SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22435
FIRSTBANK CORP.
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(Exact name of registrant as specified in its charter)
Delaware 84-1389562
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
920 Main Street, Lewiston, Idaho 83501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 746-9610
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section
12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB. X
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The registrant's combined revenues for the year ended March 31, 1997
were $12.4 million.
Number of shares outstanding on June 30, 1997: None.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business
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General
FirstBank Corp. ("Company"), a Delaware corporation, was organized
in March 1997 for the purpose of becoming the holding company for First Bank
Northwest (formerly known as First Federal Bank of Idaho, a Federal Savings
Bank) ("Bank") upon the Bank's conversion from a federally chartered mutual to
a federally chartered stock savings bank ("Conversion"). The Conversion was
completed on July 1, 1997. The Company sold 1,983,750 shares at $10.00 per
share. The Company has not engaged in any significant activity other than
holding the stock of the Bank. Accordingly, the information set forth in this
report, including combined financial statements and related data, relates
primarily to the Bank and its subsidiary.
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 converting to a
Washington-chartered savings bank (the "Charter Conversion"), the Bank changed
its name from "First Federal Bank of Idaho, a Federal Savings Bank" to
"FirstBank Northwest." 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. 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 Company
intends to apply for approval of the Board of Governors of the Federal Reserve
System ("Federal Reserve") to become a bank holding company through the
continued ownership of the Bank following the Charter Conversion.
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. 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, subject to
market conditions and other factors. 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.
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
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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.
Selected Financial Data
The following tables set forth certain information concerning the
combined financial position and results of operations of the Company at the
dates and for the periods indicated.
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At March 31,
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1993 1994 1995 1996 1997
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(In Thousands)
FINANCIAL CONDITION
DATA:
Total assets. . . . $96,816 $102,223 $104,121 $129,832 $137,652
Loans receivable,
net. . . . . . . . 77,574 76,217 82,777 93,817 113,048
Cash and cash
equivalents. . . . 3,988 12,754 4,172 13,581 5,303
Investment securities
available for sale 1,414 1,335 1,289 1,328 --
Investment securities
held to maturity . 2,692 4,110 6,732 10,545 5,199
Mortgage-backed
securities held to
maturity . . . . . 5,013 3,446 2,840 2,488 2,281
Mortgage-backed
securities available
for sale . . . . . -- -- -- -- 2,599
Deposits. . . . . . 83,182 91,858 88,787 115,324 107,596
Borrowings. . . . . 4,044 -- 4,000 2,304 13,922
Total equity. . . . 7,807 8,797 9,504 10,356 11,011
At March 31,
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1993 1994 1995 1996 1997
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(In Thousands)
SELECTED OPERATING
DATA:
Interest income . . $7,335 $7,418 $7,658 $9,552 $10,192
Interest expense. . 3,928 3,625 3,596 5,158 5,338
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Net interest income 3,407 3,793 4,062 4,394 4,854
Provision for loan
losses . . . . . . 267 79 27 150 310
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Net interest income
after provision for
loan losses. . . . 3,140 3,714 4,035 4,244 4,544
Non-interest income 2,116 2,740 1,737 1,980 2,245
Non-interest expense 3,367 4,310 4,567 5,261 5,877
Income before income ------ ------ ------ ------ -------
taxes and cumulative
effect of accounting
change . . . . . . 1,889 2,144 1,205 963 912
Income taxes. . . . 797 963 452 375 263
Income before ------ ------ ------ ------ -------
cumulative effect
of accounting change 1,092 1,181 753 588 649
Cumulative effect of
accounting change(1) -- (116) -- -- --
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Net income. . . . . $1,092 $1,065 $ 753 $ 588 $ 649
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(1) Reflects adoption of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes."
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At March 31,
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1993 1994 1995 1996 1997
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KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average
assets (1). . . . 1.15% 1.05% 0.74% 0.50% 0.50%
Return on average
equity (2). . . . 15.28 12.48 8.19 5.81 5.99
Average total
equity to average
assets (3). . . . 7.51 8.43 9.03 8.55 8.34
Total equity to
total assets at
end of period . . 8.06 8.61 9.13 7.98 8.00
Interest rate
spread (4). . . . 3.64 3.61 3.87 3.61 3.68
Net interest
margin (5). . . . 3.80 3.88 4.15 3.89 3.92
Average interest-
earning assets to
average interest-
bearing liabilities 103.54 107.27 107.44 106.09 105.62
Non-interest expense
as a percent of
average total
assets. . . . . . 3.54 4.26 4.49 4.44 4.52
Efficiency ratio (6) 60.96 65.97 78.75 82.54 82.79
Equity Ratios:
Core capital . . . 8.06 8.61 9.13 7.98 8.02
Tangible capital . 8.06 8.61 9.13 7.98 8.02
Risk-based capital 14.02 15.42 15.66 14.14 13.59
Asset Quality Ratios:
Nonaccrual and 90
days or more past
due loans as a
percent of loans
receivable, net . 0.99 0.28 0.64 0.74 1.00
Nonperforming assets
as a percent of
total assets. . . 0.95 0.21 0.51 0.59 0.99
Allowance for loan
losses as a percent
of total loans
receivable. . . . 0.56 0.66 0.62 0.70 0.82
Allowance for loan
losses as a percent
of nonperforming
loans . . . . . . 59.61 252.38 104.32 101.30 86.58
Net charge-offs to
average outstanding
loans . . . . . . 0.15 0.01 0.00 0.00 0.03
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(1) Net earnings divided by average total assets.
(2) Net earnings divided by average equity.
(3) Average total equity divided by average total assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income.
Lending Activities
General. The principal lending activity of the Bank is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential property. 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 $113.0 million at March 31, 1997, representing 82.1% of consolidated
total assets.
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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.
At March 31,
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1995 1996 1997
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Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Real estate loans:
Residential. . . . $53,307 60.02% $ 62,818 62.41% $ 77,408 65.32%
Construction . . . 12,259 13.80 13,832 13.74 11,861 10.01
Agricultural . . . 11,887 13.39 11,945 11.87 11,998 10.12
Commercial . . . . 5,068 5.71 4,036 4.01 5,392 4.55
Total real estate ------- ------ -------- ------ -------- ------
loans . . . . . 82,521 92.92 92,631 92.03 106,659 90.00
Consumer and other loans:
Home equity. . . . 3,826 4.31 5,229 5.20 5,003 4.22
Agricultural
operating . . . . 561 0.63 589 0.58 1,030 0.87
Commercial . . . . -- -- -- -- 1,692 1.43
Other consumer . . 1,902 2.14 2,206 2.19 4,125 3.48
Total consumer ------- ------ -------- ------ -------- ------
and other loans 6,289 7.08 8,024 7.97 11,850 10.00
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Total loans
receivable. . . 88,810 100.00% 100,655 100.00% 118,509 100.00%
------- ====== -------- ====== -------- ======
Less:
Loans in process . 5,052 5,726 4,108
Unearned loan fees
and discounts . . 426 411 379
Allowance for loan
losses. . . . . . 555 701 974
Loans receivable, ------- -------- --------
net . . . . . . $82,777 $ 93,817 $113,048
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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 March 31, 1997, $106.7 million, or
90.0%, of the Bank's total gross loan portfolio consisted of loans secured by
residential real estate. The Bank presently originates both adjustable rate
mortgage ("ARM") loans and fixed-rate mortgage loans with maturities of up to
30 years. Substantially all of the Bank's residential mortgage loans are
secured by property located in the Bank's primary market area. Very few of
the properties securing the Bank's residential mortgage loans are second homes
or vacation properties. The Bank's conventional mortgage loans are generally
underwritten and documented in accordance with the guidelines established by
the Federal Home Loan Mortgage Corporation ("Freddie Mac").
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 year ended March 31, 1997 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 March 31, 1997, 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."
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The Bank offers ARM loans at rates and terms competitive with market
conditions. The Bank currently offers ARM products that adjust annually after
an initial fixed period of one, three or five years based on the One Year U.S.
Treasury Note Constant Maturity Rate. ARM loans held in the Bank's portfolio
do not permit negative amortization of principal and carry no prepayment
restrictions. The periodic interest rate cap (the maximum amount by which the
interest rate may be increased or decreased in a given period) on the Bank's
ARM loans is generally 2% per adjustment period and the lifetime interest rate
cap is generally 6% over the initial interest rate of the loan. The terms and
conditions of the ARM loans offered by the Bank, including the index for
interest rates, may vary from time to time. Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan.
The relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
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 March 31, 1997, the Bank's residential
loan portfolio included $27 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. 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 loan maturity is a function of, among other factors, the level
of purchase and sale activity in the real estate market, prevailing interest
rates and the interest rates payable on outstanding loans.
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The Bank generally obtains title insurance insuring the status of
its lien on all loans where real estate is the primary source of security.
The Bank also requires that fire and casualty insurance (and, if appropriate,
flood insurance) be maintained in an amount at least equal to the outstanding
loan balance.
The Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
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 March 31, 1997, construction loans totalled $11.9 million, or 10.0%
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 March 31, 1997 was $332,000. During the year
ended March 31, 1997, construction loans constituted 22% 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 March 31,
1997, speculative loans totalled $4.9 million, or 41% of the total
construction loan portfolio. Construction loans to individuals generally
convert to permanent mortgage loans upon completion of the construction
period. At March 31, 1997, custom construction loans to individuals totalled
$2.5 million, or 21% 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 to provide the Bank with annual financial statements and other credit
information. At March 31, 1997, the Bank had approved five major builders,
the largest borrowing capacity of which was approximately $1.4 million. At
March 31, 1997, the Bank's major builders had total loans of $1.6 million
outstanding. For all other builders, the Bank reviews the financial strength
and credit of the builder on a loan by loan basis.
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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. At March 31, 1997, agricultural real estate loans
totalled $12.0 million, or 10.1% 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 March 31, 1997, the largest
agricultural real estate loan was $598,000 and the average amount of the
Bank's agricultural real estate loans was approximately $106,000.
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.
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.
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Commercial Real Estate Lending. Commercial real estate lending has
been a minor part of the Bank's lending strategy in recent years. At March
31, 1997, the Bank's commercial real estate loan portfolio totalled $5.4
million, or 4.6% of total loans. The Bank has been more active in originating
commercial real estate loans in recent periods. During the year ended March
31, 1997, originations of commercial real estate loans totalled $4.8 million.
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 March 31, 1997, the average size of the Bank's
commercial real estate loans was $146,000 and the largest was a $1.7 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 $487,000 at March 31, 1997.
During the year ended March 31, 1997, originations of loans for the
development of residential subdivisions totalled $1.2 million.
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 March 31,
1997, the Bank's consumer and other non-mortgage loans totalled approximately
$11.9 million, or 10.0% 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.
At March 31, 1997, home equity loans totalled $5.0 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 March 31, 1997, 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
9
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<PAGE>
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 March 31, 1997, the Bank had $4,000 of consumer and
non-mortgage loans accounted for on a nonaccrual basis.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 1997 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.
After After After 10
One Year 5 Years Years
Within Through Through Through Beyond
One Year 5 Years 10 Years 15 Years 15 Years Total
------- ------- -------- -------- -------- -----
(In Thousands)
Real estate
loans:
Residential $ 2,702 $ 5,968 $ 5,689 $12,114 $50,935 $ 77,408
Construction 11,861 -- -- -- -- 11,861
Commercial 466 2,716 599 588 1,023 5,392
Agricultural 1,024 370 980 2,380 7,244 11,998
Consumer and
other loans 1,858 3,447 6,164 258 123 11,850
------- ------- ------- ------- ------- --------
Total gross
loans $17,911 $12,501 $13,432 $15,340 $59,325 $118,509
======= ======= ======= ======= ======= ========
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The following table sets forth the dollar amount of all loans due
after March 31, 1998, that have fixed interest rates and have floating or
adjustable interest rates.
Fixed Floating or
Rates Adjustable Rates
----- ----------------
(In Thousands)
Real estate loans:
Residential . . . . . . . . . . . . . . $33,521 $41,185
Construction. . . . . . . . . . . . . . -- --
Commercial. . . . . . . . . . . . . . . 2,915 2,011
Agricultural. . . . . . . . . . . . . . 635 10,339
Consumer and other loans. . . . . . . . . 4,304 5,688
------- -------
Total gross loans. . . . . . . . . . $41,375 $59,223
======= =======
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, 1997, the Bank originated $119.5 million of
loans. Residential real estate loan originations totalled $80.7 million for
the year ended March 31, 1997. Of the $119.5 million of loans originated
during the year ended March 31, 1997, 15% were adjustable-rate loans and 85%
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
11
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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 $1.2 million during the years ended March 31, 1995, 1996 and
1997. 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 March 31,
1997, the Bank remained contingently liable for approximately $1.8 million of
loans sold with recourse.
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.
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The following table shows total loans originated, purchased, sold
and repaid during the periods indicated.
Year Ended March 31,
----------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
Total loans receivable at
beginning of period. . . . . . . . . . . $80,780 $ 88,810 $100,655
------- -------- --------
Loans originated:
Real estate loans:
Residential . . . . . . . . . . . . . . 61,030 83,551 80,721
Construction. . . . . . . . . . . . . . 22,385 29,569 26,359
Agricultural. . . . . . . . . . . . . . 2,402 1,023 1,326
Commercial. . . . . . . . . . . . . . . -- 1,481 4,887
Consumer and other loans . . . . . . . . 3,957 5,270 6,229
------- -------- --------
Total loans originated. . . . . . . . 89,774 120,894 119,522
------- -------- --------
Loans purchased:
Real estate loans:
Residential . . . . . . . . . . . . . . 88 25 43
Construction. . . . . . . . . . . . . . -- -- --
Agricultural. . . . . . . . . . . . . . -- -- --
Commercial. . . . . . . . . . . . . . . -- -- --
Consumer and other loans . . . . . . . . -- -- --
------- -------- --------
Total loans purchased . . . . . . . . 88 25 43
------- -------- --------
Loans sold:
Servicing retained . . . . . . . . . . . (26,996) (21,219) (25,140)
Servicing released . . . . . . . . . . . (24,570) (48,550) (33,585)
------- -------- --------
Total loans sold. . . . . . . . . . . (51,566) (69,769) (58,725)
Loan principal repayments . . . . . . . . (26,199) (32,112) (33,905)
Other(1). . . . . . . . . . . . . . . . . (4,067) (7,193) (9,081)
------- -------- --------
Change in total loans receivable. . . . . 8,030 11,845 17,854
------- -------- --------
Total loans receivable
at end of period . . . . . . . . . . . . $88,810 $100,655 $118,509
======= ======== ========
- ----------------
(1) Consists of refinanced loans.
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 $26 million at March 31, 1997.
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
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associated with loans that are prepaid are recognized as income at the time of
prepayment. The Bank had $379,000 of net deferred loan fees at March 31,
1997.
Loan Servicing. The Bank sells residential real estate loans to
Freddie Mac and Fannie Mae on a servicing-retained basis and receives fees in
return for performing the traditional services of collecting individual
payments and managing the loans. In the past, the Bank has sold agricultural
real estate loans to private investors on a servicing-retained basis. At
March 31, 1997, the Bank was servicing $132.2 million of loans for others.
Loan servicing includes processing payments, accounting for loan funds and
collecting and paying real estate taxes, hazard insurance and other
loan-related items, such as private mortgage insurance. When the Bank
receives the gross mortgage payment from individual borrowers, it remits to
the investor in the mortgage a predetermined net amount based on the yield on
that mortgage. The difference between the coupon on the underlying mortgage
and the predetermined net amount paid to the investor is the gross loan
servicing fee. For a discussion of the adoption SFAS No. 122. In addition,
the Bank retains certain amounts in escrow for the benefit of the investor for
which the Bank incurs no interest expense but is able to invest. At March 31,
1997, the Bank held $918,000 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.
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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.
At March 31,
---------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a
nonaccrual basis:
Real estate loans:
Residential. . . . . . . . . . . . . $ 407 $ 399 $ 526
Construction . . . . . . . . . . . . -- 194 595
Agricultural . . . . . . . . . . . . -- -- --
Commercial . . . . . . . . . . . . . -- -- --
Consumer and other loans. . . . . . . -- -- 4
------ ------ ------
Total. . . . . . . . . . . . . . . 407 593 1,125
------ ------ ------
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 1,125
Real estate owned . . . . . . . . . . . -- 76 234
------ ------ ------
Total nonperforming assets . . . . . $ 532 $ 768 $1,359
====== ====== ======
Restructured loans. . . . . . . . . . . $3,333 $1,760 $1,742
Nonaccrual and 90 days or more past due
loans as a percentage of net loans . . 0.64% 0.74% 1.00%
Nonaccrual and 90 days or more past due
loans as a percentage of total assets. 0.51 0.53 0.82
Total nonperforming assets to
total assets. . . . . . . . . . . . . 0.51 0.59 0.99
Interest income that would have been recorded for the year ended
March 31, 1997 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $74,000. The amount of interest
included in interest income on such loans for the year ended March 31, 1997
amounted to approximately $40,000.
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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 March 31, 1997, the Bank had $234,000 of REO.
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 March 31, 1997, classified assets totalled $2.6 million. Assets
classified as loss totalled $20,000 and consisted of REO in the amount of
$10,500 and overdrawn negotiable order of withdrawal ("NOW") accounts
totalling $9,500. Assets classified as substandard totalled $2.0 million and
consisted of REO totalling $234,000, one consumer loan in the amount of
$4,000, four construction loans totalling $743,000, eight residential real
estate loans totalling $964,000 and overdrawn NOW accounts totalling $62,000.
Assets designated as special mention totalled $618,000 and consisted of five
residential real estate loans totalling $126,000 and two agricultural real
estate loans totalling $492,000. The aggregate amounts of the Bank's
classified assets at the dates indicated were as follows:
At March 31,
-----------------
1996 1997
---- ----
(In Thousands)
Loss. . . . . . . . . . . . . . . . . . . . . $ 2 $ 20
Doubtful. . . . . . . . . . . . . . . . . . . -- --
Substandard . . . . . . . . . . . . . . . . . 1,219 2,006
Special mention . . . . . . . . . . . . . . . 342 618
------ ------
Total classified assets . . . . . . . . . . $1,563 $2,644
====== =======
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.
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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 March 31, 1997, the Bank had an allowance for loan losses of
$974,000. 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 generally accepted accounting principles
("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.
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.
Year Ended March 31,
-----------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Allowance at beginning of period. . . . . $530 $555 $701
Provision for loan losses(1). . . . . . . 28 150 310
Recoveries. . . . . . . . . . . . . . . . -- -- --
Charge-offs:
Real estate loans:
Residential. . . . . . . . . . . . . . -- -- --
Construction . . . . . . . . . . . . . -- -- 36
Agricultural . . . . . . . . . . . . . -- -- --
Commercial . . . . . . . . . . . . . . -- -- --
Consumer and other loans. . . . . . . . 3 4 1
---- ---- ----
Total charge-offs. . . . . . . . . . 3 4 37
---- ---- ----
Net charge-offs. . . . . . . . . . . 3 4 37
---- ---- ----
Balance at end of period . . . . . . $555 $701 $974
==== ==== ====
Ratio of allowance to total
loans outstanding
at the end of the period . . . . . . . . 0.62% 0.70% 0.82%
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . . . . -- -- 0.03
17
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_____________
(1) See "Item 6. Management's Discussion and Analysis or Plan of Operation
-- Comparison of Operating Results for the Years Ended March 31, 1996 and
1997 -- 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.
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.
At March 31,
--------------------------------------------------------
1995 1996 1997
----------------- ------------------ ----------------
% 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)
Real estate loans:
Residential . . $117 60.02% $375 62.41% $317 65.32%
Construction. . 136 13.80 135 13.74 261 10.01
Agricultural. . 119 13.39 119 11.87 216 10.12
Commercial. . . 108 5.71 -- 4.01 97 4.55
Consumer and other
loans. . . . . . 75 7.08 72 7.97 83 10.00
---- ------ ---- ------ ---- ------
Total allowance for
loan losses. . $555 100.00% $701 100.00% $974 100.00%
==== ====== ==== ====== ==== ======
Investment Activities
The Bank is permitted under federal law to invest in various types
of liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock. The Bank is required under federal
regulations to maintain a minimum amount of liquid assets. See "REGULATION"
and "Item 6. Management's Discussion and Analysis or Plan of Operation --
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.
18
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<PAGE>
The Chief Executive Officer and the Chief Financial Officer
determine appropriate investments in accordance with the Board of Directors'
approved investment policies and procedures. The Bank's investment policies
generally limit investments to FHLB obligations, certificates of deposit, U.S.
Government and agency securities, municipal bonds rated AAA, mortgage-backed
securities and certain types of mutual funds. The Bank'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 August 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.
At March 31,
--------------------------------------------------------------
1995 1996 1997
------------------- ------------------ -------------------
Percent Percent Percent
Carrying of Carrying of Carrying of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
(Dollars in Thousands)
Available for
sale:
Mutual funds $ 1,289 11.87% $ 1,328 9.25% $ -- --%
Mortgage-
backed
securities -- -- -- -- 2,599 25.79
Held to maturity:
U.S. Government
and federal
agency
obligations 6,732 61.98 10,545 73.43 5,199 51.58
Mortgage-backed
securities 2,840 26.15 2,488 17.32 2,281 22.63
Total held ------- ------ ------- ------ ------- ------
to maturity 9,572 88.13 13,033 90.75 7,480 74.21
------- ------ ------- ------ ------- ------
Total $10,861 100.00% $14,361 100.00% $10,079 100.00%
======= ====== ======= ====== ======= ======
The table below sets forth certain information regarding the
carrying value, weighted average yields and maturities of the Bank's
investment and mortgage-backed securities at March 31, 1997.
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)
U.S. Government
and federal
agency
obligations $500 5.35% $4,699 6.17% $ -- --% $ -- --%
Mortgage-backed
securities 9 7.07 8 7.07 -- -- 4,863 6.15%
---- ------ ----- ------
Total $509 5.38% $4,707 6.17% $ -- -- $4,863 6.15%
==== ====== ===== ======
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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 March 31, 1997, the Bank had one brokered deposit in the amount
of $1.1 million. At March 31, 1997, certificates of deposit that are
scheduled to mature in less than one year totalled $53.1 million. See "Item
6. Management's Discussion and Analysis or Plan of Operation -- 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 "Item 6. Management's Discussion and Analysis or Plan of Operation --
Asset and Liability Management."
20
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<PAGE>
The following table sets forth information concerning the Bank's
deposits at March 31, 1997.
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ---- ---- ---------------- ------ ------- --------
(In Thousands)
1.23% -- NOW $ -- $ 15,943 14.82
3.00 -- Money Market Deposit -- 6,968 6.48
3.03 -- Passbook -- 14,164 13.16
Certificates of Deposit
-----------------------
4.25 7 days to 179 days Fixed term, fixed rate 2,500 6,926 6.44
5.46 11 months special/
non-renewable Fixed term, fixed rate 500 8,145 7.57
5.27 6 months to less
than 1 year Fixed term, fixed rate 1,000 12,148 11.29
5.58 14 months special/
non-renewable Fixed term, fixed rate 500 1,037 0.96
5.29 1 year to less
than 2 years Fixed term, fixed rate 500 8,077 7.51
5.75 27 months special/
non-renewable Fixed term, fixed rate 500 2,889 2.69
6.20 2 years to less
than 3 years Fixed term, fixed rate 500 14,815 13.76
5.96 New 2 years to 5
years - add on Fixed term, fixed rate 100 4,524 4.20
5.65 3 years to less
than 4 years Fixed term, fixed rate 500 2,538 2.36
5.85 4 years to less
than 5 years Fixed term, fixed rate 500 1,314 1.22
6.09 5 years to less
than 10 years Fixed term, fixed rate 500 7,197 6.69
5.45 IRA Variable Fixed term, adjustable
rate -- 910 0.85
-------- ------
Total $107,596 100.00%
======== ======
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of March 31, 1997. Jumbo
certificates of deposit are certificates in amounts of more than $100,000.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less. . . . . . . . . . . $3,740
Over three through six months . . . . . . 1,826
Over six through 12 months. . . . . . . . 1,652
Over 12 months. . . . . . . . . . . . . . 1,479
Total jumbo certificates ------
of deposit. . . . . . . . . . . . . $8,697
======
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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.
At March 31,
-------------------------------------------------------------------
1995 1996 1997
--------------- ------------------------- ------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in Thousands)
NOW
accounts $13,146 14.81% $ 14,617 12.67% $ 1,471 $ 15,943 14.82% $ 1,326
Passbook
accounts 15,610 17.58 13,861 12.02 (1,749) 14,164 13.16 303
Money
market
deposit
accounts 8,932 10.06 7,167 6.21 (1,765) 6,968 6.48 (199)
Fixed-rate
certificates
which
mature:
Within 1
year 13,506 15.21 52,692 45.69 39,186 53,120 49.37 428
After 1
year,
but
within
2 years 16,621 18.72 16,329 14.16 (292) 11,139 10.35 (5,190)
After 2
years,
but
within
5 years 18,834 21.21 10,639 9.23 (8,195) 6,241 5.80 (4,398)
Certifi-
cates
maturing
there-
after 2,138 2.41 19 .02 (2,119) 21 0.02 2
------- ------ -------- ------ ------- -------- ------ -------
Total $88,787 100.00% $115,324 100.00% $26,537 $107,596 100.00% $(7,728)
======= ====== ======== ====== ======= ======== ====== =======
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank categorized by rates at the dates indicated.
At March 31,
--------------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
3.00 - 3.99%. . . . . . . . . . $ 4,681 $ 1,706 $ 997
4.00 - 4.99%. . . . . . . . . . 8,252 7,748 7,132
5.00 - 5.99%. . . . . . . . . . 16,770 33,623 42,816
6.00 - 6.99%. . . . . . . . . . 17,073 31,263 17,082
7.00 - 7.99%. . . . . . . . . . 1,646 2,858 1,990
8.00 - 8.99%. . . . . . . . . . 2,210 1,993 51
9.00% and over. . . . . . . . . 483 488 453
------- ------- -------
Total . . . . . . . . . . . . . $51,115 $79,679 $70,521
======= ======= =======
The following table sets forth the amount and maturities of time
deposits at March 31, 1997.
Amount Due
-------------------------------------------
Less Percent
Than After After After After of Total
One 1 to 2 2 to 3 3 to 4 4 Certificate
Year Years Years Years Years Total Accounts
---- ----- ----- ----- ----- ----- --------
(Dollars in Thousands)
3.00 -
3.99% $ 997 $ -- $ -- $ -- $ -- $ 957 1.41%
4.00 -
4.99% 6,990 101 41 -- -- 7,132 10.11
5.00 -
5.99% 28,865 9,698 2,048 832 1,373 42,816 60.71
6.00 -
6.99% 16,245 837 -- -- -- 17,082 24.22
7.00 -
7.99% 6 482 1,008 9 485 1,990 2.82
8.00 -
8.99% 5 4 42 -- -- 51 0.07
9.00%
and
over 12 17 424 -- -- 453 0.64
------- ------- ------ ---- ------ ------- ------
Total $53,120 $11,139 $3,563 $841 $1,858 $70,521 100.00%
======= ======= ====== ==== ====== ======= ======
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Deposit Activity. The following table sets forth the deposit
activities of the Bank for the periods indicated.
Year Ended March 31,
--------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
Beginning balance . . . . . . . . . $91,858 $ 88,787 $115,324
------- -------- --------
Net increase (decrease)
before interest credited. . . . . (6,557) 21,769 (11,902)
Interest credited . . . . . . . . . 3,486 4,768 4,174
------- -------- --------
Net increase (decrease)
in savings deposits . . . . . . . (3,071) 26,537 (7,728)
------- -------- --------
Ending balance. . . . . . . . . . . $88,787 $115,324 $107,596
======= ======== ========
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.
The following tables sets forth certain information regarding
borrowings by the Bank at the dates and for the periods indicated:
At or For the
Year Ended March 31,
---------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
Maximum amount of FHLB advances
outstanding at any month end
during the period. . . . . . . . . $4,900 $9,688 $15,060
Approximate average FHLB advances
outstanding during the period . . 1,150 4,862 8,488
Balance of FHLB advances outstanding
at end of period. . . . . . . . . 4,000 2,304 13,922
Weighted average rate paid on
FHLB advances at end of period. . 6.74% 6.10% 5.87%
Approximate weighted average rate
paid on FHLB advances during the
period . . . . . . . . . . . . . 6.68% 6.19% 5.90%
23
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<PAGE>
REGULATION OF THE BANK
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 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 $945,000 at March 31, 1997. 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
24
<PAGE>
<PAGE>
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 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 "Item 6. Management's Discussion and Analysis or Plan of
Operation -- 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%,
25
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<PAGE>
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 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 March 31, 1997, 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
26
<PAGE>
<PAGE>
to an overall limit of 20% of the savings institution's portfolio assets: 50%
of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer loans; and stock issued by Freddie Mac or Fannie
Mae. Portfolio assets consist of total assets minus the sum of (i) goodwill
and other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets. At March 31, 1997, the qualified thrift investments of the Bank
were approximately 83.7% 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 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.
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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 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.
The following table presents the Bank's regulatory capital levels as
of March 31, 1997.
At March 31, 1997
---------------------
Percent of
Amount Assets
------ ------
(Dollars in thousands)
Tangible capital. . . . . . . . . . . . . $11,044 8.02%
Minimum capital requirement . . . . . . . 2,065 1.50
------- ------
Excess. . . . . . . . . . . . . . . . . . $ 8,979 6.52%
======= ======
Core capital. . . . . . . . . . . . . . . $11,044 8.02%
Minimum capital requirement . . . . . . . 4,131 3.00
------- ------
Excess . . . . . . . . . . . . . . . . . $ 6,913 5.02%
======= ======
Risk-based capital. . . . . . . . . . . . $12,002 13.59%
Minimum capital requirement . . . . . . . 7,063 8.00
------- ------
Excess. . . . . . . . . . . . . . . . . . $ 4,939 5.59%
======= ======
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
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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 March 31, 1997, the Bank's
limit on loans to one borrower was $1 million plus 10% of unencumbered
capital. At March 31, 1997, the Bank's largest aggregate amount of loans to
one borrower was $1.7 million. See "Item 1. Business -- 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
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
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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.
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."
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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% 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.
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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
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.
REGULATION OF THE COMPANY
Savings and Loan Holding Company Regulations
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 savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions under
the HOLA. If the Company acquires control of 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.
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Bank Holding Company Regulation
General. Upon consummation of the Charter Conversion, the 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 Bank
Holding Company Act ("BHCA") and the regulations of the Federal Reserve. As a
bank holding company, the 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 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 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
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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.
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 Company's total consolidated
assets will not exceed $150 million.
TAXATION
Federal Taxation
General. The Company and the Bank 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 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
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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 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" 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 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 Company and the Bank will not file a
consolidated tax return, except that if the Company or the Bank
35
<PAGE>
<PAGE>
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 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 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 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.
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 March 31, 1997,
the Bank's equity investment in its subsidiary was $42,000.
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 March
31, 1997.
Personnel
As of March 31, 1997, 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.
36
<PAGE>
<PAGE>
Item 2. Description of 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 March 31, 1997,
the net book value of the properties (including land and buildings) and the
Bank's fixtures, furniture and equipment was $4.9 million.
Item 3. Legal Proceedings
- --------------------------
Periodically, there have been various claims and lawsuits involving
the Bank, mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Bank's business. The 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The Company had no shares of Common Stock outstanding at March 31,
1997.
The Board of Directors of the 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 Company that the net income, capital and financial condition of the
Company, industry trends and general economic conditions justify the payment
of dividends. The rate of such dividends and the 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 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 Company, the payment of
dividends by the Company will depend in part upon the amount of the net
proceeds from the Conversion retained by the Company and the Company's
earnings thereon and the receipt of dividends from the Bank, which are subject
to various tax and regulatory restrictions on the payment of dividends.
Dividend payments by the Company will be 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.
37
<PAGE>
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
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.
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
maybe 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.
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.
38
<PAGE>
<PAGE>
Comparison of Financial Condition at March 31, 1996 and March 31, 1997
Total assets increased $7.9 million, or 6.1%, from $129.8 million at
March 31, 1996 to $137.7 million at March 31, 1997. 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 $113.0 million at March 31, 1997.
During the year ended March 31, 1997, 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 March 31, 1997, the Bank decreased
its cash and cash equivalents and investment and mortgage- backed securities.
Cash and cash equivalents decreased from $13.6 million to $5.3 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 increased from $2.5 million to $4.9 million. 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 March 31, 1997. 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
$126.6 million at March 31, 1997. Deposits decreased $7.7 million from $115.3
million at March 31, 1996 to $107.6 million at March 31, 1997. 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 March 31, 1997 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 $13.9 million at
March 31, 1997. Because of the decrease in deposits, the Bank increased its
use of borrowings to fund asset growth.
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.
39
<PAGE>
<PAGE>
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
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 $8,000, or 3.1%, 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.
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.
40
<PAGE>
<PAGE>
<TABLE>
Year Ended March 31,
-----------------------------------------------------------------------------------------
1995 1996 1997
---------------------------- ------------------------------ ----------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ---- ------- --------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning
assets(1):
Loans
receivable $ 79,912 $6,826 8.54% $ 91,849 $8,408 9.15% $106,295 $ 9,249 8.70%
Mortgage-
backed
securities 2,981 136 4.56 2,622 157 5.99 2,588 147 5.68
Investment
securities 8,075 501 6.20 6,553 457 6.97 8,955 534 5.96
Other earning
assets 6,986 195 2.79 12,026 530 4.41 5,834 262 4.49
Total -------- ------ -------- ------ -------- -------
interest-
earning
assets 97,954 7,658 7.82 113,050 9,552 8.45 123,672 10,192 8.24
------ ------ -------- -------
Non-interest-
earning
assets 3,873 5,460 6,259
Total -------- -------- --------
assets $101,827 $118,510 $129,931
======== ======== ========
Interest-earning
liabilities:
Passbook,
NOW and
money
market
accounts $ 39,546 1,036 2.62 $ 35,072 876 2.50 $ 36,457 818 2.24
Certificates
of deposit 50,319 2,458 4.88 66,066 3,917 5.93 72,550 4,021 5.54
Total -------- ------ -------- ------ -------- -------
deposits 89,865 3,494 3.89 101,138 4,793 4.74 109,007 4,839 4.44
Advances from
FHLB 1,305 102 7.82 5,419 365 6.74 8,080 499 6.18
Total -------- ------ -------- ------ -------- -------
interest-
bearing
liabilities 91,170 3,596 3.95 106,557 5,158 4.84 117,087 5,338 4.56
Non-interest- ------ ------ -------- -------
bearing
liabilities 1,458 1,826 2,003
Total -------- -------- -------
liabilities 92,628 108,383 119,090
-------- -------- --------
Total equity 9,199 10,127 10,841
Total -------- -------- --------
liabilities
and total
equity $101,827 $118,510 $129,931
======== ======== ========
Net interest
income $4,062 $4,394 $ 4,854
====== ====== =======
Interest rate
spread 3.87% 3.61% 3.68%
==== ==== ====
Net interest
margin 4.15% 3.89% 3.92%
==== ==== ====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 107.44% 106.09% 105.62%
====== ====== ======
- ----------------------
(1) Does not include interest on loans 90 days or more past due.
(2) Yields and ratios for the nine-month periods are annualized.
41
</TABLE>
<PAGE>
<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).
Year Ended March 31, Year Ended March 31,
1996 Compared to Year Ended 1997 Compared to Year Ended
March 31, 1995 March 31, 1996
------------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------ ---------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
Interest-
earning
assets:
Loans
receivable(1) $489 $1,020 $ 73 $1,582 $ (38) $ 814 $ 65 $ 841
Mortgage-
backed
securities 42 (16) (5) 21 (8) (2) -- (10)
Investment
securities 62 (94) (12) (44) (66) 167 (24) 77
Other earning
assets 113 141 81 335 10 (273) (5) (268)
---- ------ ---- ------ ----- ------ ---- -----
Total net change
in income on
interest-
earning
assets 706 1,051 137 1,894 (102) 706 36 640
---- ------ ---- ------ ----- ------ ---- -----
Interest-
bearing
liabilities:
Passbook,
NOW and
money
market
accounts (48) (117) 5 (160) (90) 36 (4) (58)
Certificates
of deposit 525 769 164 1,458 (258) 386 (24) 104
FHLB advances (14) 322 (44) 264 (29) 178 (15) 134
---- ------ ---- ------ ----- ------ ---- -----
Total net change
in expense
on interest-
bearing
liabilities 463 974 125 1,562 (377) 600 (43) 180
---- ------ ---- ------ ----- ------ ---- -----
Net increase
(decrease)
in net
interest
income $243 $ 77 $ 12 $ 332 $ 275 $ 106 $ 79 $ 460
==== ====== ==== ====== ===== ===== ==== =====
- ----------------
(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
transaction accounts and certificates of deposit with longer maturities (up to
five years) to reduce the interest sensitivity of its interest-bearing
liabilities.
42
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<PAGE>
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 March 31,
1997 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 March 31, 1997, 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.
Net Portfolio as % of
Basis Point Net Portfolio Value Portfolio Value of Assets
("bp") Change ------------------------------- ---------------------------
in Rates $ Amount $ Change(1) % Change NPV Ratio(2) Change(bp)(3)
- -------- -------- ----------- -------- ------------ -------------
(Dollars in Thousands)
400 11,446 (5,835) (34.00)% 8.48% (359)bp
300 13,154 (4,126) (24.00) 9.58 (248)
200 14,765 (2,515) (15.00) 10.59 (148)
100 16,194 (1,087) (6.00) 11.44 (62)
0 17,280 12.07
(100) 17,856 576 3.00 12.36 30
(200) 17,731 451 3.00 12.22 16
(300) 17,527 246 1.00 12.03 (3)
(400) 17,661 381 2.00 12.05 (2)
- ----------------
(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.
43
<PAGE>
<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 March 31, 1997, the change in NPV as a
percentage of portfolio value of total assets is negative 1.76%, which is less
than negative 2.0%, indicating that the Bank has a "normal" level of interest
rate risk.
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock NPV Ratio: NPV as % of PV of Assets. . . . . . 12.07%
Exposure Measure: Post-Shock NPV Ratio . . . . . . . . . 10.59
Sensitivity Measure: Change in NPV Ratio . . . . . . . . (148)bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of PV of Assets. . . . . . . . . . . . 1.76
Interest Rate Risk Capital Component (1). . . . . . . . . --
- ------------------
(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 March 31, 1997,
cash and cash equivalents totalled $5.3 million, or 3.9% of total assets, and
investment securities that matured in one year or less totalled $500,000, or
.4% of total assets. In addition, the Bank maintains a credit facility with
the FHLB-Seattle, which provides for immediately available advances. Advances
under this credit facility totalled $13.9 million at March 31, 1997.
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-
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 total and short-term liquidity
ratios at March 31, 1997 were 7.23% and 6.42%, respectively.
44
<PAGE>
<PAGE>
The primary investing activity of the Bank is the origination of
mortgage loans. During the years ended March 31, 1995, 1996 and 1997, the
Bank originated loans in the amounts of $89.2 million, $120.9 million, and
$119.5 million, respectively. At March 31, 1997, the Bank had loan
commitments totalling $26 million and undisbursed lines of credit totalling
$5.8 million and undisbursed loans in process totalling $4.1 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 March 31, 1997 totalled $53.1
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 March 31, 1997, 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 8.02%, 8.02%
and 13.59%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements."
Impact of New Accounting Standards
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 position or results of operations.
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.
Deferral of the Effective Date of Certain Provisions of SFAS No.
125. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127
defers for one year the effective date of portions of SFAS No. 125 that
address secured borrowings and collateral for all transactions. Additionally,
SFAS No. 127 defers for one year the effective date of transfers of financial
assets that are part of repurchase agreements, securities lending and similar
transactions. The Company does not expect adoption of SFAS No. 127 to have a
material impact on the Company's results of operations or financial position.
Earnings Per Share. SFAS No. 128, "Earnings Per Share,"
standardizes the international calculation for earnings per share and requires
companies with complex capital structures that have publicly held common stock
or potential common stock to present both basic and diluted earnings per share
on the face of the income statement. SFAS No. 128 becomes effective for
periods ending after December 31, 1997. The Company does not expect adoption
of SFAS No. 128 to have a material impact on the Company's results of
operations or financial position.
45
<PAGE>
<PAGE>
Effect of Inflation and Changing Prices
The combined 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.
Item 7. Financial Statements
- ------------------------------
46
<PAGE>
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
FirstBank Corp. and FirstBank Northwest
We have audited the accompanying combined statements of financial condition of
FirstBank Corp. and FirstBank Northwest (collectively referred to as "the
Company") as of March 31, 1997 and 1996, and the related combined statements
of income, changes in equity and cash flows for the years then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of FirstBank
Corp. and FirstBank Northwest at March 31, 1997 and 1996 and the combined
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in the summary of accounting policies, the Company changed its
method of accounting for mortgage servicing rights.
/s/ BDO Seidman, LLP
Spokane, Washington
May 19, 1997, except for Note 14 and the first paragraph
of the Summary of Accounting Policies which are
as of July 1, 1997.
47
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Financial Condition
==============================================================================
March 31, 1997 1996
- -------------------------------------------------------------------------
Assets
Cash and Cash Equivalents (Note 13):
Non-interest bearing cash deposits $ 3,883,176 $ 3,549,349
Interest bearing deposits - 9,366,053
Federal funds sold 1,419,560 665,463
- -------------------------------------------------------------------------
Total cash and cash equivalents 5,302,736 13,580,865
Investment securities (Notes 1 and 13):
Held-to-maturity 5,199,375 10,544,953
Available-for-sale - 1,328,295
Mortgage-backed securities (Notes 2 and 13):
Held-to-maturity 2,280,743 2,487,998
Available-for-sale 2,599,147 -
Loans receivable, net (Notes 3, 8, 9 and 13) 113,048,075 93,817,254
Accrued interest receivable (Note 4) 1,013,848 1,075,384
Real estate owned 234,366 76,163
Stock in FHLB, at cost (Notes 12 and 13) 945,475 875,600
Premises and equipment, net (Note 5) 4,928,655 4,679,644
Income taxes receivable (Note 7) - 10,667
Cash surrender value of life insurance polices 1,350,964 1,283,628
Mortgage servicing assets 242,462 10,598
Other assets 505,864 61,242
- --------------------------------------------------------------------------
Total Assets $137,651,710 $129,832,291
==========================================================================
48
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Financial Condition
==============================================================================
March 31, 1997 1996
- -------------------------------------------------------------------------
Liabilities and Equity
Liabilities:
Bank overdrafts $ 2,112,629 $ -
Deposits (Notes 6 and 13) 107,595,602 115,324,069
Accrued interest on deposits 24,267 31,386
Advances from borrowers for taxes and
insurance 1,558,438 1,076,174
Income taxes payable (Note 7) 116,921 -
Advances from FHLB (Notes 12 and 14) 13,922,083 2,304,028
Deferred federal and state income
taxes (Note 7) 76,664 70,000
Accrued expenses and other liabilities 1,233,995 670,429
- -------------------------------------------------------------------------
Total liabilities 126,640,599 119,476,086
- -------------------------------------------------------------------------
Commitments and Contingencies (Notes 3, 10,
11 and 14)
Equity (Note 8):
Retained earnings, substantially restricted 11,043,959 10,395,106
Unrealized loss on securities
available-for-sale, net of tax (Note 1) (32,848) (38,901)
- -------------------------------------------------------------------------
Total equity 11,011,111 10,356,205
- -------------------------------------------------------------------------
Total Liabilities and Equity $137,651,710 $129,832,291
=========================================================================
See accompanying summary of significant accounting policies and notes to
combined financial statements.
49
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Income
==============================================================================
Year Ended March 31, 1997 1996
- -------------------------------------------------------------------------
Interest income:
Loans receivable $ 9,248,607 $ 8,407,900
Mortgage-backed securities 146,963 156,879
Investment securities 534,450 456,907
Other interest earning assets 262,043 530,207
- -------------------------------------------------------------------------
Total interest income 10,192,063 9,551,893
- -------------------------------------------------------------------------
Interest expense:
Deposits (Note 6) 4,839,334 4,792,837
Advances from FHLB 498,653 365,093
- -------------------------------------------------------------------------
Total interest expense 5,337,987 5,157,930
- -------------------------------------------------------------------------
Net interest income 4,854,076 4,393,963
Provision for loan losses (Note 3) 309,943 150,000
- -------------------------------------------------------------------------
Net interest income after
provision for loan losses 4,544,133 4,243,963
- -------------------------------------------------------------------------
Non-interest income:
Gain on sales of loans 1,199,357 1,138,352
Service fees and charges 960,279 812,751
Commissions and other 85,938 28,838
- -------------------------------------------------------------------------
Total non-interest income 2,245,574 1,979,941
- -------------------------------------------------------------------------
50
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Income
==============================================================================
Year Ended March 31, 1997 1996
- --------------------------------------------------------------------------
Non-interest expense:
Compensation and related
benefits (Notes 10 and 11) 3,110,759 3,048,163
Occupancy 696,978 671,258
Deposit insurance premiums 699,787 234,728
Advertising 159,948 122,162
Data processing 157,868 88,432
Supplies and postage 262,211 270,525
Other 789,786 825,851
- -------------------------------------------------------------------------
Total non-interest expense 5,877,337 5,261,119
- -------------------------------------------------------------------------
Income before income
tax expense 912,370 962,785
Income tax expense (Note 7) 263,517 375,000
- -------------------------------------------------------------------------
Net income $ 648,853 $ 587,785
=========================================================================
See accompanying summary of significant accounting policies and notes to
combined financial statements.
51
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Changes in Equity
==============================================================================
Unrealized Loss
Retained on Securities
Earnings, Available-
Substantially for-Sale, Total
Restricted net of tax Equity
- --------------------------------------------------------------------------
Balance, April 1, 1995 $9,807,321 $ (303,099) $9,504,222
Net income 587,785 - 587,785
Change in unrealized loss on securities
available-for-sale, net of tax - 64,198 64,198
Write-down of 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 648,853 - 648,853
Sale of securities
available-for-sale - 38,901 38,901
Change in unrealized loss on securities
available-for-sale, net of tax - (32,848) (32,848)
- --------------------------------------------------------------------------
Balance, March 31, 1997 $11,043,959 $ (32,848) $11,011,111
==========================================================================
See accompanying summary of significant accounting policies and notes to
combined financial statements.
52
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Cash Flows
==============================================================================
Increase (Decrease) in Cash and Cash Equivalents
Year Ended March 31, 1997 1996
- --------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 648,853 $ 587,785
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 371,275 299,870
Provision for loan losses 309,943 150,000
Loss on sale of investment
securities available-for-sale 89,789 -
Other (gains) losses, net 4,783 -
Deferred income taxes 2,913 (126,000)
Write-down on impaired investment
securities available-for-sale - 200,000
Changes in assets and liabilities:
Accrued interest receivable and other
assets (614,950) (30,111)
Income taxes receivable (payable) 127,588 62,333
Accrued expenses and other liabilities 556,447 273,197
- -------------------------------------------------------------------------
Net cash provided by operating activities 1,496,641 1,417,074
- -------------------------------------------------------------------------
53
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Cash Flows
==============================================================================
Increase (Decrease) in Cash and Cash Equivalents
Year Ended March 31, 1997 1996
- ---------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of mortgage-backed
securities held-to-maturity (109,742) -
Purchase of mortgage-backed
securities available-for-sale (2,659,465) -
Proceeds from maturities of
mortgage-backed securities
held-to-maturity 305,542 340,320
Proceeds from maturities of investment
securities held-to-maturity 5,350,000 4,586,825
Proceeds from sale of investment
securities available-for-sale 1,302,406 -
Decrease in loans receivable from loans sold 58,725,000 69,769,000
Other net change in loans receivable (78,510,556) (81,034,949)
FHLB stock dividends (69,875) (57,800)
Purchases of premises and equipment (615,752) (1,919,161)
Net increase in cash surrender
value of life insurance policies (67,336) (42,958)
Proceeds from disposition of assets 90,527 -
Purchases of investment securities
held-to-maturity - (8,387,090)
- -------------------------------------------------------------------------
Net cash used in investing activities (16,259,251) (16,745,813)
- -------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (7,728,467) 26,537,060
Bank overdrafts 2,112,629 -
Advances from borrowers for
taxes and insurance 482,264 (103,589)
Advances from FHLB 81,050,000 22,500,000
Payments on advances from FHLB (69,431,945) (24,195,972)
- -------------------------------------------------------------------------
54
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Combined Statements of Cash Flows
==============================================================================
Increase (Decrease) in Cash and Cash Equivalents
Year Ended March 31, 1997 1996
- ---------------------------------------------------------------------------
Net cash provided by financing activities 6,484,481 24,737,499
- -------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (8,278,129) 9,408,760
Cash and cash equivalents, beginning of year 13,580,865 4,172,105
- -------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,302,736 $13,580,865
=========================================================================
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ 5,345,106 $5,145,455
Income taxes 201,083 457,490
Noncash investing and financing
activities:
Unrealized (gain) loss on securities
available-for-sale, net of tax 90,766 (64,198)
Loans receivable charged to the
allowance for loan losses 36,838 3,342
Transfer from loans converted to real
estate acquired through foreclosure 244,792 76,163
See accompanying summary of significant accounting policies and notes to
combined financial statements.
55
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
Conversion to a FirstBank Corp. (the Holding Company), a Delaware
Stock Corporation Corporation, was organized on March 12, 1997 for the
purpose of acquiring all of the capital stock of
FirstBank Northwest (the Bank) as part of its conversion
from a federally chartered mutual savings bank to a
federally chartered stock savings bank (the Conversion)
and completion of an initial public offering of Holding
Company stock. Effective July 1, 1997, the Holding
Company completed its initial public offering of
1,983,750 shares of common stock for $10.00 per share
and received final regulatory approvals regarding its
acquisition of all the Bank's capital stock using 50
percent of the public offering net proceeds.
This transaction was accounted for in a manner similar
to a pooling of interests, consequently, no goodwill or
other intangibles were recorded as a result of the
transaction and the accompanying combined financial
statements report the operations and financial condition
of the combined entities as if they had operated as a
single entity during the periods presented.
FirstBank Corp. has not engaged in any significant
activity since its inception on March 12, 1997 or prior
to the completion of the Conversion on July 1, 1997.
Accordingly information set forth in the financial
statements and notes thereto, relates primarily to the
Bank and its subsidiary.
Principles of The combined financial statements include the
Combination accounts of FirstBank Corp. and FirstBank Northwest
and its wholly-owned subsidiary (collectively referred
to as "the Company"). All significant intercompany
transactions and balances are eliminated in combination.
Nature of Business The Holding Company's principal business consists of
and Concentration operations of FirstBank Northwest and its wholly-owned
of Credit Risk subsidiary, Tri-Star Financial Corporation ("Tri-Star").
The Bank's operations 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. Tri-
Star's operations consist primarily of selling life
insurance and tax deferred annuities to customers in the
same areas as the Bank operates.
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 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 Company
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.
56
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
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 Company 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 The Company accounts for securities according to the
Mortgage-Backed provision of SFAS No. 115, "Accounting for Certain
Securities Investments in Debt and Equity Securities." SFAS 115
addresses the accounting and reporting for investments
in equity securities that have readily determinable fair
values and for all investments in debt securities.
Investments in securities are to be classified as either
held-to- maturity, available-for-sale or trading.
Held-to-Maturity - Investments in debt securities
classified as held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of
discounts using the effective interest method. The
Company has the ability and 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.
57
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
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 Company 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
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
58
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
discounting the total expected future cash flows at the
loan's effective rate of interest as stated in the
original loan agreement.
The Company applies the recognition criteria of SFAS 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 Company 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
Company'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 Company'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.
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 Company,
and losses are recognized by a charge to income if the
carrying value of a property exceeds its estimated fair
value.
59
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
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.
Deferred The costs associated with the Conversion have been
Conversion deferred and will be deducted from the proceeds of the
Costs sale and issuance of the Holding Company's stock. At
March 31, 1997, deferred Conversion costs were $228,765.
Accounting for Effective April 1, 1996, the Company adopted the
the Impairment of provisions of SFAS No. 121, "Accounting for the
Long-Lived Assets Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 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. The adoption of this statement did not have a
material effect on the Company's March 31, 1997 combined
financial statements.
Mortgage Servicing Effective April 1, 1996, the Company adopted the
Rights provisions of SFAS No. 122 "Accounting for Mortgage
Servicing 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, 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 Company's mortgage servicing rights represent the
unamortized cost of originated contractual rights to
service mortgages for others in exchange for a servicing
fee. Mortgage servicing rights are amortized over the
period of estimated net servicing income and are
periodically adjusted for actual and anticipated
prepayments of the underlying mortgage loans. The
effect of adopting SFAS No. 122 was to increase income
before income taxes for the year ended March 31, 1997,
by approximately $246,000.
60
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FirstBank Corp. and
FirstBank Northwest
Summary of Accounting Policies
==============================================================================
Accounting for In October 1995, the Financial Accounting Standards
Stock-Based Board (FASB) issued SFAS No. 123, "Accounting for
Compensation Stock-Based 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
Company for the fiscal year beginning April 1, 1996.
The Company did not have any stock-based compensation
plans as of March 31, 1997. However, in the future,
such plans may be offered and the provisions of SFAS No.
123 would apply.
Accounting for In June 1996, the FASB issued SFAS No. 125, "Accounting
Transfers and for Transfer and Servicing of Financial Assets and
Servicing of Extinguishment of Liabilities," which supersedes SFAS
Financial Assets No. 122 and establishes new standards that focus on
and Extinguishment control whereas, after a transfer of financial assets,
of Liabilities 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
Company does not expect adoption to have a material
effect on its financial statements.
SFAS 127 In December 1996, the FASB issued SFAS 127, "Deferral of
Deferral of the the Effective Date of Certain Provisions of FASB
Effective Date of Statement No. 125," which defers for one year the
Certain Provisions effective date of certain provisions of SFAS 125 that
of FASB Statement address secured borrowings, collateral for all
No. 125 transactions and transfers of financial assets that are
part of repurchase agreements, securities lending and
similar transactions. The Company does not expect
adoption to have a material effect on its financial
statements.
SFAS 128 In February 1997, the FASB issued SFAS 128, "Earnings
Earnings per Share per Share," which establishes standards for computing
and presenting earnings per share and applies to
entities with publicly held common stock or potential
common stock. This statement is effective for financial
statements ending after December 15, 1997. The Company
does not expect adoption to have a material effect on
its financial statements.
61
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
1. Investment The amortized cost and estimated market values of
Securities investment securities held- to-maturity and
available-for-sale are summarized as follows:
HELD-TO-MATURITY
----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1997: Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
Farm Credit Bank
and FHLB bonds $ 4,249,375 $ - $(59,800) $ 4,189,575
SLMA notes 700,000 1,765 - 701,765
FHLB and FNMA notes 250,000 - (4,975) 245,025
-------------------------------------------
$ 5,199,375 $ 1,765 $(64,775) $ 5,136,365
===========================================
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996: Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
Farm Credit Bank
and FHLB bonds $ 8,297,090 $ - $(46,245) $ 8,250,845
SLMA notes 700,000 - (235) 699,765
FHLB and FNMA notes 1,547,863 - (19,048) 1,528,815
-------------------------------------------
$10,544,953 $ - $(65,528) $10,479,425
===========================================
AVAILABLE-FOR-SALE
------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996 Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
Colonial Government
Investment Fund
(126,444 shares) $ 1,392,196 $ - $(63,901) $ 1,328,295
-------------------------------------------
$ 1,392,196 $ - $(63,901) $ 1,328,295
===========================================
The amortized cost and estimated market value of
investment securities at March 31, 1997, 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.
62
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
HELD-TO-MATURITY
-------------------
Estimated
Amortized Market
Cost Value
---------------------------------------------------
Due in one year or less $ 500,000 $ 499,875
Due after one through
five years 4,699,375 4,636,490
---------------------------------------------------
$ 5,199,375 $5,136,365
===================================================
2. Mortgage The amortized cost and estimated market values of
Backed mortgage-backed and related securities held-to-maturity
Securities and available-for-sale are summarized as follows:
HELD-TO-MATURITY
----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1997: Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
FNMA Certificates $1,300,481 $ 9,483 $(72,764) $1,237,200
Collateralized Mortgage
Obligations 432,303 74 (1,033) 431,344
SBA Certificates 16,443 - (814) 15,629
GNMA Certificates 139,515 1,883 (6) 141,392
FHLMC Certificates 392,001 509 (12,435) 380,075
-------------------------------------------
$2,280,743 $ 11,949 $(87,052) $2,205,640
===========================================
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1996: Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
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
-------------------------------------------
$2,487,998 $ 23,985 $(89,950) $2,422,033
===========================================
63
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
AVAILABLE-FOR-SALE
------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
March 31, 1997: Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
Collateralized Mortgage
Obligations $1,604,249 $ - $(47,072) $1,557,177
FHLMC Certificates 1,048,995 - (7,025) 1,041,970
-------------------------------------------
$2,653,244 $ - $(54,097) $2,599,147
===========================================
The amortized cost and estimated market value of
mortgage backed securities at March 31, 1997, 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.
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-----------------------------------------------------
Due in one year or less $ 8,581 $ 8,140 $ - $ -
Due after one through
five years 7,862 7,489 - -
Due after ten years 2,264,300 2,190,011 2,653,244 2,599,147
-------------------------------------------
$2,280,743 $2,205,640 $2,653,244 $2,599,147
===========================================
Collateralized mortgage obligations at March 31, 1997
and 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.
64
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
3. Loans Loans receivable at March 31 consists of the following:
Receivable
1997 1996
--------------------------------------------------------
Real estate loans:
Conventional mortgages:
Adjustable rate loans $ 42,837,472 $36,166,820
Fixed rate loans 33,761,002 25,381,370
FHA and VA insured 810,059 1,270,317
Construction 11,861,206 13,831,983
Agricultural 11,997,828 11,945,067
Commercial 5,392,173 4,036,102
Other loans:
Agricultural operating 1,029,503 553,983
Commercial (non-real
estate) 1,692,030 35,174
Loans to depositors,
secured by savings 430,950 411,750
Other consumer 8,696,912 7,022,726
--------------------------------------------------------
Total loans receivable 118,509,135 100,655,292
Less:
Loans in process 4,107,763 5,726,171
Unearned loan fees and
discounts 378,849 410,524
Allowance for loan losses 974,448 701,343
--------------------------------------------------------
Loans receivable, net $113,048,075 $93,817,254
Total loans receivable consist of approximately
$85,028,000 and $76,050,000 in one-to four-family
residential real estate loans at March 31, 1997 and
1996.
65
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
The following summarizes the changes in the allowance
for loan losses at March 31:
1997 1996
-----------------------------------------------------
Allowance for loan losses,
beginning of year $ 701,343 $ 554,685
Provision for loan losses 309,943 150,000
Recoveries - -
Charge-offs (36,838) (3,342)
---------------------------------------------------
Allowance for loan losses,
end of year $ 974,448 $ 701,343
===================================================
Outstanding commitments of the Bank to originate loans
as of March 31, 1997 were as follows:
Fixed Variable
Rate Rate Total
-----------------------------------------------------
First mortgage
loans $20,380,525 $2,552,050 $22,932,575
Other loans 180,886 2,921,500 3,102,386
-----------------------------------------------------
Outstanding loan
commitments $20,561,411 $5,473,550 $26,034,961
Interest rates on fixed rate loan commitments range from
6.17% to 9.50% and are committed through June 25, 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. In addition, the Bank had commitments to
fund outstanding credit lines of approximately
$5,837,000 at March 31, 1997. Commitments to extend
credit may involve elements of interest rate risk in
excess of the amount recognized in the balance sheets.
Interest rate risk on commitments to extend credit
results from the possibility that interest rates may
have moved unfavorably from the position of the Bank
since the time the commitment was made.
66
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
The Bank remains contingently liable for approximately
$1,756,000 of loans sold with recourse as of March 31,
1997. Loans serviced for others (including contract
collections) are not included in the consolidated
statements of financial condition. The unpaid principal
balances of these loans at March 31 are as follows:
1997 1996
----------------------------------------------------
Loan portfolios serviced for:
FNMA $ 63,534,868 $ 73,181,444
FHLMC 65,336,568 45,481,134
Others 3,280,310 3,590,255
---------------------------------------------------
$ 132,151,746 $122,252,833
===================================================
The principal amount of loans subject to delinquent
principal or interest, defined as payment being in
arrears over three months, totalled approximately
$1,125,000 and $692,000 at March 31, 1997 and 1996.
4. Accrued Accrued interest receivable at March 31 consists of the
Interest following:
Receivable
1997 1996
----------------------------------------------------
Investment securities $ 34,723 $ 16,226
Mortgage-backed
securities 59,083 76,811
Interest bearing deposits - 21,250
Loans receivable 920,042 961,097
---------------------------------------------------
Accrued interest
receivable $ 1,013,848 $1,075,384
===================================================
67
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
5. Premises and Premises and equipment at March 31 consists of the
Equipment following:
1997 1996
------------------------------------------------------
Land, buildings and building
improvements $ 4,999,564 $4,747,777
Branch premises under
development 45,803 -
Furniture, fixtures and
equipment 2,276,235 1,972,543
----------------------------------------------------
7,321,602 6,720,320
Accumulated depreciation (2,392,947) (2,040,676)
----------------------------------------------------
Premises and equipment,
net $ 4,928,655 $4,679,644
=====================================================
6. Deposits Deposits and the related weighted average interest rates
at March 31 consist of the following:
1997 1996
------------------------------------------------------
Deposit accounts:
NOW accounts (1.38% and
1.48%) $ 15,942,961 $14,616,706
Passbook accounts
(3.03% and 3.29%) 14,163,562 13,860,858
Money market accounts
(3.03% and 3.03%) 6,968,209 7,167,327
-----------------------------------------------------
37,074,732 35,644,891
-----------------------------------------------------
Certificates of deposit:
3.00% to 3.99% 996,689 1,705,828
4.00% to 4.99% 7,131,625 7,748,142
5.00% to 5.99% 42,816,278 33,623,130
6.00% to 6.99% 17,082,245 31,263,120
7.00% to 7.99% 1,989,661 2,857,858
8.00% to 8.99% 51,315 1,993,442
9.00% and over 453,057 487,658
-----------------------------------------------------
70,520,870 79,679,178
-----------------------------------------------------
Deposits $107,595,602 $115,324,069
=====================================================
68
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
The scheduled maturities of certificates of deposit are
as follows:
Year ending March 31, Amount
----------------------------------------------------
1998 $53,119,636
1999 11,139,013
2000 3,563,250
2001 840,750
2002 1,837,360
Thereafter 20,861
----------------------------------------------------
Total $70,520,870
====================================================
Interest expense on deposits consists of the following:
Year ended March 31, 1997 1996
---------------------------------------------------
NOW and money market $ 405,274 $ 422,008
Passbook savings 413,341 454,056
Certificates of deposit 4,020,719 3,916,773
---------------------------------------------------
Interest expense $ 4,839,334 $4,792,837
===================================================
Certificates of deposit of $100,000 or more totaled
approximately $10,097,140 and $12,987,000 at March 31,
1997 and 1996, respectively. Deposit balances in excess
of $100,000 approximately $8,697,000 and $9,387,000 at
March 31, 1997 and 1996, respectively, are not insured
by the Federal Deposit Insurance Corporation (FDIC).
The deposits of the Bank are insured by the Savings
Association Insurance Fund (SAIF), one of two funds
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
69
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
to recapitalize the SAIF. Accordingly, the Bank
recorded a one time pre-tax charge of approximately
$584,000 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.
7. Income Taxes The components of income tax expense are summarized as
follows:
Year ended March 31, 1997 1996
---------------------------------------------------
Current:
Federal $ 232,543 $ 402,000
State 28,061 99,000
---------------------------------------------------
260,604 501,000
---------------------------------------------------
Deferred:
Federal 2,521 (109,000)
State 392 (17,000)
---------------------------------------------------
2,913 (126,000)
---------------------------------------------------
Income tax expense $ 263,517 $ 375,000
===================================================
Deferred tax liabilities and assets at March 31 consist
of the following:
1997 1996
---------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends $(286,528) $(259,000)
Loan loss reserves (243,191) -
Depreciation (121,876) (46,000)
Other (37,682) (88,000)
---------------------------------------------------
Total deferred tax
liabilities (689,277) (393,000)
---------------------------------------------------
70
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
1997 1996
---------------------------------------------------
Deferred tax assets:
Unearned loan fees 148,812 161,000
Allowance for loan losses 397,233 59,000
Deferred compensation 45,319 -
Unrealized loss on
securities available-
for-sale 21,249 103,000
---------------------------------------------------
Total deferred tax assets 612,613 323,000
---------------------------------------------------
Net deferred income
tax liability $ (76,664) $(70,000)
===================================================
A reconciliation of the statutory federal income tax
rate to the effective income tax rate follows:
1997 1996
---------------- ----------------
Amount Percent Amount Percent
-----------------------------------------------------
Income tax
expense at
statutory
rates $ 310,206 34.0% $ 327,347 34.0%
Increase
(decrease)
resulting
from:
State income
taxes, net
of federal
benefit 18,779 2.1 65,340 6.8
Prior year
over/under
accrual (47,319) (5.2) - -
Permanent and
other
differences (18,149) (2.0) (17,687) (1.9)
---------------------------------------------------
$ 263,517 28.9% $375,000 38.9%
===================================================
71
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
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 Company's
combined financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting
practices. The Bank's capital amounts and
classifications are also subject to qualitative
judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to
ensure capital adequacy require the Bank to maintain
minimum amounts and ratios. 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 March 31, 1997, the Bank met the regulatory tangible
capital, core capital and risk-based capital
requirements. At March 31, 1997, the Bank's regulatory
tangible capital and core capital were both $11,043,959
or 8.0 percent of tangible assets and risk-based capital
was $12,001,959 or 13.6 percent of total risk-weighted
assets.
72
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
The following is a reconciliation of equity as reported
in accordance with generally accepted accounting
principles (GAAP capital) to federal regulatory capital
at March 31:
1997 1996
-------------------------- -------------------------
Risk Risk
Tangible Core Based Tangible Core Based
Capital Capital Capital Capital Capital Capital
- ------------------------------------------------------------------------------
(In Thousands)
GAAP capital $11,011 $11,011 $11,011 $10,356 $10,356 $10,356
Additional capital items:
Unrealized losses
as defined 33 33 33 - - -
Allowances for loan
and lease losses
as defined - - 958 - - 701
- --------------------------------------------------------------------------
Regulatory capital 11,044 11,044 12,002 10,356 10,356 11,057
Minimum capital
requirement 2,065 4,131 7,063 1,947 3,895 6,254
- --------------------------------------------------------------------------
Regulatory capital -
excess $8,979 6,913 $ 4,939 $8,409 $6,461 $4,803
==========================================================================
As of March 31, 1997 and 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:
73
<PAGE>
<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
Minimum
Actual Requirement
-------------- -------------
Amount Ratio Amount Ratio
-----------------------------------------------------
March 31, 1997
Tier 1 Capital
(to adjusted total
assets) $11,044 8.0 $6,883 5.0%
Tier 1 Capital
(to risk-weighted
assets) $11,044 12.5 $5,298 6.0%
Total Capital
(to risk-weighted
assets) $12,002 13.6 $8,829 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%
===================================================
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.
74
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined 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 at March 31:
1997 1996
-----------------------------------------------------
Balance, beginning of
year $1,376,661 $1,464,192
Additions 122,000 545,900
Repayments and sales
proceeds (183,326) (633,431)
---------------------------------------------------
Balance, end of year $1,315,335 $1,376,661
===================================================
10. Employee The Bank established, during 1995, a profit sharing plan
Benefit pursuant to Section 401(k) of the Internal Revenue Code,
Plans 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 $43,868 and
$33,447 for the years ended March 31, 1997 and 1996. In
addition, the Bank may make additional contributions at
the discretion of the Board of Directors. These
additional contributions amounted to $96,395 and 61,770
for the years ended March 31, 1997 and 1996.
The Bank plans to establish an Employee Stock Ownership
Plan (ESOP) for the benefit of eligible employees, in
connection with the Conversion. The ESOP will 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.
11. Retirement Plan The Bank had a noncontributory pension trust ("the
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.
On March 31, 1996, the Bank terminated the Plan. The
termination of the Plan required an additional
contribution of approximately $130,000 to fund the
necessary lump sum distributions as specified in the
Plan documents. The Bank satisfied this obligation in
September 1996.
75
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
12. Advances Advances from FHLB had weighted average interest rates
from FHLB at March 31, 1997 and 1996 of 5.87% and 6.10%,
respectively. Maturity dates of advances at March 31
were as follows:
1997 1996
-----------------------------------------------------
Advances from FHLB due:
Less than 1 year $ 9,828,472 $ 750,000
1 to 2 years 328,472 328,472
2 to 3 years 1,000,000 578,472
3 to 4 years 497,083 -
4 to 5 years 2,268,056 647,084
-----------------------------------------------------
$ 13,922,083 $2,304,028
=====================================================
Pursuant to collateral requirements of the FHLB,
advances are secured by stock in the FHLB and qualifying
first mortgage loans.
13. Fair Values of SFAS No. 107, "Disclosures about Fair Value of Financial
Financial Instruments," requires disclosure of fair value
Instruments information about financial instruments, whether or not
recognized on the balance sheet, for which it is
practicable to estimate that value. SFAS No. 107
excludes certain financial instruments and all
nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value
estimates presented do not reflect the underlying fair
value of the Company. Although management is not aware
of any factors that would materially affect the
estimated fair value amounts presented, such amounts
have not been comprehensively revalued for purposes of
these financial statements since that date and,
therefore, estimates of fair value subsequent to that
date may differ significantly from the amounts presented
as follows.
76
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<PAGE>
FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
March 31, 1997 March 31, 1996
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
Financial assets
Cash and cash
equivalents $ 5,302,736 $ 5,302,736 $13,580,865 $13,580,865
Investment securities:
Held-to-maturity 5,199,375 5,136,365 10,544,953 10,479,425
Available-for-sale - - 1,328,295 1,328,295
Mortgage-backed
securities:
Held-to-maturity 2,280,743 2,205,640 2,487,998 2,422,033
Available-for-sale 2,599,147 2,599,147 - -
Loans receivable 113,048,075 112,106,875 93,817,254 93,157,000
Stock in FHLB 945,475 945,475 875,600 875,600
Cash surrender value
of life insurance
policies 1,350,964 1,350,964 1,283,628 1,283,628
Financial liabilities
Deposits 107,595,602 108,014,842 115,324,069 116,050,000
Advances from FHLB 13,922,083 13,786,403 2,304,028 2,201,000
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
held-to-maturity - The fair value of investment
securities is based on quoted market prices or dealer
estimates. Estimated fair value for mortgage-backed
securities issued by quasi-governmental agencies is
based on quoted market prices. The fair value of all
other mortgage-backed securities is based on dealer
estimates.
Loans receivable - For certain homogeneous categories of
loans, such as fixed and variable residential mortgages,
fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of
other loan types is estimated by discounting the future
cash flows and estimated prepayments using the current
rates at which similar loans would be made to borrowers
with similar credit
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FirstBank Corp. and
FirstBank Northwest
Notes to Combined Financial Statements
==============================================================================
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 Company's combined consolidated financial
position.
14. Liquidation At the time of the Conversion, the Bank will establish a
Account 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 balance in the
liquidation account at March 31, 1997 was approximately
$10,818,000.
The Bank may not declare or pay dividends on its stock
if such declaration and payment would violate statutory
or regulatory requirements.
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Item 8. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
- -----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The Board of Directors of the Company is presently composed of seven
members, each of who are elected for a term of three years. The executive
officers of the Company and the Bank 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 tables
sets forth information with respect to the Directors and executive officers of
the Company and the Bank at March 31, 1997.
Directors of the Company
Age at Current
March 31, Director Term
Name 1997 Since Expires
- ---- ---- ----- -------
William J. Larson 66 1997 1998
Larry K. Moxley 46 1997 1998
James N. Marker 61 1997 1999
Robert S. Coleman, Sr. 69 1997 1999
Clyde E. Conklin 45 1997 2000
W. Dean Jurgens 64 1997 2000
Steve R. Cox 50 1997 2000
Directors of the Bank
Age at Current
March 31, Director Term
Name 1997 Since Expires
- ---- ---- ----- -------
Steve R. Cox 50 1986 2000
James N. Marker 61 1974 1999
Robert S. Coleman, Sr. 69 1978 1999
Dr. L. Glen Carlson 73 1977 1998
William J. Larson 66 1973 1998
F. Ron McMurray 56 1986 1999
W. Dean Jurgens 64 1969 2000
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Executive Officers of the Company and Bank
Age at Position
March 31, ----------------------------------------------
Name 1997 Company Bank
- ---- ---- ------- ----
Clyde E. Conklin 45 President and Chief Chief Executive Officer
Executive Officer
Larry K. Moxley 46 Executive Vice Presi- Chief Financial Officer
dent, Chief Finan- and Secretary/Treasurer
cial Officer and
Corporate Secretary
Cynthia M. Moore 39 Controller and Controller
Assistant Corporate
Secretary
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
Biographical Information
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 NezPerce, 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.
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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 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.
Item 10. 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
$100,000 during the year ended March 31, 1997.
Annual Compensation(1)
---------------------------------------------
Name and Other Annual All Other
Position Year Salary($) Bonus($) Compensation($)(2) Compensation($)(3)
- -------- ---- --------- -------- ------------------ ------------------
Clyde E.
Conklin 1997 $75,500 $24,842 -- 3,011
Chief
Executive
Officer
- -------------------
(1) Compensation information for fiscal years ended March 31, 1995 and 1996
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
Company and the Bank (collectively, the "Employers") entered into a three-year
employment agreements with Mr. Conklin. Under the agreement the initial
salary level for Mr. Conklin is $88,000, which amount 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 agreement, the term of the agreement may be extended for an
additional year. The agreements are terminable by the Employers at any time,
or by Mr. Conklin if he 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 Mr.
Conklin'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 agreement provides 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, Mr. Conklin 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 Company purchases shares of Common Stock
81
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<PAGE>
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
Company representing 25% or more of the combined voting power of the 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
Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Company's assets, or a plan of partial or complete
liquidation.
The severance payment from the Employers will equal three times Mr.
Conklin'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
March 31, 1997, Mr. Conklin would be entitled to severance payments of
approximately $218,000. 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.
The agreement restricts Mr. Conklin'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.
Salary Continuation Agreements. The Bank has entered into salary
continuation agreements with Mr. Conklin as an incentive to ensure his
continued employment with the Bank and to provide an additional source of
retirement income. Under the agreements, Mr. Conklin would receive a lifetime
benefit of $4,583 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 termination of employment prior to age 60.
The agreement also provides for payment of a reduced benefit in the event of
disability and a lump sum death benefit in the event of death while employed
by the Bank. In the event of a change in control of the Bank, the agreement
provides that Mr. Conklin would be entitled to a lump sum payment based on his
vested benefit when the change in control occurred. The Bank has purchased
life insurance on Messrs. Conklin to informally fund the Bank's obligations
under the salary continuation agreement funded by a single premium annuity in
1995.
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. 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 Company. Employee directors of the Bank will
receive an annual retainer of $8,480.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The Company had no shares of common stock outstanding at March
31, 1997.
82
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<PAGE>
(b) Security Ownership of Management.
The Company had no shares of common stock outstanding at March
31, 1997.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge
by any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
Item 12. Certain Relationships and Related Transactions
- ----------------------------------------------------------
Current law requires 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 does 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 and at different rates or terms than
those offered to the general public and has adopted a policy to this effect.
The aggregate amount of loans by the Bank to its executive officers and
directors was approximately $164,000 at March 31, 1997. Such loans (i) were
made in the ordinary course of business, (ii) were made on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the Bank's other
customers, and (iii) did not involve more than the normal risk of
collectibility or present other unfavorable features when made.
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -------------------------------------------------
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement between First Bank NorthWest,
FirstBank Corp. and Clyde E. Conklin
10.2 Salary Continuation Agreement between First Federal Bank
of Idaho F.S.B. and Clyde E. Conklin*
10.3 Salary Continuation Agreement between First Federal Bank
of Idaho, F.S.B. and Larry K. Moxley*
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
27 Financial Data Schedule
___________________
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, (File No. 333-23395).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
March 31, 1997.
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<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRSTBANK CORP.
Date: July 14, 1997 By: /s/ Clyde E. Conklin
---------------------------------
Clyde E. Conklin
President and Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ Clyde E. Conklin President, Chief July 14, 1997
- --------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)
/s/ Larry K. Moxley Chief Financial Officer July 14, 1997
- --------------------------- and Director (Principal
Larry K. Moxley Financial Officer)
/s/ Cynthia M. Moore Controller July 14, 1997
- ---------------------------- (Principal Accounting Officer)
Cynthia M. Moore
/s/ William J. Larson Director July 14, 1997
- ---------------------------
William J. Larson
Director _______, 1997
- ---------------------------
Steve R. Cox
/s/ Robert S. Coleman, Sr. Director July 14, 1997
- ---------------------------
Robert S. Coleman, Sr.
/s/ James N. Marker Director July 14, 1997
- ---------------------------
James N. Marker
Director _______, 1997
- ---------------------------
W. Dean Jurgens
<PAGE>
<PAGE>
Exhibit 10.1
Employment Agreement between First Bank NorthWest,
FirstBank Corp. and Clyde E. Conklin
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of July 1, 1997, by and between
FIRSTBANK NORTHWEST (the "Bank"), FIRSTBANK CORP. (the "Company"), a Delaware
corporation; and CLYDE E. CONKLIN (the "Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as Chief Executive Officer of the Bank. During said period, Executive also
agrees to serve, if elected, as an officer and director of the Company or any
subsidiary or affiliate of the Company or the Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary
date, and continuing at each anniversary date thereafter, the Board of
Directors of the Bank (the "Board") may extend the Agreement for an additional
year. Prior to the extension of the Agreement as provided herein, the Board
of Directors of the Bank will conduct a formal performance evaluation of
Executive for purposes of determining whether to extend the Agreement, and the
results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods
of absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the
approval of the Board, as evidenced by a resolution of such Board, from time
to time, Executive may serve, or continue to serve, on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which, in such Board's judgment, will not present any conflict of interest
with the Bank, or materially affect the performance of Executive's duties
pursuant to this Agreement.
<PAGE>
<PAGE>
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute
the salary and benefits paid for the duties described in Sections 1 and 2.
The Bank shall pay Executive as compensation a salary of $88,000 per year
("Base Salary"). Such Base Salary shall be payable in accordance with the
customary payroll practices of the Bank. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement.
Such review shall be conducted by a Committee designated by the Board. In
addition to the Base Salary provided in this Section 3(a), the Bank shall
provide Executive at no cost to Executive with all such other benefits as are
provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately
prior to the beginning of the term of this Agreement, and the Bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Without limiting the generality of the foregoing
provisions of this Subsection (b), Executive will be entitled to participate
in or receive benefits under any employee benefit plans including, but not
limited to, retirement plans, supplemental retirement plans, pension plans,
profit-sharing plans, health-and-accident plan, medical coverage or any other
employee benefit plan or arrangement made available by the Bank in the future
to its senior executives and key management employees, subject to, and on a
basis consistent with, the terms, conditions and overall administration of
such plans and arrangements. Executive will be entitled to incentive
compensation and bonuses as provided in any plan, or pursuant to any
arrangement of the Bank, in which Executive is eligible to participate.
Nothing paid to Executive under any such plan or arrangement will be deemed to
be in lieu of other compensation to which Executive is entitled under this
Agreement, except as provided under Section 5(e).
(c) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from
time to time determine.
(d) If Executive serves as a member of the Board or the Board of
Directors of the Company (the "Company Board"), the Company or the Bank, as
applicable, shall pay Executive, as additional compensation, an amount equal
to eighty (80) percent of the fees or retainers received by a nonemployee
member of the Board or the Company Board.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more
2
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<PAGE>
of the following: (i) the termination by the Bank of Executive's full-time
employment hereunder for any reason other than a Change in Control, as defined
in Section 5(a) hereof; disability, as defined in Section 6(a) hereof; death;
retirement, as defined in Section 7 hereof; or Termination for Cause, as
defined in Section 8 hereof; (ii) Executive's resignation from the Bank's
employ, upon (A) unless consented to by Executive, a material change in
Executive's function, duties, or responsibilities, which change would cause
Executive's position to become one of lesser responsibility, importance, or
scope from the position and attributes thereof described in Sections 1 and 2,
above (any such material change shall be deemed a continuing breach of this
Agreement), (B) a relocation of Executive's principal place of employment by
more than 35 miles from its location at the effective date of this Agreement,
or a material reduction in the benefits and perquisites to Executive from
those being provided as of the effective date of this Agreement, (C) the
liquidation or dissolution of the Bank, or (D) any breach of this Agreement by
the Bank. Upon the occurrence of any event described in clauses (A), (B), (C)
or (D), above, Executive shall have the right to elect to terminate his
employment under this Agreement by resignation upon not less than sixty (60)
days prior written notice given within a reasonable period of time not to
exceed, except in case of a continuing breach, four (4) calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or
liquidated damages, or both, a lump sum amount equal to one (1) times the
amount of compensation paid by the Bank to Executive during the twelve (12)
month period ending on the last day of the month immediately preceding the
Date of Termination; provided, however, that if the Bank is not in compliance
with its minimum capital requirements or if such payments would cause the
Bank's capital to be reduced below its minimum capital requirements, such
payment shall be deferred until such time as the Bank is in capital
compliance. For purposes of this Section 4(b), for any determination period,
Executive's "compensation" shall equal the sum of (i) amounts paid to
Executive as Base Salary and (ii) amounts paid to Executive or accrued on his
behalf as a bonus.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of twelve (12)
months following the Date of Termination.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall
have occurred a Change in Control of the Company or the Bank. For purposes of
this Agreement, a "Change in Control" of the Company or the Bank shall be
deemed to occur if and when (a) an offeror other than the Company purchases
shares of the common stock of the Company or the Bank pursuant to a tender or
exchange offer for 25% or more of such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) is
or becomes the beneficial owner, directly or indirectly, of securities of the
Company or the Bank representing
3
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<PAGE>
25% or more of the combined voting power of the Company's or the Bank's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four (24) month
period (whether commencing before or after the date of adoption of this
Agreement) do not constitute a majority of the Board at the end of such
period, or (d) shareholders of the Company or the Bank approve a merger,
consolidation, sale or disposition of all or substantially all of the
Company's or the Bank's assets, or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting
a Change in Control have occurred or the Board of the Bank or the Company has
reasonably determined that a Change in Control has occurred, Executive shall
be entitled to the benefits provided in paragraphs (c), (d) and (e) of this
Section 5 upon his subsequent involuntary termination following the effective
date of a Change in Control (or voluntary termination following the effective
date of a Change in Control following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits (other
than a reduction affecting the Bank's personnel generally), or relocation of
his principal place of employment by more than thirty-five (35) miles from its
location immediately prior to the Change in Control), unless such termination
is because of his death, retirement as provided in Section 7, termination for
Cause, or termination for Disability.
(c) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Bank shall pay Executive, or in the event of
his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, as severance pay or liquidated damages, or both, a sum equal to
2.99 times Executive's "base amount," within the meaning of Section 280G(b)(3)
of the Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall
be made in a lump sum paid within ten (10) days of Executive's Date of
Termination.
(d) Upon the occurrence of a Change in Control followed by Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions
that would have been made on Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Bank as of the
Date of Termination. Such coverage and payments shall cease upon the
expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive shall be
entitled to receive benefits due him under, or contributed by the Company or
the Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by
the Bank or the Company on Executive's behalf to the extent that such benefits
are not otherwise paid to Executive upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to
Executive under this Section, together
4
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<PAGE>
with any other payments or benefits received or to be received by Executive in
connection with a Change in Control, would be deemed to include an "excess
parachute payment" under Section 280G of the Code, then, at the election of
Executive, (i) such payments or benefits shall be payable or provided to
Executive over the minimum period necessary to reduce the present value of
such payments or benefits to an amount which is one dollar ($1.00) less than
three (3) times Executive's "base amount" under Section 280G(b)(3) of the Code
or (ii) the payments or benefits to be provided under this Section 5 shall be
reduced to the extent necessary to avoid treatment as an excess parachute
payment with the allocation of the reduction among such payments and benefits
to be determined by Executive.
6. TERMINATION FOR DISABILITY.
(a) If Executive shall become disabled as defined in the Bank's then
current disability plan (or, if no such plan is then in effect, totally
disabled within with respect to the performance of the material duties of his
regular occupation, as determined by a physician designated by the Board), the
Bank may terminate Executive's employment for "Disability."
(b) Upon Executive's termination of employment for Disability, the Bank
will pay Executive, as disability pay, a bi-weekly payment equal to
three-quarters (3/4) of Executive's bi-weekly compensation, determined as of
the effective date of such termination. For purposes of the preceding
sentence of this paragraph, "bi-weekly compensation" shall mean the sum of
Executive's Base Salary and bonuses paid or accrued on Executive's behalf
during the twelve-month period ending on the last day of the month preceding
Executive's termination of employment for Disability divided by twenty-six
(26). These disability payments shall commence on the effective date of
Executive's termination and will end on the earlier of (i) the date Executive
returns to the full-time employment of the Bank in the same capacity as he was
employed prior to his termination for Disability and pursuant to an employment
agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive attaining the age of
sixty-five (65); or (iv) Executive's death; or (v) the expiration of the term
of this Agreement. The disability pay shall be reduced by the amount, if any,
paid to Executive under any plan of the Bank providing disability benefits to
Executive.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date Executive returns to the
full-time employment of the Bank, in the same capacity as he was employed
prior to his termination for Disability and pursuant to an employment
agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the age of
sixty-five (65); (iv) Executive's death; or (v) the expiration of the term of
this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of
temporary disability.
5
<PAGE>
<PAGE>
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination of Executive based on "Retirement" shall mean retirement at
or after attaining age sixty-five (65) or in accordance with any retirement
arrangement established with Executive's consent with respect to him. Upon
termination of Executive upon Retirement, Executive shall be entitled to all
benefits under any retirement plan of the Bank or the Company and other plans
to which Executive is a party. Upon the death of Executive during the term of
this Agreement, the Bank shall pay to Executive's estate the compensation due
to Executive through the last day of the calendar month in which his death
occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of Executive's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's
part shall be "willful" unless done, or omitted to be done, not in good faith
and without reasonable belief that the action or omission was in the best
interest of the Bank or its affiliates. Notwithstanding the foregoing,
Executive shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to him a copy of a resolution duly
adopted by the affirmative vote of not less than three-fourths (3/4) of the
members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
termination for Cause and specifying the reasons thereof. Executive shall not
have the right to receive compensation or other benefits for any period after
termination for Cause. Any stock options granted to Executive under any stock
option plan or any unvested awards granted under any other stock benefit plan
of the Bank, the Company, or any subsidiary or affiliate thereof, shall become
null and void effective upon Executive's receipt of Notice of Termination for
Cause pursuant to Section 10 hereof, and shall not be exercisable by Executive
at any time subsequent to such Termination for Cause.
9. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits
for any period after Termination for Cause as defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under
6
<PAGE>
<PAGE>
the Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may, in its discretion, (i) pay Executive all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate (in
whole or in part) any of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting parties
shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the
FDIA), all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his designee at the time the Federal Deposit
Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA or (ii) by the Director, or
his designee at the time the Director or such designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank
is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
10. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his
duties on a full-time basis during such thirty (30) day period), and (B) if
his employment is terminated for any other reason, the date specified in the
Notice of Termination (which, in the case of a Termination for Cause, shall
not be less than thirty (30) days from the date such Notice of Termination is
given).
7
<PAGE>
<PAGE>
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence
of a Change in Control and voluntary termination by Executive in which case
the Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined,
either by mutual written agreement of the parties, by a binding arbitration
award, or by a final judgment, order or decree of a court of competent
jurisdiction (the time for appeal there from having expired and no appeal
having been perfected) and provided further that the Date of Termination shall
be extended by a notice of dispute only if such notice is given in good faith
and the party giving such notice pursues the resolution of such dispute with
reasonable diligence. Notwithstanding the pendency of any such dispute, the
Bank will continue to pay Executive his full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
Base Salary) and continue him as a participant in all compensation, benefit
and insurance plans in which he was participating when the notice of dispute
was given, until the dispute is finally resolved in accordance with this
Agreement. Amounts paid under this Section are in addition to all other
amounts due under this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant
to an Event of Termination as provided in Section 4 hereof, Executive agrees
not to compete with the Bank and/or the Company for a period of one (1) year
following such termination in any city, town or county in which the Bank
and/or the Company has an office or has filed an application for regulatory
approval to establish an office, determined as of the effective date of such
termination. Executive agrees that during such period and within said cities,
towns and counties, Executive shall not work for or advise, consult or
otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities
of the Bank and/or the Company. The parties hereto, recognizing that
irreparable injury will result to the Bank and/or the Company, its business
and property in the event of Executive's breach of this Subsection 11(a) agree
that in the event of any such breach by Executive, the Bank and/or the Company
will be entitled, in addition to any other remedies and damages available, to
an injunction to restrain the violation hereof by Executive, Executive's
partners, agents, servants, employers, employees and all persons acting for or
with Executive. Executive represents and admits that in the event of the
termination of his employment pursuant to Section 8 hereof, Executive's
experience and capabilities are such that Executive can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. Nothing herein will be
construed as prohibiting the Bank and/or the Company from pursuing any other
remedies available to the Bank and/or the Company for such breach or
threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and
affiliates thereof, as it may exist from
8
<PAGE>
<PAGE>
time to time, is a valuable, special and unique asset of the business of the
Bank. Executive will not, during or after the term of his employment,
disclose any knowledge of the past, present, planned or considered business
activities of the Bank or affiliates thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever. Notwithstanding the
foregoing, Executive may disclose any knowledge of banking, financial and/or
economic principles, concepts or ideas which are not solely and exclusively
derived from the business plans and activities of the Bank. In the event of a
breach or threatened breach by Executive of the provisions of this Section,
the Bank will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned
or considered business activities of the Bank or affiliates thereof, or from
rendering any services to any person, firm, corporation, other entity to whom
such knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or
threatened breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
all payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and
any attempt, voluntary or involuntary, to affect any such action shall be
null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
9
<PAGE>
<PAGE>
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any
provision of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed a
continuing waiver unless specifically stated therein, and each such waiver
shall operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future as to any act
other than that specifically waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other
provision of this Agreement or any part of such provision not held so invalid,
and each such other provision and part thereof shall to the full extent
consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation
of any of the provisions of this Agreement.
18. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Idaho,
unless otherwise specified herein; provided, however, that in the event of a
conflict between the terms of this Agreement and any applicable federal or
state law or regulation, the provisions of such law or regulation shall
prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a location selected by the employee
within one hundred (100) miles from the location of the Bank, in accordance
with the rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in
connection with this Agreement.
10
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<PAGE>
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under the Company's Certificate of Incorporation and Bylaws.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent
that the Bank or the Company would be required to perform if no such
succession or assignment had taken place.
23. ADDITIONAL AGREEMENTS
Upon the termination of Executive's employment with the Bank and the
Company (or any successor entity) during the term of this Agreement, Executive
shall submit in writing his resignation as a member of the Bank Board, the
Company Board or the board of directors of any affiliate of the Bank or the
Company if he is then serving in such capacity, with such resignation to be
effective as of the date of his termination of employment.
11
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the Bank and the Company hereto have caused this
Agreement to be executed and their seal to be affixed hereunto by a duly
authorized officer or director, and Executive has signed this Agreement, all
on the 1st day of July, 1997.
ATTEST: FIRSTBANK NORTHWEST
/s/ Larry K. Moxley BY: /s/ Steve R. Cox
- ----------------------------- ----------------------------------
[SEAL]
ATTEST: FIRSTBANK CORP.
/s/ Larry K. Moxley BY: /s/ Steve R. Cox
- ----------------------------- ----------------------------------
[SEAL]
WITNESS:
/s/ Deby L. Lutes /s/ Clyde E. Conklin
- ----------------------------- --------------------------------------
Clyde E. Conklin
12
<PAGE>
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
- ------
FirstBank Corp.
Percentage Jurisdiction or
Subsidiaries (1) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
FirstBank Northwest 100% United States
Tri-star Financial Corporation 100% Idaho
- -----------------
(1) These subsidiaries were acquired by the parent effective July 1, 1997.
The operations of the Registrants's subsidiaries are included in the
Registrant's combined financial statements.
<PAGE>
<PAGE>
Exhibit 23
Consent of Independent Auditors
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
FirstBank Corp. and FirstBank Northwest
Lewiston, ID
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of FirstBank Corp. of our report dated May 19, 1997,
except for Note 14 and the first paragraph of the Summary of Accounting
Policies which are as of July 1, 1997, relating to the combined financial
statements of FirstBank Corp. and FirstBank Northwest appearing in the
Company's Annual Report on Form 10-KSB for the year ended March 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
July 11, 1997
Spokane, Washington
<PAGE>
<PAGE>
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