SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22435
FIRSTBANK CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1389562
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
920 Main Street, Lewiston, Idaho 83501
- --------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (208) 746-9610
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
--------------------
(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, 1999 were $18.1.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant was $24,873,370 based on the last reported sale price of the common
stock of the Registrant on the Nasdaq National Market on June 17, 1999. 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 17, 1999, there were 1,658,158 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 21, 1999 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 state savings bank
located in Lewiston, Idaho. The Bank, which was formed as an Idaho mutual
savings and loan association, converted to a federal mutual savings and loan
association in 1935 and adopted the federal mutual savings bank charter in 1990.
In July 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 Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits.
The Bank's deposits are insured by the FDIC's Savings Association Insurance Fund
("SAIF") and have been federally insured since 1933. The Bank has been a member
of the Federal Home Loan Bank ("FHLB") System since 1933.
The Bank is a community-oriented financial institution, operating in
one business segment, that engages primarily in the business of attracting
deposits from the general public and using those funds to originate residential
mortgage loans 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, although in the year ended March 31, 1999 the Bank retained some
30-year fixed rate loans for its portfolio.
MARKET AREA
FirstBank's general market area includes northern Idaho and Eastern
Washington. Headquartered in Lewiston, Idaho, the bank operates seven
full-service offices in Lewiston, Lewiston Orchards, Moscow, Grangeville, Coeur
d'Alene and Post Falls, Idaho, and in Clarkston, Washington. The Bank also
operates two real estate loan production offices, one in Lewiston and one in
Coeur d'Alene, and a commercial and agricultural production center in Lewiston.
Most of the Bank's depositors reside in the communities surrounding the Bank's
offices. The vast majority of the Bank's loans are made to borrowers residing in
the counties in which the Bank's offices are located and in the surrounding
counties.
In general, the market areas served by the Bank are dependent on
agriculture, mining, tourism and the forest products industry, and the local
economies reflect the health or weakness of those industries. Agricultural
activity in the Bank's market area is mainly dry land farming, the primary crop
being wheat. Other major crops are barley, peas, lentils, beans and grass seed.
Livestock 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 Nez Perce County, is connected to that of Clarkston,
Washington, which is separated from Lewiston by the Snake River. The Lewis-Clark
Valley has a population of approximately 58,000. Forest products and agriculture
are the dominant industries in the Lewiston-Clarkston area. Medical services,
light manufacturing and tourism have helped keep the economy stable in recent
years. Moscow, Idaho, in Latah County, has a population of around 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. 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
2
<PAGE>
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 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,
------------------------------
FINANCIAL CONDITION DATA: 1997 1998 1999
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total assets $137,652 $183,563 $206,745
Loans receivable, net 113,048 145,697 165,617
Cash and cash equivalents 5,303 8,417 8,536
Investment securities held-to-maturity 5,199 2,449 700
Investment securities available-for-sale -- 2,654 6,536
Mortgage-backed securities held-to-maturity 2,281 3,420 2,739
Mortgage-backed securities available-for-sale 2,599 7,970 10,135
Deposits 107,596 114,495 133,278
Advances from FHLB 13,922 35,656 42,027
Stockholders' equity 11,011 30,008 27,774
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------
SELECTED OPERATING DATA: 1997 1998 1999
-------- -------- --------
(In Thousands, except per share data)
<S> <C> <C> <C>
Interest income $ 10,192 $ 13,321 $ 14,961
Interest expense 5,338 6,573 7,223
-------- -------- --------
Net interest income 4,854 6,748 7,738
Provision for loan losses 310 200 296
-------- -------- --------
Net interest income after provision for loan losses 4,544 6,548 7,442
Non-interest income 2,245 2,282 3,106
Non-interest expenses 5,877 6,179 7,593
-------- -------- --------
Income before income tax expense 912 2,651 2,955
Income tax expense 263 945 923
-------- -------- --------
Net income $ 649 $ 1,706 $ 2,032
======== ======== ========
Per Share Data: Pro forma amounts
(unaudited):
------------
Basic earnings per share N/A $ 0.93 $ 1.16
Diluted earnings per share N/A $ 0.93 $ 1.13
======== ======== ========
Dividends N/A $ 0.14 $ 0.34
======== ======== ========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or For the
Year Ended March 31,
--------------------------
1997 1998 1999
------ ------ ------
KEY FINANCIAL RATIOS:
PERFORMANCE RATIOS:
<S> <C> <C> <C>
Return on average assets (1) 0.50% 1.02% 1.03%
Return on average equity (2) 5.99 6.98 6.94
Average equity to average assets (3) 8.34 14.63 14.88
Total equity to total assets at end of year 8.00 16.35 13.43
Interest rate spread (4) 3.68 3.78 3.88
Net interest margin (5) 3.92 4.27 4.36
Average interest-earning assets to average interest-bearing
Liabilities 105.62 113.26 112.07
Non-interest expense as a percent of average assets 4.52 3.70 3.86
Efficiency ratio (6) 82.79 68.43 70.02
Dividend payout ratio N/A 15.01 30.45
EQUITY RATIOS:
Tier I capital to average assets 8.02 11.36 10.20
Tier I capital to risk-weighted assets 12.51 17.10 14.40
Total capital to risk-weighted assets 13.59 18.05 15.40
ASSET QUALITY RATIOS:
Nonaccrual and 90 days or more past due loans as a percent
of loans receivable, net 1.00 0.31 0.38
Nonperforming assets as a percent of total assets 0.99 0.73 0.45
Allowance for loan losses as a percent of total loans
receivable 0.82 0.73 0.76
Allowance for loan losses as a percent of nonperforming
loans 86.58 245.61 217.76
Net charge-offs to average outstanding loans 0.03 0.04 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 $165.6
million at March 31, 1999, representing 80.1% of consolidated total assets.
4
<PAGE>
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 10.0% of total gross loans other than as
disclosed below.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------
1997 1998 1999
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $ 77,408 65.32% $ 87,985 57.06% $ 83,670 46.54%
Agricultural 11,998 10.12 14,602 9.47 16,257 9.05
Commercial 5,392 4.55 12,433 8.06 23,484 13.06
Construction 11,861 10.01 7,966 5.17 9,333 5.19
-------- ------ -------- ------ -------- ------
Total real estate loans 106,659 90.00 122,986 79.76 132,744 73.84
Consumer and other loans:
Commercial 1,692 1.43 16,627 10.78 27,969 15.56
Home equity 5,003 4.22 6,175 4.00 6,012 3.34
Other consumer 4,125 3.48 6,109 3.96 8,687 4.83
Agricultural operating 1,030 0.87 2,305 1.50 4,357 2.43
-------- ------ -------- ------ -------- ------
Total consumer and other loans 11,850 10.00 31,216 20.24 47,025 26.16
-------- ------ -------- ------ -------- ------
Total loans receivable 118,509 100.00% 154,202 100.00% 179,769 100.00%
-------- ====== -------- ====== -------- ======
Less:
Loans in process 4,108 6,934 12,237
Unearned loan fees and discounts 379 451 554
Allowance for loan losses 974 1,120 1,361
-------- -------- --------
Loans receivable, net $113,048 $145,697 $165,617
======== ======== ========
</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, 1999, $132.7 million,
or 73.8%, 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, 1999 the Bank retained some 30-year, fixed-rate loans for
its portfolio. The Bank generally retains all of the ARM loans 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, 1999, the Bank
remains contingently liable for approximately $910,000 of loans sold with
recourse. The Bank's decision to hold or sell loans is based on its
asset/liability management policies and goals and the market conditions for
mortgages. See "-- 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,
1999, the Bank's residential loan portfolio included $15.6 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 of 200 basis points
above the initial interest rate or the fully indexed rate, whichever is higher.
Another consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds.
While one- to four-family residential real estate loans are 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.
6
<PAGE>
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 portion of its loan portfolio
in residential construction loans. This activity has been prompted by favorable
economic conditions in northern Idaho, especially in the area around Coeur
d'Alene, lower long-term interest rates and an increased demand for housing
units as a result of the population growth in northern Idaho. At March 31, 1999,
construction loans totaled $9.3 million, or 5.2% of total loans. At such date,
the average amount of the Bank's construction loans was approximately $101,000,
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, 1999 was $400,000. During the year ended March 31, 1999, construction
loans constituted 9.3% 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,
1999, speculative loans totaled $3.6 million, or 38.6% 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, 1999,
custom construction loans to individuals totaled $4.0 million, or 42.9% 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, 1999, the Bank had approved seven major builders, the largest
borrowing capacity of which was approximately $1.3 million. At March 31, 1999,
the Bank's major builders had total loans of $3.0 million outstanding. For all
other builders, the Bank reviews the financial strength and credit of the
builder on a loan by loan basis.
7
<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 25 years of experience and the Senior Vice President,
Agricultural and Consumer Lending has 19 years of experience in agricultural
real estate lending. The existing staff's experience maintains the Bank as the
most experienced agricultural lender in the area. At March 31, 1999,
agricultural real estate loans totaled $16.3 million, or 9.0% of the Bank's
total loan portfolio.
The Bank presently originates both adjustable-rate and fixed-rate loans
secured by farmland located in the Bank's market area, primarily around
Lewiston. The Bank offers adjustable-rate loans that adjust annually after an
initial fixed period of one, three or five years. Such loans generally provide
for up to a 25-year term. The Bank also offers fixed-rate loans with a ten-year
term and a ten-year amortization schedule. The Bank also makes agricultural
operating loans. See "-- Consumer and Other Lending."
Agricultural real estate loans generally are underwritten to Federal
Agricultural Mortgage Corporation ("Farmer Mac") standards so as to qualify for
sale in the secondary market, although the Bank currently retains most of these
loans for its portfolio. In originating an agricultural real estate loan, the
Bank considers the debt service coverage of the borrower's cash flow, the amount
of working capital available to the borrower, the financial history of the
farmer and the appraised value of the underlying property as well as the Bank's
experience with and knowledge of the borrower. An environmental assessment is
also performed. The maximum loan-to-value for agricultural real estate loans is
75%. At March 31, 1999, the largest agricultural real estate loan was $1.0
million and the average Bank agricultural real estate loan was approximately
$145,000.
- ---------
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.
8
<PAGE>
COMMERCIAL LENDING. Commercial real estate lending is becoming a
significant part of the Bank's lending strategy. At March 31, 1999, the Bank's
commercial real estate loan portfolio totaled $23.5 million, or 13.1% of total
loans. The Bank has been more active in originating commercial real estate loans
in recent periods. During the year ended March 31, 1999, originations of
commercial real estate loans totaled $14.7 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 primarily
by owner-occupied buildings, storage facilities, manufactured home parks, small
office buildings, retail shops, multi-family residential properties and other
small commercial properties. Commercial real estate loans in the Bank's
portfolio only includes loans originated by the Bank. At March 31, 1999, the
average size of the Bank's commercial real estate loans was $222,000 and the
largest was $2.5 million. Appraisals on properties that secure commercial real
estate loans are performed by an independent appraiser engaged by the Bank
before the loan is made. An environmental assessment is also performed.
Underwriting of commercial real estate loans includes a thorough analysis of the
cash flows generated by the real estate or the borrower's business to support
the debt service and the financial resources, experience, and income level of
the borrowers. Operating statements on most commercial loans are prepared and
submitted to the Bank on an annual basis.
Commercial lending has become an important part of the Bank's lending
strategy this past year. The Senior Vice President has 19 years of commercial
lending experience and was able, with the help of other experienced lenders to
increase commercial non-real estate loans to 15.6% 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 $16.6 million to $28.0
million from fiscal year ended 1998 and 1999, respectively.
Commercial 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, 1999, the
Bank's consumer and other non-mortgage loans totaled approximately $19.1
million, or 10.6% 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, 1999, home equity loans totaled $6.0 million. The Bank
offers both home equity second mortgage loans and lines of credit. Substantially
all of the Bank's home equity loans are primarily secured by second mortgages on
residential real estate located in the Bank's primary market area. Home equity
second mortgage loans are generally offered with terms of five or ten years and
only with fixed interest rates. Home equity lines of credit generally have
adjustable interest rates based on the prime rate.
At March 31, 1999, agricultural operating loans totaled $4.4 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.
9
<PAGE>
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, 1999, 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, 1999 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 $20,872 $12,093 $ 9,584 $ 8,423 $32,698 $ 83,670
Construction 9,073 260 0 0 0 9,333
Commercial 2,026 6,559 11,045 2,172 1,682 23,484
Agricultural 323 151 1,095 4,647 10,041 16,257
Commercial non-real estate 11,308 8,226 1,035 0 7,400 27,969
Consumer and other loans 12,012 4,128 2,070 223 623 19,056
------- ------- ------- ------- ------- --------
Total loans receivable $55,614 $31,417 $24,829 $15,465 $52,444 $179,769
======= ======= ======= ======= ======= ========
</TABLE>
10
<PAGE>
The following table sets forth the dollar amount of all loans due after
March 31, 1999, that have fixed interest rates and have floating or adjustable
interest rates.
Fixed Floating or
Rates Adjustable Rates
------- ----------------
(In Thousands)
Real estate loans:
Residential $56,822 $26,848
Construction 9,333 0
Commercial 8,792 14,692
Agricultural 1,419 14,838
Commercial non-real estate 16,924 11,045
Consumer and other loans 6,256 12,800
------- -------
$99,546 $80,223
======= =======
Total loans receivable
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 $245,000 that qualify for sale in
the secondary market may be approved by the Bank's underwriters. All other
portfolio real estate loans up to $750,000 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 $750,000 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 $750,000 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, 1999, the Bank originated $165.6 million of loans. Residential
real estate loan originations totaled $105.9 million for the year ended March
31, 1999. Of the $165.6 million of loans originated during the year ended March
31, 1999, 21.6% were adjustable-rate loans and 78.4% 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 contribution to the Bank's profitability depends on
11
<PAGE>
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 $1.0 million and $1.7 million
during the years ended March 31, 1998 and 1999, respectively. The Bank sells
loans on a loan-by-loan basis. Generally a loan is committed to be sold and a
price for the loan is fixed at the time the interest rate on the loan is fixed,
which may be at the time the Bank issues a loan commitment or at the time the
loan closes. This eliminates the risk to the Bank that a rise in market interest
rates will reduce the value of a mortgage before it can be sold. Where a loan is
committed to be sold before it is closed, the Bank is subject to the risk that
the loan fails to close or that the closing of the loan is delayed beyond the
specified delivery date. In such event, the Bank may be required to compensate
the purchaser for failure to deliver the loan. Generally, all loans are sold
without recourse, although in the past the Bank has sold loans with recourse. As
of March 31, 1999, the Bank remained contingently liable for approximately
$910,000 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,
-----------------------------------
1997 1998 1999
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Total loans receivable at beginning of year $ 100,655 $ 118,509 $ 154,202
--------- --------- ---------
Loans originated:
Real estate loans:
Residential 80,721 96,124 105,939
Construction 26,359 12,377 15,411
Agricultural 1,326 4,395 4,249
Commercial 4,887 9,555 14,726
Commercial non-real estate 1,692 16,526 18,539
Consumer and other loans 4,537 6,297 6,763
--------- --------- ---------
Total loans originated 119,522 145,274 165,627
--------- --------- ---------
Loans purchased:
Real estate loans:
Residential 43 160 1,270
Construction -- -- --
Agricultural -- -- 775
Commercial -- -- --
Commercial non-real estate -- 144 --
Consumer and other loans -- -- --
--------- --------- ---------
Total loans purchased 43 304 2,045
--------- --------- ---------
Loans sold:
Servicing retained (25,140) (25,435) (38,204)
Servicing released (33,585) (39,860) (55,722)
--------- --------- ---------
Total loans sold (58,725) (65,295) (93,926)
Loan principal repayments (33,905) (25,747) (28,303)
Other(1) (9,081) (18,843) (24,338)
--------- --------- ---------
Change in total loans receivable 17,854 35,693 25,567
--------- --------- ---------
Total loans receivable at end of year $ 118,509 $ 154,202 $ 179,769
========= ========= =========
</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
$22.0 million at March 31, 1999.
LOAN ORIGINATION AND OTHER FEES. The Bank, in some instances, receives
loan origination fees. Loan fees are a fixed dollar amount or a percentage of
the principal amount of the mortgage loan that is charged to the borrower for
funding the loan. The amount of fees charged by the Bank generally is 1% of the
loan amount. Current accounting standards require fees received (net of certain
loan origination costs) for originating loans to be deferred and amortized into
13
<PAGE>
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 $554,000 of unearned loan fees and discounts at
March 31, 1999.
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, 1999, the
Bank was servicing $150.5 million of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. When the Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. 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, 1999, the Bank held $1.8
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.
<TABLE>
<CAPTION>
At March 31,
------------
1997 1998 1999
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 526 $ 418 $ 386
Construction 595 36 44
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- 182
Consumer and other loans 4 -- --
------ ------ ------
Total 1,125 454 612
------ ------ ------
Accruing loans which are contractually
Past due 90 days or more:
Real estate loans:
Residential -- 2 --
Construction -- -- 13
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- --
Consumer and other loans -- -- --
------ ------ ------
Total -- 2 13
------ ------ ------
Total of nonaccrual and 90 days past
Due loans 1,125 456 625
Real estate owned 234 883 299
------ ------ ------
Total nonperforming assets $1,359 $1,339 $ 924
====== ====== ======
Restructured loans $1,742 -- $ 201
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 1.00% 0.31% 0.37%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.82% 0.25% 0.30%
Nonperforming assets as a percent of
total assets 0.99% 0.73% 0.54%
Total nonperforming assets to total loans 1.15% 0.87% 0.51%
</TABLE>
Interest income that would have been recorded for the year ended March
31, 1999 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $21,000. The amount of interest included in
interest income on such loans for the year ended March 31, 1999 amounted to
approximately $40,000.
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, 1999, the Bank had $299,000 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, 1999, classified assets of the Company totaled $1.7
million. Assets classified as loss totaled $26,000 and consisted of overdrawn
negotiable order of withdrawal ("NOW") accounts totaling $7,000 and installment
loans of $19,000. Assets classified as substandard totaled $697,000 and
consisted of REO totaling $299,000. Assets designated as special mention totaled
$967,000 and consisted of seven residential real estate loans totaling $587,000,
five installment loans totaling $198,000, and one commercial real estate loan
totaling $182,000. The aggregate amounts of the Bank's classified assets at the
dates indicated were as follows:
At March 31,
------------------------
1997 1998 1999
------ ------ ------
(In Thousands)
Loss $ 20 $ 19 $ 26
Doubtful -- -- --
Substandard 2,006 1,598 697
Special mention 618 569 967
------ ------ ------
Total classified assets $2,644 $2,186 $1,690
====== ====== ======
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, 1999, the Bank had an allowance for loan losses of $1.4
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.
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,
--------------------------
1997 1998 1999
------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Allowance at beginning of year $ 701 $ 974 $1,120
Provision for loan losses(1) 310 200 296
Recoveries -- -- 1
Charge-offs:
Real estate loans:
Residential -- -- 21
Construction 36 51 --
Agricultural -- -- --
Commercial -- -- --
Commercial non-real estate -- -- --
Consumer and other loans 1 3 35
------ ------ ------
Total charge-offs 37 54 56
------ ------ ------
Net charge-offs 37 54 55
------ ------ ------
Balance at end of year $ 974 $1,120 $1,361
====== ====== ======
Allowance for loan losses as a percent of total
loans receivable 0.82% 0.73% 0.76%
Net charge-offs to average outstanding loans 0.03% 0.04% 0.04%
</TABLE>
17
<PAGE>
(1) See "Item 6. Management's Discussion and Analysis or Plan of Operation
-- Comparison of Operating Results for the Years Ended March 31, 1998
and 1999 -- Provisions for Loan Losses" for a discussion of the factors
responsible for changes in the Bank's provision for loan losses between
the years.
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,
--------------------------------------------------------
1997 1998 1999
--------------------------------------------------------
(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 $ 317 65.32% $ 367 57.06% $ 288 46.54%
Construction 261 10.01 181 5.17 217 5.19
Agricultural 216 10.12 202 9.47 252 9.05
Commercial 97 4.55 310 18.84 527 28.62
Consumer and other loans 83 10.00 60 9.46 77 10.60
------ ------ ------ ------ ------ --------
Total allowance for loan losses $ 974 100.00% $1,120 100.00% $1,361 100.00%
====== ====== ====== ====== ====== ========
</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.
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that investments be categorized as "held-to-maturity," "trading securities" or
"available-for-sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held-to-maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as
"held-to-maturity." Debt and equity securities held for current resale are
classified as "trading securities." Such securities are reported at fair value,
and unrealized gains and losses on such securities would be included in
earnings. Debt and equity securities not classified as either "held-to-maturity"
or "trading securities" are classified as "available-for-sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity.
The 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
18
<PAGE>
engaging directly in hedging activities or purchasing high risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Bank's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Bank's credit and interest rate
risk, and risk-based capital is also given consideration during the evaluation.
Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage- backed securities only during times of
reduced loan demand
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)
1997 1998 1999
---- ---- ----
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 $ -- --% $ 2,654 16.09% $ 6,536 32.50%
Mortgage-backed securities 2,599 25.79 7,970 48.32 10,135 50.40
------- ------ ------- ------ ------- ------
Total available-for-sale 2,599 25.79 10,624 64.41 16,671 82.90
HELD-TO-MATURITY:
Investment securities 5,199 51.58 2,449 14.85 700 3.48
Mortgage-backed securities 2,281 22.63 3,420 20.74 2,739 13.62
------- ------ ------- ------ ------- ------
Total held-to-maturity 7,480 74.21 5,869 35.59 3,439 17.10
------- ------ ------- ------ ------- ------
Total $10,079 100.00% $16,493 100.00% $20,110 100.00%
======= ====== ======= ====== ======= ======
</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, 1999.
<TABLE>
<CAPTION>
Over Over
Less Than One to Five to Over Ten
One Year Five Years Ten Years Years
--------------- ------------- -------------- ---------------
(Dollars in Thousands)
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities $ 700 5.12% -- -- $ 853 7.75% $ 5,683 7.49%
Mortgage-backed
Securities -- -- -- -- 481 4.55 12,393 6.37
------- ---- ---- ---- ------- ---- ------- ----
Total $ 700 5.12% -- -- $ 1,334 6.60% $18,076 6.72%
======= ==== ==== ==== ======= ==== ======= ====
</TABLE>
19
<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, 1999, the Bank
had no brokered deposits. In March 31, 1999, certificates of deposit that are
scheduled to mature in less than one year totaled $51.4 million. See "Item 6.
Management's Discussion and Analysis or Plan of Operation -- Liquidity and
Capital Resources."
20
<PAGE>
The following table sets forth information concerning the Bank's
deposits at March 31, 1999.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Savings Deposits Amount Balance Deposits
---- ---------------- ------ ------- --------
(In Thousands, except minimum amount)
<S> <C> <C> <C> <C>
0.77% NOW $ -- $29,277 21.97%
3.22 Money Market Deposit -- 10,240 7.68
2.55 Passbook -- 14,958 11.22
------- ------
Total Checking & Passbook 54,475 40.87
Certificates of Deposit
-----------------------
3.88 7 days to 179 days 2,500 11,991 9.00
5.09 11 months special/non- 500 5,758 4.32
renewable
4.61 6 months to less than 1 year 1,000 8,908 6.69
3.03 14 months special/non- 500 323 0.24
renewable
5.12 1 year to less than 2 years 500 7,772 5.83
5.63 27 months special/non- 500 22,163 16.63
renewable
5.57 2 years to less than 3 years 500 7,133 5.35
5.48 New 2 years to 5 years- 100 4,215 3.16
Add on
5.34 3 years to less than 4 years 500 1,647 1.24
5.81 4 years to less than 5 years 500 2,585 1.94
6.19 5 years to less than 10 years 500 5,482 4.11
5.0 IRA Variable -- 826 0.62
-------- ------
Total Certificates of Deposit 78,803 59.13%
-------- ------
Total Deposits $133,278 100.00%
======== ======
</TABLE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 1999.
Jumbo certificates of deposit are certificates in amounts of more than $100,000.
Maturity Period Amount
--------------- ------
(In Thousands)
Three months or less $ 6,919
Over three through six months 2,056
Over six through 12 months 2,130
Over 12 months 3,141
-------
Total jumbo certificates of deposit $14,246
=======
21
<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,
-----------------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------
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 $ 15,943 14.82% $ 19,389 16.93% $ 3,446 $ 29,277 21.97% 9,888
Passbook accounts 14,164 13.16 13,418 11.72 (746) 14,958 11.22 1,540
Money market deposit
Accounts 6,968 6.48 9,078 7.93 2,110 10,240 7.68 1,162
Fixed-rate certificates
which mature:
Within 1 year 53,120 49.37 52,836 46.15 (284) 51,365 38.54 (1,471)
After 1 year, but within
2 years 11,139 10.35 13,111 11.45 1,972 21,838 16.39 8,727
After 2 years, but within
5 years 6,241 5.80 6,626 5.79 385 5,386 4.04 (1,240)
Certificates maturing
thereafter 21 0.02 37 0.03 16 214 0.16 177
-------- ------ -------- ------ -------- -------- ------ --------
Total $107,596 100.00% $114,495 100.00% $ 6,899 $133,278 100.00% $ 18,783
======== ====== ======== ====== ======== ======== ====== ========
</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,
------------
1997 1998 1999
------- ------- -------
(In Thousands)
2.0 - 2.99% $ -- $ -- $ 689
3.0 - 3.99% 997 1,001 10,758
4.0 - 4.99% 7,132 7,995 17,314
5.0 - 5.99% 42,816 55,992 45,354
6.0 - 6.99% 17,082 6,638 3,794
7.0 - 7.99% 1,990 483 402
8.0 - 8.99% 51 49 47
9% and over 453 452 445
------- ------- -------
Total $70,521 $72,610 $78,803
======= ======= =======
22
<PAGE>
The following table sets forth the amount and maturities of time deposits at
March 31, 1999.
<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> <C>
2.0 - 2.99% $ 689 $ -- $ -- $ -- $ -- $ 689 0.87%
3.0 - 3.99% 9,426 1,276 56 -- -- 10,758 13.65
4.0 -4.99% 10,813 5,355 866 174 106 17,314 21.97
5.0 - 5.99% 26,940 14,751 687 613 2,363 45,354 57.55
6.0 - 6.99% 3,478 316 -- -- -- 3,794 4.82
7.0 - 7.99% 6 111 218 -- 67 402 0.51
8.0 - 8.99% 4 8 35 -- -- 47 0.06
9% and over 9 21 415 -- -- 445 0.57
------- ------- ------- ------- ------- ------- -----------
Total $51,365 $21,838 $ 2,277 $ 787 $ 2,536 $78,803 100.00%
======= ======= ======= ======= ======= ======= ===========
</TABLE>
DEPOSIT ACTIVITY. The following table sets forth the deposit activities
of the Bank for the years indicated.
Year Ended March 31,
----------------------
1997 1998 1999
--------- --------- ---------
(In Thousands)
Beginning balance $ 115,324 $ 107,596 $ 114,495
--------- --------- ---------
Net increase (decrease)
before interest credited (11,902) 3,396 13,864
Interest credited 4,174 3,503 4,919
--------- --------- ---------
Net increase (decrease)
in savings deposits (7,728) 6,899 18,783
--------- --------- ---------
Ending balance $ 107,596 $ 114,495 $ 133,278
========= ========= =========
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.
23
<PAGE>
The following tables set forth certain information regarding borrowings
by the Bank for the years indicated:
<TABLE>
<CAPTION>
At or For the
Year Ended March 31,
-----------------------------------------------
1997 1998 1999
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances outstanding
At any month end during the year $15,060 $39,323 $47,227
Approximate average FHLB advances
Outstanding during the year 8,488 32,566 41,107
Balance of FHLB advances outstanding
at end of year 13,922 35,656 42,027
Weighted average rate paid on
FHLB advances at end of year 5.87% 5.84% 5.51%
Approximate weighted average rate paid on
FHLB advances during the year 5.90% 6.26% 5.72%
</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 $16,200 $13,656 $10,750 $1,421
Percentage of total advances 38.55% 32.49% 25.58% 3.38%
</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 Bank's. Particularly in times of high
interest rates, the Bank has faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The Bank's competition for loans comes from commercial
banks and other thrifts operating in its market as well as from mortgage bankers
and brokers, consumer finance companies, and, with respect to agricultural
loans, government sponsored lending programs. Such competition for deposits and
the origination of loans may limit the Bank's growth and profitability in the
future.
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, 1999, the
Bank's equity investment in its subsidiary was $47,000.
24
<PAGE>
PERSONNEL
As of March 31, 1999, the Bank had 97 full-time and 13 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank believes its relationship with its employees to be good.
REGULATION
FIRSTBANK NORTHWEST
GENERAL. As a state-chartered, federally insured depository
institution, the Bank is subject to extensive regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The Bank is
regularly examined by the FDIC and the Washington Department of Financial
Institutions, Division of Banks ("Division") and files periodic reports
concerning the Bank's activities and financial condition with its regulators.
The Bank's relationship with depositors and borrowers also is regulated to a
great extent by both federal law and the laws of the State of Washington,
especially in such matters as the ownership of savings accounts and the form and
content of mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe or unsound practices.
STATE REGULATION AND SUPERVISION. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington State law and the
regulations of the Division adopted thereunder. Washington State law and
regulations govern the Bank's ability to take deposits and pay interest thereon,
to make loans on or invest in residential and other real estate, to make
consumer loans, to invest in securities, to offer various banking services to
its customers, and to establish branch offices. Under state law, savings banks
in Washington also generally have all of the powers that federal mutual savings
banks have under federal laws and regulations. The Bank is subject to periodic
examination and reporting requirements by and of the Division.
DEPOSIT INSURANCE. The FDIC 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
25
<PAGE>
deposits. The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund, 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, 1999, 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.
26
<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, 1999, the Bank had a Tier 1
capital to average assets ratio of 10.2%, a Tier 1 capital to risk-weighted
assets ratio of 14.4%, and a Total capital to risk-weighted assets ratio of
15.4%.
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 and/or
27
<PAGE>
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, 1999, 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 examination of a
28
<PAGE>
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 Company. The amount of dividends
payable by the Bank to the 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 and consumer-related
29
<PAGE>
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, 1999, the Bank was in compliance with
the QTL test.
ITEM 2. DESCRIPTION OF PROPERTIES
The Bank operates seven full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville, Coeur d'Alene, and Post Falls, Idaho, and
Clarkston, Washington. The Company owns the Lewiston, Lewiston Orchards, Moscow,
Grangeville, and Coeur d'Alene facilities, leases the Washington building on a
month-to-month tenancy for three years which began July 1, 1997, and leases the
in store location of the Post Falls branch on a month-to-month tenancy with
Tidymans which began March 1, 1999. The Bank also operates one loan production
office in Coeur d'Alene, Idaho, which is located in the same facility as its
full-service office, and one loan production office in Lewiston, Idaho, which is
a leased building adjacent to the Lewiston facilities. 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, 1999, the net book value of the properties
(including land and buildings) and the Bank's fixtures, furniture and equipment
was $5.3 million. The Company believes that its existing facilities are adequate
for the current level of operations.
ITEM 3. LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Bank, mainly as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Bank's business. The Company and the Bank are not a party to any
pending legal proceedings that it believes would have a material adverse effect
on the financial condition or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1999.
30
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on the Nasdaq National Market
under the symbol FBNW. The table below reflects the high and low closing and
sales prices of the common stock and cash dividends paid per share for the last
three fiscal years. The common stock began trading on July 2, 1997. At March 31,
1999 there were 331 record holders of common stock of the Company.
<TABLE>
<CAPTION>
1999 High Low Dividends
---- ---- --- ---------
<S> <C> <C> <C>
First Quarter $23.500 $19.500 $0.08
Second Quarter 24.000 13.750 0.08
Third Quarter 17.375 12.688 0.09
Fourth Quarter 18.000 14.000 0.09
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
</TABLE>
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.
31
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
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. Additional expenses that will be incurred in fiscal
2000 are related to the new in-store branch in Post Falls, Idaho, the new branch
which is to open this Fall in Liberty Lake, Washington, and the Management
Recognition and Development Plane (MRDP). The conversion from the present
service bureau to an in-house system will result in an assessment of a penalty,
de-conversion and related costs of over $120,000, to be incurred in June 1999.
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 continue to expand its agricultural
real estate and commercial real estate lending activities. The Company also
intends to pursue the expansion 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 but involve greater credit risk. As part of this strategy, the
Company hired an experienced commercial loan officer to head the commercial loan
department in fiscal 1997. In fiscal 1998, the commercial department added three
experienced officers and the agricultural department expanded its lending
32
<PAGE>
capabilities with the addition of two locally established loan officers. In
fiscal 1999, the commercial department added another experienced loan officer
that resides in the Moscow, Idaho area. During fiscal year 2000, the commercial
department will strengthen its presence in the Coeur d'Alene area by adding a
loan officer. There can be no assurances that the Company will be successful in
its efforts to increase its originations of these types of loans. Management
anticipates that the Company will incur significant other expenses in connection
with the implementation and maintenance of its online banking programs, and as
various programs and services, such as its commercial real estate and business
lending operations, are 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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND MARCH 31, 1999
Total assets increased $23.2 million, or 12.6%, from $183.6 million at
March 31, 1998 to $206.8 million at March 31, 1999. The growth in assets is
primarily attributable to an increase in loans receivable and investment and
mortgage-backed securities, resulting primarily from the increased deposits and
FHLB advances. Net loans receivable increased from$145.7 million at March 31,
1998 to $165.6 million at March 31, 1999. The mix of loans has changed
reflecting the Company's community banking strategy. In real estate loans,
residential mortgage loans decreased from 57.0% to 46.5% of total loans,
construction loans stayed consistent at 5.2% agricultural loans decreased from
9.5% to 9.1% and commercial real estate loans increased from 8.0% to 13.1%. In
non-real estate loans, home equity lines decreased from 4.0% to 3.3%,
agricultural operating lines increased from 1.5% to 2.4%, commercial business
loans increased from 10.8% to 15.6% and other consumer loans increased from 4.0%
to 4.8%. Included in the March 31, 1999 residential real estate loan balance is
$7.0 million of fixed interest equity loans secured by second liens; if these
had been classified as consumer loans, the real estate residential loan ratio
would have been 42.6% and home equity would have been 7.2% of total loans. These
ratios reflect the Bank's move to a more commercial banking mix of assets.
During the year ended March 31, 1999, the Company retained for its portfolio
fixed-rate mortgage loans with terms of 15 years or less totaling $11.1 million.
Cash and cash equivalents increased from $8.4 million to $8.5 million and
investment securities increased from $5.1 million to $7.2 million.
Mortgage-backed securities increased from $11.4 million to $12.9 million, due to
a portion of FHLB advances being invested in collateralized mortgage
obligations.
Total liabilities increased from $153.6 million at March 31, 1998 to
$179.0 million at March 31, 1999. Deposits increased $18.8 million from $114.5
million at March 31, 1998 to $133.3 million at March 31, 1999. Of the $18.8
million gain, $12.6 was in core deposit accounts. Presently 52.0% of checking
accounts are non-interest bearing. FHLB advances increased from $35.7 million at
March 31, 1998 to $42.0 million at March 31, 1999. Included in these advances is
$15.8 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, 1998 AND 1999
GENERAL. Net income increased $330,000, from $1.7 million ($0.93 per
share - basic and diluted) for the year ended March 31, 1998 to $2.0 million
($1.16 per share - basic; $1.13 per share - diluted) for the year ended March
31, 1999. The Company experienced an increase in net interest income and
non-interest income in fiscal 1999 compared to fiscal 1998. However, these
increases were partially offset by an increase in non-interest expense. The
non-interest expenses included opening a new branch office, expanding staff,
offering new services and expensing items not able to be capitalized related to
purchasing and installing new telephone lines.
NET INTEREST INCOME. Net interest income increased $990,000, or 14.7%,
from $6.7 million for the year ended March 31, 1998 to $7.7 million for the year
ended March 31, 1999. The most significant portion of this increase was a result
of decreasing cost of funds greater than the small decline in loan yields. The
Company's interest rate spread between the yield on interest-earning assets and
the rate paid on interest-bearing liabilities increased from 3.78% for fiscal
1998 to 3.88% for fiscal 1999.
Total interest income increased $1.7 million from $13.3 million for the
year ended March 31, 1998 to $15.0 million for the year ended March 31, 1999.
Interest income on loans receivable increased $1.6 million, or 13.9%, from $11.7
33
<PAGE>
million for fiscal 1998 to $13.3 million for fiscal 1999. The increase was the
result of a larger average balance of loans in fiscal 1999. Interest income on
mortgage-backed and related securities increased $11,000 from fiscal 1998 to
fiscal 1999 primarily as a result of a larger average balance of mortgage-backed
securities in fiscal 1999 offset by a decreasing yield caused by higher
pre-payments. Interest income on additional investment securities increased
$9,000, from fiscal 1998 to fiscal 1999 as a result of purchasing additional
Bank Qualified Idaho Municipal Bonds, which increased the average balance.
Interest income on other interest-earning assets decreased slightly from fiscal
1998 to fiscal 1999 as a result of lower yields in 1999.
Interest expense increased by $650,000, from $6.6 million for the year
ended March 31, 1998 to $7.2 million for the year ended March 31, 1999. Interest
expense on deposits increased $210,000, or 4.5%, from fiscal 1998 to fiscal
1999. The average balance of deposits increased from fiscal 1998 to fiscal 1999,
and the average rate paid on deposits decreased. Interest expense on FHLB
advances increased $440,000 from $1.9 million in fiscal 1998 to $2.4 million in
fiscal 1999 as a result of a larger average balance of outstanding borrowings in
fiscal 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $296,000
for the year ended March 31, 1999 compared to $200,000 for the year ended March
31, 1998. Management continues to increase the provision for loan losses as a
result of the growth experienced in the loan portfolio, specifically the growth
of commercial and consumer loans, which generally are riskier than residential
mortgage loans. The Company's allowance for loan losses was $1.4 million or
0.76% of total loans receivable, at March 31, 1999, compared to $1.1 million, or
0.73% of total loans receivable, at March 31, 1998. Net loan charge-offs were
$55, 000 during both fiscal 1999 and fiscal 1998.
NON-INTEREST INCOME. Total non-interest income increased $820,000, or
36.1%, from fiscal 1998 to fiscal 1999. Income on gain on sales of loans
increased $640,000, or 63.2%, from fiscal 1999 to fiscal 1998 because of higher
volume of sold loans that were originated during the year. Service fees and
charges increased $165,000, 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 $16,000, resulting
from higher life and accidental health insurance sales on installment loans.
NON-INTEREST EXPENSE. Total non-interest expense increased $1.4
million, or 22.9%, from $6.2 million for the year ended March 31, 1998 to $7.6
million for the year ended March 31, 1999. Compensation and related benefits
increased $740,000, or 20.8%, from fiscal 1998 to fiscal 1999. Occupancy
expenses increased $100,000, or 13.6% and data processing expenses increased
$190,000, or 66.8%, between the periods, while professional fees decreased
$43,000. These increases were primarily the result of the increased level of
operations in 1999 undertaken by the Company. All other non-interest expenses
increased approximately $420,000, or 31.8%.
INCOME TAXES. Income taxes were $923,000 for the year ended March 31,
1999 compared with $944,000 for the year ended March 31, 1998. The decrease in
the effective income tax rate was due to an increase in fiscal 1999 tax exempt
interest income.
34
<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 tax
effected yields and costs. Such yields and costs for the years indicated are
derived by dividing tax effected income or expense by the average 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,
---------------------------------------------------------------------------------------
1997 1998 1999
---- ---- ----
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 $106,295 $ 9,249 8.70% $133,294 $11,695 8.82% $155,860 $13,315 8.64%
Mortgage-backed securities 2,588 147 5.68 9,589 613 6.39 11,111 623 5.61
Investment securities 8,955 534 5.96 5,164 292 6.33 6,816 302 6.22
Other earning assets 5,834 262 4.49 10,005 721 7.21 9,972 721 7.23
-------- ------- -------- ------- -------- -------
Total interest-earning assets 123,672 10,192 8.24 158,052 13,321 8.49 183,759 14,961 8.29
Non-interest-earning assets 6,259 9,011 13,067
-------- -------- --------
Total assets $129,931 $167,063 $196,826
======== ======== ========
Interest-earning liabilities:
Passbook, NOW and money
market accounts $ 36,457 818 2.24 $ 38,245 890 2.33 $ 46,749 877 1.88
Certificates of deposit 72,550 4,021 5.54 70,743 3,769 5.33 76,107 3,993 5.25
-------- ------- -------- ------- -------- -------
Total deposits 109,007 4,839 4.44 108,988 4,659 4.27 122,856 4,870 3.96
Advances from FHLB 8,080 499 6.18 30,560 1,914 6.26 41,107 2,353 5.72
-------- ------- -------- ------- -------- -------
Total interest-bearing
Liabilities 117,087 5,338 4.56 139,548 6,573 4.71 163,963 7,223 4.41
------- ------- -------
Non-interest-bearing
Liabilities 2,003 3,067 3,574
-------- -------- --------
Total liabilities 119,090 142,615 167,537
-------- -------- --------
Total stockholders' equity 10,841 24,448 29,289
-------- -------- --------
Total liabilities and
total stockholders' equity $129,931 $167,063 $196,826
======== ======== ========
Net interest income $ 4,854 $ 6,748 $ 7,738
======= ======= =======
Interest rate spread 3.68% 3.78% 3.88%
==== ==== ====
Net interest margin 3.92% 4.27% 4.36%
====== ======= =======
Ratio of average interest-
earning assets to average
interest- bearing liabilities 105.62% 113.26% 112.07%
====== ======= =======
</TABLE>
(1) Does not include interest on loans 90 days or more past due.
35
<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, 1998 Year Ended March 31, 1999
Compared to Year Ended Compared to Year Ended
March 31, 1997 March 31, 1998
-------------- --------------
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) $ 75 $ 2,352 $ 19 $ 2,446 $ (308) $ 1,980 $ (52) $,1620
Mortgage-backed securities 18 398 50 466 (75) 97 (12) 10
Investment securities (28) (226) 12 (242) (63) 93 (20) 10
Other earning assets 159 187 113 459 2 (2) -- --
------- ------- ------- ------- ------- ------- ------- -------
Total net change in income
on interest-earning assets 224 2,711 194 3,129 (444) 2,168 (84) 1,640
------- ------- ------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Passbook, NOW and money
market accounts 30 40 2 72 (173) 198 (38) (13)
Certificates of deposit (156) (100) 4 (252) (57) 285 (4) 224
FHLB advances 7 1,388 20 1,415 (165) 661 (57) 439
------- ------- ------- ------- ------- ------- ------- -------
Total net change in expense
on interest-bearing liabilities (119) 1,328 26 1,235 (395) 1,144 (99) 650
------- ------- ------- ------- ------- ------- ------- -------
Net increase (decrease) in net
interest income $ 343 $ 1,383 $ 168 $ 1,894 $ (49) $ 1,024 $ 15 $ 990
======= ======= ======= ======= ======= ======= ======= =======
</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 of funds. As part of its interest rate risk
management strategy, the Company promotes non-interest-bearing transaction
36
<PAGE>
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, 1999 as compared
to the 10.00% Board approved policy limit.
-200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $7,814 $8,024 $8,055
NII $ Change $ (210) -- $ 31
NII % Change -2.62% -- 0.39%
The preceding sensitivity analysis does not represent a Company
forecast and should not be relied upon as being indicative of expected future
operating results. These hypothetical estimates are based upon numerous
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows, and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.
37
<PAGE>
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, 1999, cash and cash
equivalents totaled $8.5 million, or 4.1% 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
$42.0 million at March 31, 1999.
The primary investing activity of the Company is the origination of
mortgage loans. During the years ended March 31, 1998 and 1999, the Company
originated loans in the amounts of $145.3 million and $165.6 million,
respectively. At March 31, 1999, the Company had loan commitments totaling $22.0
million, undisbursed lines of credit totaling $15.1 million, credit card
available balances of 1.7 million and undisbursed loans in process totaling
$12.2 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, 1999
totaled $51.4 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, 1999, the
Bank was in compliance with all regulatory capital requirements which were
effective as of such date with Tier 1 Capital to average assets, Tier 1 Capital
to risk-weighted assets and total capital to risk-weighted assets of 10.2%,
14.4%, and 15.4%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- State Regulation and Supervision" and "--
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. 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 following guidelines are identify the five steps
provided by The Federal Financial Institutions Examination Council ("FFIEC"):
Awareness Phase - Define the Year 2000 problem and establish a Year
2000 program team and overall strategy. The Company as of September 30, 1997
completed this step.
Assessment Phase - Assess the size and complexity of the problem and
detail the magnitude of effort necessary to address Year 2000 issues, including
hardware, software, networks, automated teller machines, etc. This step was
approximately 99% complete by March 31, 1999 and assessment will be ongoing
until the Year 2000.
38
<PAGE>
Renovation Phase - This phase includes hardware and software upgrades
and system replacements. This step was 100% complete for in-house systems at
December 31, 1998. This phase also encompasses ongoing discussions with and
monitoring of outside servicers and third- party software providers.
Validation/Testing Phase - This process includes testing of hardware
and software components. Testing is completed by performing extensive tests with
the computer dates changed to January 1, 2, and 3, 2000. Such testing will
continue through June 30, 1999, with the most critical functions tested first.
This allows time to correct any discovered deficiencies before the end of 1999.
In-house systems and third party service bureaus are 100% tested as of March 31,
1999. The Company is either testing or reviewing test documents of additional
third party vendors that are deemed critical to the operations of the Company.
Overall, the validation phase is approximately 85% complete as of March 31,
1999.
Implementation Phase - Systems successfully tested will be certified as
Year 2000 compliant. For any system failing validation testing, the business
impact must be assessed and a contingency plan implemented. This phase is
scheduled for completion by June 30, 1999.
Critical data processing applications, in addition to those provided by
the service bureau, have been identified. These include applications such as
electronic processing through the Federal Reserve Bank and ATM processing.
Testing with Federal Reserve has been successfully completed. All ATM machines
have been upgraded and are now ready for Year 2000. Contingency plans are also
being developed by the committee. The contingency plans address actions to be
taken to continue operations in the event of system failure due to areas that
cannot be tested in advance, such as power service, which are vital to business
continuation. Contingency planning is scheduled for completion by June 30, 1999.
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 intended to complete its
year 2000 adjustment by June 1998 and to make its systems available for testing
in December 1998. Testing by the Bank was completed in October 1998 and
management was satisfied with the results. 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 $20,000. Such
costs are expected to be incurred during fiscal 2000. During fiscal 1999,
$65,000 was spent on Year 2000 preparation. 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 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.
All new commercial and agricultural loans over $100,000 are assessed
for Year 2000 risk. Loans are then rated low, medium or high risk. A higher
reserve level will be maintained for medium and high-risk loans. All existing
commercial and agriculture loans over $100,000 have been rated: 1 loan rated at
the highest risk and 12 at medium risk.
The Bank has assessed its liquidity needs and believes there will be
adequate funds available from FHLB or the Portland Federal Reserve.
In June of 1999, the Bank will be converting from a service bureau to
an in-house computer system. This system will be a client/server system that was
developed from 1992 to 1996 with Year 2000 compliance as a priority. Part of the
conversion process is to test the interfaces to outside vendors. The Bank has a
complete separate system set up solely for the purpose of Year 2000 testing.
Test scripts will be run prior to the June conversion, and a review of the proxy
testing manuals provided by the Software Company will be completed.
39
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in all fiscal quarters of fiscal years beginning after
June 15, 1999. The statement requires companies to recognize all derivative
contracts as either assets or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. The Company is currently evaluating the financial statement impact of
adopting SFAS No. 133.
In June 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires all start-up and organizational costs to be expensed as incurred. It
also requires all remaining historically capitalized amounts of these costs
existing at the date of adoption to be expensed and reported as the cumulative
effect of a change in accounting principle. SOP 98-5 is effective for all fiscal
years beginning after December 31, 1998. The Company believes that the adoption
of SOP 98-5 will not have a significant effect on its financial statements.
In October 1998, the Financial Accounting Standards Board issued SFAS
No. 134, "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This statement effectively changes the way mortgage banking firms
account for certain securities and other interests they retain after
securitizing mortgage loans that were held for sale. The Company believes that
the adoption of SFAS No. 134 will not have a significant effect on the its
financial statements.
In February 1999, the Financial Accounting Standards Board issued SFAS
No. 135, "Rescission of Financial Accounting Standards Board No. 75 and
Technical Corrections." SFAS No. 135 rescinds SFAS No. 75 and amends SFAS No.
35. SFAS No. 135 also amends other existing authoritative literature to make
various technical corrections, clarify meanings, or describe applicability under
changed conditions. SFAS No. 135 is effective for financial statements issued
for fiscal years ending after February 15, 1999. The Company believes that the
adoption of SFAS No. 135 will not have a significant effect on its 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.
40
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference
under the caption "Consolidated Financial Statements" in the 1999 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information concerning the Company's directors required by this
Item is incorporated by reference from the information set forth under the
caption "Proposal 1 - Election of Directors" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Stockholders to be held on July 21,
1999 (the "1999 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 1999 Proxy Statement.
EXECUTIVE OFFICERS OF THE COMPANY AND BANK
Age at
March 31, Position
Name 1999 Company -------- Bank
- ---- ---- ------- ----
Clyde E. Conklin 47 President and Chief Executive Chief Executive
Officer Officer
Larry K. Moxley 48 Executive Vice President, Chief Financial
Chief Financial Officer and Officer and
Corporate Secretary Secretary/Treasurer
Terence A. Otte 42 -- Senior Vice President,
Agricultural and
Consumer Lending
Donn L. Durgan 44 -- Senior Vice President,
Residential Lending
Douglas R. Ax 43 -- Senior Vice President,
Commercial Lending
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.
41
<PAGE>
LARRY K. MOXLEY, who joined the Bank in 1973, currently serves as Chief
Financial Officer of the Bank, which position he has held since February 1996.
Mr. Moxley served as Senior Vice President - Finance from 1993 to February 1996
and as Vice President Finance from 1984 to 1993.
TERENCE A. OTTE joined the Bank in June 1989 as an Agricultural Loan
Officer. From 1991 to 1994, he served as manager of the Bank's Moscow, Idaho
branch. In 1994 he became Vice President-Lending and Agricultural Lending
Manager and in 1996 became Vice President, Agricultural and Consumer Lending and
Compliance Officer.
DONN L. DURGAN, who joined the Bank in February 1996, currently serves
as Vice President, Residential Lending. Prior to that time, Mr. Durgan was
employed by First Security Bank for 11 years in various positions in commercial
and residential real estate lending.
DOUGLAS R. AX, who joined the Bank in January 1997, currently serves as
Vice President, Commercial Lending. Prior to that time, Mr. Ax was employed by
West One Bank (which became U.S. Bank) for over nine years in various positions
in commercial lending, most recently as a Vice President and Commercial Loan
Officer.
ITEM 10. EXECUTIVE COMPENSATION
The information provided by this Item is incorporated by reference to
the information under the captions "Directors' Compensation" and "Executive
Compensation" in the 1999 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 1999 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 1999
Proxy Statement.
42
<PAGE>
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Registrant*
3.2 Bylaws of the Registrant*
10.1 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Clyde E. Conklin
10.2 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Larry K. Moxley*
10.3 Salary Continuation Agreement between First Federal
Bank of Idaho F.S.B. and Clyde E. Conklin*
10.4 Salary Continuation Agreement between First Federal
Bank of Idaho, F.S.B. and Larry K. Moxley*
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- -------------------
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (File No. 333-23395).
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended
March 31, 1999.
43
<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 18,1999 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 18, 1999
- --------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)
/s/ LARRY K. MOXLEY Chief Financial Officer June 18, 1999
- --------------------------- and Director (Principal
Larry K. Moxley Financial Officer)
/s/ CYNTHIA M. MOORE Controller June 18, 1999
- --------------------------- (Principal Accounting
Cynthia M. Moore Officer)
/s/ WILLIAM J. LARSON Director June 18, 1999
- ---------------------------
William J. Larson
/s/ STEVE R. COX Director June 18, 1999
- ---------------------------
Steve R. Cox
/s/ ROBERT S. COLEMAN, SR. Director June 18, 1999
- ---------------------------
Robert S. Coleman, Sr.
/s/ JAMES N. MARKER Director June 18, 1999
- ---------------------------
James N. Marker
/s/ W. DEAN JURGENS Director June 18, 1999
- ---------------------------
W. Dean Jurgens
44
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
FirstBank Corp.
Percentage Jurisdiction or
Subsidiaries (1) of Ownership State of Incorporation
- ---------------- ------------ ----------------------
FirstBank Northwest 100% Washington
Tri-Star Financial Corporation 100% Idaho
(1) These subsidiaries were acquired by the parent effective July 1, 1997.
The operations of the Registrant's subsidiaries are included in the
Registrant's consolidated financial statements.
<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, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035513
<NAME> FirstBank Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 8,536
<INT-BEARING-DEPOSITS> 1,503
<FED-FUNDS-SOLD> 2,309
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,671
<INVESTMENTS-CARRYING> 3,439
<INVESTMENTS-MARKET> 3,400
<LOANS> 165,617
<ALLOWANCE> 1,361
<TOTAL-ASSETS> 206,745
<DEPOSITS> 133,278
<SHORT-TERM> 16,200
<LIABILITIES-OTHER> 3,665
<LONG-TERM> 25,827
0
0
<COMMON> 20
<OTHER-SE> 27,754
<TOTAL-LIABILITIES-AND-EQUITY> 206,745
<INTEREST-LOAN> 13,315
<INTEREST-INVEST> 925
<INTEREST-OTHER> 721
<INTEREST-TOTAL> 14,961
<INTEREST-DEPOSIT> 4,870
<INTEREST-EXPENSE> 7,223
<INTEREST-INCOME-NET> 7,738
<LOAN-LOSSES> 296
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,593
<INCOME-PRETAX> 2,955
<INCOME-PRE-EXTRAORDINARY> 2,955
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,032
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 4.00
<LOANS-NON> 612
<LOANS-PAST> 13
<LOANS-TROUBLED> 201
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,120
<CHARGE-OFFS> 56
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,361
<ALLOWANCE-DOMESTIC> 1,361
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
