. In the event that an executive's employment
is terminated without cause or upon the executive's voluntary termination
following the occurrence of an event described in the preceding sentence, the
Bank would be required to honor the terms of the agreement for a period of one
year, including payment of current cash compensation and continuation of
employee benefits.
The employment agreements provide for severance payments and other benefits
in the event of involuntary termination of employment in connection with any
change in control of the Employers. Severance payments also will be provided on
a similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, the executive is assigned duties inconsistent
with his position, duties, responsibilities and status immediately prior to such
change in control. The term "change in control" is defined in the agreement as
having occurred when, among other things, (a) a person other than the Holding
Company purchases shares of Common Stock pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities of the Holding Company representing 25% or more of the
combined voting power of the Holding Company's then outstanding securities, (c)
the membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
The severance payment from the Employers will equal three times the
executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within ten
business days following the termination of employment. Assuming these
agreements had been entered into and that a change in control had occurred at
December 31, 1996, Mr. Conklin and Mr. Moxley would be entitled to severance
payments of approximately $216,000 and $234,000, respectively. Section 280G of
the Internal Revenue Code of 1986, as amended ("Code"), states that severance
payments which equal or exceed three times the base compensation of the
individual for the most recently completed five taxable years are deemed to be
"excess parachute payments" if they are contingent upon a change in control.
Individuals receiving excess parachute payments are subject to a 20% excise tax
on the amount of such excess payments, and the Employers would not be entitled
to deduct the amount of such excess payments.
62
<PAGE>
The agreement restricts the executive's right to compete against the
Employers for a period of one year from the date of termination of the agreement
if he voluntarily terminates employment, except in the event of a change in
control.
The Board of Directors of the Holding Company or the Bank may, from time to
time, also enter into employment or severance agreements with other senior
executive officers.
Salary Continuation Agreements. The Bank has entered into salary
continuation agreements with Messrs. Conklin and Moxley as an incentive to
ensure their continued employment with the Bank and to provide an additional
source of retirement income. Under the agreements, Messrs. Conklin and Moxley
would receive lifetime benefits of $4,583 and $4,375 per month, respectively,
upon retirement at or after attaining age 60. The monthly benefit would be
reduced proportionately in accordance with a specified vesting schedule in the
event of the executive's termination of employment prior to age 60. The
agreements also provide for payment of a reduced benefit in the event of an
executive's disability and a lump sum death benefit in the event of the
executive's death while employed by the Bank. In the event of a change in
control of the Bank, the agreements provide that the executive would be entitled
to a lump sum payment based on the executive's vested benefit when the change in
control occurred. The Bank has purchased life insurance on Messrs. Conklin and
Moxley to informally fund the Bank's obligations under the salary continuation
agreements funded by a single premium annuity in 1995.
Benefits
General. The Bank currently pays the premiums for medical, dental, life and
disability insurance benefits for full-time employees, subject to certain
deductibles.
401(k) Plan. The Bank maintains a 401(k) Plan (the "401(k) Plan") for the
benefit of eligible employees of the Bank. The 401(k) Plan is intended to be a
tax-qualified plan under Sections 401(a) and 401(k) of the Code. Employees of
the Bank who have completed 1,000 hours of service during 12 consecutive months
and who have attained age 21 are eligible to participate in the 401(k) Plan.
Participants may contribute a portion of their annual compensation to the 401(k)
Plan through a salary reduction election in an amount not in excess of
applicable Code limits. The limit for 1997 is $9,500. The Bank matches 50% of
participant contributions up to a maximum of 6% of a participant's salary. In
addition to employer matching contributions, the Bank may contribute a
discretionary amount to the 401(k) Plan in any plan year which is allocated to
individual participants in the proportion that their annual compensation bears
to the total compensation of all participants during the plan year. To be
eligible to receive a discretionary employer contribution, the participant must
complete 1,000 hours of service during the plan year and remain employed by the
Bank on the last day of the plan year. Participants are at all times 100%
vested in salary reduction contributions. With respect to employer matching and
discretionary employer contributions, participants are 40% vested in such
contributions at the completion of their fourth year of service with full
vesting occurring after five years of service. For the fiscal year ended March
31, 1996, the Bank incurred total contribution-related expenses of $95,000 in
connection with the 401(k) Plan.
In general, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Conversion, participants will have the
opportunity to direct the investment of up to 100% of their vested account
balance to purchase shares of the Common Stock. A participant in the 401(k)
Plan who elects to purchase Common Stock in the Conversion through the 401(k)
Plan will receive the same subscription priority and be subject to the same
individual purchase limitations as if the participant had elected to make such
purchase using other funds. See "THE CONVERSION -- Limitations on Purchases of
Shares."
Employee Stock Ownership Plan. The Board of Directors has authorized the
adoption by the Bank of an ESOP for employees of the Bank to become effective
upon the completion of the Conversion. The ESOP is intended to satisfy the
requirements for an employee stock ownership plan under the Code and the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Full-
time employees of the Holding Company and the Bank
63
<PAGE>
who have been credited with at least 1,000 hours of service during a 12-month
period and who have attained age 19 will be eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Conversion, it is anticipated that the ESOP will borrow funds from the
Holding Company. Such loan will equal 100% of the aggregate purchase price of
the Common Stock. If, for any reason, the ESOP is unable to acquire 8% of the
Common Stock issued in the Conversion, it is anticipated that the ESOP will
acquire shares not obtained through the Offering in open market purchases. The
loan to the ESOP will be repaid principally from the Bank's contributions to the
ESOP and dividends payable on Common Stock held by the ESOP over the anticipated
seven-year term of the loan. However, the term of the loan may be extended as
part of the Bank's overall strategy for managing compensation expense. The
interest rate for the ESOP loan is expected to be the prime rate as published in
The Wall Street Journal on the closing date of the Conversion. See "PRO FORMA
DATA." In any plan year, the Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions.
Shares purchased by the ESOP with the proceeds of the loan will be held in a
suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will vest in their accrued benefits under the ESOP upon the
completion of five years of service. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Bank's contributions to the ESOP are not fixed, so benefits
payable under the ESOP cannot be estimated.
It is anticipated that officers and/or directors of the Bank will be
appointed by the Board of Directors of the Bank to serve as trustees of the
ESOP. Under the ESOP, the trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of plan participants and allocated
shares for which no instructions are received must be voted in the same ratio on
any matter as those shares for which instructions are given.
Pursuant to SOP 93-6, the Bank will record compensation expense in an amount
equal to the fair value of shares committed to be released to employees from the
ESOP and will exclude unallocated shares from earnings per share computations.
The effect of SOP 93-6 on net income and earnings per share in future periods
cannot be predicted due to the uncertainty of the fair value of the shares at
the time they will be committed to be released.
If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease. However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.
The ESOP will be subject to the requirements of ERISA and the regulations of
the IRS and the Department of Labor issued thereunder. The Bank intends to
request a determination letter from the IRS regarding the tax-qualified status
of the ESOP. Although no assurance can be given that a favorable determination
letter will be issued, the Bank expects that a favorable determination letter
will be received by the ESOP.
Stock Option Plan. The Board of Directors of the Holding Company intends to
adopt the Stock Option Plan and to submit the Stock Option Plan to the
stockholders for approval at a meeting held no earlier than six months following
consummation of the Stock Conversion. Under current OTS regulations, the
approval of a majority
64
<PAGE>
vote of the Holding Company's outstanding shares is required prior to the
implementation of the Stock Option Plan within one year of the consummation of
the Stock Conversion. The Stock Option Plan will comply with all applicable
regulatory requirements. However, the Stock Option Plan will not be approved or
endorsed by the OTS.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as a incentive to contribute to the success of the Holding Company and
the Bank, and to reward officers and key employees for outstanding performance.
The Stock Option Plan will provide for the grant of incentive stock options
("ISOs") intended to comply with the requirements of Section 422 of the Code and
for nonqualified stock options ("NQOs"). Upon receipt of stockholder approval
of the Stock Option Plan, stock options may be granted to key employees of the
Holding Company and its subsidiaries, including the Bank. Unless sooner
terminated, the Stock Option Plan will continue in effect for a period of ten
years from the date the Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Stock Conversion will be
reserved for future issuance under the Stock Option Plan (172,500 shares based
on the issuance of 1,725,000 shares at the maximum of the Estimated Valuation
Range). Shares acquired upon exercise of options will be authorized but
unissued shares or treasury shares. In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of Common
Stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted by the
Committee to reflect the increase or decrease in the total number of shares of
Common Stock outstanding.
The Stock Option Plan will be administered and interpreted by a committee of
the Board of Directors ("Committee"). Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Stock Conversion, (i) no officer or
employee could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30%, of the number of
shares reserved for issuance under the Stock Option Plan.
It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant. Under OTS regulations, if
the Stock Option Plan is implemented within the first year following
consummation of the Stock Conversion, the minimum vesting period will be five
years. All unvested options will be immediately exercisable in the event of the
recipient's death or disability. Unvested options will also be exercisable
following a change in control (as defined in the Stock Option Plan) of the
Holding Company or the Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that, if the
Stock Option Plan is implemented prior to the first anniversary of the Stock
Conversion, vesting may not be accelerated upon a change in control of the
Holding Company or the Bank.
Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
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nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
permitted by applicable regulations. The size of individual awards will be
determined prior to submitting the Stock Option Plan for stockholder approval,
and disclosure of anticipated awards will be included in the proxy materials for
such meeting.
Management Recognition Plan. Following the Stock Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Bank,
subject to shareholder approval. The MRP will enable the Holding Company and
the Bank to provide participants with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Bank. The MRP will comply with all applicable regulatory requirements.
However, the MRP will not be approved or endorsed by the OTS.
Under current OTS regulations, the approval of a majority vote of the
Holding Company's outstanding shares is required prior to the implementation of
the MRP within one year of the consummation of the Stock Conversion.
The MRP expects to acquire a number of shares of Common Stock equal to 4% of
the Common Stock issued in connection with the Stock Conversion (69,000 shares
based on the issuance of 1,725,000 shares in the Stock Conversion at the maximum
of the Estimated Valuation Range). Such shares will be acquired on the open
market, if available, with funds contributed by the Holding Company or the Bank
to a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized but unissued shares or treasury shares of the
Holding Company.
A committee of the Board of Directors of the Holding Company will administer
the MRP, the members of which will also serve as trustees of the MRP Trust, if
formed. The trustees will be responsible for the investment of all funds
contributed by the Holding Company or the Bank to the MRP Trust. The Board of
Directors of the Holding Company may terminate the MRP at any time and, upon
termination, all unallocated shares of Common Stock will revert to the Holding
Company.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant. During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust. Under OTS regulations, if
the Stock Option plan is implemented within the first year following
consummation of the Stock Conversion, the minimum vesting period will be five
years. All unvested MRP awards will vest in the event of the recipient's death
or disability. Unvested MRP awards will also vest following a change in control
(as defined in the MRP) of the Holding Company or the
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Bank to the extent authorized or not prohibited by applicable law or
regulations. OTS regulations currently provide that, if the MRP is implemented
prior to the first anniversary of the Stock Conversion, vesting may not be
accelerated upon a change in control of the Holding Company or the Bank.
A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount. Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
permitted by applicable regulations. Under current OTS regulations, if the MRP
is implemented within one year of the consummation of the Stock Conversion, (i)
no officer or employee could receive an award of options covering in excess of
25%, (ii) no nonemployee director could receive in excess of 5% and (iii)
nonemployee directors, as a group, could not receive in excess of 30%, of the
number of shares reserved for issuance under the MRP. The size of individual
awards will be determined prior to submitting the MRP for stockholder approval,
and disclosure of anticipated awards will be included in the proxy materials for
such meeting.
Transactions with the Bank
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and must not involve more than the
normal risk of repayment or present other unfavorable features. The Bank is
therefore prohibited from making any new loans or extensions of credit to the
Bank's executive officers and directors at different rates or terms than those
offered to the general public and has adopted a policy to this effect. In
addition, loans made to a director or executive officer in an amount that, when
aggregated with the amount of all other loans to such person and his or her
related interests, are in excess of the greater of $25,000, or 5% of the Bank's
capital and surplus (up to a maximum of $500,000) must be approved in advance by
a majority of the disinterested members of the Board of Directors. See
"REGULATION -- Federal Regulation of Savings Associations -- Transactions with
Affiliates." The aggregate amount of loans by the Bank to its executive
officers and directors was $436,000 at December 31, 1996, or approximately 1.7%
of pro forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range).
REGULATION
General
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition
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to obtaining regulatory approvals prior to entering into certain transactions
such as mergers with, or acquisitions of, other financial institutions. There
are periodic examinations by the OTS and the FDIC to review the Bank's
compliance with various regulatory requirements. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Bank and its operations.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury. The
OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner. The Bank, as a member
of the FHLB-Seattle, is required to acquire and hold shares of capital stock in
the FHLB-Seattle in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or (ii) 1/20 of
its advances (i.e., borrowings) from the FHLB-Seattle. The Bank is in
compliance with this requirement with an investment in FHLB-Seattle stock of
$929,000 at December 31, 1996. Among other benefits, the FHLB-Seattle provides
a central credit facility primarily for member institutions. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB-
Seattle.
Federal Deposit Insurance Corporation. 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 BIF and the SAIF. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over the Bank.
The Bank's accounts are insured by the SAIF to the maximum extent permitted
by law. The Bank pays deposit insurance premiums based on a risk-based
assessment system established by the FDIC. Under applicable regulations,
institutions are assigned to one of three capital groups that are based solely
on the level of an institution's capital -- "well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with
rates that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the FDIC
imposed a special assessment on each depository institution with SAIF-assessable
deposits which resulted in the SAIF achieving its designated reserve ratio. In
connection therewith, the FDIC reduced the assessment schedule for SAIF members,
effective January 1, 1997, to a range of 0% to 0.27%, with most institutions,
including the Bank, paying 0%. This assessment schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of .065% of SAIF-
assessable deposits for the purpose of paying interest on the obligations issued
by the Financing Corporation ("FICO") in the 1980s to help fund the
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thrift industry cleanup. BIF-assessable deposits will be charged an assessment
to help pay interest on the FICO bonds at a rate of approximately .013% until
the earlier of December 31, 1999 or the date upon which the last savings
association ceases to exist, after which time the assessment will be the same
for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the Deposit
Insurance Fund on January 1, 1999, but only if no insured depository institution
is a savings association on that date. The DIF Act contemplates the development
of a common charter for all federally chartered depository institutions and the
abolition of separate charters for national banks and federal savings
associations. It is not known what form the common charter may take and what
effect, if any, the adoption of a new charter would have on the operation of the
Bank.
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.
Liquidity Requirements. Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable accounts plus short-term borrowings.
Monetary penalties may be imposed for failure to meet liquidity requirements.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that
it regulates. The federal banking agencies have promulgated substantially
similar regulations to implement this system of prompt corrective action. Under
the regulations, an institution shall be deemed to be (i) "well capitalized" if
it has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-
based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is
not subject to specified requirements to meet and maintain a specific capital
level for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, has a Tier I risk-based capital ratio
of 4.0% or more, has a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, has a Tier I risk-based capital ratio that is less than 4.0% or has a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0%
or has a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a hearing,
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category if
the institution is in an unsafe or unsound condition or has received in its most
recent examination, and has not corrected, a less than satisfactory rating for
asset quality, management, earnings or liquidity. (The OTS may not, however,
reclassify a significantly undercapitalized institution as critically
undercapitalized.)
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
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within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.
At December 31, 1996, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
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 OTS 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. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. A savings institution that fails to become or remain a QTL shall
either convert to a national bank charter or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be able
to establish a branch office; (iii) the association shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three years
after the date on which the savings institution ceases to be a QTL, the savings
institution would be prohibited from retaining any investment or engaging in any
activity not permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date on
which a savings association controlled by a company ceases to be a QTL, the
company must register as a bank holding company and become subject to the rules
applicable to such companies. A savings institution may requalify as a QTL if
it thereafter complies with the QTL test.
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
December 31, 1996, the qualified thrift investments of the Bank were
approximately 82.3% of its portfolio assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
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preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. Institutions that
fail to meet the core capital requirement would be required to file with the OTS
a capital plan that details the steps they will take to reach compliance. In
addition, the OTS's prompt corrective action regulation provides that a savings
institution that has a leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. See "--Federal
Regulation of Savings Associations -- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined. Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by a
savings institution to one of four risk categories based on the amount of credit
risk associated with that particular class of assets. Assets not included for
purposes of calculating capital are not included in calculating risk-weighted
assets. The categories range from 0% for cash and securities that are backed by
the full faith and credit of the U.S. Government to 100% for repossessed assets
or assets more than 90 days past due. Qualifying residential mortgage loans
(including multi-family mortgage loans) are assigned a 50% risk weight.
Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets. Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its regulatory
capital rule. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
----
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A
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savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital.
See "HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE" for a table that sets
forth in terms of dollars and percentages the OTS tangible, core and risk-based
capital requirements, the Bank's historical amounts and percentages at December
31, 1996 and pro forma amounts and percentages based upon the assumptions stated
therein.
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
----
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association. Capital distributions in excess of such
amount require advance notice to the OTS. A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding this amount
require prior OTS approval. Tier 3 associations are savings associations with
capital below the minimum capital requirement (either before or after the
proposed capital distribution). Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units. At December 31, 1996, the Bank's limit on loans to one borrower
was $1.6 million. At December 31, 1996, the Bank's largest aggregate amount of
loans to one borrower was $1.8 million. See "BUSINESS OF THE BANK -- Lending
Activities -- Commercial Real Estate Lending."
Activities of Associations and Their Subsidiaries. A savings association
may establish operating subsidiaries to engage in any activity that the savings
association may conduct directly and service corporation
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subsidiaries to engage in certain preapproved activities or, with approval of
the OTS, other activities reasonably related to the activities of financial
institutions. When a savings association establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the association
controls, the savings association must notify the FDIC and the OTS 30 days in
advance and provide the information each agency may, by regulation, require.
Savings associations also must conduct the activities of subsidiaries in
accordance with existing regulations and orders.
The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Bank to an affiliate must
be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve, as is currently the case with respect to all FDIC-
insured banks.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation
O thereunder. Among other things, these regulations require that such loans be
made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Regulation O also places individual and aggregate limits on the amount of loans
the Bank may make to such persons based, in part, on the Bank's capital
position, and requires certain board approval procedures to be followed. The
OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.
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.
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Regulation of Washington Savings Banks
General. As a Washington-chartered, federally insured savings bank, the
Bank will be subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Bank will be regularly
examined by the FDIC and the Department.
State Regulation and Supervision. As a Washington-chartered savings bank,
the Bank will be subject to applicable provisions of Washington law and the
regulations of the Department adopted thereunder. Washington law and
regulations govern the 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 will be subject to
periodic examination and reporting requirements by and of the Department.
Deposit Insurance. The deposits of the Bank will continue to be insured up
to applicable limits by the SAIF. See "-- Federal Regulation of Savings
Associations -- Deposit Insurance."
Prompt Corrective Action. The Bank will be subject the prompt corrective
action regulations of the FDIC, which are substantially similar to those of the
OTS. See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
Standards for Safety and Soundness. The Bank will be subject to the FDIC's
standards for safety and soundness, which are substantially similar to those of
the OTS. See "-- Federal Regulations of Savings Associations -- Standards for
Safety and Soundness."
Capital Requirements. The FDIC's minimum capital standards applicable to
FDIC-regulated depository institutions require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100-200 basis points above
the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio
of not less than 4% for banks that are not highly rated or are anticipating or
experiencing significant growth.
Any insured bank with a Tier 1 capital to total assets ratio of less than
2% is deemed to be operating in an unsafe and unsound condition unless the
insured bank enters into a written agreement, to which the FDIC is a party, to
correct its capital deficiency. Insured banks operating with Tier 1 capital
levels below 2% (and which have not entered into a written agreement) are
subject to an insurance removal action and to the appointment of a receiver.
Insured banks operating with lower than the prescribed minimum capital levels,
generally will not receive approval of applications submitted to the FDIC. Also,
inadequately capitalized state nonmember banks will be subject to such
administrative action as the FDIC deems necessary.
FDIC regulations also require that banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital (which
is defined as Tier 1 capital and Tier 2 or supplementary capital) to risk-
weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%. In
determining the amount of risk-weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for loan and lease losses.
Allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25%
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of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of Tier 1 capital.
Net unrealized holding gains or losses on available for sale debt and equity
securities are not included when calculating core and risk-based capital ratios.
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.
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, the activities of which are limited to those
permissible to a subsidiary of a national bank, (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.
Dividends. The amount of dividends payable by the Bank to the Holding
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 Department.
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 Department. 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 Regulation
Holding Company Acquisitions. The HOLA and 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
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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 Holding Company generally is not subject to activity restrictions under the
HOLA. If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple 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.
Qualified Thrift Lender Test. The HOLA requires that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
Bank Holding Company Regulation
General. Upon consummation of the Charter Conversion, the Holding Company,
as the sole shareholder of the Bank, will become a bank holding company and will
register as such with the Federal Reserve. Bank holding companies are subject
to comprehensive regulation by the Federal Reserve under the BHCA and the
regulations of the Federal Reserve. As a bank holding company, the Holding
Company will be required to file with the Federal Reserve annual reports and
such additional information as the Federal Reserve may require and will be
subject to regular examinations by the Federal Reserve. The Federal Reserve
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institution, mortgage company,
finance company, credit card company or factoring company; performing certain
data processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of credit-
related insurance; leasing property on a full-payout, non-operating basis;
selling money orders, travelers' checks and United States Savings
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Bonds; real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Holding Company has no present plans to
engage in any of these activities.
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Riegle-Neal Act") was enacted
to ease restrictions on interstate banking. The Riegle-Neal Act allows the
Federal Reserve to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve may not approve the
acquisition of a bank that has not been in existence for the minimum time period
(not exceeding five years) specified by the statutory law of the host state.
The Riegle-Neal Act also prohibits the Federal Reserve from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Riegle-Neal Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Riegle-Neal Act.
Additionally, beginning on June 1, 1997, the federal banking agencies will
be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches
will be permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions will also
be subject to the nationwide and statewide insured deposit concentration amounts
described above.
The Riegle-Neal Act authorizes the applicable federal banking agency to
approve interstate branching de novo by national and state banks, but only in
states which specifically allow for such branching. The Riegle-Neal Act also
requires the appropriate federal banking agencies to prescribe regulations by
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. These
regulations must include guidelines to ensure that interstate branches operated
by an out-of-state bank in a host state are reasonably helping to meet the
credit needs of the communities which they serve.
Dividends. The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve may disapprove such a purchase or redemption if
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve. This notification
requirement does not apply to any company that meets the well-capitalized
standard for commercial banks, has a safety and soundness examination rating of
at least a "2" and is not subject to any unresolved supervisory issues.
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Capital Requirements. The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. The Federal Reserve regulations provide that
capital standards will generally be applied on a bank only (rather than a
consolidated) basis on the case of a bank holding company with less than $150
million in total consolidated assets. Assuming sales of Common Stock at the
minimum of the Estimated Valuation Range, the Holding Company's total
consolidated assets will not exceed $150 million. See "HISTORICAL AND PRO FORMA
CAPITAL COMPLIANCE" for a numerical presentation of the Holding Company's pro
forma capital based on the assumptions stated therein.
TAXATION
Federal Taxation
General. The Holding Company and the Bank will report their income on a
calendar year basis using the accrual method of accounting and will be subject
to federal income taxation in the same manner as other corporations with some
exceptions. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Holding Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank which
met certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrift") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been deducted
in arriving at their taxable income. The Bank's deductions with respect to
"qualifying real property loans," which are generally loans secured by certain
interest in real property, were computed using an amount based on the Bank's
actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
In August 1996, provisions repealing the current thrift bad debt rules were
enacted by Congress as part of "The Small Business Job Protection Act of 1996."
The new rules eliminate the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all institutions recapture all
or a portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such, the new
rules will have no effect on the net income or federal income tax expense. For
taxable years beginning after December 31, 1995, the Bank's bad debt deduction
will be determined under the experience method using a formula based on actual
bad debt experience over a period of years or, if the Bank is a "large" bank
(i.e., assets in excess of $500 million) on the basis of net charge-offs during
the taxable year. The new rules allow an institution to suspend bad debt
reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institution's average
residential lending activity for the six taxable years preceding 1996. For this
purpose, only home purchase or home improvement loans are included and the
institution can elect to have the tax years with the highest and lowest lending
activity removed from the average calculation. If an institution is permitted
to postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year. The unrecaptured base year reserves will not be subject
to recapture as long as the institution qualifies as a bank as defined by the
statue. In addition, the balance of the pre-1988 bad debt reserves continue to
be subject to provision of present law referred to below that require recapture
in the case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial
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or complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserves.
The amount of additional taxable income created from and Excess Distribution
is an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% federal corporate income tax rate. See
"REGULATION" and "DIVIDEND POLICY" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax
("AMT") is paid. Under President Clinton's 1998 budget proposal, the corporate
environmental income tax would be reinstated for taxable years beginning after
December 31, 1996 and before January 1, 2008.
Dividends-Received Deduction and Other Matters. The Holding Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Holding Company and the Bank will not file a
consolidated tax return, except that if the Holding Company or the Bank owns
more than 20% of the stock of a corporation distributing a dividend, then 80% of
any dividends received may be deducted.
There have not been any IRS audits of the Bank's federal income tax returns
during the past five years.
State Taxation
Idaho. The Holding Company and the Bank are subject to the general
corporate tax provisions of the State of Idaho. Idaho's state corporate income
taxes are generally determined under federal tax law with some modifications.
Idaho taxable income is taxed at a rate of 8%. These taxes are reduced by
certain credits, primarily the Idaho investment tax credit in the case of the
Bank.
Washington. To the extent that the Holding Company and the Bank conducts
business in the State of Washington, any related gross income is generally
subject to a business and occupation tax (gross receipts tax). Washington
allows a deduction from gross income for interest received on certain loans
secured by first trust deeds. The business and occupation tax rate for
financial business is 1.6%.
Delaware. As a Delaware holding company not earning income in Delaware, the
Holding Company is exempted from Delaware corporate income tax, but is required
to file an annual report with and pay an annual franchise tax to the State of
Delaware.
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THE CONVERSION
The OTS has given approval to the Plan subject to the Plan's approval by
the members of the Bank entitled to vote on the matter and subject to the
satisfaction of certain other conditions imposed by the OTS in its approval.
OTS approval, however, does not constitute a recommendation or endorsement of
the Plan.
General
On January 8, 1997, the Board of Directors of the Bank unanimously adopted
the Plan of Conversion, which was amended on March 12, 1997, pursuant to which
the Bank will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank and subsequently relocate its main office
to Clarkston, Washington and convert to a Washington-chartered savings bank.
All of the capital stock of the Bank will be held by the Holding Company, a
newly formed Delaware corporation. The following discussion of the Plan of
Conversion is qualified in its entirety by reference to the Plan of Conversion,
which is available from the Bank upon request. The OTS has approved the Plan of
Conversion subject to the Plan's approval by the members of the Bank entitled to
vote on the matter at a Special Meeting called for that purpose to be held on
June 23, 1997, and subject to the satisfaction of certain other conditions
imposed by the OTS in its approval.
The Stock Conversion will be accomplished through adoption of a Federal
Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank.
As part of the Stock Conversion, the Bank will transfer all of its newly issued
common stock (1,000 shares) to the Holding Company in exchange for 50% of the
net proceeds from the sale of Common Stock by the Holding Company. As soon as
practicable following the Stock Conversion, the Bank will relocate its main
office to Clarkston, Washington and consummate the Charter Conversion whereby it
will convert to a Washington-chartered savings bank. The main office relocation
will be accomplished by opening a full-service office in Clarkston, Washington
and designating that office as the Bank's main office. The Bank's
administrative offices will remain in their present location. In connection
with the Charter Conversion, the Holding Company anticipates becoming a bank
holding company under the BHCA.
The Plan of Conversion provides generally that: (i) the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank; (ii) the Common Stock will be offered by the Holding Company in
the Subscription Offering to persons having Subscription Rights and in the
Direct Community Offering to certain members of the general public, with
preference given to natural persons and trusts of natural persons residing in
the Local Community; (iii) if necessary, shares of Common Stock not subscribed
for in the Subscription and Direct Community Offering will be offered to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers pursuant to selected dealers agreements;
(iv) the Holding Company will purchase all of the capital stock of the Bank to
be issued in connection with the Stock Conversion; and (v) the Bank will
relocate its main office to Clarkston, Washington and convert to a Washington-
chartered savings bank and the Holding Company will become a bank holding
company. The Stock Conversion will be effected only upon completion of the sale
of at least $12,750,000 of Common Stock to be issued pursuant to the Plan of
Conversion.
Consummation of the Stock Conversion is subject to the approval of the Plan
of Conversion by the Bank's members and the approval by the OTS of the Plan of
Conversion and the Holding Company's acquisition of the Bank. Consummation of
the Charter Conversion is subject to the approval by the OTS and the Department
of the Charter Conversion and approval by the Federal Reserve of the Holding
Company's continued ownership of the Bank. The Holding Company has received
approval from the OTS to become the holding company of the Bank, subject to the
satisfaction of certain conditions, and to acquire all of the common stock of
the Bank to be issued in the Stock Conversion in exchange for at least 50% of
the net proceeds from the sale of Common Stock in the Offerings. The Stock
Conversion will be effected only upon completion of the sale of the shares of
Common Stock to be issued by the Holding Company pursuant to the Plan of
Conversion. The Bank intends to apply to the OTS and the Department for
approval of the conversion of the Bank to a Washington-chartered savings bank
after it selects a location for its Clarkston, Washington office. The Bank is
in the process of evaluating locations for its
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Clarkston office and expects that the Charter Conversion will not be completed
until several months after the consummation of the Stock Conversion, or longer
in the event the Bank has difficulty locating suitable office space in
Clarkston. The Holding Company intends to apply to the Federal Reserve to
become a bank holding company and for approval of the Holding Company's
continued ownership of 100% of the Bank following the Charter Conversion
concurrently with the Bank's application for the Charter Conversion. While the
Holding Company and the Bank expect receipt of all such approvals in a timely
manner, delays in receiving any such approvals may result in a delay in the
consummation of the Charter Conversion. If there is a significant delay in
obtaining the approval of the Federal Reserve for the Holding Company to become
a bank holding company or if the Federal Reserve seeks to impose conditions on
its approval that the Holding Company and the Bank believe would adversely
affect the Holding Company and the Bank, the Holding Company may elect to be
regulated by the OTS as a savings and loan holding company following the
completion of the Charter Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of December 31, 1995); (ii) the Bank's ESOP; (iii) Supplemental
Eligible Account Holders (depositors with $50.00 or more on deposit as of March
31, 1997); and (iv) Other Members (depositors of the Bank as of April 30, 1997
and borrowers of the Bank with loans outstanding as of April 25, 1990 which
continue to be outstanding as of April 30, 1997).
Shares of Common Stock not sold in the Subscription and Direct Community
Offering may be offered in the Syndicated Community Offering. Regulations
require that the Direct Community and Syndicated Community Offerings be
completed within 45 days after completion of the Subscription Offering unless
extended by the Bank or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Bank will consult with the regulatory
authorities to determine an appropriate alternative method for selling the
unsubscribed shares of Common Stock. The Plan of Conversion provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan of Conversion by the members of the Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Bank.
The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Bank's control. No assurance can be given as to
the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Offerings or other sale of the
Common Stock. If delays are experienced, significant changes may occur in the
estimated pro forma market value of the Holding Company and the Bank as
converted, together with corresponding changes in the net proceeds realized by
the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Bank would be required to charge all Conversion
expenses against current income.
Orders for shares of Common Stock will not be filled until at least
1,275,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Conversion closes. If the Stock Conversion
is not completed within 45 days after the last day of the fully extended
Subscription Offering and the OTS consents to an extension of time to complete
the Stock Conversion, subscribers will be given the right to increase, decrease
or rescind their subscriptions. Unless an affirmative indication is received
from subscribers that they wish to continue to subscribe for shares, the funds
will be returned promptly, together with accrued interest at the Bank's passbook
rate from the date payment is received until the funds are returned to the
subscriber. If such period is not extended, or, in any event, if the Stock
Conversion is not completed, all withdrawal authorizations will be terminated
and all funds held will be promptly returned together with accrued interest at
the Bank's passbook rate from the date payment is received until the Conversion
is terminated.
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Purposes of Conversion
Management of the Bank believes that the Stock Conversion offers a number
of advantages which will be important to the future growth and performance of
the Bank in that it is intended: (i) to improve the overall competitive position
of the Bank in its market area and to support possible future expansion and
diversification of operations (currently there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities
other than the establishment of a Clarkston, Washington office); (ii) to afford
members of the Bank and others the opportunity to become stockholders of the
Holding Company and thereby participate more directly in, and contribute to, any
future growth of the Holding Company and the Bank; and (iii) to provide future
access to capital markets.
The Bank's Board of Directors has formed the Holding Company to serve upon
consummation of the Conversion as a holding company with the Bank as its
subsidiary. The Bank, as a federal mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
stock form of organization, the Holding Company and the Bank will be structured
in the form used by holding companies of commercial banks and by a large number
of savings institutions.
Management believes that conversion to a Washington-chartered savings bank
is in the best interests of the Bank, its members and the communities it serves.
As a result of recent legislation that provides that the SAIF will be merged
with the BIF on January 1, 1999, but only if there are no thrift institutions in
existence, the U.S. Congress is expected to consider further legislation that
may eliminate the thrift industry as a separate industry. The Treasury
Department is studying the development of a common charter for banks and thrifts
and is expected to submit a report of its findings to Congress in the near
future. The Bank cannot predict what the attributes of such common charter
would be or whether any legislation will result from this study. If developed,
the common charter may not offer all the advantages that a federal savings
association now enjoys (e.g., unrestricted nationwide branching). As a
----
Washington-chartered savings bank with offices in Washington and Idaho, the Bank
will have the flexibility to expand in Washington and Idaho, should it decide to
do so, through branch acquisitions, opening new branches, or by acquiring other
institutions. Furthermore, the Washington savings bank charter will provide the
Bank with the authority to pursue its community banking strategy. Because of
the uncertainties with regard to the future of the thrift industry, the Bank has
determined to undertake the Charter Conversion as soon as possible following the
Stock Conversion.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Savings members and borrowers will have no voting rights in
the Bank or the Holding Company and therefore will not be able to elect
directors of the Bank or the Holding Company or to control their affairs.
Currently, these rights are accorded to savings members of the Bank. Subsequent
to the Stock Conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Bank and the holders of the Common Stock as to
matters pertaining to the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
Common Stock owned.
Savings Accounts and Loans. The Bank's savings accounts, account balances
and existing FDIC insurance coverage of savings accounts will not be affected by
the Conversion. Furthermore, the Conversion will not affect the loan accounts,
loan balances or obligations of borrowers under their individual contractual
arrangements with the Bank.
Tax Effects. The Bank has received an opinion from Breyer & Aguggia,
Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Bank in its
mutual or stock form by reason of its Conversion; (ii) no gain or loss will be
recognized to its account holders upon the issuance to them of accounts in the
Bank immediately after the Conversion, in the same dollar amounts and on the
same terms and conditions as
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their accounts at the Bank in its mutual form plus interest in the liquidation
account; (iii) the tax basis of account holders' accounts in the Bank
immediately after the Conversion will be the same as the tax basis of their
accounts immediately prior to Conversion; (iv) the tax basis of each account
holder's interest in the liquidation account will be zero; (v) the tax basis of
the Common Stock purchased in the Conversion will be the amount paid and the
holding period for such stock will commence at the date of purchase; and (vi) no
gain or loss will be recognized to account holders upon the receipt or exercise
of Subscription Rights in the Conversion, except to the extent Subscription
Rights are deemed to have value as discussed below. Unlike a private letter
ruling issued by the IRS, an opinion of counsel is not binding on the IRS and
the IRS could disagree with the conclusions reached therein. In the event of
such disagreement, no assurance can be given that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan will be taxable to the
extent, if any, that the Subscription Rights are deemed to have a fair market
value. RP Financial, a financial consulting firm retained by the Bank, whose
findings are not binding on the IRS, has indicated that the Subscription Rights
do not have any value, based on the fact that such rights are acquired by the
recipients without cost, are nontransferable and of short duration and afford
the recipients the right only to purchase shares of the Common Stock at a price
equal to its estimated fair market value, which will be the same price paid by
purchasers in the Direct Community Offering for unsubscribed shares of Common
Stock. If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights may only be taxable to those Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members who exercise their
Subscription Rights. The Bank could also recognize a gain on the distribution
of such Subscription Rights. Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are encouraged to consult with their own tax
advisors as to the tax consequences in the event the Subscription Rights are
deemed to have a fair market value.
The Bank has also received an opinion from BDO Seidman, LLP, Spokane,
Washington, that, assuming the Conversion does not result in any federal income
tax liability to the Bank, its account holders, or the Holding Company,
implementation of the Plan of Conversion will not result in any Idaho income tax
liability to such entities or persons.
The opinions of Breyer & Aguggia and BDO Seidman, LLP and the letter from
RP Financial are filed as exhibits to the Registration Statement. See
"ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
Liquidation Account. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors up to the withdrawal value
of their accounts). Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his or her deposit account to
the total value of all deposit accounts in the Bank at the time of liquidation.
After the Conversion, holders of withdrawable deposit(s) in the Bank,
including certificates of deposit ("Savings Account(s)"), shall not be entitled
to share in any residual assets in the event of liquidation of the Bank.
However, pursuant to OTS regulations, the Bank shall, at the time of the
Conversion, establish a liquidation account in an amount equal to its total
equity as of the date of the latest statement of financial condition contained
herein.
The liquidation account shall be maintained by the Bank subsequent to the
Conversion for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who retain their Savings Accounts in the Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder shall, with respect to
each Savings Account held, have a related inchoate interest in a portion of the
liquidation account balance ("subaccount").
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The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders. Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Bank subsequent to December 31, 1995 is less than the lesser
of (i) the deposit balance in such Savings Account at the close of business on
any other annual closing date subsequent to December 31, 1995 or March 31, 1997
or (ii) the amount of the "qualifying deposit" in such Savings Account on
December 31, 1995 or March 31, 1997, then the subaccount balance for such
Savings Account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of
a downward adjustment, such subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. If any such Savings Account is closed, the related subaccount
balance shall be reduced to zero.
In the event of a complete liquidation of the Bank (and only in such event)
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders. No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally insured institution in which the Bank is not the
surviving institution shall be considered to be a complete liquidation. In any
such transaction the liquidation account shall be assumed by the surviving
institution.
The Subscription, Direct Community and Syndicated Community Offerings
The Subscription and Direct Community Offering will expire at 12:00 Noon,
Pacific Time, on the Expiration Date, unless extended or continued by the
Holding Company and the Bank, with the approval of the OTS, if necessary.
Subscription Offering. In accordance with the Plan, nontransferable
Subscription Rights to purchase the Common Stock have been issued to all persons
and entities entitled to purchase the Common Stock in the Subscription Offering.
The amount of the Common Stock which these parties may purchase will be subject
to the availability of the Common Stock for purchase under the categories set
forth in the Plan. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
Category 1: Eligible Account Holders. Each depositor with $50.00 or more
on deposit at the Bank as of December 31, 1995 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $125,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders. If the exercise of Subscription
Rights in this category results in an oversubscription, shares of Common Stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal to 100 shares or
the number of shares actually subscribed for, whichever is less. Any shares
remaining after that allocation will be allocated among the subscribing Eligible
Account Holders whose subscriptions remain unsatisfied in the proportion that
the amount of the qualifying deposit of each Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all Eligible Account Holders whose subscriptions remain unsatisfied.
Subscription Rights received by officers and directors in this category based on
their increased deposits in the Bank
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in the one year period preceding December 31, 1995 are subordinated to the
Subscription Rights of other Eligible Account Holders.
Category 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 8% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of
the shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a priority right to purchase any such
shares exceeding the maximum of the Estimated Valuation Range up to an aggregate
of 8% of the Common Stock.
Category 3: Supplemental Eligible Account Holders. Each depositor with
$50.00 or more on deposit as of March 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $125,000 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposits of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders. If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make such
person's total allocation equal to 100 shares or the number of shares actually
subscribed for, whichever is less. Any shares remaining after that allocation
will be allocated among the subscribing Supplemental Eligible Account Holders
whose subscriptions remain unsatisfied in the proportion that the amount of the
qualifying deposit of each Supplemental Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied.
Category 4: Other Members. Each depositor of the Bank as of the Voting
Record Date and each borrower with a loan outstanding on April 25, 1990 which
continues to be outstanding as of the Voting Record Date will receive
nontransferable Subscription Rights to purchase up to $125,000 of Common Stock
to the extent shares are available following subscriptions by Eligible Account
Holders, the Bank's ESOP and Supplemental Eligible Account Holders. In the
event of an oversubscription in this category, the available shares will be
allocated among subscribing Other Members so as to permit each Other Member, to
the extent possible, to purchase a number of shares sufficient to make such
person's total allocation equal to 100 shares or the number of shares actually
subscribed for, whichever is less. Thereafter, unallocated shares will be
allocated among subscribing Other Members proportionately, based on the number
of votes on the Voting Record Date of a subscribing Other Member as compared to
the total votes on the Voting Record Date of all subscribing Other Members whose
subscriptions remain unsatisfied.
Subscription Rights are nontransferable. Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government. Each
person exercising Subscription Rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED OR
MODIFIED WITHOUT THE CONSENT OF THE BANK AND THE HOLDING COMPANY.
The Subscription Offering and all Subscription Rights under the Plan will
expire at 12:00 Noon, Pacific Time, on the Expiration Date, whether or not the
Bank has been able to locate each person entitled to such Subscription Rights.
The Subscription Offering may be extended by the Holding Company and the Bank up
to July 3, 1997 without the OTS's approval. OTS regulations require that the
Holding Company complete the sale of Common Stock within 45 days after the close
of the Subscription Offering. If the sale of Common Stock is not completed
within such period, all funds received will be promptly returned with interest
at the Bank's passbook rate
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and all withdrawal authorizations will be canceled. If regulatory approval of
an extension of the time period has been granted, all subscribers will be
notified of such extension and of the duration of any extension that has been
granted, and will be given the right to increase, decrease or rescind their
orders. If an affirmative response to any resolicitation is not received by the
Holding Company from a subscriber, the subscriber's order will be rescinded and
all funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
Direct Community Offering. Concurrently with the Subscription Offering,
the Holding Company is offering shares of Common Stock to certain members of the
general public in a Direct Community Offering, with preference given to natural
persons ("Preferred Subscribers") and trusts of natural persons residing in the
Local Community. Purchasers in the Direct Community Offering are eligible to
purchase up to $125,000 of Common Stock. In the event an insufficient number of
shares are available to fill orders in the Direct Community Offering, the
available shares will be allocated first to each Preferred Subscriber whose
order is accepted by the Bank, in an amount equal to the lesser of 100 shares or
the number of shares subscribed for by each such Preferred Subscriber, if
possible. Thereafter, unallocated shares will be allocated among the Preferred
Subscribers whose orders remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to other
persons of the general public who purchase in the Direct Community Offering
applying the same allocation described above for Preferred Subscribers. The
Direct Community Offering will terminate at 12:00 Noon, Pacific Time, on the
Expiration Date unless extended by the Holding Company and the Bank, with
approval of the OTS, if necessary. Any extensions beyond 45 days after the
close of the Subscription Offering would require a resolicitation of orders,
wherein subscribers would be given the opportunity to continue their orders, in
which case they will need to affirmatively reconfirm their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate, or be
permitted to modify or cancel their orders. The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Bank to accept or reject such purchases in whole or in
part. If an order is rejected in part, the purchaser does not have the right to
cancel the remainder of the order. The Holding Company presently intends to
terminate the Direct Community Offering as soon as it has received orders for
all shares available for purchase in the Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
Syndicated Community Offering. The Plan provides that, if necessary, all
shares of Common Stock not purchased in the Subscription and Direct Community
Offering, if any, may be offered for sale to certain members of the general
public in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Sandler O'Neill acting as agent of
the Holding Company. The Holding Company and the Bank have the right to reject
orders, in whole or part, in their sole discretion in the Syndicated Community
Offering. Neither Sandler O'Neill nor any registered broker-dealer shall have
any obligation to take or purchase any shares of the Common Stock in the
Syndicated Community Offering; however, Sandler O'Neill has agreed to use its
best efforts in the sale of shares in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the $10.00
Purchase Price, the same price as all other shares in the Offering. See "--
Stock Pricing and Number of Shares to be Issued." No person will be permitted
to subscribe in the Syndicated Community Offering for more than $125,000 of
Common Stock. See "--Marketing and Underwriting Arrangements" for a description
of the commission to be paid to the selected dealers and to Sandler O'Neill.
Sandler O'Neill may enter into agreements with selected dealers to assist
in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit
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indications of interest from their customers to place orders with the Holding
Company as of a certain date ("Order Date") for the purchase of shares of
Conversion Stock. When and if Sandler O'Neill and the Holding Company believe
that enough indications of interest and orders have been received in the
Subscription Offering, the Direct Community Offering and the Syndicated
Community Offering to consummate the Conversion, Sandler O'Neill will request,
as of the Order Date, selected dealers to submit orders to purchase shares for
which they have received indications of interest from their customers. Selected
dealers will send confirmations to such customers on the next business day after
the Order Date. Selected dealers may debit the accounts of their customers on a
date which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date. On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer. Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit. After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Bank's passbook
rate until the completion of the Offerings. At the completion of the
Conversion, the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. The shares issued in the Conversion cannot and
will not be insured by the FDIC or any other government agency. In the event
the Conversion is not consummated as described above, funds with interest will
be returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may terminate no more than 45 days
following the expiration of the Subscription Offering, unless extended by the
Holding Company with the approval of the OTS.
In the event the Bank is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of the Bank, if feasible. Such other arrangements will be
subject to the approval of the OTS. The OTS may grant one or more extensions of
the offering period, provided that (i) no single extension exceeds 90 days, (ii)
subscribers are given the right to increase, decrease or rescind their
subscriptions during the extension period, and (iii) the extensions do not go
more than two years beyond the date on which the members approved the Plan. If
the Conversion is not completed within 45 days after the close of the
Subscription Offering, either all funds received will be returned with interest
(and withdrawal authorizations canceled) or, if the OTS has granted an extension
of time, all subscribers will be given the right to increase, decrease or
rescind their subscriptions at any time prior to 20 days before the end of the
extension period. If an extension of time is obtained, all subscribers will be
notified of such extension and of their rights to modify their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled).
Persons in Non-Qualified States. The Holding Company and the Bank will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan reside. However, the Holding Company and the Bank are not required to
offer stock in the Subscription Offering to any person who resides in a foreign
country or resides in a state of the United States with respect to which: (i) a
small number of persons otherwise eligible to subscribe for shares of Common
Stock reside in such state; (ii) the granting of Subscription Rights or offer or
sale of shares of Common Stock to such persons would require the Holding Company
to register, under the securities laws of such state, as a broker or dealer or
to register or otherwise qualify the Common Stock for sale in such state; or
(iii) such registration or qualification would be impractical for reasons of
cost or otherwise. Where the number of persons eligible to subscribe for shares
in one state is small, the Holding Company and the Bank will base their decision
as to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state and
the cost of registering or qualifying the shares.
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Limitations on Purchases of Shares
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 25 shares. With
the exception of the ESOP, which is expected to purchase 8% of the shares of
Common Stock issued in the Conversion, no person or entity may purchase more
than $125,000 of Common Stock in the Conversion; and no person or entity,
together with associates of and persons acting in concert with such person or
entity, may purchase in the aggregate more than $250,000 of Common Stock in the
Conversion. Officers, directors and their associates may not purchase, in the
aggregate, more than 33% of the shares of Common Stock offered in the
Conversion. For purposes of the Plan, the directors are not deemed to be acting
in concert solely by reason of their Board membership. Pro rata reductions
within each Subscription Rights category will be made in allocating shares to
the extent that the maximum purchase limitations are exceeded.
The Bank's and the Holding Company's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the shares of Common Stock sold in the Conversion, provided that orders for
shares which exceed 5% of the shares of Common Stock sold in the Conversion may
not exceed, in the aggregate, 10% of the shares sold in the Conversion. The
Bank and the Holding Company do not intend to increase the maximum purchase
limitation unless market conditions are such that an increase in the maximum
purchase limitation is necessary to sell a number of shares in excess of the
minimum of the Estimated Valuation Range. If the Boards of Directors decide to
increase the purchase limitation, all persons who subscribed for the maximum
number of shares will be given the opportunity to increase their subscriptions
accordingly, subject to the rights and preferences of any person who has
priority Subscription Rights.
The term "acting in concert" is defined in the Plan to mean (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. In
general, a person who acts in concert with another other party shall also be
deemed to be acting in concert with any person who is also acting in concert
with that other party. The Holding Company and the Bank may presume that
certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
The term "associate" of a person is defined in the Plan to mean (i) any
corporation or organization (other than the Bank or a majority-owned subsidiary
of the Bank) of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank or any of its parents or subsidiaries. For example, a corporation of which
a person serves as an officer would be an associate of such person, and,
therefore, all shares purchased by such corporation would be included with the
number of shares which such person could purchase individually under the above
limitations.
The term "officer" is defined in the Plan to mean an executive officer of
the Bank, including its Chairman of the Board, President, Executive Vice
Presidents, Senior Vice Presidents, Vice Presidents in charge of principal
business functions, Secretary and Treasurer.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank
and the Holding Company and by National Association of Securities Dealers, Inc.
("NASD") members. See "-- Restrictions on Transferability by Directors and
Officers and NASD Members."
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Marketing and Underwriting Arrangements
The Bank and the Holding Company have engaged Sandler O'Neill as a
consultant and financial advisor in connection with the offering of the Common
Stock, and Sandler O'Neill has agreed to use its best efforts to assist the
Holding Company with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Sandler O'Neill is not obligated to
take or purchase any shares of Common Stock in the Offerings. Based upon
negotiations with the Bank and the Holding Company concerning fee structure,
Sandler O'Neill will receive a fee equal to 1.5% of the aggregate Purchase Price
of the shares of Common Stock sold in the Subscription and Direct Community
Offering, excluding shares purchased by directors, officers, employees, and any
immediate family member thereof, and any employee benefit plan of the Holding
Company or the Bank, including the ESOP, subject to a maximum fee equal to 1.5%
of the aggregate gross proceeds at the midpoint of the Estimated Valuation
Range. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Bank will pay a fee (to be
negotiated at such time under such agreement) to such selected dealers, any
sponsoring dealers fees, and a management fee to Sandler O'Neill of 2.0% for
shares sold by NASD member firms pursuant to a selected dealers agreement;
provided, however, that any fees payable to Sandler O'Neill for Common Stock
sold by them pursuant to such a selected dealers agreement shall not exceed 2.0%
of the Purchase Price of such shares and provided, further, however, that the
aggregate fees payable to Sandler O'Neill and the selected dealers will not
exceed 7.0% of the aggregate purchase price of the Common Stock sold by selected
dealers. Fees to Sandler O'Neill and to any other broker-dealer may be deemed
to be underwriting fees, and Sandler O'Neill and such broker-dealers may be
deemed to be underwriters. Sandler O'Neill will also be reimbursed for its
reasonable out-of-pocket expenses, including legal fees, in an amount not to
exceed $50,000. In the event the Offerings are not consummated or Sandler
O'Neill ceases, under certain circumstances after the subscription solicitation
activities are commenced, to provide assistance to the Holding Company, Sandler
O'Neill will be reimbursed for its reasonable out-of-pocket expenses as
described above. The Holding Company and the Bank have agreed to indemnify
Sandler O'Neill for reasonable costs and expenses in connection with certain
claims or liabilities, including certain liabilities under the Securities Act.
Sandler O'Neill has received advances towards its fees totalling $50,000. Total
marketing fees to Sandler O'Neill are expected to be approximately $153,000 and
$215,000 at the minimum and the maximum of the Estimated Valuation Range,
respectively. See "PRO FORMA DATA" for the assumptions used to arrive at these
estimates.
Sandler O'Neill will perform conversion and records management services for
the Bank in the Conversion and will receive a fee for these services of $10,000,
plus reimbursement of reasonable out-of-pocket expenses which shall not exceed
$5,000.
Description of Sales Activities
The Common Stock will be offered in the Subscription and Direct Community
Offering principally by the distribution of this Prospectus and through
activities conducted at the Bank's Conversion Center. The Conversion Center is
expected to operate during normal business hours throughout the Subscription and
Direct Community Offering. It is expected that at any particular time, one or
more Sandler O'Neill employees will be working at the Conversion Center. Such
employees of Sandler O'Neill will be responsible for mailing materials relating
to the Subscription and Direct Community Offering, responding to questions
regarding the Conversion and the Subscription and Direct Community Offering and
processing stock orders.
Sales of Common Stock will be made by registered representatives affiliated
with Sandler O'Neill or by the selected dealers managed by Sandler O'Neill. The
management and employees of the Bank may participate in the Offerings in
clerical capacities, providing administrative support in effecting sales
transactions or, when permitted by state securities laws, answering questions of
a mechanical nature relating to the proper execution of the Order Form.
Management of the Bank may answer questions regarding the business of the Bank
when permitted by state securities laws. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. The management and
employees of the Holding Company
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and the Bank have been instructed not to solicit offers to purchase Common Stock
or provide advice regarding the purchase of Common Stock.
No officer, director or employee of the Bank or the Holding Company will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the Conversion.
None of the Bank's personnel participating in the Subscription and Direct
Community Offering is registered or licensed as a broker or dealer or an agent
of a broker or dealer. The Bank's personnel will assist in the above-described
sales activities pursuant to an exemption from registration as a broker or
dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the Exchange Act.
Rule 3a4-1 generally provides that an "associated person of an issuer" of
securities shall not be deemed a broker solely by reason of participation in the
sale of securities of such issuer if the associated person meets certain
conditions. Such conditions include, but are not limited to, that the
associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his or her participation in the sale of securities. For
purposes of this exemption, "associated person of an issuer" is defined to
include any person who is a director, officer or employee of the issuer or a
company that controls, is controlled by or is under common control with the
issuer.
Procedure for Purchasing Shares in the Subscription and Direct Community
Offering
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the Order
Form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus. The Bank will accept for
processing only orders submitted on Order Forms.
To purchase shares in the Subscription and Direct Community Offering, an
executed Order Form and certification form with the required full payment for
each share subscribed for, or with appropriate authorization for withdrawal of
full payment from the subscriber's deposit account with the Bank (which may be
given by completing the appropriate blanks in the Order Form), must be received
by the Bank by 12:00 Noon, Pacific Time, on the Expiration Date. Order Forms
which are not received by such time or are executed defectively or are received
without full payment (or without appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank is not obligated to accept
orders submitted on photocopied or telecopied Order Forms. The Holding Company
and the Bank have the right to waive or permit the correction of incomplete or
improperly executed Order Forms, but do not represent that they will do so.
Pursuant to the Plan of Conversion, the interpretation by the Holding Company
and the Bank of the terms and conditions of the Plan of Conversion and of the
Order Form will be final. Once received, an executed Order Form may not be
modified, amended or rescinded without the consent of the Bank unless the
Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995) and/or the Supplemental Eligibility Record Date (March 31, 1997) and/or
the Voting Record Date (April 30, 1997) must list all accounts on the Order Form
giving all names in each account and the account number.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Bank, (ii) by check, bank draft, or money order, or (iii) by
authorization of withdrawal from deposit accounts maintained with the Bank.
Appropriate means by which such withdrawals may be authorized are provided on
the Order Form. No wire transfers will be accepted. Interest will be paid on
payments made by cash, check, bank draft or money order at the Bank's passbook
rate from the date payment is received until the completion or termination of
the Stock Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from
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a deposit account will continue to accrue interest at the contractual rates
until completion or termination of the Stock Conversion (unless the certificate
matures after the date of receipt of the Order Form but prior to closing, in
which case funds will earn interest at the passbook rate from the date of
maturity until consummation of the Stock Conversion), but a hold will be placed
on such funds, thereby making them unavailable to the depositor until completion
or termination of the Stock Conversion. At the completion of the Stock
Conversion, the funds received in the Offerings will be used to purchase the
shares of Common Stock ordered. The shares issued in the Stock Conversion
cannot and will not be insured by the FDIC or any other government agency. In
the event that the Stock Conversion is not consummated for any reason, all funds
submitted will be promptly refunded with interest as described above. Any
subscriber funds handled by NASD members in the Subscription and Direct
Community Offering will be handled in compliance with Rule 15c2-4 under the
Exchange Act.
If a subscriber authorizes the Bank to withdraw the amount of the aggregate
Purchase Price from his or her deposit account, the Bank will do so as of the
effective date of the Stock Conversion, though the account must contain the full
amount necessary for payment at the time the subscription order is received.
The Bank will waive any applicable penalties for early withdrawal from
certificate accounts. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will earn interest at the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Stock Conversion, provided that
there is in force from the time of its subscription until such time, a loan
commitment from an unrelated financial institution or the Holding Company to
lend to the ESOP, at such time, the aggregate Purchase Price of the shares for
which it subscribed.
Individual Retirement Accounts ("IRAs") maintained in the Bank do not
permit investment in the Common Stock. A depositor interested in using his or
her IRA funds to purchase Common Stock must do so through a self-directed IRA.
Since the Bank does not offer such accounts, it will allow such a depositor to
make a trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase the Holding Company's Common Stock in the Offerings. There will be no
early withdrawal or IRS interest penalties for such transfers. The new trustee
would hold the Common Stock in a self-directed account in the same manner as the
Bank now holds the depositor's IRA funds. An annual administrative fee may be
payable to the new trustee. Depositors interested in using funds in a Bank IRA
to purchase Common Stock should contact the Conversion Center at the Bank so
that the necessary forms may be forwarded for execution and returned prior to
the Expiration Date. In addition, the provisions of ERISA and IRS regulations
require that officers, directors and 10% shareholders who use self-directed IRA
funds to purchase shares of Common Stock in the Subscription Offering make such
purchases for the exclusive benefit of IRAs.
Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Bank as soon as practicable following consummation of the
sale of all shares of Common Stock. Any certificates returned as undeliverable
will be disposed of in accordance with applicable law. Until certificates for
the Common Stock are available and delivered to purchasers, purchasers may not
be able to sell the shares of Common Stock which they purchased, even though
trading of the Common Stock may have commenced.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Conversion be based upon an estimated pro
forma value of the Holding Company and the Bank as converted (i.e., taking into
----
account the expected receipt of proceeds from the sale of securities in the
Conversion), as determined
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<PAGE>
by an independent appraisal. The Bank and the Holding Company have retained RP
Financial to prepare an appraisal of the pro forma market value of the Holding
Company and the Bank as converted, as well as a business plan. RP Financial
will receive a fee expected to total approximately $25,000 for its appraisal
services and preparation of a business plan, plus reasonable out-of-pocket
expenses incurred in connection with the appraisal. The Bank has agreed to
indemnify RP Financial under certain circumstances against liabilities and
expenses (including legal fees) arising out of, related to, or based upon the
Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Holding Company and the Bank as converted taking into account the
formation of the Holding Company as the holding company for the Bank. For its
analysis, RP Financial undertook substantial investigations to learn about the
Bank's business and operations. Management supplied financial information,
including annual financial statements, information on the composition of assets
and liabilities, and other financial schedules. In addition to this
information, RP Financial reviewed the Bank's Form AC Application for Approval
of Conversion and the Holding Company's Form SB-2 Registration Statement.
Furthermore, RP Financial visited the Bank's facilities and had discussions with
the Bank's management and its special conversion legal counsel, Breyer &
Aguggia. No detailed individual analysis of the separate components of the
Holding Company's or the Bank's assets and liabilities was performed in
connection with the evaluation.
In estimating the pro forma market value of the Holding Company and the
Bank as converted, as required by applicable regulatory guidelines, RP
Financial's analysis utilized three selected valuation procedures, the
Price/Book ("P/B") method, the Price/Earnings ("P/E") method, and Price/Assets
("P/A") method, all of which are described in its report. RP Financial placed
the greatest emphasis on the P/E and P/B methods in estimating pro forma market
value. In applying these procedures, RP Financial reviewed, among other
factors, the economic make-up of the Bank's primary market area, the Bank's
financial performance and condition in relation to publicly-traded institutions
that RP Financial deemed comparable to the Bank, the specific terms of the
offering of the Holding Company's Common Stock, the pro forma impact of the
additional capital raised in the Conversion, conditions of securities markets in
general, and the market for thrift institution common stock in particular. RP
Financial's analysis provides an approximation of the pro forma market value of
the Holding Company and the Bank as converted based on the valuation methods
applied and the assumptions outlined in its report. Included in its report were
certain assumptions as to the pro forma earnings of the Holding Company after
the Conversion that were utilized in determining the appraised value. These
assumptions included expenses as described under "PRO FORMA DATA," an assumed
after-tax rate of return on the net Conversion proceeds of 3.96%, purchases by
the ESOP of 8% of the stock sold in the Conversion and purchases in the open
market by the MRP of a number of shares equal to 4% of the stock sold in the
Conversion at the Purchase Price. See "PRO FORMA DATA" for additional
information concerning these assumptions. The use of different assumptions may
yield somewhat different results.
On the basis of the foregoing, RP Financial has advised the Holding Company
and the Bank that, in its opinion, as of February 28, 1997, the aggregate
estimated pro forma market value of the Holding Company and the Bank as
converted and, therefore, the Common Stock was within the valuation range of
$12,750,000 to $17,250,000 with a midpoint of $15,000,000. After reviewing the
methodology and the assumptions used by RP Financial in the preparation of the
appraisal, the Board of Directors established the Estimated Valuation Range,
which is equal to the valuation range of $12,750,000 to $17,250,000 with a
midpoint of $15,000,000. In determining the reasonableness and adequacy of the
appraisal, consistent with OTS regulations and policies, the Board of Directors
reviewed the methodology and reasonableness of the assumptions utilized by RP
Financial in the preparation of the appraisal. Assuming that the shares are
sold at $10.00 per share in the Conversion, the estimated number of shares would
be between 1,275,000 and 1,725,000 with a midpoint of 1,500,000. The Purchase
Price of $10.00 was determined by discussion among the Boards of Directors of
the Bank and the Holding Company and Sandler O'Neill, taking into account, among
other factors (i) the requirement under OTS regulations that the Common Stock be
offered in a manner that will achieve the widest distribution of the stock and
(ii) desired liquidity in the Common Stock subsequent to the Conversion. Since
the outcome of the Offerings relate in large measure to market conditions at the
time of sale, it is not possible to determine the exact number of shares that
will be issued by the Holding Company at this time. The Estimated Valuation
Range may be amended, with the approval of the OTS, if
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<PAGE>
necessitated by developments following the date of such appraisal in, among
other things, market conditions, the financial condition or operating results of
the Bank, regulatory guidelines or national or local economic conditions.
RP Financial's appraisal report is filed as an exhibit to the Registration
Statement. See "ADDITIONAL INFORMATION."
If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, RP Financial, after taking into account
factors similar to those involved in its prior appraisal, will determine its
estimate of the pro forma market value of the Holding Company and the Bank as
converted, as of the close of the Subscription Offering.
No sale of the shares will take place unless prior thereto RP Financial
confirms to the OTS that, to the best of RP Financial's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the Bank
as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offerings or other sale may be canceled, a new Estimated
Valuation Range and price per share set and new Subscription, Direct Community
and Syndicated Community Offerings held. Under such circumstances, subscribers
would have the right to modify or rescind their subscriptions and to have their
subscription funds returned promptly with interest and holds on funds authorized
for withdrawal from deposit accounts would be released or reduced.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. In the
event the total amount of shares issued is less than 1,275,000 or more than
1,983,750 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $12,750,000 or more than $19,837,500,
subscription funds will be returned promptly with interest to each subscriber
unless he or she indicates otherwise. In the event a new valuation range is
established by RP Financial, such new range will be subject to approval by the
OTS.
If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Bank and the Holding Company, if possible. Such
other purchase arrangements will be subject to the approval of the OTS and may
provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended. If such other purchase
arrangements cannot be made, the Plan will terminate.
In formulating its appraisal, RP Financial relied upon the truthfulness,
accuracy and completeness of all documents the Bank furnished it. RP Financial
also considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate. While RP
Financial believes this information to be reliable, RP Financial does not
guarantee the accuracy or completeness of such information and did not
independently verify the financial statements and other data provided by the
Bank and the Holding Company or independently value the assets or liabilities of
the Holding Company and the Bank. The appraisal by RP Financial is not intended
to be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. Moreover, because the appraisal is necessarily based on many
factors which change from time to time, there is no assurance that persons who
purchase such shares in the Conversion will later be able to sell shares
thereafter at prices at or above the Purchase Price.
Restrictions on Repurchase of Stock
Upon consummation of the Conversion, the Board of Directors of the Holding
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements, including the OTS regulations applicable
for three years from the date of consummation of the Conversion. Pursuant to
OTS
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regulations, OTS-regulated savings associations (and their holding companies)
may not for a period of three years from the date of an institution's mutual-to-
stock conversion repurchase any of its common stock from any person, except in
the event of: (i) an offer made to all of its stockholders to repurchase the
common stock on a pro rata basis, approved by the OTS; or (ii) the repurchase of
qualifying shares of a director; or (iii) a purchase in the open market by a
tax-qualified or non-tax-qualified employee stock benefit plan in an amount
reasonable and appropriate to fund the plan. Furthermore, repurchases are
prohibited if the effect thereof would cause the association's regulatory
capital to be reduced below (a) the amount required for the liquidation account
or (b) the regulatory capital requirements imposed by the OTS. Repurchases are
generally prohibited during the first year following conversion. Upon ten days'
written notice to the OTS, and if the OTS does not object, an institution may
make open market repurchases of its outstanding common stock during years two
and three following the conversion, provided that (x) no more than 5% of the
outstanding common stock is to be purchased during any 12-month period, (y) the
repurchases do not cause the association to become undercapitalized as defined
under the OTS prompt corrective action regulations and (z) the repurchase would
not adversely affect the financial condition of the association. No assurances,
however, can be given that the OTS will approve a repurchase program under
current policy or that such policy will not change or become more restrictive.
Shares to be Purchased by Management Pursuant to Subscription Rights
The following table sets forth certain information as to the approximate
purchases of Common Stock by each director and executive officer of the Bank,
including their associates, as defined by applicable regulations. No individual
has entered into a binding agreement with respect to such intended purchases.
Directors and officers of the Bank and their associates may not purchase in
excess of 33% of the shares sold in the Conversion and, therefore, actual
purchases could be more or less than indicated below. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price for the shares for which they subscribe as the price that
will be paid by all other subscribers.
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<TABLE>
<CAPTION>
Percent of Percent of
Shares at Shares at
Minimum of Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated Estimated
Position Shares Purchased(1) Amount Purchased Valuation Range Valuation Range
-------- --------------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Steve R. Cox 17,500 $175,000 1.37% 1.01%
Chairman
James N. Marker 2,500 25,000 0.20 0.15
First Vice Chairman
Robert S. Coleman, Sr. 10,000 100,000 0.78 0.58
Second Vice Chairman
Dr. L. Glen Carlson 15,000 150,000 1.18 0.87
Director
William J. Larson 15,000 150,000 1.18 0.87
Director
F. Ron McMurray 2,500 25,000 0.20 0.14
Director
W. Dean Jurgens 12,000 120,000 0.94 0.70
Director
Clyde E. Conklin 25,000 250,000 1.96 1.45
Chief Executive Officer
Larry K. Moxley 25,000 250,000 1.96 1.45
Chief Financial Officer
Terence A. Otte 5,000 50,000 0.39 0.29
Vice President
Donn L. Durgan 8,000 80,000 0.63 0.46
Vice President
Douglas R. Ax 25,000 250,000 1.96 1.45
------- ---------- ----- ----
Vice President
Total 162,500 $1,625,000 12.75% 9.42%
======= ========== ===== ====
</TABLE>
- -------------
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of the
number of shares to be purchased by the ESOP and issued or reserved under
the MRP and Stock Option Plan, see "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan," "-- Benefits -- Stock Option Plan" and "--
Benefits -- Management Recognition Plan."
Restrictions on Transferability by Directors and Officers and NASD Members
Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the Stock Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company. Shares of Common Stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the
Conversion are not subject to this restriction. Accordingly, shares of Common
Stock issued by the Holding Company to directors and officers shall bear a
legend giving appropriate notice of the restriction, and, in addition, the
Holding Company will give appropriate instructions to the transfer agent for the
Holding Company's Common Stock with respect to the restriction on transfers.
Any shares issued to directors and officers as a stock dividend, stock split or
otherwise with respect to restricted Common Stock shall be subject to the same
restrictions.
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Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the OTS. This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal law
and regulations and Delaware corporate law, as well as the Certificate of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Certificate of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
Conversion Regulations
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company)
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or who controls more than 10% of the outstanding shares or voting rights of a
converting or converted institution (or its holding company).
Change of Control Regulations
OTS Regulations. Under the Change in Bank Control Act, no person may
acquire control of an insured federal savings association or its parent holding
company unless the OTS has been given 60 days' prior written notice and has not
issued a notice disapproving the proposed acquisition. In addition, OTS
regulations provide that no company may acquire control of a savings association
without the prior approval of the OTS. Any company that acquires such control
becomes a "savings and loan holding company" subject to registration,
examination and regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations. Such control factors include
the acquiror being one of the two largest stockholders. The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies that acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable. There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
Federal Reserve Regulations. The Change in Bank Control Act and the BHCA,
together with the Federal Reserve regulations under those acts, require that the
consent of the Federal Reserve be obtained prior to any person or company
acquiring "control" of a bank holding company. Control is conclusively presumed
to exist if an individual or company acquires more than 25% of any class of
voting stock of the bank holding company. Control is rebuttably presumed to
exist if the person acquires more than 10% of any class of voting stock of a
bank holding company if either (i) the Holding Company has registered securities
under Section 12 of the Exchange Act or (ii) no other person will own a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure to rebut the rebuttable control presumption.
Since the Holding Company's Common Stock will be registered under Section 12 of
the Exchange Act, any acquisition of 10% or more of the Holding Company's Common
Stock will give rise to a rebuttable presumption that the acquiror of such stock
controls the Holding Company, requiring the acquiror, prior to acquiring such
stock, to rebut the presumption of control to the satisfaction of the Federal
Reserve or obtain Federal Reserve approval for the acquisition of control.
Restrictions applicable to the operations of bank holding companies may deter
companies from seeking to obtain control of the Holding Company. See
"REGULATION -- Bank Holding Company Regulation."
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Anti-takeover Provisions in the Holding Company's Certificate of Incorporation
and Bylaws and Delaware Law
A number of provisions of the Holding Company's Certificate of
Incorporation and Bylaws deal with matters of corporate governance and certain
rights of stockholders. The following discussion is a general summary of
certain provisions of the Holding Company's Certificate of Incorporation and
Bylaws and regulatory provisions relating to stock ownership and transfers, the
Board of Directors and business combinations, which might be deemed to have a
potential "anti-takeover" effect. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual Holding Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the incumbent Board of
Directors or management of the Holding Company more difficult. The following
description of certain of the provisions of the Certificate of Incorporation and
Bylaws of the Holding Company is necessarily general and reference should be
made in each case to such Certificate of Incorporation and Bylaws, which are
incorporated herein by reference. See "ADDITIONAL INFORMATION" as to how to
obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of common stock (the "Limit") be entitled or permitted to any vote in respect of
the shares held in excess of the Limit, unless permitted by a resolution adopted
by a majority of the board of directors. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations of the Exchange Act
and includes shares beneficially owned by such person or any of such person's
affiliates (as defined in the Certificate of Incorporation), shares which such
person or such person's affiliates have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and such
person's affiliates have or share investment or voting power, but shall not
include shares beneficially owned by the ESOP or directors, officers and
employees of the Bank or Holding Company or shares that are subject to a
revocable proxy and that are not otherwise beneficially, or deemed by the
Holding Company to be beneficially, owned by such person and his or her
affiliates.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board. The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year. The Holding Company's
Certificate of Incorporation provides that the size of the Board shall be as set
forth in the Bylaws. The Bylaws currently set the number of directors at seven.
The Certificate of Incorporation provides that any vacancy occurring in the
Board, including a vacancy created by an increase in the number of directors,
shall be filled by a vote of two-thirds of the directors then in office and any
director so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of the class to which the director has been
chosen expires. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the Holding
Company. The Certificate of Incorporation of the Holding Company provides that
a director may be removed from the Board of Directors prior to the expiration of
his or her term only for cause and only upon the vote of 80% of the outstanding
shares of voting stock. In the absence of this provision, the vote of the
holders of a majority of the shares could remove the entire Board, but only with
cause, and replace it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, the Certificate of Incorporation provides that special
meetings of stockholders of the Holding Company may be called only by the Board
of Directors of the Holding Company and that stockholders may take action only
at a meeting and not by written consent.
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Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 5,000,000 shares of Common Stock and 500,000 shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits, restricted stock grants and the exercise of stock options. However,
these additional authorized shares may also be used by the Board of Directors,
consistent with fiduciary duties, to deter future attempts to gain control of
the Holding Company. The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of
the ability to fix voting rights for a series of preferred stock, the Board has
the power, to the extent consistent with its fiduciary duty, to issue a series
of preferred stock to persons friendly to management in order to attempt to
block a tender offer, merger or other transaction by which a third party seeks
control of the Holding Company, and thereby assist members of management to
retain their positions. The Holding Company's Board currently has no plans for
the issuance of additional shares, other than the issuance of shares of Common
Stock upon exercise of stock options and in connection with the MRP.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Holding Company's outstanding shares of voting
stock to approve certain "Business Combinations" (as defined therein) involving
a "Related Person" (as defined therein) except in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Related
Person and were directors prior to the time when the Related Person became a
Related Person. The term "Related Person" is defined to include any individual,
corporation, partnership or other entity (other than the Holding Company or its
subsidiary) which owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the Holding Company or an
affiliate of such person or entity. This provision of the Certificate of
Incorporation applies to any "Business Combination," which is defined to
include: (i) any merger or consolidation of the Holding Company with or into
any Related Person; (ii) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of the Holding Company or combined
assets of the Holding Company and its subsidiaries to a Related Person;
(iii) any merger or consolidation of a Related Person with or into the Holding
Company or a subsidiary of the Holding Company; (iv) any sale, lease, exchange,
transfer, or other disposition of 25% or more of the assets of a Related Person
to the Holding Company or a subsidiary of the Holding Company; (v) the issuance
of any securities of the Holding Company or a subsidiary of the Holding Company
to a Related Person; (vi) the acquisition by the Holding Company or a subsidiary
of the Holding Company of any securities of a Related Person; (vii) any
reclassification of common stock of the Holding Company or any recapitalization
involving the common stock of the Holding Company; or (viii) any agreement or
other arrangement providing for any of the foregoing.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of the Holding
Company and any other affected class of stock. One exception under Delaware law
to the majority approval requirement applies to stockholders owning 15% or more
of the common stock of a corporation for a period of less than three years.
Such 15% stockholder, in order to obtain approval of a business combination,
must obtain the approval of two-thirds of the outstanding stock, excluding the
stock owned by such 15% stockholder, or satisfy other requirements under
Delaware law relating to board of director approval of his or her acquisition of
the shares of the Holding Company. The increased stockholder vote required to
approve a business combination may have the effect of foreclosing mergers and
other business combinations which a majority of stockholders deem desirable and
place the power to prevent such a merger or combination in the hands of a
minority of stockholders.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to
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amend or repeal certain provisions of the Certificate of Incorporation,
including the provision limiting voting rights, the provisions relating to
approval of certain business combinations, calling special meetings, the number
and classification of directors, director and officer indemnification by the
Holding Company and amendment of the Holding Company's Bylaws and Certificate of
Incorporation. The Holding Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of stockholders.
Stockholder Nominations and Proposals. The Certificate of Incorporation of
the Holding Company requires a stockholder who intends to nominate a candidate
for election to the Board of Directors, or to raise new business at a
stockholder meeting to give not less than 30 nor more than 60 days' advance
notice to the Secretary of the Holding Company. The notice provision requires a
stockholder who desires to raise new business to provide certain information to
the Holding Company concerning the nature of the new business, the stockholder
and the stockholder's interest in the business matter. Similarly, a stockholder
wishing to nominate any person for election as a director must provide the
Holding Company with certain information concerning the nominee and the
proposing stockholder.
Purpose and Takeover Defensive Effects of the Holding Company's Certificate
of Incorporation and Bylaws. The Board of Directors of the Bank believes that
the provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank in the orderly deployment of the Conversion proceeds
into productive assets during the initial period after the Conversion. The
Board of Directors believes these provisions are in the best interest of the
Bank and Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best position to determine
the true value of the Holding Company and to negotiate more effectively for what
may be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of the Holding Company and
its stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is
also the view of the Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of the Holding Company and that is in the best
interest of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for Exchange Act deregistration.
Despite the belief of the Bank and the Holding Company as to the benefits
to stockholders of these provisions of the Holding Company's Certificate of
Incorporation and Bylaws, these provisions may also have the effect of
discouraging a future takeover attempt that would not be approved by the Holding
Company's Board, but
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pursuant to which stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of the Holding Company's Board
of Directors and of management more difficult. The Board of Directors of the
Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Delaware business corporation. The Holding Company and the
Bank do not presently intend to propose the adoption of further restrictions on
the acquisition of the Holding Company's equity securities.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Certificate of Incorporation and Bylaws of the Holding
Company and in Federal and Delaware law may be to discourage potential takeover
attempts and perpetuate incumbent management, even though certain stockholders
of the Holding Company may deem a potential acquisition to be in their best
interests, or deem existing management not to be acting in their best interests.
DESCRIPTION OF CAPITAL STOCK
OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue 5,000,000 shares of Common Stock
having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 1,725,000 shares of Common Stock and no shares of preferred stock in
the Conversion. Each share of the Holding Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
The Common Stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.
Common Stock
Dividends. The Holding Company can pay dividends out of statutory surplus
or from certain net profits if, as and when declared by its Board of Directors.
The payment of dividends by the Holding Company is subject to limitations which
are imposed by law and applicable regulation. See "DIVIDEND POLICY" and
"REGULATION." The holders of Common Stock of the Holding Company will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Holding Company out of funds legally available
therefor. If the Holding Company issues preferred stock, the holders thereof
may have a priority over the holders of the Common Stock with respect to
dividends.
Stock Repurchases. The Plan and OTS regulations place certain limitations
on the repurchase of the Holding Company's capital stock. See "THE CONVERSION
- -- Restrictions on Repurchase of Stock" and "USE OF PROCEEDS."
Voting Rights. Upon Conversion, the holders of Common Stock of the Holding
Company will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or as are otherwise
presented to them by the Board of Directors. Except as discussed in
"RESTRICTIONS ON ACQUISITION OF THE
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HOLDING COMPANY," each holder of Common Stock will be entitled to one vote per
share and will not have any right to cumulate votes in the election of
directors. If the Holding Company issues preferred stock, holders of the
Holding Company preferred stock may also possess voting rights. Certain matters
require a vote of 80% of the outstanding shares entitled to vote thereon. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, all of which will be owned by the
Holding Company, and voted at the direction of the Holding Company's Board of
Directors. Consequently, the holders of the Common Stock will not have direct
control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Holding Company, as holder of the Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "THE CONVERSION"), all assets of the Bank available for distribution. In
the event of liquidation, dissolution or winding up of the Holding Company, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of the
Holding Company available for distribution. If Holding Company preferred stock
is issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.
Preemptive Rights. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine. The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.
Restrictions on Acquisition
Acquisitions of the Holding Company are restricted by provisions in its
Certificate of Incorporation and Bylaws and by the rules and regulations of
various regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company has registered the Common Stock with the SEC pursuant
to Section 12(g) of the Exchange Act upon the completion of the Conversion and
will not deregister its Common Stock for a period of at least three years
following the completion of the Conversion. As a result of such registration,
the proxy and tender offer rules, insider trading reporting and restrictions,
annual and periodic reporting and other requirements of the Exchange Act will be
applicable.
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LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the Idaho tax
consequences of the Offerings have been opined upon by BDO Seidman, LLP,
Spokane, Washington. Breyer & Aguggia and BDO Seidman, LLP have consented to
the references herein to their opinions. Certain legal matters will be passed
upon for Sandler O'Neill by Thacher Proffitt & Wood, Washington, D.C.
EXPERTS
The consolidated financial statements of the Bank as of March 31, 1995 and
1996 and for each of the two years in the period ended March 31, 1996 included
in this Prospectus have been audited by BDO Seidman, LLP, independent auditors,
as stated in its report appearing herein, and have been so included in reliance
upon the report of such firm given upon its authority as experts in accounting
and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form SB-2 (File No. 333-23395) under the Securities Act with respect to the
Common Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Registration
Statement is publicly available through the SEC's World Wide Web site on the
Internet (http://www.sec.gov).
The Bank has filed with the OTS an Application for Approval of Conversion,
which includes proxy materials for the Bank's Special Meeting and certain other
information. This Prospectus omits certain information contained in such
Application. The Application, including the proxy materials, exhibits and
certain other information that are a part thereof, may be inspected, without
charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552
and at the office of the Regional Director of the OTS at the West Regional
Office of the OTS, 1 Montgomery Street, Suite 400, San Francisco, California
94104.
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<PAGE>
Index To Consolidated Financial Statements
First Federal Bank of Idaho, a Federal Savings Bank
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Certified Public Accountants........................ F-1
Consolidated Statements of Financial Condition as of
March 31, 1995 and 1996 and December 31, 1996............................ F-2
Consolidated Statements of Income for the Years Ended
March 31, 1995 and 1996 and the Nine Months Ended
December 31, 1995 and 1996............................................... 21
Consolidated Statements of Changes in Equity for the Years
Ended March 31, 1995 and 1996 and the Nine Months Ended
December 31, 1995 and 1996............................................... F-4
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1995 and 1996 and the Nine Months Ended
December 31, 1995 and 1996............................................... F-5
Summary of Significant Accounting Policies................................ F-8
Notes to Consolidated Financial Statements................................ F-14
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements on the Holding Company have not been included
since it will not engage in material transactions, if any, until after the
Conversion. The Holding Company, which has been inactive to date, has no
significant assets, liabilities, revenues, expenses or contingent liabilities.
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[LETTERHEAD OF BDO APPEARS HERE]
Report of Independent Certified Public Accountants
Board of Directors
First Federal Bank of Idaho, a Federal Savings Bank, and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of First Federal Bank of Idaho, a Federal Savings Bank, and Subsidiary (the
Bank) as of March 31, 1995 and 1996, and the related consolidated statements of
income, changes in equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Bank'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 generally accepted auditing
standards. 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 First
Federal Bank of Idaho, a Federal Savings Bank, and Subsidiary at March 31, 1995
and 1996 and the consolidated results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
January 31, 1997, except for Note 15
which is as of March 12, 1997
F-1
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statments of Financial Condition
================================================================================
<TABLE>
<CAPTION>
March 31,
-------------------------- December 31,
1995 1996 1996
- --------------------------------------------------------------------------------
(Unaudited)
Assets
<S> <C> <C> <C>
Cash and Cash Equivalents (Note 14):
Non-interest bearing cash deposits $ 3,283,998 $ 3,549,349 $ 4,948,433
Interest bearing deposits 364,720 9,366,053 249,979
Federal funds sold 523,387 665,463 566,203
- --------------------------------------------------------------------------------
Total cash and cash equivalents 4,172,105 13,580,865 5,764,615
Investment securities: (Notes 1 and 14)
Held-to-maturity 6,732,171 10,544,953 5,189,358
Available-for-sale 1,289,097 1,328,295 -
Mortgage-backed securities held-to-
maturity
(Notes 2 and 14) 2,840,282 2,487,998 2,342,753
Loans receivable, net (Notes 3, 8, 9,
and 14) 82,777,468 93,817,254 111,085,210
Accrued interest receivable (Note 4) 951,862 1,075,384 1,185,885
Real estate owned - 76,163 195,792
Stock in FHLB, at cost (Notes 12 and 14) 817,800 875,600 928,975
Premises and equipment, net (Note 5) 3,060,906 4,679,644 4,772,423
Income taxes receivable (Note 7) 73,000 10,667 -
Cash surrender value of life insurance
polices 1,240,670 1,283,628 1,333,905
Mortgage servicing assets 11,372 10,598 213,438
Other assets 153,879 61,242 181,734
- -------------------------------------------------------------------------------
Total Assets $ 104,120,612 $ 129,832,291 $ 133,194,088
===============================================================================
</TABLE>
F-2
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statments of Financial Condition
================================================================================
<TABLE>
<CAPTION>
March 31,
-------------------------- December 31,
1995 1996 1996
- --------------------------------------------------------------------------------
(Unaudited)
Liabilities and Equity
<S> <C> <C> <C>
Liabilities:
Deposits (Notes 6, 13, and 14) $ 88,787,009 $ 115,324,069 $105,348,812
Accrued interest on deposits 18,911 31,386 6,629
Advances from borrowers for taxes
and insurance 1,179,763 1,076,174 981,485
Income taxes payable (Note 7) - - 154,376
Advances from FHLB (Notes 12 and
14) 4,000,000 2,304,028 15,059,583
Deferred federal and state income
taxes (Note 7) 221,000 70,000 144,726
Accrued expenses and other
liabilities 409,707 670,429 680,661
- --------------------------------------------------------------------------------
Total liabilities 94,616,390 119,476,086 122,376,272
- --------------------------------------------------------------------------------
<CAPTION>
Commitments and Contingencies (Notes 3, 10, 11, 13 and 15)
<S> <C> <C> <C>
Equity:
Retained earnings, substantially
restricted (Note 8) 9,807,321 10,395,106 10,817,816
Unrealized loss on investment
securities available-for-sale,
net of tax (Note 1) (303,099) (38,901) -
- --------------------------------------------------------------------------------
Total equity 9,504,222 10,356,205 10,817,816
- --------------------------------------------------------------------------------
Total Liabilities and Equity $104,120,612 $129,832,291 $133,194,088
================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-3
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statements of Changes in Equity
================================================================================
<TABLE>
<CAPTION>
Unrealized Loss
on Investment
Retained Securities
Earnings, Available-
Substantially for-Sale, Total
Restricted net of tax Equity
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, April 1, 1994 $ 9,054,158 $ (257,579) $ 8,796,579
Net income 753,163 - 753,163
Change in unrealized loss on investment
securities available-for-sale,
net of tax - (45,520) (45,520)
- -----------------------------------------------------------------------------------------
Balance, March 31, 1995 9,807,321 (303,099) 9,504,222
Net income 587,785 - 587,785
Change in unrealized loss on investment
securities available-for-sale,
net of tax - 64,198 64,198
Write-down of investment securities
available-for-sale due to
permanent impairment - 200,000 200,000
- ------------------------------------------------------------------------------------------
Balance, March 31, 1996 10,395,106 (38,901) 10,356,205
Net income (unaudited) 422,710 - 422,710
Loss on sale of investment securities
available-for-sale (unaudited) - 38,901 38,901
- ------------------------------------------------------------------------------------------
Balance, December 31, 1996 (unaudited) $10,817,816 $ - $10,817,816
==========================================================================================
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-4
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, December 31,
-------------------------- ---------------------------
1995 1996 1995 1996
- --------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income $ 753,163 $ 587,785 $ 799,330 $ 422,710
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 338,311 299,870 216,154 267,783
Provision for loan losses 27,453 150,000 78,312 193,619
Write-down on impaired
investment securities
available-for-sale - 200,000 - -
Loss on sale of investment
securities available-for-sale - - - 89,789
Loss on sale of real estate owned - - - 1,815
Provision for deferred income taxes 39,000 (126,000) (11,422) 49,726
Changes in assets and liabilities:
Accrued interest receivable (235,412) (123,522) (300,573) (110,501)
Other assets (54,454) 93,411 83,880 (323,332)
Income taxes receivable (payable) (26,700) 62,333 15,396 165,043
Accrued expenses and other
liabilities (22,769) 273,197 110,743 (14,525)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 818,592 1,417,074 991,820 742,127
- --------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, December 31,
------------------------------ ------------------------------
1995 1996 1995 1996
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Investing Activities:
Purchase of mortgage-backed
securities held-to-maturity $ - $ - $ - $ (109,082)
Proceeds from maturities of
mortgage-backed securities
held-to-maturity 589,070 340,320 250,621 245,367
Purchases of investment securities
held-to-maturity (8,578,024) (8,387,090) (1,405,247) (8,349,154)
Proceeds from maturities of investment
securities held-to-maturity 5,934,539 4,586,825 3,666,190 13,700,736
Proceeds from sale of investment
securities available-for-sale - - - 1,302,406
Decrease in loans receivable from
loans sold 51,566,000 69,769,000 52,376,000 46,407,000
Other net change in loans receivable (58,154,263) (81,034,949) (63,369,015) (64,064,367)
FHLB stock dividends (48,500) (57,800) (41,900) (53,375)
Purchases of premises and equipment (668,435) (1,919,161) (1,883,380) (347,588)
Purchase of other invested assets (1,240,670) - - -
Net increase in cash surrender
value of life insurance policies - (42,958) (51,727) (50,277)
Proceeds from sale of real estate owned - - - 74,348
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,600,283) (16,745,813) (10,458,458) (11,243,986)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits (3,070,811) 26,537,060 30,455,892 (9,975,257)
Advances from borrowers for
taxes and insurance 270,935 (103,589) (386,164) (94,689)
Advances from FHLB 4,000,000 22,500,000 22,500,000 39,150,000
Payments on advances from FHLB - (24,195,972) (24,033,472) (26,394,445)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,200,124 24,737,499 28,536,256 2,685,609
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
March 31, December 31,
--------------------------- ----------------------------
1995 1996 1995 1996
- ---------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net Increase (Decrease) in
Cash and Cash Equivalents (8,581,567) 9,408,760 19,069,618 (7,816,250)
Cash and Cash Equivalents,
beginning of period 12,753,672 4,172,105 4,172,105 13,580,865
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents,
end of period $ 4,172,105 $ 13,580,865 $ 23,241,723 $ 5,764,615
===================================================================================================
Supplemental Disclosures of
Cash Flow Information:
Cash paid during the period for:
Interest $ 3,601,416 $ 5,145,455 $ 3,681,008 $ 4,039,133
Income taxes 516,137 457,490 442,316 -
Noncash investing and financing
activities:
Unrealized gain (loss) on
investment securities
available-for-sale, net
of tax (45,520) 64,198 97,356 (36,669)
Loans receivable charged
to the allowance for loan
losses 3,154 3,342 1,997 14,962
Transfer from loans converted
to real estate acquired
through foreclosure - 76,163 98,799 119,629
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-7
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
Nature of Business First Federal Bank of Idaho, a Federal Savings Bank, and
and Concentration Subsidiary's (collectively referred to as the "Bank")
of Credit Risk principal business consists 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 loans
and, to a lesser extent, construction, agricultural,
commercial, consumer and other loans. The Bank primarily
grants residential loans to customers in Central and North
Idaho and Southeast Washington.
Principles of The consolidated financial statements include the accounts
Consolidation of First Federal Bank of Idaho, a Federal Savings Bank and
its wholly-owned subsidiary, Tri-Star Financial Corporation
whose activities consist primarily of selling life insurance
and tax deferred annuities. All significant intercompany
transactions and balances are eliminated in consolidation.
Interim Financial The consolidated financial statements at December 31, 1996
Information and for the nine months ended December 31, 1996 and 1995 are
unaudited, but include all adjustments (consisting only of
normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position
at such dates and the operating results and cash flows for
those periods. Results for interim periods are not
necessarily indicative of results to be expected for the
entire year.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
assets and liabilities and disclosures on 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. Management believes that the
allowance for loan losses is adequate. While management uses
current information to recognize losses on loans, future
additions to the allowances may be necessary based on
changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their
examination
F-8
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
process, periodically review the Bank's allowances for loan
losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about
information available to them at the time of the
examination.
Statement of For purposes of the statement of cash flows, the Bank
Cash Flows considers all cash on hand and in banks, federal funds sold
and highly liquid marketable debt instruments with original
maturities when purchased of three months or less to be cash
and cash equivalents.
Premises and Premises and equipment, which consist of buildings,
Equipment building improvements, furniture, fixtures and office
equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The estimated
useful lives used to compute depreciation range from thirty
to forty years for buildings, thirty years for building
improvements, and five to ten years for furniture, fixtures
and equipment.
Income Taxes The Bank accounts for income taxes according to the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for
deferred income taxes. Under SFAS No. 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.
Investment and In May 1993, the Financial Accounting Standards Board
Mortgage-Backed issued SFAS No. 115, "Accounting for Certain Investments
Securities in Debt and Equity Securities." The Bank adopted the
provisions of SFAS 115 during the year ended March 31, 1995.
There was no material impact on either income or equity of
the Bank from the adoption of this standard. 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.
F-9
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
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 Bank has the ability and
the intention to hold investment and mortgage backed
securities to maturity and, accordingly, they are not
adjusted for temporary declines in their market value.
Available-for-Sale - Investments in debt and equity
securities classified as available-for-sale are carried at
the lower of their cost or estimated market value in the
aggregate. Unrealized gains and losses are recognized (net
of tax effect) through a valuation allowance that is shown
as a reduction in the carrying value of the related
securities and as a corresponding reduction of equity.
Trading - Investments in debt and equity securities
classified as trading are stated at their market value.
Unrealized holding gains and losses for trading securities
are included in the statement of income.
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 less the net
deferred loan origination fees and discounts. Deferred loan
origination fees and discounts are amortized over the
contractual life 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.
Effective April 1, 1995, the Bank adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures," which amends SFAS No.
114. These statements define the recognition criteria for
loan impairment and the measurement methods for certain
F-10
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
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 - 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 are 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 No. 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 Bank applies the recognition criteria of SFAS No. 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 No. 118 amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest
income on impaired loans. The Bank has elected to continue
to use its existing nonaccrual methods for recognizing
interest on impaired loans. The adoption of SFAS No. 114 and
SFAS No. 118 resulted in no prospective adjustment to the
allowance for loan losses and did not affect the Bank's
policies regarding charge-offs or recoveries.
Interest accruals on loans which are more than ninety days
delinquent are suspended. Suspended interest ultimately
collected is credited to interest income in the period of
recovery. Uncollectible accrued interest is included in the
Bank's allowance for loan losses.
Any unamortized discounts, premiums or fees on loans repaid
or sold are recognized as income in the year of repayment or
sale.
F-11
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
Real Estate Real estate acquired in settlement of loans, whether
Owned through actual foreclosure or in-substance foreclosure, is
initially recorded at the lower of fair value, less selling
costs, or the balance of the loan on the property at 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 those relating to holding
the property are charged to expense.
Valuations are periodically performed by the Bank, and
losses are recognized by a charge to income if the carrying
value of a property exceeds its estimated fair value.
Stock in Federal Federal law requires a member institution of the Federal
Home Loan Bank Home Loan Bank (FHLB) System to hold common stock of
its district FHLB according to predetermined formulas. No
ready market exists for such stock and it has no quoted
market value.
Reclassifications Certain reclassifications of prior years information have
been made to conform to the current year presentation.
Accounting for In March 1995, the Financial Accounting Standards Board
the Impairment of issued SFAS No. 121,"Accounting for the Impairment
and Disposal of of Long-Lived Assets and for Long-Lived Assets to
Long-Lived Assets be Disposed of," which establishes new guidelines regarding
when impairment losses on long-lived assets, which include
premises and equipment, certain identifiable intangible
assets and goodwill, should be recognized and how impairment
losses should be measured. This statement became effective
for the Bank for the fiscal year beginning April 1, 1996.
The adoption of this statement did not have a material
effect on the Bank's December 31, 1996 unaudited financial
statements.
Accounting for Effective April 1, 1996, the Bank adopted the provisions
Mortgage Servicing of SFAS No. 122 "Accounting for Mortgage Servicing Rights."
Rights SFAS No. 122 amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires a
mortgage banking enterprise to recognize as a separate
asset, the rights to service mortgage loans regardless of
whether the servicing rights are acquired through either
purchase or origination. Prior to SFAS No. 122,
F-12
<PAGE>
First Federal Bank of Idaho
a Federal Savings Bank
and Subsidiary
Summary of Significant Accounting Policies
================================================================================
SFAS No. 65 prohibited the capitalization of mortgage
servicing rights except where the rights to service the
loans were acquired from another organization. Additionally,
the new standard requires impairment analysis of mortgage
servicing rights regardless of whether purchased or
originated.
The Bank'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. The effect of adopting SFAS No. 122 was to
increase income before income taxes for the nine months
ended December 31, 1996, by approximately $204,000
(unaudited).
Accounting for In October 1995, the Financial Accounting Standards Board
Stock-Based issued SFAS No. 123, "Accounting for Stock-Based
Compensation Compensation," which encourages companies to adopt a new
method of accounting to measure the compensation cost of
stock-based employee compensation plans based on the fair
value of the stock at the date it is granted. This statement
became effective for the Bank for the fiscal year beginning
April 1, 1996. Currently, the Bank does not have any stock-
based compensation plans. However, in the future, such plans
may be offered and the provisions of SFAS No. 123 would
apply.
Accounting for In June 1996, the Financial Accounting Standards Board
Transfers and issued SFAS No. 125, "Accounting for Transfer and Servicing
Servicing of of Financial Assets and Extinguishment of Liabilities,"
Financial Assets which supercedes SFAS No. 122 and establishes new standards
and Extinguishment that focus on control whereas, after a transfer of financial
of Liabilities assets, an entity recognizes the financial servicing assets
it controls and the liabilities it has incurred,
derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished.
This statement applies prospectively in fiscal years
beginning after December 31, 1996. The Bank does not expect
adoption to have a material effect on its financial
statements.
F-13
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Investment Securities
Investment securities, net of unamortized premiums or unaccreted discounts
consist of the following held-to-maturity and available-for-sale:
HELD-TO-MATURITY
----------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1995: Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Farm Credit Bank, FHLB
and FHLMC bonds 4,236,883 -- (14,460) 4,222,423
Student Loan Marketing
Association bill 700,000 2,903 -- 702,903
FHLB and FNMA notes 1,795,288 -- (35,525) 1,759,763
- --------------------------------------------------------------------------------
Total $ 6,732,171 $ 2,903 $ (49,985) $ 6,685,089
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996: Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Farm Credit Bank
and FHLB bonds $ 8,297,090 $ -- $ (46,245) $ 8,250,845
Student Loan Marketing
Association bill 700,000 -- (235) 699,765
FHLB and FNMA notes 1,547,863 -- (19,048) 1,528,815
- --------------------------------------------------------------------------------
Total $ 10,544,953 $ -- $ (65,528) $ 10,479,425
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1996: Cost Gains Losses Market Value
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB bonds $ 3,989,124 $ 16,476 $ (20,500) $ 3,985,100
Student Loan
Marketing Assoc. bill 950,234 1,900 (549) 951,585
FNMA notes 250,000 -- (5,450) 244,550
- --------------------------------------------------------------------------------
Total $ 5,189,358 $ 18,376 $ (26,499) $ 5,181,235
================================================================================
</TABLE>
F-14
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
- ------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996: Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colonial Government
Investment Fund
(126,444 shares) $ 1,592,196 $ -- $ (303,099) $ 1,289,097
- --------------------------------------------------------------------------------
Less unrealized
depreciation on
marketable equity
securities (303,099) -- 303,099 --
- --------------------------------------------------------------------------------
Total $ 1,289,097 $ -- $ -- $ 1,289,097
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996 Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colonial Government
Investment Fund
(126,444 shares) $ 1,392,196 $ -- $ (63,901) $ 1,328,295
- --------------------------------------------------------------------------------
Less unrealized loss on
investment securities
available-for-sale (63,901) -- 63,901 --
- --------------------------------------------------------------------------------
$ 1,328,295 $ -- $ -- $ 1,328,295
================================================================================
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Due in one year or less $ 500,234 $ 499,850
Due after one through five years 4,689,124 4,681,385
- --------------------------------------------------------------------------------
$ 5,189,358 $ 5,181,235
================================================================================
</TABLE>
F-15
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. Mortgage Backed Securities
The amortized cost and estimated market values of mortgage-backed and
related securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1995: Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Certificates $ 1,668,579 $ -- $ (17,459) $ 1,651,120
Collateralized Mortgage
Obligations 556,121 -- (867) 555,254
SBA Certificates 61,641 -- (5,249) 56,392
GNMA Certificates 43,102 253 -- 43,355
FHLMC Certificates 510,839 -- (1,650) 509,189
- --------------------------------------------------------------------------------
Total $ 2,840,282 $ 253 $ (25,225) $ 2,815,310
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996: Cost Gains Losses Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Certificates $ 1,472,887 $ 17,263 $ (72,190) $ 1,417,960
Collateralized Mortgage
Obligations 488,082 1,504 (1,112) 488,474
SBA Certificates 37,010 -- (3,145) 33,865
GNMA Certificates 39,215 762 (907) 39,070
FHLMC Certificates 450,804 4,456 (12,596) 442,664
- --------------------------------------------------------------------------------
Total $ 2,487,998 $ 23,985 $ (89,950) $ 2,422,033
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
December 31, 1996: Cost Gains Losses Market Value
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FNMA Certificates $ 1,332,334 $ 15,066 $ (74,952) $ 1,272,448
Collateralized Mortgage
Obligations 442,246 298 (1,297) 441,247
SBA Certificates 21,551 60 (2,592) 19,019
GNMA Certificates 145,039 2,509 (1,363) 146,185
FHLMC Certificates 401,583 3,592 (13,213) 391,962
- --------------------------------------------------------------------------------
Total $ 2,342,753 $ 21,525 $ (93,417) $ 2,270,861
================================================================================
</TABLE>
F-16
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
The amortized cost and estimated market value of mortgage
backed securities at December 31, 1996, by contractual
maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Due in one year or less $ 7,266 $ 7,236
Due after one through five years 14,285 11,783
Due after five years through ten years -- --
Due after ten years 2,321,202 2,251,842
--------------------------------------------------------------------------
$2,342,753 $2,270,861
==========================================================================
</TABLE>
Collateralized mortgage obligations at March 31, 1995, March
31, 1996 and December 31, 1996 were collateralized by
mortgage-backed securities issued by the Federal National
Mortgage Association, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association.
3. Loans Loans receivable consist of the following:
Receivable
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------
1995 1996 1996
(Unaudited)
--------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate loans:
Conventional mortgages:
Adjustable rate loans $ 35,025,310 $ 36,166,820 $ 41,761,360
Fixed rate loans 18,487,312 25,381,370 29,733,379
FHA and VA insured 1,853,670 1,270,317 1,161,821
Construction 12,258,500 13,831,983 14,944,762
Agricultural 11,887,070 11,945,067 11,875,609
Commercial 5,068,081 4,036,102 6,007,391
</TABLE>
F-17
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------
1995 1996 1996
(Unaudited)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Other loans:
Agricultural operating 561,092 589,157 1,024,314
Loans to depositors, secured
by savings 502,657 411,750 310,482
Other consumer 3,166,713 7,022,726 11,777,686
------------------------------------------------------------------------------
Total loans receivable 88,810,405 100,655,292 118,596,804
Less:
Loans in process 5,052,172 5,726,171 6,223,956
Unearned loan fees and discounts 426,080 410,524 407,638
Allowance for loan losses 554,685 701,343 880,000
------------------------------------------------------------------------------
Loans receivable, net $ 82,777,468 $ 93,817,254 $111,085,210
==============================================================================
</TABLE>
Total loans receivable consists of approximately $64,732,000,
$76,050,000 and $87,090,000 in one- to four-family
residential real estate loans at March 31, 1995, March 31,
1996 and December 31, 1996, respectively.
The following summarizes the changes in the allowance for
loan losses:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------- -----------------------
1995 1996 1995 1996
(Unaudited)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for Loan
Losses, beginning
of period $ 530,386 $ 554,685 $ 554,685 $ 701,343
Provision for loan losses 27,453 150,000 78,312 193,619
Recoveries -- -- -- --
Charge-offs (3,154) (3,342) (1,997) (14,962)
-----------------------------------------------------------------------------
Allowance for Loan
Losses, end of period $ 554,685 $ 701,343 $ 631,000 $ 880,000
=============================================================================
</TABLE>
F-18
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
Outstanding commitments of the Bank to originate loans as of
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
------------------------------------------------------------------------
<S> <C> <C> <C>
(Unaudited)
First mortgage loans $ 14,065,713 $ 2,260,425 $ 16,326,138
Other loans 38,250 -- 38,250
------------------------------------------------------------------------
Outstanding Loan
Commitments $ 14,103,963 $ 2,260,425 $ 16,364,388
========================================================================
</TABLE>
Interest rates on fixed rate loan commitments range from
6.47% to 8.50% and are committed through March 1997. 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.
The Bank remains contingently liable for approximately
$1,811,000 (unaudited) of loans sold with recourse as of
December 31, 1996. Loans serviced for others (including
contract collections) are not included in the consolidated
statements of financial condition. The unpaid principal
balances of these loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------- -------------------------
1995 1996 1995 1996
(Unaudited)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan portfolios serviced for:
FNMA $ 80,886,855 $ 73,181,444 $ 75,917,627 $ 65,599,875
FHLMC 31,166,542 45,481,134 41,034,176 62,346,466
Others 3,843,719 3,590,255 3,808,317 3,511,976
-------------------------------------------------------------------------
$115,897,116 $122,252,833 $120,760,120 $131,458,317
=========================================================================
</TABLE>
F-19
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The principal amount of loans subject to delinquent principal or interest,
defined as payment being in arrears over three months, totalled
approximately $532,000, $692,000 and $1,006,000 (unaudited) at March 31,
1995, March 31, 1996 and December 31, 1996, respectively.
4. Accrued Interest Receivable
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------- December 31,
1995 1996 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities $ 103,647 $ 16,226 $ 13,645
Mortgage-backed securities 15,883 76,811 97,619
Interest bearing deposits -- 21,250 --
Loans receivable 832,332 961,097 1,074,621
----------------------------------------------------------------------------
Accrued Interest Receivable $ 951,862 $1,075,384 $1,185,885
============================================================================
</TABLE>
5. Premises and Equipment
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
-------------------------- December 31,
1995 1996 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Land, buildings and building
improvements $ 2,960,881 $ 4,747,777 $ 4,752,283
Branch premises under development 109,850 -- 248,271
Furniture, fixtures and equipment 1,730,428 1,972,543 2,067,354
----------------------------------------------------------------------------
4,801,159 6,720,320 7,067,908
Accumulated depreciation (1,740,253) (2,040,676) (2,295,485)
----------------------------------------------------------------------------
Premises and equipment, net $ 3,060,906 $ 4,679,644 $ 4,772,423
============================================================================
</TABLE>
F-20
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Deposits
Deposits and the related weighted average interest rates consist of the
following:
<TABLE>
<CAPTION>
March 31,
----------------------------- December 31,
1995 1996 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Deposit accounts:
NOW accounts (1.36%,
1.48% and 1.23%) $ 13,146,372 $ 14,616,706 $ 15,211,424
Passbook accounts (3.33%,
3.29% and 3.00%) 15,609,900 13,860,858 13,455,667
Money market accounts
(3.28%, 3.03% and 3.03%) 8,931,898 7,167,327 7,427,621
----------------------------------------------------------------------------
37,688,170 35,644,891 36,094,712
----------------------------------------------------------------------------
Certificates of deposit:
3.20% to 4.19% 5,797,420 1,786,227 1,078,532
4.20% to 5.19% 16,001,220 13,854,350 24,585,767
5.20% to 6.19% 18,688,995 50,331,588 32,929,053
6.20% to 7.19% 6,674,310 10,299,587 9,751,964
7.20% to 8.19% 3,348,552 2,814,237 453,574
8.20% to 11.19% 588,342 593,189 455,210
----------------------------------------------------------------------------
51,098,839 79,679,178 69,254,100
----------------------------------------------------------------------------
Deposits $ 88,787,009 $115,324,069 $105,348,812
============================================================================
</TABLE>
F-21
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The scheduled maturities of certificates of deposit at December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
Amount
----------------------------------------------------------------------------
(Unaudited)
<S> <C>
1997 $ 49,235,000
1998 12,240,000
1999 5,459,000
2000 796,000
2001 1,305,000
Thereafter 219,100
----------------------------------------------------------------------------
Total $ 69,254,100
============================================================================
</TABLE>
Interest expense on deposits consists of:
<TABLE>
<CAPTION>
Year ended Nine months ended
March 31, December 31,
------------------------ -----------------------
1995 1996 1995 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW and money market $ 486,419 $ 422,008 $ 319,254 $ 303,924
Passbook savings 549,675 454,056 345,773 311,573
Certificates of deposit 2,458,169 3,916,773 2,684,731 3,083,496
----------------------------------------------------------------------------
Interest Expense $3,494,263 $4,792,837 $3,349,758 $3,698,993
============================================================================
</TABLE>
Certificates of deposit of $100,000 or more totalled approximately
$9,294,000, $12,987,000 and $9,386,000 (unaudited) at March 31, 1995, March
31, 1996 and December 31, 1996, respectively. Deposit balances in excess of
$100,000 are not insured by the Federal Deposit Insurance Corporation
(FDIC).
F-22
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. Income Taxes
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
March 31, December 31,
------------------------ -------------------------
1995 1996 1995 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ 329,423 $ 402,000 $ 349,785 $ 98,378
State 83,803 99,000 89,463 2,571
----------------------------------------------------------------------------
413,226 501,000 439,248 100,949
----------------------------------------------------------------------------
Deferred:
Federal 35,000 (109,000) (9,907) 43,161
State 4,000 (17,000) (1,515) 6,565
----------------------------------------------------------------------------
39,000 (126,000) (11,422) 49,726
----------------------------------------------------------------------------
Income Tax Expense $ 452,226 $ 375,000 $ 427,826 $ 150,675
----------------------------------------------------------------------------
</TABLE>
Deferred tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
March 31,
------------------------- December 31,
1995 1996 1996
(Unaudited)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Liabilities:
Stock in FHLB $ (236,000) $ (259,000) $ (279,000)
Loan loss reserves -- -- (83,000)
Depreciation (90,000) (46,000) (75,000)
Other (62,000) (88,000) (2,726)
----------------------------------------------------------------------------
Total Deferred Tax Liabilities (388,000) (393,000) (439,726)
----------------------------------------------------------------------------
Deferred Tax Assets:
Unearned loan fees 167,000 161,000 160,000
Allowance for loan losses -- 59,000 135,000
Unrealized loss on equity security -- 103,000 --
----------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
March 31,
----------------------------------------- December 31,
1995 1996 1996
(Unaudited)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Deferred Tax Assets 167,000 323,000 295,000
--------------------------------------------------------------------------------------------
Net Deferred
Income Tax Liability $ (221,000) $ (70,000) $ (144,726)
============================================================================================
A reconciliation of the statutory federal income tax rate to the effective income tax rate
follows:
</TABLE>
<TABLE>
<CAPTION>
Year ended Nine months ended
March 31, December 31,
------------------------------------------ -----------------------------------------------
1995 1996 1995 1996
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax expense
at statutory rates $ 409,832 34.0% $ 327,347 34.0% $ 417,233 34.0% $ 194,951 34.0%
Increase (decrease)
resulting from:
State income taxes,
net of federal benefit 55,310 4.6 65,340 6.8 59,046 4.8 1,697 0.3
Permanent and other differences (12,916) (1.1) (17,687) (1.9) (48,453) (3.9) (45,973) (8.0)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 452,226 37.5% $ 375,000 38.9% $ 427,826 34.9% $ 150,675 26.3%
====================================================================================================================================
</TABLE>
8. Equity The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary
actions by 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.
F-24
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
Quantitative measures established by regulation to
ensure capital adequacy require the Bank to maintain minimum
amounts and ratios. Under regulations of the Office of
Thrift Supervision ("OTS"), the Bank must meet three
minimum-capital requirements: a tangible capital requirement
equal to not less than 1.5 percent of tangible assets, a
core capital requirement, comprised of tangible capital
adjusted for supervisory goodwill and other deferred factors
equal to not less than 3 percent of tangible assets; and a
risk-based capital requirement equal to at least 8 percent
of all risk-weighted assets.
At December 31, 1996, the Bank met the regulatory tangible
capital, core capital and risk-based capital requirements.
At December 31, 1996, the Bank's regulatory tangible capital
and core capital were both $10,818,000 or 8.1 percent of
tangible assets and risk-based capital was $11,698,000 or
13.3 percent of total risk-weighted assets.
The following is a reconciliation of equity as reported in
accordance with generally accepted accounting principles
(GAAP capital) to federal regulatory capital:
<TABLE>
<CAPTION>
March 31, 1995 March 31, 1996 December 31, 1996
---------------------------- -------------------------- ----------------------------
(Unaudited)
Risk Risk Risk
Tangible Core Based Tangible Core Based Tangible Core Based
Capital Capital Capital Capital Capital Capital Capital Capital Capital
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
GAAP capital $ 9,504 $ 9,504 $ 9,504 $ 10,356 $ 10,356 $ 10,356 $ 10,818 $10,818 $10,818
Additional capital items:
Allowances for loan and
lease losses - - 555 - - 701 - - 880
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital 9,504 9,504 10,059 10,356 10,356 11,057 10,818 10,818 11,698
Minimum capital requirement 1,562 3,125 5,138 1,947 3,895 6,254 1,998 3,996 7,052
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital - excess $ 7,942 $ 6,379 $ 4,921 $ 8,409 $ 6,461 $ 4,803 $ 8,820 $ 6,822 $ 4,646
===================================================================================================================
</TABLE>
F-25
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
As of March 31, 1995, March 31, 1996 and December 31, 1996,
the most recent respective notifications from the OTS
categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are
no conditions or events since the most recent notification
that management believes have changed the Bank's category.
To be categorized as well capitalized, the Bank must
maintain minimum ratios of total capital to risk-based
assets, core capital to risk-based assets and core capital
to adjusted total assets. The Bank's actual and minimum
capital requirements (in thousands) to be well capitalized
under prompt corrective action provisions are as follows:
<TABLE>
<CAPTION>
Minimum
Actual Requirements
Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1995
Tier 1 Capital (to adjusted total assets) $ 9,504 9.1% $ 5,207 5.0%
Tier 1 Capital (to risk-weighted assets) $ 9,504 14.8% $ 3,854 6.0%
Total Capital (to risk-weighted assets) $ 10,059 15.7% $ 6,423 10.0%
March 31, 1996
Tier 1 Capital (to adjusted total assets) $ 10,356 8.0% $ 6,492 5.0%
Tier 1 Capital (to risk-weighted assets) $ 10,356 13.2% $ 4,691 6.0%
Total Capital (to risk-weighted assets) $ 11,057 14.1% $ 7,818 10.0%
December 31, 1996
Tier 1 Capital (to adjusted total assets) $ 10,818 8.1% $ 6,660 5.0%
Tier 1 Capital (to risk-weighted assets) $ 10,818 12.3% $ 5,289 6.0%
Total Capital (to risk-weighted assets) $ 11,698 13.3% $ 8,815 10.0%
</TABLE>
9. Related Party Prior to the Financial Institutions Reform, Recovery and
Transactions Enforcement Act of 1989 (FIRREA), the Bank's policy allowed
all full-time permanent employees with one complete year of
service, key officers and directors to receive a first
mortgage loan on their primary residence at rates which may
be below market. At such time that they cease to be employed
by the Bank and are not eligible for retirement (age 55 or
older), the loan terms will change to the market interest
rate on the date the loan closed.
F-26
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
Subsequent to FIRREA, preferential terms on key officer and
director loans were discontinued. The following schedule
summarizes the activity in loans to directors, key officers
and employees:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------
1995 1996 1996
(Unaudited)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 1,049,433 $ 1,464,192 $ 1,376,661
Additions 557,875 545,900 --
Repayments and sales proceeds (143,116) (633,431) (151,632)
-------------------------------------------------------------------------------
Balance, end of period $ 1,464,192 $ 1,376,661 $ 1,225,029
===============================================================================
</TABLE>
10. Profit Sharing The Bank established, during 1995, a profit sharing plan
Plan pursuant to Section 401(k) of the Internal Revenue Code,
whereby participants may contribute a percentage of
compensation, but not in excess of the maximum allowed under
the Code. The plan provides for a matching contribution by
the Bank which amounted to $5,945 and $33,447 for the years
ended March 31, 1995 and 1996, and $22,593 (unaudited) and
$135,238 (unaudited) for the nine months ended December 31,
1995 and 1996. In addition, the Bank may make additional
contributions at the discretion of the Board of Directors.
These additional contributions amounted to $0 and $61,770
for the years ended March 31, 1995 and 1996, and $51,068
(unaudited) and $69,737 (unaudited) for the nine months
ended December 31, 1995 and 1996.
11. Retirement The Bank had a noncontributory pension trust ("the Plan")
Plan which was suspended effective January 1, 1995. As a result
of the Plan suspension, a net loss of $96,000, resulting
from the recognition of previously deferred gains and losses
for prior service, was recorded as pension expense for the
year ended March 31, 1995.
F-27
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
On March 31, 1996, the Bank terminated the Plan. The
termination of the Plan required an additional contribution
of approximately $130,000 (unaudited) to fund the necessary
lump sum distributions as specified in the Plan documents.
The Bank satisfied this obligation in September 1996.
12. Advances Advances from FHLB had weighted average interest rates at
from FHLB March 31, 1995, March 31, 1996 and December 31, 1996 of
6.74%, 6.10% and 6.07% (unaudited), respectively. Maturity
dates of advances were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------
1995 1996 1996
(Unaudited)
--------------------------------------------------------------------------
<S> <C> <C> <C>
Advances from FHLB due:
Less than 1 year $ 4,000,000 $ 750,000 $10,740,972
1 to 2 years -- 328,472 390,972
2 to 3 years -- 578,472 1,000,000
3 to 4 years -- -- 534,583
4 to 5 years -- 647,084 2,393,056
--------------------------------------------------------------------------
$ 4,000,000 $ 2,304,028 $15,059,583
==========================================================================
</TABLE>
Pursuant to collateral requirements of the FHLB, advances
are secured by stock in the FHLB and qualifying first
mortgage loans.
13. Commitments The deposits of the Bank are insured by the Savings
and Association Insurance Fund (SAIF), one of two funds
Contingencies administered by the FDIC. The Bank previously paid annual
premiums of approximately $.23 per $100 of deposits. On
September 30, 1996, the Deposit Insurance Funds Act of 1996
was signed, which authorized the FDIC to impose a special
assessment on certain deposits held by thrift institutions.
This special assessment, which was based on $.657 per $100
of outstanding deposits at March 31, 1995, was intended to
recapitalize the SAIF. Accordingly, the Bank recorded a one
time pre-tax charge of approximately $584,000 (unaudited) at
September 30, 1996, which was paid prior to December 31,
1996. The Bank's annual SAIF premium rates were reduced to
$.0648 per $100 of deposits beginning January 1, 1997.
F-28
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
14. Fair Values of SFAS No. 107, "Disclosures about Fair Value of Financial
Financial Instruments," requires disclosure of fair value information
Instruments 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 below.
<TABLE>
<CAPTION>
March 31, 1996
-----------------------------
Carrying Estimated
Amount Fair Value
------------------------------------------------------------------------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 13,580,865 $ 13,580,865
Investment securities held-to-maturity 10,544,953 10,479,425
Investment securities available for sale 1,328,295 1,328,295
Mortgage-backed securities
held-to-maturity 2,487,998 2,422,033
Loans receivable 93,817,254 93,157,000
Stock in FHLB 875,600 875,600
Cash surrender value of
life insurance policies 1,283,628 1,283,628
Financial liabilities
Deposits 115,324,069 116,050,000
Advances from FHLB 2,304,028 2,201,000
</TABLE>
F-29
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------
Carrying Estimated
Amount Fair Value
(Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
Financial assets
Cash and cash equivalents $ 5,764,615 $ 5,764,615
Investment securities held-to-maturity 5,189,358 5,181,235
Mortgage-backed securities
held-to-maturity 2,342,753 2,270,861
Loans receivable 111,085,210 110,303,430
Stock in FHLB 928,975 928,975
Cash surrender value of
life insurance policies 1,333,905 1,333,905
Financial liabilities
Deposits 105,348,812 106,011,951
Advances from FHLB 15,059,583 15,059,583
</TABLE>
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 - 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 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
F-30
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
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 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.
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 Bank's consolidated financial position.
15. Subsequent Event - Adoption of Plan of Conversion
On January 8, 1997, the Board of Directors of the Bank adopted the Plan of
Conversion (the Plan), which was subsequently amended on March 12, 1997,
pursuant to which the Bank will convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank, all of the
outstanding common stock of which will be acquired by FirstBank Corp. (the
Company), a holding company formed expressly for such purpose, in exchange
for a portion of the net conversion proceeds (Conversion). All of
F-31
<PAGE>
First Federal Bank of Idaho,
a Federal Savings Bank
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
the common stock of the Company to be issued in the Conversion is being
offered initially to certain eligible account holders, members and to the
Bank's tax-qualified employee benefit plans. Pursuant to the Plan, as soon
as practicable after the Conversion, the Bank will relocate its main
office to the state of Washington and convert to a Washington-chartered
savings bank.
The Bank plans to establish an Employee Stock Ownership Plan (ESOP) for
the benefit of eligible employees, to become effective upon consummation
of the Conversion. The ESOP intends to purchase up to 8% of the Company's
common stock issued in the Conversion utilizing the proceeds of a loan
from the Company. The loan will be repaid over a period of 10 years and
the collateral for the loan will be the common stock purchased by the
ESOP.
At the time of the Conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the latest
balance sheet 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.
The costs associated with Conversion will be deferred and will be deducted
from the proceeds of the sale and issuance of the Company's stock. In the
event the Conversion is not consummated, costs incurred will be charged to
expenses. At December 31, 1996, deferred Conversion costs were $12,425
(unaudited).
After the Conversion, the Bank may not declare or pay dividends on its
stock if such declaration and payment would violate statutory or
regulatory requirements.
F-32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY FIRSTBANK CORP., FIRSTBANK NORTHWEST OR SANDLER O'NEILL. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF FIRSTBANK CORP. OR FIRSTBANK NORTHWEST SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary...................................................... (i)
Selected Consolidated Financial Information............................. (vii)
Recent Developments..................................................... (ix)
Risk Factors............................................................ 1
FirstBank Corp. ........................................................ 7
FirstBank Northwest..................................................... 8
Use of Proceeds......................................................... 9
Dividend Policy......................................................... 10
Market for Common Stock................................................. 11
Capitalization.......................................................... 12
Historical and Pro Forma Capital Compliance............................. 14
Pro Forma Data.......................................................... 16
First Federal Bank of Idaho, a Federal Savings Bank
Consolidated Statements of Income...................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 22
Business of the Holding Company......................................... 34
Business of the Bank.................................................... 34
Management of the Holding Company....................................... 59
Management of the Bank.................................................. 59
Regulation.............................................................. 67
Taxation................................................................ 78
The Conversion.......................................................... 80
Restrictions on Acquisition of the Holding Company...................... 96
Description of Capital Stock of the Holding Company..................... 101
Registration Requirements............................................... 102
Legal and Tax Opinions.................................................. 103
Experts................................................................. 103
Additional Information.................................................. 103
Index to Consolidated Financial Statements.............................. 104
</TABLE>
UNTIL THE LATER OF JUNE 14, 1997, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,725,000 SHARES
[LOGO OF FIRSTBANK CORP. APPEARS HERE]
(PROPOSED HOLDING COMPANY FOR FIRSTBANK NORTHWEST)
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MAY 14, 1997
Sandler O'Neill & Partners, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
[LOGO OF FIRSTBANK APPEARS HERE]
Subscription & Community Offering
Stock Order Form
======================================
FIRSTBANK NORTHWEST EXPIRATION DATE
CONVERSION CENTER for Stock Order
141 9th Street, Forms:
Suite #8 Day, Month XX,
Lewiston, ID 83501 1997
1-888-430-7300 12:00 Noon,
Pacific Time
================================================================================
IMPORTANT--PLEASE NOTE: A properly completed original stock order form must
be used to subscribe for common stock. Copies of this form are not required
to be accepted. Please read the Stock Ownership Guide and Stock Order Form
Instructions as you complete this Form.
================================================================================
(1) NUMBER SUBSCRIPTION (2) TOTAL The minimum purchase is 25 shares. No
OF SHARES PRICE PAY- person may purchase more than
MENT $125,000 of the shares offered
DUE (12,500 shares). In addition, no
- ------------- ---------- person, together with Associates and
X $10.00 = persons acting in concert with such
- ------------- ---------- person, may purchase in the
aggregate more than $250,000 of the
shares offered (25,000 shares).
================================================================================
[_] (3) EMPLOYEE/OFFICER/DIRECTOR (6) PURCHASER INFORMATION
INFORMATION a. [_] Check here if you are an
Check here if you are an employee, Eligible Account Holder with
officer or director of FirstBank a deposit account(s) totalling
Northwest or a member of such $50.00 or more on December 31,
person's immediate family. 1995. List account(s) below.
=========================================
(4) METHOD OF Check Amount b. [_] Check here if you are a
PAYMENT/CHECK -------------- Supplemental Eligible Account
Enclosed is a check, Holder with a deposit
bank draft or money -------------- account(s) totalling $50.00
order made payable to or more on March 31, 1997.
FirstBank Northwest List account(s) below.
in the amount of:
c. [_] Check here if you were a
========================================= depositor as of April 30, 1997
(5) METHOD OF PAYMENT/WITHDRAWAL or a borrower with a loan
The undersigned authorizes with- outstanding as of April 25,
drawal from the following account(s) 1990 which continued to be
at FirstBank Northwest. Individual outstanding as of April 30,
Retirement Accounts maintained at 1997. LIST ACCOUNT(S) OR
FirstBank Northwest cannot be used. LOAN(S) BELOW.
There is no penalty for early
withdrawal used for this payment.
-------------------------------------
----------------------------------- Account Title
Withdrawal (Names on Account
Account Number(s) Amount(s) Accounts) Number(s)
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
----------------------------------- -------------------------------------
Total Withdrawal -------------------------------------
Amount
---------------- -------------------------------------
PLEASE NOTE: FAILURE TO LIST ALL
YOUR ACCOUNTS MAY RESULT IN THE
LOSS OF PART OR ALL OF YOUR
SUBSCRIPTION RIGHTS. IF ADDITIONAL
SPACE IS NEEDED, PLEASE UTILIZE THE
BACK OF THIS STOCK ORDER FORM.
================================================================================
(7) STOCK REGISTRATION/FORM OF ------ ---- --------
STOCK OWNERSHIP - -
[_] Individual [_] Joint Tenants [_] Tenants ------ ---- --------
in [_] IRA or other
[_] Fiduciary [_] Company/ Common Qualified Plan--
(i.e. trust, Corp/ Beneficial
estate, etc.) Partnership [_] Uniform Owners SS#
Transfer
to Minors
Act
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY)
--------------------------------------------------------------------------
Name(s) Social Security
# or Tax ID
--------------------------------------------------------------------------
Name(s) continued Social Security
# or Tax ID
--------------------------------------------------------------------------
Street Address County of
Residence
--------------------------------------------------------------------------
City State Zip Code
---------------------------------------------------
(9) TELEPHONE-- Daytime ( ) Evening ( )
---------------------------------------------------
================================================================================
[_] (10) NASD AFFILIATION--Check here if you are a [_] (11) ASSOCIATES--ACTING
member of the National Association of IN CONCERT
Securities Dealers, Inc. ("NASD"), a person Check here, and
associated with an NASD member, a member of the complete the reverse
immediate family of any such person to whose side of this Form, if
support such person contributes, directly or you or any associates
indirectly, or the holder of an account in (as defined on the
which an NASD member or person associated with reverse side of this
an NASD member has a beneficial interest. To Form) or persons with
comply with conditions under which an exemption acting in concert
from the NASD's Interpretation With Respect to you have submitted
Free-Riding and Withholding is available, you other orders for shares
agree, if you have checked the NASD Affiliation in the Subscription
box, (i) not to sell, transfer or hypothecate and/or Direct Community
the stock for a period of three months follow- Offerings.
ing issuance, and (ii) to report this sub-
scription in writing to the applicable NASD
member within one day of payment therefor.
================================================================================
(12) ACKNOWLEDGMENT--To be effective, this Stock Order Form and BANK USE
accompanying Certification Form must be properly completed and ONLY
actually received by FirstBank Northwest no later than 12:00
Noon, Pacific time, on DAY, MONTH, DATE, 1997, unless extended; ============
otherwise this Stock Order Form and all subscription rights
will be void. The undersigned agrees that after receipt by
FirstBank Northwest, this Stock Order Form may not be modified, ============
withdrawn or canceled without the Bank's consent and if author-
ization to withdraw from deposit accounts at the Bank has been
given as payment for shares; the amount authorized for with- ============
drawal shall not otherwise be available for withdrawal by the BANK USE
undersigned. Under penalty of perjury, I hereby certify that ONLY
the Social Security or Tax ID Number and the information ============
provided on this Stock Order Form is true, correct and
complete, that I am not subject to back-up withholding, and
that I am purchasing solely for my own account and that there
is no agreement or understanding regarding the sale or transfer
of such shares, or my right to subscribe for shares herewith.
It is understood that this Stock Order Form will be accepted in
accordance with, and subject to, the terms and conditions of
the Plan of Conversion of the Bank described in the accompany-
ing Prospectus. The undersigned hereby acknowledges receipt of
the Prospectus at least 48 hours prior to delivery of this
Stock Order Form to the Bank. FEDERAL REGULATIONS PROHIBIT ANY
PERSON FROM TRANSFERRING, OR ENTERING INTO ANY AGREEMENT,
DIRECTLY OR INDIRECTLY, TO TRANSFER THE LEGAL OR BENEFICIAL
OWNERSHIP OF SUBSCRIPTION RIGHTS OR THE UNDERLYING SECURITIES
TO THE ACCOUNT OF ANOTHER. FIRSTBANK NORTHWEST AND FIRSTBANK
CORP. WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN
THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION
RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE SUCH
TRANSFER.
----------------------------- --------------------------------
SIGNATURE DATE SIGNATURE DATE
----------------------------- --------------------------------
A SIGNED CERTIFICATION FORM MUST ACCOMPANY ALL STOCK ORDER
FORMS
- --------------------------------------------------------------------------------
<PAGE>
Item (6)a, (6)b, (6)c--(continued)
----------------------------------------------------------------------
Account Title (Names on Accounts) Account Number(s)
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
Item (11)--(continued)
List below all other orders submitted by you or Associates (as defined)
or by persons acting in concert with you.
----------------------------------------------------------------------
Name(s) listed on other Stock Order Forms Number of Shares
Ordered
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
"Associate" is defined as: (i) any corporation or organization (other
than the Bank or a majority-owned subsidiary of the Bank or FirstBank
Corp.) of which such person is a director, officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such
person serves as a trustee or in a similar fiduciary capacity, except
that such term does not include FirstBank Corp.'s or FirstBank
Northwest's employee benefit plans; and (iii) ANY RELATIVE OR SPOUSE OF
SUCH PERSON, OR ANY RELATIVE OF SUCH SPOUSE, WHO HAS THE SAME HOME AS
SUCH PERSON or who is a Director or officer of the Bank or the
FirstBank Corp. or any subsidiaries thereof. Directors of the Bank or
the FirstBank Corp. are not treated as Associates solely because of
their Board memberships.
<PAGE>
================================================================================
YOU MUST SIGN THE FOLLOWING CERTIFICATION IN ORDER TO PURCHASE STOCK
CERTIFICATION FORM
I ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, AND IS NOT GUARANTEED BY FIRSTBANK NORTHWEST, THE FEDERAL
GOVERNMENT OR BY ANY GOVERNMENT AGENCY. THE ENTIRE AMOUNT OF AN INVESTOR'S
PRINCIPAL IS SUBJECT TO LOSS.
If anyone asserts that this security is federally insured or guaranteed, or
is as safe as an insured deposit, I should call the Regional Director of the
Office of Thrift Supervision, West Region located in San Francisco,
California at (415) 616-1500.
I further certify that, before purchasing the common stock, par value $.01
per share, of FirstBank Corp. (the "Company"), the proposed holding company
for FirstBank Northwest, I received a Prospectus of the Company dated May ,
1997 relating to such offer of Common Stock.
The Prospectus that I received contains disclosure concerning the nature of
the Common Stock being offered by the Company and describes the risks
involved in the investment in this Common Stock, including but not limited to
the:
1. Diversified Lending Risks (page 1)
2. Reliance on Mortgage Banking Operations (page 1)
3. Risks of Dependency on Local Economy (page 2)
4. Risks of Community Banking Strategy (page 2)
5. Low Return on Equity After Conversion (page 3)
6. Competition Within Market Area (page 3)
7. Anti-takeover Effects of Governing Documents, Delaware and
Federal Law, Control by Insiders and Employment Agreements (page 3)
8. Interest Rate Risk Exposure (page 5)
9. Absence of Active Market for the Common Stock (page 5)
10. Possible Dilutive Effect of Benefit Programs (page 6)
11. Possible Adverse Income Tax Consequences of the
Distribution of Subscription Rights (page 6)
12. Possible Increase in Estimated Price Range and Number of
Shares Issued (page 6)
13. Potential Operational Restrictions Associated with
Regulatory Oversight (page 7)
Signature Date Signature Date
------------------------------------ ----------------------------------
------------------------------------ ----------------------------------
Name (Please Print) Name (Please Print)
------------------------------------ ----------------------------------
------------------------------------ ----------------------------------
================================================================================
<PAGE>
[LOGO OF FIRSTBANK]
================================================================================
STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
- --------------------------------------------------------------------------------
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
- --------------------------------------------------------------------------------
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenant in common.
- --------------------------------------------------------------------------------
UNIFORM TRANSFER TO MINORS ACT ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfer to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for
Custodian is "CUST", while the Uniform Transfer to Minors Act is "UTMA".
Standard U.S. Postal Service state abbreviations should be used to describe
the appropriate state. For example, stock held by John Doe as custodian for
Susan Doe under the Idaho Uniform Transfer to Minors Act will be abbreviated
John Doe, CUST Susan Doe UTMA. ID (use minor's social security number).
- --------------------------------------------------------------------------------
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
. The name(s) of the fiduciary. If an individual, list the first name,
middle initial and last name. If a corporation, list the full corporate
title (name). If an individual and a corporation, list the corporation's
title before the individual.
. The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
. A description of the document governing the fiduciary relationship, such
as a trust agreement or court order. Documentation establishing a
fiduciary relationship may be required to register your stock in a
fiduciary capacity.
. The date of the document governing the relationship, except that the date
of a trust created by a will need not be included in the description.
. The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is:
John Doe, Trustee Under Agreement Date 10-1-87 for Susan Doe.
================================================================================
================================================================================
STOCK ORDER FORM INSTRUCTIONS
ITEMS 1 AND 2-
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares by the
subscription price of $10.00 per share. The minimum purchase in the
Subscription and Direct Community Offerings is 25 shares. No person may
purchase more than $125,000 of the shares offered (12,500 shares). In
addition, no person, together with associates and persons acting in concert
with such person, may purchase in the aggregate more than $250,000 (25,000
shares). Eligible Account Holders desiring to purchase shares in the Direct
Community Offering must do so by obtaining from the Conversion Center an
additional Stock Order Form and submitting a completed additional Stock Order
Form which indicates the number of shares to be purchased in the Direct
Community Offering. FirstBank Northwest and FirstBank Corp. have reserved the
right to reject the subscription of any order received in the Direct Community
Offering, in whole or in part.
- --------------------------------------------------------------------------------
ITEM 3-
Please check this box to indicate whether you are an employee, officer or
trustee of FirstBank Northwest or a member of such person's immediate family.
- --------------------------------------------------------------------------------
ITEM 4-
Payment for shares may be made in cash (only if delivered by you in person to
a branch office of FirstBank Northwest) or by check, bank draft or money order
payable to FirstBank Northwest. Your funds will earn interest at the Bank's
passbook rate of interest until the Conversion is completed. DO NOT MAIL CASH
TO PURCHASE STOCK! Please check this box if your method of payment is by
check, bank draft or money order.
- --------------------------------------------------------------------------------
ITEM 5-
If you pay for your stock by a withdrawal from a deposit account at FirstBank
Northwest, insert the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases. THIS FORM OF
PAYMENT MAY NOT BE USED IF YOUR ACCOUNT IS AN INDIVIDUAL RETIREMENT ACCOUNT OR
QUALIFIED PLAN.
- --------------------------------------------------------------------------------
ITEM 6-
a. Please check this box if you are an Eligible Account Holder with a deposit
account(s) totalling $50.00 or more on December 31, 1995.
b. Please check this box if you are a Supplemental Eligible Account Holder
with a deposit account(s) totalling $50.00 or more on March 31, 1997.
c. Check here if you were a depositor as of April 30, 1997 or a borrower with
a loan outstanding as of April 25, 1990 which continued to be outstanding as
of April 30, 1997.
Please list all names on the account(s) and all account number(s) of accounts
you had at these dates in order to insure proper identification of your
purchase rights. PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN
THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS.
- --------------------------------------------------------------------------------
ITEMS 7, 8 AND 9-
The stock transfer industry has developed a uniform system of shareholder
registrations that will be used in the issuance of your FirstBank Corp. Common
Stock. Please complete items 7, 8 and 9 as fully and accurately as possible,
and be certain to supply your social security or Tax I.D. number(s) and your
daytime and evening telephone number(s). We will need to call you if we cannot
execute your order as given. If you have any questions regarding the
registration of your stock, please consult your legal advisor. Stock ownership
must be registered in one of the ways described above under "Stock Ownership
Guide".
- --------------------------------------------------------------------------------
ITEM 10-
Please check this box if you are a member of the NASD or if this item other-
wise applies to you.
- --------------------------------------------------------------------------------
ITEM 11-
Please check this box if you or any associate (as defined on the reverse side
of the Stock Order Form) or person acting in concert with you has submitted
another order for shares and complete the reverse side of the Stock Order Form.
- --------------------------------------------------------------------------------
ITEM 12-
Please sign and date the Stock Order Form and Certification Form where
indicated. Before you sign, review the Stock Order Form, including the
acknowledgement, and the Certification Form. Normally, one signature is
required. An additional signature is required only when payment is to be made
by withdrawal from a deposit account that requires multiple signatures to
withdraw funds.
- --------------------------------------------------------------------------------
You may mail your completed Stock Order Form and Certification Form in the
envelope that has been provided, or you may deliver your Stock Order Form and
Certification Form to any branch of FirstBank Northwest. Your Stock Order Form
and Certification Form, properly completed, and payment in full (or withdrawal
authorization) at the subscription price must be received by FirstBank
Northwest no later than 12:00 noon, Pacific time, on , 1997 or it
will become void. If you have any remaining questions, or if you would like
assistance in completing your Stock Order Form and Certification Form, you may
call our Conversion Center Monday through Friday from 10:00 a.m. to 4:00 p.m.
================================================================================
<PAGE>
[LOGO OF FIRSTBANK APPEARS HERE]
Dear Member:
The Board of Directors of FirstBank Northwest (formerly known as First
Federal Bank of Idaho, a Federal Savings Bank) has voted unanimously in favor
of a plan to convert from a federal mutual savings bank to a federal stock
savings bank and then to a Washington-chartered savings bank. As part of this
plan, we have formed a holding company, FirstBank Corp., which will become the
parent company of FirstBank Northwest. We are converting so that FirstBank
Northwest will be structured in the form of ownership used by a growing number
of savings institutions and to allow our Bank to become stronger.
TO ACCOMPLISH THIS CONVERSION YOUR PARTICIPATION IS EXTREMELY IMPORTANT. On
behalf of the Board, I ask that you help us meet our goal by reading the
enclosed Proxy Statement and Question and Answer Brochure and then casting
your vote in favor of the Plan of Conversion and mailing your signed proxy
card immediately in the BLUE postage-paid envelope provided. Should you choose
to attend the Special Meeting of Members and wish to vote in person, you may
do so by revoking any previously executed proxy. If you have an IRA or other
Qualified Plan account for which the Bank acts as trustee and we do not
receive a proxy from you, the Bank intends, as trustee for such account, to
vote in favor of the Plan of Conversion on your behalf.
If the Plan of Conversion is approved let me assure you that:
. Deposit accounts will continue to be federally insured to the same extent
they are today.
. The balance and terms of existing deposit accounts and loans will not
undergo any change as a result of the conversion.
. Voting for approval will not obligate you to buy any shares of Common
Stock.
As a qualifying account holder, you may also take advantage of your
nontransferable rights to subscribe for shares of FirstBank Corp.'s Common
Stock without commission or fee on a priority basis, before the stock is
offered to the general public. If you are interested in subscribing for shares
of Common Stock, please complete the enclosed request card and return it to us
in the WHITE postage-paid envelope provided by May 30, 1997, and we will mail
you a Prospectus, a stock order form and a certification form.
If you wish to use funds in your IRA or Qualified Plan at FirstBank
Northwest to subscribe for Common Stock, please be aware that federal law
requires that such funds first be transferred to a self-directed retirement
account with a trustee other than FirstBank Northwest. The transfer of such
funds to a new trustee takes time, so please make arrangements as soon as
possible.
If you have any questions after reading the enclosed material, please call
our Conversion Center toll-free at 1-888-430-7300. The Conversion Center is
open Monday through Friday from 10:00 a.m. to 4:00 p.m., Pacific Time. Please
note that the Conversion Center will be closed from 12:00 noon Friday, May
23rd, through 12:00 noon Tuesday, May 27th, in observance of the Memorial Day
holiday.
Sincerely,
/s/ Clyde E. Conklin
Clyde E. Conklin
Chief Executive Officer
The shares of Common Stock offered in the conversion are not savings
accounts or deposits and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy Common
Stock. The offer is made only by the Prospectus.
#1
<PAGE>
[LOGO OF FIRSTBANK APPEARS HERE]
Dear Friend:
FirstBank Northwest (formerly known as First Federal Bank of Idaho, a
Federal Savings Bank) is in the process of converting from a federal mutual
savings bank to a federal stock savings bank and then to a Washington-
chartered savings bank. As part of this plan, we have formed a holding
company, FirstBank Corp., which will become the parent company of FirstBank
Northwest. We are converting so that FirstBank Northwest will be structured in
the form of ownership used by a growing number of savings institutions and to
allow our Bank to become stronger. The conversion will in no way affect the
insurance of deposit accounts or the services offered by the Bank.
As a former account holder, you may take advantage of your nontransferable
rights to subscribe for shares of FirstBank Corp.'s Common Stock without
commission or fee on a priority basis, before the stock is offered to the
general public. If you are interested in subscribing for shares of Common
Stock, please complete the enclosed request card and return it to us in the
postage-paid envelope provided by May 30, 1997, and we will mail you a
Prospectus, a stock order form and a certification form.
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date of June 20, 1997 in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, as amended, no Prospectus will be mailed any
later than five days prior to such date or hand delivered any later than two
days prior to such date.
If you have any questions after reading the enclosed material, please call
our Conversion Center toll-free at 1-888- 430-7300. The Conversion Center is
open Monday through Friday from 10:00 a.m. to 4:00 p.m., Pacific Time. Please
note that the Conversion Center will be closed from 12:00 noon Friday, May
23rd through 12:00 noon Tuesday, May 27th, in observance of the Memorial Day
holiday.
Sincerely,
/s/ Clyde E. Conklin
Clyde E. Conklin
Chief Executive Officer
The shares of Common Stock offered in the conversion are not savings
accounts or deposits and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy Common
Stock. The offer is made only by the Prospectus.
#3
<PAGE>
[LOGO OF FIRSTBANK CORP. APPEARS HERE]
Dear Potential Investor:
We are pleased to provide you with the enclosed material regarding the
conversion of FirstBank Northwest (formerly known as First Federal Bank of
Idaho, a Federal Savings Bank) from a federal mutual savings bank to a federal
stock savings bank.
This information packet includes the following:
PROSPECTUS: This document provides detailed information about FirstBank
Northwest's operations and the proposed stock offering by FirstBank Corp.,
a holding company formed by the Bank to become its parent company upon
completion of the conversion. Please read it carefully prior to making an
investment decision.
STOCK QUESTION AND ANSWER BROCHURE: This answers commonly asked questions
about the stock offering.
STOCK ORDER AND CERTIFICATION FORMS: Use these forms to subscribe for stock
and return them together with your payment in the postage-paid envelope
provided. The deadline to subscribe for stock is 12:00 noon, Pacific Time
on June 20, 1997.
We are pleased to offer you this opportunity to become one of our charter
stockholders. If you have any questions regarding the conversion or the
Prospectus, please call our Conversion Center toll-free at 1-888-430-7300. The
Conversion Center is open Monday through Friday from 10:00 a.m. to 4:00 p.m.,
Pacific Time.
Sincerely,
/s/ Clyde E. Conklin
Clyde E. Conklin
President and Chief Executive
Officer
The shares of Common Stock offered in the conversion are not savings
accounts or deposits and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
#4
<PAGE>
- --------------------------
[LETTERHEAD OF SANDLER O'NEILL & PARTNERS APPEARS HERE]
Dear Customer of FirstBank Northwest:
At the request of FirstBank Northwest (formerly known as First Federal Bank
of Idaho, a Federal Savings Bank) and FirstBank Corp., a holding company formed
by the Bank to become its parent company, we have enclosed material regarding
the offering of Common Stock in connection with the conversion of the Bank from
a federal mutual savings bank to a federal stock savings bank. This material
includes a Prospectus, stock order and certification forms which offer you the
opportunity to subscribe for shares of Common Stock of FirstBank Corp.
We recommend that you study this material carefully. If you decide to
subscribe for shares, you must return the properly completed stock order form
and signed certification form along with full payment for the shares (or
appropriate instructions authorizing withdrawal from a deposit account at
FirstBank Northwest) no later than 12:00 Noon, Pacific Time on June 20, 1997 in
the accompanying postage-paid envelope. If you have any questions after reading
the enclosed material, please call the Conversion Center toll-free at 1-888-
430-7300 and ask for a Sandler O'Neill representative. The Conversion Center is
open Monday through Friday from 10:00 a.m. to 4:00 p.m., Pacific Time.
We have been asked to forward these documents to you in view of certain
requirements of the securities laws of your jurisdiction. We should not be
understood as recommending or soliciting in any way any action by you with
regard to the enclosed material.
Sincerely,
SANDLER O'NEILL & PARTNERS, L.P.
The shares of Common Stock offered in the Conversion are not savings accounts
or deposits and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Enclosure
#5
<PAGE>
QUESTIONS
& ANSWERS
About Voting
For Conversion
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[LOGO OF FIRSTBANK APPEARS HERE]
<PAGE>
PROXY QUESTIONS AND ANSWERS
MUTUAL TO STOCK CONVERSION
FirstBank Northwest (formerly known as First Federal Bank of Idaho, a Federal
Savings Bank) has received approval from the Office of Thrift Supervision to
convert from a federal mutual savings bank to a federal stock savings bank
subject to the approval of members of the Bank. FirstBank Northwest is
converting so that it will be structured in the form of ownership used by a
growing number of savings institutions and to allow our Bank to become
stronger. It is necessary for FirstBank Northwest to receive a majority of the
outstanding votes in favor of conversion, so YOUR VOTE IS VERY IMPORTANT.
Please return your proxy in the enclosed BLUE postage-paid envelope. YOUR BOARD
OF DIRECTORS URGES YOU TO VOTE "FOR" THE CONVERSION AND RETURN YOUR PROXY
TODAY.
Q.WHAT IS MEANT BY CONVERSION?
A.FirstBank Northwest presently operates as a federal mutual savings bank. It
has no stockholders. Under the proposed conversion, the Bank's capital stock
will be purchased by a newly formed holding company, FirstBank Corp., which
will offer Common Stock to FirstBank Northwest's Eligible Account Holders,
Employee Stock Ownership Plan, Supplemental Eligible Account Holders and Other
Members in a Subscription Offering, and then to certain member's of the general
public in a Direct Community Offering. The Board of Directors of FirstBank
Northwest has unanimously adopted the Plan of Conversion.
Q.WHO IS ELIGIBLE TO VOTE ON THE CONVERSION?
A.Depositors and certain borrowers as of April 30, 1997 (the "Voting Record
Date") who continue to be members of the Bank as of the Special Meeting of
Members to be held on June 23, 1997.
Q.AM I REQUIRED TO VOTE?
A.No. Members are not required to vote. However, because the conversion will
produce a fundamental change in FirstBank Northwest's corporate structure, the
Board of Directors encourages all members to vote.
<PAGE>
Q.WHY DID I RECEIVE SEVERAL PROXIES?
A.If you have more than one account you may have received more than one proxy
depending upon the ownership structure of your accounts. Please vote and sign
all proxy cards that you received.
Q.HOW DO I VOTE?
A.You may vote by mailing your signed proxy card in the BLUE postage-paid
envelope provided. Should you choose to attend the Special Meeting of Members
and decide to change your vote, you may do so by revoking any previously
executed proxy.
Q.WILL THE CONVERSION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
A.No. The conversion will have no effect on the balance or terms of any deposit
account or loan. Your deposits will continue to be federally insured to the
fullest extent permissible.
Q.DOES MY VOTE FOR CONVERSION MEAN THAT I MUST BUY COMMON STOCK IN FIRSTBANK
CORP.?
A.No. Voting for the conversion does not obligate you to buy shares of Common
Stock of FirstBank Corp.
Q.WILL ANY ACCOUNT I HOLD WITH FIRSTBANK NORTHWEST BE CONVERTED INTO STOCK?
A.No. All accounts remain as they were prior to the conversion. As an eligible
account holder or other member, you receive priority over the general public in
exercising your right to subscribe for shares of Common Stock.
Q.I HAVE A JOINT SAVINGS ACCOUNT. MUST BOTH PARTIES SIGN THE PROXY CARD?
A.Only one signature is required, but both parties should sign if possible.
Q.WHO MUST SIGN TRUST OR CUSTODIAN ACCOUNTS?
A.The trustee or custodian must sign such accounts, not the beneficiary.
<PAGE>
Q.I AM THE EXECUTOR (ADMINISTRATOR) FOR A DECEASED DEPOSITOR. CAN I SIGN THE
PROXY CARD?
A.Yes. Please indicate on the card the capacity in which you are signing the
card.
Q.HOW CAN I RECEIVE ADDITIONAL INFORMATION ABOUT THE CONVERSION?
A.The Bank's Proxy Statement describes the conversion in detail. Please read
the Proxy Statement carefully before voting. Additional information is
available in the Prospectus which you may obtain by returning a completed
request card, or you may call our Conversion Center toll-free at 1-888-430-
7300, Monday through Friday, between 10:00 A.M. and 4:00 P.M. Please note, the
Conversion Center will be closed for the Memorial Day holiday, from 12:00 noon
Friday, May 23rd through 12:00 noon Tuesday, May 27th. TO ENSURE THAT EACH
PURCHASER RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE
OF JUNE 20, 1997 IN ACCORDANCE WITH RULE 15C2-8 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS
PRIOR TO SUCH DATE OR HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO SUCH
DATE.
The shares of Common Stock offered in the conversion are not savings accounts
or deposits and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy Common Stock.
The offer is made only by the Prospectus.
<PAGE>
QUESTIONS
& ANSWERS
About the
Stock
Offering
----------
[LOGO OF FIRSTBANK APPEARS HERE]
<PAGE>
STOCK OFFERING QUESTIONS & ANSWERS
FACTS ABOUT THE CONVERSION
The Board of Directors of FirstBank Northwest (formerly known as First Federal
Bank of Idaho, a Federal Savings Bank) has unanimously adopted a Plan of
Conversion whereby the Bank will convert from a federal mutual savings bank to
a federal stock savings bank and then to a Washington-chartered savings bank.
As part of this plan, the Bank will become a wholly-owned subsidiary of
FirstBank Corp., a Delaware corporation formed by FirstBank Northwest to own
all the outstanding stock of the Bank. The Common Stock of FirstBank Corp.
will be offered to FirstBank Northwest's Eligible Account Holders, Employee
Stock Ownership Plan, Supplemental Eligible Account Holders and Other Members
in a Subscription Offering, and then to certain members of the general public
in a Direct Community Offering. Stock that is not sold in the Subscription and
Direct Community Offerings will be offered to the general public in a
Syndicated Community Offering.
Investment in Common Stock involves certain risks. For a discussion of these
risks and other factors, investors are urged to read the accompanying
Prospectus.
Q.WHY IS FIRSTBANK NORTHWEST CONVERTING TO STOCK FORM?
A.We are converting so that FirstBank Northwest will be structured in the form
of ownership used by a growing number of savings institutions and to allow our
Bank to become stronger. The stock form of organization will increase the
Bank's capital and provide it with increased operating flexibility.
Q.WILL THE CONVERSION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS?
A.No. The conversion will not have any effect on the balance or terms of any
deposit account or loan, and your deposits will continue to be federally
insured to the fullest extent permissible.
<PAGE>
Q.WILL I RECEIVE A DISCOUNT ON THE PRICE OF THE STOCK?
A.No. Conversion regulations require that the offering price of the stock be
the same for everyone: customers, directors, officers and employees of
FirstBank Northwest, and the general public.
Q.HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A.FirstBank Corp. is offering 1,725,000 shares of Common Stock at a
subscription price of $10 per share through the Prospectus. Under certain
circumstances, FirstBank Corp. may issue up to 1,983,750 shares.
Q.WHAT ARE THE PRIORITIES OF PURCHASING THE COMMON STOCK?
A.The Common Stock of FirstBank Corp. will be offered in a Subscription
Offering in the following order to: (1) FirstBank Northwest's Eligible Account
Holders (depositors with accounts totaling $50 or more as of December 31,
1995), (2) the Bank's Employee Plans, (3) FirstBank Northwest's Supplemental
Eligible Account Holders (depositors with accounts totaling $50 or more as of
March 31, 1997), and (4) Other Members (depositors as of April 30, 1997 and
borrowers with loans outstanding as of April 25, 1990 which continue to be
outstanding as of April 30, 1997). The Common Stock will then be offered to
certain members of the general public in a Direct Community Offering. Common
Stock that is not sold in the Subscription and Direct Community Offerings will
be offered to the general public in a Syndicated Community Offering.
Q.HOW MUCH STOCK CAN I PURCHASE?
A.The minimum purchase is 25 shares; the maximum purchase by any person is
$125,000 (12,500 shares); and the maximum aggregate purchase by any person
together with purchases by associates of such person is $250,000 (25,000
shares).
<PAGE>
Q.HOW DO I ORDER STOCK?
A.You may subscribe for shares of Common Stock by completing and returning the
stock order form and certification form, together with your payment, in the
postage-paid envelope that has been provided.
Q.HOW CAN I PAY FOR MY SHARES OF STOCK?
A.You can pay for FirstBank Corp. Common Stock by check, cash, money order or
withdrawal from your deposit account at FirstBank Northwest; provided, that
payment or withdrawal instructions, together with a completed stock order form
and certification form, are received by FirstBank Northwest no later than 12:00
noon, Pacific Time on Friday, June 20, 1997. If you choose to pay by cash, you
must deliver the stock order form and payment in person to a FirstBank
Northwest branch and it will be converted to a bank check or a money order.
PLEASE DO NOT SEND CASH IN THE MAIL.
Q.CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY FIRSTBANK NORTHWEST
IRA/QUALIFIED PLAN?
A.Federal regulations do not permit the purchase of Common Stock with your
existing FirstBank Northwest IRA or Qualified Plan. To use such funds to
subscribe for stock, you need to establish a "self-directed" trust account with
an outside trustee. Please call our Conversion Center if you require additional
information. TRANSFER OF SUCH FUNDS TAKES TIME, SO, PLEASE MAKE ARRANGEMENTS AS
SOON AS POSSIBLE.
Q.CAN I SUBSCRIBE FOR SHARES AND ADD SOMEONE ELSE TO MY STOCK REGISTRATION?
A.Federal regulations prohibit the transfer of subscription rights. Replacing
the name of an Eligible Account Holder with the names of non-account holders
will result in your order becoming null and void. Adding the names of account
holders in a lower purchase priority to your stock registration will result in
the lowering of your purchase priority to that of the person added.
<PAGE>
Q.WILL PAYMENTS FOR STOCK EARN INTEREST UNTIL THE CONVERSION CLOSES?
A.Yes. Any payments made by cash, check or money order will earn interest at
the Bank's passbook rate from the date of receipt to the completion or
termination of the conversion. Withdrawals from a deposit account or a
certificate of deposit may be made without penalty. Depositors who elect to pay
for their common stock by withdrawal will receive interest at the contract rate
on the account until the completion or termination of the conversion.
Q.WILL DIVIDENDS BE PAID ON THE STOCK?
A.No dividends are expected to be paid initially. Following the conversion,
however, the Board of Directors of FirstBank Corp. may consider a policy of
paying cash dividends on the stock.
Q.WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE?
A.No. Common Stock cannot be insured by the FDIC, the Savings Association
Insurance Fund, the Bank Insurance Fund or any other government agency.
Q.WHERE WILL THE STOCK BE TRADED?
A.Upon completion of the conversion, FirstBank Corp. expects the stock to be
traded over-the-counter and to be quoted on the Nasdaq National Market under
the symbol "FBNW".
Q.CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A.No. After receipt, your order may not be modified or withdrawn.
<PAGE>
Q.WHAT IF I HAVE ADDITIONAL QUESTIONS OR REQUIRE MORE INFORMATION?
A.If you have any questions regarding the conversion or need additional
information, please call our Conversion Center toll-free at 1-888-430-7300,
Monday through Friday, between 10:00 A.M. and 4:00 P.M.
The shares of Common Stock offered in the conversion are not savings accounts
or deposits and are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
This is not an offer to sell or a solicitation of an offer to buy Common
Stock. The offer is made only by the Prospectus.
