<PAGE>
As filed with the Securities and Exchange Commission on April 13, 1999
Registration No. 000-24151
================================================================================
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
INLAND NORTHWEST BANCORPORATION, INC.
(Name of Registrant as Specified in Its Charter)
NOT APPLICABLE
(Name of Persons(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] $125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] Fee Computed on table below per Exchange Act Rules 14a-6(i)(4) and O-11.
1) Title of each class of securities to which transaction applies:
.........................................................................
2) Aggregate number of securities to which transaction applies:
.........................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
.........................................................................
4) Proposed maximum aggregate value of transaction:
.........................................................................
5) Total fee paid:
.........................................................................
[ ] Fee paid previously by written preliminary materials.
[ ] Check box is any part of the fee is offset as provided by Exchange Act Rule
O-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ____________________________________________
2) Form Schedule or Registration Statement No.: _______________________
3) Filing Party: ______________________________________________________
4) Date Filed: _______________________
================================================================================
<PAGE>
Definitive Copy
Filed on April 13, 1999
INLAND NORTHWEST BANCORPORATION, INC.
421 West Riverside
Spokane, Washington 99201
----------------
April 13, 1999
Dear Shareholder:
You will find herein the following enclosures:
.Notice of Annual Meeting of Shareholders to be held May 17, 1999
.Proxy Statement
.Proxy Card
.Annual Report on Form 10-KSB (without exhibits) for the fiscal year ended
December 31, 1998
As noted in the Proxy Statement, you are being asked at the Annual Meeting
(1) to elect five Directors for a three-year term, (2) to approve an amendment
to the Articles of Incorporation to increase the authorized number of shares
of common stock and (3) to ratify the selection of Moss Adams, LLP (formerly
McFarland & Alton, P.S.) as independent certified public accountants.
More information about the Annual Meeting is included in the enclosed Proxy
Statement.
Please call Jennifer Johnson or myself (509-456-8888) with any questions
that you may have concerning the enclosed material. Your vote is important.
Whether or not you plan to attend the Annual Meeting, please take the time to
vote now by signing and dating the enclosed proxy card and returning it in the
enclosed self-addressed, stamped envelope as soon as possible. It is important
that all individuals listed on the mailing label sign the proxy card.
Thank you for your cooperation and immediate attention given to this matter.
Sincerely,
Frederick M. Schunter
President & Chief Executive Officer
<PAGE>
Definitive Copy
Filed on April 13, 1999
INLAND NORTHWEST BANCORPORATION, INC.
421 West Riverside
Spokane, Washington 99201
----------------
Notice of Annual Meeting of Shareholders
to be held May 17, 1999
----------------
TO THE SHAREHOLDERS OF INLAND NORTHWEST BANCORPORATION, INC.:
The Annual Meeting of Shareholders of Inland Northwest Bancorporation, Inc.
(the "Company") will be held in the facilities of Inland Northwest Bank
situated at 421 West Riverside (corner of Riverside and Stevens), Spokane,
Washington on Monday, May 17, 1999 at 5:30 p.m. (PDT) for the following
purposes:
(1) To elect five persons as Directors for a three-year term.
(2) To consider and vote upon a proposal to amend the Articles of
Incorporation to increase the authorized number of shares of common stock
from 1,000,000 shares to 5,000,000 shares.
(3) To consider and vote upon a proposal to ratify the selection of Moss
Adams, LLP (formerly McFarland & Alton, P.S.) as independent certified
public accountants for the fiscal year ending December 31, 1999.
(4) To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.
The close of business on April 8, 1999 has been designated as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Annual Meeting or any adjournments thereof.
By Order of the Board of Directors
William E. Shelby
Chairman
Spokane, Washington
April 13, 1999
Your Vote Is Important
We consider the vote of each shareholder to be important, whatever the
number of shares held. Whether or not you are able to attend the Annual
Meeting, please sign and date the enclosed proxy card and return it in the
enclosed envelope at your earliest convenience. The prompt return of your
proxy card will help to avoid further expense for your Company.
The Board of Directors recommends that you vote for (1) all five
nominees for Director, (2) the amendment to the Articles of Incorporation
and (3) the ratification of Moss Adams, LLP as independent certified
public accountants, and encourages the prompt return of the enclosed proxy
card.
<PAGE>
Definitive Copy
Filed on April 13, 1999
INLAND NORTHWEST BANCORPORATION, INC.
421 West Riverside
Spokane, Washington 99201
----------------
PROXY STATEMENT
----------------
Proxies, Solicitation and Voting
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Inland Northwest Bancorporation, Inc.
(the "Company") for use at the Annual Meeting of Shareholders of the Company
to be held in the facilities of Inland Northwest Bank situated at 421 West
Riverside (corner of Riverside and Stevens), Spokane, Washington, on Monday,
May 17, 1999 at 5:30 p.m. (PDT) or any adjournments thereof. This Proxy
Statement was first mailed to shareholders on or about April 14, 1999.
The enclosed proxy, if properly signed and returned, will be voted in
accordance with the instructions specified thereon. If no instructions are
specified, the enclosed proxy will be voted for (1) all five nominees for
Director, (2) the amendment to the Articles of Incorporation and (3) the
ratification of the independent certified public accountants. A shareholder
who has delivered a proxy may revoke it at any time before it is exercised by
filing an instrument of revocation with the Secretary of the Company or by
delivering a duly signed proxy bearing a later date. A proxy may also be
revoked by attending the Annual Meeting and notifying the Secretary that the
shareholder intends to vote in person. Attendance at the Annual Meeting
without requesting the opportunity to vote in person will not constitute the
revocation of a proxy.
The close of business on April 8, 1999 has been designated as the record
date for the determination of shareholders entitled to notice of, and to vote
at, the Annual Meeting or any adjournments thereof. As of the record date for
the Annual Meeting, the Company had 604,378 shares of common stock
outstanding, held of record by 478 shareholders. Each share of common stock
outstanding on the record date for the Annual Meeting entitles the holder
thereof to one vote on each matter to be voted on at the Annual Meeting (in
the case of the election of Directors, one vote for each Director position up
for election). Shareholders of the Company are not entitled to exercise
cumulative voting rights in the election of Directors.
The holders of a majority of the shares outstanding on the record date for
the Annual Meeting, present in person or represented by proxy, will constitute
a quorum for the transaction of business at the Annual Meeting. The five
persons who receive a plurality of the votes cast at the Annual Meeting will
be elected as Directors. The affirmative vote of the holders of a majority of
the shares of common stock outstanding on the record date for the Annual
Meeting is required for the approval of the amendment to the Articles of
Incorporation. A plurality of the votes cast at the Annual Meeting is required
for the ratification of the independent certified public accountants.
Abstentions and "broker non-votes" will be counted as shares that are present
at the Annual Meeting for purposes of determining a quorum. Abstentions and
"broker non-votes," however, will not be counted as either votes for or
against any item, which means that they will have no effect in the election of
Director or the ratification of the independent certified public accountants
but will have the effect of a vote against the amendment to the Articles of
Incorporation.
1
<PAGE>
1. ELECTION OF DIRECTORS
Composition of Board of Directors and Staggered Terms
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 of Directors would be in its first
year of service, one-third would be in its second year of service and another
one-third would be in its third year. The same persons currently serve as
Directors of Inland Northwest Bank, a wholly-owned subsidiary of the Company
(the "Bank").
The staggered term arrangements for Directors of the Company and the Bank
are consistent with similar staggered term arrangements originally established
by the Bank in 1990, prior to the organization of the Company as a holding
company for the Bank.
Nominees for Election As Directors at the Annual Meeting
Five of the thirteen Director positions have terms expiring, and are up for
election, at the Annual Meeting. The persons elected to such positions at the
Annual Meeting will serve for a three-year term ending with the Annual Meeting
to be held in 2002 or until their successors are duly elected and qualified,
unless they die, resign or are removed before such time. The Board of
Directors has nominated the following five persons for election as Directors
of the Company at the Annual Meeting. The Board of Directors recommends that
the shareholders vote for the election of all five nominees.
<TABLE>
<CAPTION>
Name Age Recent Business and Professional Experience
---- --- -------------------------------------------
<C> <C> <S>
Dwight B. Aden, Jr. 56 Mr. Aden was elected as a Director of the Bank
and the Company on May 20, 1996. His current
term as a Director will expire at the Annual
Meeting. Mr. Aden retired in 1997 as a senior
member and an owner of Jones & Mitchell
Insurance Co., an insurance brokerage firm in
Spokane, Washington.
Jimmie T.G. Coulson 65 Mr. Coulson 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. His current term as a Director will expire
at the Annual Meeting. Mr. Coulson is the
President and Chief Executive Officer of The
Coeur d'Alenes Company, a steel service center
and fabrication facility located in Spokane,
Washington.
Harlan D. Douglass 62 Mr. Douglass has been a Director of the Bank
since May 26, 1989. He has been a Director of
the Company since March 30, 1992. His current
term as a Director will expire at the Annual
Meeting. Mr. Douglass' primary business
activities consist of the management of a
diversified real estate business, including
multi-family and commercial projects.
Freeman B. Duncan 52 Mr. Duncan was elected as a Director of the Bank
and the Company on May 20, 1996. His term as a
Director will expire at the Annual Meeting. Mr.
Duncan is an attorney specializing in real
estate matters.
Donald A. Ellingsen, M.D. 62 Dr. Ellingsen was elected as a Director of the
Bank and the Company on May 20, 1996. His
current term as a Director will expire at the
Annual Meeting. Dr. Ellingsen is a retired
ophthalmologist and member of the Spokane Eye
Clinic, Spokane, Washington.
</TABLE>
Each of the nominees has consented to being named in this Proxy Statement
and to serving as a Director if elected. The Company knows of no reason why
any nominee would be unable to unwilling to serve if elected. If any nominee
becomes unavailable for election, the persons named in the enclosed proxy will
vote for such other nominee as the Board of Directors may recommend. There are
no arrangements or understandings between any nominee and any other nominee.
2
<PAGE>
Other Directors Not up for Election at the Annual Meeting
The following persons are the other eight Directors of the Company whose
terms are not expiring at the Annual Meeting.
<TABLE>
<CAPTION>
Name Age Recent Business and Professional Experience
---- --- -------------------------------------------
<C> <C> <S>
Clark H. Gemmill 56 Mr. Gemmill 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 expire at the Annual
Meeting to be held in 2001. 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 42 Mr. Norby 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 will expire at the Annual Meeting 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 64 Mr. Peterson 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 will expire at
the Annual Meeting to be held in 2000. During the
past five years, Mr. Peterson was the President and
Chief Executive Officer of Peterson & Company, an
independent investment securities firm in Spokane,
Washington until 1994 and is now a vice president of
Everen Securities at its branch in Spokane.
Hubert F. Randall 70 Mr. Randall 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 will expire at
the Annual Meeting 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 66 Mr. Sandberg 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 will expire at
the Annual Meeting to be held in 2001. Mr. Sandberg
is retired; for the five years prior to his
retirement, he was the President and Chief Executive
Officer of Sandberg Securities, an independent
investment services firm in Spokane, Washington.
Frederick M. Schunter 62 Mr. Schunter 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 and President of the Company since December
10, 1991. Mr. Schunter's current term as a Director
will expire at the Annual Meeting to be held in
2001. Mr. Schunter also is the Chief Executive
Officer of INB Mortgage, a subsidiary of the
Company.
William E. Shelby 60 Mr. Shelby 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 will expire
at the Annual Meeting to be held in 2001. Mr. Shelby
is employed as the Vice President of Store
Development for U.R.M. Stores, Inc.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Name Age Recent Business and Professional Experience
---- --- -------------------------------------------
<C> <C> <S>
James R. Walker 65 Mr. Walker 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 will expire at the Annual Meeting to be
held in 2001. Mr. Walker was the President and Chief
Executive Officer of Hazen & Clark, Inc., a general
contracting firm, from 1968 until his retirement in 1995.
</TABLE>
Committees and Meetings of the Board of Directors
The Board of Directors has an Audit and Examination Committee and a
Nominating Committee, but not a Compensation Committee. The members of the
Audit and Examination Committee are Mr. Sandberg, Mr. Aden, Mr. Duncan, Dr.
Ellingsen, Mr. Norby and Mr. Walker. The Audit and Examination Committee held
one meeting during the fiscal year ended December 31, 1998. The
responsibilities of the Audit and Examination Committee include monitoring
compliance with Board policies and applicable laws and regulations, holding
periodic meetings with the Bank's internal and external auditors and with the
Bank's examiners to receive reports and discuss findings, making
recommendations to the full Board of Directors concerning the adequacy and
accuracy of internal systems and controls, the appointment of auditors and the
acceptance of audits, and monitoring management's efforts to correct any
deficiencies discovered in an audit or supervisory examination.
The members of the Nominating Committee are Mr. Coulson, Mr. Duncan, Mr.
Douglass, Mr. Norby, Mr. Randall, Mr. Schunter and Mr. Shelby. The Nominating
Committee held one meeting during the fiscal year ended December 31, 1998. The
responsibilities of the Nominating Committee include selecting and
recommending to the full Board of Directors nominees for election as Director
at the Annual Meeting held each year, candidates to fill any Director
vacancies, and persons for appointment as officers. Shareholders who wish the
Nominating Committee to consider their recommendations for nominees for
Director should submit their recommendations in writing to the Nominating
Committee in care of the Company's Secretary at the Company's principal
executive office.
The Board of Directors held eight meetings and Committees of the Board of
Directors, in total, held two meetings during the fiscal year ended December
31, 1998. All of the Directors attended more than seventy-five percent of the
aggregate of all meetings of the Board of Directors and the Committees on
which they serve during the fiscal year ended December 31, 1998.
Officers
In addition to Mr. Schunter, the officers of the Company and its
subsidiaries are:
Jennifer L. Johnson--Ms. Johnson is 38 and is an officer of the Bank. She
also is the Secretary of the Company. She has been employed by the Bank from
1989 to date and by the Company since 1992.
Christopher C. Jurey--Mr. Jurey is 49 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 of the Bank and the Chief Financial
Officer of INB Mortgage.
Randall L. Fewel--Mr. Fewel is 50 and joined the Bank as a Vice President
and Senior Loan Officer in March 1994. He currently is an Executive Vice
President.
Douglas Beaudoin--Mr. Beaudoin is 48 and joined INB Mortgage as President
and Chief Operating Officer on November 23, 1998. Prior to joining INB
Mortgage, he was an officer with a commercial bank with general banking
responsibilities and with another commercial bank with specific
responsibilities for residential and commercial real estate lending
activities.
There are no family relationships among these Directors and executive
officers.
4
<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 1998 fiscal
year. No officer or Director of the Company has received any remuneration or
indirect financial benefit to date.
<TABLE>
<CAPTION>
Name of
individual Aggregate annual
or identity of Capacities in which remuneration
group remuneration was received for last fiscal year
-------------- ------------------------- --------------------
<S> <C> <C>
Frederick M.
Schunter President and Chief Executive Officer $161,914(1)
Christopher C.
Jurey Executive Vice President 96,668
Randall L.
Fewel Executive Vice President 100,981
</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 1998 was $35,000.
Directors of the Bank (excluding Mr. Schunter) receive an attendance fee in
the amount of $200 per meeting and $100 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 $522,999 for fiscal year 1998.
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 $150,000.
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 $91,924, the Fixed Salary for Randall L. Fewel currently is
$91,924 and the Fixed Salary for Jennifer L. Johnson is $70,620.
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 $115,995 and $95,379 at December 31, 1998 and 1997,
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, 1998 and 1997, $134,764 and $99,764,
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, 1998 and 1997, was
$35,000 and $35,000, 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.
5
<PAGE>
Security Ownership of Management and Certain Security Holders
This information has been provided for the four highest paid executive
officers of the Bank. The Company does not have any compensated officers.
<TABLE>
<CAPTION>
Title of Amount Percent of Class
Class Name and Address of Owner Owned (as of 2-28-99)
-------- ------------------------- ------ ----------------
<C> <S> <C> <C>
Common Stock F. M. Schunter
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 20,272 3.38%
Common Stock Christopher C. Jurey
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 5,903 .98%
Common Stock Randall L. Fewel
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 1,602 .27%
Common Stock Jennifer L. Johnson
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 590 .10%
</TABLE>
Officers and Directors as a group own of record, to the knowledge of the
Company, 129,852 shares of common stock of the Company, representing 21.66% of
the outstanding 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, Date Exercisable
Name of Warrants or Exercise (if not currently
Holder Rights Price vested) Expiration Date
- ------- ---------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
F.M. option--1000 24.50 January 1, 2000
Schunter option--1000 25.00 January 2, 2001
option--1000 25.00 December 16, 2006
option--1000 26.00 December 16, 1999 December 15, 2007
option--1500 32.00 December 14, 2008
warrants--12,933 10.25 January 16, 2000
(as adjusted)
Christopher option--500 24.50 January 1, 2000
C. Jurey option--500 25.00 January 2, 2001
option--500 25.00 December 16, 1999 December 16, 2006
option--500 26.00 December 15, 2007
option--1000 32.00 December 14, 2008
Randall L. option--500 24.50 January 1, 2000
Fewel option--500 25.00 January 2, 2001
option--500 25.00 December 16, 1999 December 16, 2006
option--500 26.00 December 15, 2007
option--1000 32.00 December 14, 2008
Jennifer L. option--500 24.50 January 1, 2000
Johnson option--500 25.00 January 2, 2001
option--500 25.00 December 16, 1999 December 16, 2006
option--500 26.00 December 15, 2007
option--1000 32.00 December 14, 2008
</TABLE>
The options granted to the above persons expiring December 16, 2006,
December 15, 2007 and December 14, 2008, respectively, are subject to a
vesting schedule of 20% per year after the first year.
6
<PAGE>
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, 1998, was $1,041,586 including unused
commitments.
2. AMENDMENT TO ARTICLES OF INCORPORATION
The Board of Directors has approved, and is submitting to the shareholders a
proposal to consider and vote upon, an amendment to Article VII of the
Company's Articles of Incorporation to increase the number of shares of common
stock which the Company is authorized to issue from 1,000,000 shares to
5,000,000 shares. The Board of Directors recommends that the shareholders vote
for approval of the amendment to the Articles of Incorporation.
Purposes and Effects of Proposed Amendment
Under the Company's existing Articles of Incorporation, the Company is
authorized to issue 1,000,000 shares of common stock and 500,000 shares of
preferred stock. The proposed amendment would increase the number of shares of
common stock which the Company is authorized to issue to 5,000,000 shares. The
additional 4,000,000 shares would be a part of the existing class of common
stock and, if and when issued, would have the same rights and privileges as
the shares of common stock currently authorized. The proposed amendment would
not make any change in the number of shares of preferred stock which the
Company is authorized to issue.
As of the April 8, 1999 record date for the Annual Meeting, there were
604,378 shares of common stock outstanding and there were 203,392 shares of
common stock reserved for issuance pursuant to commitments under the Company's
outstanding stock options and warrants, leaving 192,230 shares of common stock
available for issuance. As of the record date for the Annual Meeting, there
were no shares of preferred stock outstanding.
The Board of Directors believes it is desirable to increase the authorized
number of shares of common stock in order to have a sufficient number of
shares to accomplish a two-for-one stock split on the common stock recently
declared by the Board of Directors which is further described below, as well
as to provide the Company with additional flexibility on the number of shares
which may be issued in the future. The stock split would result in the
issuance of 807,770 additional shares of common stock (including additional
shares issuable upon exercise of the Company's outstanding stock options and
warrants pursuant to appropriate adjustments in them as a result of the stock
split). Except for the stock split, the Company has no current commitments, or
definitive plans, to issue additional shares of common stock, other than
shares reserved for issuance under the Company's outstanding stock options and
warrants.
The Board of Directors, however, believes it is desirable for the Company to
have additional flexibility in the future on the issuance of shares of common
stock. The proposed amendment would permit the issuance of additional shares
of common stock up to the new 5,000,000 maximum number by action of the Board
of Directors alone, without any further action by the shareholders, on such
terms as the Board of Directors may approve. The Board of Directors believes
it is desirable for the Company to have this flexibility.
The holders of common stock are not entitled to preemptive rights or
cumulative voting. Consequently, the issuance of additional shares of common
stock might dilute the ownership and voting rights of existing shareholders,
depending on the circumstances.
7
<PAGE>
The proposed increase in the number of authorized shares of common stock is
not intended to attempt to inhibit a change in control of the Company. The
availability for issuance of additional shares of common stock, however, might
have the effect of discouraging or making more difficult efforts to obtain
control of the Company, depending on the circumstances. For example, the
issuance of additional shares of common stock would increase the number of
outstanding shares, thereby possibly diluting the interest of a party
attempting to obtain control of the Company. The Company, however, is not
aware of any pending or threatened efforts to acquire control of the Company.
Purposes and Effects of Recently Declared Stock Split
On March 16, 1999, the Board of Directors declared a two-for-one stock split
on the common stock effective as of May 21, 1999, the effective date for the
stock split. The stock split is intended to facilitate a more active trading
market in the Company's common stock by increasing the number of shares
outstanding and reducing the market price per share to a range more preferred
in the market place. The close of business on May 1, 1999, has been designated
as the record date for the stock split. Under the stock split, each record
owner of common stock on the record date for the stock split would become the
record owner of, and entitled to receive, certificate(s) representing one
additional share of common stock for each share of common stock then owned of
record by such shareholder, effective as of the effective date for the stock
split. In addition, the stock split will result in appropriate adjustments to
the Company's outstanding stock options and warrants, effective as of the
effective date for the stock split. Certificates representing shares of common
stock should be retained by each shareholder and should not be returned to the
Company. It will not be necessary to submit outstanding certificates for
exchange.
After the stock split, the shareholders' proportional percentages of the
outstanding common stock would not change.
Relationship of Proposed Amendment and Declared Stock Split
Under Washington law, the Board of Directors has the authority by its own
action alone, without any further action by the shareholders, to adopt an
amendment to the Company's Articles of Incorporation solely to change the
number of authorized shares of common stock to effectuate a split of the
shares of common stock, or solely to do so and to change the number of
authorized shares of common stock in proportion thereto. Consequently,
shareholder approval of an amendment to the Articles of Incorporation to
increase the authorized number of shares of common stock is not required under
Washington law to the extent that the increase in the number of authorized
shares is permitted by action of the Board of Directors alone in connection
with the stock split as described above.
An increase in the number of authorized shares of common stock over and
above an increase permitted by action of the Board of Directors alone in
connection with the stock split, however, does require shareholder approval
under Washington law. Since the Board of Directors believes that it is
desirable for the Company to have flexibility to issue additional shares of
common stock over and above an increase permitted by action of the Board of
Directors alone in connection with the stock split, the Board of Directors is
submitting to the shareholders for approval the proposed amendment to the
Articles of Incorporation to increase the authorized number of shares of
common stock to 5,000,000 shares.
The stock split, however, is not conditioned upon the approval by the
shareholders of the proposed amendment to the Articles of Incorporation to
increase the authorized number of shares of common stock to 5,000,000 shares.
If the proposed amendment is not approved by the shareholders, the stock split
will still take place because the Board of Directors has already adopted a
substitute amendment to the Articles of Incorporation to increase the
authorized number of shares of common stock by a sufficient amount to
effectuate the stock split pursuant to the independent authority of the Board
of Directors to adopt such an amendment by its own action alone. The
substitute amendment, however, will only take effect if the proposed amendment
to increase the authorized number of shares of common stock to 5,000,000 is
not approved by the shareholders.
8
<PAGE>
Text of Amendment of Articles of Incorporation
If the proposed amendment to the Articles of Incorporation is approved by
the shareholders, Article VII of the Articles of Incorporation would be
amended to read as follows:
ARTICLE VII.
The aggregate number of shares which the corporation shall have
authority to issue is five million (5,000,000) shares of common stock,
which shares shall be issued without par value and five hundred
thousand (500,000) shares of preferred stock having such par value per
share, if any, as the directors may determine. No shareholder shall be
entitled as of right to purchase or subscribe for any shares of this
corporation authorized but unissued at this time or for any shares,
debentures, bonds, or other certificates of indebtedness of whatever
kind and nature which may hereafter be authorized and issued. The
shareholders of this corporation shall not be entitled to exercise the
right of cumulative voting in the election of directors.
The shares of preferred stock may be issued from time to time in one
or more series, with each series to have a distinctive designation or
title as may be fixed by the Board of Directors prior to the issuance
of any shares thereof.
The Board of Directors may authorize the issuance of preferred stock
in accordance with the provisions of RCW 23B.06.020. The Board of
Directors is expressly authorized in the resolution or resolutions
providing for the issuance of any wholly unissued series of preferred
stock, to fix and determine the powers, rights, designations,
preferences, qualifications, limitations, voting rights and
restrictions on any such series. The Board of Directors is also
expressly authorized to fix the number of shares constituting any
series and to increase or decrease the number of shares of such series
but not below the number of shares of such series then outstanding. The
Board of Directors further shall have all powers granted to a Board of
Directors by applicable provisions of laws of the State of Washington,
as they may be amended from time to time or superseded or replaced by a
similar provision or provisions.
Effective Date of Proposed Amendment and Declared Stock Split
The proposed amendment to the Articles of Incorporation, if approved by the
shareholders, will become effective on or before May 21, 1999, the effective
date for the stock split. If the proposed amendment is not approved by the
shareholders, the substitute amendment to the Articles of Incorporation
adopted by the Board of Directors pursuant to its independent authority to
adopt such an amendment by its own action alone will instead become effective
on or before May 21, 1999, the effective date for the stock split. In either
case, the stock split will be effectuated, with an effective date of May 21,
1999.
Name Change
The Board of Directors has also adopted an amendment to the Company's
Articles of Incorporation to change the name of the Company to Northwest
Bancorporation, Inc. Under Washington law, the Board of Directors has the
authority by its own action alone, without any further action by the
shareholders, to adopt an amendment to the Articles of Incorporation to change
the name of the Company. Consequently, the amendment to change the name of the
Company is not being submitted to the shareholders for approval. The name
change amendment will become effective on or before May 21, 1999 along with
either the proposed amendment to increase the authorized number of shares of
common stock to 5,000,000, if approved by the shareholders, or the substitute
amendment to increase the authorized number of shares of common stock by a
sufficient amount to effectuate the stock split, if not.
9
<PAGE>
3. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Moss Adams, LLP (formerly McFarland &
Alton, P.S.) as independent certified public accountants to examine the
consolidated financial statements of the Company and its subsidiaries for the
fiscal year ending December 31, 1999, and is submitting to the shareholders a
proposal to consider and vote upon the ratification of such selection. The
Board of Directors recommends that the shareholders vote for ratification of
the selection of the independent certified public accountants.
Moss Adams, LLP (formerly McFarland & Alton, P.S.) has examined the
financial statements of the Bank since the Bank's organization in 1989 and the
consolidated financial statements of the Company and its subsidiaries since
the Company became a holding company for the Bank in 1993. A representative of
that accounting firm will be present at the Annual Meeting with the
opportunity to make a statement if desired and to respond to appropriate
questions.
OTHER BUSINESS
No other business is intended to be brought before the Annual Meting by the
Board of Directors, nor is the Board of Directors aware of any other business
to be brought before the Annual Meeting by others. If, however, any other
business properly comes before the Annual Meeting, the enclosed proxy
authorizes the persons named in the proxy to vote on such other business in
their discretion.
ADDITIONAL INFORMATION
Proposals of Shareholders
Shareholders who intend to have a proposal considered for inclusion in the
Company's proxy materials for presentation at the Annual Meeting to be held in
2000 must submit the proposal to the Company no later than December 16, 1999.
The Company reserves the right to reject or take other appropriate action with
respect to any proposal that does not comply with these and any other
applicable requirements.
Expenses
All expenses incurred in connection with the solicitation of proxies will be
borne by the Company. The Company will reimburse brokers, fiduciaries and
custodians for their costs in forwarding proxy materials to beneficial owners
of common stock held in their names.
Directors, officers, and employees of the Company and its subsidiaries may
also solicit proxies by mail, telephone and personal contact, but they will
not receive any additional compensation for these activities.
Annual Report
The Annual Report on Form 10-KSB (without exhibits) of the Company for the
fiscal year ended December 31, 1998 is also enclosed along with this Proxy
Statement. The consolidated financial statements of the Company (appearing
under the heading "1998 Financial Statements" in the Annual Report) and the
information regarding lack of changes in or disagreements with accountants of
the Company (appearing in Part II, Item 3 of the Annual Report) which are
contained in the Annual Report are incorporated by reference herein.
By Order of the Board of Directors
William E. Shelby
Chairman
April 13, 1999
10
<PAGE>
Definitive Copy
Filed on April 13, 1999
INLAND NORTHWEST BANCORPORATION, INC.
421 W. RIVERSIDE
SPOKANE, WASHINGTON 99201
The undersigned hereby constitutes and appoints F.M. SCHUNTER, WILLIAM. E.
SHELBY or JENNIFER L. JOHNSON, and each of them, proxies of the undersigned,
with full power of substitution, to vote all shares of the undersigned which
the undersigned would be entitled to vote if personally present at the Annual
Meeting of Shareholders of INLAND NORTHWEST BANCORPORATION, INC. to be held on
Monday, May 17, 1999 at 5:30 p.m. (PDT) or any adjournments thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL OF THE BELOW ITEMS. THIS
PROXY WILL BE VOTED IN ACCORDANCE WITH ANY SPECIFICATIONS MADE BELOW. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR ALL OF THE BELOW ITEMS.
(1)Election of five Directors for a three-year term.
<TABLE>
<S> <C> <C> <C>
NOMINEES: Dwight B. Aden, Jr., Jimmie T. FOR ALL WITHHOLD ALL FOR ALL EXCEPT
G. Coulson, Harlan D. Douglass, Freeman
B. Duncan, Donald A. Ellingsen [_] [_] [_]
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name below:
_______________________________________________________________________
(2) Approval of the amendment to the FOR AGAINST ABSTAIN
Articles of Incorporation to increase
the authorized number of shares of
common stock to 5,000,000. [_] [_] [_]
(3) Ratification of the selection of Moss FOR AGAINST ABSTAIN
Adams, LLP (formerly McFarland &
Alton, P.S.) as
independent certified public
accountants for the fiscal year
ending December 31, 1999. [_] [_] [_]
(4) To vote in their discretion upon such FOR AGAINST ABSTAIN
other matters as may properly come
before the Annual Meeting. [_] [_] [_]
</TABLE>
(TO BE SIGNED ON THE OTHER SIDE)
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
THIS PROXY IS SOLICITED BY PLEASE FILL IN, DATE AND SIGN THIS PROXY AND
THE BOARD OF DIRECTORS FOR RETURN IT IN THE ENCLOSED ENVELOPE.
THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON
MAY 17, 1999 AT 5:30 P.M.
(PDT) AT Shareholder's signature must agree with name
appearing on mailing label. If the shares are
held in joint tenancy, all parties to the joint
tenancy must sign. When signing the proxy as
attorney-in-fact, personal representative,
trustee, or guardian, please indicate capacity
in which you are signing.
INLAND NORTHWEST BANK
421 WEST RIVERSIDE
SPOKANE, WASHINGTON 99201
________________________________________________
Shareholder's Signature Date
________________________________________________
Shareholder's Signature Date
MAILING LABEL
(OVER)
<PAGE>
APPENDIX B
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998.
[ ] Transition report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from _______________ to
__________________
Commission file number 000-24151
Inland Northwest Bancorporation, Inc.
(Name of small business issuer in its charter)
WASHINGTON 91-1574174
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
421 W. Riverside, 99201-0403
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (509) 456-8888
Securities to be registered under Section 12(b) of the Act:
Title of each class
None
Name of each exchange on which registered
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, Without Par Value Per Share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
______ ______
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $13,027,474.
-----------------
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. $15,619,241 Based on average bid/ask
price as of February 28, 1999.
(Applicable only to corporate registrants) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the latest
practicable date 599,497
-------
Documents incorporated by reference. If the following documents are
incorporated by reference, briefly describe them and identify the part of the
Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) 9r
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure
Format (check one):
Yes X No
_____ _____
<PAGE>
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. In 1993, the Company became the
bank holding company parent of Inland Northwest Bank (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"). Following regulatory and shareholder
approval and in accordance with the provisions of the Plan of Exchange, the
transaction became effective on June 10, 1993. Since then, the Bank has been a
wholly-owned subsidiary of the Company and all the outstanding shares of
common stock of the Bank have been substantially all the assets of the Company
until the acquisition of a mortgage company on February 27, 1998.
The Bank had 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 through
the acquisition of all the outstanding common stock of Hege Company, Inc., a
Washington corporation 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, and the purchase price also included an
additional cash payment of $145,554. In connection with the acquisition, the
subsidiary's name was changed to INB Mortgage Company ("INB Mortgage"). INB
Mortgage is a mortgage broker, acting as a mortgage loan correspondent and is
qualified as a non-supervised loan mortgagee pursuant to government
regulations.
The acquisition was accounted for by the Company under the purchase method
of accounting, and the Company has recognized 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 under applicable
regulations to engage in additional types of correspondent mortgage loan
business. To fund the acquisition and provide for the additional capital, the
Company arranged for a $500,000 non-revolving line of credit with the Key Bank
of Washington.
General
The Company. During the period June 10, 1993 through December 31, 1998, the
Company's assets and revenues have increased because of the growth of the
Bank. The Company has expanded its business through the acquisition of its INB
Mortgage subsidiary, but that subsidiary is not profitable as yet. Although
the Company's management continues to consider the possibility of other
business opportunities, the Company currently has not established any
independent business activity apart from acting as the holding company parent
of the Bank and INB Mortgage. Expenses associated with any new business
activity initially would need to be funded through dividends received by the
Company from the Bank or INB Mortgage. Consequently, the Company would 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
2
<PAGE>
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 borrowed funds. 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.
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, in the market area. 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 of 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 market area is considered strong and stable.
Banking Services. A variety of commercial and retail banking services
offered by the Bank have been the Company's principal products during the past
five years. 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.
The financial products and services include a full range of deposit accounts
including checking accounts, money market accounts, and 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.).
3
<PAGE>
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 its only office. Because of the Company's
administrative support and capital availability, INB Mortgage expects to have
a larger presence in its market. In addition to the downtown location with 14
employees, a branch office has been established in the Spokane Valley with 4
employees.
As a broker, 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 operating at some
point in the future if it is profitable to engage in that type of activity.
Because INB Mortgage has not become profitable, as anticipated by the
Company in the business plan adopted for the acquisition, it has become
necessary for the Company to replace prior management and to increase its
equity contribution to a total of $719,334 as of December 31, 1998. The
Company does not believe that any additional investment will be required that
would have a material effect upon the Company's financial statements.
INB Mortgage is licensed to do business throughout the States of Washington
and 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. Competition in the Bank's market area is not greater than
competition in other parts of the United States. Consequently, the Company
does not believe that it faces unusual competitive conditions.
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 advantage 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.
4
<PAGE>
Regulation
General. Bank holding companies and banks are extensively regulated under
both federal and state law. Mortgage loan correspondents are subject to other
federal and state law. Mortgage loan correspondents 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 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, some of which may have a material impact
upon the Company's future financial performance.
Bank Holding Company Regulation. The Company is subject to the Bank 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
that 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
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,
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
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
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 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
5
<PAGE>
prospective rate of earnings retention appears to be consistent with the
corporation's capital needs, asset quality and overall financial condition.
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
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
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
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 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
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, 1998, 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 7.48%, 9.76% and
11.05%, respectively.
Federal Home Loan Bank. The Bank is a member of the Federal Home Loan Bank
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 a member of the FHLB, the Bank is required to purchase and hold stock in
the FHLB. As of December 31, 1998, the Bank held stock in the FHLB in the
amount of $382,200.
6
<PAGE>
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
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 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.
Community Reinvestment. Bank holding companies and their subsidiary banks
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,
1998 the Bank was rated "Satisfactory" with respect to CRA.
Other Regulations. The policies of regulatory authorities, including the
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 the regulations established by the Department of Housing and Urban
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.
7
<PAGE>
Employees
The Bank and INB Mortgage employed 105 full time equivalent persons as of
December 31, 1998; the Company does not have any compensated employees.
Merger of Independent Public Accounting Firm
Effective on January 1, 1999, McFarland & Alton, P.S. merged its practice
with Moss Adams LLP and accordingly, the independent certified public
accountant for future filings for Inland Northwest Bancorporation, Inc. (The
"Company") will be Moss Adams LLP. Moss Adams LLP audited the Company's
financial statements as of December 31, 1998 and rendered its unqualified
opinion thereon. There have not been any disagreements between the Company and
McFarland & Alton, P.S. up to the date of this filing, nor did Inland
Northwest Bancorporation, Inc. consult with Moss Adams LLP prior to the
merger.
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-KSB.
The Bank has experienced growth in total assets of 25.8% and 20.9% for the
fiscal years ended December 31, 1998 and 1997, respectively. Net loan growth
was 19.9% and 16.07% for these same periods. Also for these same periods, loan
losses net of recoveries were $399,557 and 47,994, respectively. The Bank
continues to provide for anticipated future losses through increases in the
allowance for loan loss reserve which was at $1,184,322, or 1.30% of
outstanding loans, on December 31, 1998 and $1,085,374, or 1.40% of
outstanding loans, on December 31, 1997. For information on the Bank's capital
ratios as of December 31, 1998, 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.
8
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDER EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL.
AVERAGE BALANCE/INTEREST INCOME AND EXPENSE RATES
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Average Average
Interest Yield Interest Yield
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Rate Paid Balance Expense Rate Paid
-------- -------- --------- -------- -------- ---------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable Investments.... $ 25,943 $ 1,715 6.61% $ 20,477 $1,258 6.14%
Nontaxable
Investments........... 819 36 4.40% 78 4 5.13%
-------- ------- ---- -------- ------ ----
Total Investment
Securities........... $ 26,762 $ 1,751 6.54% $ 20,555 $1,262 6.14%
Interest-bearing
Deposits with Banks.... $ 101 $ 5 4.95% $ 285 $ 13 4.56%
Fed Funds Sold.......... 15,183 815 5.37% 6,798 367 5.40%
-------- ------- ---- -------- ------ ----
Total Investments..... $ 42,046 $ 2,571 6.11% $ 27,638 $1,642 5.94%
Real Estate Loans....... $ 24,934 $ 2,351 9.43% $ 23,296 $2,221 9.53%
Consumer Loans.......... 7,404 674 9.10% 7,417 642 8.66%
VISA/MC................. 1,091 103 9.44% 1,066 104 9.76%
Commercial Loans........ 54,576 4,903 8.98% 39,553 3,767 9.52%
-------- ------- ---- -------- ------ ----
Total Loans........... $ 88,005 $ 8,031 9.13% $ 71,332 $6,734 9.44%
-------- ------- ---- -------- ------ ----
Total Earning Assets.. $130,051 $10,602 8.15% $ 98,970 $8,376 8.46%
Less Reserve for
Possible Loan Losses... $ (1,224) $ (1,025)
Cash and Due from
Banks.................. $ 7,464 $ 5,831
Other Non-earning
Assets................. 4,653 5,979
-------- --------
Total Assets.......... $140,944 $109,755
======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDER'S EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts............ $ 6,270 $ 111 1.77% $ 4,842 $ 89 1.84%
Money Market Accounts... 25,672 1,004 3.91% 23,689 994 4.20%
Savings Accounts........ 2,898 71 2.45% 2,641 66 2.50%
Other Time Deposits..... 57,932 3,363 5.81% 38,954 2,209 5.67%
-------- ------- ---- -------- ------ ----
Total Interest-bearing
Deposits............. $ 92,772 $ 4,549 4.90% $ 70,126 $3,358 4.79%
Securities Sold Under
Repurchase
Agreements/Borrowed
Funds.................. 10,604 490 4.62% 9,718 472 4.86%
-------- ------- ---- -------- ------ ----
Total Interest-bearing
Liabilities.......... $103,376 $ 5,039 4.87% $ 79,844 $3,830 4.80%
Demand Deposits......... $ 26,553 $ 21,158
Other Liabilities....... 1,157 790
Stockholder's Equity.... 9,858 7,963
-------- --------
Total Liabilities and
Stockholder's
Equity............... $140,944 $109,755
======== ========
Net Interest Income..... $ 5,563 $ 4,546
Net Average Yield on
Interest-earning
Assets................. 4.28% 4.59%
</TABLE>
COMMENTS
1. There were no out-of-period adjustments.
2. Loan fees are not included in interest income.
3. Bank was not involved in any foreign activities.
9
<PAGE>
<TABLE>
<CAPTION>
Difference Change Net Change
Change in in Income in Income in Income
Income on 1997 Due to Due to
Due to Change Volume Change in Rate and
1997 Change in in Due to Rate and Volume
1998 1997 Variance Rate Volume Rate Rate Change Volume Changes
------- ------- -------- ----- --------- ------ ----------- --------- ----------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans................... $88,005 $71,332 $16,673 9.44% $1,574 -0.31% $(225) $(52) $1,297
Securities.............. $26,762 $20,555 $ 6,207 6.14% $ 381 0.40% $ 83 $ 25 $ 489
Fed Funds Sold/Interest
Bearing Bank Balances.. $15,284 $ 7,083 $ 8,201 5.36% $ 440 0.00% $ 0 $ 0 $ 440
------- ------
Net Change in Income on
Total Earning Assets... $31,081 $2,226
======= ======
<CAPTION>
LIABILITIES
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW Accounts............ $ 6,270 $ 4,842 $ 1,428 1.84% $ 26 -0.07% $ (3) $ (1) $ 22
Money Market Accounts... 25,672 23,689 1,983 4.20% 83 -0.29% (68) (6) 10
Savings Accounts........ 2,898 2,641 257 2.50% 6 -0.05% (1) (0) 5
Other Time Deposits..... 57,932 38,954 18,978 5.67% 1,076 0.13% 52 25 1,154
Securities Sold under
Repurchase Agreements.. 10,604 9,718 886 4.86% 43 -0.24% (23) (2) 18
------
Net Change in Expense on
Total Interest Bearing
Deposits............... $1,209
Net Increase in Net
Interest Income........ $1,017
</TABLE>
10
<PAGE>
II. INVESTMENT PORTFOLIO.
Securities
The book & market values of the major classifications of investment
securities were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Securities available-for-sale:
US Treasury securities............... $ 5,019 $ 5,209 $ 5,055 $ 5,158
Obligations of federal government
agencies............................ 18,248 18,424 16,068 16,191
Mortgage backed securities........... 1,960 1,970 908 930
Corporate debt obligations........... 250 250 757 756
------- ------- ------- -------
Total.............................. $25,477 $25,853 $22,788 $23,035
======= ======= ======= =======
Securities held-to-maturity:
Obligations of states, municipalities
and political subdivisions.......... $ 818 $ 832 $ 970 $ 980
======= ======= ======= =======
</TABLE>
Analysis of Investment Securities
The following table sets forth the maturities of investment securities at
December 31, 1998.
<TABLE>
<CAPTION>
After After
1 yr. 5 yr.
but but
Within Weighted Within Weighted Within Weighted After Weighted
1 yr. Average 5 yr. Average 10 yr. Average 10 yr. Average
Maturity Yield Maturity Yield Maturity Yield Maturity Yield
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury........... $2,516 5.72% $1,499 6.40% $ 1,005 6.91% $ 0 n/a $ 5,020
U.S. Government
Agencies............... 2,275 6.01% 1,984 6.58% 13,988 6.54% 1,960 6.88% 20,207
State and Political
Subdivisions........... 240 4.27% 353 4.61% 225 4.50% 0 n/a 818
Other Securities........ 250 6.34% n/a 0.00% 0 n/a 0 n/a 250
------ ----- ------ ----- ------- ----- ------ ----- -------
Total by Maturity and
Yield................. $5,281 5.81% $3,836 6.33% $15,218 6.53% $1,960 6.88% $26,295
====== ===== ====== ===== ======= ===== ====== ===== =======
</TABLE>
Comment 1. Yields have not been adjusted on tax-exempt investments to
determine a tax-equivalent yield due to the nominal amount held in the
portfolio ($818).
With the exception of U.S. Government and U.S. Government agencies and
corporations, no securities issued by any one issuer exceed ten percent of
stockholder's equity.
11
<PAGE>
III. LOAN PORTFOLIO.
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loan:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Commercial loans......................................... $58,779 $48,289
Real estate loans........................................ 24,024 21,112
Installment loans........................................ 4,227 3,852
Consumer and other loans................................. 4,531 4,623
------- -------
Total Loans............................................ $91,561 $77,876
------- -------
Allowance for loan losses................................ (1,184) (1,085)
Deferred loan fees, net of deferred costs................ (256) (267)
------- -------
Net Loans.............................................. $90,121 $76,524
======= =======
</TABLE>
The following table shows the amounts and maturity analysis of commercial
and real estate construction loans outstanding as of December 31, 1998.
<TABLE>
<CAPTION>
Maturing
------------------------------------------------
After 1 yr. but
Within 1 yr. Within 5 yr. After 5 yr.
Maturity Maturity Maturity Total
------------ --------------- ----------- -------
<S> <C> <C> <C> <C>
Commercial............... $30,029 $11,590 $17,159 $58,778
Real Estate Loans........ 10,244 3,350 10,430 24,024
Installment.............. 844 2,029 1,355 4,228
Consumer and Other....... 4,298 0 233 4,531
------- ------- ------- -------
$45,415 $16,969 $29,177 $91,561
======= ======= ======= =======
Loans maturing after one year with
Fixed Rates.............. $ 8,473 $27,491
Variable Rates........... 8,496 1,686
------- -------
Totals................. $16,969 $29,177
======= =======
</TABLE>
Loans are placed in a nonaccrual status when they are not adequately
collateralized and when, in the opinion of management, the collection of
interest is questionable. 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 nonaccrual status.
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis.......... $ 144 $ 136
Loans contractually past due ninety days or more as
to interest or principal.......................... 632 220
Gross interest income which would have been
recorded under original terms..................... 163 36
Gross interest income recorded during the period... 128 37
</TABLE>
C.2. As of the end of the most recent reported period, 12/31/98, management
has no knowledge of additional loans where the financial condition of
its borrowers 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.
12
<PAGE>
IV. Summary of Loan Loss Experience
The following table provides an analysis of net losses by loan type for the
past two years:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
Total loans net of deferred fees at end of
period.......................................... $ 91,305 $ 77,609
Monthly average net loans........................ 88,005 71,332
Balance of allowance for possible loan losses at
beginning of period............................. 1,085 908
Loan charge-offs:
Commercial..................................... 342 48
Real Estate.................................... 7 15
Installment.................................... 62 0
----------- -----------
Total Charge-offs............................ 411 63
Recoveries of loans previously charged-off:
Commercial..................................... 0 15
Real Estate.................................... 0 0
Installment.................................... 11 0
----------- -----------
Total Recoveries............................. 11 15
Net Charge-offs.................................. 400 48
Provision charged to expense..................... 499 225
Balance of allowance for possible loan losses at
end of period................................... 1,184 1,085
Ratio of net charge-offs during period to average
loan outstanding................................ 0.45% 0.07%
</TABLE>
Breakdown of Allowance for Loan Losses:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
--------------- --------------
(Dollars in Thousands)
% of
% of Loans
Loans to to
Total Total
Amount Loans Amount Loans
------ -------- ------ -------
<S> <C> <C> <C> <C>
Risk Category 1 (Excellent)................. $ 1 0.08% $ 1 0.09%
Risk Category 2 (Good)...................... 3 0.25% 4 0.37%
Risk Category 3 (Pass):
Commercial................................ 291 24.58% 229 21.11%
Consumer.................................. 85 7.18% 86 7.93%
Risk Category 4 (Pass/Monitor).............. 94 7.94% 74 6.82%
Risk Category 5 (Watch)..................... 44 3.72% 17 1.57%
Risk Category 6 (Substandard)............... 269 22.72% 259 23.87%
Risk Category 7 (Doubtful).................. 12 1.01% 0 0.00%
SBA Loans Sold (Retained Portion)........... 46 3.89% 18 1.66%
Bankcard Loans.............................. 57 4.81% 54 4.98%
Specifically Identified Potential Loss...... 124 10.47% 227 20.92%
Commitments to Lend under Lines of Credit... 147 12.42% 76 7.00%
Supplementary Allowance Not Specifically
Allocated.................................. 11 0.93% 40 3.69%
------ ------- ------ -------
$1,184 100.00% $1,085 100.00%
====== ======= ====== =======
</TABLE>
13
<PAGE>
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>
Years Ended December 31,
---------------------------
1998 1997
------------- -------------
Amount Rate Amount Rate
------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-interest Bearing Demand Deposits........... $26,553 n/a $21,158 n/a
------- ----- ------- -----
Interest Bearing Deposits:
NOW Accounts................................. 6,270 1.77% 4,842 1.84%
Money Market Accounts........................ 25,672 3.91% 23,689 4.20%
Savings Accounts............................. 2,898 2.45% 2,641 2.50%
Other Time Deposits.......................... 57,932 5.81% 38,954 5.67%
------- ----- ------- -----
Total Interest Bearing Deposits................ $92,772 4.90% $70,126 4.79%
======= ===== ======= =====
</TABLE>
Maturities of Time Certificates of Deposit over $100,000 are shown below:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
(Dollars in Thousands)
<S> <C> <C>
3 Months or Less.................................. $ 4,390 $ 5,442
Over 3 through 6 Months........................... 3,681 3,802
Over 6 through 12 Months.......................... 2,320 2,397
Over 1 year through 5 years....................... 451 977
Over 5 years...................................... 0 0
----------- -----------
$ 10,842 $ 12,618
=========== ===========
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
Ratios for the two-year periods ended December 31, 1998 and December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Ratio: 1998 1997
------ ----- ------
<S> <C> <C>
Return on Average Assets...................................... 0.67% 0.76%
Return on Average Equity...................................... 9.61% 10.42%
Equity to Average Assets...................................... 6.99% 7.26%
Dividend Payout Ratio......................................... 0 0
</TABLE>
VII. SHORT-TERM BORROWINGS
Note payable, FHLB advances maturing 1999, 5.15% fixed rate. Requires
monthly principal and interest payment of $752.
Rate Shock Analysis
Periodically, the Bank commissions an analysis of the effect that a sudden
increase or decrease in interest rates would have on net interest income and
the value of the Bank's equity. The analyses are performed by the Independent
Banker's Association of America quarterly, and the Seattle Branch of the
Federal Home Loan Bank annually.
The Rate Shock Analysis presents estimates of the effect of an immediate
change in rates of between +400 basis points and -400 basis points (+ 4% to -
4%) as applied to all earning assets and interest bearing liabilities.
Depending upon the repricing characteristics of the Bank's assets and
liabilities, such a sudden change in rates
14
<PAGE>
can be expected to have either a positive or negative effect on Bank net
interest income. If, for example, substantially all of the Bank's deposits are
fixed rate and substantially all of the Bank's loans are variable rate, an
increase in interest rates would, initially, cause interest income to rise,
while interest expense would not change. As a result, net interest income
would increase until such time as deposits renewed or matured and were
replaced with higher rate deposits. On the other hand, if rates were to
decrease, the Bank would experience a decrease in net interest income. Sudden
changes in interest rates will have a similar, but generally opposite, effect
of the value of the Bank's equity.
Presented below are the results of the analysis performed on financial
information as of December 31, 1998. The results are supportive of Bank
management's desire to limit volatility of net interest income to no more than
plus or minus ten-percent when applying an interest rate shock of plus or
minus two-hundred basis points. There is currently no specific discipline that
Bank management applies to change in economic value of equity.
NET INTEREST INCOME AND MARKET VALUE
Summary Performance
($ in thousands)
<TABLE>
<CAPTION>
Net Interest Economic Value of
Income Equity
Projected ------------------ ------------------
Interest $ Change % Change $ Change % Change
Rate Estimated From From Estimated From From
Scenario Value Base Base Value Base Base
--------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
+400 $7,097 $ 826 13.17% $ 6,680 $(5,402) -44.71%
+300 6,888 $ 617 9.84% 7,865 $(4,217) -34.90%
+200 6,684 $ 413 6.59% 9,241 $(2,841) -23.51%
+100 6,478 $ 207 3.30% 10,645 $(1,437) -11.89%
Base 6,271 $ 0 0.00% 12,082 $ 0 0.00%
-100 6,050 $ (221) -3.52% 13,352 $ 1,270 10.51%
-200 5,788 $ (483) -7.70% 14,204 $ 2,122 17.56%
-300 5,507 $ (764) -12.18% 15,339 $ 3,257 29.96%
-400 5,209 $(1,062) -16.94% 16,672 $ 4,590 37.99%
</TABLE>
Forward-Looking Statements
The section, as well as certain other sections of this Annual Report 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 Annual Report will in fact transpire or prove to be
accurate.
Assessment of Year 2000 Issues
The Company established a Y2K committee, consisting of senior management and
its internal auditor, to consider computer-related issues commonly referred to
as the Year 2000 (Y2K) problem. In December 1997, the Board of Directors also
approved a budget in excess of $300,000 for equipment and expenses to meet
year 2000 issues and assure that the Company would be Y2K compliant. Nearly
half that amount represents the purchase of new equipment to replace equipment
that was slated for replacement irrespective of year 2000 concerns; the
Company did not accelerate the replacement date because of year 2000 issues.
Consequently, at least $150,000 of this budgeted amount is not solely a Y2K
cost. Through December 1998, the Company has spent $225,000 of that budgeted
amount. The Company estimates that 1,750 employee hours have been devoted to
Y2K issues to
15
<PAGE>
date with about 1,500 additional hours budgeted for 1999. The Company believes
that these cost and employee hour estimates will be adequate. In addition, the
Company purchased new Y2K compliant hardware and software for the mortgage
subsidiary at a cost of $101,000. This expense was not included in the Y2K
budget described above.
The equipment purchased and the testing programs conducted to date relate to
information technology systems. The Company has considered problems that might
be present in non-information technology systems and is not aware of any Y2K
issues arising from noninformation technology systems that would have a
material effect upon the Company. The Company itself is not dependent upon
significant non-information technology systems.
The Company has substantially completed testing of its computer hardware and
software systems and has concluded that those critical systems will continue
to accurately process and maintain customer and Company information through
and beyond the century date change. Testing was accomplished during non-
business hours utilizing hardware and software currently in production use.
Existing databases were modified and converted for use in the testing process.
System dates on existing hardware were advanced and processing was
accomplished for year-end 1999 through January 3, 2000; February 28 through
March 1, 2000; year-end 2000 through January 1, 2001; and several other
significant dates. The Company believes that, by the end of 1999, any risk of
Y2K problems will be limited to business relationships with third parties.
Remaining unresolved hardware and software issues are not expected to be
substantial. Inland Northwest Bank (the "Bank"), the banking subsidiary of the
Company, owns and operates eleven automated teller machines (ATMs) in
Washington and Idaho. Each of the ATMs has been scheduled for software upgrade
and larger capacity hard-drives will be installed in several of these ATMs.
The Company's ATM provider expects to complete this work by March 31, 1999.
With replacement of PC banking hardware, software upgrades, and purchase of a
few desktop personal computers, the Company will have substantially completed
its identified Y2K expenditures.
The Company will focus in 1999 primarily on employee training and
contingency planning. While some additional funds will be utilized to produce
informational brochures, the more meaningful investment will be in employee
time spent dealing with customer questions and concerns. Contingency planning
will be related primarily to concerns with Y2K compliance by third parties.
Additional testing has been accomplished with third-party vendors who provide
critical services to the Company, the most important of which is the Federal
Reserve System.
While the Company has established and will manage a program to minimize
internal disruption due to the century date change, it is unable to fully
quantify the degree of risk that it faces due to the failure of customers,
vendors, and providers to be Y2K compliant. The Company has established
communication with its significant vendors and is monitoring their progress.
Additionally, the Bank has completed a risk assessment of all customers who
maintain significant loan or deposit relationships with the Bank. Incorporated
into the Bank's provision for loan loss calculation is the result of the
Bank's analysis of exposure to borrowing customers due to Y2K concerns.
Despite these steps taken by the Company, there is a risk that Y2K issues
facing third parties with whom the Company must conduct business will not be
resolved satisfactorily in a timely manner. If these issues are not
appropriately resolved, the Company's business operations and, in turn, its
financial position and results could be negatively impacted. Disaster recovery
and contingency plans have been enhanced, and will receive additional
attention throughout the remainder of 1999, as a means of reducing the
Company's exposure to non-compliance by third parties.
The Company believes that it has developed and implemented an adequate plan
to address remaining internal Y2K concerns. Additional costs will not be
material. The Company cannot control third-party preparedness; it has
implemented procedures, however, to identify risks from third-parties. Once
risks are identified, it will have contingency plans to provide alternate
means of providing products and services to our customers through its own
systems or from Y2K compliant third parties.
16
<PAGE>
Description of Property
The Company does not own or lease any real property and does not own any
personal property other than the shares of common stock of its subsidiaries;
it utilizes the premises and equipment of the Bank.
The Bank owns the real property for the Northpointe branch located in north
Spokane, Washington. The Bank also owns the building for 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 branches 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
improvements in the one ground-leased location and in the leasehold
improvements in the eight leased locations. As of December 31, 1998, the total
net book value of the Company's consolidated premises and equipment was
$3,055,063.
INB Mortgage leases its offices located in downtown Spokane, Washington and
in the Spokane Valley.
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 first year of
service, one-third 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 56 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; he
retired in 1997.
Jimmie T.G. Coulson--Mr. Coulson 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. Coulson's current term as director 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 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 52 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.
17
<PAGE>
Donald A. Ellingsen, M.D.--Dr. Ellingsen is 62 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 retired; for the five years prior to his retirement, he was an
ophthalmologist and a member of the Spokane Eye Clinic, Spokane, Washington.
Clark H. Gemmill--Mr. Gemmill is 56. 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 was reelected as a director at the annual meeting
of shareholders 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 42. 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 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 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. Peterson's current term as a director will be up for
election at the annual meeting of the shareholders to be held in 2000. During
the past five years, Mr. Peterson was the President and Chief Executive
Officer of Peterson & Company, an independent investment securities firm in
Spokane, Washington until 1994 and is now a vice president of Everen
Securities at its branch in Spokane.
Hubert F. Randall--Mr. Randall is 70. 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 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 66 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 was re-elected as a director at the annual
meeting of shareholders held in 1998. Mr. Sandberg is retired; for the five
years prior to his retirement, he was the President and Chief Executive
Officer of Sandberg Securities, an independent investment services firm in
Spokane, Washington.
Frederick M. Schunter--Mr. Schunter is 62; 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
and President of the Company since December 10, 1991. Mr. Schunter was re-
elected as a director at the annual meeting of shareholders held in 1998. Mr.
Schunter also is the Chief Executive Officer of INB Mortgage.
William E. Shelby--Mr. Shelby is 60 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 was reelected as a director at the annual
meeting of shareholders 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 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. Walker was reelected as a director at the annual meeting
of the shareholders 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.
18
<PAGE>
Officers
In addition to Mr. Schunter, the officers of the Company and its
subsidiaries are:
Jennifer L. Johnson--Ms. Johnson is 38 and is an officer of the Bank. She
also is the Secretary of the Company. She has been employed by the Bank from
1989 to date and by the Company since 1992.
Christopher C. Jurey--Mr. Jurey is 49 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 of the Bank and the Chief Financial
Officer of INB Mortgage.
Randall L. Fewel--Mr. Fewel is 50 and joined the Bank as a Vice President
and Senior Loan Officer in March 1994. He currently is an Executive Vice
President.
Douglas Beaudoin--Mr. Beaudoin is 48 and joined INB Mortgage as President
and Chief Operating Officer on November 23, 1998. Prior to joining INB
Mortgage, he was an officer with a commercial bank with general banking
responsibilities and with another commercial bank with specific
responsibilities for residential and commercial real estate lending
activities.
There are no family relationships among these directors and executive
officers.
19
<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 1998 fiscal
year. No officer or director of the Company has received any remuneration or
indirect financial benefit to date.
<TABLE>
<CAPTION>
Name of
individual Aggregate annual
or identity of Capacities in which remuneration
group remuneration was received for last fiscal year
-------------- ------------------------------------- --------------------
<S> <C> <C>
Frederick M.
Schunter President and Chief Executive Officer $161,914(1)
Christopher C.
Jurey Executive Vice President 96,668
Randall L.
Fewel Executive Vice President 100,981
</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 1998 was $35,000.
Directors of the Bank (excluding Mr. Schunter) receive an attendance fee in
the amount of $200 per meeting and $100 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 $522,999 for fiscal year 1998.
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 $150,000.
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 $91,924, the Fixed Salary for Randall L. Fewel currently is
$91,924 and the Fixed Salary for Jennifer L. Johnson is $70,620.
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 $115,995 and $95,379 at December 31, 1998 and 1997,
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, 1998 and 1997, $134,764 and $99,764,
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, 1998 and 1997, was
$35,000 and $35,000, 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.
20
<PAGE>
Security Ownership of Management and Certain Security Holders
This information has been provided for the four highest paid executive
officers of the Bank. The Company does not have any compensated officers.
<TABLE>
<CAPTION>
Title of Percent of Class
Class Name and Address of Owner Amount Owned (as of 2-28-99)
-------- ------------------------- ------------ ----------------
<C> <S> <C> <C>
Common Stock F. M. Schunter
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 20,272 3.38%
Common Stock Christopher C. Jurey
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 5,903 .98%
Common Stock Randall L. Fewel
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 1,602 .27%
Common Stock Jennifer L. Johnson
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 590 .10%
</TABLE>
Officers and directors as a group own of record, to the knowledge of the
Company, 129,852 shares of common stock of the Company, representing 21.66% of
the outstanding 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 Date Exercisable
Securities Called for by Exercise (if not currently
Name of Holder Options, Warrants or Rights Price vested) Expiration Date
- -------------- --------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
F.M. Schunter option - 1000 24.50 January 1, 2000
option - 1000 25.00 January 2, 2001
option - 1000 25.00 December 16, 2006
option - 1000 26.00 December 15, 2007
option - 1500 32.00 December 16, 1999 December 14, 2008
warrants - 12,933 10.25 January 16, 2000
(as adjusted)
Christopher C. Jurey option - 500 24.50 January 1, 2000
option - 500 25.00 January 2, 2001
option - 500 25.00 December 16, 2006
option - 500 26.00 December 15, 2007
option - 1000 32.00 December 16, 1999 December 14, 2008
Randall L. Fewel option - 500 24.50 January 1, 2000
option - 500 25.00 January 2, 2001
option - 500 25.00 December 16, 2006
option - 500 26.00 December 15, 2007
option - 1000 32.00 December 16, 1999 December 14, 2008
Jennifer L. Johnson option - 500 24.50 January 1, 2000
option - 500 25.00 January 2, 2001
option - 500 25.00 December 16, 2006
option - 500 26.00 December 15, 2007
option - 1000 32.00 December 16, 1999 December 14, 2008
</TABLE>
The options granted to the above persons expiring December 16, 2006,
December 15, 2007 and December 14, 2008, respectively, are subject to a
vesting schedule of 20% per year after the first year.
21
<PAGE>
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, 1998, was $1,041,586 including unused
commitments.
22
<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 deal 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>
1998 1997
------------- -------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
January 1 - March 31........................ $30.00 $28.00 $25.00 $24.00
April 1 - June 30........................... $30.00 $29.00 $25.00 $25.00
July 1 - September 30....................... $30.00 $30.00 $25.00 $25.00
October 1 - December 31..................... $30.00 $30.00 $27.00 $25.00
</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 Company also declared a 10% stock dividend, payable June 26, 1998, to
holders of record May 18, 1998; 58,611 shares were issued on June 26, 1998.
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, 1998
was $32.00 and $30.00, respectively.
Holders
As of December 31, 1998, there were approximately 487 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 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.
23
<PAGE>
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
Other than routine litigation incidental to the business of the
subsidiaries, there are no pending legal proceedings in which the Company or
either of its subsidiaries 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 beneficiary 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holder during the fourth
quarter of the 1998 fiscal year.
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based on the Company's review of the copies of reports filed on Forms 3, 4
and 5 by officers and directors of the Company, pursuant to Section 16(a) of
the Exchange Act, the Company believes that all filing requirements applicable
to such persons have been complied with in 1998 except for the following:
Harlan D. Douglass, a director, disclosed on an amended Form 5 filed
March 22, 1999, that he had omitted inadvertently 4351 shares from the
initial Form 3 filed June 29, 1998.
F. M. Schunter, President, disclosed on a Form 5 report filed March 22,
1999, that a Form 4 Report was not filed for the Employee Stock Options
granted December 16, 1998 for 1500 shares. Randall L. Fewel, an officer of
the Bank, Christopher C. Jurey, an officer of the Bank, and Jennifer L.
Johnson, Secretary, disclosed on a Form 5 Report filed February 12, 1999,
that a Form 4 Report was not filed for the Employee Stock Options granted
December 16, 1998 for 1000 shares, respectively. No portion of these
options will be exercisable until December 16, 1999.
In addition, the same Form 5 Reports for the same persons disclosed that
the Employee Stock Options granted on December 17, 1997, for Mr. Schunter
for 1000 shares and for the other persons for 500 shares respectively were
not included in the Form 3 filed June 29, 1998 by each reporting person. No
portion of these options were subject to exercise until December 17, 1998.
ITEM 6. REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal year
1998.
24
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
1998 FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditor's Report on Consolidated Financial Statements......... 26
Consolidated Financial Statements
Consolidated Statements of Financial Condition.......................... 27
Consolidated Statements of Income....................................... 28
Consolidated Statements of Changes in Stockholders' Equity.............. 29
Consolidated Statements of Cash Flows................................... 30
Notes to Consolidated Financial Statements.............................. 31-46
</TABLE>
25
<PAGE>
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 subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
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 subsidiaries as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Moss Adams L.L.P.
Spokane, Washington
January 15, 1999
26
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and due from banks.............................. $ 9,445,327 $ 7,404,503
Federal funds sold................................... 18,673,900 7,947,500
Securities available for sale (Note 3)............... 25,852,647 23,035,683
Securities held to maturity (Note 3)................. 817,974 969,770
Federal Home Loan Bank (FHLB) stock, at cost......... 382,200 309,200
Loans receivable, net of allowance for loan losses
1998 $1,184,322; 1997 $1,085,374 (Note 4)........... 90,120,882 76,523,949
Loans held for sale.................................. 1,746,223 --
Premises and equipment (Note 5)...................... 3,055,063 2,434,792
Accrued interest receivable.......................... 931,688 700,979
Foreclosed real estate, net of allowances for losses
1998 $10,048; 1997 $85,681 (Note 6)................. 202,759 566,941
Other assets (Notes 12 and 13)....................... 526,323 465,742
Goodwill, net of accumulated amortization of $9,925
in 1998 (Note 22)................................... 188,573 --
------------ ------------
Total Assets..................................... $151,943,559 $120,359,059
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits (Note 7).................................... $128,675,490 $101,711,216
Securities sold under repurchase agreements (Notes 3
and 9).............................................. 8,929,783 8,434,126
Accrued interest and other liabilities (Notes 12 and
13)................................................. 999,376 690,811
Borrowed funds (Note 8).............................. 2,705,158 62,684
------------ ------------
Total Liabilities................................ 141,309,807 110,898,837
------------ ------------
Commitments And Contingencies
(Notes 5, 10, 11, and 13)
Stockholders' Equity
Common stock, no par value, authorized 1,000,000
shares issued 595,724 and 535,398 shares; (Notes
14, 15, and 19)................................... 9,771,204 8,064,281
Retained earnings (Notes 15 and 19)................ 618,807 1,234,762
Accumulated comprehensive income................... 243,741 161,179
------------ ------------
Total Stockholders' Equity....................... 10,633,752 9,460,222
------------ ------------
Total Liabilities and Stockholders' Equity....... $151,943,559 $120,359,059
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Interest Income:
Loans receivable, including fees...................... $ 8,854,480 $7,329,813
Investment securities:
U.S. Treasury securities............................ 309,056 315,491
U.S. government agency securities................... 1,349,459 821,359
Other securities.................................... 98,158 138,379
Federal funds sold.................................... 814,554 366,522
----------- ----------
Total Interest Income............................. 11,425,707 8,971,564
----------- ----------
Interest Expense:
Deposits.............................................. 4,548,452 3,358,491
Borrowed funds and repurchase agreements.............. 521,132 471,863
----------- ----------
Total Interest Expense............................ 5,069,584 3,830,354
----------- ----------
Net Interest Income............................... 6,356,123 5,141,210
Provision for loan losses (Note 4)...................... 498,500 225,000
----------- ----------
Net Interest Income After Provision for Loan
Losses........................................... 5,857,623 4,916,210
----------- ----------
Noninterest Income:
Service charges on deposits........................... 603,979 542,748
Net gains from sale of loans.......................... 662,973 --
Other income.......................................... 334,815 214,430
----------- ----------
1,601,767 757,178
----------- ----------
Noninterest Expense:
Salaries and employee benefits........................ 3,546,255 2,358,453
Occupancy expense..................................... 506,083 329,183
Equipment expense..................................... 483,331 446,977
Losses on foreclosed real estate (Note 6)............. 26,986 107,450
Other operating expenses.............................. 1,474,785 1,175,078
----------- ----------
6,037,440 4,417,141
----------- ----------
Income Before Income Taxes........................ 1,421,950 1,256,247
Federal income tax expense (Note 12).................... 474,863 426,843
----------- ----------
Net Income........................................ $ 947,087 $ 829,404
=========== ==========
Earnings per share (Note 20)............................ $1.60 $1.61
===== =====
Earnings per share assuming full dilution (Note 20)..... $1.32 $1.33
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Retained Accumulated Comp Income
Total Stock Earnings Comprehensive Comprehensive
----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $ 6,548,259 $6,113,286 $ 408,441 $ 26,532
Net income for 1997.... 829,404 -- 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 gains
(losses), on available
for sale securities,
net of taxes of
$72,502............... 134,647 -- -- 134,647 134,647
Fractional shares
issued in cash........ (3,083) -- (3,083) --
----------
Comprehensive income... $ 964,051
----------
Sale of 117,872 shares
of stock.............. 1,862,745 1,862,745 -- --
----------- ---------- ---------- --------
Balance, December 31,
1997................... 9,460,222 8,064,281 1,234,762 161,179
Net income for 1998.... 947,087 -- 947,087 -- $ 947,087
Exercise of 1,135 stock
options............... 24,796 24,796 -- --
Exercise of 1,708 stock
warrants.............. 17,505 17,505 -- --
Issuance of stock to
directors, 1,200
shares (Note 15)...... 34,800 34,800 -- --
Net change in
unrealized gains
(losses), on available
for sale securities,
net of taxes of
$44,456............... 82,562 -- -- 82,562 82,562
10% stock dividend
53,731 shares of
common stock (Note
15)................... -- 1,558,199 (1,558,199) --
Fractional shares
issued in cash........ (4,843) -- (4,843) --
Issuance of 2,385
shares of stock to
enact purchase of
mortgage company...... 66,780 66,780 -- --
Sale of 167 shares of
stock................. 4,843 4,843 -- --
----------
Comprehensive income... $1,029,649
----------- ---------- ---------- -------- ==========
Balance, December 31,
1998................... $10,633,752 $9,771,204 $ 618,807 $243,741
=========== ========== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
29
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................... $ 947,087 $ 829,404
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 388,499 295,791
Amortization................................... 9,925 4,209
Provision for loan losses...................... 498,500 225,000
Provision for losses on foreclosed real
estate........................................ 22,680 85,681
Accretion of securities discounts.............. (17,258) (34,304)
Amortization of securities premiums............ 114,484 147,695
Loss on disposal of assets..................... 649 97,017
Loss on sale of foreclosed real estate......... 4,306 21,769
Stock dividends received....................... (33,000) (15,900)
Deferred income taxes.......................... 69,799 133,290
Originations of loans held for sale............ (15,051,217) --
Proceeds from sales of loans held for sale..... 13,313,157 --
(Increase) decrease in:
Accrued interest receivable.................. (230,709) (45,966)
Other assets................................. (59,936) (13,583)
Increase in:
Accrued interest and other liabilities......... 186,980 135,959
------------ ------------
Net Cash Provided by Operating Activities... 163,946 1,866,062
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of FHLB stock........................... (40,000) (25,400)
Purchase of INB Mortgage Company assets.......... (145,554) --
Net increase in federal funds sold............... (10,726,400) (5,222,500)
Securities available for sale:
Proceeds from maturities or principal
payments...................................... 10,464,480 5,287,519
Purchases...................................... (13,249,856) (9,518,133)
Securities held to maturity:
Proceeds from maturities or principal
payments...................................... 150,000 815,000
Purchases...................................... -- (225,000)
Purchases of premises and equipment.............. (997,061) (918,428)
Proceeds (expenditures) from sale of foreclosed
real estate..................................... 465,003 (50,690)
Net increase in loans............................ (14,223,240) (11,935,082)
------------ ------------
Net Cash Used in Investing Activities....... (28,302,628) (21,792,714)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits......................... 26,964,274 14,481,199
Net increase in securities sold under repurchase
agreements...................................... 495,657 3,224,510
Proceeds from issuance of capital stock.......... 81,944 1,950,995
Payments on fractional shares.................... (4,843) (3,083)
Proceeds from the issuance of debt............... 2,745,900 62,684
Repayment of long-term debt...................... (103,426) --
------------ ------------
Net Cash Provided by Financing Activities... 30,179,506 19,716,305
------------ ------------
Net Increase (decrease) in Cash and Due From
Banks........................................... 2,040,824 (210,347)
Cash and due from banks, beginning of year....... 7,404,503 7,614,850
------------ ------------
Cash and due from banks, end of year............. $ 9,445,327 $ 7,404,503
============ ============
SUPPLEMENTAL CASH FLOWS INFORMATION Cash paid
during the year for:
Interest......................................... $ 5,058,491 $ 3,730,911
============ ============
Income taxes..................................... $ 353,055 $ 348,692
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
ACTIVITIES
Net change in unrealized gain (loss) on
securities available for sale................... $ 127,018 $ 207,767
Acquisition of real estate in settlement of
loans........................................... $ 127,807 $ 725,082
Stock issued to purchase mortgage company assets
and goodwill.................................... $ 66,780 $ --
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
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
subsidiaries, Inland Northwest Bank (the Bank) and INB Mortgage Company (the
Mortgage Company). All significant intercompany balances and transactions have
been eliminated in consolidation.
Nature of Business:
The Bank 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 Mortgage Company provides conventional
mortgage loan services throughout eastern Washington and northern Idaho. Loans
originated by the Mortgage Company are held for sale and sold on the secondary
market. The Corporation and its subsidiaries are subject to competition from
other financial institutions, as well as nonfinancial intermediaries. The
Corporation and its subsidiaries 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 consolidated 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 consolidated statements 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
31
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Summary of Significant Accounting Policies--(Continued)
amount in accumulated comprehensive income. 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.
Declines in the fair value of individual held to maturity and available for
sale securities below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. No such write-
downs have occurred.
Loans Held for Sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income. Gains or losses on the sale of such loans are based on the specific
identification method.
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 balance adjusted for any charge offs, the allowance for loan losses,
and any deferred fees or costs on originated loans.
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 generally when the
loan becomes 90 days delinquent or when, in management's opinion, the borrower
may be unable to meet payments as they become due. When interest accrual is
discontinued, if the Bank does not feel they are adequately secured, 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 and Mortgage Company 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 selling cost. An allowance for impairment
losses is used for fluctuations in estimated fair value.
32
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1. Summary of Significant Accounting Policies--(Continued)
Income Taxes:
The Corporation and its subsidiaries 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 and stock options during the respective periods. The
dilutive effect of stock warrants and stock options are considered using the
treasury stock method.
Note 2. Accounting Change
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
Statement No. 130, Reporting Comprehensive Income, for the year ended December
31, 1998. This statement establishes standards for reporting and display of
comprehensive income and its components in the consolidated financial
statements. The December 31, 1997, consolidated financial statements have been
reclassified to reflect the application of the provisions of this statement
for comparative purposes. The adoption of SFAS No. 130 has no impact on the
Corporation's consolidated statements of financial condition, income, or cash
flows. Management has elected to display its components of comprehensive
income in the consolidated statements of stockholders' equity.
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,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Losses Fair Value Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available for
Sale:
U.S. government agency
securities.................. $18,248,328 $202,432 $(26,984) $18,423,776
U.S. treasury securities..... 5,019,279 189,421 -- 5,208,700
Corporate debt obligations... 250,079 121 -- 250,200
Mortgage backed securities... 1,959,975 18,995 (8,999) 1,969,971
----------- -------- -------- -----------
$25,477,661 $410,969 $(35,983) $25,852,647
=========== ======== ======== ===========
</TABLE>
33
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Investments in Securities--(Continued)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Available for
Sale:
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
=========== ======== ======= ===========
<CAPTION>
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
State and municipal
securities.................. $ 817,974 $ 14,274 $ -- $ 832,248
=========== ======== ======= ===========
<CAPTION>
December 31, 1997
---------------------------------------------
Gross
Amortized Gross Unrealized
Cost Unrealized Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
State and municipal
securities.................. $ 969,770 $ 9,944 $ -- $ 979,714
=========== ======== ======= ===========
</TABLE>
The scheduled maturities of securities held to maturity and securities
available for sale at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------ -----------------------
Amortized Fair Amortized
Cost Value Cost Fair Value
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less......... $239,951 $240,598 $ 4,283,194 $ 4,296,600
Due from one year to five
years.......................... 353,023 358,370 4,240,796 4,324,128
Due from five to ten years...... -- -- 13,993,587 14,246,048
Due after ten years............. 225,000 233,280 1,000,109 1,015,900
Mortgage backed securities...... -- -- 1,959,975 1,969,971
-------- -------- ----------- -----------
$817,974 $832,248 $25,477,661 $25,852,647
======== ======== =========== ===========
</TABLE>
At December 31, 1998 and 1997, securities available for sale with an
amortized cost of $12,027,142 and $11,772,200 were pledged to secure the
Bank's performance of its obligations under repurchase agreements. Approximate
market value of these securities was $12,171,100 and $11,958,968 at December
31, 1998 and 1997. Securities available for sale with an amortized cost of
$3,247,718 and $1,481,005 at December 31, 1998 and 1997, were pledged to
secure public deposits for purposes required or permitted by law. The
approximate market value of these securities was $3,272,316 and $1,498,900 at
December 31, 1998 and 1997, respectively. There were no sales of available for
sale securities in 1998 or 1997.
34
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial....................................... $58,779,339 $48,288,589
Real Estate...................................... 24,023,768 21,112,199
Installment...................................... 4,227,222 3,852,485
Consumer and other............................... 4,530,696 4,622,926
----------- -----------
91,561,025 77,876,199
Allowance for loan losses........................ (1,184,322) (1,085,374)
Net deferred loan fees........................... (255,821) (266,876)
----------- -----------
$90,120,882 $76,523,949
=========== ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Balance, beginning of year......................... $1,085,374 $ 908,368
Provision charged to operations.................... 498,500 225,000
Loans charged off, net of recoveries............... (399,552) (47,994)
---------- ----------
Balance, end of year............................... $1,184,322 $1,085,374
========== ==========
</TABLE>
35
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Loans Receivable and Allowance for Loan Losses--(Continued)
Maturities for each loan category are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial loans:
Maturing one year or less....................... $30,029,620 $16,626,583
Maturing one to five years...................... 11,590,099 9,803,535
Maturing five years or more..................... 17,159,620 21,858,471
----------- -----------
58,779,339 48,288,589
----------- -----------
Real estate loans:
Maturing one year or less....................... 10,244,088 5,666,595
Maturing one to five years...................... 3,349,650 3,629,838
Maturing five years or more..................... 10,430,030 11,815,766
----------- -----------
24,023,768 21,112,199
----------- -----------
Installment loans:
Maturing one year or less....................... 843,925 381,616
Maturing one to five years...................... 2,028,714 2,121,700
Maturing five years or more..................... 1,354,583 1,349,169
----------- -----------
4,227,222 3,852,485
----------- -----------
Consumer and other loans:
Maturing one year or less....................... 4,297,592 4,447,374
Maturing one to five years...................... -- 35,552
Maturing five years or more..................... 233,104 140,000
----------- -----------
4,530,696 4,622,926
----------- -----------
$91,561,025 $77,876,199
=========== ===========
</TABLE>
The loans fall into the following fixed and variable components:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Fixed rate loans................................... $41,046,703 $43,764,028
Variable rate loans................................ 50,514,322 34,112,171
----------- -----------
$91,561,025 $77,876,199
=========== ===========
</TABLE>
Impairment of loans having recorded investments of $1,802,940 and $716,860
at December 31, 1998 and 1997, 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 $338,060 and $254,674 at December
31, 1998 and 1997. 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, 1998 and 1997, was
$1,477,895 and $281,749, respectively. Interest income on impaired loans of
$128,186 and $37,465 was recognized for cash payments received in 1998 and
1997, respectively.
36
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Premises and Equipment
Components of premises and equipment included in the consolidated statements
of financial condition at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Land................................................ $ 269,204 $ 269,204
Furniture, equipment, and building.................. 2,703,740 1,982,974
Leasehold improvements.............................. 1,245,671 972,962
Vault............................................... 48,483 48,483
Land improvements................................... 313,098 313,098
---------- ----------
Total cost........................................ 4,580,196 3,586,721
Less accumulated depreciation....................... 1,525,133 1,151,929
---------- ----------
Net book value.................................... $3,055,063 $2,434,792
========== ==========
</TABLE>
Depreciation expense was $388,499 and $295,791 for the years ended December
31, 1998 and 1997, 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, 1998:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<C> <S> <C>
1999............ $ 295,924
2000............ 282,306
2001............ 239,778
2002............ 214,422
2003............ 207,027
Thereafter...... 1,106,464
----------
Total mini-
mum pay-
ments re-
quired..... $2,345,921
==========
</TABLE>
Total lease payments under the above mentioned operating leases and other
month-to-month rentals for the years ended December 31, 1998 and 1997, were
$330,414 and $226,851, 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>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance, beginning of year............................... $85,681 $ --
Provision charged to income............................ 22,680 107,450
Charge offs, net of recoveries......................... (98,313) (21,769)
------- -------
Balance, end of year..................................... $10,048 $85,681
======= =======
</TABLE>
37
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Foreclosed Real Estate--(Continued)
Included in the losses on foreclosed real estate in the consolidated
statements of income for the years ending December 31, 1998 and 1997, are
impairment losses of $22,680 and $85,681, respectively, on real estate held
for sale, and $4,306 and $21,769, respectively, of actual losses on sales of
real estate.
Note 7. Deposits
Major classifications of deposits at December 31, 1998 and 1997, were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Demand deposits................................. $ 30,397,265 $ 24,316,238
Money Market.................................... 27,406,537 24,597,471
NOW accounts.................................... 10,041,192 6,116,414
Savings deposits................................ 3,067,768 2,727,396
Time deposits, $100,000 and over................ 10,841,892 12,618,384
Other time deposits............................. 46,920,836 31,335,313
------------ ------------
$128,675,490 $101,711,216
============ ============
</TABLE>
Maturities for time deposits at December 31, 1998, are summarized as
follows:
<TABLE>
<S> <C>
Maturing one year or less..................................... $49,824,349
Maturing one to five years.................................... 7,919,836
Maturing after five years..................................... 18,543
-----------
$57,762,728
===========
</TABLE>
Note 8. Borrowed Funds
Borrowed funds at December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- -------
<S> <C> <C>
Notes payable, FHLB advances maturing 2013, 6.15% fixed
rate. Requires monthly principal and interest payments
of $9,130.............................................. $1,747,826 $ --
Unsecured note payable with KeyBank, matures in five
equal annual payments of $100,000 plus accrued interest
beginning on March 1, 2000, variable interest rate of
prime minus 0.76%, currently 7.74% at December 31,
1998................................................... 500,000 --
Notes payable, FHLB advances maturing 1999, 5.15% fixed
rate. Requires monthly principal and interest payments
of $752................................................ 175,000 --
Notes payable, FHLB advances maturing 2028, 6.09% fixed
rate. Requires monthly principal and interest payments
of $583................................................ 112,713 --
Notes payable, FHLB advances maturing 2028, 6.28% fixed
rate. Requires monthly principal and interest payments
of $581................................................ 109,001 --
Notes payable, FHLB advances maturing 2027, 6.60% fixed
rate. Requires monthly principal and interest payments
of $340................................................ $ 60,618 $62,684
---------- -------
$2,705,158 $62,684
========== =======
</TABLE>
38
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Borrowed Funds--(Continued)
The scheduled maturities of borrowed funds at December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Weighted Average
Years Ending December 31, Interest Rate Amount
------------------------- ---------------- ----------
<S> <C> <C>
1999.......................................... 6.49% $ 247,481
2000.......................................... 6.44% 178,443
2001.......................................... 6.39% 184,931
2002.......................................... 6.33% 191,991
2003 and after................................ 6.26% 1,902,312
----------
$2,705,158
==========
</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, 1998, is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year............................. $ 8,358,249
-----------
Average interest rate during the year....................... 4.33%
-----------
Maximum month-end balance during the year................... $11,223,312
-----------
</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 KeyBank of Washington
for $2,250,000, U.S. Bank for $1,500,000, Zions Bank for $1,500,000, and
Federal Home Loan Bank for $7,617,000. There were $2,205,158 and $62,684 of
outstanding borrowing on the Federal Home Loan Bank operating line at
December 31, 1998 and 1997, respectively.
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, 1998 and 1997,
commitments under standby letters of credit were $188,911 and $312,609 and
firm loan commitments were $22,449,107 and $20,350,039, respectively. The
Corporation does not anticipate any material losses as a result of these
commitments.
The Corporation has conducted a comprehensive review of its computer systems
to identify the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the issue. The Corporation
presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Corporation's computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 may have a material impact on the operations of the
Corporation.
39
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Concentrations of Credit Risk
The majority 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. Outstanding commitments and standby
letters of credit were granted primarily to commercial borrowers.
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>
1998 1997
-------- --------
<S> <C> <C>
Current tax expense..................................... $405,064 $293,553
Deferred tax expense.................................... 69,799 133,290
-------- --------
Federal income tax expense............................ $474,863 $426,843
======== ========
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses......................... $ 343,592 $349,711
Deferred compensation............................. 45,820 34,917
Other............................................. -- 5,677
--------- --------
389,412 390,305
--------- --------
Deferred tax liabilities:
Accumulated depreciation.......................... 213,823 186,270
Conversion from accrual to cash basis method of
accounting for tax purposes...................... 8,667 17,843
Deferred loan fees................................ 117,650 87,491
Net unrealized loss on securities available for
sale............................................. 131,245 86,788
Other............................................. 39,656 18,365
--------- --------
511,041 396,757
--------- --------
Net deferred tax liability...................... $(121,629) $ (6,452)
========= ========
</TABLE>
The net deferred tax liability is included in accrued expenses and other
liabilities on the consolidated statements of financial condition.
At December 31, 1998 and 1997, a prepaid federal income tax refund of
$11,536 and $61,993, respectively, was included in other assets on the
consolidated statements of financial condition.
40
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Federal Income Taxes--(Continued)
The effective tax rate differs from the statutory federal tax rate for the
years presented as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Federal income tax at statutory rate................... $480,042 $434,112
Effect of tax-exempt interest income................... (12,368) (8,850)
Effect of tax-exempt interest expense.................. 2,252 3,014
Effect of nondeductible expenses....................... 6,416 1,383
Other.................................................. (1,479) (2,816)
-------- --------
Federal income tax expense........................... $474,863 $426,843
======== ========
</TABLE>
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, 1998 and 1997, $134,764 and $99,764, 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, 1998 and 1997, was $35,000.
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
$115,995 and $95,379 at December 31, 1998 and 1997, 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 of 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 196,145
shares of common stock adjusted for stock dividends. The warrants expire on
January 16, 2000. As of December 31, 1998, 5,847 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.
41
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Common Stock Purchase Warrants and Stock Option Plan--(Continued)
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>
1998 1997
----------------- -----------------
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
Actual Price Actual Price
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding options at beginning of year
......................................... 15,480 $23.10 11,930 $22.23
Granted................................. 8,500 $32.00 4,950 $23.64
Exercised............................... (1,135) $21.00 (1,400) $17.50
Forfeited............................... (265) $21.00 -- --
------ ------
Outstanding at end of year................ 22,580 $26.58 15,480 $23.10
------ ------
Options exercisable at year end........... 7,942 7,500
------ ------
Weighted average fair value of options
granted during the year.................. $12.41 $8.76
------ ------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<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
Year Life Price Year Price
----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Exercise Prices
Price ranges ($20.66
through $26.00)....... 14,080 5.8 years $23.31 7,942 $23.88
------ --------- ------ ----- ------
$32.00................. 8,500 10 years $32.00 -- $32.00
------ --------- ------ ----- ------
</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 1998 and 1997, respectively, assuming no cash dividends declared.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income as previously reported.......................... $947,087 $829,404
Pro forma adjustment for effect of a change in accounting
principle................................................. (23,318) (9,389)
-------- --------
Pro forma net income....................................... $923,769 $820,015
-------- --------
Per share amounts:
Earnings per share....................................... $ 1.60 $ 1.61
Pro forma adjustment for the effect of the fair value of
accounting for stock options............................ (0.03) (0.02)
-------- --------
Pro forma net income................................... $ 1.57 $ 1.59
-------- --------
Earnings per share assuming full dilution................ $ 1.32 $ 1.33
Pro forma adjustment for the effect of the fair value of
accounting for stock options (0.02) (0.01)
-------- --------
Pro forma net income................................... $ 1.30 $ 1.32
-------- --------
</TABLE>
42
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15. Common Stock
On May 13, 1998, the Board of Directors declared a 10% stock dividend,
effective to stockholders of record May 18, 1998, and issued June 26, 1998.
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 June 26, 1998.
During 1998 and 1997, the Board of Directors voted to issue 100 shares of
common stock to each Director in lieu of increasing Director's fees. Total
shares issued during 1998 and 1997 were 1,200 and 1,300, respectively.
Additionally, during 1997 the Corporation issued a total of 50 shares 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 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 $43,060 and $35,550 for
years ended December 31, 1998 and 1997.
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, 1998 and 1997, were $563,386 and
$725,562, respectively. Aggregate deposit balances with related parties at
December 31, 1998, were $1,037,303. All related party loans and deposits 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 $627,473 can be declared by the Corporation without
prior regulatory approval. Aggregate dividends of approximately $665,305 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.
43
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19. Regulatory Capital Requirements--(Continued)
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, 1998, 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 Corporation's and Bank's actual December 31, 1998, capital amounts and
ratios are also presented in the table:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Capital Adequacy Prompt Corrective
Purposes Action Provisions
Actual ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total capital (to risk-
weighted assets):
Consolidated.......... $11,495,443 10.99% $ 8,365,440 *8% $10,456,800 *10%
Inland Northwest
Bank................. 11,507,818 11.05% 8,334,560 *8% 10,418,200 *10%
Tier 1 capital (to risk-
weighted assets):......
Consolidated.......... 10,201,438 9.76% 4,182,720 *4% 6,274,080 * 6%
Inland Northwest
Bank................. 10,163,252 9.76% 4,167,280 *4% 6,250,920 * 6%
Tier 1 capital (to aver-
age assets):
Consolidated.......... 10,201,438 7.49% 5,446,052 *4% 6,807,565 * 5%
Inland Northwest
Bank................. 10,163,252 7.48% 5,435,719 *4% 6,794,649 * 5%
December 31, 1997
Total capital (to risk-
weighted assets):......
Inland Northwest
Bank................. $10,384,417 12.26% *$6,776,400 *8% *$8,470,500 *10%
Tier 1 capital (to risk-
weighted assets):......
Inland Northwest
Bank................. 9,299,043 10.98% * 3,388,200 *4% *5,082,300 * 6%
Tier 1 capital (to
average assets):.......
Inland Northwest
Bank................. 9,299,043 8.46% * 4,397,778 *4% *5,497,223 * 5%
</TABLE>
44
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1998
--------------------------------
Per
Income Per Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders........................... $947,087 592,488 $1.60
-------- -----
Effect of Dilutive Securities
Stock warrants.......................... 124,009
Stock options........................... 2,163
-------
Diluted EPS...............................
Income available to common stockholders
plus assumed conversions............... $947,087 718,660 $1.32
-------- ------- -----
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------
Per
Income Per Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders........................... $829,404 516,098 $1.61
-------- -----
Effect of Dilutive Securities
Stock warrants.......................... 106,591
-------
Diluted EPS
Income available to common stockholders
plus assumed conversions............... $829,404 622,689 $1.33
-------- ------- -----
</TABLE>
These options were not included in the computation of diluted EPS, because
the options' exercise prices were greater than the average market price of the
common shares. 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 Corporation's financial instruments were as
follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks.. $ 9,445,327 $ 9,445,327 $ 7,404,503 $ 7,404,503
Federal funds sold....... 18,673,900 18,673,900 7,947,500 7,947,500
Securities available for
sale.................... 25,852,647 25,852,647 23,035,683 23,035,683
Securities held to
maturity................ 817,974 832,248 969,770 979,714
Loans receivable......... 91,561,025 94,739,398 77,876,199 79,166,025
Accrued interest
receivable.............. 931,688 931,688 700,979 700,979
Financial Liabilities:
Borrowed funds........... 2,705,158 2,646,222 62,684 62,684
Deposits................. 128,675,490 127,851,113 101,711,216 101,166,971
Accrued interest
payable................. 415,236 415,236 404,143 404,143
</TABLE>
45
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21. Fair Value of Financial Instruments--(Continued)
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.
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.
Borrowed Funds:
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, 1998, and December 31, 1997, were
insignificant. See Note 10 for the notional amount of the commitments to
extend credit.
Note 22. Business Combination
On March 1, 1998, the Corporation acquired for $145,554 and issuance of
2,385 shares of stock valued at $28 per share, all of the outstanding shares
of INB Mortgage Company, formerly Creative Mortgage. The total acquisition
cost was $212,334. The excess of the total acquisition cost over the fair
value of the net assets acquired of $13,836 resulted in goodwill of $198,498.
The goodwill is being amortized over 15 years by the straight-line method.
The acquisition has been accounted for under the purchase method of
accounting for business combinations. The results of operations for the
Mortgage Company since the date of acquisition are included in the
consolidated financial statements.
46
<PAGE>
SIGNATURES
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
INLAND NORTHWEST BANCORPORATION, INC.
Dated: March 26, 1999 /s/ Frederick M. Schunter
By: __________________________________
Frederick M. Schunter, President
and
Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ F.M. Schunter* Director and March 23, 1999
___________________________________________ President
F.M. Schunter
/s/ William E. Shelby* Chairman and March 23, 1999
___________________________________________ Director
William E. Shelby
/s/ Dwight B. Aden, Jr.* Director March 23, 1999
___________________________________________
Dwight B. Aden, Jr.
/s/ Jimmie T.G. Coulson* Director March 23, 1999
___________________________________________
Jimmie T.G. Coulson
Director March , 1999
___________________________________________
Harlan Douglass
Director March , 1999
___________________________________________
Freeman B. Duncan
Director March , 1999
___________________________________________
Donald A. Ellingsen, M.D.
/s/ Clark H. Gemmill* Director March 23, 1999
___________________________________________
Clark H. Gemmill
Director March , 1999
___________________________________________
Bryan S. Norby
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard H. Peterson* Director March 23, 1999
___________________________________________
Richard H. Peterson
Director March , 1999
___________________________________________
Hubert F. Randall
/s/ Phillip L. Sandberg* Director March 23, 1999
___________________________________________
Phillip L. Sandberg
Director March , 1999
___________________________________________
James R. Walker
</TABLE>
<TABLE>
<C> <S>
/s/ Christopher C. Jurey
*By: ___________________________
Christopher C. Jurey
Attorney-in-Fact
</TABLE>
48
