SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1998
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 (I.R.S. Employer
incorporation or organization) I.D. Number)
920 Main Street, Lewiston, Idaho 83501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (208) 746-9610
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Securities registered pursuant to
Section 12(b) of the Act: None
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Securities registered pursuant to
Section 12(g) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The Registrant's revenues for the year ended March 31, 1998 were $15.6
million.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was$37,212,615 based on the last reported sale price of the common
stock of the Registrant on the NASDAQ National Market on June 9, 1998. For
purposes of this disclosure, shares of common stock held by persons who hold
more than 5% of the outstanding common stock and by officers and directors of
the Registrant have been excluded in that such persons may be deemed to be
affiliates of the Registrant.
As of June 9, 1998, there were 1,837,660 shares outstanding of the Registrant's
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's definitive proxy statement for its annual
meeting of stockholders to be held on July 22, 1998 are incorporated by
reference into Part II of the Form 10-KSB.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
FirstBank Corp. ("Company"), a Delaware corporation, was organized in
March 1997 for the purpose of becoming the holding company for FirstBank
Northwest (formerly known as First Federal Bank of Idaho, a Federal Savings
Bank) ("Bank") upon the Bank's conversion from a federally chartered mutual to a
federally chartered stock savings bank ("Conversion"). The Company completed its
conversion and initial public offering on July 1, 1997 through the sale of
1,983,750 shares of common stock at $10.00 per share.
The Bank, founded in 1920, is a Washington 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 July of 1997 the Bank relocated its main office to Clarkston, Washington and
on January 30, 1998 converted to a Washington-chartered savings bank. The Bank
is currently regulated by the State of Washington, its primary regulator, and
the FDIC, the insurer of its deposits. The Bank's deposits are insured by the
FDIC's Savings Association Insurance Fund ("SAIF") and have been federally
insured since 1933. The Bank has been a member of the Federal Home Loan Bank
("FHLB") System since 1933.
The Bank is a community-oriented financial institution 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, commercial,
agricultural real estate loans, and consumer and other non-real estate loans.
The Bank has adopted a mortgage banking strategy pursuant to which it generally
sells a majority of the fixed-rate residential mortgage loans with maturities in
excess of 15 years that it originates while retaining the servicing rights on
most of the conventional loans it sells.
MARKET AREA
The Bank is headquartered in Lewiston, Idaho and operates six
full-service offices in Lewiston, Lewiston Orchards, Moscow, Grangeville, and
Coeur d'Alene, Idaho, and Clarkston, Washington. 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 58,000. 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 approximately 21,000. The
county population is approximately 33,000. Agriculture and higher education are
the primary industries in Moscow. The University of Idaho is located in Moscow
and is the city's largest employer. In addition, Washington State University is
located eight miles west of Moscow in Pullman, Washington. Both universities
have been expanding in recent years, which resulted in increased demand for
housing. The growth of the universities has slowed recently, which has caused
some slow down in the real estate market. Grangeville, Idaho, in Idaho County,
has an economy based mostly on agriculture, the forest products industry and the
U.S. Forest Service. Declines in the forest products industry has resulted in a
decline in population in Idaho County over the last decade. Tourism has become
increasingly important to the Grangeville economy in recent years. Coeur
D'Alene, Idaho, in Kootenai County, has a population of approximately 31,000 in
a county with almost 100,000 residents. Tourism, forest products, mining and
agriculture are the major industries of this
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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
consolidated financial position and results of operations of the Company at the
dates and for the years indicated.
<TABLE>
<CAPTION>
At March 31,
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FINANCIAL CONDITION DATA: 1996 1997 1998
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(In Thousands)
<S> <C> <C> <C>
Total assets $129,832 $137,652 $183,563
Loans receivable, net 93,817 113,048 145,697
Cash and cash equivalents 13,581 5,303 8,417
Investment securities held-to-maturity 10,545 5,199 2,449
Investment securities available-for-sale 1,328 -- 2,654
Mortgage-backed securities held-to-maturity 2,488 2,281 3,420
Mortgage-backed securities available-for-sale -- 2,599 7,970
Deposits 115,324 107,596 114,495
Advances from FHLB 2,304 13,922 35,656
Stockholders' equity 10,356 11,011 30,008
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1996 1997 1998
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SELECTED OPERATING DATA: (In Thousands, except
per share data)
<S> <C> <C> <C>
Interest income $ 9,552 $10,192 $13,321
Interest expense 5,158 5,338 6,573
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Net interest income 4,394 4,854 6,748
Provision for loan losses 150 310 200
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Net interest income after provision for loan losses 4,244 4,544 6,548
Non-interest income 1,980 2,245 2,282
Non-interest expenses 5,261 5,877 6,179
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Income before income tax expense 963 912 2,651
Income tax expense 375 263 945
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Net income $ 588 $ 649 $ 1,706
======= ======= =======
Per Share Data:
Pro forma amounts (unaudited):
Net income per share - basic and diluted N/A N/A $ 0.93
======= ======= =======
Historical:
Dividends N/A N/A $ 0.14
======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
At or For the
Year Ended March 31,
-----------------------
1996 1997 1998
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<S> <C> <C> <C>
KEY FINANCIAL RATIOS:
PERFORMANCE RATIOS:
Return on average assets (1) 0.50% 0.50% 1.02%
Return on average equity (2) 5.81 5.99 6.98
Average equity to average assets (3) 8.55 8.34 14.63
Total equity to total assets at end of year 7.98 8.00 16.35
Interest rate spread (4) 3.61 3.68 3.72
Net interest margin (5) 3.89 3.92 4.27
Average interest-earning assets to average interest-bearing
liabilities 106.09 105.62 113.26
Non-interest expense as a percent of average assets 4.44 4.52 3.70
Efficiency ratio (6) 82.54 82.79 68.43
Dividend payout ratio N/A N/A 15.01
EQUITY RATIOS:
Tier I capital to average assets 7.98 8.02 11.36
Tier I capital to risk-weighted assets 13.24 12.51 17.10
Total capital to risk-weighted assets 14.14 13.59 18.05
ASSET QUALITY RATIOS:
Nonaccrual and 90 days or more past due loans as a percent
of loans receivable, net 0.74 1.00 0.31
Nonperforming assets as a percent of total assets 0.59 0.99 0.73
Allowance for loan losses as a percent of total loans
receivable 0.70 0.82 0.73
Allowance for loan losses as a percent of nonperforming
loans 101.30 86.58 245.61
Net charge-offs to average outstanding loans 0.00 0.03 0.04
</TABLE>
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Average equity divided by average assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on interest-bearing liabilities.
(5) Net interest income as a percentage of average interest-earning assets.
(6) Represents the ratio of non-interest expenses divided by the sum of net
interest income and non-interest income.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing
owner-occupied, one- to four-family residential property. With the
implementation of the Commercial Loan Department in fiscal 1998, commercial real
estate and commercial non-real estate lending have become a significant portion
of the lending activities. The Bank is also active in originating construction
and agricultural real estate loans. The Bank's net loans receivable totaled
$145.7 million at March 31, 1998, representing 79.4% 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 years indicated. The Bank
had no concentration of loans exceeding 10% of total gross loans other than as
disclosed below.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------
1996 1997 1998
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $62,818 62.41% $ 77,408 65.32% $ 87,985 57.06%
Agricultural 11,945 11.87 11,998 10.12 14,602 9.47
Commercial 4,036 4.01 5,392 4.55 12,433 8.06
Construction 13,832 13.74 11,861 10.01 7,966 5.17
------- ------ -------- ------ -------- ------
Total real estate loans 92,631 92.03 106,659 90.00 $122,986 79.76
Consumer and other loans:
Commercial -- -- 1,692 1.43 16,627 10.78
Home equity 5,229 5.20 5,003 4.22 6,175 4.00
Other consumer 2,206 2.19 4,125 3.48 6,109 3.96
Agricultural operating 589 0.58 1,030 0.87 2,305 1.50
------- ------ -------- ------ -------- ------
Total consumer and other loans 8,024 7.97 11,850 10.00 31,216 20.24
------- ------ -------- ------ -------- ------
Total loans receivable 100,655 100.00% 118,509 100.00% 154,202 100.00%
------- ====== -------- ====== -------- ======
Less:
Loans in process 5,726 4,108 6,934
Unearned loan fees and discounts 411 379 451
Allowance for loan losses 701 974 1,120
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Loans receivable, net $93,817 $113,048 $145,697
======= ======== ========
</TABLE>
RESIDENTIAL REAL ESTATE LENDING. The principal lending activity of the
Bank is the origination of mortgage loans to enable borrowers to purchase or
refinance existing residential real estate. At March 31, 1998, $123.0 million,
or 79.8%, 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, 1998 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, 1998, the Bank remains contingently liable for approximately $1.3
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."
5
<PAGE>
The Bank offers ARM loans at rates and terms competitive with market
conditions. The Bank currently offers ARM products that adjust annually after an
initial fixed period of one, three or five years based on the One Year U.S.
Treasury Note Constant Maturity Rate. ARM loans held in the Bank's portfolio do
not permit negative amortization of principal and carry no prepayment
restrictions. The periodic interest rate cap (the maximum amount by which the
interest rate may be increased or decreased in a given period) on the Bank's ARM
loans is generally 2% per adjustment period and the lifetime interest rate cap
is generally 6% over the initial interest rate of the loan. The terms and
conditions of the ARM loans offered by the Bank, including the index for
interest rates, may vary from time to time. Borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
The Bank also originates residential mortgage loans that are insured by
the Federal Housing Administration, or guaranteed by the Veterans Administration
or the USDA Rural Development. These loans are sold to private investors or to
the Idaho Housing and Finance Agency. A significant portion of the Bank's
residential mortgage loan originations in recent years has consisted of
government insured and guaranteed loans. Most of these loans have been
originated in the Coeur d'Alene area, where there 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 basis. At March 31,
1998, the Bank's residential loan portfolio included $19 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 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, 1998, construction loans totaled $8.0 million, or 5.2% of total loans. At
such date, the average amount of the Bank's construction loans was approximately
$95,000, 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, 1998 was $500,000. During the year ended March 31, 1998,
construction loans constituted 8.5% 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,
1998, speculative loans totaled $4.8 million, or 60.3% 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, 1998,
custom construction loans to individuals totaled $2.5 million, or 31.4% 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, 1998, the Bank had approved four major builders, the largest
borrowing capacity of which was approximately $1.6 million. At March 31, 1998,
the Bank's major builders had total loans of $1.3 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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<PAGE>
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 Senior Vice President,
Agricultural and Consumer Lending has 18 years of experience in agricultural
real estate lending. The addition of two loan officers to the existing staff
establishes FirstBank as the most experienced agricultural lender in the area.
At March 31, 1998, agricultural real estate loans totaled $14.6 million, or 9.5%
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, 1998, the largest agricultural real estate loan was $1.0
million and the average Bank agricultural real estate loan was approximately
$107,000.
The Bank is approved to originate agricultural real estate loans
qualifying for purchase by the Farmer Mac II program, which requires Farm
Service Agency guarantees up to a maximum of 90% of the principal and interest.
Once the guaranteed loan has been funded, the Bank generally sells the
guaranteed portion of the loan to Farmer Mac II, while retaining the servicing
rights on the entire loan.
Agricultural real estate lending affords the Bank the opportunity to
earn yields higher than those generally available on standard conforming
residential real estate lending. However, agricultural real estate lending
involves a greater degree of risk than residential real estate loans. Payments
on agricultural real estate loans are dependent on the successful operation or
management of the farm property securing the loan. The success of the farm may
be affected by many factors outside the control of the farm borrower, including
adverse weather conditions that limit crop yields (such as hail, drought and
floods), declines in market prices for agricultural products and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. Farming in the Bank's market area is generally
dry-land farming, with wheat being the primary crop. Accordingly, adverse
circumstances affecting the area's wheat crop could have an adverse effect on
the Bank's agricultural loan portfolio.
The 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 is
becoming a significant part of the Bank's lending strategy. At March 31, 1998,
the Bank's commercial real estate loan portfolio totaled $12.4 million, or 8.1%
of total loans. The Bank has been more active in originating commercial real
estate loans in recent periods. During the year ended March 31, 1998,
originations of commercial real estate loans totaled $9.6 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.
The Bank's commercial real estate loans include loans secured by
storage facilities, a manufactured home park, small office buildings, retail
shops, multi-family residential properties 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, 1998, the average size of the Bank's commercial real
estate loans was $107,000 and the largest was $966,000. 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 totaled $1.8 million at March 31, 1998.
During the year ended March 31, 1998, originations of loans for the development
of residential subdivisions totaled $1.0 million. Other types of loans in the
commercial portfolio include SBA guaranteed loans, B & I guaranteed loans, and
participation loans with other banks.
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.
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, 1998, the
Bank's consumer and other non-mortgage loans totaled approximately $31.2
million, or 20.2% 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, 1998, home equity loans totaled $6.2 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, 1998, agricultural operating loans totaled $2.3 million.
Agricultural operating loans or lines of credit generally are made for a term of
one to three years and may be secured or unsecured. Such loans may be secured by
a first or second mortgage, or liens on property, vehicles, accounts receivable,
crop held or growing crop. Personal guarantees are frequently required for loans
made to corporations and other business entities.
Commercial lending has become an important part of the Bank's lending
strategy this past year. The Senior Vice President has 18 years of commercial
lending experience and was able, with the help of two other experienced
9
<PAGE>
commercial lenders to increase commercial non-real estate loans to 10.8% of the
total loan portfolio. The Bank presently originates both adjustable-rate and
fixed-rate loans secured by equipment, accounts receivable and inventory. Loans
secured by accounts receivable and inventory are generally operating lines of
credit of one year while equipment secured loans may be for a term as long as
five years. Nonresidential commercial lending has increased from $1.7 million to
$16.6 million from fiscal year ended 1997 and 1998, respectively. The major
component of this increase was the origination of two tax anticipation notes:
one with the City of Lewiston for $3.4 million and the other with the Lewiston
School District for $3.3 million, both of which have a term of less than one
year.
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, 1998, the Bank had no 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, 1998 regarding the dollar amount of principal repayments for loans
becoming due during the years indicated. All loans are included in the year in
which the final contractual payment is due. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due within one year. The table does not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause the
Bank's actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
One After 5 Years After 10 Years
Within Year Through Through Through Beyond
One Year 5 Years 10 Years 15 Years 15 Years Total
-------- ------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $ 25,507 $ 17,352 $ 8,488 $ 15,201 $ 21,437 $ 87,985
Construction 7,735 231 0 0 0 7,966
Commercial 1,263 10,168 795 0 207 12,433
Agricultural 11,154 1,832 1,225 391 0 14,602
Commercial non-real estate 11,222 5,099 306 0 0 16,627
Consumer and other loans 9,269 3,222 1,310 0 788 14,589
-------- -------- -------- -------- -------- --------
Total loans receivable $ 66,150 $ 37,904 $ 12,124 $ 15,592 $ 22,432 $154,202
======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
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 $48,708 $39,277
Construction 7,966 0
Commercial 1,811 10,622
Agricultural 1,218 13,384
Commercial non-real estate 10,082 6,545
Consumer and other loans 5,332 9,257
------- -------
Total loans receivable $75,117 $79,085
======= =======
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 $227,150 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, 1998, the Bank originated $145.3 million of loans. Residential
real estate loan originations totaled $96.1 million for the year ended March 31,
1998. Of the $145.3 million of loans originated during the year ended March 31,
1998, 14% were adjustable-rate loans and 86% were fixed-rate loans.
In the early 1990's, the Bank adopted a mortgage banking strategy
pursuant to which it seeks to generate income from the sale of loans (which may
be sold either servicing-retained or servicing-released) and from servicing fees
from loans sold on a servicing-retained basis. Generally, the level of loan sale
activity and, therefore, its
11
<PAGE>
contribution to the Bank's profitability depends on maintaining a sufficient
volume of loan originations. Changes in the level of interest rates and the
local economy affect the amount of loans originated by the Bank and, thus, the
amount of loan sales as well as origination and loan fees earned. Gains on sales
of loans totaled $1.2 million and $1.0 million during the years ended March 31,
1997, and 1998. 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, 1998, the Bank remained
contingently liable for approximately $1.3 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. Such loans include those secured by local
low-income housing projects, single family pre-sold and spec housing, and
commercial loans. 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 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.
12
<PAGE>
The following table shows total loans originated, purchased, sold and
repaid during the years indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Total loans receivable at beginning of year $ 88,810 $100,655 $118,509
-------- -------- --------
Loans originated:
Real estate loans:
Residential 83,551 80,721 96,124
Construction 29,569 26,359 12,377
Agricultural 1,023 1,326 4,395
Commercial 1,481 4,887 9,555
Commercial non-real estate -- 1,692 16,526
Consumer and other loans 5,270 4,537 6,297
-------- -------- --------
Total loans originated 120,894 119,522 145,274
-------- -------- --------
Loans purchased:
Real estate loans:
Residential 25 43 160
Construction -- -- --
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- 144
Consumer and other loans -- -- --
-------- -------- --------
Total loans purchased 25 43 304
-------- -------- --------
Loans sold:
Servicing retained (21,219) (25,140) (25,435)
Servicing released (48,550) (33,585) (39,860)
-------- -------- --------
Total loans sold (69,769) (58,725) (65,295)
Loan principal repayments (32,112) (33,905) (25,747)
Other(1) (7,193) (9,081) (18,843)
-------- -------- --------
Change in total loans receivable 11,845 17,854 35,693
-------- -------- --------
Total loans receivable at end of year $100,655 $118,509 $154,202
======== ======== ========
</TABLE>
(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
$22.4 million at March 31, 1998.
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
13
<PAGE>
standards require fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees or costs associated with loans
that are prepaid are recognized as income at the time of prepayment. The Bank
had $451,000 of unearned loan fees and discounts at March 31, 1998.
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, 1998, the
Bank was servicing $135.6 million of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. When the Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. In addition, the Bank retains certain
amounts in escrow for the benefit of the investor for which the Bank incurs no
interest expense but is able to invest. At March 31, 1998, the Bank held $2.0
million 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 delinquent over 90 days is reduced
by the full amount of accrued and uncollected interest.
14
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of generally
accepted accounting principles ("GAAP") at the years indicated. It is the policy
of the Bank to cease accruing interest on loans more than 90 days past due.
At March 31,
-----------------------------
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 399 $ 526 $ 418
Construction 194 595 36
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- --
Consumer and other loans -- 4 --
------ ------ ------
Total 593 1,125 454
------ ------ ------
Accruing loans which are contractually
Past due 90 days or more:
Real estate loans:
Residential 97 -- 2
Construction -- -- --
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- --
Consumer and other loans 2 -- --
------ ------ ------
Total 99 -- 2
------ ------ ------
Total of nonaccrual and 90 days past
due loans 692 1,125 456
Real estate owned 76 234 883
------ ------ ------
Total nonperforming assets $ 768 $1,359 $1339
====== ====== ======
Restructured loans $1,760 $1,742 --
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 0.74% 1.00% 0.31%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.53% 0.82% 0.25%
Nonperforming assets as a percent of
total assets 0.59% 0.99% 0.73%
Total nonperforming assets to total loans 0.76% 1.15% 0.87%
Interest income that would have been recorded for the year ended March
31, 1998 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $66,000. The amount of interest included in
interest income on such loans for the year ended March 31, 1998 amounted to
approximately $31,000.
15
<PAGE>
REAL ESTATE OWNED. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
("REO") until it is sold. When property is acquired it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan plus
foreclosure costs, or fair market value. Subsequent to foreclosure, REO is
carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. At March 31, 1998, the Bank had $883,000 of REO.
ASSET CLASSIFICATION. The State of Washington has adopted various
regulations regarding problem assets of savings institutions. The regulations
require that each insured institution review and classify its assets on a
regular basis. In addition, in connection with examinations of insured
institutions, State of Washington examiners have authority to identify problem
assets and, if appropriate, require them to be classified. There are three
classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. If an asset or
portion thereof is classified as loss, the insured institution establishes
specific allowances for loan losses for the full amount of the portion of the
asset classified as loss. All or a portion of general loan loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are classified as special mention and
monitored by the Company.
At March 31, 1998, classified assets of the Company totaled $2.2
million. Assets classified as loss totaled $19,000 and consisted of overdrawn
negotiable order of withdrawal ("NOW") accounts totaling $16,500 and installment
loans of $2,500. Assets classified as substandard totaled $1.6 million and
consisted of REO totaling $883,000, one consumer loan in the amount of $1,000,
four construction loans totaling $416,000, 6 residential real estate loans
totaling $276,000 and overdrawn NOW accounts totaling $22,000. Assets designated
as special mention totaled $569,000 and consisted of seven residential real
estate loans totaling $479,000, one agricultural real estate loan totaling
$90,000. The aggregate amounts of the Bank's classified assets at the dates
indicated were as follows:
At March 31,
----------------------------------
1996 1997 1998
------ ------ ------
(In Thousands)
Loss $ 2 $ 20 $ 19
Doubtful ------ ------ ------
Substandard 1,219 2,006 1,598
Special mention 342 618 569
------ ------ ------
Total classified assets $1,563 $2,644 $2,186
====== ====== ======
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.
16
<PAGE>
The general allowance is maintained to cover losses inherent in the
portfolio of performing loans. Management's periodic evaluation of the adequacy
of the allowance is based on management's evaluation of probable losses in the
loan portfolio. Specific valuation allowances are established to absorb losses
on loans for which full collectibility may not be reasonably assured, based
upon, among other factors, the estimated fair market value of the underlying
collateral and estimated holding and selling costs. Generally, a provision for
losses is charged against income on a quarterly basis to maintain the
allowances.
At March 31, 1998, the Bank had an allowance for loan losses of $1.1
million. The allowance for loan losses is maintained at an amount management
considers adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Bank believes it has established its existing allowance for
loan losses in accordance with GAAP, there can be no assurance that regulators,
in reviewing the Bank's loan portfolio, will not request the Bank to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect the Bank's financial
condition and results of operations.
17
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the years indicated. Where specific loan loss reserves have been
established, any differences between the loss allowances and the amount of loss
realized has been charged or credited to current income.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of year $555 $701 $ 974
Provision for loan losses(1) 150 310 200
Recoveries -- -- --
Charge-offs:
Real estate loans:
Residential -- -- --
Construction -- 36 51
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- --
Consumer and other loans 4 1 3
---- ---- ------
Total charge-offs 4 37 54
---- ---- ------
Net charge-offs 4 37 54
---- ---- ------
Balance at end of year $701 $974 $1,120
==== ==== ======
Allowance for loan losses as a percent of total
loans receivable 0.70% 0.82% 0.73%
Net charge-offs to average outstanding loans -- 0.03% 0.04%
</TABLE>
(1) See "Item 6. Management's Discussion and Analysis or Plan of Operation --
Comparison of Operating Results for the Years Ended March 31, 1997 and 1998
-- Provisions for Loan Losses" for a discussion of the factors responsible
for changes in the Bank's provision for loan losses between the years.
18
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the years indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------------------
(Dollars in Thousands)
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $375 62.41% $317 65.32% $ 367 57.06%
Construction 135 13.74 261 10.01 181 5.17
Agricultural 119 11.87 216 10.12 202 9.47
Commercial -- 4.01 97 4.55 310 8.06
Consumer and other loans 72 7.97 83 10.00 60 20.24
---- ------ ---- ------ ------ ------
Total allowance for loan losses $701 100.00% $974 100.00% $1,120 100.00%
==== ====== ==== ====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
FHLB-Seattle, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds. Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities. Savings institutions like the Bank are also required to
maintain an investment in FHLB stock.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held-to-maturity,"
"trading securities" or "available-for-sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held-to-maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as
"held-to-maturity." Debt and equity securities held for current resale are
classified as "trading securities." Such securities are reported at fair value,
and unrealized gains and losses on such securities would be included in
earnings. Debt and equity securities not classified as either "held-to-maturity"
or "trading securities" are classified as "available-for-sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity.
The 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.
19
<PAGE>
Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage-backed securities only during times of
reduced loan demand
The following table sets forth the composition of the Bank's investment
and mortgage-backed securities portfolios for the years indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------------------------
(Dollars in Thousands)
1996 1997 1998
---- ---- ----
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
Investment securities $ 1,328 9.25% $ -- --% $ 2,654 16.09%
Mortgage-backed securities -- -- 2,599 25.79 7,970 48.32
------- ------ ------- ------ ------- ------
Total available-for-sale 1,328 9.25 2,599 25.79 10,624 64.41
HELD-TO-MATURITY:
U.S. Government and federal
agency obligations 10,545 73.43 5,199 51.58 2,449 14.85
Mortgage-backed securities 2,488 17.32 2,281 22.63 3,420 20.74
------- ------ ------- ------ ------- ------
Total held-to-maturity 13,033 90.75 7,480 74.21 5,869 35.59
------- ------ ------- ------ ------- ------
Total $14,361 100.00% $10,079 100.00% $16,493 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Bank's investment and
mortgage-backed securities at March 31, 1998.
<TABLE>
<CAPTION>
Over Over
Less Than One to Five to Over Ten
One Year Five Year Ten Years Years
--------- --------- --------- -----
(Dollars in Thousands)
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency obligation $ -- --% $2,449 5.99% $ -- --% $ 2,654 7.75%
Mortgage-backed
securities 3 5.23 -- -- -- -- 11,387 6.41
------ ---- ------ ---- ------ ----- ------- ----
Total $ 3 5.23% $2,449 5.99% $ -- --% $14,041 6.66%
====== ==== ====== ==== ====== ===== ======= ====
</TABLE>
20
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle are used
to compensate for reductions in the availability of funds from other sources.
Presently, the Bank has no other borrowing arrangements.
DEPOSIT ACCOUNTS. Savings deposits are the primary source of funds for
the Bank's lending and investment activities and for its general business
purposes. Substantially all of the Bank's depositors are residents of the States
of Idaho and Washington. Deposits are attracted from within the Bank's market
area through the offering of a broad selection of deposit instruments, including
NOW accounts, money market deposit accounts, regular savings accounts,
certificates of deposit and retirement savings plans. The Bank also offers
"TT&L" (treasury, taxes and loans) accounts for local businesses. Deposit
account terms vary, according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Bank considers current market
interest rates, profitability to the Bank, matching deposit and loan products
and its customer preferences and concerns. The Bank reviews its deposit mix and
pricing weekly. Currently, the Bank does not accept brokered deposits, nor has
it aggressively sought jumbo certificates of deposit, although the Bank has in
the past accepted brokered certificates of deposit. At March 31, 1998, the Bank
had no brokered deposit. In March 31, 1998, certificates of deposit that are
scheduled to mature in less than one year totaled $52.8 million. See "Item 6.
Management's Discussion and Analysis or Plan of Operation -- Liquidity and
Capital Resources."
21
<PAGE>
The following table sets forth information concerning the Bank's
deposits at March 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Savings Deposits Amount Balance Deposits
---- ---------------- ------ ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1.23% NOW $ -- $ 19,389 16.93%
3.05 Money Market Deposit -- 9,078 7.93
3.03 Passbook -- 13,418 11.72
-------- ------
Total Checking & Passbook $ 41,885 36.58
CERTIFICATES OF DEPOSIT
4.51 7 days to 179 days 2,500 10,096 8.82
5.61 11 months special/non-renewable 500 12,973 11.33
5.42 6 months to less than 1 year 1,000 9,665 8.44
3.03 14 months special/non-renewable 500 368 0.32
6.50 1 year to less than 2 years 500 7,625 6.66
5.95 27 months special/non-renewable 500 10,328 9.02
5.57 2 years to less than 3 years 500 7,160 6.25
5.66 New 2 years to 5 years-Add on 100 2,768 2.42
5.76 3 years to less than 4 years 500 4,391 3.84
5.58 4 years to less than 5 years 500 624 0.55
6.04 5 years to less than 10 years 500 5,746 5.02
5.45 IRA Variable -- 866 0.75
-------- ------
Total Certificates of Deposit 72,610 63.42
-------- ------
Total Deposits $114,495 100.00%
======== ======
</TABLE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 1998.
Jumbo certificates of deposit are certificates in amounts of more than $100,000.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less $ 5,506
Over three through six months 3,991
Over six through 12 months 1,581
Over 12 months 3,060
-------
Total jumbo certificates of deposit $14,138
=======
22
<PAGE>
DEPOSIT FLOW. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank between the years indicated.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------------------------------------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ----- ------ ----- ---------- ------ ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts $ 14,617 12.67% $ 15,943 14.82% $ 1,326 $ 19,389 16.93% $3,446
Passbook accounts 13,861 12.02 14,164 13.16 303 13,418 11.72 (746)
Money market deposit
accounts 7,167 6.21 6,968 6.48 (199) 9,078 7.93 2,110
Fixed-rate certificates
which mature:
Within 1 year 52,692 45.69 53,120 49.37 428 52,836 46.15 (284)
After 1 year, but within
2 years 16,329 14.16 11,139 10.35 (5,190) 13,111 11.45 1,972
After 2 years, but within
5 years 10,639 9.23 6,241 5.80 (4,398) 6,626 5.79 385
Certificates maturing
thereafter 19 0.02 21 0.02 2 37 0.03 16
-------- ------ -------- ------ ------- -------- ------ --
Total $115,324 100.00% $107,596 100.00% $(7,728) $114,495 100.00% $6,899
======== ====== ======== ====== ======= ======== ======= ======
</TABLE>
TIME DEPOSITS BY RATES. The following table sets forth the time
deposits in the Bank categorized by rates for the years indicated.
At March 31,
------------
1996 1997 1998
---- ---- ----
(In Thousands)
3.0 - 3.99% $ 1,706 $ 997 $ 1,001
4.0 - 4.99% 7,748 7,132 $ 7,995
5.0 - 5.99% 33,623 42,816 55,992
6.0 - 6.99% 31,263 17,082 6,638
7.0 - 7.99% 2,858 1,990 483
8.0 - 8.99% 1,993 51 49
9% and over 488 453 452
------- ------- -------
Total $79,679 $70,521 $72,610
======= ======= =======
23
<PAGE>
The following table sets forth the amount and maturities of time deposits at
March 31, 1998.
<TABLE>
<CAPTION>
Amount Due
----------
Percent
After After After of Total
Less Than 1 to 2 2 to 3 3 to 4 After Certificate
One Year Years Years Years 4 Years Total Accounts
-------- ----- ----- ----- ------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.0 - 3.99% $ 1,001 $ -- $ -- $ -- $ -- $ 1,001 1.38%
4.0 - 4.99% 7,836 113 46 -- -- 7,995 11.01
5.0 - 5.99% 37,668 12,536 3,983 1,290 515 55,992 77.11
6.0 - 6.99% 6,313 325 -- -- -- 6,638 9.14
7.0 - 7.99% 1 116 245 2 119 483 0.67
8.0 - 8.99% 5 4 40 -- -- 49 0.06
9% and over 12 17 423 -- -- 452 0.62
------- ------- ------ ------ ---- ------- ------
Total $52,836 $13,111 $4,737 $1,292 $634 $72,610 100.00%
======= ======= ====== ====== ==== ======= ======
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activities
of the Bank for the years indicated.
Year ended March 31,
------------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
Beginning balance $ 88,787 $115,324 $107,596
-------- -------- --------
Net increase (decrease)
before interest credited 21,769 (11,902) 3,396
Interest credited 4,768 4,174 3,503
-------- -------- --------
Net increase (decrease)
in savings deposits 26,537 (7,728) 6,899
-------- -------- --------
Ending balance $115,324 $107,596 $114,495
======== ======== ========
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 40% of total assets.
24
<PAGE>
The following tables sets forth certain information regarding
borrowings by the Bank for the years indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended March 31,
---------------------------------------
1996 1997 1998
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances outstanding
At any month end during the year $ 9,688 $15,060 $39,323
Approximate average FHLB advances
Outstanding during the year 4,862 8,488 32,566
Balance of FHLB advances outstanding
at end of year 2,304 13,922 35,656
Weighted average rate paid on
FHLB advances at end of year 6.10% 5.87% 5.84%
Approximate weighted average rate paid on
FHLB advances during the year 6.19% 5.90% 6.26%
</TABLE>
<TABLE>
<CAPTION>
One Year to Five Years to
Less than One Less than Five Less than Ten Greater than
Year Years Years Ten Years
---- ----- ----- ---------
<S> <C> <C> <C> <C>
Maturities of advances from FHLB $22,579 $11,606 $ -- $1,471
Percentage of total advances 63.32% 32.55% 0.00% 4.13%
</TABLE>
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 Banks. 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 Banks 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 who sells life insurance
and tax deferred annuities on an agency basis. At March 31, 1998, the Bank's
equity investment in its subsidiary was $47,000.
25
<PAGE>
PERSONNEL
As of March 31, 1998, the Bank had 87 full-time and 11 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank believes its relationship with its employees to be good.
REGULATION
FIRST BANK NORTHWEST
GENERAL. As a state-chartered, federally insured depository
institution, the Bank is subject to extensive regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The Bank is
regularly examined by the FDIC and the Washington Department of Financial
Institutions, Division of Banks ("Division") and files periodic reports
concerning the Bank's activities and financial condition with its regulators.
The Bank's relationship with depositors and borrowers also is regulated to a
great extent by both federal law and the laws of the State of Washington,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
STATE REGULATION AND SUPERVISION. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington State law and the
regulations of the Division adopted thereunder. Washington State law and
regulations govern the Bank's ability to take deposits and pay interest thereon,
to make loans on or invest in residential and other real estate, to make
consumer loans, to invest in securities, to offer various banking services to
its customers, and to establish branch offices. Under state law, savings banks
in Washington also generally have all of the powers that federal mutual savings
banks have under federal laws and regulations. The Bank is subject to periodic
examination and reporting requirements by and of the Division.
DEPOSIT INSURANCE. The FDIC insures deposits at the Bank to the maximum
extent permitted by law. The Bank currently pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which 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. The FDIC
is authorized to raise assessment rates in certain circumstances.
Pursuant to the Deposit Insurance Fund ("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 Bank Insurance Fund ("BIF"),
which reached its designated reserve ratio in 1995. In addition, since January
1, 1997, SAIF members are charged an assessment of 0.065% 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
26
<PAGE>
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.
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 which could result in termination of the
deposit insurance of the Bank.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
substantially similar regulations to implement a 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 Tier I leverage capital
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 Tier I leverage capital
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 Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or has a Tier
I leverage capital 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 engaging in
an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which 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, 1998, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the FDIC determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard.
27
<PAGE>
CAPITAL REQUIREMENTS. The FDIC's minimum capital standards applicable
to FDIC-regulated banks and savings banks 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 the most highly rated or are
anticipating or experiencing significant growth.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained. 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. 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 possible loan and lease
losses. Allowance for possible 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. The FDIC includes in its evaluation of a bank's capital adequacy
an assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. However, no measurement framework for
assessing the level of a bank's interest rate risk exposure has been codified.
An undercapitalized, significantly undercapitalized, or critically
undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against the
institution and (iv) the types and levels of activities in which the institution
will engage.
The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At March 31, 1998, the Bank had a Tier 1
capital to average assets ratio of 11.4%, a Tier 1 capital to risk-weighted
assets ratio of 17.1%, and a Total capital to risk-weighted assets ratio of
18.1%.
The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Specifically, the agencies
determined that net unrealized holding gains or losses on available-for-sale
debt and equity securities should not be 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
28
<PAGE>
and/or a bank has a significant volume of assets classified substandard,
doubtful or loss or otherwise criticized, the FDIC may determine that the
minimum adequate amount of capital for that bank is greater than the minimum
standards established in the regulation.
The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of the Bank, such as a downturn in
the economy in areas where the Bank has most of its loans, could adversely
affect future earnings and, consequently, the ability of the Bank to meet its
capital requirements.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Federal
law generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
Subject to certain regulatory exceptions, FDIC regulations provide 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 or for which the FDIC has granted and exception must cease the
impermissible activity.
FEDERAL RESERVE SYSTEM. In 1980, Congress enacted legislation which
imposed Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits with
the regional Federal Reserve Bank. NOW accounts and other types of accounts that
permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3% of the first $47.8 million of transaction
accounts and for amounts greater than $47.8 million, the reserve requirement is
10% of that portion of total transaction accounts in excess of $47.8 million.
The first $4.4 million of otherwise reservable balances are exempt from reserve
requirements. The reserve requirement on nonpersonal time deposits with original
maturities of less than 1-1/2 years is 0%. As of March 31, 1998, the Bank met
its reserve requirements.
AFFILIATE TRANSACTIONS. Various legal limitations restrict the Bank
from lending or otherwise supplying funds to the Company (an "affiliate"),
generally limiting such transactions with the affiliate to 10% of the bank's
capital and surplus and limiting all such transactions to 20% of the bank's
capital and surplus. Such transactions, including extensions of credit, sales of
securities or assets and provision of services, also must be on terms and
conditions consistent with safe and sound banking practices, including credit
standards, that are substantially the same or at least as favorable to the bank
as those prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
COMMUNITY REINVESTMENT ACT. The Bank is subject to the provisions of
the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate
federal bank regulatory agency, in connection with its regular
29
<PAGE>
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. The Bank received an "Outstanding" rating during its most recent
CRA examination.
DIVIDENDS. Dividends from the Bank will constitute the major source of
funds for dividends which may be paid by the Holding Company. The amount of
dividends payable by the Bank to the Holding Company will depend upon the Bank's
earnings and capital position, and is limited by federal and state laws,
regulations and policies. According to Washington law, the Bank may not declare
or pay a cash dividend on its capital stock if it would cause its net worth to
be reduced below (i) the amount required for liquidation accounts or (ii) the
net worth requirements, if any, imposed by the Director of the Division.
Dividends on the Bank's capital stock may not be paid in an aggregate amount
greater than the aggregate retained earnings of the Bank, without the approval
of the Director of the Division.
The amount of dividends actually paid during any one period will be
strongly affected by the Bank's management policy of maintaining a strong
capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The Home Owners Loan Act ("HOLA") and 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. There generally are more restrictions
on the activities of a multiple savings and loan holding company than on those
of a unitary savings and loan holding company. The HOLA provides that, among
other things, no multiple savings and loan holding company or subsidiary thereof
which is not an insured association shall commence or continue for more than two
years after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the
qualified thrift lender ("QTL") test must, within one year after the date on
which the Bank ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations. Currently, the QTL test
requires that either an institution qualify as a domestic building and loan
association under the Internal Revenue Code or that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing
30
<PAGE>
and consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 1998, the Bank was in compliance with the QTL test.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank operates six full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville and Coeur d'Alene, Idaho, and Clarkston,
Washington. The Company owns all of the Idaho facilities and leases the
Washington building on a month-to-month tenancy for three years which began July
1, 1997. 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, 1998, the net book value of the properties (including land and buildings)
and the Bank's fixtures, furniture and equipment was $4.7 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, 1998.
31
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of FirstBank Corp. is traded on the NASDAQ National
Market under the symbol FBNW. The table below reflects the high and low closing
and sales prices of the common stock and cash dividends paid per share for the
last two fiscal years. The common stock began trading on July 2, 1997. At March
31, 1998 there were 333 record holders of common stock of the Company.
1998 High Low Dividends
---- ---- --- ---------
First Quarter N/A N/A N/A
Second Quarter 19.125 15.250 0.00
Third Quarter 18.875 15.625 0.07
Fourth Quarter 21.125 18.188 0.07
1997 High Low Dividends
---- ---- --- ---------
First Quarter N/A N/A N/A
Second Quarter N/A N/A N/A
Third Quarter N/A N/A N/A
Fourth Quarter N/A N/A N/A
The payment of dividends on the common stock is subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the continued payment thereof will
depend upon various factors at the intended time of declaration and payment,
including the Bank's profitability and liquidity, alternative investment
opportunities, and regulatory restrictions on dividend payments and on capital
levels applicable to the Bank. Accordingly, there can be no present assurance
that any dividends will be paid. Periodically, the Board of Directors, if
market, economic and regulatory conditions permit, may combine or substitute
periodic special dividends with or for regular dividends. In addition, since the
Company has no significant source of income other than dividends from the Bank
and earnings from investment of the net proceeds of the Conversion retained by
the Company, the payment of dividends by the Company depends in part upon the
amount of the net proceeds from the Conversion retained by the Company and the
Company's earnings thereon and the receipt of dividends from the Bank, which are
subject to various tax and regulatory restrictions on the payment of dividends.
Dividend payments by the Company is 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.
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 Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
32
<PAGE>
This report contains statements that constitute forward-looking
statements and are subject to certain risks and uncertainties that could cause
actual facts to differ materially from those presented in this report. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date of this report.
The profitability of the Company's operations depends primarily on its
net interest income, its non-interest income (principally from mortgage banking
activities) and its non-interest expense. Net interest income is the difference
between the income the Company receives on its loan and investment portfolio and
its cost of funds, which consists of interest paid on deposits and borrowings.
Net interest income is a function of the Company's interest rate spread, which
is the difference between the yield earned on interest-earning assets and the
rate paid on interest-bearing liabilities, as well as a function of the average
balance of interest-earning assets as compared to the average balance of
interest-bearing liabilities. Non-interest income is comprised of income from
mortgage banking activities, gain on the occasional sale of assets and
miscellaneous fees and income. Mortgage banking generates income from the sale
of mortgage loans and from servicing fees on loans serviced for others. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in market interest
rates and the local and national economy. The Company's profitability is also
affected by the level of non-interest expense. Non-interest expenses include
compensation and benefits, occupancy and maintenance expenses, deposit insurance
premiums, data servicing expenses, advertising expenses, supplies and postage,
and other operating costs. The Company's results of operations may be adversely
affected during periods of reduced loan demand to the extent that non-interest
expenses associated with mortgage banking activities are not reduced
commensurate with the decrease in loan originations.
OPERATING STRATEGY
The Company's primary goal has been to improve the Company's
profitability while maintaining a sound capital position. To accomplish this
goal, the Company has employed an operating strategy that includes: (1)
originating for its portfolio residential mortgage loans, primarily with
adjustable 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 Company's capital position. The Company has
adopted a community banking strategy pursuant to which it will expand the
products and services it offers within its primary market area in order to
improve market share and increase the average yield of its interest-earning
assets. Specifically, the Company intends to expand its agricultural real estate
and commercial real estate lending activities. The Company 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 Company the opportunity to achieve higher interest rates with
shorter terms to maturity than residential mortgage loans. As part of this
strategy, the Company hired an experienced commercial loan officer to head the
commercial loan department in 1997. In fiscal 1998, the commercial department
added three experienced officers and the agricultural department expanded its
lending capabilities with the addition of two locally established loan officers.
There can be no assurances that the Company will be successful in its efforts to
increase its originations of these types of loans. Management anticipates that
the Company will incur ongoing expenses in connection with the implementation
and maintenance of the new credit card and online banking programs, 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.
33
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND MARCH 31, 1998
Total assets increased $45.9 million, or 33.4%, from $137.7 million at
March 31, 1997 to $183.6 million at March 31, 1998. The growth in assets is
primarily attributable to an increase in loans receivable, cash and cash
equivalents, and investment and mortgage-backed securities, resulting primarily
from the deployment of funds received by the Company from its public offering of
common stock and increased FHLB advances. Net loans receivable increased from
$113.0 million at March 31, 1997 to $145.7 million at March 31, 1998. The mix of
loans has changed reflecting the Company's community banking strategy. In real
estate loans: residential mortgage loans decreased from 65.3% to 57.1% of total
loans, construction loans decreased from 10.0% to 5.0%, agricultural loans
decreased from 10.1% to 9.5% and commercial mortgage loans increased from 4.6%
to 8.1%. In non-real estate loans: home equity lines decreased from 4.2% to 4.0
%, agricultural operating lines increased from 0.9% and 1.5%, commercial
business loans increased from 1.4% to 10.8% and other loans from 3.5% to 4.0%.
During the year ended March 31, 1998, the Company retained for its portfolio
fixed-rate mortgage loans with terms of 15 years or less totaling $8.4 million.
In addition adjustable-rate mortgage loans that adjust after a fixed period of
three or five years, which the Company retains for its portfolio, were in higher
demand by borrowers during this period. Cash and cash equivalents increased from
$5.3 million to $8.4 million and investment securities decreased from $5.2
million to $5.1 million. Mortgage-backed securities increased from $4.9 million
to $11.4 million, due to a portion of the conversion proceeds being invested in
short term collateralized mortgage obligations.
Total liabilities increased from $126.6 million at March 31, 1997 to
$153.6 million at March 31, 1998. Deposits increased $6.9 million from $107.6
million at March 31, 1997 to $114.5 million at March 31, 1998. FHLB advances
increased from $13.9 million at March 31, 1997 to $35.7 million at March 31,
1998. Included in these advances is $5.0 million in callable advances, as the
Company increased its use of borrowings to fund asset growth.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1998
GENERAL. Net income increased $1.1 million, from $649,000 (basic and
diluted per share data not available, as the company had no shares outstanding
in fiscal 1997) for the year ended March 31, 1997 to $1.7 million ($0.93 per
share basic; $0.93 per share diluted) for the year ended March 31, 1998. The
Company experienced an increase in net interest income and non-interest income
in fiscal 1998 compared to fiscal 1997. However, these increases were partially
offset by an increase in non-interest expense. 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 $1.0 million for fiscal 1997.
NET INTEREST INCOME. Net interest income increased $1.9 million, or
38.8%, from $4.9 million for the year ended March 31, 1997 to $6.8 million for
the year ended March 31, 1998. The most significant portion of this increase was
a result of earnings from the investment of conversion proceeds which were
utilized to purchase mortgage-backed securities and to originate and retain a
larger portion of loans. The Company's spread between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities
increased from 3.68% for fiscal 1997 to 3.72% for fiscal 1998.
Total interest income increased $3.1 million from $10.2 million for the
year ended March 31, 1997 to $13.3 million for the year ended March 31, 1998.
Interest income on loans receivable increased $2.5 million, or 27.2%, from $9.2
million for fiscal 1997 to $11.7 million for fiscal 1998. The increase was the
result of a larger average balance of loans in fiscal 1998, and a slight
increase in average yield on the loan portfolio. Interest income on
mortgage-backed and related securities increased $466,000 from fiscal 1997 to
fiscal 1998 primarily as a result of a larger average balance of mortgage-backed
securities in fiscal 1998. Interest income on investment securities decreased
$242,000 from fiscal 1997 to fiscal 1998 as a result of a smaller average
balance in fiscal 1998, and a decrease in the average yield. Interest income on
other interest-earning assets increased $459,000 from fiscal 1997 to fiscal 1998
as a result of a larger average balance and a higher yield in fiscal 1998.
34
<PAGE>
Interest expense increased by $1.2 million, from $5.3 million for the
year ended March 31, 1997 to $6.5 million for the year ended March 31, 1998.
Interest expense on deposits decreased $181,000, or 3.7%, from fiscal 1997 to
fiscal 1998. The average balance of deposits decreased slightly from fiscal 1997
to fiscal 1998, and the average rate paid on deposits decreased. Interest
expense on FHLB advances increased $1.4 million from $499,000 in fiscal 1997 to
$1.9 million in fiscal 1998 as a result of a larger average balance of
borrowings in fiscal 1998.
PROVISION FOR LOAN LOSSES. The provision for loans losses was $200,000
for the year ended March 31, 1998 compared to $310,000 for the year ended March
31, 1997. Management increased the provision for loan losses in fiscal 1997
after considering the anticipated growth of the loan portfolio, including the
growth of commercial real estate and consumer loans, which generally are riskier
than residential mortgage loans. In 1998 the provision for loan losses was
increased according to the actual mix of loans funded during the year. The
Company's allowance for loan losses was $1,120,000 or 0.8% of total loans
receivable, at March 31, 1998, compared to $974,000, or 0.8% of total loans
receivable, at March 31, 1997. Net loan charge-offs were $54,000 during fiscal
1998 compared to $37,000 during fiscal 1997.
NON-INTEREST INCOME. Total non-interest income increased $36,000, or
1.6%, from fiscal 1997 to fiscal 1998. Income on gain on sales of loans
decreased $181,000, or 15.1%, from fiscal 1997 to fiscal 1998 due to lower
servicing released premiums caused by lower interest rates. Service fees and
charges increased $174,000, which was caused by an increase in checking account
fee income. This increase was due to a growing number of NOW accounts and an
increase in corresponding fees charged. Commissions increased $43,000, resulting
from higher life and accidental health insurance sales on installment loans.
NON-INTEREST EXPENSE. Total non-interest expense increased $302,000, or
5.1%, from $5.9 million for the year ended March 31, 1997 to $6.2 million for
the year ended March 31, 1998. Compensation and related benefits increased
$439,000, or 14.1%, from fiscal 1997 to 1998. Advertising expenses increased
$47,000, or 29.1% and data processing expenses increased $132,000, or 83.5%,
between the periods while legal fees increased $46,000. These increases were
primarily the result of the increased level of operations in 1998 undertaken by
the Company. All other non-interest expenses decreased approximately $362,000,
or 14.9%.
INCOME TAXES. Income taxes were $944,000 for the year ended March 31,
1998 compared with $264,000 for the year ended March 31, 1997. The increase in
income tax expense in fiscal 1998 was primarily the result of an increase in
taxable income.
35
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the years
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. Such yields and costs for the years indicated are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the years 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.
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------------------------------------------------------------------
1996 1997 1998
---- ---- ----
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 $ 91,849 $8,408 9.15% $106,295 $ 9,249 8.70% $133,294 $11,695 8.77%
Mortgage-backed securities 2,622 157 5.99 2,588 147 5.68 9,589 613 6.39
Investment securities 6,553 457 6.97 8,955 534 5.96 5,164 292 5.65
Other earning assets 12,026 530 4.41 5,834 262 4.49 10,005 721 7.21
-------- ------ -------- ------- -------- -------
Total interest-earning assets 113,050 9,552 8.45 123,672 10,192 8.24 158,052 13,321 8.43
Non-interest-earning assets 5,460 6,259 9,011
-------- -------- --------
Total assets $118,510 $129,931 $167,063
======== ======== ========
Interest-earning liabilities:
Passbook, NOW and money
market accounts $ 35,072 876 2.50 $ 36,457 818 2.24 $ 38,245 890 2.33
Certificates of deposit 66,066 3,917 5.93 72,550 4,021 5.54 70,743 3,769 5.33
-------- ------ -------- ------- -------- -------
Total deposits 101,138 4,793 4.74 109,007 4,839 4.44 108,988 4,659 4.27
Advances from FHLB 5,419 365 6.74 8,080 499 6.18 30,560 1,914 6.26
-------- ------ -------- ------- -------- -------
Total interest-bearing
liabilities 106,557 5,158 4.84 117,087 5,338 4.56 139,548 6,573 4.71
------ ------- -------
Non-interest-bearing
liabilities 1,826 2,003 3,067
-------- -------- --------
Total liabilities 108,383 119,090 142,615
-------- -------- --------
Total stockholders' equity 10,127 10,841 24,448
-------- -------- --------
Total liabilities and
total stockholders' equity $118,510 $129,931 $167,063
======== ======== ========
Net interest income $4,394 $ 4,854 $ 6,748
====== ======= =======
Interest rate spread 3.61% 3.68% 3.72%
==== ==== ====
Net interest margin 3.89% 3.92% 4.27%
====== ======= =======
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 106.09% 105.62% 113.26%
======== ======= =======
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
36
<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 Company. Information
is provided with respect to: (i) effects attributable to changes in rate
(changes in rate multiplied by prior volume); (ii) effects attributable to
changes in volume (changes in volume multiplied by prior rate); (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume); and (iv) the net change (the sum of the prior columns.)
<TABLE>
<CAPTION>
Year Ended March 31, 1997 Year Ended March 31, 1998
Compared to Year Ended Compared to Year Ended
March 31, 1996 March 31, 1997
-------------- --------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------ ------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) $(38) $814 $65 $841 $ 75 $2,352 $ 19 $2,446
Mortgage-backed securities (8) (2) -- (10) 18 398 50 466
Investment securities (66) 167 (24) 77 (115) (161) 34 (242)
Other earning assets 10 (273) (5) (268) 211 138 110 459
---- ---- --- ---- ---- ------ ---- ------
Total net change in income
on interest-earning assets (102) 706 36 640 180 2,727 213 3,129
---- ---- --- ---- ---- ------ ---- ------
Interest-bearing liabilities:
Passbook, NOW and money
market accounts (90) 36 (4) (58) 32 37 2 71
Certificates of deposit (258) 386 (24) 104 (156) (100) 4 (252)
FHLB advances (29) 178 (15) 134 7 1,389 20 1,416
---- ---- --- ---- ---- ------ ---- ------
Total net change in expense
on interest-bearing liabilities (377) 600 (43) 180 (117) 1,326 26 1,235
---- ---- --- ---- ---- ------ ---- ------
Net increase (decrease) in net
interest income $275 $106 $79 $460 $306 $1,401 $187 $1,894
==== ==== === ==== ==== ====== ==== ======
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
ASSET AND LIABILITY MANAGEMENT
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Company has sought to reduce exposure of its earnings to changes in market
interest rates by attempting to manage the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of the Company's interest-earning
assets by retaining for its portfolio shorter term loans and loans with interest
rates subject to periodic adjustment to market conditions and by selling
substantially all of its longer term, fixed-rate residential mortgage loans. The
Company has historically relied on retail deposits as its primary source of
funds. Management believes retail deposits, compared to brokered deposits,
reduce the effects of interest rate fluctuations because they generally
represent a more stable source
37
<PAGE>
of funds. As part of its interest rate risk management strategy, the Company
promotes non-interest-bearing transaction accounts and certificates of deposit
with longer maturities (up to five years) to reduce the interest sensitivity of
its interest-bearing liabilities.
MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. The Company's primary
market risk exposure is interest rate risk. The on-going monitoring and
management of the risk is an important component of the Company's
asset/liability management process, which is governed by policies established by
its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out the asset/liability
management policies to the Asset/Liability Committee (ALCO). In this capacity
ALCO develops guidelines and strategies impacting the Company's asset/liability
management related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income (NII), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet as well as for off balance
sheet derivative financial instruments, if any. This sensitivity analysis is
compared to ALCO policy limits which specify a maximum tolerance level for NII
exposure over a one year horizon, assuming no balance sheet growth, given both a
200 basis point (bp) upward and downward shift in interest rates. A parallel and
pro rata shift in rates over a 12 month period is assumed. The following
reflects the Company's NII sensitivity analysis as of March 31, 1998 as compared
to the 10.00% Board approved policy limit.
-200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $6,932 $6,994 $6,928
NII $ Change (62) -- (66)
NII % Change (0.89%) -- (0.94%)
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected future
operating results. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cashflows, and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables.
38
<PAGE>
Furthermore, the sensitivity analysis does not reflect actions that ALCO might
take in responding to or anticipating changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary recurring sources of funds are customer deposits,
proceeds from principal and interest payments on loans, proceeds from sales of
loans, maturing securities and FHLB advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition.
The Company must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to satisfy financial commitments and to take advantage of investment
opportunities. The Company generally maintains sufficient cash and short-term
investments to meet short-term liquidity needs. At March 31, 1998, cash and cash
equivalents totaled $8.4 million, or 4.6% of total assets In addition, the
Company maintains a credit facility with the FHLB-Seattle, which provides for
immediately available advances. Advances under this credit facility totaled
$35.7 million at March 31, 1998.
The primary investing activity of the Company is the origination of
mortgage loans. During the years ended March 31, 1997 and 1998, the Company
originated loans in the amounts of $119.5 million and $145.3 million
respectively. At March 31, 1998, the Company had loan commitments totaling $22.4
million and undisbursed lines of credit totaling $8.4 million, undisbursed loans
in process totaling $6.9 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit that are scheduled to mature in less than one year from
March 31, 1998 totaled $52.8 million. Historically, the Company has been able to
retain a significant amount of its deposits as they mature. In addition,
management of the Company believes that it can adjust the offering rates of
savings certificates to retain deposits in changing interest rate environments.
The Bank is required to maintain specific amounts of capital pursuant
to the FDIC and the State of Washington requirements. As of March 31, 1998, the
Bank was in compliance with all regulatory capital requirements which were
effective as of such date with Tier 1 Capital to average assets, Tier 1 Capital
to risk-weighted assets and Total capital to risk-weighted assets 11.4%, 17.1%
and 18.1%, respectively. For a detailed discussion of regulatory Capital
requirements, see "REGULATION - State Regulation and Supervision -- Capital
Requirements."
YEAR 2000 ISSUES
The Year 2000 issue exists because many computer systems and
applications use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly.
All of the material data processing of the Company that could be
affected by this problem is provided by a third party service bureau. The
Company's service bureau informed the Company that it intends to complete its
year 2000 adjustment by June 1998 and to make its systems available for testing
in December 1998. The Company has developed a plan and created a committee of
the Board of Directors to analyze how the year 2000 will impact its operations
and to monitor the status of its vendors. The Company will continue to monitor
its status as well as its service providers' status in their efforts to become
year 2000 compliant. The Company does not believe that the costs associated with
its actions and those of its vendors will be material to the Company. The
Company's service bureau will make available certain software that will allow
the Company to test its critical applications. The Company estimates the costs
incurred for the implementation and testing of such software to be $100,000.
Such costs are expected to be incurred during fiscal 1999. The costs for
accomplishing the Company's plans to complete the year 2000 modifications and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumption of future events, including the continued
availability of various resources, third-party
39
<PAGE>
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ from those
plans. In the event the Company's service bureau is unable to fulfill its
contractual obligations to the Company, it could have a significant adverse
impact on the financial condition and results of operations of the Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. Comprehensive income is the total of reported net
income and all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130 requires
that comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements and requires an entity to
(a) classify items of the comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and surplus in the equity section of the
balance sheet. This statement is effective for fiscal years beginning after
December 15, 1997. Companies are also required to report comparative totals for
comprehensive income in interim reports. The Company does not expect adoption to
have a material effect on its consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which establishes standards for
public companies to report certain financial information about operating
segments in interim and annual financial statements. Operating segments are
components of a business about which separate financial information is available
and that are evaluated regularly by the chief operating decision maker in
assessing performance and deciding how to allocate resources. The statement also
requires public companies to report certain information about their products and
services and the geographic areas in which they operate. This statement is
effective for fiscal years beginning after December 15, 1997. The statement does
not need to be applied to interim financial statements in the initial year of
its application, but such comparative information will be required in interim
statements in the second year. The Company does not expect adoption to have a
material effect on the Company's financial statements.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature. As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference
under the caption "Consolidated Financial Statements" in the 1998 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information concerning the Company's directors required by this
Item is incorporated by reference form the information set forth under the
caption "Proposal 1 - Election of Director" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Stockholders to be held on July 22,
1998 (the "1998 Proxy Statement").
The information concerning compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, required by this Item is
incorporated by reference to the information set forth under the caption
"Compliance with Section 16(a) of the Exchange Act" in the 1998 Proxy Statement.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE COMPANY AND BANK
Position
Age at --------
March 31,
Name 1998 Company Bank
- ---- ---- ------- ----
<S> <C> <C> <C>
Clyde E. Conklin 46 President and Chief Executive Chief Executive Officer
Officer
Larry K. Moxley 47 Executive Vice President, Chief Financial Officer and
Chief Financial Officer and Secretary/Treasurer
Corporate Secretary
Terence A. Otte 41 -- Senior Vice President, Agricultural and
Consumer Lending
Donn L. Durgan 43 -- Senior Vice President, Residential Lending
Douglas R. Ax 42 -- Senior Vice President, Commercial Lending
</TABLE>
BIOGRAPHICAL INFORMATION
CLYDE E. CONKLIN, who joined the Bank in 1987, has served as the Chief Executive
Officer of the Bank since February 1996. From September 1994 to February 1996,
Mr. Conklin served as Senior Vice President - Lending. In 1993, Mr. Conklin
became Vice President - Lending. Prior to that time, Mr. Conklin served as
Agricultural Lending Manager.
LARRY K. MOXLEY, who joined the Bank in 1973, currently serves as Chief
Financial Officer of the Bank, which position he has held since February 1996.
Mr. Moxley served as Senior Vice President - Finance from 1993 to February 1996
and as Vice President - Finance from 1984 to 1993.
TERENCE A. OTTE joined the Bank in June 1989 as an Agricultural Loan Officer.
From 1 991 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.
41
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information provided by this Item is incorporated by reference to
the information under the captions "Directors' Compensation" and "Executive
Compensation" in the 1998 Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information under the caption "Transactions with Management" in the 1998
Proxy Statement.
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
21 Subsidiaries of the Registrant
22 Consolidated Financial Statements of Firstbank Corp.
and Subsidiaries
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
March 31, 1998.
42
<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: June 16, 1998 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 June 16, 1998
- ----------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)
/s/ LARRY K. MOXLEY Chief Financial Officer June 16, 1998
- ----------------------------- and Director (Principal
Larry K. Moxley Financial Officer)
/s/ CYNTHIA M. MOORE Controller June 16, 1998
- ----------------------------- (Principal Accounting Officer)
Cynthia M. Moore
/s/ WILLIAM J. LARSON Director June 16, 1998
- -----------------------------
William J. Larson
/s/ STEVE R. COX Director June 16, 1998
- -----------------------------
Steve R. Cox
/s/ ROBERT S. COLEMAN, SR. Director June 16, 1998
- -----------------------------
Robert S. Coleman, Sr.
/s/ JAMES N. MARKER Director June 16, 1998
- -----------------------------
James N. Marker
/s/ W. DEAN JURGENS Director June 16, 1998
- -----------------------------
W. Dean Jurgens
43
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.
44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
FirstBank Corp. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition
of FirstBank Corp. and Subsidiaries as of March 31, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FirstBank Corp. and Subsidiaries at March 31, 1998 and 1997 and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
Spokane, Washington
April 23, 1998
45
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
=========================================================================================================
MARCH 31, 1998 1997
=========================================================================================================
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS (Note 13):
Non-interest bearing cash deposits $ 5,443,129 $ 3,883,176
Interest bearing deposits 1,139,185 --
Federal funds sold 1,834,506 1,419,560
- ---------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,416,820 5,302,736
Investment securities (Notes 1 and 13):
Held-to-maturity 2,449,375 5,199,375
Available-for-sale 2,654,233 --
Mortgage-backed securities (Notes 2 and 13):
Held-to-maturity 3,420,153 2,280,743
Available-for-sale 7,969,533 2,599,147
Certificates of deposit 991,000 --
Loans receivable, net (Notes 3, 9 and 13) 145,696,660 113,048,075
Accrued interest receivable (Note 4) 1,374,239 1,013,848
Stock in FHLB, at cost (Notes 12 and 13) 2,110,075 945,475
Premises and equipment, net (Note 5) 4,705,829 4,928,655
Income taxes receivable (Note 7) 468,807 --
Cash surrender value of life insurance policies (Note 10) 1,400,055 1,350,964
Other assets 1,906,391 982,692
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 183,563,170 $ 137,651,710
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Bank overdrafts $ -- $ 2,112,629
Deposits (Notes 6 and 13) 114,495,090 107,595,602
Advances from borrowers for taxes and insurance 1,329,080 1,558,438
Income taxes payable (Note 7) -- 116,921
Advances from FHLB (Notes 12 and 13) 35,655,579 13,922,083
Deferred income taxes (Note 7) 245,000 76,664
Accrued expenses and other liabilities (Note 10) 1,830,423 1,258,262
- ---------------------------------------------------------------------------------------------------------
Total liabilities 153,555,172 126,640,599
- ---------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 10, 11 and 14)
STOCKHOLDERS' EQUITY (Notes 8 and 14):
Preferred stock, $.01 par value, 500,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.01 par value, 5,000,000 shares authorized,
1,983,750 and 0 shares issued, 1,834,407 and 0 shares outstanding 19,838 --
Additional paid-in capital 18,989,977 --
Unearned ESOP shares (Note 11) (1,493,430 --
Retained earnings, substantially restricted 12,493,990 11,043,959
Unrealized loss on securities available-for-sale, net of tax (Note 1) (2,377) (32,848)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,007,998 11,011,111
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 183,563,170 $ 137,651,710
=========================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
46
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
====================================================================================
YEAR ENDED MARCH 31, 1998 1997
====================================================================================
<S> <C> <C>
INTEREST INCOME:
Loans receivable $ 11,694,425 $ 9,248,607
Mortgage-backed securities 612,550 146,963
Investment securities 292,395 534,450
Other interest earning assets 721,266 262,043
- ------------------------------------------------------------------------------------
Total interest income 13,320,636 10,192,063
- ------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 6) 4,658,565 4,839,334
Advances from FHLB 1,914,038 498,653
- ------------------------------------------------------------------------------------
Total interest expense 6,572,603 5,337,987
- ------------------------------------------------------------------------------------
NET INTEREST INCOME 6,748,033 4,854,076
PROVISION FOR LOAN LOSSES (Note 3) 200,463 309,943
- ------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,547,570 4,544,133
- ------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain on sale of loans 1,018,409 1,199,357
Service fees and charges 1,134,030 960,279
Commissions and other 129,478 85,938
- ------------------------------------------------------------------------------------
Total non-interest income 2,281,917 2,245,574
- ------------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Compensation and related benefits (Notes 10 and 11) 3,549,585 3,110,759
Occupancy 770,100 696,978
Supplies and postage 308,938 262,211
Data processing 289,677 157,868
Advertising 206,461 159,948
Deposit insurance premiums 69,232 699,787
Other 984,991 789,786
- ------------------------------------------------------------------------------------
Total non-interest expense 6,178,984 5,877,337
- ------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,650,503 912,370
INCOME TAX EXPENSE (Note 7) 944,310 263,517
- ------------------------------------------------------------------------------------
NET INCOME $ 1,706,193 $ 648,853
====================================================================================
PRO FORMA AMOUNTS (UNAUDITED):
Net income per share - basic and diluted $ 0.93
==============
Weighted average common shares outstanding 1,829,911
==============
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
47
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
===================================================================================================================================
Unrealized
Loss on
Retained Securities
Common Stock Additional Unearned Earnings, Available- Total
------------------------- Paid-In ESOP Substantially for-Sale, Stockholders'
Shares Amount Capital Shares Restricted net of tax Equity
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1996 -- $ -- $ -- $ -- $ 10,395,106 $ (38,901) $ 10,356,205
Sale of securities -- -- -- -- -- 38,901 38,901
available-for-sale
Change in unrealized loss on
securities -- -- -- -- -- (32,848) (32,848)
available-for-sale, net of tax
Net income -- -- -- -- 648,853 -- 648,853
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1997 -- -- -- -- 11,043,959 (32,848) 11,011,111
Proceeds from issuance of
common stock, net of offering 1,983,750 19,838 18,921,825 -- -- -- 18,941,663
costs
Sale of common stock to
ESOP (Note 11) -- -- -- (1,587,00) -- -- (1,587,000)
Dividends paid -- -- -- -- (256,162) -- (256,162)
Change in unrealized loss on
securities -- -- -- -- -- 30,471 30,471
available-for-sale, net of tax
ESOP shares released (Note 11) -- -- 68,152 93,570 -- -- 161,722
Net income -- -- -- -- 1,706,193 -- 1,706,193
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1998 1,983,750 $ 19,838 $ 18,989,977 $ (1,493,430) $ 12,493,990 $ (2,377) $ 30,007,998
===================================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
48
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
===========================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED MARCH 31, 1998 1997
===========================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,706,193 $ 648,853
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 611,944 371,275
Provision for loan losses 200,463 309,943
Gain on sale of loans (1,018,409) (1,199,357)
Other losses, net 871 4,783
Deferred income taxes 147,940 2,913
FHLB stock dividends (138,500) (69,875)
Deferred compensation expense 63,837 57,087
ESOP compensation expense 161,722 --
Loss on sale of investment securities available-for-sale -- 89,789
Changes in assets and liabilities:
Accrued interest receivable and other assets (281,592) (614,950)
Income taxes receivable (payable) (585,728) 127,588
Accrued expenses and other liabilities 508,324 499,410
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,377,065 227,409
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed securities held-to-maturity (1,500,000) (109,742)
Purchases of mortgage-backed securities available-for-sale (6,873,082) (2,659,465)
Proceeds from maturities of mortgage-backed securities held-to-maturity 408,157 305,542
Proceeds from maturities of mortgage-backed securities available-for-sale 1,307,091 --
Purchases of investment securities available-for-sale (2,647,485) --
Proceeds from maturities of investment securities held-to-maturity 2,750,000 5,350,000
Proceeds from sale of investment securities available-for-sale -- 1,302,406
Purchases of certificates of deposit (3,790,000) --
Proceeds from maturity of certificates of deposit 2,799,000 --
Decrease in loans receivable from loans sold 66,313,240 59,924,357
Other net change in loans receivable (99,044,386) (78,510,556)
Purchases of FHLB stock (1,026,100) --
Purchases of premises and equipment (532,858) (615,752)
Net increase in cash surrender value of life insurance policies (49,091) (67,336)
Proceeds from disposition of assets 233,035 90,527
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41,652,479) (14,990,019)
- -----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
49
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
===================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED MARCH 31, 1998 1997
===================================================================================================
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 6,899,488 (7,728,467)
Bank overdrafts (2,112,629) 2,112,629
Advances from borrowers for taxes and insurance (229,358) 482,264
Advances from FHLB 256,291,000 81,050,000
Repayments on advances from FHLB (234,557,504) (69,431,945)
Proceeds from issuance of common stock, net of offering costs 18,941,663
Funding provided to ESOP for purchase of common stock (1,587,000)
Cash dividends paid on common stock (256,162)
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 43,389,498 6,484,481
- ---------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,114,084 (8,278,129)
CASH AND CASH EQUIVALENTS, beginning of year 5,302,736 13,580,865
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 8,416,820 $ 5,302,736
===================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,568,192 $ 5,345,106
Income taxes $ 1,263,702 $ 201,083
NONCASH INVESTING AND FINANCING ACTIVITIES:
Unrealized loss on securities available-for-sale, net of tax $ 30,471 $ 90,766
Loans receivable charged to the allowance for loan losses $ 55,204 $ 36,838
Transfer from loans receivable to real estate acquired through
foreclosure $ 900,507 $ 244,792
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
50
</TABLE>
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
================================================================================
CONVERSION TO A STOCK CORPORATION. FirstBank Corp. (the Holding Company), a
Delaware 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. On January 30, 1998, the Bank
converted to a Washington-chartered savings bank. 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 net public offering 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
consolidated financial statements report the operations and financial condition
of the consolidated entities as if they had operated as a single entity during
each of the periods presented.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements Include the
accounts of the Holding Company, the Bank and Tri Star Financial Corporation
(Tri Star) (collectively referred to as the Company). All significant
intercompany transactions and balances are eliminated in consolidation.
NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK. The Holding Company's
principal business consists of the operations of the Bank and Tri Star. The
Bank's operations consist of attracting deposits from the general public through
a variety of deposit products and investing these, together with funds from
on-going operations, in the origination of residential mortgage 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.
STATEMENTS OF CASH FLOWS. For purposes of the statements of cash flows, the
Company considers all cash on hand and in banks, federal funds sold and highly
liquid marketable debt instruments with original maturities when purchased of
three months or less to be cash and cash equivalents.
PREMISES AND EQUIPMENT. Premises and equipment, which consist of buildings,
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.
51
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
================================================================================
INVESTMENT AND MORTGAGE-BACKED SECURITIES. The Company accounts for securities
according to the provisions of SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS No. 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 these investment and mortgage backed securities to
maturity and, accordingly, they are not adjusted for temporary declines in their
fair value.
AVAILABLE-FOR-SALE - Investments in debt and equity securities classified as
available-for-sale are stated at fair value. Unrealized gains and losses are
recognized (net of tax effect) as a separate component of stockholders' equity.
TRADING - Investments in debt and equity securities classified as trading are
stated at fair value. Realized and unrealized gains and losses for trading
securities are included in income.
Realized gains and losses on the sale of securities are determined using the
specific identification method.
LOANS RECEIVABLE. Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and 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.
The Company accounts for loan impairment according to the provisions of 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 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.
52
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
================================================================================
Any unamortized discounts, premiums or fees on loans repaid or sold are
recognized as income in the year of repayment or sale.
REAL ESTATE OWNED. Real estate acquired in settlement of loans is initially
recorded at fair value less cost to sell at the date of foreclosure. Costs
relating to development and improvement of property are capitalized to the
extent that carrying value does not exceed estimated fair market value, less
estimated cost to sell, whereas costs relating to holding the property are
charged to expense.
Valuations are periodically performed by the Company, and losses are recognized
by a charge to income if the carrying value of a property exceeds its estimated
fair value less cost to sell.
STOCK IN FEDERAL HOME LOAN BANK. Federal law requires a member institution of
the Federal Home Loan Bank (FHLB) System to hold common stock of its district
FHLB according to predetermined formulas. No ready market exists for such stock
and it has no quoted market value.
EMPLOYEE STOCK OWNERSHIP PLAN. The Company sponsors an Employee Stock Ownership
Plan ("ESOP"). The ESOP is accounted for in accordance with the American
Institute of Certified Public Accountants Statement of Position 93-6,
"Employer's Accounting for Employee Stock Ownership Plans." Accordingly, the
shares held by the ESOP are reported as unearned shares issued to the ESOP in
the statements of financial condition. As shares are released from collateral,
compensation expense is recorded equal to the then current market price of the
shares, and the shares become outstanding for earnings per share calculations.
Stock and cash dividends on allocated shares are recorded as a reduction of
retained earnings and paid or distributed directly to participants' accounts.
Stock and cash dividends on unallocated shares are recorded as a reduction of
debt and accrued interest.
MORTGAGE SERVICING RIGHTS. The Company accounts for mortgage servicing rights
according to the provisions of SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities", which amended
SFAS No. 122 "Accounting for Mortgage Servicing Rights" and SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." SFAS No. 125 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. 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.
EARNINGS PER SHARE. Effective April 1, 1997, the Company adopted SFAS No. 128,
"Earnings per Share". SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of
primary EPS with earnings per common share ("basic EPS"). Basic EPS is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. SFAS No. 128 also requires presentation of EPS
assuming dilution ("diluted EPS"). Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The Company had no dilutive potential
common stock at March 31, 1998 and therefore, basic and diluted EPS are the same
for this period. ESOP shares which are unallocated and not yet committed to be
released, which totaled 149,343 shares at March 31, 1998, are excluded from the
weighted average shares outstanding calculation.
Pro forma income per share and weighted average common shares outstanding
information is presented for the year ended March 31, 1998 assuming the
Conversion occurred on April 1, 1997. Net income per share was not calculated
for the year ended March 31, 1997 as no shares were outstanding during this
period.
53
<PAGE>
SUMMARY OF ACCOUNTING POLICIES
================================================================================
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
total of reported net income and all other revenues, expenses, gains and losses
that under generally accepted accounting principles bypass reported net income.
SFAS No. 130 requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements and requires an entity to (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. This statement is effective
for fiscal years beginning after December 15, 1997. Companies are also required
to report comparative totals for comprehensive income in interim reports. The
Company does not expect adoption to have a material effect on its consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which establishes standards for public
companies to report certain financial information about operating segments in
interim and annual financial statements. Operating segments are components of a
business about which separate financial information is available and that are
evaluated regularly by the chief operating decision maker in assessing
performance and deciding how to allocate resources. The statement also requires
public companies to report certain information about their products and services
and the geographic areas in which they operate. This statement is effective for
fiscal years beginning after December 15, 1997. The statement does not need to
be applied to interim financial statements in the initial year of its
application, but such comparative information will be required in interim
statements in the second year. The Company does not expect adoption to have a
material effect on its financial statements.
54
<PAGE>
1. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities
held-to-maturity and available-for-sale are summarized as follows:
HELD-TO-MATURITY
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1998 Cost Gains Losses Value
=========================================================================================
<S> <C> <C> <C> <C>
Farm Credit Bank and FHLB bonds $ 1,749,375 $ -- $ (7,200) $ 1,742,175
SLMA notes 450,000 875 (460) 450,415
FHLB and FNMA notes 250,000 -- (1,425) 248,575
- -----------------------------------------------------------------------------------------
$ 2,449,375 $ 875 $ (9,085) $ 2,441,165
=========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1997 Cost Gains Losses Value
=========================================================================================
<S> <C> <C> <C> <C>
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
=========================================================================================
</TABLE>
AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1998 Cost Gains Losses Value
=========================================================================================
<S> <C> <C> <C> <C>
State Municipal bonds $ 2,619,735 $ 37,265 $ (2,767) $ 2,654,233
=========================================================================================
</TABLE>
The amortized cost and estimated market values of investment securities at March
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------- --------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
=========================================================================================
<S> <C> <C> <C> <C>
Due after one through five years $ 2,449,375 $ 2,441,165 $ -- $ --
Due after ten years -- -- 2,619,735 2,654,233
- -----------------------------------------------------------------------------------------
$ 2,449,375 $ 2,441,165 $ 2,619,735 $ 2,654,233
=========================================================================================
55
</TABLE>
<PAGE>
2. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed and related
securities held-to-maturity and available-for-sale are summarized as follows:
HELD-TO-MATURITY
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1998 Cost Gains Losses Value
=============================================================================================
<S> <C> <C> <C> <C>
FNMA Certificates $ 1,122,115 $ 9,511 $ (42,883) $ 1,088,743
Collateralized Mortgage Obligations 364,586 3,103 (265) 367,424
SBA Certificates 2,904 -- (159) 2,745
GNMA Certificates 109,567 1,968 -- 111,535
FHLMC Certificates 327,392 52 (4,835) 322,609
State revenue bonds 1,493,589 -- -- 1,493,589
- ---------------------------------------------------------------------------------------------
$ 3,420,153 $ 14,634 $ (48,142) $ 3,386,645
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1997 Cost Gains Losses Value
=============================================================================================
<S> <C> <C> <C> <C>
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
=============================================================================================
</TABLE>
AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1998 Cost Gains Losses Value
=============================================================================================
<S> <C> <C> <C> <C>
Collateralized Mortgage Obligations $ 1,951,150 $ 28,006 $ -- $ 1,979,156
FHLMC Certificates 2,688,586 1,453 (40,210) 2,649,829
FNMA Certificates 3,366,424 10,275 (36,151) 3,340,548
- ---------------------------------------------------------------------------------------------
$ 8,006,160 $ 39,734 $ (76,361) $ 7,969,533
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
March 31, 1997 Cost Gains Losses Value
=============================================================================================
<S> <C> <C> <C> <C>
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
=============================================================================================
56
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The amortized cost and estimated market value of mortgage backed securities at
March 31, 1998, 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 2,904 $ 2,745 $ -- $ --
Due after ten years 3,417,249 3,383,900 8,006,160 7,969,533
- -------------------------------------------------------------------------------
3,420,153 $3,386,645 $8,006,160 $7,969,533
===============================================================================
Collateralized mortgage obligations at March 31, 1998 and 1997 were
collateralized by mortgage-backed securities issued by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Government National Mortgage Association.
3. LOANS RECEIVABLE
Loans receivable at March 31 consists of the following:
1998 1997
===============================================================================
REAL ESTATE LOANS:
Residential $ 87,984,804 $ 77,408,533
Agricultural 14,601,861 11,997,828
Commercial 12,433,453 5,392,173
Construction 7,965,557 11,861,206
OTHER LOANS:
Commercial (non-real estate) 16,626,915 1,692,030
Home equity 6,175,466 5,003,037
Other consumer 6,109,394 4,124,825
Agricultural operating 2,304,571 1,029,503
- -------------------------------------------------------------------------------
TOTAL LOANS RECEIVABLE 154,202,021 118,509,135
LESS:
Loans in process 6,934,502 4,107,763
Unearned loan fees and discounts 451,152 378,849
Allowance for loan losses 1,119,707 974,448
- -------------------------------------------------------------------------------
LOANS RECEIVABLE, NET $145,696,660 $113,048,075
===============================================================================
Total loans receivable consist of approximately $91,617,000 and $85,028,000 in
one-to four-family residential real estate loans at March 31, 1998 and 1997.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following summarizes the changes in the allowance for loan losses at March
31:
1998 1997
===============================================================================
ALLOWANCE FOR LOAN LOSSES, beginning of year $ 974,448 $ 701,343
Provision for loan losses 200,463 309,943
Charge-offs (55,204) (36,838)
- -------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES, end of year $ 1,119,707 $ 974,448
===============================================================================
Outstanding commitments of the Bank to originate loans as of March 31, 1998 were
as follows:
Fixed Variable
Rate Rate Total
===============================================================================
First mortgage loans $20,184,810 $ 381,952 $20,566,762
Other loans 37,500 1,776,500 1,814,000
- -------------------------------------------------------------------------------
OUTSTANDING LOAN COMMITMENTS $20,222,310 $ 2,158,452 $22,380,762
===============================================================================
Interest rates on fixed rate loan commitments range from 5.68% to 8.50% and are
committed through June 13, 1998. 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 $8,414,000 at
March 31, 1998. Commitments to extend credit may involve elements of interest
rate risk in excess of the amount recognized in the balance sheets. Interest
rate risk on commitments to extend credit results from the possibility that
interest rates may have moved unfavorably from the position of the Bank since
the time the commitment was made.
The Bank remains contingently liable for approximately $1,267,000 of loans sold
with recourse as of March 31, 1998. 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:
1998 1997
===============================================================================
Loan portfolios serviced for:
FNMA $ 52,287,098 $ 63,534,868
FHLMC 79,516,491 65,336,568
Others 3,785,131 3,280,310
- -------------------------------------------------------------------------------
$135,588,720 $132,151,746
===============================================================================
The principal amount of loans subject to delinquent principal or interest,
defined as payment being in arrears over three months, totaled approximately
$456,000 and $1,125,000 at March 31, 1998 and 1997.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at March 31 consists of the following:
1998 1997
===============================================================================
Investment securities $ 41,870 $ 34,723
Mortgage-backed securities 120,509 59,083
Loans receivable 1,211,860 920,042
- -------------------------------------------------------------------------------
ACCRUED INTEREST RECEIVABLE $1,374,239 $1,013,848
===============================================================================
5. PREMISES AND EQUIPMENT
Premises and equipment at March 31 consists of the following:
1998 1997
===============================================================================
Land, buildings and building improvements $ 4,663,205 $ 4,999,564
Branch premises under development 129,177 45,803
Furniture, fixtures and equipment 2,725,719 2,276,235
- -------------------------------------------------------------------------------
7,518,101 7,321,602
Accumulated depreciation (2,812,272) (2,392,947)
- -------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET $ 4,705,829 $ 4,928,655
===============================================================================
6. DEPOSITS
Deposits and the related weighted average interest rates at March 31 consist of
the following:
1998 1997
===============================================================================
DEPOSIT ACCOUNTS:
NOW accounts (1.23% and 1.38%) $ 19,388,968 $ 15,942,961
Passbook accounts (3.03% and 3.03%) 13,418,157 14,163,562
Money market accounts (3.05% and 3.03%) 9,077,548 6,968,209
- -------------------------------------------------------------------------------
41,884,673 37,074,732
- -------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT:
3.00% to 3.99% 1,000,908 996,689
4.00% to 4.99% 7,995,140 7,131,625
5.00% to 5.99% 55,991,677 42,816,278
6.00% to 6.99% 6,638,110 17,082,245
7.00% to 7.99% 483,427 1,989,661
8.00% to 8.99% 49,118 51,315
9.00% and over 452,037 453,057
- -------------------------------------------------------------------------------
72,610,417 70,520,870
- -------------------------------------------------------------------------------
$114,495,090 $107,595,602
===============================================================================
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
The scheduled maturities of certificates of deposit at March 31, 1998 are as
follows:
YEAR ENDING MARCH 31, Amount
===============================================================================
1999 $52,836,258
2000 13,111,435
2001 4,736,520
2002 1,292,190
2003 596,690
Thereafter 37,324
- -------------------------------------------------------------------------------
Total $72,610,417
===============================================================================
Interest expense on deposits consists of the following:
YEAR ENDED MARCH 31, 1998 1997
===============================================================================
NOW and money market $ 483,742 $ 405,274
Passbook savings 405,829 413,341
Certificates of deposit 3,768,994 4,020,719
- -------------------------------------------------------------------------------
INTEREST EXPENSE $4,658,565 $4,839,334
===============================================================================
Certificates of deposit of $100,000 or more totaled approximately $14,138,000
and $10,097,140 at March 31, 1998 and 1997, respectively. Deposit balances in
excess of $100,000, approximately $11,363,000 and $8,697,000 at March 31, 1998
and 1997, 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 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, 1998 1997
===============================================================================
Current:
Federal $ 660,184 $ 232,543
State 136,186 28,061
- -------------------------------------------------------------------------------
796,370 260,604
- -------------------------------------------------------------------------------
Deferred:
Federal 128,054 2,521
State 19,886 392
- -------------------------------------------------------------------------------
147,940 2,913
- -------------------------------------------------------------------------------
INCOME TAX EXPENSE $ 944,310 $ 263,517
===============================================================================
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Deferred tax liabilities and assets at March 31 consist of the following:
1998 1997
===============================================================================
DEFERRED TAX LIABILITIES:
FHLB stock dividends $ (341,000) $ (286,528)
Loan loss reserves (243,000) (243,191)
Depreciation (146,000) (121,876)
Other (174,000) (37,682)
- -------------------------------------------------------------------------------
Total deferred tax liabilities (904,000) (689,277)
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Unearned loan fees 68,000 148,812
Allowance for loan losses 476,000 397,233
Deferred compensation 70,000 45,319
Other 45,000 21,249
- -------------------------------------------------------------------------------
Total deferred tax assets 659,000 612,613
- -------------------------------------------------------------------------------
NET DEFERRED INCOME TAX LIABILITY $ (245,000) $ (76,664)
===============================================================================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------
AMOUNT PERCENT Amount Percent
=================================================================================================
<S> <C> <C> <C> <C>
Income tax expense at statutory rates $ 901,172 34.0% $ 310,206 34.0%
Increase (decrease) resulting from:
State income taxes, net of federal benefit 116,742 4.4 18,779 2.1
Prior year over/ under accrual (37,051) (1.4) (47,319) (5.2)
Permanent and other differences (36,553) (1.4) (18,149) (2.0)
- -------------------------------------------------------------------------------------------------
$ 944,310 35.6% $ 263,517 28.9%
=================================================================================================
</TABLE>
8. EQUITY
The Company is not subject to capital adequacy requirements by its primary
regulator, the Office of Thrift Supervision. The Bank, however, is subject to
various regulatory capital requirements administered by the Washington
Department of Financial Institutions (the Department) and the FDIC,
(collectively referred to as the "regulators"). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of March 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As of March 31, 1998, the most recent notification from the OTS categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the table below
(dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1998
Tier 1 Capital (to average assets) $ 20,331 11.4% $ 7,160 4.0% $ 8,950 5.0%
Tier 1 Capital (to risk-weighted assets) 20,331 17.1% $ 4,755 4.0% $ 7,132 6.0%
Tier Capital (to risk-weighted assets) 21,451 18.1% $ 9,509 8.0% $ 11,886 10.0%
AS OF MARCH 31, 1997
Tier 1 Capital (to average assets) 11,044 8.0% $ 5,506 4.0% $ 6,883 5.0%
Tier 1 Capital (to risk-weighted assets) 11,044 12.5% $ 3,532 4.0% $ 5,298 6.0%
Total Capital (to risk-weighted assets) $ 12,002 13.6% $ 7,064 8.0% $ 8,829 10.0%
====================================================================================================
</TABLE>
The Bank may not declare or pay a cash dividend if such declaration and payment
would violate regulatory requirements. Unlike the Bank, the Company is not
subject to these regulatory restrictions on the payment of dividends to its
stockholders. However, the source of its future corporate dividends may depend
upon dividends from the Bank.
9. RELATED PARTY TRANSACTIONS
Prior to the Financial Institutions Reform, Recovery and 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.
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:
1998 1997
===============================================================================
BALANCE, beginning of year $ 1,315,335 $ 1,376,661
Additions 865,350 122,000
Repayments and sales proceeds (891,696) (183,326)
- -------------------------------------------------------------------------------
BALANCE, end of year $ 1,288,989 $ 1,315,335
===============================================================================
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. EMPLOYEE BENEFIT PLANS
The Bank established, during 1995, a profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code, whereby participants may contribute a
percentage of compensation, but not in excess of the maximum allowed under the
Code. The plan provides for a matching contribution by the Bank which amounted
to $19,111 and $43,868 for the years ended March 31, 1998 and 1997. In addition,
the Bank may make additional contributions at the discretion of the Board of
Directors. These additional contributions amounted to $0 and $96,395 for the
years ended March 31, 1998 and 1997.
The Company has entered into a salary continuation agreement with certain
employees. This program was funded by purchasing single premium life insurance
contracts. The program provides for aggregate continued annual compensation for
all participants totaling $179,500 for life with a guarantee period ranging from
15-20 years. Participants vest ratably each plan year until retirement,
termination, death or disability. The Company is recording the salary obligation
over the estimated remaining service lives of the participants. Expenses related
to this program were $63,837 and $57,037 for the years ended March 31, 1998 and
1997, respectively. At March 31, 1998, an obligation of $179,211 and cash value
of life insurance of $1,400,055 were recorded. At March 31, 1997, an obligation
of $115,374 and cash value of life insurance of $1,350,964 were recorded.
Increases in cash surrender value and related net earnings from the life
insurance contracts offset the expenses of this program.
The Company entered into three year employment agreements with certain officers
which may be extended by the Board for an additional year at each anniversary
date. The agreements provide for severance payments and other benefits in the
event of termination without cause and termination of employment in connection
with any change in control of the Company of up to 2.99 times the officer's
average annual compensation during the preceding five years. The employment
agreements provide for termination by the Company for cause at any time.
11. EMPLOYEE STOCK OWNERSHIP PLAN
The Bank established for eligible employees an ESOP and related trust in
connection with the stock conversion consummated on July 1, 1997. Eligible
employees of the Bank as of June 30, 1997 and eligible employees of the Company
and the Bank employed after such date who have been credited with at least 1,000
hours during a 12-month period and are age 21 will become participants. The ESOP
borrowed $1,587,000 from the Holding Company in order to purchase 158,700 shares
of common stock of the Holding Company. The loan will be repaid principally from
the Bank's contributions to the ESOP over a period of fifteen years, and the
collateral for the loan will be the unreleased, restricted common stock
purchased by the ESOP. Contributions to the ESOP will be discretionary; however,
the Bank intends to make annual contributions to the ESOP in an aggregate amount
at least equal to the principal and interest requirements of the debt. The
interest rate for the loan is 8.5%.
The cost of shares acquired by the ESOP is considered unearned compensation and,
as such, is recorded as a reduction of the Company's stockholders' equity.
Shares purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is repaid. Contributions to the ESOP and shares
released from the suspense account are allocated among the participants on the
basis of compensation in the year of allocation. Participants generally become
100% vested in their ESOP account after five years of credited service or if
their service was terminated due to death, retirement, permanent disability or a
change in control. Prior to the completion of four years of credited service, a
participant who terminates employment for reasons other than death, retirement,
disability, or change in control of the Company will not receive any benefit.
Forfeitures will be reallocated among remaining participating employees, in the
same proportion as contributions. Benefits are payable upon death, retirement,
disability or separation from service. The contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated.
Compensation expense is recorded equal to the fair value of shares held by the
ESOP which are deemed committed to be released. ESOP compensation expense for
March 31, 1998 (first plan year) was $162,000. As of March 31, 1998, the Company
has allocated or committed to be released to the ESOP 9,357 earned shares and
has 149,343 unearned, restricted shares remaining to be released. The market
value of unearned, restricted shares held by the ESOP trust was approximately
$2,987,000 at March 31, 1998.
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
12. ADVANCES FROM FHLB
Advances from FHLB had weighted average interest rates at March 31, 1998 and
1997 of 5.84% and 5.87%, respectively. Maturity dates of advances at March 31
were as follows:
1998 1997
===============================================================================
ADVANCES FROM FHLB DUE:
Less than 1 year $ 22,578,472 $ 9,828,472
1 to 2 years 4,000,000 328,472
2 to 3 years 838,085 1,000,000
3 to 4 years 1,768,055 497,083
4 to 5 years 5,000,000 2,268,056
More than 5 years 1,470,967 --
- -------------------------------------------------------------------------------
$ 35,655,579 $ 13,922,083
===============================================================================
Included in the table above is a $5,000,000 advance from FHLB maturing in
December 2002 which is callable every 90 days from the date of advance at the
option of the FHLB.
Pursuant to collateral requirements of the FHLB, advances are secured by stock
in the FHLB and qualifying first mortgage loans.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate that
value. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value estimates presented do not reflect the underlying fair value of the
Company. Although management is not aware of any factors that would materially
affect the estimated fair value amounts presented, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and, therefore, estimates of fair value subsequent to that date may differ
significantly from the amounts presented as follows.
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
----------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
================================================================================================
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,416,820 $ 8,416,820 $ 5,302,736 $ 5,302,736
Investment securities:
Held-to-maturity 2,449,375 2,441,165 5,199,375 5,136,365
Available-for-sale 2,654,233 2,654,233 -- --
Mortgage-backed securities:
Held-to-maturity 3,420,153 3,386,645 2,280,743 2,205,640
Available-for-sale 7,969,533 7,969,533 2,599,147 2,599,147
Loans receivable 145,696,660 146,018,504 113,048,075 112,106,875
Stock in FHLB 2,110,075 2,110,075 945,475 945,475
Cash surrender value of life
insurance policies 1,400,055 1,400,055 1,350,964 1,350,964
Financial liabilities:
Deposits 114,495,090 114,488,907 107,595,602 108,014,842
Advances from FHLB 35,655,579 35,687,164 13,922,083 13,786,403
64
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 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 consolidated financial position.
14. LIQUIDATION ACCOUNT
At the time of the Conversion, the Bank established a liquidation account in an
amount equal to its equity as reflected in the latest statement of financial
condition used in the final conversion prospectus. The liquidation account will
be maintained for the benefit of eligible account holders and supplemental
eligible account holders who continue to maintain their accounts at the Bank
after the Conversion. The liquidation account will be reduced annually to the
extent that eligible account holders and supplemental eligible account holders
have reduced their qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible account holder's or supplemental eligible
account holder's interest in the liquidation account. In the event of a complete
liquidation of the Bank, each eligible account holder will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held.
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. PARENT COMPANY FINANCIAL INFORMATION
The summarized financial information for FirstBank Corp. is presented below.
Since FirstBank Corp. was not organized until March 12, 1997 and had no
activities prior to April 1, 1997, comparative information is not presented.
FIRSTBANK CORP.
Statement of Financial Condition
MARCH 31, 1998
===============================================================================
ASSETS
Cash and cash equivalents $ 258,099
Loan to FirstBank Northwest 6,100,000
Loan receivable from ESOP 1,477,411
Investment in subsidiaries 20,333,119
Certificates of deposit 1,741,000
Other assets 99,589
- -------------------------------------------------------------------------------
Total assets $30,009,218
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 1,220
Stockholders' equity 30,007,998
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $30,009,218
===============================================================================
FIRSTBANK CORP
Statement of Income
YEAR ENDED MARCH 31, 1998
===============================================================================
INTEREST INCOME:
Certificates and time deposits $ 87,503
Loans receivable 89,358
ESOP loan 67,345
Cash and cash equivalents 210,253
OTHER INCOME:
Equity in undistributed income of subsidiaries 1,544,136
- -------------------------------------------------------------------------------
1,998,595
OTHER EXPENSE:
Compensation, payroll taxes and fringe benefits 17,724
Other expense 167,392
- -------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 1,813,479
INCOME TAX EXPENSE 107,286
- -------------------------------------------------------------------------------
NET INCOME $ 1,706,193
===============================================================================
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
FIRSTBANK CORP.
Statement of Cash Flows
YEAR ENDED MARCH 31, 1998
===============================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,706,193
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries (1,544,136)
(Increase) decrease in other assets (31,437)
Increase (decrease) in liabilities 1,220
- -------------------------------------------------------------------------------
Net cash provided by operating activities 131,840
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in wholly owned subsidiary (9,470,831)
Purchases of certificates of deposit (4,540,000)
Maturities of certificates of deposit 2,799,000
Dividends received from subsidiaries 230,000
Loan to FirstBank Northwest (6,100,000)
Loan provided to ESOP (1,587,000)
Principal repayments on ESOP loan 109,589
- -------------------------------------------------------------------------------
Net cash used by investing activities (18,559,242)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of underwriting costs 18,941,663
Dividends paid (256,162)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 18,685,501
- -------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 258,099
CASH AND CASH EQUIVALENTS, beginning of year --
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 258,099
===============================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 65,673
Income taxes $ --
NONCASH INVESTING AND FINANCING ACTIVITIES:
ESOP shares committed to be released $ 68,152
===============================================================================
67
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of FirstBank Corp. for the year ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035513
<NAME> FIRSTBANK CORP.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 8,417
<INT-BEARING-DEPOSITS> 1,139
<FED-FUNDS-SOLD> 1,835
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,624
<INVESTMENTS-CARRYING> 5,870
<INVESTMENTS-MARKET> 5,828
<LOANS> 145,697
<ALLOWANCE> 1,120
<TOTAL-ASSETS> 183,563
<DEPOSITS> 114,495
<SHORT-TERM> 22,579
<LIABILITIES-OTHER> 3,404
<LONG-TERM> 13,077
0
0
<COMMON> 20
<OTHER-SE> 29,988
<TOTAL-LIABILITIES-AND-EQUITY> 183,563
<INTEREST-LOAN> 11,695
<INTEREST-INVEST> 905
<INTEREST-OTHER> 721
<INTEREST-TOTAL> 13,321
<INTEREST-DEPOSIT> 4,659
<INTEREST-EXPENSE> 6,573
<INTEREST-INCOME-NET> 6,748
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,179
<INCOME-PRETAX> 2,651
<INCOME-PRE-EXTRAORDINARY> 2,651
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,706
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 4.27
<LOANS-NON> 454
<LOANS-PAST> 2
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 974
<CHARGE-OFFS> 54
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,120
<ALLOWANCE-DOMESTIC> 1,120
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
