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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
_____ _____
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Part I
(ALTERNATIVE 2)
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Inland Northwest Bancorporation, Inc. ("the Company") was incorporated as
a Washington corporation on December 10, 1991. 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 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,
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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.).
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
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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.
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 BBC 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
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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 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.
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
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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.
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.
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I. Distribution of Assets, Liabilities and Stockholder Equity;
Interest Rates and Interest Differential.
<TABLE>
AVERAGE BALANCE/INTEREST INCOME AND EXPENSE RATES
(Dollars in Thousands)
1998 1997
Average Average
Yield Yield
Interest Earned/ Interest Earned/
Average Income/ Rate Average Income/ Rate
Balance Expense Paid Balance Expense Paid
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
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
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
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.
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<TABLE>
<CAPTION>
Change Difference Change
in income in income in income Net change
due to on 1997 due to in income
change volume due change in due to rate
1997 in Change to rate rate and and volume
1998 1997 VARIANCE RATE volume in rate change volume changes
------- ------- -------- ----- ------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
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 $31,081 $2,226
Total Earning Assets ======= ======
LIABILITIES
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>
8
<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>
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-equivilent 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.
9
<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.
Within 1 yr. but Within 5 After 5 yr.
Maturity yr. 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
</TABLE>
Loans maturing after one year with
<TABLE>
<CAPTION>
<S> <C> <C>
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 $632 $220
as to interest or principal
Gross interest income which would have been $163 $36
recorded under original terms
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.
10
<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 1,085 908
beginning of period
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 1,184 1,085
end of period
Ratio of net charge-offs during period to average 0.45% 0.07%
loan outstanding
</TABLE>
<TABLE>
<CAPTION>
Breakdown of Allowance for Loan Losses:
December 31
-----------
1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
% of Loans % of Loans
to Total to Total
Amount Loans Amount Loans
------ -------- ------ --------
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>
11
<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
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Amount Rate Amount Rate
------- ---- ------- ----
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>
<S> <C> <C>
Ratio: 1998 1997
------ ---- ----
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 $752.
12
<PAGE>
Rate Shock Analysis
Periodically, the Bank commissions an analysis of the effect that a sudden
increase or decrease in interest rates would have on net interest income and the
value of the Bank's equity. The analyses are performed by the Independent
Banker's Association of America quarterly, and the Seattle Branch of the Federal
Home Loan Bank annually.
The Rate Shock Analysis presents estimates of the effect of an immediate change
in rates of between +400 basis points and -400 basis points (+ 4% to - 4%) as
applied to all earning assets and interest bearing liabilities. Depending upon
the repricing characteristics of the Bank's assets and liabilities, such a
sudden change in rates can be expected to have either a positive or negative
effect on Bank net interest income. If, for example, substantially all of the
Bank's deposits are fixed rate and substantially all of the Bank's loans are
variable rate, an increase in interest rates would, initially, cause interest
income to rise, while interest expense would not change. As a result, net
interest income would increase until such time as deposits renewed or matured
and were replaced with higher rate deposits. On the other hand, if rates were
to decrease, the Bank would experience a decrease in net interest income. Sudden
changes in interest rates will have a similar, but generally opposite, effect of
the value of the Bank's equity.
Presented below are the results of the analysis performed on financial
information as of December 31, 1998. The results are supportive of Bank
management's desire to limit volatility of net interest income to no more than
plus or minus ten-percent when applying an interest rate shock of plus or minus
two-hundred basis points. There is currently no specific discipline that Bank
management applies to change in economic value of equity.
<TABLE>
<CAPTION>
Net Interest Income and Market Value
Summary Performance
($ in thousands)
Net Interest Income Economic Value of Equity
Projected
Interest Rate Estimated $Change %Change Estimated $Change %Change
Scenario Value From Base From Base Value From Base From Base
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
+400 $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>
13
<PAGE>
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
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.
14
<PAGE>
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.
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.
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.
15
<PAGE>
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.
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.
16
<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 Capacities in which remuneration Aggregate annual
or identity of group was received remuneration
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.
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.
17
<PAGE>
<TABLE>
<CAPTION>
Title of Class Name and Address of Owner Amount Owned Percent of Class
(as of 2-28-99)
- ---------------------------------------------------------------------------------
<S> <C> <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 Date Exercisable
Name of Holder by Options, Warrants Exercise Price (if not Expiration Date
or Rights currently
vested)
- ------------------------------------------------------------------------------------------------------
<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.
18
<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.
19
<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
<S> <C> <C> <C> <C>
High Low High Low
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.
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.
20
<PAGE>
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.
21
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
1998 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
INDEPENDENT AUDITOR'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS.......... 23
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION........................... 24
CONSOLIDATED STATEMENTS OF INCOME........................................ 25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY............... 26
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 27-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 29-50
</TABLE>
22
<PAGE>
[LETTERHEAD APPEARS HERE]
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
23
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
------------------------------------------
1998 1997
------------------------------------------
<S> <C> <C>
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.
24
<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.
25
<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 Compre-hensive Compre-hensive
--------------- ----------------- ------------ ------------------ ------------------
<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.
26
<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)
------------- --------------
</TABLE>
27
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
-----------------------------------------
1998 1997
-----------------------------------------
<S> <C> <C>
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.
28
<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.
29
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES HELD TO MATURITY:
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
SECURITIES AVAILABLE FOR SALE:
Securities available for sale consist of bonds, notes, and debentures not
classified as securities held to maturity. Unrealized holding gains and losses,
net of tax, on securities available for sale are reported as a net amount in
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.
30
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED):
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.
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.
31
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
32
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
----------- ---------- ---------- -----------
</TABLE>
<TABLE>
<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>
33
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS IN SECURITIES (CONTINUED)
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 Fair
Cost Value Cost 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.
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>
34
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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>
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>
35
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
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.
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.
36
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PREMISES AND EQUIPMENT (CONTINUED)
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,
<S> <C>
1999 $ 295,924
2000 282,306
2001 239,778
2002 214,422
2003 207,027
Thereafter 1,106,464
----------
TOTAL MINIMUM PAYMENTS REQUIRED $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>
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.
37
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 -
</TABLE>
38
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. BORROWED FUNDS, (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
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>
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>
39
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
40
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FEDERAL INCOME TAXES
The components of federal income tax expense are as follows:
1998 1997
-------- --------
Current tax expense $405,064 $293,553
Deferred tax expense 69,799 133,290
-------- --------
FEDERAL INCOME TAX EXPENSE $474,863 $426,843
-------- --------
The components of the net deferred tax liability are as follows:
1998 1997
-------- --------
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 131,245 86,788
available for sale
Other 39,656 18,365
--------- --------
511,041 396,757
--------- --------
NET DEFERRED TAX LIABILITY $(121,629) $ (6,452)
--------- --------
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.
41
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FEDERAL INCOME TAXES (CONTINUED)
The effective tax rate differs from the statutory federal tax rate for the years
presented as follows:
1998 1997
--------- ---------
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
-------- --------
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.
42
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
A summary of the status of the Bank's stock option plans and changes during the
years ending on those dates is presented below:
1998 1997
----------------------- -----------------------
WEIGHTED- Weighted-
AVERAGE Average
SHARES EXERCISE Shares Exercise
ACTUAL PRICE Actual Price
-------- -------------- -------- ------------
Outstanding options at 15,480 $23.10 11,930 $22.23
beginning of year
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 $12.41 $ 8.76
the year ------- -------
43
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMON STOCK PURCHASE WARRANTS AND STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Exercisable Options
---------------------------------- ----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at End of Contractual Exercise at End of Exercise
Exercise Prices Year Life Price Year Price
--------- ------------- --------- ---------- ----------
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
--------- ------------- --------- ---------- ----------
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.
1998 1997
--------- --------
Net income as previously reported $947,087 $829,404
Pro forma adjustment for effect of a change (23,318) (9,389)
in accounting principle --------- --------
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
-------- --------
44
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
45
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines on the regulatory
framework for prompt corrective action, the Bank must meet specific capital
adequacy guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tier 1 capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). Under the regulatory framework
for prompt corrective action, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based, and total risk-based ratios as set forth in the table.
As of December 31, 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.
46
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
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 Prompt
Capital Adequacy Corrective Action
Purposes Provisions
Actual ----------------------- ----------------------
DECEMBER 31, 1998 Amount Ratio Amount Ratio Amount Ratio
----------- ------ ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
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 average
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>
47
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
----------------------------------------
Income Shares Per
(Numerator) (Denominator) Share
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.
48
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
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.
49
<PAGE>
INLAND NORTHWEST BANCORPORATION, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
50
<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.
By: /s/ Frederick M. Schunter
--------------------------------------
Frederick M. Schunter, President and
Chief Executive Officer
Dated: March 26, 1999
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.
SIGNATURE TITLE DATE
/s/ F.M. Schunter* Director and President March 23, 1999
- --------------------------
F.M. Schunter
/s/ William E. Shelby* Chairman and Director March 23, 1999
- --------------------------
William E. Shelby
/s/ Dwight B. Aden* 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
51
<PAGE>
/s/ Richard H. Peterson* Director March 23, 1999
- -----------------------------------
Richard H. Peterson
- -----------------------------------
Hubert F. Randall Director March __, 1999
/s/ Phillip L. Sandberg* Director March 23, 1999
- -----------------------------------
Phillip L. Sandberg
Director March __, 1999
- -----------------------------------
James R. Walker
*By: /s/ Christopher C. Jurey
-------------------------------
Christopher C. Jurey
Atorney-in-Fact
52
<PAGE>
Part III
Item 1. Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------------------------------------------------------------------------------------------------------------
<C> <S>
3.1.1 Articles of Incorporation****
- ------------------------------------------------------------------------------------------------------------------
3.1.2 Amendment to Articles of Incorporation****
- ------------------------------------------------------------------------------------------------------------------
3.1.3 Amendment to Articles of Incorporation****
- ------------------------------------------------------------------------------------------------------------------
3.2 Bylaws****
- ------------------------------------------------------------------------------------------------------------------
4 See Exhibit Nos. 3.1.1 through 3.2 above****
- ------------------------------------------------------------------------------------------------------------------
10.1.1 Lease Agreement Dated 08/01/89 and Amendment dated 07/13/95 - The Paulsen Center (Main Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.2 Lease - 15111 East Sprague Avenue (Valley Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.3 Lease - 12825-14th Avenue (Airway Heights Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.4 Lease - East 210 North Foothills Drive (North Foothills Drive Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.5 Lease - 805 East Polston Ave., Post Falls, Idaho (Post Falls Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.6 Ground Lease dated 09/24/96** and Amendment dated August 12, 1997 for South Hill Branch
- ------------------------------------------------------------------------------------------------------------------
10.1.7 Lease - 3321 W. Indian Trail Road (Indian Trail Branch)*
- ------------------------------------------------------------------------------------------------------------------
10.1.8 Lease - 225 West Appleway, Coeur d'Alene, Idaho (Appleway Branch)****
- ------------------------------------------------------------------------------------------------------------------
10.1.9 Lease - 622 Sherman Avenue, Coeur d'Alene, Idaho (Sherman Avenue Branch)****
- ------------------------------------------------------------------------------------------------------------------
10.2.1 F.M. Schunter Employment Agreement dated 01/01/94*
- ------------------------------------------------------------------------------------------------------------------
10.2.2 Unfunded Supplemental Executive Retirement Plan for F.M. Schunter*
- ------------------------------------------------------------------------------------------------------------------
10.2.3 Non-Qualified Stock Option Plan*
- ------------------------------------------------------------------------------------------------------------------
10.2.4 Christopher C. Jurey Employment Agreement dated 01/01/94*
- ------------------------------------------------------------------------------------------------------------------
10.2.5 Jennifer L. Johnson Employment Agreement dated 01/01/94*
- ------------------------------------------------------------------------------------------------------------------
10.2.6 Randall L. Fewel Employment Agreement dated 03/14/94*
- ------------------------------------------------------------------------------------------------------------------
10.3 Stock Purchase Agreement dated February 23, 1998 by and among the Company, Selling Shareholders and
Hege Company, Inc. *****
- ------------------------------------------------------------------------------------------------------------------
23.1 Consent of Accountant
- ------------------------------------------------------------------------------------------------------------------
27 Financial Data Schedule
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Previously filed (in paper format) as an Exhibit to the Company's Form 1-A
Offering Statement Under Regulation A (Registration No. 24-3714) and
incorporated herein by reference.
** Ground Lease previously filed (in paper format) as an Exhibit to the
Company's Form 1-A offering Statement Under Regulation A (Registration No.
24-3714) and incorporated herein by reference; only Amendment being filed
(in electronic format) with this Form 10-SB.
*** Exhibit numbers determined by reference to Regulation S-T Exhibit numbering
requirements, rather than Exhibit numbering requirements of Part III of
Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III of
Form 10-SB. Included Exhibits respond to Exhibits required under Part III
of Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III
of Form 10-SB, specifically those documents required to be filed as Exhibit
nos. 2, 3, 5, 6 and 7 in Part III of Form 1-A.
**** Previously filed in electronic format as an Exhibit to the Company's Form
10-SB (Registration No. 0-24151) on April 30, 1998, and incorporated
herein by reference.
*****Previously filed in electronic format as an Exhibit to the Company's Form
10-QSB on July 6, 1998, and incorporated herein by reference.
<PAGE>
[MOSS ADAMS L.L.P. LETTERHEAD]
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in, and incorporation by reference in, the annual
report on Form 10-KSB of Inland Northwest Bancorporation, Inc. of our report
dated January 15, 1999 on our audit of the financial statements and financial
statement schedules of Inland Northwest Bancorporation, Inc. as of and for the
years ended December 31, 1998 and 1997. We also consent to the reference to our
firm in such annual report.
/s/ Moss Adams L.L.P.
Spokane, Washington
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income presented
above, as well as additional information relating to problem loans required by
Item 601 (c) of Regulation S-B.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,445
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 18,674
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,853
<INVESTMENTS-CARRYING> 818
<INVESTMENTS-MARKET> 832
<LOANS> 91,561
<ALLOWANCE> 1,184
<TOTAL-ASSETS> 151,944
<DEPOSITS> 128,675
<SHORT-TERM> 8,930
<LIABILITIES-OTHER> 999
<LONG-TERM> 2,705
0
0
<COMMON> 9,771
<OTHER-SE> 863
<TOTAL-LIABILITIES-AND-EQUITY> 10,634
<INTEREST-LOAN> 8,854
<INTEREST-INVEST> 1,757
<INTEREST-OTHER> 815
<INTEREST-TOTAL> 11,426
<INTEREST-DEPOSIT> 4,548
<INTEREST-EXPENSE> 5,070
<INTEREST-INCOME-NET> 6,356
<LOAN-LOSSES> 499
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,037
<INCOME-PRETAX> 1,422
<INCOME-PRE-EXTRAORDINARY> 1,422
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 947
<EPS-PRIMARY> $1.60
<EPS-DILUTED> $1.32
<YIELD-ACTUAL> 4.38
<LOANS-NON> 144
<LOANS-PAST> 632
<LOANS-TROUBLED> 242
<LOANS-PROBLEM> 2,369
<ALLOWANCE-OPEN> 1,085
<CHARGE-OFFS> 411
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,184
<ALLOWANCE-DOMESTIC> 1,184
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
