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As filed with the Securities and Exchange Commission on June 30, 1998
Registration No. 000-24151
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
Amendment No. 1
INLAND NORTHWEST BANCORPORATION, INC.
(Name of Small Business Issuer in its charter)
WASHINGTON 91-1574174
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
421 WEST RIVERSIDE, SUITE 113 99201-0403
SPOKANE, WASHINGTON (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (509) 456-8888
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
NONE NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE PER SHARE
(Title of class)
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PART I
(ALTERNATIVE 2)
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Inland Northwest Bancorporation, Inc. ("the Company") was incorporated as a
Washington corporation on December 10, 1991. It was formed at the request of
the Board of Directors of Inland Northwest Bank, a Washington state - chartered
commercial bank (the "Bank"), for the purpose of eventually becoming the bank
holding company parent of the Bank and any other subsidiaries which might be
established from time to time.
In 1993, the Company became the bank holding company parent of the Bank by
acquiring all the outstanding shares of common stock of the Bank in exchange for
an equal number of shares of common stock of the Company pursuant to a Plan of
Exchange dated March 23, 1993, as amended April 1, 1993, between the Company and
the Bank (the "Plan of Exchange"). The Board of Governors of the Federal
Reserve System approved the Company's application for permission to act as a
bank holding company on March 23, 1993. The shareholders of the Bank approved
the transaction on May 10, 1993. The State of Washington, Division of Banking,
approved the transaction on May 13, 1993, as a reorganization of the Bank into a
wholly-owned subsidiary of the Company, and the State of Washington issued a
Certificate of Reorganization as of that date to effect the transaction. In
accordance with the provisions of the Plan of Exchange, the transaction did not
become effective until June 10, 1993. Since then, the Bank has been a wholly-
owned subsidiary of the Company.
The Bank initially commenced operations on October 2, 1989 as a Washington
state-chartered commercial bank. During 1995, it transferred its corporate
domicile and state bank charter to Idaho in order to implement branching
activity in that state. During 1997, it re-transferred its corporate domicile
and state bank charter to Washington.
On February 27, 1998, the Company established a second subsidiary by
acquiring all of the outstanding common stock of Hege Company, Inc., a
Washington corporation doing business as Creative Mortgages and is engaged in
business as a non-supervised mortgage loan correspondent, in exchange for 2,385
shares of common stock of the Company. The shares were considered to have an
agreed market value of $28 per share, for total consideration of $66,780, plus
an additional cash payment of $145,567. The Stock Purchase Agreement is dated
February 23, 1998 between the Company, Hege Company, Inc. and its shareholders.
The Board of Governors of the Federal Reserve System approved the Company's
application to make the acquisition on February 27, 1998. In connection with
the acquisition, the mortgage broker subsidiary's name was changed to INB
Mortgage Company ("INB Mortgage"). Since the acquisition, INB Mortgage has been
a wholly-owned subsidiary of the Company.
The acquisition is being accounted for by the Company under the purchase
method of accounting, and the Company will recognize goodwill of $198,498 as a
result of the acquisition. After the acquisition, the Company increased the
capitalization of INB Mortgage by making an additional capital contribution of
$300,000 on March 3, 1998 in order to qualify INB Mortgage
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under applicable regulations to engage in additional types of correspondent
mortgage loan business. In connection with the acquisition, the Company arranged
for a $500,000 non-revolving line of credit with Key Bank of Washington. The
purpose of the line is to provide funding for the acquisition and the increased
capitalization of INB Mortgage. The line is priced at 91% of Key Bank Prime Rate
and calls for interest-only payments during the first year. Principal payments
begin two years after the date of origination and are due in four, equal, annual
installments.
Since the acquisition occurred after the Company's most recent fiscal year
ended December 31, 1997, the historical financial and other information about
the Company and its subsidiaries contained in this Form 10-SB do not reflect
that acquisition. In addition, since the acquisition is not material to the
Company under applicable accounting principles and requirements, the Company
will not be preparing pro forma financial statements for the acquisition.
GENERAL
THE COMPANY. The Company was formed because a bank holding company can
engage in certain types of financial activities not available to a commercial
bank. Over recent years, the Company has grown through the growth of the Bank,
its only subsidiary during this period. The Company recently expanded its
business through the acquisition of its INB Mortgage subsidiary. Although the
Company's management continues to consider the possibility of providing local
loan servicing for real estate mortgages or providing data processing services
for other financial institutions or other business opportunities, the Company's
Board of Directors currently has not authorized and the Company currently has
not established, any independent business activity apart from acting as the
holding company parent of the Bank and INB Mortgage. At least some of the costs
and expenses associated with any new business activity initially will need to be
funded through dividends received by the Company from the Bank or INB Mortgage.
Consequently, the Company may not be able to engage in any new business activity
if the associated costs and expenses would require the payment of a dividend
from the Bank or INB Mortgage that would adversely affect the Bank's ability to
conduct its banking activities or INB Mortgage's ability to conduct its mortgage
loan activities.
Since the primary asset of the Company currently continues to be the common
stock of the Bank, the Bank's operating results, financial position, and power
and ability to provide dividends to the Company will directly and materially
affect the operating results, financial position and liquidity of the Company.
The operating results of the Bank depend primarily on its net interest and
dividend income, which is the difference between (i) interest and dividend
income on earnings assets, primarily loans and investment securities, and (ii)
interest expense on interest bearing liabilities, which primarily consist of
deposits and borrowings. Also affecting the Bank's operating results are the
level of the provision for loan losses; the level of other operating income,
such as service charges on deposits and gains or losses on the sale of
investment securities; the level of operating expenses; and income taxes. With
the acquisition of INB Mortgage and at such time as the Company may engage in
any other business activities, the success or failure of these business
activities and the associated costs and expenses would be additional factors
affecting the operating results, financial position and liquidity of the
Company. Consequently, the position of a holding company with more diverse
business activities will be different from the position of a holding company
with a single bank subsidiary.
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THE BANK. The Bank's principal office and main branch is located in the
downtown business core of Spokane, Washington, and it has nine other branches
located in the Spokane, Washington, Coeur d'Alene, Idaho and Post Falls, Idaho
areas. The Bank considers eastern Washington and northern Idaho to be its
primary market area. The majority of the Banks' deposits and loans are generated
in Spokane County, Washington, (with a population in excess of 409,000) and
Kootenai County, Idaho, (with a population in excess of 100,000). There is
little concentration of industry in the two counties. A historical reliance on
the natural resources based timber, agricultural, and mining industries has
given way to a focus on trades and services, including high-tech services. The
city of Spokane serves as the hub of an area known as the Inland Northwest that
includes thirty-six counties in eastern Washington, northern Idaho, western
Montana and northeastern Oregon, home to 1.7 million residents. As a regional
trade center, the Spokane market area extends to southern British Columbia and
Alberta with a population base exceeding 3 million. The largest employers in the
area are Fairchild Air Force base, with 4,988 military and 998 civilian
employees, and Kaiser Aluminum & Chemical Corporation, with 2,633 employees.
Several regional hospitals report in excess of 1,000 full-time equivalent
employees. For the most part, however, employment in the area is well
diversified with a 500 employee firm considered a large company by area
standards.
The Spokane County civilian labor force reports levels at 159,000 in 1985,
171,900 in 1990, 189,500 in 1994, and, 198,000 in 1995. Employment in 1995 is
divided among major sectors as follows: Finance, Insurance & Real Estate,
10,200; Manufacturing, 21,500; Government, 29,800; Wholesale & Retail Trade,
45,900; and, Services, 53,100. Kootenai County is similarly diversified, with a
focus on outdoor recreational activities and related services. The median
household income in Spokane County has increased from $32,990 in 1994 to $33,769
in 1995 to $34,612 in 1996 and to an estimated $35,837 in 1997. Kootenai COunty
reports similar, but somewhat higher, household income. The area economy is
considered strong and stable.
Banking Services. The Bank offers a variety of commercial and retail
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banking services. The Bank strives to occupy a niche market wherein it
specializes in the delivery of depository, cash management, and lending
arrangements to professionals in business and medical related services and to
small businesses employing from several to 150 or more employees.
More specifically, these services include a full range of deposit accounts
typically available in most banks, including checking accounts, savings
accounts, and other time deposits of various types. Transaction accounts and
time certificates are offered at rates competitive in the primary market area.
In addition, retirement accounts such as Individual Retirement Accounts are also
available. All deposit accounts are insured by the FDIC up to the maximum
amount.
The Bank also offers a full range of short-to medium-term commercial and
personal loans. These credit services include:
To businesses:
(1) Operating loans and lines;
(2) Equipment loans;
(3) Commercial real estate and construction loans;
(4) Guaranteed or subsidized loan programs for small businesses; and
(5) Accounts receivable factoring.
To individuals:
(1) Installment loans for vehicle, professional services, and personal
lines of credit;
(2) Home loans (conventional and insured);
(3) Home improvement and rehabilitation loans;
(4) Guaranteed or subsidized loan programs; and
(5) National credit card (Visa, Mastercard, etc.).
Other services that the Bank offers include cash management services,
investment services, wire transfers, direct deposit of payroll and social
security checks, automated teller machine access, and automatic drafts and
transfers to and from various accounts.
INB MORTGAGE. The principal office of INB Mortgage is located near the
downtown business core of Spokane, Washington. At the time of its acquisition
by the Company, this was the only office of the predecessor mortgage company,
which had ten employees. As a subsidiary of the Company, however, INB Mortgage
will have a larger presence in the market. The downtown location is currently
being remodeled and employment is expected to increase to fifteen at that
facility. A branch office is also in the process of being established in the
Spokane Valley,
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which will employ four. Additionally, as qualified candidates are identified,
the intent is to place mortgage loan officers in four branch locations of the
Bank. With the exception of one loan officer to be located in Coeur d'Alene,
Idaho, all of the employees of INB Mortgage will be located in the greater
Spokane area. It is anticipated that the full complement of twenty-three
employees will be in place in the third quarter of 1998.
INB Mortgage offers virtually every mortgage product available in the
market. It specializes in Conventional, FHA & VA home loans for purchase or
refinance of 1-4 family residential living units. Additionally, it provides
second mortgage loans for home improvement, bill consolidation, and other
purposes. INB Mortgage also processes loans requiring special credit
considerations, that is, subprime loans. Substantially all loans produced by
INB Mortgage are sold to third party investors, including servicing rights. INB
Mortgage will consider establishment of a loan servicing operation at some point
in the future if production provides to be adequate to profitably engage in that
type of activity.
The predecessor mortgage company was established in Spokane in 1906. The
principal employees have worked together for in excess of ten years and,
generally, have in excess of twenty years experience in the mortgage industry in
Spokane.
INB Mortgage is licensed to do business throughout the States of Washington
and Idaho; and it also solicits second mortgage business by mail outside of its
primary market areas of Spokane County, Washington and Kootenai County, Idaho.
As its core business solidifies in its primary market area, expansion to
additional markets may provide further opportunities.
COMPETITION
THE BANK. Competition in the banking and financial services industry is
significant and has intensified in recent years. Competitors include financial
institutions within the traditional banking system, such as commercial banks,
savings banks, savings and loan associations and credit unions. Furthermore,
financial institutions from outside the traditional banking system, such as
investment banking and brokerage firms, insurance companies, credit card
issuers, mortgage companies, and related industries offering bank-like products,
has widened the competition. With liberalization of interstate banking
limitations and other financial institution regulations, increased competition
and consolidation in the overall financial services industry, and other recent
developments, it is anticipated that competition will increase in the future.
The banking industry in the Bank's primary market area is characterized by
a mix of local, independent community-based banks and financial institutions and
branch offices of larger, out-of-area banks and financial institutions,
including regional and money center banks.
The branch offices of these larger, out-of-area banks and financial
institutions may have certain competitive advantages over the Bank, including
the following. With their greater size, they have high or public visibility and
are able to maintain advertising and marketing activity on a much larger scale
than the Bank is able to do. Also, since many are part of large holding company
structures, they are also able to offer, either directly or through their
affiliates, a wider array of services and products, including traditional bank
services (such as trust services and international banking services) which the
Bank does not offer at this time as well as non-traditional
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bank services (such as investment services). Since single borrower lending
limits imposed by banking regulations are dependent upon the capital of the
banking institution, the branch offices of larger institutions with substantial
capital bases have an advantage with respect to loan applications which are in
excess of the Bank's legal lending limits.
At present, there are 10 other local, independent community-based banks
operating in the Bank's primary market area which offer services similar to, and
which are in direct competition with, the Bank. One of these community-based
competitors is of a significantly larger size than the Bank and may have some or
all of the competitive advantages enjoyed by the branch offices of larger, out-
of-area institutions.
Based on industry information there are 13 commercial banks, savings banks
and savings and loan associations in Spokane County, Washington, having a total
of 102 locations and with an estimated total of $2,988 million in deposits as of
June 30, 1997, the most recent date for which information is readily available.
Based on the same information there are 10 commercial banks, savings banks and
savings and loan associations in Kootenai County, Idaho having a total of 31
locations and with an estimated total of $785 million in deposits.
The Bank also faces numerous non-bank competitors, which have some or all
of the competitive advantages enjoyed by branch offices of larger, out-of-area
institutions and may have further competitive advantages because they are not
subject to the extensive bank regulatory structure and restrictive policies
which apply to the Bank.
Despite some possible competitive advantages of the Bank's competitors, to
date the Bank has been able to compete effectively for business, in accordance
with its general business plan, because of its community-based philosophy, the
local character of its business, its focus on its identified niche market (which
the Bank believes is under served), its emphasis on offering personalized
service, and its ability to build and maintain a loyal customer base. Since
commencing operations in 1989, the Bank's total assets have grown to over
$120,000,000, and in the two most recent fiscal years ended December 31, 1997
and 1996, the Bank has experienced increases in total assets of 28.7% and 17.7%,
respectively.
INB MORTGAGE. There are approximately 120 competitors in the Spokane
market, ranging from one person mortgage brokerage offices to branch offices of
the nation's largest private mortgage lender. The Company believes INB Mortgage
can compete effectively in its market through personalized service,
technological advantages made possible by investment in state of the art
mortgage lending software and hardware, referrals generated through its
affiliation with the Bank, and by identifying and employing the most effective
mortgage loan officers in the area.
REGULATION
GENERAL. Bank holding companies such as the Company and banks such as the
Bank are extensively regulated under both federal and state law. Mortgage loan
correspondents such as INB Mortgage are subject to other federal and state
regulations. The following information describes certain aspects of regulations
applicable to the Company and its subsidiaries (including the Bank and INB
Mortgage), but does not purport to be complete and is qualified in its entirety
by reference to the particular provisions of these regulations. In addition,
federal and state
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regulations are subject to future changes that may have significant impact on
the way in which bank holding companies and their subsidiaries (including banks)
may conduct business. The likelihood and potential effects of such changes
cannot be predicted. Legislation enacted in recent years has substantially
increased the level of competition among commercial banks, savings banks, thrift
institutions and non-banking companies, including insurance companies,
securities brokerage firms, mutual funds, investment banks and major retailers.
Recent legislation also has broadened the regulatory powers of the federal
banking agencies in a number of areas.
THE COMPANY. As a bank holding company, the Company is subject to various
regulations, including the following.
Bank Holding Company Regulation. The Company is subject to the Bank
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Holding Company Act of 1956, as amended (the "BHC Act"), and related federal
statutes, and is subject to supervision, regulation and inspection by the Board
of Governors of the Federal Reserve System and the Federal Reserve Bank of San
Francisco (collectively, the "Federal Reserve"). The Company is required to
file with the Federal Reserve an annual report and any additional information as
the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve
possesses cease and desist powers over bank holding companies and their non-bank
subsidiaries if their actions represent unsafe or unsound practices.
Bank Acquisitions. The BHC Act requires, among other things, the prior
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approval of the Federal Reserve in any case where the Company proposes to (i)
acquire all or substantially all the assets of any bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the voting shares of any bank,
or (iii) merge or consolidate with any other bank holding company. The BHC Act
currently permits bank holding companies from any state to acquire banks and
bank holding companies located in any other state, subject to certain
conditions, including certain nationwide and state-imposed concentration limits.
The establishment of new interstate branches also will be possible in those
states with laws that expressly permit it. Interstate branches will be subject
to certain laws of the states in which they are located. Competition may
increase further as banks branch across state lines and enter new markets.
Non-Bank Acquisitions. The BHC Act also prohibits a bank holding company,
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with certain exceptions, from acquiring or retaining direct or indirect
ownership or control or more than 5% of the voting shares of any company that is
not a bank or bank holding company, and from engaging in any activities other
than those of banking, managing or controlling banks, or activities which the
Federal Reserve has determined to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto.
Restrictions on the Acquisition of the Company. The acquisition of 10% or
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more of the Company's outstanding shares by any person or group of persons may,
in certain circumstances, be subject to the provisions of the Change in Bank
Control Act of 1978, as amended, and the acquisition of control of the Company
by another company would be subject to regulatory approval under the BHC Act.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
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company is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary
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banks, the Federal Reserve has stated that, as a matter of prudent banking, a
bank holding company generally should not maintain a rate of cash dividends
unless its net income available to common shareholders has been sufficient to
fund fully the dividends, and the prospective rate of earnings retention appears
to be consistent with the corporation's capital needs, asset quality and overall
financial condition.
Securities Regulation. Following the effective date of this registration
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statement for the Company's common stock with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the proxy and tender offer rules, periodic reporting
requirements and insider trading restrictions and reporting requirements, as
well as certain other requirements of the Exchange Act, will be applicable to
the Company. The Company also may, from time to time, be subject to regulation
by various state securities commissions with respect to the offer and sale of
its securities.
THE BANK. As a Washington state-chartered commercial bank the deposits of
which are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit
Insurance Corporation (the "FDIC"), the Bank is subject to various regulations,
including the following.
Bank Regulation. The Bank is subject to supervision, regulation and
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examination by the Divisions of Banking of the States of Washington and Idaho
and by the FDIC. The Bank is subject to various requirements and restrictions
under federal and state law, including (i) requirements to maintain reserves
against deposits, (ii) restrictions on the types, amount and terms and
conditions of loans that may be granted, (iii) limitations on the types of
investments that may be made, the activities that may be engaged in, and the
types of services that may be offered, and (iv) standards relating to asset
quality, earnings, and employee compensation. The approval of a Bank's primary
regulator is required prior to any merger or consolidation or the establishment
or relocation of any office. Various consumer laws and regulations also affect
the operations of the Banks.
Affiliate Transactions. The Bank is subject to federal laws that limit the
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transactions by subsidiary banks to or on behalf of their parent company and to
or on behalf of any non-bank subsidiaries. Such transactions by a subsidiary
bank to its parent company or to any non-bank subsidiary are limited to 10% of a
bank subsidiary's capital and surplus and, with respect to such parent company
and all such non-bank subsidiaries, to an aggregate of 20% of such bank
subsidiary's capital and surplus. Further, loans and extensions of credit
generally are required to be secured by eligible collateral in specified
amounts. Federal law also prohibits banks from purchasing "low-quality" assets
from affiliates.
FDIC Assessments. The deposits of the Banks are insured by the BIF up to a
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maximum of $100,000 per depositor and are subject to FDIC insurance assessments.
The amount of FDIC assessments paid by individual insured depository
institutions is based on their relative risk as measured by regulatory capital
ratios and certain other factors. During 1995, the FDIC's Board of Directors
significantly reduced premium rates assessed on deposits insured by the BIF. In
1996, legislation was enacted that provides that the Financing Corporation
("FICO") bond repayment obligations would be shared by institutions insured by
the BIF and the Savings Association Insurance Fund ("SAIF"). For the years 1997
through 1999, BIF-assessable deposits will be assessed at a FICO premium rate of
1/5 of the rate imposed on SAIF-assessable deposits. The
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FICO premiums for BIF and SAIF are 1.3 and 6.4 basis points, respectively, from
January 1, 1997.
Prompt Corrective Action. Federal banking agencies possess broad powers to
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take corrective action as deemed appropriate for an insured depository
institution and its holding company. The extent of these powers depends on
whether the institution in question is considered "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
or "critically undercapitalized". The required Tier 1 capital to average assets
ratio, Tier 1 capital to risk-weighted assets ratio for classification as
"adequately capitalized" are 4.0%, 4.0% and 8.0%, respectively. (See discussion
of the components of these ratios in "The Company and the Bank - Risk-Based
Capital Requirements" below.) The required Tier 1 capital to average assets
ratio, Tier 1 capital to risk-weighted assets ratio and total capital to risk-
weighted assets ratio for classification as "well-capitalized" are 5.0%, 6.0%
and 10.0%, respectively. As of December 31, 1997, the Bank exceeded the
required Tier 1 capital to average assets ratio, Tier 1 capital to risk-weighted
assets ratio and total capital to risk-weighted assets ratio for classification
as "well capitalized", with ratios of 8.46%, 10.98% and 12.26%, respectively.
The classification of depository institutions is primarily for the purpose of
applying the federal banking agencies' prompt corrective action powers and is
not intended to be, and should not be interpreted as, a representation of the
overall financial condition or prospects of any financial institution. The
agencies' prompt corrective action powers can include, among other things,
requiring an insured depository institution to adopt a capital restoration plan
which cannot be approved unless guaranteed by the institution's parent company;
placing limits on asset growth and restrictions on activities, including
restrictions on transactions with affiliates; restricting the interest rate the
institution may pay on deposits; prohibiting the payment of principal or
interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval and, ultimately,
appointing a receiver for the institution. Among other things, only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and only an "adequately capitalized" depository institution
may accept brokered deposits with prior regulatory approval.
Federal Home Loan Bank. The Bank is a member of the Federal Home Loan Bank
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of Seattle (the "FHLB"), which is one of twelve regional Federal Home Loan
Banks. The FHLB serves as a reserve or central bank for its members and makes
advances to its members in accordance with the FHLB's policies and procedures.
As s member of the FHLB, the Bank is required to purchase and hold stock in the
FHLB. As of December 31, 1997, the Bank held stock in the FHLB in the amount of
$309,200.
THE COMPANY AND THE BANK. As a bank holding company and state-chartered
bank, the Company and the Bank are also subject to the following further
regulation.
Risk-Based Capital Requirements. Under the risk-based capital guidelines
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applicable to the Company and the Bank, the minimum guideline for the ratio of
total capital to risk-weighted assets (including certain off-balance-sheet
activities) is 8.0%. At least half of the total capital must be "Tier 1"
capital, which primarily includes common shareholders' equity and qualifying
preferred stock, less goodwill and other disallowed tangibles. "Tier 2" capital
includes, among other items, certain cumulative and limited-life preferred
stock, qualifying subordinated debt and
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the allowance for credit losses, subject to certain limitations, less required
deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio (Tier 1
capital to total adjusted average assets) guidelines providing for a minimum
leverage ratio of 3.0% for bank holding companies and banks meeting certain
specified criteria, including that such institutions have the highest regulatory
examination rating and are not contemplating significant growth or expansion.
Institutions not meeting these criteria are expected to maintain a ratio which
exceeds the 3.0% minimum by at least 100 to 200 basis points. The federal bank
regulatory agencies may, however, set higher capital requirements when
particular circumstances warrant. Under the federal banking laws, failure to
meet the minimum regulatory capital requirements could subject a bank to a
variety of enforcement remedies available to federal bank regulatory agencies,
including the termination of deposit insurance by the FDIC and seizure of the
institution.
The required Tier 1 capital to average assets ratio, Tier 1 capital to
risk-weighted assets ratio for classification as "adequately capitalized" are
4.0%, 4.0% and 8.0%, respectively. (See discussion of the components of these
ratios in "The Company and the Bank - Risk-Based Capital Requirements" below.)
The required Tier 1 capital to average assets ratio, Tier 1 capital to risk-
weighted assets ratio and total capital to risk-weighted assets ratio for
classification as "well-capitalized" are 5.0%, 6.0% and 10.0%, respectively. As
of December 31, 1997, the Bank exceeded the required Tier 1 capital to average
assets ratio, Tier 1 capital to risk-weighted assets ratio and total capital to
risk-weighted assets ratio for classification as "well-capitalized," with ratios
of 8.46%, 10.98% and 12.26%, respectively.
Community Reinvestment. Bank holding companies and their subsidiary banks
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are also subject to the provisions of the Community Reinvestment Act of 1977, as
amended ("CRA"). Under the terms of the CRA, a bank's record in meeting the
credit needs of the community served by the bank, including low- and moderate-
income neighborhoods, is generally annually assessed by the bank's primary
federal regulator. When a bank holding company applies for approval to acquire a
bank or other bank holding company, the Federal Reserve will review the
assessment of each subsidiary bank of the applicant bank holding company, and
such records may be the basis for denying the application. As of December 31,
1997, the Bank was rated "Satisfactory" with respect to CRA.
Other Regulations. The policies of regulatory authorities, including the
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Federal Reserve and the FDIC, have had a significant effect on the operating
results of financial institutions in the past and are expected to do so in the
future. An important function of the Federal Reserve is to regulate aggregate
national credit and money supply through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and changes in
reserve requirements against bank deposits. Policies of these agencies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States government. Supervision, regulation or examination of the Company
by these regulatory agencies is not intended for the protection of the Company's
shareholders.
INB MORTGAGE. As a qualified FHA Direct Endorsement lender, INB Mortgage is
governed by all of the regulations established by the Department of Housing and
Urban
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Development (HUD) and is subject to their audit criteria and quality control
requirements. The same is true for loans originated under the rules of the
United States Veterans Administration. Conventional loans are produced under
rules and requirements established by the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Additionally,
each investor that purchases mortgage loans from INB Mortgage may have its own
lending criteria and may reserve the right to audit procedures in place at INB
Mortgage. INB Mortgage holds a mortgage broker's license from the State of Idaho
and is subject to rules and regulations attendant to the Idaho Mortgage Brokers
Practices Act. As a subsidiary of the Company, INB Mortgage is exempt from the
requirement to hold a mortgage broker's license in the State of Washington;
however, it is subject to regulation and review through the examination
procedures established by the regulators of the Bank and as described elsewhere
in this filing.
SUMMARY PERFORMANCE INFORMATION
Certain summary recent performance information for the Bank is set forth
below. All information in this section should be read in conjunction with the
Company's consolidated financial statements and notes thereto contained in Part
F/S of this Form 10-SB.
The Bank has experienced growth in total assets of 28.7% and 17.7% for the
fiscal years ended December 31, 1997 and 1996, respectively. Net loan growth was
16.7% and 20.9% for these same periods. Also for these same periods, loan losses
net of recoveries were $47,994 and $148,766, respectively. The Bank continues to
provide for anticipated future losses through increases in the allowance for
loan loss reserve, which was at $1,085,374, or 1.39% of outstanding loans, on
December 31, 1997 and $908,368, or 1.36% of outstanding loans, on December 31,
1996. For information on the Bank's capital ratios as of December 31, 1997, see
"Regulation - The Bank - Prompt Corrective Action" and "Regulation - The Company
and the Bank - Risk-Based Capital Requirements" above.
STATISTICAL DISCLOSURE
Certain statistical and other information is set forth below. All
information in this sub-section should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in Part F/S of
this Form 10-SB.
All references in this sub-section to historical statistical and other
information are to the historical consolidated information of the Company and
the Bank for the two most recently ended fiscal years, but do not reflect the
Company's recent acquisition of INB Mortgage since the acquisition occurred
after the end of the Company's most recent fiscal year ended December 31, 1997.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCK EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL. The following table sets forth comparisons of
average interest earning assets and interest bearing liabilities, and interest
income and interest expense expressed as a percentage of the related asset or
liability, for the last two fiscal years.
AVERAGE BALANCE/INTEREST INCOME AND EXPENSES RATES
(Dollars in Thousands)
Page 11 of 57
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
1997 1996
- -----------------------------------------------------------------------------------------------------------
Avg
Interest Avg Yield Interest Yield
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Rate Paid Balance Expense Rate Paid
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment Securities:
Taxable investments $ 20,477 $1,258 6.14% $17,188 $1,051 6.11%
Nontaxable investments 78 4 5.13% 1,052 45 4.28%
-------- ------ ---- ------- ------ ----
Total investment securities $ 20,555 $1,262 6.14% $18,240 $1,096 6.01%
- -----------------------------------------------------------------------------------------------------------
Interest-bearing deposits with banks $ 285 $ 13 4.56% $ 111 $ 4 3.60%
Fed funds sold 6,798 367 5.40% 3,408 176 5.16%
-------- ------ ---- ------- ------ ----
Total investments $ 27,638 $1,642 5.94% $21,759 $1,276 5.86%
- -----------------------------------------------------------------------------------------------------------
Real estate loans $ 23,296 $2,221 9.53% $18,168 $1,718 9.46%
Consumer loans 7,417 642 8.66% 6,878 606 8.81%
VISA/MC 1,066 104 9.76% 1,008 96 9.52%
Commercial loans 39,553 3,767 9.52% 33,993 3,191 9.39%
-------- ------ ---- ------- ------ ----
Total loans $ 71,332 $6,734 9.44% $60,047 $5,611 9.34%
-------- ------ ---- ------- ------ ----
Total earnings assets $ 98,970 $8,376 8.46% $81,806 $6,887 8.42%
Less reserve for possible loan losses ($1,025) ($835)
Cash and due from banks $ 5,831 $ 5,118
Other non-earning assets 6,119 3,210
-------- -------
Total assets $109,895 $89,299
======== =======
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts $ 4 842 $ 89 1.84% $ 4,228 $ 90 2.13%
Money market accounts 23,689 994 4.20% 17,898 763 4.26%
Savings accounts 2,641 66 2.50% 3,215 81 2.52%
Other time deposits 38,954 2,209 5.67% 33,651 1,957 5.82%
-------- ------ ---- ------- ------ ----
Total interest-bearing deposits $ 70,126 $3,358 4.79% $58,992 $2,891 4.90%
Securities sold under
Repurchase agreements 9,718 472 4.86% 5,723 270 4.72%
-------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $ 79,844 $3,830 4.80% $64,715 $3,161 4.88%
- -----------------------------------------------------------------------------------------------------------
Demand deposits $ 21,158 $17,860
Other liabilities 930 569
Stockholders' equity 7,963 6,155
-------- -------
Total liabilities and
stockholders' equity $109,895 $89,299
======== =======
- -----------------------------------------------------------------------------------------------------------
Net interest income $ 4,546 $ 3,726
Net avg. yield on interest- 4.59% 4.55%
bearing assets
===========================================================================================================
</TABLE>
Page 12 of 57
<PAGE>
COMMENTS
1. There were no out-of-period adjustments.
2. Loan fees are not included in interest income.
3. The Bank was not involved in any foreign activities.
4. Non-accrual loans are included in loan totals, within the appropriate
loan categories. Loan interest income does not include any accrued interest
on non-accrual loans as any previously accrued interest on such loans is
reversed at the time they are re-categorized as non-accrual. As a result,
total loan yield on earning loans is reduced to reflect the effect of non-
earning assets on the portfolio.
The following table presents changes in interest and dividend income,
interest expense, and net interest income which are attributable to changes
in the average amounts of interest earning assets and interest bearing
liabilities and/or changes in rates earned or paid thereon, for the last
two fiscal years.
AVERAGE BALANCE/INTEREST INCOME AND EXPENSE RATES
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
Change Net
in change
Change income/ in
in Difference expense income/
income/ in income/ due to expense
expense expense of change due to
due to 1996 volume in rate rate and
1996 change Change due to rate and volume
1997 1996 VARIANCE RATE in volume in rate change volume changes
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $71,332 $60,047 $11,285 9.34% $ 1,054 0.10% $ 60 $ 11 $1,125
Securities $20,555 $18,240 $ 2,315 6.01% $ 139 0.13% $ 24 $ 3 $ 166
Fed Funds Sold $ 7,083 $ 3,519 $ 3,564 5.16% $ 182 0.25% $ 9 $ 9 $ 200
------- ------
Net Change in income on total earning assets $17,164 $1,491
======= ======
LIABILITIES
NOW Accounts $ 4,842 $ 4,228 $ 614 2.13% $ 13 -.29% ($ 12) ($ 2) ($ 1)
Money Market Accounts $23,689 $17,898 $ 5,791 4.26% $ 247 -.06% ($ -13) ($ 4) $ 230
Savings Accounts $ 2,641 $ 3,215 ($ 574) 2.52% ($ 14) -.02% ($ 1) $ 0 ($ 15)
Other Time Deposits $38,954 $33,651 $ 5,303 5.82% $ 308 -.15% ($ 49) ($ 7) $ 253
Securities Sold under $ 9,718 $ 5,723 $ 3,995 4.72% $ 188 .14% $ 8 $ 6 $ 203
Repurchase Agreements ------
Net change in expense on total interest bearing $ 670
deposits ------
Net increase in net interest income, excluding $ 821
loan fees
</TABLE>
II. INVESTMENT PORTFOLIO.
Securities. The book value of the major classifications of investment
----------
securities were as follows.
Page 13 of 57
<PAGE>
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in Thousands)
----------------------
1997 1996
<S> <C> <C>
U.S. Treasury $ 5,055 $ 6,568
U.S. Government 16,976 11,121
Agencies
State and Political 970 1,573
Subdivisions
Other Securities $ 757 969
------- -------
Totals $23,758 $20,231
======= =======
</TABLE>
Analysis of Investment Securities. The following table sets forth the
---------------------------------
maturities of investment securities as of December 31, 1997.
<TABLE>
<CAPTION>
Within 1 Weighted After 1 yr. Weighted After 5 yr. but Weighted After 10 Weighted
year Average but within 5 Average within 10 yr. Average yr. Average
Maturity Yield yr. Maturity Yield Maturity Yield Maturity Yield
-------- --------- ------------ --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 0 n/a $ 4.050 6.39% $1,005 6.92% $ 0 n/a
U.S. Government
Agencies 1,768 5.32% 11,301 6.61% 1,999 6.82% 1,908 7.97%
State and Political
Subdivisions 375 4.40% 595 4.41% 0 n/a 0 n/a
Other Securities 504 6.15% 253 5.76% 0 n/a 0 n/a
------ ---- ------- ---- ------ ---- ------ ----
Totals $2,647 5.34% $16,199 6.46% $3,004 6.86% $1,908 7.97%
====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
III. LOAN PORTFOLIO. The gross amounts of loans (including deferred loan
fees of $267m in 1997 and $247m in 1996) outstanding as of the and of the last
two fiscal years are shown in the following table according to type of loan.
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in Thousands)
1997 1996
<S> <C> <C>
Commercial $48,289 $39,345
Real Estate Loans 21,112 18,530
Installment 3,852 3,913
Consumer and Other 4,623 4,907
------- -------
Totals $77,876 $66,695
======= =======
</TABLE>
An essential part of lending is to recognize that various risks are
associated with the lending process in general and with specific types of loans
in particular. In general, the Bank
Page 14 of 57
<PAGE>
monitors the state of the economy, local, regional, and national, comments
resulting from examinations conducted by its internal and external (including
regulatory) auditors; developing trends in loan loss experience; consumer debt
loads, concentration of loans by industry and category, rapidity of growth of
the loan portfolio; and so on. Allocation to the loan loss reserve reflects
management's best estimate of losses that are likely to be inherent in the
portfolio as a result of its analysis of the various types of risk.
In addition to the various general risks associated with the loan process,
various types of loans exhibit specific risk characteristics. Risk
characteristics typical of the following types of loans include:
Commercial Loans: Lending to small business typically entails working with
financially unsophisticated owners who may fail to maintain disciplines in the
management of their companies that the Bank would find appropriate.
Additionally, with relatively unsophisticated borrowers, the Bank may find it
difficult to maintain control of such borrowers through enforcement of various
terms and conditions of loan agreements. Many small businesses lack the
resources to deal with adverse circumstances over a prolonged period of time.
Obligations that the business may incur, exclusive of bank borrowings, may
utilize resources that had been intended to fund repayment of bank obligations.
Collateral pledged to provide an alternate source of repayment in the event of
business failure may be dissipated through sale without application of proceeds,
by becoming obsolete, due to the lack of a viable market, due to the creation of
intervening or undiscovered liens, or for a variety of other reasons. The Bank
also provides accounts receivable factoring; that is, it buys accounts
receivable from certain businesses rather than providing the business with a
line of credit. While factoring is commonplace in certain industries (such as
the fashion industry), and may not be indicative of any particular financial
weakness in the company selling its receivables, the Bank is typically extending
this facility to companies that would not otherwise qualify for commercial bank
funding. The companies that the Bank funds through its factoring program
typically exhibit one or more of the following financial weaknesses: they may be
undercapitalized; they may not have significant assets to pledge as collateral;
the guarantee of their owners may not add strength to the relationship due to
nominal net worth; the company and/or its owners may have a history of poor
credit or prior financial failure; access to capital may not be adequate to
properly fund significant growth opportunities; or, the company may be new, with
little evidence of a successful history that would support extension of
traditional bank funding. On the other hand, these companies may provide
products and services of high quality to very reputable buyers. Many of our
factoring clients, in fact, sell to regional and national firms with good
financial qualifications. The accounts receivable generated are also of
good quality; and, the Bank can provide immediate cash flow to its factoring
clients by purchasing these receivables at a discount. Risk entailed in
factoring are different in scope and nature than risks attendant to traditional
commercial bank lending. Because there is, normally, no secondary source of
repayment (collateral) the Bank needs to exercise very tight controls over the
invoices it purchases. The Bank may audit the books of its factoring clients on
a regular basis; invoices purchased may be verified by phone or by mail in order
to insure that they are legitimate receivables; and, all payments come directly
to, and bookkeeping is performed by, the bank. Additionally, because the Bank
may not have good information about the parties that our customers have sold to,
the Bank purchases "default" insurance on a significant portion of the invoices
it buys. In spite of being very labor intensive, the factoring program provides
financial return to the Bank several times higher than does traditional
commercial lending activity.
Real Estate Loans: For all real estate loans the secondary source of
repayment is sale of collateral. In a down real estate market the Bank faces the
risk of inadequate collateral value at the same time that borrowers have the
least reason, and perhaps the least ability, to retain ownership and service
debt. Owner occupied commercial real estate loans carry an additional risk in
that repayment typically relies on satisfactory financial results of the tenant
business. In the event of business failure the property may prove not to be able
to generate adequate lease income to service debt because it is of a single or
limited purpose nature suited primarily to the needs of
Page 15 of 57
<PAGE>
its current occupant. The primary risk in loans to finance non-owner occupied or
income property, as well as in lending to finance multifamily housing projects,
is the volatile nature of the rental market. Single-family residential lending
carries the risk of declining property values and abandonment of the property to
the Bank with a deficiency balance.
Real Estate Construction Loans: These loans carry the same risks as other
real estate loans; plus, the risk of cost overruns during the construction
process, poor quality construction, discovery of adverse site conditions after
initiation of construction process, intervening liens resulting from disputes
between the property owner and contractors, and failure of an identified takeout
lender to meet its obligations upon completion of the project. In addition, in
the case of non-owner occupied real estate construction loans, the project may
prove to be less marketable than anticipated at inception, resulting in high
carrying costs or inadequate proceeds upon sale to satisfy all obligations.
Installment/Consumer Loans: Loans secured by titled vehicles typically have
an alternate source of repayment provided by sale of collateral. Most other
consumer loans are either unsecured or secured by collateral with little
liquidation value. Consequently, the primary risk in consumer lending is that of
default without an identified secondary source of repayment. Default may be the
result of overextension of credit by multiple creditors, a loss of income due to
general economic slowdown or reduction in force by specific employers, personal
issues such as illness or death in the family, divorce, legal issues, and
increased acceptance of bankruptcy as a means of avoiding monetary obligations.
VISA and MasterCard loans, once extended, tend to remain available to borrowers
over prolonged periods of time during which personal financial conditions can
adversely change, without the knowledge of the Bank.
The following table shows the amounts and maturity analysis of commercial
and real estate construction loans outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
After 5 yr. but
Within 1 yr. After 1 yr. but within within 10 yr.
Maturity 5 yr. Maturity Maturity TOTAL
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Commercial $16,627 $ 9,804 $21,858 $48,289
Real Estate Loans 5,666 3,630 11,816 21,112
Installment 381 2,122 1,349 3,852
Consumer and Other 4,447 36 140 4,623
------- ------- ------- -------
$27,121 $15,592 $35,163 $77,876
</TABLE>
<TABLE>
<CAPTION>
Loans maturing after one year After 1 yr. but within After 5 yr.
with: 5 yr. Maturity Maturity
-------- --------
<S> <C> <C>
Fixed rates $ 9,420
Variable rates 6,172 $19,450
------- 15,713
Totals $15,592 -------
</TABLE> $35,163
Loans are placed in a non-accrual status when they are not adequately
collateralized and when, in the opinion of management, the collection of
interest is questionable.
Page 16 of 57
<PAGE>
Thereafter, no interest is taken into income unless received in cash or
until such time as the borrower demonstrates the ability to resume payments of
principal and interest. Interest previously accrued but not collected, is
reversed and charged against income at the time the loan is placed on non-
accrual status.
The following tables set forth information regarding non-performing loans
as of the end of the two most recent fiscal years.
<TABLE>
<CAPTION>
December 31
----------------------
(Dollars in Thousands)
1997 1996
----- -----
<S> <C> <C>
Loans accounted for on a non- $ 136 $ 528
accrual basis
Loans contractually past due $ 220 $ 97
ninety days or more as to
interest or principal
Impaired loans $ 717 $ 336
Gross interest income which $ 36 $ 15
would have been recorded under
original terms
Gross interest income recorded $ 37 $ 13
during the period
</TABLE>
As of the end of the most recent fiscal year ended December 31, 1997,
management has no knowledge of additional loans in which the financial condition
of its borrower is likely to result in the inability of the borrower to comply
with current loan repayment terms. All such credits known to management are
identified in the table above, and any identified potential loss has already
been recognized by charge to the Loan Loss Reserve.
IV. SUMMARY OF LOAN LOSS EXPERIENCE. The following table provides an
analysis of net losses by loan type for the two most recent fiscal years.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------
(Dollars in Thousands)
1997 1996
------- -------
<S> <C> <C>
Total loans net of deferred fees
at end of period $77,609 $66,447
Monthly average net loans 71,332 60,047
Balance of allowance for possible loan
losses at beginning of period 908 765
Loan charge-offs:
Commercial 11 91
Real estate 48
Installment 52 28
------- -------
Total charge-offs $ 63 $ 167
</TABLE>
Page 17 of 57
<PAGE>
<TABLE>
<S> <C> <C>
Recoveries of loans previously
charged-off:
Commercial 14 12
Real Estate 0 0
Installment 1 6
------- -------
Total recoveries $ 15 $ 18
------- -------
Net charge-offs (48) (149)
Provision charged to expense 225 292
Balance of allowance for possible
loan losses at end of period 1,085 908
Ratio of net charge-offs during
period to average loans outstanding 0.07% 0.25%
</TABLE>
The following table shows a breakdown of the allowance for possible loan
losses as of the end of the two most recent fiscal years.
Breakdown of Allowance for Possible Loan Losses
-----------------------------------------------
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in Thousands)
----------------------
1997 1996
-------- -------
% of Loans to % of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Risk Category 1 (Excellent) $ 1 0.28% $ 1 1.15%
Risk Category 2 (Good) 4 1.83% 2 1.36%
Risk Category 3 (Pass)
Commercial 229 58.20% 230 64.23%
Consumer 86 21.09% 69 19.55%
Risk Category 4 (Pass/Monitor) 74 9.51% 49 7.30%
Risk Category 5 (Watch) 17 1.47% 24 2.43%
Risk Category 6 (Substandard) 259 2.22% 133 1.34%
Risk Category 7 (Doubtful) 0 0.00% 7 0.02%
SBA Loans Sold (Retained 18 0.47% 35 1.04%
Portion)
Bankcard Loans 54 1.39% 26 1.58%
Specifically Identified Potential 227 3.54% n/a n/a
Losses
Commitments to Lend under
Lines of Credit 76 n/a 70 n/a
Supplementary Allowance Not
Specifically Allocated 40 n/a 262 n/a
------ ------ ---- ------
</TABLE>
Page 18 of 57
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
$1,085 100.00% $908 100.00%
</TABLE>
V. DEPOSITS. The average amount of deposits and average rates paid on
such deposits is summarized for the periods indicated in the following table.
<TABLE>
<CAPTION>
Fiscal Years Ended December 31
--------------------------------
(Dollars in Thousands)
1997 1996
-------- ---------
Rate Amount Rate
---- ------ ----
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $21,158 n/a $17,860 n/a
------- ---- ------- ----
Interest bearing deposits:
NOW Accounts 4,842 1.84% 4,228 2.13%
Money Market Accounts 23,689 4.20% 17,898 4.26%
Savings Accounts 2,641 2.50% 3,215 2.52%
Other Time Deposits 38,954 5.67% 33,651 5.82%
------- ---- ------- ----
Total interest bearing deposits $70,126 4.79% $58,992 4.90%
======= ==== ======= ====
</TABLE>
Maturities of time certificates of deposit over $100,000 as of the end of
the two most recent fiscal years are shown below.
<TABLE>
<CAPTION>
December 31
-----------
(Dollars in Thousands)
1997 1996
<S> <C> <C> <C>
Maturities
----------
3 months or less $ 5,442 $3,218
Over 3 through 6 months 3,802 4,083
Over 6 through 12 months 2,397 1,137
Over 1 year through 5 years 977 719
Over 5 years 0 0
------- ------
Total $12,618 $9,157
======= ======
</TABLE>
VI. RETURN ON EQUITY AND ASSETS. Certain ratios for the two most recent
fiscal years are as follows.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31
------------------------------
Ratio 1997 1996
- ----- ----- ----
<S> <C> <C>
Return on average assets 0.75% 0.64%
Return on average equity 10.42% 9.23%
Equity to average assets 7.26% 6.89%
</TABLE>
Page 19 of 57
<PAGE>
<TABLE>
<S> <C> <C>
Dividend payout 0 0
</TABLE>
VII SHORT-TERM BORROWINGS. None.
The following table sets forth the changes in net interest income and in
the economic value of equity that could be expected to result from changes in
market rates of interest. Based on asset and liability pricing and pricing
characteristics existing on December 31, 1997, and adjusting for anticipated
pre-payment and decay rates, an analysis of the effect of an increase or
decrease in the market rate of interest of between 100 and 400 basis points
results in the following effect on net interest income and economic value of
equity:
<TABLE>
<CAPTION>
Net Interest Income and Market Value
Summary Performance
($ in thousands)
Net Interest Income Economic Value of Equity
Projected
Interest Rate Estimated $ Change % Change Estimated $ Change % Change
Scenario Value From Base From Base Value From Base From Base
<S> <C> <C> <C> <C> <C> <C>
+400 $5,540 $279 5.30% $5,822 ($4,432) -43.22%
+300 5,468 207 3.93% 6,802 (3,452) -33.66%
+200 5,402 141 2.68% 7,923 (2,331) -22.73%
+100 5,333 72 1.37% 9,067 (1,187) -11.58%
Base 5,261 0 0.00% 10,254 0 0.00%
-100 5,178 (83) -1.58% 11,357 1,103 10.76%
-200 5,075 (186) -3.54% 12,325 2,071 20.20%
-300 4,914 (347) -6.60% 13,076 2,822 27.52%
-400 4,758 (503) -9.56% 14,229 3,975 38.77%
</TABLE>
FORWARD-LOOKING STATEMENTS
The section, as well as certain other sections of this Form 10-SB, may
contain forward-looking statements regarding, among other possible items,
anticipated trends in the Company's business. These forward-looking statements
are based on the Company's current expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking statements as
a result of various factors, including, among other possible ones, competition,
regulatory, economic and business influences, services and products, business
and growth plans and strategies, and other relevant market conditions. In light
of these risks and uncertainties, there can be no assurance that the forward-
looking statements contained in this section or other sections of this Form 10-
SB will in fact transpire or prove to be accurate.
EMPLOYEES
As of December 31, 1997, the Company had no compensated employees and the
Bank had a total of 73 full-time equivalent employees. See "General - INB
Mortgage" above for information about the number of employees of INB Mortgage.
The employees are not represented by any collective bargaining unit, and
relations between management and employees are considered good.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
It is anticipated that all reprogramming efforts and initial testing will
be completed by September 30, 1998. Additional testing will take place
throughout the remainder of 1998 and all of 1999 to further determine that
enhancements made to the Bank's data processing system are fully functional
beyond the end of the century. Substantially all of the Bank's programs operate
within a software package that was written within the last five years with the
Year 2000 issue in mind and with the capability to store data information in a
Year 2000 compliant format. The software vendor has completed testing and has
certified its software fully compliant. On site testing, utilizing Bank
hardware, operating and application software, and peripherals, will be
substantially complete by the end of September. Some minor third party software
applications, not critical to the continued smooth operation of the Bank, will
not be available until year-end 1998 which means additional testing will
continue into 1999. The Bank has established a budget in excess of $300,000 in
support of its Year 2000 efforts. Nearly half that amount represents purchase
of new equipment that replaces equipment that was slated for replacement
irrespective of Year 2000 concerns. Another third of the Year 2000 budget
represents the value of time spent by Bank personnel dealing with the issue.
While Year 2000 personnel expenses do not impact Bank earnings, as the
individuals involved would have been paid the same amount regardless, the time
spent on Year 2000 issues is time that cannot be spent on other opportunities
available to the Bank. Actual out of pocket cost directly related to Year 2000
concerns is anticipated to be less than $50,000 and relates to replacement of a
small number of personal computers and upgrade of commercially available
software products, such as word processing and spreadsheets.
Page 20 of 57
<PAGE>
DESCRIPTION OF PROPERTY
The Company does not own or lease any real property and does not own any
personal property other than the stock of its subsidiaries, but utilizes the
premises and equipment of the Bank.
The Bank owns the branch (the Northpointe branch) located in north Spokane,
Washington. The Bank also owns the building for the branch (the South Hill
branch) located in south Spokane, Washington, constructed on leased land.
The Bank leases its principal office and main branch located (at the
Paulsen Center) in downtown Spokane, Washington. The Bank also leases
additional, adjacent space which is used for a drive-through banking station and
parking facilities.
The Bank leases a total of six other branches situated inside retail
grocery stores. The Bank leases an additional branch in Coeur d'Alene, Idaho
(the Sherman Avenue branch). Four are located in or around Spokane, Washington,
including the Spokane Valley, Airway Heights and north Spokane (the Spokane
Valley branch, the Airway Heights branch, the North Foothills branch and the
Indian Trail branch). The remaining branches in leased facilities are located
in Post Falls, Idaho (the Post Falls branch) and Coeur d'Alene, Idaho (the
Appleway branch).
In addition to the one owned location, the Bank has made significant
building improvements in the one ground-leased location and leasehold
improvements in the eight leased locations. As of December 31, 1997, the total
net book value of the Company's consolidated premises and equipment was
$2,434,792.
INB Mortgage leases its sole office located in downtown Spokane,
Washington.
Page 21 of 57
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
DIRECTORS
The Board of Directors of the Company currently consists of thirteen
members and is divided into three classes. Directors within each class are
elected to three-year terms, meaning that under ordinary circumstances, at any
given time, approximately one-third of the Board would be in its second year of
service and another one-third would be in its third year of service. The same
persons currently serve as directors of the Bank and are elected in the same
manner.
Dwight B. Aden, Jr. - Mr. Aden is 55 and was elected as a director of the
Bank and the Company on May 20, 1996. His term as a director will be up for
election at the annual meeting of shareholders to be held in 1999. During the
past five years, Mr. Aden has been a senior member and an owner of Jones &
Mitchell Insurance Co., an insurance brokerage firm in Spokane, Washington.
Jimmie T.G. Coulson - Mr. Coulson is 64 and has been a director of the Bank
since its incorporation on May 26, 1989. He has been a director of the Company
since March 30, 1992. Mr. Coulson's current term as director of the Bank will be
up for election at the annual meeting of shareholders to be held in 1999.
During the past five years, Mr. Coulson has been the President and Chief
Executive Officer of The Coeur d'Alene's Company, a steel service center and
fabrication facility located in Spokane, Washington.
Harlan D. Douglass - Mr. Douglass is 61 and has been a director of the Bank
since May 26, 1989. He has been a director of the Company since March 30, 1992.
Mr. Douglass' current term as a director of the Bank will be up for election at
the annual meeting of shareholders to be held in 1999. Mr. Douglass' primary
business activities consist of the management of a diversified real estate
business, including multifamily and commercial projects.
Freeman B. Duncan - Mr. Duncan is 51 and was elected as a director of the
Bank and the Company on May 20, 1996. His term as a director will be up for
election at the annual meeting of shareholders to be held in 1999. Mr. Duncan
is an attorney specializing in real estate matters.
Donald A. Ellingsen, M.D. - Dr. Ellingsen is 61 and was elected as a
director of the Bank and the Company on May 20, 1996. His term as a director
will be up for election at the annual meeting of shareholders to be held in
1999. Dr. Ellingsen is an ophthalmologist and a member of the Spokane Eye
Clinic, Spokane, Washington.
Clark H. Gemmill - Mr. Gemmill is 55. He has been a director of the Bank
since its incorporation on May 26, 1989 and a director of the Company since
March 30, 1992. Mr. Gemmill's current term as a director will be up for
election at the annual meeting of shareholders to be held in 1998. During the
past five years, he has been a Vice President with Paine Webber (successor in
interest to Kidder, Peabody Inc.), a financial investment firm with a branch
office in Spokane, Washington.
Bryan S. Norby - Mr. Norby is 41. He has been a director of the Bank since
August 15, 1989, and a director of the Company since March 30, 1992. Mr.
Norby's current term as a director of the Bank will be up for election at the
Annual Meeting of the Shareholders to be held in 2000. Mr. Norby is a certified
public accountant and is Treasurer and Financial Analyst for a Boise, Idaho
based business enterprise.
Richard H. Peterson - Mr. Peterson is 63 and has been a director of the
Bank since its incorporation on May 26, 1989. He has been a director of the
Company since March 30, 1992. Mr. Peterson's current term as a director of the
Bank will be up for election at the annual meeting of the shareholders to be
held in 2000. During the past five years, Mr. Peterson has been the
Page 22 of 57
<PAGE>
President and Chief Executive Officer of Peterson & Company, an independent
investment securities firm in Spokane, Washington until 1994 and, thereafter, a
vice president of Everen Securities at its branch in Spokane.
Hubert F. Randall - Mr. Randall is 69. He has been a director of the Bank
since its incorporation on May 26, 1989 and has been a director of the Company
since March 30, 1992. Mr. Randall's current term as a director of the Bank will
be up for election at the annual meeting of the shareholders to be held in 2000.
Mr. Randall retired as the Executive Vice President and Chief Executive Officer
of Kim Hotstart Manufacturing Company, Inc., a Spokane company specializing in
the design and manufacture of heating systems for industrial engines, during
July 1990.
Phillip L. Sandberg - Mr. Sandberg is 65 and has been a director of the
Bank since its incorporation on May 26, 1989. He has been a director of the
Company since March 30, 1992. Mr. Sandberg's current term as a director of the
Bank will be up for election at the annual meeting of the shareholders to be
held in 1999. During the past five years, Mr. Sandberg has been the President
and Chief Executive Officer of Sandberg Securities, an independent investment
services firm in Spokane, Washington.
Frederick M. Schunter - Mr. Schunter is 61; he is a director, President and
Chief Executive Officer of the Bank. He has fulfilled those capacities with the
Bank since its incorporation on May 26, 1989 and he has been a director of the
Company since December 10, 1991. Mr. Schunter's term as a director will be up
for election at the annual meeting of shareholders to be held in 1998.
William E. Shelby - Mr. Shelby is 59 and has been a director of the Bank
since its incorporation on May 26, 1989. He has been a director of the Company
since March 30, 1992. Mr. Shelby's current term as a director of the Bank will
be up for election at the annual meeting of shareholders to be held in 1998.
Mr. Shelby is employed as the Vice President of Store Development for U.R.M.
Stores, Inc.
James R. Walker - Mr. Walker is 64 and has been a director of the Bank
since its incorporation on May 26, 1989. He has been a director of the Company
since March 30, 1992. Mr. Walker's current term as a director of the Bank will
be up for election at the annual meeting of the shareholders to be held in 1998.
Mr. Walker was the President and Chief Executive Officer of Hazen & Clark, Inc.,
a general contracting firm, from 1968 until his retirement in 1995.
OFFICERS
In addition to Mr. Schunter, the officers of the Bank are:
Jennifer L. Johnson - Ms. Johnson is 37 and is the Secretary, Treasurer and
Cashier of the Bank. She also is the Secretary of the Company. She has been
employed by the Bank from 1989 to date.
Christopher C. Jurey - Mr. Jurey is 48 and has been an officer of the Bank
since 1991. Prior to that time, Mr. Jurey was a Commercial Loan Officer; he
currently is an Executive Vice President.
Randall L. Fewel - Mr. Fewel is 49 and joined the Bank as a Vice President
and Senior Loan Officer in March 1994. He currently is an Executive Vice
President.
There are no family relationships among these directors and executive
officers.
Page 23 of 57
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth information as to remuneration received by
the three highest paid employees or officers of the Bank in the 1997 fiscal
year. No officer or director of the Company has received any remuneration or
indirect financial benefit to date.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Aggregate annual
Name of individual or Capacities in remuneration remuneration
identity of group was received for last fiscal year
- --------------------------------------------------------------------------------
<S> <C> <C>
Frederick M. Schunter President and Chief Executive $155,477.87(1)
Officer
- --------------------------------------------------------------------------------
Christopher C. Jurey Executive Vice President $ 94,472.49
- --------------------------------------------------------------------------------
Randall L. Fewel Executive Vice President $102,312.32
- --------------------------------------------------------------------------------
</TABLE>
(1) Does not include benefits under a retirement plan for Mr. Schunter which
is further described below. The net post-retirement cost recognized for
this plan in fiscal year 1997 was $35,000.
Directors of the Bank receive an attendance fee in the amount of $200 per
meeting and $75 per committee meeting. Directors also receive 100 shares of
Common Stock of the Company annually. A compensation arrangement has not been
established for the directors of the Company as yet. The aggregate annual
remuneration of officers and directors of the Bank as a group was $501,969.86
for fiscal 1997.
The Bank and Frederick M. Schunter entered into an Employment Agreement
dated January 1, 1991. This employment agreement has been amended, effective
January 1, 1994. The employment term has been changed to a continuous period
until such time as the Bank notifies the employee that the Bank will establish
an employment term of three years commencing with the date of receipt of the
notice by the employee. At that time, the Bank also has the right to terminate
the employee without cause. The agreement provides that the directors will set
the Fixed Salary each year. The amended agreement also contains a covenant not
to compete providing, essentially, that the employee may not compete with the
Bank during a term of employment or for a period of three years following a
voluntary termination of employment; if there has been a change in control, as
defined by that agreement, then the covenant not to compete will be for a period
of two years. Mr. Schunter's current Fixed Salary is $130,000.
The Bank has entered into employment agreements with Mr. Jurey; Mr. Fewel
and Ms. Johnson; these employment agreements provide for a continuous employment
term until such time as the Bank notifies the employee that the Bank will
establish an employment term of one (1) year commencing with the date of receipt
of notice by the employee. The Fixed Salary for Christopher C. Jurey currently
is $85,910, the Fixed Salary for Randall L. Fewel currently is $85,910 and the
Fixed Salary for Jennifer L. Johnson is $66,000.
The Bank has purchased and maintains a term life insurance policy for the
benefit of the Chief Executive Officer during the employment term in the
aggregate amount of $250,000. The Bank is the owner and beneficiary of life
insurance policies on Mr. Schunter with a total face value of $226,274 and
cash surrender value of $95,379 and $66,390 at December 31, 1997 and 1996,
respectively.
Mr. Schunter also has an unfunded retirement plan which vests in full at
retirement. The plan provides for monthly payments to the executive upon his
retirement or termination of employment and, alternatively, to his designated
beneficiary in the event of his death, for a period of fifteen years following
retirement at age 65. At December 31, 1997 and 1996, $99,764 and $64,764,
respectively, has been accrued under this plan. This liability is recognized in
accrued interest and other liabilities in the financial statements. The present
value at retirement of the retirement benefit obligation is approximately
$220,173. The unfunded benefit is being expensed
Page 24 of 57
<PAGE>
over the period of service through his expected retirement age. The net post-
retirement benefit cost recognized during the years ended December 31, 1997 and
1996, was $35,000 and $33,000, respectively.
Both the Bank and the Company are and will be highly dependent upon the
services of Mr. Schunter, Mr. Jurey, Mr. Fewel, and Ms. Johnson. Other than the
Employment Agreements described herein, neither the Bank nor the Company have
any specific arrangement with these individuals to assure that they will remain
with the Bank or the Company and not compete upon termination of their
employment.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
(1) (2) (3) (4)
Title of Class Name and address of owner Amount owned Percent of Class
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock F. M. Schunter
421 West Riverside, Suite 113 17,521 3.3%/(1)/
Spokane, WA 99201-0403
- ---------------------------------------------------------------------------------
Common Stock Christopher C. Jurey 5,367 1.0% /(2)/
421 West Riverside, Suite 113
Spokane, WA 99201-0403
- ---------------------------------------------------------------------------------
Common Stock Randall L. Fewel 1,457 .27%/(3)/
421 West Riverside, Suite 113
Spokane, WA 99201-0403
- ---------------------------------------------------------------------------------
Common Stock Jennifer L. Johnson 400 .07%/(4)/
421 West Riverside, Suite 113
Spokane, WA 99201-0403
- ---------------------------------------------------------------------------------
</TABLE>
/(1)/ Mr. Schunter holds warrants to purchase an additional 8,834 shares of
Common Stock of the Company for which, if exercised, he will receive
2,924 additional shares due to stock dividends declared since issuance
and the appreciation rights established within the terms of the warrant
certificate. He also has options to purchase an additional 4,000 shares
at option prices ranging between $21.00 and $25.00. An option to
purchase an additional 1,000 shares with a ten-year term was granted for
fiscal year 1997 at an option price of $26.00, subject to a vesting
schedule of 20% per year after the first year.
/(2)/ Mr. Jurey has options to purchase 1,500 shares of common stock of the
Company at option prices ranging between $24.50 and $25.00. An option to
purchase an additional 500 shares with a ten-year term was granted for
fiscal year 1997 at an option price of $26.00, subject to a vesting
schedule of 20% per year after the first year.
/(3)/ Mr. Fewel has options to purchase 1,500 shares of common stock of the
Company at option prices ranging between $24.50 and $25.00. An option to
purchase an additional 500 shares with a ten-year term was granted for
fiscal year 1997 at an option price of $26.00, subject to a vesting
schedule of 20% per year after the first year.
/(4)/ Ms. Johnson has options to purchase 1,900 shares at option prices
ranging between $21.00 to $25.00. An option to purchase an additional
500 shares was granted for fiscal year 1997 at an option price of
$26.00, subject to a vesting schedule of 20% per year after the first
year.
The stock options referred to above are accounted for under AB25-
Accounting for Stock Issued to Employees. Accordingly, no compensation cost has
been recognized by the Company related to these stock options.
Officers and directors as a group own of record, to knowledge of the
Company, 113,780 shares of common stock of the Company, representing 21.25% of
the outstanding shares of
Page 25 of 57
<PAGE>
common stock. Directors as a group hold warrants to purchase an additional
75,142 shares of common stock. No shareholder presently owns more than ten
percent (10%) of the outstanding shares of common stock of the Company.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Title and amount of
securities called for
by options, warrants
Name of holder or rights Exercise price Date of Expiration
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
F.M. Schunter option - 1000 $21.00 December 20, 1998
option - 1000 24.50 January 1, 2000
option - 1000 25.00 January 2, 2001
option - 1000 25.00 January 2, 2007
option - 1000 26.00 January 1, 2008
warrants - 11,758 11.27 January 16, 2000
(as adjusted)
- -----------------------------------------------------------------------------------
Officers and 86,542 As stated above As stated above
Directors as a
group
- -----------------------------------------------------------------------------------
</TABLE>
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
The Bank has had, and may be expected to have in the future, deposits and
loans in the ordinary course of business with directors, officers, their
immediate families and affiliated companies in which they are principal
shareholders, all of which have been, in the opinion of management, on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable banking transactions with others. The loan balance of any one
related party is not material. The aggregate loan balances with related parties
at December 31, 1997 was $970,036, including unused commitments.
SECURITIES BEING REGISTERED
Each holder of shares of the Company's common stock has equal rights to
receive dividends, if any, declared thereon by the Board of Directors. Each
holder of shares of the Company's common stock has equal voting rights on
matters on which they are entitled to vote under the Washington Business
Corporation Act and the Company's Articles of Incorporation and such holders do
not have cumulative voting rights in the election of directors. Under the
Company's Articles of Incorporation, shareholders do not have preemptive rights
to acquire additional shares of common stock or other securities of the Company.
Under the Company's Articles of Incorporation, the Board of Directors has
the authority to authorized the issuance of shares of preferred stock and to
establish the rights, preferences and privileges thereof without shareholder
approval.
Under the Company's Articles of Incorporation and Bylaws, the Board of
Directors is divided into three classes with staggered three-year terms, which
could have the effect of delaying, deferring or preventing a change in control.
Page 26 of 57
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
There is no established public trading market for the Company's shares of
common stock. Transactions take place from time to time and the Company becomes
aware of those transactions if certificates are presented for transfer.
Quotations are published in a daily newspaper in Spokane, Washington, but those
quotations are not reflective necessarily of actual transactions. The quotations
are prepared by a registered broker as a guide to shareholders intending to
engage in a transaction. The high and low range of those quotations by quarters
for the Company's last two fiscal years is set forth below.
<TABLE>
<CAPTION>
1997* 1996
High Low High Low
<S> <C> <C> <C> <C>
January 1 - March 31 $25.0000 $24.0000 $26.0000 $24.8750
April 1 - June 30 $25.0000 $25.0000 $25.2500 $25.2500
July 1 - September 30 $25.0000 $25.0000 $25.2500 $25.2500
October 1 - December 31 $27.0000 $25.0000 $26.0000 $25.2500
</TABLE>
* In January 1997 the Company declared a 10% stock dividend. In June 1997
existing shareholders were allowed to purchase one additional share for each
five shares owned. The exercise price on the "Rights" offering was well below
market, at $16.00 per share. The quotations listed above have not been adjusted
to reflect the effect that the issuance of additional shares, some of which were
below market, may have had on actual transaction values or quotations.
The above quotations also do not reflect inter-dealer prices and should not
be considered over-the-counter market quotations as that term is customarily
used. To the best knowledge of the Company, the highest and lowest prices per
share paid in actual transactions during the quarter ended December 31, 1997 was
$27.00 and $25.00, respectively.
HOLDERS
As of December 31, 1997, there were approximately 398 holders of record of
the Company's common stock, including shares held, to the best knowledge of the
Company, by non-affiliated depositories. The Company has relied upon
information received from those depositories in determining the number of record
holders.
DIVIDENDS
In the last two fiscal years, the Company has not declared or paid any cash
dividends on its common stock.
Under the Washington Business Corporation Act, dividends may not be paid
if, after the payment is made, the corporation would not be able to pay its
debts as they become due in the usual course of business, or the corporation's
total assets would be less than the sum of its total liabilities (plus the
amount that would be needed, if the corporation were to be dissolved at the
Page 27 of 57
<PAGE>
time of the distribution, to satisfy the preferential rights upon dissolution of
shareholders, if any, whose preferential rights are superior to those receiving
the distribution).
The principal source of the Company's revenue and cash flow is dividends
from the Bank and other subsidiaries. The Bank is subject to various statutory
and regulatory restrictions on its ability to pay dividends or otherwise make
distributions or supply funds to the Company. In addition, bank regulators may
have authority to prohibit a bank subsidiary from paying dividends, depending on
the bank subsidiary's financial condition, if such payment is deemed to
constitute an unsafe or unsound practice.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends without the payment
of taxes at the current income tax rates on the amount used.
ITEM 2. LEGAL PROCEEDINGS
Outside of proceedings undertaken in the ordinary course of business, there
are no pending legal proceedings in which the Company or the Bank is a party or
any of their respective properties is subject. There are no pending legal
proceedings in which any director, officer or affiliate of the Company, any
owner of record or beneficially of more than 5% of the common stock of the
Company, or any security holder of the Company is a party adverse to the Company
or its subsidiaries or has a material interest adverse to the Company or its
subsidiaries.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the Company's two most recent fiscal years, there has been no
resignation (or declination to stand for re-election) or dismissal of the
principal independent accountant of the Company or any significant subsidiary.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
During the last three fiscal years, the Company has sold the following
securities without registering them under the Securities Act of 1933, as
amended; (the "Securities Act"): (1) the Company issued a total 117,872 shares
of common stock on July 16, 1997 at a purchase price per share of $16.00 for
total proceeds (before costs) of $1,885,952 in a rights offering to existing
security holders pursuant to the exemption under Regulation A of the Securities
Act; (2) the Company declared a stock dividend of 10% of the outstanding shares
of common stock to shareholders of record on January 15, 1997 with a total of
37,480 shares being issued on February 14, 1997 pursuant to the exemption
under Section 2(3) of the Securities Act that registration is not required for
securities which are not issued "for value"; (3) the Company declared a stock
dividend of 10% of the outstanding shares of common stock to shareholders of
record on December 1, 1994 with a total of 33,894 shares being issued on
January 15, 1995 pursuant to the same exemption; (4) the number of shares of
common stock purchasable under outstanding warrants was increased by a total of
16,392 and 14,901 shares, respectively, in connection with the two stock
dividends referred to above as a result of anti-dilution adjustment provisions
in such warrants, which warrants were issued pursuant to the general private
placement exemption under Section 4(2) of the Securities Act; (5) the Company
issued a total of 2,633 shares of common stock on August 29, 1997 and October
20, 1997 at an average exercise price of $11.39 per share for total proceeds
(before costs) of $30,000 upon exercise of certain of such warrants; (6) the
Company issued a total of 1,400 shares of common stock on January 15, 1997 at an
average exercise of $17.50 for total proceeds (before costs) of $24,500 upon
exercise of outstanding options, which options were issued pursuant to the
general private placement exemption under Section 4(2) of the Securities Act;
and (7) the Company issued a total of 1,300 shares of common stock on June 9,
1997 and a total of 800 shares of common stock on September 30, 1996 and
April 22, 1996 to directors as part of the Company's director compensation
package pursuant to the general private placement exemption under Section 4(2)
of the Securities Act. The foregoing information regarding sales of unregistered
securities during the last three fiscal years does not include securities issued
in connection with the acquisition of INB Mortgage since that acquisition
occurred after the end of the Company's most recent fiscal year.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article IV of the Company's Articles of Incorporation, as amended,
("Articles") provides as follows:
Limitation on Liability. To the full extent that the
Washington Business Corporation Act, as it exists on the date
hereof or may hereafter be amended, permits the limitation or
elimination or the liability of Directors, a Director of this
Corporation shall not be liable to this Corporation or its
shareholders for monetary damages for conduct as a Director,
except for:
a. Acts or omissions of the Director finally adjudged
to be intentional misconduct or a knowing violation of law
by the Director;
Page 28 of 57
<PAGE>
b. Conduct of the Director finally adjudged to be in
violation of RCW 23B.08.310 (which involves certain
distributions by the Corporation); or
c. Any transaction with respect to which it was
finally adjudged that such Director personally received a
benefit in money, property, or services to which the
Director was not legally entitled.
If the Washington Business Corporation Act is amended to
authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Washington business Corporation Act, as
so amended. Any repeal or modification of the foregoing paragraph
by the shareholders of the Corporation shall not adversely effect
any right or protection of a director of the Corporation with
respect to any acts or omissions of such director occurring prior
to such repeal or modification.
This limitation shall not apply to any act or omission
occurring before the effective date of this paragraph.
The Corporation shall have the power to indemnify any
directors, officers, or former directors or officers of the
Corporation, or any person who may have served at the
Corporations's request as a director or officer of another
corporation, against expenses actually and reasonable incurred by
such person in connection with the defense of any action, suit or
proceeding, civil or criminal, in which he becomes a party by
reason of being or having been such director or officer, to the
full extend permitted by the laws of the State of Washington, as
such laws at any time may be in force and effect.
The Corporation also, to the full extent permitted by the
laws of the State of Washington, shall have the power to enter
into an agreement to advance expenses and litigation costs of any
director or former director, without making any determination of
the director's good faith, reasonable beliefs, or beliefs with
regard to the lawfulness of his or her activity and without
following the provisions of RCW 23B.08.550 or any subsequent or
similar provision of Washington law. The indemnification so
authorized shall not protect or purport to protect any director
against any liability to the Corporation or the shareholders to
which he or she otherwise would be subject by reason of
intentional misconduct, knowing violation of law, any violation
of RCW 23B.08.320, or in connection with any transaction with
respect to which it is finally adjudged that such director
personally received a benefit in money, property or services to
which that director was not legally entitled. The indemnification
so authorized shall continue in effect as it relates to all acts
or omissions committed while the director held his or her
position, notwithstanding his or her subsequent resignation or
removal from that position, and the indemnification shall inure
to the benefit of the heirs, executors, and administrators of
that person or his or her estate.
Article IV of the Company's Bylaws, as amended, provides as
follows:
Section 1. Right to Indemnification. Each individual who was
--------- ------------------------
or is made a party or is threatened to be made a party to or is
otherwise involved (including, without limitation, as a witness)
in any actual or threatened action, suit or proceeding, whether
civil, criminal, administrative or investigative and whether
formal or informal (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the
Corporation or, that while serving as a
Page 29 of 57
<PAGE>
Director or officer of the Corporation, he or she is or was also
serving at the request of the Corporation as a Director, officer,
partner, trustee, employee or agent of another foreign or
domestic corporation or of a foreign or domestic partnership,
joint venture, trust, employee benefit plan or other enterprise
(hereinafter an "indemnitee"), whether the basis of a proceeding
is alleged action in an official capacity as such a Director,
officer, employee, partner, trustee, or agent or in any other
capacity while serving as such a Director, officer, employee,
partner, trustee, or agent, shall be indemnified and held
harmless by the Corporation to the full extent permitted by the
Articles of Incorporation and by applicable law as then in
effect, against all expense, liability, and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts to be paid in settlement) actually and
reasonably incurred or suffered by such indemnitee in connection
therewith, and such indemnification shall continue as to an
indemnitee who has ceased to be a Director, officer, employee,
partner, trustee, or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided,
however, that no indemnification shall be provided to any such
indemnitee if the Corporation is prohibited by the Articles of
Incorporation or by the Washington Business Corporation Act or
other applicable law as then in effect from paying such
indemnification; and provided, further, that except as provided
in Section 2 of this Article with respect to proceedings seeking
to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or
part thereof) initiated by such indemnitee only if a proceeding
(or part thereof) was authorized or ratified by the Board. The
right to indemnification conferred in this Section 1 shall be a
contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any proceeding in
advance of its final disposition (hereinafter an "advancement of
expenses"). Any advancement of expense" shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
that such indemnitee is not entitled to be indemnified for such
expenses under this Section 1 and upon delivery to the
Corporation of a written affirmation (hereinafter an
"affirmation") by the indemnitee of his or her good faith belief
that such indemnitee has met the standard of conduct necessary
for indemnification by the Corporation pursuant to this Article.
Section 2. Right of Indemnitee to Bring Suit. If a claim
--------- ---------------------------------
under Section 1 of this Article is not paid in full by the
Corporation within sixty (60) days after a written claim has been
received by the Corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period
shall be twenty (20) days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in
any such suit or in a suit brought by the Corporation to recover
an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this
Article upon submission of a written claim (and, in an action
brought to enforce a claim for an advancement of expenses, where
the required undertaking and affirmation have been tendered to
the Corporation) and thereafter the Corporation shall have the
burden of proof to overcome the presumption that the indemnitee
is so entitled. Neither the failure of the Corporation (including
the Board, independent legal counsel or the shareholders) to have
made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances
nor an actual determination by the Corporation (including the
Page 30 of 57
<PAGE>
Board, independent legal counsel or the shareholders) that the
indemnitee is not entitled to indemnification shall be a defense
to the suit or create a presumption that the indemnitee is not so
entitled.
Section 3. Nonexclusivity of Rights. The right to
--------- ------------------------
indemnification and the advancement of expenses conferred in this
Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision
of the Articles of Incorporation or Bylaws of the Corporation,
general or specific action of the Board, contract or otherwise.
Section 4. Insurance, Contracts and Funding. The Corporation
--------- --------------------------------
may maintain insurance, at its expense, to protect itself and any
individual who is or was a Director, officer, employee or agent
of the Corporation or who, while a Director, officer, employee or
agent of the Corporation is or was serving at the request of the
Corporation as a Director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise
against any expense, liability or loss asserted against or
incurred by the individual in that capacity or arising from the
individual's status as a Director, officer, employee or agent,
whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the
Washington Business Corporation Act. The Corporation may enter
into contracts with any Director, officer, employee or agent of
the Corporation in furtherance of the provisions of this Article
and may create a trust fund, grant a security interest or use
other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Section.
Section 5. Indemnification of Employees and Agents of the
--------- ----------------------------------------------
Corporation. The Corporation may, by action of the Board, grant
-----------
rights to indemnification and advancement of expenses to
employees and agents of the Corporation with the same scope and
effect as the provisions of this Article with respect to the
indemnification and advancement of expenses of Directors and
officers of the Corporation or pursuant to rights granted
pursuant to, or provided by, the Washington Business Corporation
Act or otherwise.
Section 6. Persons Serving Other Entities. Any individual
--------- ------------------------------
who is or was a Director, officer or employee of the Corporation
who, while a Director, officer or employee of the Corporation, is
or was serving (a) as a Director or officer of another foreign or
domestic corporation of which a majority of the shares entitled
to vote in the election of its Directors is held by the
Corporation or (b) in an executive or management capacity in a
foreign or domestic partnership, joint venture, trust or other
enterprise of which the Corporation or a wholly owned subsidiary
of the Corporation is a general partner or has a majority
ownership shall be deemed to be so serving at the request of the
Corporation and entitled to indemnification and advancement of
expenses under Section 1 of this Article.
The Company has entered into indemnification agreements with each director
as contemplated in the foregoing indemnification provisions.
Insurance is maintained on a regular basis against liabilities arising on
the part of directors and certain officers out of their performance in such
capacities or arising on the part of the Company out of the foregoing
indemnification provisions, subject to certain exclusions and to policy limits.
Page 31 of 57
<PAGE>
Reference is made to Revised Code of Washington Section 23B.08.510 et.
seq., which sets forth the extent to which indemnification and maintenance of
insurance is permitted under the Washington Business Corporation Act.
Page 32 of 57
<PAGE>
PART F/S
INLAND NORTHWEST BANCORPORATION, INC.AND SUBSIDIARY
1997 FINANCIAL STATEMENTS
Page
Table of Contents
INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS 34
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 35
CONSOLIDATED STATEMENTS OF INCOME 36
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY 37
CONSOLIDATED STATEMENTS OF CASH FLOWS 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40
Page 33 of 57
<PAGE>
[McFarland & Alton, P.S. Letterhead]
Independent Auditor's Report
----------------------------
To the Board of Directors
Inland Northwest Bancorporation, Inc.
Spokane, Washington
We have audited the accompanying consolidated statements of financial condition
of Inland Northwest Bancorporation, Inc. and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Inland
Northwest Bancorporation, Inc. and subsidiary as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended,
in conformity with generally accepted accounting principles.
As discussed in Notes 1, 2, and 20 to the consolidated financial statements, the
Corporation changed its method of accounting for earnings per share effective
January 1, 1997, to conform with Statement of Financial Accounting Standards No.
128.
/s/ McFarland & Alton, P.S.
January 13, 1998, except for Note 22
as to which the date is January 20, 1998
Page 34 of 57
<PAGE>
ASSETS
<TABLE>
<CAPTION>
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
Cash and due from banks $ 7,404,503 $ 7,614,850
Federal funds sold 7,947,500 2,725,000
Securities available-for-sale (Note 3) 23,035,683 18,697,374
Securities held-to-maturity (Note 3) 969,770 1,573,089
Federal Home Loan Bank (FHLB) stock, at cost 309,200 267,900
Loans receivable, net of allowance for loan losses
1997 $1,085,374; 1996, $908,368 (Note 4) 76,523,949 65,538,949
Premises and equipment (Note 5) 2,434,792 1,909,172
Accrued interest receivable 700,979 655,013
Foreclosed real estate, net of allowances of 1997 $85,681;
and 1996 $-0- (Note 6) 566,941 -
Other assets (Notes 12 and 13) 459,293 554,948
------------ -----------
TOTAL ASSETS $120,352,610 $99,536,295
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 7) $101,711,216 $87,230,017
Securities sold under repurchase agreements (Notes 3 and 9) 8,434,126 5,209,616
Accrued interest and other liabilities (Note 12) 684,362 548,403
Federal Home Loan Bank advances (Note 8) 62,684 -
------------ -----------
TOTAL LIABILITIES 110,892,388 92,988,036
------------ -----------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 10, 11, and 13)
STOCKHOLDERS'' EQUITY
Common stock, no par value, authorized
1,000,000 shares; issued 535,398 and 412,113 shares
(Notes 14 and 15) 8,064,281 6,113,286
Retained earnings (Note 15) 1,234,762 408,441
Net unrealized gain on securities available-for-sale,
net of tax 1997 $86,788; 1996, $13,668 161,179 26,532
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 9,460,222 6,548,259
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $120,352,610 $99,536,295
------------ -----------
</TABLE>
The accompanying notes are an integral part of these statements.
Page 35 of 57
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
--------------------------
1997 1996
--------------------------
Interest Income:
<S> <C> <C>
Loans receivable, including fees $7,329,813 $5,998,979
Investment securities:
U.S. Treasury securities 315,491 387,082
U.S. government agency securities 821,359 556,851
Other securities 138,379 155,719
Federal funds sold 366,522 175,857
------------- -----------
TOTAL INTEREST INCOME 8,971,564 7,274,488
------------- -----------
Interest Expense:
Deposits 3,358,491 2,891,233
Repurchase agreements 471,863 269,670
------------- -----------
TOTAL INTEREST EXPENSE 3,830,354 3,160,903
------------- -----------
NET INTEREST INCOME 5,141,210 4,113,585
Provision for loan losses (Note 4) 225,000 291,600
------------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,916,210 3,821,985
------------- -----------
Noninterest income:
Service charges on deposits 542,748 389,082
Other income 214,430 100,683
------------- -----------
757,178 489,765
------------- -----------
Noninterest expense:
Salaries and employee benefits 2,358,453 1,953,130
Occupancy expense 329,183 279,263
Equipment expense 446,977 300,370
Losses on foreclosed real estate (Note 6) 107,450 -
Other operating expenses 1,175,078 919,877
------------- -----------
4,417,141 3,452,640
------------- -----------
INCOME BEFORE INCOME TAXES 1,256,247 859,110
Federal income tax expense (Note 12) 426,843 291,112
------------- -----------
NET INCOME $ 829,404 $ 567,998
------------- -----------
Earnings per share (Notes 2 and 20) $1.72 $1.27
------------- -----------
Earnings per share assuming full dilution (Notes 2 and 20) $1.43 $1.04
------------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
Page 36 of 57
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Retained Net Unrealized Total
Earnings Gain (Loss) on
Securities
Available-
For-Sale
(Note 3)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $5,440,010 $ 493,879 $ 29,298 $5,963,187
Net income for 1996 - 567,998 - 567,998
Other - (160) - (160)
Issuance of stock to Directors,
800 shares (Note 15) 20,000 - - 20,000
Net change in unrealized gain
(loss) on securities available
for sale - - (2,766) (2,766)
10% stock dividend 37,480
shares of common stock
(Note 15) 653,276 (653,276) - -
------------- ---------- ---------- ---------
Balance, December 31, 1996 6,113,286 408,441 26,532 6,548,259
Net income for 1997 - 829,404 - 829,404
Exercise of 1,400 stock options 24,500 - - 24,500
Exercise of 2,663 stock warrants 30,000 - - 30,000
Issuance of stock to Directors,
1,350 shares (Note 15) 33,750 - - 33,750
Net change in unrealized gain
(loss) on securities available
for sale - - 134,647 134,647
Fractional shares issued in cash (3,083) - (3,083)
Sale of 117,872 shares of stock 1,862,745 - - 1,862,745
------------- ---------- ---------- ---------
Balance, December 31, 1997 $8,064,281 $1,234,762 $161,179 $9,460,222
------------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
Page 37 of 57
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
----------------------------
1997 1996
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 829,404 $ 567,998
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 295,791 256,058
Amortization 4,209 4,209
Provision for loan losses 225,000 291,600
Provision for losses on foreclosed real estate 85,681 -
Accretion of securities discounts (34,304) (37,841)
Amortization of securities premiums 147,695 239,906
Loss on disposal of assets 97,017 412
Loss on sale of foreclosed real estate 21,769 -
Stock dividends received (15,900) (19,323)
Deferred income taxes 133,290 (53,281)
(Increase) decrease in:
Accrued interest receivable (45,966) (127,791)
Other assets (13,583) (38,371)
Increase in:
Accrued interest and other liabilities 135,959 17,397
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,866,062 1,100,973
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock (25,400) (41,613)
Net (increase) decrease in federal funds sold (5,222,500) 2,635,000
Securities available-for-sale:
Proceeds from maturities or principal payments 5,287,519 6,822,819
Purchases (9,518,133) (9,463,295)
Securities held-to-maturity:
Proceeds from maturities or principal payments 815,000 -
Purchases (225,000) (250,000)
Purchases of premises and equipment (918,428) (307,310)
Proceeds from sale of foreclosed real estate (50,690) -
Net increase in loans (11,935,082) (11,635,618)
------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (21,792,714) (12,240,017)
------------- --------------
</TABLE>
Page 38 of 57
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 14,481,199 $ 16,143,242
Net increase (decrease) in securities sold under
repurchase agreements 3,224,510 (1,767,958)
Proceeds from issuance of capital stock 1,950,995 20,000
Payments on fractional shares (3,083) -
Proceeds of long term debt 62,684 -
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,716,305 14,395,284
--------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (210,347) 3,256,240
Cash and due from banks, beginning of year 7,614,850 4,358,610
--------------- --------------
Cash and due from banks, end of year $ 7,404,503 $ 7,614,850
--------------- --------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid during the year for:
$ 3,730,911 $ 3,149,283
Interest --------------- --------------
Income taxes $ 488,836 $ 374,547
--------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net change in unrealized gain (loss) on securities
available-for-sale $ 207,767 $ (2,766)
--------------- --------------
Acquisition of real estate in settlement of loans $ 725,082 $ -
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
Page 39 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of Inland Northwest
Bancorporation, Inc. (the Corporation) and its wholly owned subsidiary, Inland
Northwest Bank (the Bank). All significant intercompany balances and
transactions have been eliminated in consolidation.
NATURE OF BUSINESS:
Inland Northwest Bank, the wholly owned subsidiary of Inland Northwest
Bancorporation, is a state chartered commercial bank under the laws of the state
of Washington, and provides banking services primarily throughout eastern
Washington and northern Idaho. The Corporation and its subsidiary are subject to
competition from other financial institutions, as well as nonfinancial
intermediaries. The Corporation and its subsidiary are also subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
BASIS OF FINANCIAL STATEMENT PRESENTATION:
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities as of the date of the
statement of financial condition and certain revenues and expenses for the
period. Actual results could differ, either positively or negatively, from
those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, and
the valuation of real estate acquired in connection with foreclosures, or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and other real estate owned, management obtains independent
appraisals for significant properties.
Management believes that the allowance for loan losses and other real estate
owned are adequate. While management uses currently available information to
recognize losses on loans and other real estate (when owned), future additions
to the allowances may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and other real
estate owned. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments of information available to them at the time
of their examination.
SECURITIES HELD-TO-MATURITY:
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
SECURITIES AVAILABLE-FOR-SALE:
Securities available-for-sale consist of bonds, notes, and debentures not
classified as securities held-to-maturity. Unrealized holding gains and losses,
net of tax, on securities available-for-sale are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses on
the sale of securities available-for-sale are determined using the specific-
identification method. Premiums and discounts are recognized in interest income
using the interest method over the period to maturity.
LOANS:
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding principal
adjusted for any charge offs, the allowance for loan losses, and any deferred
fees or costs on originated loans.
Page 40 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. All loans are charged off when the loan becomes 90 days delinquent
except for bankcard loans which are charged off when the loan becomes 120 days
delinquent, unless they are in the process of collection or adequately
collateralized.
The allowance for loan losses is increased by charges to income and decreased by
charge offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Interest is calculated by using the simple interest method on daily balances of
the principal amount outstanding.
PREMISES AND EQUIPMENT:
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method. Normal costs of maintenance
and repairs are charged to expense as incurred.
FORECLOSED REAL ESTATE:
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. An allowance for impairment losses is
used for fluctuations in estimated fair value.
INCOME TAXES:
The Corporation and its subsidiary file a consolidated federal income tax
return. The income tax related to the individual entities is generally computed
as if each one had filed a separate tax return.
Provisions for income taxes are based on taxes payable or refundable for the
current year (after exclusion of nontaxable income such as interest on state and
municipal securities) and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax bases
of assets and liabilities and their reported amounts in the consolidated
financial statements. Deferred tax assets and liabilities are included in the
consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities are
expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for
income taxes.
EARNINGS PER SHARE:
Earnings per share were computed by dividing net income by the total weighted
average common shares outstanding and the additional dilutive effect of stock
warrants during the respective periods. The dilutive effect of stock warrants
are considered using the treasury stock method. Per share data reflects the
stock dividend declared December 17, 1996.
RECLASSIFICATIONS:
Certain December 31, 1996, balances have been reclassified to conform with the
December 31, 1997, presentation. The reclassifications had no effect on net
income or retained earnings as previously presented.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in the
Page 41 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statement. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Inland Northwest
Bancorporation is in the process of determining its preferred format. The
adoption of SFAS No. 130 will have no impact on the consolidated statement of
financial condition, statement of income, or cash flows.
NOTE 2. ACCOUNTING CHANGE
Effective January 1, 1997, the Corporation adopted SFAS No. 128, Earnings Per
Share (EPS). Under the SFAS earnings per share is presented for basic and
diluted EPS on the face of the income statement. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
(see Note 20).
NOTE 3. INVESTMENTS IN SECURITIES
Securities held by the Corporation have been classified in the consolidated
statements of financial condition according to management's intent. The
amortized cost of securities and their approximate fair values at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------- ------------ ----------- ------------
SECURITIES AVAILABLE-FOR-SALE:
<S> <C> <C> <C> <C>
U.S. government agency
securities $16,068,048 $126,963 $(4,471) $16,190,540
U.S. treasury securities 5,054,917 107,312 (4,079) 5,158,150
Corporate debt obligations 756,982 445 (902) 756,525
Mortgage backed security 907,770 22,698 - 930,468
----------- -------- -------- -----------
$22,787,717 $257,418 $(9,452) $23,035,683
----------- -------- -------- -----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------- ----------- ---------- ---------------
SECURITIES AVAILABLE-FOR-SALE:
<S> <C> <C> <C> <C>
U.S. government agency
securities $10,148,659 $36,141 $(21,168) $10,163,632
U.S. treasury securities 6,567,867 45,380 (19,729) 6,593,518
Corporate debt obligations 968,843 851 (3,737) 965,957
Mortgage backed security 971,805 2,462 - 974,267
----------- ------- --------- -----------
$18,657,174 $84,834 $(44,634) $18,697,374
----------- ------- --------- -----------
</TABLE>
Page 42 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------------------------------------------------
SECURITIES HELD-TO-MATURITY:
<S> <C> <C> <C> <C>
State and municipal securities $969,770 $9,944 $ - $979,714
========== ========== =========== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------------
SECURITIES HELD-TO-MATURITY:
<S> <C> <C> <C> <C>
State and municipal securities $1,573,089 $5,353 $(7,342) $1,571,100
========== ========== =========== ===========
</TABLE>
The scheduled maturities of securities held-to-maturity and securities
available-for-sale (other than equity securities) at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
-------------------- ----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $375,000 $379,028 $ 2,272,159 $ 2,270,650
Due from one year to five years 594,770 600,686 15,603,848 15,685,375
Due from five to ten years - - 3,003,616 3,126,990
Due after ten years - - 1,000,324 1,022,200
Mortgage backed securities - - 907,770 930,468
--------- -------- ----------- -----------
$969,770 $979,714 $22,787,717 $23,035,683
========= ======== =========== ===========
</TABLE>
At December 31, 1997 and 1996, securities available-for-sale with an amortized
cost of $11,772,200 and $7,444,075, were pledged to secure the Bank's
performance of its obligations under repurchase agreements. Approximate market
value of these securities was $11,958,968 and $7,446,000 at December 31, 1997
and 1996. Securities available-for-sale with an amortized cost of $1,481,005 and
$1,021,649 at December 31, 1997 and 1996, were pledged to secure public deposits
for purposes required or permitted by law. The approximate market value of these
securities was $1,498,900 and $1,020,626 at December 31, 1997 and 1996,
respectively. There were no sales of available-for-sale securities in 1997 or
1996.
NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The components of loans in the consolidated statements of financial condition
were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------- ------------
<S> <C> <C>
Commercial $48,288,589 $39,345,254
Real Estate 21,112,199 18,529,737
Installment 3,852,485 3,913,269
Consumer and other 4,622,926 4,906,450
------------- -----------
</TABLE>
Page 43 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
77,876,199 66,694,710
Allowance for loan losses (1,085,374) (908,368)
Net deferred loan fees (266,876) (247,393)
----------- -----------
$76,523,949 $65,538,949
=========== ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ---------
<S> <C> <C>
Balance, beginning of year $ 908,368 $ 765,534
Provision charged to operations 225,000 291,600
Loans charged off, net of recoveries (47,994) (148,766)
---------- ---------
Balance, end of year $1,085,374 $ 908,368
========== =========
</TABLE>
Maturities for each loan category are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Commercial loans:
Maturing one year or less $16,626,583 $21,779,838
Maturing one to five years 9,803,535 7,049,521
Maturing five years or more 21,858,471 10,515,895
----------- -----------
48,288,589 39,345,254
----------- -----------
Real estate loans:
Maturing one year or less 5,666,595 7,181,213
Maturing one to five years 3,629,838 4,031,016
Maturing five years or more 11,815,766 7,317,508
----------- -----------
21,112,199 18,529,737
----------- -----------
Installment loans:
Maturing one year or less 381,616 631,100
Maturing one to five years 2,121,700 2,241,226
Maturing five years or more 1,349,169 1,040,943
----------- -----------
3,852,485 3,913,269
----------- -----------
Consumer and other loans:
Maturing one year or less 4,447,374 4,820,571
Maturing five years or more 35,552 85,879
Maturing five years or more 140,000 -
----------- -----------
4,622,926 4,906,450
----------- -----------
$77,876,199 $66,694,710
=========== ===========
</TABLE>
Page 44 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The loans fall into the following fixed and variable components:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Fixed rate loans $43,764,028 $35,098,896
Variable rate loans 34,112,171 31,595,814
----------- -----------
$77,876,199 $66,694,710
=========== ===========
</TABLE>
Impairment of loans having recorded investments of $716,860 and $335,679 at
December 31, 1997 and 1996, has been recognized in conformity with FASB
Statement No. 114 as amended by FASB Statement No. 118. The total allowance for
loan losses related to these loans was $254,674 and $50,352 at December 31, 1997
and 1996. The Bank is not committed to lend additional funds to debtors whose
loans have been modified. The average recorded investment in impaired loans
during the years ended December 31, 1997 and 1996, was $281,749 and $102,344,
respectively. Interest income on impaired loans of $37,465 and $13,010 was
recognized for cash payments received in 1997 and 1996, respectively.
NOTE 5. PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated statements of
financial condition at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Land $ 269,204 $ 269,204
Furniture, equipment, and building 1,982,974 1,654,092
Leasehold improvements 972,962 682,848
Vault 48,483 48,483
Land improvements 313,098 138,609
---------- ----------
TOTAL COST 3,586,721 2,793,236
Less accumulated depreciation 1,151,929 884,064
---------- ----------
NET BOOK VALUE $2,434,792 $1,909,172
========== ==========
</TABLE>
Depreciation expense was $295,791 and $256,058 for the years ended December 31,
1997 and 1996, respectively.
The Bank leases its main office and eight of its nine branches under lease
agreements that expire on various dates through 2017. The lease agreements have
various renewal options.
The following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining noncancellable lease terms
in excess of one year as of December 31, 1997:
Page 45 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Year ending December 31,
<S> <C>
1998 $ 269,023
1999 227,542
2000 146,014
2001 61,095
2002 58,095
Thereafter 286,360
----------
TOTAL MINIMUM PAYMENTS REQUIRED $1,048,129
==========
</TABLE>
Total lease payments under the above mentioned operating leases and other month-
to-month rentals for the years ended December 31, 1997 and 1996, were $226,851
and $185,849, respectively.
NOTE 6. FORECLOSED REAL ESTATE
An allowance for losses on foreclosed real estate was established in 1997,
activity in the account is as follows:
<TABLE>
<S> <C>
Balance at January 1, 1997 $ -
Provision charged to income 107,450
Charge-offs, net of recoveries (21,769)
--------
Balance at December 31, 1997 $85,681
========
</TABLE>
Included in the losses on foreclosed real estate in the statement of income for
the year ended December 31, 1997, are impairment losses of $85,681 on real
estate held for sale at December 31, 1997, and $21,769 of actual losses on sales
of real estate during 1997.
NOTE 7. DEPOSITS
Major classifications of deposits at December 31, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Demand deposits $ 24,316,238 $22,393,938
Money Market 24,597,471 21,144,623
NOW accounts 6,116,414 5,597,708
Savings deposits 2,727,396 2,859,168
Time deposits, $100,000 and over 12,618,384 9,157,652
Other time deposits 31,335,313 26,076,928
------------ -----------
$101,711,216 $87,230,017
============ ===========
</TABLE>
Maturities for time deposits at December 31, 1997, are summarized as follows:
<TABLE>
<S> <C>
Maturing one year or less $33,195,218
Maturing one to five years 10,741,057
Maturing after five years 17,422
-----------
$43,953,697
===========
</TABLE>
Page 46 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. FEDERAL HOME LOAN BANK ADVANCES
At December 31, 1997, FHLB advances were scheduled to mature as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate Amount
-------- -------
<S> <C> <C>
Years ending December 31,
2001 and thereafter 6.60% $62,684
======== =======
</TABLE>
NOTE 9. OTHER BORROWED FUNDS
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Securities underlying the agreements are
presented in Note 3.
Information concerning securities sold under agreements to repurchase at
December 31, 1997, is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year $ 9,743,337
===========
Average interest rate during the year 4.84%
===========
Maximum month-end balance during the year $11,086,711
===========
</TABLE>
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Bank is a party to various legal collection actions normally associated with
financial institutions, the aggregate effect of which, in management's and legal
counsel's opinion, would not be material to the financial condition of Inland
Northwest Bancorporation.
The Bank has unsecured operating lines of credit with Key Bank of Washington for
$2,000,000, U.S. Bank for $1,200,000, and Federal Home Loan Bank for $4,976,500.
There were no outstanding balances at December 31, 1997 and 1996.
In the ordinary course of business, the Corporation, through its Bank subsidiary
makes various commitments and incurs certain contingent liabilities which are
not reflected in the accompanying financial statements. These commitments and
contingent liabilities include various commitments to extend credit and standby
letters of credit. At December 31, 1997 and 1996, commitments under "standby"
letters of credit approximated $312,609 and $137,660 and firm loan commitments
approximated $20,350,039 and $18,856,569, respectively. The Corporation does
not anticipate any material losses as a result of these commitments.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
All of the Bank's loans, commitments, and standby letters of credit have been
granted to customers in the Bank's market area, which is the eastern Washington
and northern Idaho area. Substantially all such customers are depositors of the
Bank. The concentrations of credit by type of loan are set forth in Note 4.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers.
Page 47 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bank places its cash with high credit quality institutions. The amount on
deposit fluctuates, and at times exceeds the insured limit by the U.S. Federal
Deposit Insurance Corporation, which potentially subjects the Bank to credit
risk.
NOTE 12. FEDERAL INCOME TAXES
The components of federal income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current tax expense $293,553 $344,393
Deferred tax expense (credit) 133,290 (53,281)
-------- --------
FEDERAL INCOME TAX EXPENSE $426,843 $291,112
======== ========
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $349,711 $291,645
Deferred compensation 34,917 22,667
Other 5,677 5,931
-------- ---------
390,305 320,243
-------- ---------
Deferred tax liabilities:
Accumulated depreciation 186,270 69,567
Conversion from accrual to cash basis method of accounting for
tax purposes 17,843 26,764
Deferred loan fees 87,491 -
Net unrealized loss on securities available-for-sale 86,788 13,668
Other 18,365 10,286
-------- ---------
396,757 120,285
-------- ---------
NET DEFERRED TAX ASSET (LIABILITY) $ (6,452) $199,958
======== =========
</TABLE>
The net deferred tax asset (liability) is included in other assets on the
consolidated statements of financial condition.
At December 31, 1997 and 1996, a prepaid federal income tax refund of $61,993
and $6,927, respectively, was included in other assets on the consolidated
statement of financial condition.
The effective tax rate differs from the statutory federal tax rate for the years
presented as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Federal income tax at statutory rate $434,112 $296,973
Effect of tax-exempt interest income (8,850) (13,406)
Effect of tax-exempt interest expense 3,014 3,577
Effect of nondeductible expenses 1,383 4,106
Other (2,816) (138)
-------- --------
FEDERAL INCOME TAX EXPENSE $426,843 $291,112
======== ========
</TABLE>
Page 48 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. EXECUTIVE RETIREMENT PLAN
Inland Northwest Bank maintains an unfunded supplemental executive retirement
plan for the benefit of the Bank's chief executive officer which vests in full
at retirement. The plan provides for monthly payments to the executive upon his
retirement or termination of employment and, alternatively, to his designated
beneficiary in the event of his death, for a period of fifteen years following
retirement at age 65.
At December 31, 1997 and 1996, $99,764 and $64,764, respectively, has been
accrued under this plan. This liability is recognized in accrued interest and
other liabilities in the financial statements. The present value at retirement
of the retirement benefit obligation is approximately $220,173. The unfunded
benefit is being expensed over the period of service through his expected
retirement age.
The net post-retirement benefit cost recognized during the years ended December
31, 1997 and 1996, was $35,000 and $33,000, respectively.
The Bank is the owner and beneficiary of life insurance policies on this officer
with a total face value of $226,274 and cash surrender value of $95,379 and
$66,390 at December 31, 1997 and 1996, respectively. The cash surrender value
is included in the statements of financial condition in Other Assets.
NOTE 14. COMMON STOCK PURCHASE WARRANTS AND STOCK OPTION PLAN
In 1989, Inland Northwest Bank issued one common stock purchase warrant to
individuals defined as founders for each share purchased in the initial offering
or 115,145 warrants. Additionally, 19,000 warrants were issued to the Pre-
Organization Steering Committee. During 1993, those warrants were transferred
to Inland Northwest Bancorporation, Inc., and as a result thereof, the
Corporation has issued warrants to the founders group to purchase 178,314 shares
of common stock adjusted for stock dividends. The warrants expire on January
16, 2000. As of December 31, 1997, 3,763 of the warrants have been exercised.
These warrants are detachable and nontransferable. The warrants entitle the
holder to acquire shares of the Bank's common stock at the initial offering
price of $15 per share; as the warrants are adjusted for stock dividends, the
actual price per share decreases and the quantity subject to purchase increases.
During 1992, the Board of Directors of the Bank authorized key employees of the
Bank to be eligible to participate in a nonqualified stock option plan. Under
the Plan, the Board of Directors may grant options to purchase shares of common
stock of the Corporation, not to exceed 40,000 shares. The per option price for
options granted shall be the fair market value of said share on the date the
option is granted. The options granted after 1995 are eligible for stock
dividends.
A summary of the status of the Bank's stock option plans and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE SHARES EXERCISE
ACTUAL PRICE ACTUAL PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year 11,300 $20.99 8,300 $19.54
Granted 4,500 $26.00 3,000 $25.00
Exercised (1,400) $17.50 - -
Forfeited - - - -
------- -------
</TABLE>
Page 49 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Outstanding at end of year 14,400 - 11,300 $20.99
====== ======
Options exercisable at year-end 7,500 8,300
====== ======
Weighted average fair value of options
====== $ 13.74
granted during the year $10.45 ======
======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
------------------------------------ ---------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at End of Contractual Exercise at End of Exercise
Exercise Prices Year Life Price Year Price
----------- ------------ --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
All price ranges
($21.00 through
$26.00) 14,400 7.1 years $24.84 7,500 $24.09
=========== ============ ========= ============ ================
</TABLE>
The pro forma income statement below presents the effect on net income as
reported if the fair value of accounting for the nonqualified stock options had
been adopted by the Bank. The fair value assumptions are based on a risk-free
interest rate of 6%, 10 and 9 year expected life for the options granted in 1997
and 1996, respectively, assuming no cash dividends declared.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net income as previously reported $829,404 $567,998
Proforma adjustment for effect of a change in accounting principle (10,192) (6,614)
-------- --------
Proforma net income $819,212 $561,384
-------- --------
Per share amounts:
Earnings per common $ 1.72 $ 1.27
Proforma adjustment for effect of fair value account for stock options (0.02) (0.02)
-------- --------
Proforma net income $ 1.70 $ 1.25
-------- --------
Earnings per share assuming full dilution $ 1.43 $ 1.04
Proforma adjustment for effect of fair value accounting for stock options (0.02) (0.02)
-------- --------
Proforma net income $ 1.41 $ 1.02
-------- --------
</TABLE>
The pro forma effect on net income as reported, if the fair value of accounting
for stock options had been adopted by the Corporation, is not significantly
different than net income as reported on the statement of income. The fair
value assumptions are based on a risk-free interest rate of 6%, 9 year and 10
year expected lives for the options granted in 1996 and 1997, respectively, and
assumes no annual cash dividends.
NOTE 15. COMMON STOCK
On December 17, 1996, the Board of Directors declared a 10% stock dividend,
effective to stockholders of record January 15, 1997 and issued February 15,
1997. All amounts per share and weighted average shares outstanding for all
periods presented have been retroactively adjusted to reflect the stock
dividends. The Corporation recorded a transfer from retained earnings to common
stock for the book value of the additional shares issued at December 31, 1996.
Stock options granted in 1996 also received the 10% stock dividend.
In December 1996, the Board of Directors voted to authorize a stock rights offer
in the amount of one right for every five shares, warrants, or options held by a
shareholder. The offering resulted in the issuance of an additional 117,872
shares for $1,862,745, net of offering costs.
During 1997 and 1996, the Board of Directors voted to issue 100 and 50 shares,
respectively, of common stock to each Director in lieu of increasing Director's
fees. Total shares issued during 1997 and 1996 were 1,300 and 650,
respectively. Additionally, during 1997 and 1996 the Corporation issued a total
of 50 shares and 150 shares, respectively, of common stock to retiring Directors
as authorized by the Board of Directors.
NOTE 16. PROFIT SHARING PLAN
The Bank has a 401(k) profit sharing plan covering all employees who meet the
eligibility requirements. The Plan provides for employees to elect up to 15% of
their compensation to be paid into the fund. The Bank's policy is to match
contributions equal to 50% of the participant's
Page 50 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contribution not to exceed 5% of the participant's compensation. Vesting occurs
equally at 20% each year for five years. The Bank's contribution was $35,550 and
$23,553 for years ended December 31, 1997 and 1996.
NOTE 17. RELATED PARTY TRANSACTIONS
The Corporation, through its Bank subsidiary has had, and may be expected to
have in the future, banking transactions in the ordinary course of business with
directors, principal officers, their immediate families, and affiliated
companies in which they are principal stockholders. Aggregate loan balances
with related parties at December 31, 1997 and 1996, were $725,562 and
$2,065,021, respectively, all of which have been made, in the opinion of
management, on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others.
NOTE 18. RESTRICTIONS ON DIVIDENDS AND RETAINED EARNINGS
Dividends paid by the Bank subsidiary are the primary source of funds available
to the Corporation. Statutes and regulations impose restrictions on the amount
of dividends that may be declared by the Bank subsidiary. Aggregate dividends
of approximately $1,234,762 can be declared by the Bank subsidiary without prior
regulatory approval.
NOTE 19. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines on the
regulatory framework for prompt corrective action, the Bank must meet specific
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tier 1 capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). Under the regulatory framework
for prompt corrective action, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based, and total risk-based ratios as set forth in the table.
As of December 31, 1996, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum capital ratios as set forth in the following table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table:
Page 51 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
To be Adequately
Capitalized Under
Prompt Corrective
Action Purposes
-------------------
Actual
Amount Ratio Amount Ratio
---------- ------- -------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Tier 1 capital (to average assets) $ 9,299,043 8.46% more than $4,397,778 more than 4.0%
Tier 1 capital (to risk-weighted assets) $ 9,299,043 10.98% more than $3,388,200 more than 4.0%
Total capital (to risk-weighted assets) $10,384,417 12.26% more than $6,776,400 more than 8.0%
DECEMBER 31, 1996
Tier 1 capital (to average assets) $ 6,521,727 7.09% more than $3,681,897 more than 4.0%
Tier 1 capital (to risk-weighted assets) $ 6,521,727 8.93% more than $2,825,560 more than 4.0%
Total capital (to risk-weighted assets) $ 7,404,727 10.48% more than $5,651,120 more than 8.0%
<CAPTION>
To be Well Capitalized
Under Prompt Corrective
Action Provisions
--------------------------------------
Amount Ratio
------------------ -----------------
<S> <C> <C>
DECEMBER 31, 1997
Tier 1 capital (to average assets) more than $5,497,223 more than 5.0%
Tier 1 capital (to risk-weighted assets) more than $5,082,300 more than 6.0%
Total capital (to risk-weighted assets) more than $8,470,500 more than 10.0%
DECEMBER 31, 1996
Tier 1 capital (to average assets) more than $4,602,371 more than 5.0%
Tier 1 capital (to risk-weighted assets) more than $4,238,340 more than 6.0%
Total capital (to risk-weighted assets) more than $7,063,900 more than 10.0%
</TABLE>
NOTE 20. EARNINGS PER SHARE
The calculation of earnings per share and earnings per share assuming full
dilution is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $829,404 481,131 $1.72
----------- ----------- =========
EFFECT OF DILUTIVE SECURITIES
Stock warrants 96,829
Stock options 269
---------
DILUTED EPS
Income available to common stockholders
plus assumed conversions $829,404 578,229 $1.43
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $567,998 447,207 $1.27
-------- =======
EFFECT OF DILUTIVE SECURITIES
Stock warrants 98,525
Stock options 853
-------
</TABLE>
Page 52 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
DILUTED EPS
Income available to common stockholders
plus assumed conversions $567,998 546,585 $1.04
-------- ------- ------
</TABLE>
Options to purchase 14,400 and 11,300 shares of common stock at prices ranging
from $21 to $26 and $17.50 to $25 per share were outstanding for the periods
ended December 31, 1997 and 1996, respectively. The Bank's stock is quoted only
locally over the counter and traded on a limited basis. The average market
price per share used in the determination of the dilutive effect of stock
options and warrants was the average price of month end closing market values.
NOTE 21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Bank's financial instruments were as follows at
December 31, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
----------- ------------
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 7,404,503 $ 7,404,503
Federal funds sold 7,947,500 7,947,500
Securities available-for-sale 23,035,683 23,035,683
Securities held-to-maturity 969,770 979,714
Loans receivable 77,876,199 79,166,025
Accrued interest receivable 700,979 700,979
Financial Liabilities:
Federal Home Loan Bank advance 62,684 62,684
Deposits 101,711,216 101,166,971
Accrued interest liabilities 404,143 404,143
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, AND SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS:
The carrying amount approximates fair value because of the short maturity of
these investments.
SECURITIES AVAILABLE-FOR-SALE, SECURITIES HELD-TO-MATURITY, AND OTHER
INVESTMENTS:
The fair values of marketable securities are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Federal Home Loan
Bank stock fair value is based on current redemption values.
LOANS RECEIVABLE:
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, real estate,
consumer, credit card, and other. Each loan category is further segmented into
fixed and adjustable rate interest terms. The fair values for fixed-rate loans
are estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. For variable rate loans that reprice
frequently and have no significant change in credit risk, fair values are based
on carrying values.
Page 53 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEPOSITS:
The fair value of demand deposits, savings accounts, NOW, and money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity time deposits is estimated using the rates currently offered
for deposits of similar remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES:
The fair values of the Bank's long-term debt are estimated using discounted cash
flow analyses based on the Bank's current incremental borrowing rates for
similar types of borrowing arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate their fair values.
OFF-BALANCE-SHEET INSTRUMENTS:
Fair values for off-balance-sheet lending commitments are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standings. The
fair value of the fees at December 31, 1997, was insignificant. See Note 10 for
the notional amount of the commitments to extend credit.
NOTE 22. SUBSEQUENT EVENT
On January 20, 1998, a letter of intent was signed to acquire a business
operating as a mortgage company. The holding company will pay cash and stock
for all outstanding shares, and the transaction will be accounted for under the
purchase method of accounting. Any premium paid is not expected to be
significant to the financial condition or results of operations in future
periods.
Page 54 of 57
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.*** Description
- ----------- -----------
<S> <C>
EX-3.1.1 Articles of Incorporation****
EX-3.1.2 Amendment to Articles of Incorporation****
EX-3.1.3 Amendment to Articles of Incorporation****
EX-3.2 Bylaws****
EX-4 See Exhibits Nos. EX-3.1.1 through EX-3.2 above****
EX-10.1.1 Lease Agreement Dated 08/01/89 And Amendment Dated 07/13/95 - The
Paulsen Center (Main Branch)*
EX-10.1.2 Lease - 15111 East Sprague Avenue
(Valley Branch)*
EX-10.1.3 Lease - 12825 - 14th Avenue
(Airway Heights Branch)*
EX-10.1.4 Lease - East 210 N. Foothills Drive
(North Foothills Dr. Branch)*
EX-10.1.5 Lease - 805 East Polston Ave., Post Falls, Idaho
(Post Falls Branch)*
EX-10.1.6 Ground Lease Dated 09/24/96** and Amendment Dated August 12, 1997
For South Hill Branch
EX-10.1.7 Lease - 3321 W. Indian Trail Road
(Indian Trail Branch)*
EX-10.1.8 Lease - 225 West Appleway, Coeur d'Alene, Idaho
(Appleway Branch)****
EX-10.1.9 Lease - 622 Sherman Avenue, Coeur d'Alene, Idaho
(Sherman Avenue Branch)****
EX-10.2.1 F.M. Schunter Employment Agreement Dated 01/01/94*
EX-10.2.2 Unfunded Supplemental Executive Retirement Plan For F.M. Schunter*
</TABLE>
Page of
<PAGE>
<TABLE>
<S> <C>
EX-10.2.3 Non-Qualified Stock Option Plan*
EX-10.2.4 Christopher C. Jurey Employment Agreement Dated 01/01/94*
EX-10.2.5 Jennifer L. Johnson Employment Agreement Dated 01/01/94*
EX-10.2.6 Randall L. Fewel Employment Agreement Dated 03/14/94*
EX-23.1 Consent Of Accountant
</TABLE>
_________
* Previously filed (in paper format) as an Exhibit to the Company's Form 1-A
Offering Statement Under Regulation A (Registration No. 24-3714) and
incorporated herein by reference.
** Ground Lease previously filed (in paper format) as an Exhibit to the
Company's Form 1-A Offering Statement Under Regulation A (Registration No.
24-3714) and incorporated herein by reference; only Amendment being filed
(in electronic format) with this Form 10-SB.
*** Exhibit numbers determined by reference to Regulation S-T Exhibit numbering
requirements, rather than Exhibit numbering requirements of Part III of
Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III of
10-SB. Included Exhibits respond to Exhibits required under Part III of
Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III of
Form 10-SB, specifically those documents required to be filed as Exhibit
nos. 2, 3, 5, 6 and 7 in Part III of Form 1-A.
**** Previously filed in electronic format as an Exhibit to the Company's Form
10-SB (Registration No. 0-24151) on April 30, 1998, and incorporated herein
by reference.
Page of
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
INLAND NORTHWEST BANCORPORATION, INC.
Date: June 30, 1998 By: /s/ Frederick M. Schunter
------- -------------------------------------------
Frederick M. Schunter, President and
Chief Executive Officer
Page of
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.*** Description
- ----------- -----------
<S> <C>
EX-3.1.1 Articles of Incorporation****
EX-3.1.2 Amendment to Articles of Incorporation****
EX-3.1.3 Amendment to Articles of Incorporation****
EX-3.2 Bylaws****
EX-4 See Exhibits Nos. EX-3.1.1 through EX-3.2 above****
EX-10.1.1 Lease Agreement Dated 08/01/89 And Amendment Dated 07/13/95 - The
Paulsen Center (Main Branch)*
EX-10.1.2 Lease - 15111 East Sprague Avenue
(Valley Branch)*
EX-10.1.3 Lease - 12825 - 14th Avenue
(Airway Heights Branch)*
EX-10.1.4 Lease - East 210 N. Foothills Drive
(North Foothills Dr. Branch)*
EX-10.1.5 Lease - 805 East Polston Ave., Post Falls, Idaho
(Post Falls Branch)*
EX-10.1.6 Ground Lease Dated 09/24/96** and Amendment Dated August 12, 1997
For South Hill Branch
EX-10.1.7 Lease - 3321 W. Indian Trail Road
(Indian Trail Branch)*
EX-10.1.8 Lease - 225 West Appleway, Coeur d'Alene, Idaho
(Appleway Branch)
EX-10.1.9 Lease - 622 Sherman Avenue, Coeur d'Alene, Idaho
(Sherman Avenue Branch)
EX-10.2.1 F.M. Schunter Employment Agreement Dated 01/01/94*
EX-10.2.2 Unfunded Supplemental Executive Retirement Plan For F.M. Schunter*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
EX-10.2.3 Non-Qualified Stock Option Plan*
EX-10.2.4 Christopher C. Jurey Employment Agreement Dated 01/01/94*
EX-10.2.5 Jennifer L. Johnson Employment Agreement Dated 01/01/94*
EX-10.2.6 Randall L. Fewel Employment Agreement Dated 03/14/94*
EX-23.1 Consent Of Accountant
</TABLE>
_________
* Previously filed (in paper format) as an Exhibit to the Company's Form 1-A
Offering Statement Under Regulation A (Registration No. 24-3714) and
incorporated herein by reference.
** Ground Lease previously filed (in paper format) as an Exhibit to the
Company's Form 1-A Offering Statement Under Regulation A (Registration No.
24-3714) and incorporated herein by reference; only Amendment being filed
(in electronic format) with this Form 10-SB.
*** Exhibit numbers determined by reference to Regulation S-T Exhibit numbering
requirements, rather than Exhibit numbering requirements of Part III of Form
10-SB and/or Part III of Form 1-A as cross-referred to in Part III of 10-SB.
Included Exhibits respond to Exhibits required under Part III of Form 10-SB
and/or Part III of Form 1-A as cross-referred to in Part III of Form 10-SB,
specifically those documents required to be filed as Exhibit nos. 2, 3, 5, 6
and 7 in Part III of Form 1-A.
<PAGE>
[McFARLAND & ALTON P.S. LETTERHEAD]
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in, and incorporation by reference in, the
registration statement on Form 10-SB of Inland Northwest Bancorporation, Inc. of
our report dated January 13, 1998, except for Note 22 as to which the date is
January 20, 1998, on our audit of the financial statements and financial
statement schedules of Inland Northwest Bancorporation, Inc. as of and for the
years ended December 31, 1997 and 1996. We also consent to the reference to our
firm in such registration statement.
/s/ McFarland & Alton, P.S.
Spokane, Washington
June 30, 1998
