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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____________
Commission file number 000-24151
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NORTHWEST BANCORPORATION, INC.
(Name of small business issuer in its charter)
Washington 91-1574174
(State or other jurisdiction (I.R.S. 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:
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Title of each class
None
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
(Title of Class)
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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: $13,773,120.
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: $15,666,924. Based on average bid/ask
price as of March 14, 2000.
(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: 1,577,127
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form l0-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) or (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 By Issuer and Subsidiaries
Northwest Bancorporation, Inc. ("the Company''), formerly known as Inland
Northwest Bancorporation, Inc., was incorporated as a Washington corporation on
December 10, 1991. Effective June 10, 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
Bank has been a wholly-owned subsidiary of the Company since that date. 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; it continues to have authorization to establish and operate branch
facilities in Idaho.
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 4,770 shares of common stock of the Company. The
shares were considered to have an agreed market value of $14 per share (adjusted
for the stock split on May 28, 1999) for total consideration of $66,780; 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 has continued in business as a
mortgage broker in the Spokane County and North Idaho market areas. It acts 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 for 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; no principal payments were made on
that indebtedness in 1999.
General
The Company. During the period June 10, 1993 through December 31, 1999, the
Company's assets and revenues have increased because of the growth of the Bank.
INB Mortgage expanded the Company's financial services through the entry into
the real estate mortgage market. That subsidiary, however, 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 parent company 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
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would require the payment of a dividend from the Bank or INB Mortgage that would
adversely affect the ability of either subsidiary to conduct its business.
The primary asset of the Company still is 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 earning 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. During 1999, the losses incurred by INB
Mortgage affected the Company's financial position. At such time as the Company
decides to engage in any other business activities, the success or failure of
any new 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 of approximately 409,000 and
Kootenai County, Idaho, with a population of approximately 104,000; the
population figures are based upon estimates provided by the U.S. Census Bureau
as of July 1, 1999. There is little concentration of industry in the two
counties. A historical reliance on natural resources industries (timber,
agriculture, and mining) has been replaced by a focus on trades and services,
including high-tech products in the market area. The City of Spokane serves as
the hub of an area known as the Inland Northwest that includes thirty-six
counties in eastern Washington, northern Idaho, western Montana and northeastern
Oregon, home of 1.7 million residents. As a regional trade center, the Spokane
market area extends to southern British Columbia and Alberta with a population
base exceeding 3 million. The market area is considered strong and stable.
Banking Services. A variety of commercial and retail banking services
offered by the Bank have been the Bank'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:
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(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 offices of INB Mortgage are located near the downtown
business core of Spokane, Washington. An additional office was established in
1999 in leased space adjacent to the Bank's branch location in Post Falls,
Idaho. An office in the Spokane Valley was occupied during most of 1999, but
was closed late in the year as mortgage demand in the Spokane market declined
dramatically. INB Mortgage currently has 14 employees; it is licensed to do
business throughout the states of Washington and Idaho.
As a mortgage broker, through its correspondent relationships, INB Mortgage
offers virtually all mortgage products available in the market. It specializes
in Conventional, FHA & VA home loans for purchase or refinance of 1-4 family
residential living units. 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, with investor commitment in-hand prior to loan closing. INB Mortgage
will consider establishment of a loan servicing operation at some point in the
future if it determines that that type of activity would be profitable. During
1999 INB Mortgage expanded its activities to include a limited amount of
contractor financing. Contractor loans are funded by and subject to credit
approval of the Bank. The Bank retains interest income and credit risk from
contractor loans; INB Mortgage retains fee income and the opportunity to
initiate end loans to purchasers.
1999 was a very difficult year for INB Mortgage; it posted tax-adjusted
losses totaling $233,267. The losses were attributed to two factors: a
significant increase in home mortgage rates, which effectively eliminated
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home refinance activity; and, a sharp decline in home purchases in the Spokane
County market, as reflected by a full-year drop in recordings of mortgage
documents of over 30%. The Kootenai County market remains relatively strong,
compared to Spokane County, prompting the establishment of the office in Post
Falls. To effectively compete in the Idaho market, however, a mortgage company
must be approved to offer loans under the Idaho Housing Authority. INB Mortgage
did not receive approval and required training until after year-end.
The Board of Directors of the Company considers losses in the amount
incurred by INB Mortgage in 1999 to be unacceptable on an ongoing basis.
Consequently, at the Company's direction, the Board of Directors of INB Mortgage
has committed to meeting a worst-case scenario budget that calls for the
mortgage company to break-even during 2000. This will be accomplished by taking
the following action: (1) reduction in offices and personnel; (2) increased
focus on builder relationships; (3) increased standards for retention of
existing mortgage lenders; (4) hiring of more effective and proven mortgage
lenders. Implementation of these steps will be complete by March 31, 2000.
The Board of Directors of INB Mortgage is meeting on a weekly basis with
its management to provide assistance in meeting these goals and monitoring
performance under the worst-case budget. Should efforts to meet the worst-case
budget prove unsuccessful, the Board of Directors of the Company anticipates
taking action to eliminate this drain on earnings. Action taken could range
from further reduction in staffing to closure of INB Mortgage. If closed, a
small number of employees might be brought into the Bank as a mortgage
department, assuming analysis indicated enhancement of Bank profitability.
Abandonment of the mortgage company would result in one-time and ongoing
estimated costs to the Company between $202,000 and $284,000 tax-adjusted. The
most significant cost in closing the mortgage company would be reversal of
goodwill of nearly $175,000 (pre-tax adjustment). Even assuming continued
operation of INB Mortgage, the Company will be reviewing the appropriateness of
the level of goodwill carried on its books. Some adjustment may be necessary to
accurately reflect the value of the mortgage company in excess of its book
value; any such adjustment would result in a reduction to reported 2000
earnings.
The Company believes that a strong mortgage company is a desirable and
integral component of the family of services it wishes to offer. Consequently,
recognizing that the mortgage industry is cyclical in nature, the Company is
willing to accept near-term break-even results. The Board of Directors of the
Company does anticipate that long-term earnings by the mortgage company will be
commensurate with capital allocated to its operation.
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 $984,334 as of December 31, 1999.
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
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other recent developments, it is anticipated that competition will increase in
the future. Competition in the Bank's market area is not greater than
competition in other parts of the United States. Consequently, neither the Bank
nor the Company believe that the Bank 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 12 commercial banks, savings banks
and savings and loan associations in Spokane County, Washington, having a total
of 101 locations and an estimated total of $3,238 million in deposits as of June
30, 1999, the most recent date for which information is readily available. Based
on the same information there are 11 commercial banks, savings banks and savings
and loan associations in Kootenai County, Idaho having a total of 35 locations
and an estimated total of $849 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 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.
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Bank Acquisitions. The BHC Act requires, among other things, the prior
approval of the Federal Reserve if the Company proposes to (i) acquire all or
substantially all the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or (iii)
merge or consolidate with any other bank holding company. The BHC Act currently
permits bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
certain nationwide and state-imposed concentration limits. The establishment of
new interstate branches also will be possible in those states with laws that
expressly permit it. Interstate branches will be subject to certain laws of the
states in which they are located. Competition may increase further as banks
branch across state lines and enter new markets.
Non-Bank Acquisitions. The BHC Act also prohibits a bank holding company,
with certain exceptions, from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any company that is
not a bank or bank holding company, and from engaging in any activities other
than those of banking, managing or controlling banks, or activities which the
Federal Reserve has determined to be so closely related to the business of
banking or managing or controlling banks as to be a proper incident thereto.
Restrictions on the Acquisition of the Company. The acquisition of 10% or
more of the Company's outstanding shares by any person or group of persons may,
in certain circumstances, be subject to the provisions of the Change in Bank
Control Act of 1978, as amended, and the acquisition of control of the Company
by another company would be subject to regulatory approval under the BHC Act.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to act as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength'' policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings retention appears to be
consistent with the corporation's capital needs, asset quality and overall
financial condition.
Effect of Other Legislation. The Gramm-Leach-Bliley Financial Modernization
Act, effective March 11, 2000, authorizes a bank holding company to affiliate
with any financial company (for example, insurance or securities companies) and
to cross-sell an affiliate's products, subject to added privacy restrictions,
thus allowing the Company to offer its customers any financial product or
service. Certain restrictions regarding capital and Community Reinvestment Act
(CRA) performance are specified. The Company meets the standard to be
considered "well-capitalized" and the Bank has a "Satisfactory" CRA rating,
meeting the requirements contained in the Act. The Company will consider
opportunities to expand its financial offerings as they become available. At
this time, however, the Company has not identified additional financial products
or services that it intends to offer in the near future, nor does it anticipate
the establishment of additional subsidiaries this year.
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)
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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 were 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. The
annual rate during 1999 was 1.22 for the first quarter, 1.176 for the second
quarter, 1.160 for the third quarter and 1.184 for the fourth quarter.
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 I capital to risk-weighted assets ratio and total 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 l 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,
1999, 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 7.32%,
10.10% and 11.35%, 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, 1999, the Bank held stock in the FHLB in the amount of
$479,400.
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The Company and the Bank. As a bank holding company and state-chartered
bank, the Company and the Bank are also subject to the following further
regulation:
Risk-Based Capital Requirements. Under the risk-based capital guidelines
applicable to the Company and the Bank, the minimum guideline for the ratio of
total capital to risk-weighted assets (including certain off-balance-sheet
activities) is 8.0%. At least half of the total capital must be "Tier 1"
capital, which primarily includes common shareholders' equity and qualifying
preferred stock, less goodwill and other disallowed tangibles. "Tier 2'' capital
includes, among other items, certain cumulative and limited-life preferred
stock, qualifying subordinated debt and the allowance for credit losses, subject
to certain limitations, less required deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio (Tier 1
capital to total adjusted average assets) guidelines providing for a minimum
leverage ratio of 3.0% for bank holding companies and banks meeting certain
specified criteria, including that such institutions have the highest regulatory
examination rating and are not contemplating significant growth or expansion.
Institutions not meeting these criteria are expected to maintain a ratio which
exceeds the 3.0% minimum by at least 100 to 200 basis points. The federal bank
regulatory agencies may, however, set higher capital requirements when
particular circumstances warrant. Under the federal banking laws, failure to
meet the minimum regulatory capital requirements could subject a bank to a
variety of enforcement remedies available to federal bank regulatory agencies,
including the termination of deposit insurance by the FDIC and seizure of the
institution.
Community Reinvestment. Bank holding companies and their subsidiary banks
are also subject to the provisions of the Community Reinvestment Act of 1977, as
amended ("CRA"). Under the terms of the CRA, a bank's record in meeting the
credit needs of the community served by the bank, including low- and moderate-
income neighborhoods, is generally annually assessed by the bank's primary
federal regulator. When a bank holding company applies for approval to acquire a
bank or other bank holding company, the Federal Reserve will review the
assessment of each subsidiary bank of the applicant bank holding company, and
such records may be the basis for denying the application. As of December 31,
1999 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 processed 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
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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. Loans made under the authority of the
Washington State Public Housing Commission and the Idaho Housing Authority are
subject to additional requirements.
Employees
The Bank and INB Mortgage employed 101 full time equivalent persons as of
December 31, 1999; the Company does not have any compensated employees.
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 6.08% and 25.8% for the
fiscal years ended December 31, 1999 and 1998, respectively. Net loan growth was
18.09% and 19.9% for these same periods. Also for these same periods, loan
losses net of recoveries were $245,454 and $399,557, respectively. The Bank
continues to provide for anticipated future losses through increases in the
allowance for loan loss reserve which was at $1,480,208 or 1.37% of outstanding
loans, on December 31, 1999 and $1,184,322, or 1.30% of outstanding loans, on
December 31, 1998. For information on the Bank's capital ratios as of December
31, 1999, see "Regulation -- The Bank --Prompt Corrective Action" and
"Regulation -- The Company and the Bank -- Risk-Based Capital Requirements''
above.
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Statistical Disclosure
Certain statistical and other information is set forth below. All
information in this sub-subsection 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.
All references in this sub-section to historical statistical and other
information are to the historical consolidated information of the Company its
subsidiaries for the two most recently ended fiscal years.
I. Distribution of Assets, Liabilities and Stockholder's Equity; Interest
Rates and Interest Differential
AVERAGE BALANCE/INTEREST INCOME AND EXPENSE RATES
(Dollars in Thousands)
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1999 1998
Average Average
Yield Yield
Interest Earned/ Interest Earned/
Average Income/ Rate Average Income/ Rate
Balance Expense Paid Balance Expense Paid
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable Investments $ 28,868 $ 1,876 6.50% $ 25,943 $ 1,715 6.61%
Nontaxable Investments 634 28 4.42% 819 36 4.40%
-------- ------- -------- -------
Total Investment Securities $ 29,502 $ 1,904 6.45% $ 26,762 $ 1,751 6.54%
Interest-bearing Deposits with Banks $ 248 $ 5 2.02% $ 101 $ 5 4.95%
Fed Funds Sold 9,280 467 5.03% 15,183 815 5.37%
-------- ------- -------- -------
Total Investments $ 39,030 $ 2,376 6.09% $ 42,046 $ 2,571 6.11%
Real Estate Loans $ 23,634 $ 2,144 9.07% $ 24,934 $ 2,351 9.43%
Consumer Loans 8,487 743 8.75% 7,404 674 9.10%
VISA/MC 1,093 101 9.24% 1,091 103 9.44%
Commercial Loans 66,058 5,633 8.53% 54,576 4,903 8.98%
-------- ------- -------- -------
Total Loans $ 99,272 $ 8,621 8.68% $ 88,005 $ 8,031 9.13%
-------- ------- -------- -------
Total Earning Assets $ 138,302 $10,997 7.95% $130,051 $10,602 8.15%
Less Reserve for Possible Loan Losses ($1,353) ($1,224)
Cash and Due from Banks $ 7,407 $ 7,464
Other Non-earning Assets 4,726 4,653
--------- --------
Total Assets $ 149,082 $140,944
LIABILITIES AND STOCKHOLDER'S EQUITY
NOW Accounts $ 6,001 $ 94 1.57% $ 6,270 $ 111 1.77%
Money Market Accounts 29,231 1,088 3.72% 25,672 1,004 3.91%
Savings Accounts 3,423 78 2.28% 2,898 71 2.45%
Other Time Deposits 53,975 2,826 5.24% 57,932 3,363 5.81%
-------- ------- -------- -------
Total Interest-bearing Deposits $ 92,630 $ 4,086 4.41% $ 92,772 $ 4,549 4.90%
Securities Sold Under
Repurchase Agreements/
Borrowed Funds 15,709 757 4.82% 10,604 490 4.62%
-------- ------- -------- -------
Total Interest-bearing
Liabilities $108,339 $ 4,843 4.47% $103,376 $ 5,039 4.87%
Demand Deposits $ 28,824 $ 26,553
Other Liabilities 1,189 1,157
Stockholder's Equity 10,730 9,858
-------- --------
Total Liabilities
and Stockholders Equity $149,082 $140,944
Net Interest Income $ 6,154 $ 5,563
Net Average Yield on
Interest-earning Assets 4.45% 4.28%
</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.
11
<PAGE>
<TABLE>
<CAPTION>
Change Difference Change
in income in income in income Net change
due to on 1998 due to in income
change volume due change in due to rate
1998 in Change to rate rate and and volume
1999 1998 VARIANCE RATE volume in rate change volume changes
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $99,272 $88,005 $11,267 9.13% $1,028 -0.44% ($388) ($50) $ 590
Securities 29,502 26,762 2,740 6.54% 179 -0.09% (24) (2) $ 153
Fed Funds Sold/
Interest Bearing Bank Balances 9,528 15,284 (5,756) 5.37% (309) -0.41% (63) 24 ($348)
------- -------
$ 8,251
=======
Net Change in Income on Total Earning Assets $ 395
-------
LIABILITIES
NOW Accounts $ 6,001 $ 6,270 ($269) 1.77% ($5) -0.20% ($13) $ 1 ($17)
Money Market Accounts 29,231 25,672 3,559 3.91% 139 -0.19% (48) (7) $ 84
Savings Accounts 3,423 2,898 525 2.45% 13 -0.17% (5) (1) $ 7
Time Deposits 53,975 57,932 (3,957) 5.81% (30) -0.57% (330) 23 ($537)
Securities Sold Under
Repurchase Agreements 15,709 10,604 5,105 4.62% 236 0.20% 21 10 $ 267
-------
Net Change in Expense on Total Interest Bearing Deposits
($196)
------
Net Increase in Net Interest Income
$591
====
</TABLE>
II. Investment Portfolio.
Securities
The book & market values of the major classifications of investment securities
were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Securities available-for-sale:
US Treasury securities $ 3,510 $ 3,451 $ 5,019 $ 5,209
Obligations of federal government agencies 20,987 20,168 18,248 18,424
Mortgage backed securities 7,549 7,364 1,960 1,970
Corporate debt obligations 0 0 250 250
------- ------- ------- -------
TOTAL $32,046 $30,983 $25,477 $25,853
Securities held-to-maturity:
Obligations of states, municipalities and
Political subdivisions $ 526 $ 527 $ 818 $ 832
</TABLE>
12
<PAGE>
Analysis of Investment Securities
The following table sets forth the maturities of investment securities at
December 31, 1999.
<TABLE>
<CAPTION>
After 1 After 5
Weighted year but Weighted year but Weighted Weighted
Within 1 Average Within Average Within Average After 10 Average
Maturity Yield 5 year Yield 10 year Yield Year Yield Total
Maturity Maturity Maturity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 0 n/a $ 1,499 6.38% $ 2,011 6.00% $ 0 n/a $ 3,510
U.S. Government Agencies 0 n/a 13,988 6.16% 6,999 6.41% 7,549 7.04% $28,536
State and Political Subdivisions 301 4.92% 225 4.50% 0 n/a 0 n/a $ 526
------ ------ ------ ------ ------
Total by Maturity and Yield $301 4.92% $15,712 6.16% $ 9,010 6.35% $7,549 7.04% $32,572
</TABLE>
COMMENT
1. Yields have not been adjusted on tax-exempt investments to determine a tax-
equivalent yield due to the nominal amount held in the portfolio ($526.)
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.
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
1999 1998
<S> <C> <C>
Commercial loans $ 72,378 $58,779
Real estate loans 25,802 24,024
Installment loans 4,342 4,227
Consumer and other loans 5,599 4,531
-------- -------
TOTAL LOANS $108,121 $91,561
Allowance for loan losses (1,480) (1,184)
Deferred loan fees, net of deferred costs (291) (256)
-------- -------
NET LOANS $106,350 $90,121
</TABLE>
The following table shows the amounts and maturity analysis of commercial and
real estate construction loans outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
Maturing
After 1 year
Within 1 year but within 5 After 5 year
Maturity Year maturity Maturity TOTAL
<S> <C> <C> <C> <C>
Commercial $23,270 $ 8,886 $40,222 $ 72,378
Real Estate Loans 11,492 7,421 6,889 25,802
Installment 2,069 319 1,954 4,342
Consumer and Other 2,951 1,413 1,235 5,599
------- ------- ------- --------
$39,782 $18,039 $50,300 $108,121
</TABLE>
Loans maturing after one year with
<TABLE>
<S> <C> <C>
Fixed Rates $11,341 $34,183
Variable Rates 6,698 16,117
------- -------
Totals $18,039 $50,300
</TABLE>
13
<PAGE>
Loans are placed in a non-accrual status when they are not adequately
collateralized and when, in the opinion of management the collection of interest
is questionable. Thereafter, no interest is taken into income unless received in
cash or until such time as the borrower demonstrates the ability to resume
payments of principal and interest. Interest previously accrued but not
collected is reversed and charged against income at the time the loan is placed
on non-accrual status.
<TABLE>
<CAPTION>
December 31
1999 1998
(Dollars in Thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis $1,004 $144
Loans contractually past due ninety days or more $ 362 $632
as to interest or principal
Gross interest income which would have been $ 71 $163
recorded under original terms
Gross interest income recorded during the period $ 38 $128
</TABLE>
C.2. As of the end of the most recent reported period, 12/31/99, 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.
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
<S> <C> <C>
1999 1998
(Dollars in Thousands)
Total loans net of deferred fees at end of period $107,830 $91,305
YTD average net loans 99,272 88,005
Balance of allowance for possible loan losses at 1,184 1,085
beginning of period
Loan charge-offs:
Commercial 95 342
Real Estate 89 7
Installment 71 62
-------- -------
Total Charge-offs 255 411
Recoveries of loans previously charged-off:
Commercial 0 0
Real Estate 0 0
Installment 11 11
-------- -------
Total Recoveries 11 11
-------- -------
Net Charge-offs 244 400
Provision charged to expense 540 499
-------- -------
Balance of allowance for possible loan losses at
end of period $ 1,480 $ 1,184
======== =======
Ratio of net charge-offs during period to average -0.25% -0.45%
loans outstanding
</TABLE>
14
<PAGE>
Breakdown of Allowance for Loan Losses:
<TABLE>
<CAPTION>
December 31
1999 1998
(Dollars in Thousands)
% of Allowance % of Allowance
to Total to Total
Amount Allowance Amount Allowance
<S> <C> <C> <C> <C>
Risk Category 1 (Excellent) $ 1 0.07% $ 1 0.08%
Risk Category 2 (Good) 9 0.61% 3 0.25%
Risk Category 3 (Pass)
Commercial 351 23.72% 291 24.58%
Consumer 64 4.32% 85 7.18%
Risk Category 4 (Pass/Monitor) 154 10.41% 94 7.94%
Risk Category 5 (Watch) * 0.00% 44 3.72%
Risk Category 6 (Substandard) * 0.00% 269 22.72%
Risk Category 7 (Doubtful) * 0.00% 12 1.01%
SBA Loans Sold (Retained Portion) 54 3.65% 46 3.89%
Bankcard Loans 60 4.05% 57 4.81%
Specifically Identified Potential Loss 474 32.03% 124 10.47%
Commitments to Lend under Lines of Credit 122 8.24% 147 12.42%
Supplementary Allowance Not
Specifically Allocated 191 12.91% 11 0.93%
------ ------ ------ ------
$1,480 100.00% $1,184 100.00%
</TABLE>
* Previously, most category 5, 6 &7 loans were reserved for as a pool of loans.
Because each loan in these categories is analyzed at least quarterly to
determine loss potential, in 1999 Inland Northwest Bank began reserving for each
loan individually. Allocated reserves that related to Risk Categories 5, 6 &7 in
1998 are reported as "Specifically Identified Potential Loss" in 1999. The total
allocation to categories 5, 6 &7 in 1998 was 37.92%, compared to 32.03% in 1999.
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
1999 1998
(Dollars in Thousands)
Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Non-interest Bearing Demand Deposits $28,824 n/a $26,553 n/a
Interest Bearing Deposits:
NOW Accounts 6,001 1.57% 6,270 1.77%
Money Market Accounts 29,231 3.72% 25,672 3.91%
Savings Accounts 3,423 2.28% 2,898 2.45%
Time Deposits 53,975 5.24% 57,932 5.81%
------- -------
Total Interest Bearing Deposits $92,630 4.41% $92,772 4.90%
</TABLE>
15
<PAGE>
Maturities of Time Certificates of Deposit over $100,000 are shown below:
<TABLE>
<CAPTION>
December 31
1999 1998
(Dollars in Thousands)
<S> <C> <C>
3 Months or Less $ 8,429 $ 4,390
Over 3 through 6 Months 1,862 3,681
Over 6 through 12 Months 5,295 2,320
Over 1 year through 5 years 749 451
Over 5 years 0 0
------- -------
$16,335 $10,842
</TABLE>
VI. Return on Equity and Assets
Ratios for the two-year periods ended December 31, 1999 and December 31, 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Ratio:
Return on Average Assets 0.64% 0.59%
Return on Average Equity 8.83% 8.41%
Equity to Average Assets 7.20% 6.99%
Dividend Payout Ratio 0 0
</TABLE>
VII. Short-term Borrowings:
<TABLE>
<CAPTION>
Notes payable: Note Note Maturity
(amounts in 000's) Balance Rate Date Payment terms
<S> <C> <C> <C> <C>
FHLB notes (borrower is $2,000 6.17% 04/21/00 Interest monthly, balance at maturity.
Northwest Bank) 1,000 5.98% 04/28/00 Interest monthly, balance at maturity.
1,000 6.17% 09/22/00 Interest monthly, balance at maturity.
Line of credit (for INB Mortgage)
Payable to Baker Boyer Bank 530 8.50% 06/30/00 Interest monthly, balance at maturity.
------ ----
TOTAL & Average Rate $4,530 6.40%
</TABLE>
16
<PAGE>
Rate Shock
Periodically, the Bank commissions an analysis of the effect that a sudden
increase or decrease in interest rates would have on net interest income and the
value of the Bank's equity. The analyses are performed by the Independent
Community Banker's Association quarterly, and the Seattle Branch of the Federal
Home Loan Bank annually.
The Rate Shock Analysis presents estimates of the effect of an immediate change
in rates of between +400 basis points and -400 basis points (+4% to -4%) as
applied to all earning assets and interest bearing liabilities. Depending upon
the re-pricing characteristics of the Bank's assets and liabilities, such a
sudden change in rates can be expected to have either a positive or negative
effect on Bank net interest income. If, for example, substantially all of the
Bank's deposits are fixed rate and substantially all of the Bank's loans are
variable rate, an increase in interest rates would, initially, cause interest
income to rise, while interest expense would not change. As a result, net
interest income would increase until such time as deposits renewed or matured
and were replaced with higher rate deposits. On the other hand, if rates were to
decrease, the Bank would experience a decrease in net interest income. Sudden
changes in interest rates will have a similar, but generally opposite, effect on
the value of the Bank's equity. Non-interest income and non-interest expense are
assumed to remain constant.
Presented below are the results of the analysis performed on financial
information as of December 31, 1999. The results are supportive of Bank
management's desire to limit volatility of net interest income to no more than
plus or minus ten-percent when applying an interest rate shock of plus or minus
two-hundred basis points. There is currently no specific discipline that applies
to change in economic value of equity.
<TABLE>
<CAPTION>
Net Interest Income and Market Value
Summary Performance
($ in thousands)
Net Interest Income Economic Value of Equity
Projected
Interest 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 $6,589 $101 1.56% $1,941 ($8,811) -81.95%
+300 6,561 $73 1.13% 3,820 ($6,932) -64.47%
+200 6,540 $52 0.80% 6,008 ($4,744) -44.12%
+100 6,515 $27 0.42% 8,295 ($2,457) -22.85%
Base 6,488 $0 0.00% 10,752 $0 0.00%
-100 6,452 ($36) -0.55% 13,260 $2,508 23.33%
-200 6,384 ($104) -1.60% 15,563 $4,811 44.75%
-300 6,284 ($204) -3.14% 18,002 $7,250 67.43%
-400 6,154 ($334) -5.15% 20,594 $9,842 91.54%
</TABLE>
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This 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 any forward-
looking statements contained in this Annual Report will in fact take place or
prove to be accurate.
ASSESSMENT OF YEAR 2000 ISSUES.
The Company began considering computer-related issues for the Century Date
Change, or Year 2000 (Y2K) in December, 1997. The Company thereafter devoted
significant resources to preparing for potential problems. In excess of
$280,000 was spent in upgrading computers, other equipment and software. A
significant majority of those expenditures were for upgrades that would have
been made regardless of Y2K considerations. For example, $150,000 was spent on
new equipment and software related to the "proof" function, primarily because
existing equipment was barely adequate to handle the current volume of work, and
was inadequate to provide for growth in volumes due to growth of the Bank.
About $25,000 was spent to provide for automatic backup to externally obtained
electrical power. The growth of the Bank required this expenditure to be made
regardless of Y2K concerns because of the necessity of being able to continue
account processing in the event of a power outage.
About $20,000 was spent on product, services and activities solely related
to Y2K. Additionally, employee time estimated in excess of 3,000 hours was
spent preparing for worst-case possibilities related to infrastructure or other
failures resulting from Y2K considerations and testing of systems or procedures.
No overtime or other payment to employees was incurred due to the time spent on
Y2K preparation; however, time spent on Y2K concerns was time not available to
spend on other projects. The return on monetary and human resource expenditures
made in preparing for Y2K is not possible to measure, either for the Company or
other segments of society or the economy. The effort has resulted in better
disaster recovery and contingency planning and capacity, as well as a better
understanding of information technology issues and the interrelatedness of, and
dependence of various segments of the economy upon each other, both of our
employees and our customers and suppliers.
The Company, and its subsidiaries, did not experience any internal
equipment or software issues related to Y2K considerations. A few minor
problems were evident in third-party software; however, any issues were
corrected within hours and did not impact the Company, its subsidiaries or its
customers.
Certain "critical" dates remain as concerns to the banking industry and its
regulators. For example, October 10, 2000 is the first date that will include
two digits in the month-field, two digits in the day-field and two or four
digits in the year-field. December 31st will be the 366th day of the year,
testing appropriate programming for leap year. Software used internally by the
Company and its subsidiaries has been extensively
18
<PAGE>
tested for the remaining "critical" dates. The Company anticipates that
problems, if any, would be minor and limited to third-party software, with
corrective action relatively easy to perform.
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 branch in Coeur d'Alene, Idaho (the Sherman Avenue
branch).
The Bank leases a total of six other branches situated inside retail
grocery stores. 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, 1999, the total net book value
of the Company's consolidated premises and equipment was $2,788,021.
INB Mortgage leases its offices located in downtown Spokane, Washington.
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
DIRECTORS
The Board of Directors of the Company currently consists of thirteen
members and is divided into three classes. Directors within each class are
elected to three-year terms, meaning that under ordinary circumstances, at any
given time, approximately one-third of the Board would be in its second year of
service and another one-third would be in its third year of service. The same
persons currently serve as directors of the Bank and are elected in the same
manner.
Dwight B. Aden, Jr. - Mr. Aden is 57 and has been a director of the Bank
and the Company since May 20, 1996. His term as a director will be up for
election at the annual meeting of shareholders to be held in 2000. 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 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. Coulson's current term as
19
<PAGE>
director of the Bank will be up for election at the annual meeting of
shareholders to be held in 2002. 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 62 and has been a director of the Bank
since May 26, 1989. He has been a director of the Company since March 30, 1992.
Mr. Douglass' current term as a director of the Bank will be up for election at
the annual meeting of shareholders to be held in 2002. 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 53 and has been a director of the Bank
and the Company since May 20, 1996. His term as a director will be up for
election at the annual meeting of shareholders to be held in 2002. Mr. Duncan is
an attorney specializing in real estate matters.
Donald A. Ellingsen, M.D. - Dr. Ellingsen is 63 and has been a director of
the Bank and the Company since May 20, 1996. His term as a director will be up
for election at the annual meeting of shareholders to be held in 2002. Dr.
Ellingsen is retired; for the five years prior to his retirement, he was an
ophthalmologist and a member of the Spokane Eye Clinic, Spokane, Washington.
Clark H. Gemmill - Mr. Gemmill is 57. He has been a director of the Bank
since its incorporation on May 26, 1989 and a director of the Company since
March 30, 1992. Mr. Gemmill's current term as a director will be up for election
at the annual meeting of shareholders held in 2001. During the past five years,
he has been a Vice President with Paine Webber (successor in interest to Kidder,
Peabody Inc.), a financial investment firm with a branch office in Spokane,
Washington.
Bryan S. Norby - 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 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. 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 First Union
Securities at its branch in Spokane.
Hubert F. Randall - Mr. Randall is 71. 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 67 and has been a director of the
Bank since its incorporation on May 26, 1989. He has been a director of the
Company since March 30, 1992. Mr. Sandberg's current term as
20
<PAGE>
a director will be up for election at the annual meeting of shareholders held in
2001. Mr. Sandberg is retired; for the five years prior to his retirement, he
was the President and Chief Executive Officer of Sandberg Securities, an
independent investment services firm in Spokane, Washington.
Frederick M. Schunter - Mr. Schunter is 63; 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's current term as
a director will be up for election at the annual meeting of shareholders held in
2001. Mr. Schunter also is the Chief Executive Officer of INB Mortgage.
William E. Shelby - Mr. Shelby is 61 and has been a director of the Bank
since its incorporation on May 26, 1989. He has been a director of the Company
since March 30, 1992. Mr. Shelby's current term as a director will be up for
election at the annual meeting of shareholders held in 2001. Mr. Shelby is
employed as the Vice President of Store Development for U.R.M. Stores, Inc.
James R. Walker - Mr. Walker 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. Walker's current term as a director will be up for
election at the annual meeting of the shareholders held in 2001. Mr. Walker was
the President and Chief Executive Officer of Hazen & Clark, Inc., a general
contracting firm, from 1968 until his retirement in 1995.
OFFICERS
In addition to Mr. Schunter, the executive officers of the Company and its
subsidiaries are:
Jennifer L. Johnson - Ms. Johnson is 39 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. Ms. Johnson has notified the Company
that she is resigning from the Company and the Bank as of March 31, 2000.
Christopher C. Jurey - Mr. Jurey is 50 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 51 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 49 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.
21
<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 1999 fiscal
year. No officer or director of the Company has received any other remuneration
or indirect financial benefit to date.
<TABLE>
<CAPTION>
Aggregate annual
Name of individual Capacities in which remuneration remuneration
or identity of group was received for last fiscal year
- -------------------- -------------------------------- --------------------
<S> <C> <C>
Frederick M. Schunter President and Chief Executive $161,247 (1)
Officer
Christopher C. Jurey Executive Vice President 97,332
Randall L. Fewel Executive Vice President 104,835
</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 1999 was $35,400.
Directors of the Bank (excluding Mr. Schunter) received an attendance fee
in the amount of $200 per meeting and $100 per committee meeting. Each director
other than Mr. Schunter also received 100 shares of Common Stock of the Company
as additional compensation. No other compensation arrangement has 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 $526,883 for
fiscal year 1999.
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 Fixed Salary for the fiscal year 2000 is $157,500.
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 for the
fiscal year 2000 is $96,520 and the Fixed Salary for Randall L. Fewel for the
fiscal year 2000 is $101,116. The Fixed Salary for Jennifer L. Johnson remains
$70,620 on an annual basis until her termination date.
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 $126,395 and $115,995 at December 31, 1999 and 1998,
respectively.
22
<PAGE>
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, 1999 and 1998, $170,164 and $134,764,
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, 1999 and 1998, was $35,400 and
$35,000, respectively.
Both the Bank and the Company are and will be highly dependent upon the
services of Mr. Schunter, Mr. Jurey and Mr. Fewel. 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.
<TABLE>
<CAPTION>
Percent of Class
Title of Class Name and Address of Owner Amount Owned (as of March 14, 2000)
<S> <C> <C> <C>
Common Stock F. M. Schunter
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 66,411 4.21%
Common Stock Christopher C. Jurey
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 11,806 .75
Common Stock Randall L. Fewel
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 3,204 .20
Common Stock Jennifer L. Johnson
421 W. Riverside, Suite 113
Spokane, WA 99201-0403 1,150 .07
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Officers and directors as a group own of record, to the knowledge of the
Company, 458,061 of common stock of the Company, representing 40.93% 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.
23
<PAGE>
<TABLE>
<CAPTION>
Title and Amount of
Securities Called Date Exercisable
for by Options, Effective Exercise (if not currently
Name of Holder Warrants or Rights Price/1/ vested)/2/ Expiration Date
- -------------- ------------------ ------------------ ----------------- ---------------
<S> <C> <C> <C> <C>
F.M. Schunter option - 2662 9.20 January 1, 2005
option - 2420 10.33 January 2, 2001
option - 2420 10.33 December 16, 2006
option - 2200 11.82 December 15, 2007
option - 3000 16.00 December 14, 2008
warrants - 25,867 5.12 January 16, 2000
(as adjusted)
option - 3000 16.00 December 20, 2009
Christopher C. Jurey option - 1331 9.20 January 1, 2005
option - 1210 10.33 January 2, 2001
option - 1210 10.33 December 16, 2006
option - 1100 11.82 December 15, 2007
option - 2000 16.00 December 14, 2008
option - 2000 16.00 December 20, 2009
Randall L. Fewel option - 1331 9.20 January 1, 2005
option - 1210 10.33 January 2, 2001
option - 1210 10.33 December 16, 2006
option - 1100 11.82 December 15, 2007
option - 2000 16.00 December 14, 2008
option - 2000 16.00 December 20, 2009
Jennifer L. Johnson option - 1210 10.33 January 2, 2001
option - 1210 10.33 December 16, 2006
option - 1100 11.82 December 15, 2007
option - 2000 16.00 December 14, 2008
</TABLE>
/1/ The number of shares subject to the option have been increased to reflect
the declaration of stock dividends after the options were granted and the stock
split effective May 28, 1999; the exercise price also has been adjusted to
correspond with the increase in shares.
/2/ The options granted to the above persons expiring December 16, 2006,
December 15, 2007, December 14, 2008 and December 20, 2009, respectively, are
subject to a vesting schedule of 20% per year after the first year.
24
<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, 1999, was $3,038,237 including unused commitments.
25
<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 dealer 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>
1999 1998
(without adjustment for stock split)
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
January 1 - March 31 $16.50 $16.00 $30.00 $28.00
April 1 - June 30 $16.50 $16.00 $30.00 $29.00
July 1 - September 30 $16.00 $16.00 $30.00 $30.00
October 1 - December 31 $16.00 $16.00 $30.00 $30.00
</TABLE>
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. A
two-for-one stock split was effective on May 28, 1999.
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 price per share paid in actual
transactions during the quarter ended December 31, 1999 was $16.00.
Holders
As of December 31, 1999, there were approximately 441 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.
26
<PAGE>
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.
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 1999 except for the following:
Dwight B. Aden, Jr., Freeman B. Duncan, Bryan S. Norby, Richard H. Peterson,
Hubert F. Randall, Phillip L. Sandberg, and William E. Shelby (all of whom are
directors) filed their Form 5 reports on February 23,2000; these reports did not
disclose any transactions that had not been timely reported. Frederick M.
Schunter, a director and officer, Donald D. Ellingsen, a director, and Harlan D.
Douglass, a director filed their
27
<PAGE>
Form 5 reports on February 24, 2000, March 3, 2000 and March 10, 2000,
respectively; these reports did not disclose any unreported transactions.
James R. Walker, Jimmie T. G. Coulson and Clark H. Gemmill, each of whom is
a director, filed their Form 5 reports on February 23, 2000, March 3, 2000, and
February 23, 2000, respectively. Mr. Walker's report disclosed that he had
exercised warrants to purchase 6,834 shares on July 19, 1999. Mr. Coulson's
report disclosed that he had exercised warrants to purchase 18,546 shares on
December 31, 1999. Mr. Gemmill's report disclosed that he had exercised warrants
to purchase 16,105 shares on December 6, 1999. Form 4 reports were not filed to
disclose these transactions.
On February 24, 2000, Frederick M. Schunter, a director and officer, filed
an amended Form 4 report disclosing that he had exercised warrants to purchase
25,867 shares on January 14, 2000. On March 3, 2000, Richard H. Peterson and
William E. Shelby filed Form 4 reports. Mr. Peterson's report disclosed that he
had exercised warrants to purchase 29,870 shares on January 18, 2000. Mr.
Shelby's report disclosed that he had exercised warrants to purchase 3,513
shares on January 18, 2000. On March 7, 2000, Hubert F. Randall, a director,
filed a report on Form 4 disclosing that he had exercised warrants to purchase
9,768 shares on January 14, 2000. On March 10, 2000, Phillip L. Sandberg, a
director, and Harlan D. Douglas, a director filed reports on Form 4. Mr.
Sandberg's report disclosed that he had exercised warrants to purchase 29,282
shares on January 14, 2000. Mr. Douglass' report disclosed that he had exercised
warrants to purchase 26,938 shares on January 14, 2000.
ITEM 6. REPORTS ON FORM 8-K
No reports were filed on Form 8-K during the last quarter of the fiscal
year 1999.
28
<PAGE>
NORTHWEST BANCORPORATION, INC.
AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
and
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
29
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- ------------------------------------------------------------------
<S> <C>
INDEPENDENT AUDITOR'S REPORT 31
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition 32
Consolidated Statement of Income 33
Consolidated Statement of Changes in Stockholders' Equity 34-35
Consolidated Statement of Cash Flows 36-37
Notes to Consolidated Financial Statements 38-58
</TABLE>
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Northwest Bancorporation, Inc.
and subsidiaries
Spokane, Washington
We have audited the accompanying consolidated statements of financial condition
of Northwest Bancorporation, Inc. and subsidiaries as of December 31, 1999 and
1998, 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
Northwest Bancorporation, Inc. and subsidiaries as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Spokane, Washington
January 14, 2000
31
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
December 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Cash and due from banks $ 8,474,571 $ 9,445,327
Federal funds sold 7,333,000 18,673,900
Securities available for sale 30,982,163 25,852,647
Securities held to maturity 525,657 817,974
Federal Home Loan Bank (FHLB) stock, at cost 479,400 382,200
Loans receivable, net of allowance for loan losses
1999 $1,480,208; 1998 $1,184,322 106,349,900 90,120,882
Loans held for sale 980,675 1,746,223
Premises and equipment 2,788,020 3,055,063
Accrued interest receivable 1,091,831 931,688
Foreclosed real estate, net of allowance for losses
1999 $-0-; 1998 $10,048 853,444 202,759
Other assets 1,144,819 526,323
Goodwill, net of accumulated amortization of
1999 $24,261; 1998 $9,925 174,237 188,573
------------- ------------
TOTAL ASSETS $161,177,717 $151,943,559
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $124,129,846 $128,675,490
Securities sold under repurchase agreements 17,927,655 8,929,783
Accrued interest and other liabilities 989,846 999,376
Borrowed funds 6,984,451 2,705,158
------------- ------------
Total liabilities 150,031,798 141,309,807
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 5,000,000
shares issued 1,290,453 and 1,191,448 shares 10,312,307 9,771,204
Retained earnings 1,535,355 618,807
Accumulated comprehensive income (loss) (701,743) 243,741
------------- ------------
Total stockholders' equity 11,145,919 10,633,752
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $161,177,717 $151,943,559
============= ============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
32
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Interest Income:
Loans receivable, including fees $ 9,200,036 $ 8,854,480
Investment securities:
U.S. Treasury securities 228,038 309,056
U.S. government agency securities 1,613,407 1,349,459
Other securities 67,407 98,158
Federal funds sold 466,879 814,554
----------- -----------
Total internet income 11,575,767 11,425,707
----------- -----------
Interest Expense:
Deposits 4,085,769 4,548,452
Borrowed funds and repurchase
agreements 836,825 521,132
----------- -----------
Total interest expense 4,922,594 5,069,584
----------- -----------
Net interest income 6,653,173 6,356,123
Provision for loan losses 540,000 498,500
----------- -----------
Net interest income after
provision for loan losses 6,113,173 5,857,623
----------- -----------
Noninterest Income:
Service charges on deposits 793,039 603,979
Net gains from sale of loans 918,348 817,943
Gain on sale of securities 94,455 -
Other income 391,511 179,845
----------- -----------
2,197,353 1,601,767
----------- -----------
Noninterest Expense:
Salaries and employee benefits 3,988,403 3,546,255
Occupancy expense 536,476 496,158
Equipment expense 532,516 483,331
Losses on foreclosed real estate 51,669 26,986
Goodwill amortization 14,336 9,925
Other operating expenses 1,765,221 1,474,785
----------- -----------
6,888,621 6,037,440
---------------------------
Net income before federal income taxes 1,421,905 1,421,950
Federal income tax expense 505,357 474,863
----------- -----------
NET INCOME $ 916,548 $ 947,087
----------- -----------
Earnings per share $0.74 $0.80
----------- -----------
Earnings per share assuming full dilution $0.61 $0.65
----------- -----------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
33
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Compre- Compre-
Common Retained hensive hensive
Total Stock Earnings Income Income
----------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
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 2,270 stock options 24,796 24,796 - -
Exercise of 3,416 stock warrants 17,505 17,505 - -
Issuance of stock to directors,
2,400 shares 34,800 34,800 - -
Net change in unrealized gains
on available for sale securities,
net of taxes of $44,456 82,562 - - 82,562 82,562
10% stock dividend 107,462
shares of common stock - 1,558,199 (1,558,199) -
Fractional shares issued in cash (4,843) - (4,843) -
Issuance of 4,770 shares of stock
to enact purchase of mortgage
company 66,780 66,780 - -
Sale of 334 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>
- --------------------------------------------------------------------------------
34
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Compre-
Compre- hensive
Common Retained hensive Income
Total Stock Earnings Income (Loss)
----------- ----------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $10,633,752 $ 9,771,204 $ 618,807 $ 243,741
Net income for 1999 916,548 - 916,548 - $ 916,548
Exercise of 220 stock options 2,600 2,600 - -
Exercise of 95,912 stock warrants 491,324 491,324 - -
Issuance of stock to directors,
2,400 shares 39,600 39,600 - -
Net change in unrealized losses
on available for sale securities,
net of taxes of $492,750 (945,484) - - (945,484) (945,484)
Exercise of 473 stock appreciation
rights 7,579 7,579 - -
----------- ----------- --------- ------------ ----------
Comprehensive loss $ (28,936)
----------
Balance, December 31, 1999 $11,145,919 $10,312,307 $1535,355 $(701,743)
----------- ----------- --------- ------------
Disclosure of 1999 reclassification amount
Unrealized holding losses during period (realized and unrealized) $(883,144)
Less reclassification adjustment for gains reported in net income (62,340)
------------
Net unrealized goals on securities $(945,484)
------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
35
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 916,548 $ 947,087
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 421,603 388,499
Amortization 14,336 9,925
Provision for loan losses 540,000 498,500
Provision for losses on foreclosed real estate 38,499 22,680
Accretion of securities discounts (25,446) (17,258)
Amortization of securities premiums 45,964 114,484
Loss on disposal of assets - 649
Net loss on sale of foreclosed real estate 1,313 4,306
Stock dividends received (33,460) (33,000)
Issuance of stock appreciation rights 7,579 4,843
Deferred income taxes (44,330) 69,799
Gain on sale of securities (94,455) -
Gain on sale of loans (918,348) (817,943)
Originations of loans held for sale (28,777,217) (15,051,217)
Proceeds from sales of loans held for sale 30,399,792 14,131,100
Change in assets and liabilities:
Accrued interest receivable (160,143) (230,709)
Other assets (700,897) (59,936)
Accrued interest and other liabilities 609,992 186,980
Net cash provided by operating activities 2,241,290 168,789
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of PHLB stock (63,740) (40,000)
Purchase of INB Mortgage Company assets - (145,554)
Net decrease (increase) in federal funds sold 11,340,900 (10,726,400)
Securities available for sale:
Proceeds from maturities or principal payments 7,410,614 10,464,480
Proceeds from sales 1,098,750 -
Purchases (15,000,860) (13,249,856)
Securities held to maturity:
Proceeds from maturities or principal payments 290,000 150,000
Purchases of premises and equipment (154,560) (997,061)
Proceeds from sale of foreclosed real estate 282,786 465,003
Net increase in loans (17,680,981) (14,223,240)
-------------- -------------
Net cash used by investing activities (12,477,091) (28,302,628)
-------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE>
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $(4,545,644) $26,964,274
Net increase in securities sold under
repurchase agreements 8,997,872 495,657
Proceeds from issuance of capital stock 533,524 77,101
Payments on fractional shares - (4,843)
Proceeds from the issuance of debt 4,000,000 2,745,900
Repayment of long-term debt (250,365) (103,426)
Net increase m other borrowed funds 529,658 -
------------ ------------
Net cash provided by financing activities 9,265,045 30,174,663
------------ ------------
NET CHANGE IN CASH AND DUE FROM BANKS (970,756) 2,040,824
Cash and due from banks, beginning of year 9,445,327 7,404,503
------------ ------------
Cash and due from banks, end of year $ 8,474,571 $ 9,445,327
------------ ------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Cash paid during the year for:
Interest $ 4,915,791 $ 5,058,491
------------ ------------
Income taxes $ 495,514 $ 353,055
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Net change in unrealized gain (loss) on securities
available for sale $(1,438,234) $ 127,018
------------ ------------
Acquisition of real estate in settlement of loans $ 973,243 $ 127,807
------------ ------------
Stock issued to purchase mortgage company assets
and goodwill $ - $ 66,780
------------ ------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
37
<PAGE>
Note 1 - Summary of Significant Accounting Policies
Change in name:
During 1999, the Corporation changed its name from Inland Northwest
Bancorporation, Inc. to Northwest Bancorporation, Inc.
Basis of presentation and consolidation:
The consolidated financial statements include the accounts of 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.
Use of estimates:
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, 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.
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.
Note 1 - Summary of Significant Accounting Policies (Continued)
Cash equivalents:
For the purpose of presentation in the consolidated statement of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."
Securities held to maturity:
Bonds and notes 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.
38
<PAGE>
Securities available for sale:
Securities available for sale consist of bonds and notes 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.
Note 1 - Summary of 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.
Allowance for loan losses:
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
39
<PAGE>
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments or principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
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.
Note 1 - Summary of Significant Accounting Policies (Continued)
Goodwill:
Goodwill related to the purchase of INB Mortgage Company is being amortized on a
straight-line basis over 15 years.
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.
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.
40
<PAGE>
Note 1 - Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements:
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting standards
for derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the balance sheet and measure them
at fair value. If certain conditions are met, an entity may elect to designate
a derivative as follows: (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of an unrecognized firm commitment,
an available for sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The statement
generally provides for matching the timing of the recognition of the gain or
loss on derivatives designated as hedging instruments with the recognition of
the changes in the fair value of the item being hedged. Depending on the type
of hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in
fair value will be recognized in net income in the period of change. Management
is currently evaluating the impact of adopting this statement on the
consolidated financial statements, but does not anticipate that it will have a
material impact.
Note 2 - 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,
1999 and 1998, were as follows:
<TABLE>
<CAPTION>
Securities available for sale: December 31, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
U.S. government agency
securities $20,987,239 $ 5,854 $ (824,594) $20,168,499
U.S. treasury securities 3,509,521 3,243 (62,753) 3,450,011
Mortgage backed
securities 7,548,651 3,645 (188,643) 7,363,653
----------- ------------ ----------- -----------
$32,045,411 $12,742 $(1,075,990) $30,982,163
=========== ============ =========== ===========
</TABLE>
41
<PAGE>
Note 2 - Investments in Securities (Continued)
<TABLE>
<CAPTION>
Securities available for sale: December 31, 1998
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
Securities held to maturity: December 31, 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal
securities $525,657 $1,870 $(499) $527,028
----------- ------------ ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
State and municipal $817,974 $14,274 $ - $832,248
securities
----------- ------------ ----------- -----------
</TABLE>
The scheduled maturities of securities held to maturity and securities available
for sale at December 31, 1999, 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 $300,657 $302,528 $ - $ -
Due from one year to five
years 225,000 224,500 15,487,104 15,103,840
Due from five to ten years - - 9,009,656 8,514,670
Due after ten years - - - -
Mortgage backed securities - - 7,548,651 7,363,653
------------ ----------- --------------- --------------
$525,657 $527,028 $32,045,411 $30,982,163
============ =========== =============== ==============
</TABLE>
42
<PAGE>
Note 2 - Investments in Securities (Continued)
At December 31, 1999 and 1998, securities available for sale with an amortized
cost of $22,327,997 and $12,027,142, were pledged to secure the Bank's
performance of its obligations under repurchase agreements. The approximate
market value of these securities was $21,615,116 and $12,171,100 at December 31,
1999 and 1998. Securities available for sale with an amortized cost of
$3,207,893 and $3,247,718 at December 31, 1999 and 1998, were pledged to secure
public deposits for purposes required or permitted by law. The approximate
market value of these securities was $3,068,288 and $3,272,316 at December 31,
1999 and 1998, respectively. Securities available for sale with an amortized
cost of $1,500,000 at December 31, 1999, were pledged to the Federal Reserve
Bank. The approximate market value of these securities was $1,445,000 at
December 31, 1999.
There was one sale of available for sale securities during 1999. Total proceeds
of the sale were $1,098,750, resulting in a gain of $94,455. Amortized cost was
the method used to determine cost when calculating the gain. There were no
sales of available for sale securities in 1998.
Note 3 - Loans Receivable and Allowance for Loan Losses
The components of loans in the consolidated statement of financial condition
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Commercial $ 72,378,239 $58,779,339
Real estate 25,801,594 24,023,768
Installment 4,342,005 4,227,222
Consumer and other 5,599,134 4,530,696
108,120,972 91,561,025
Allowance for loan losses (1,480,208) (1,184,322)
Net deferred loan fees (290,864) (255,821)
------------ -----------
$106,349,900 $90,120,882
============ ===========
</TABLE>
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Balance, beginning of year $1,184,322 $1,085,374
Provision charged to operations 540,000 498,500
Loans charged off, net of recoveries (244,114) (399,552)
---------- ----------
Balance, end of year $1,480,208 $1,184,322
========== ==========
</TABLE>
43
<PAGE>
Note 3 - Loans Receivable and Allowance for Loan Losses (Continued)
The loans fall into the following fixed and variable components:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Fixed rate loans $ 39,982,045 $41,046,703
Variable rate loans 68,138,927 50,514,322
------------ -----------
$108,120,972 $91,561,025
============ ===========
</TABLE>
Impairment of loans having recorded investments of $952,538 and $1,802,940 at
December 31, 1999 and 1998, 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 $65,330 and $338,060 at December 31, 1999
and 1998, respectively. 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, 1999 and 1998, was $1,244,591
and $1,477,895, respectively. Interest income on impaired loans of $37,943 and
$128,186 was recognized for cash payments received in 1999 and 1998,
respectively.
Note 4 - Premises and Equipment
Components of premises and equipment included in the consolidated statements of
financial condition at December 31, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land $ 269,204 $ 269,204
Furniture, equipment, and building 2,841,256 2,703,740
Leasehold improvements 1,262,717 1,245,671
Vault 48,483 48,483
Land improvements 313,096 313,098
----------- -----------
Total cost 4,734,756 4,580,196
Accumulated depreciation (1,946,736) (1,525,133)
----------- -----------
NET BOOK VALUE $ 2,788,020 $ 3,055,063
=========== ===========
</TABLE>
Depreciation expense was $421,603 and $388,499 for the years ended December 31,
1999 and 1998, respectively.
The Bank leases its main office and eight of its nine branches under lease
agreements that expire on various dates through 2017. The lease agreements have
various renewal options.
Note 4 - Premises and Equipment (Continued)
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, 1999:
44
<PAGE>
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 282,306
2001 239,778
2002 214,422
2003 207,027
2004 193,524
Thereafter 912,940
----------
TOTAL MINIMUM PAYMENTS REQUIRED $2,049,997
==========
</TABLE>
Total lease payments under the above mentioned operating leases and other month-
to-month rentals for the years ended December 31, 1999 and 1998, were $339,963
and $330,414, respectively.
Note 5 - Foreclosed Real Estate
An allowance for losses on foreclosed real estate has been established.
Activity in the account is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Balance, beginning of year $ 10,048 $ 85,681
Provision charged to income 38,499 22,680
Charge offs, net of recoveries (48,547) (98,313)
--------- ---------
Balance, end of year $ - $ 10,048
========= =========
</TABLE>
Included in the losses on foreclosed real estate in the consolidated statement
of income for the years ending December 31, 1999 and 1998, are impairment losses
of $38,499 and $22,680, respectively, on real estate held for sale, and $1,313
and $4,306, respectively, of actual losses on sales of real estate.
45
<PAGE>
Note 6 - Deposits
Major classifications of deposits at December 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Demand deposits $ 28,599,410 $ 30,397,265
Money market 31,362,643 27,406,537
NOW accounts 5,129,004 10,041,192
Savings deposits 3,520,787 3,067,768
Time deposits, $100,000 and over 16,334,669 10,841,892
Other time deposits 39,183,333 46,920,836
------------ ------------
$124,129,846 $128,675,490
============ ============
</TABLE>
Maturities for time deposits at December 31, 1999, are summarized as follows:
<TABLE>
<S> <C>
Maturing one year or less $47,013,285
Maturing one to five years 8,504,717
------------
$55,518,002
============
</TABLE>
Note 7 - Borrowed Funds
Borrowed funds at December 31 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes payable, FHLB advances maturing 2013, 6.15% fixed
rate. Requires monthly principal and interest payments $1,676,999 $1,747,826
of $17,500.
Notes payable, FHLB advances maturing 2000, 6.17% fixed
rate. Requires monthly interest payments and repayment
of principal in full on April 21, 2000. 2,000,000 -
Notes payable, FHLB advances maturing 2000, 5.95% fixed
rate. Requires monthly interest payments and repayment
of principal in full on September 22, 2000. 1,000,000 -
Notes payable, FHLB advances maturing 2000, 5.98% fixed
rate. Requires monthly interest payments and repayment
of principal in full on April 28, 2000. 1,000,000 -
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, 1999. 500,000 500,000
</TABLE>
46
<PAGE>
Note 7 - Borrowed Funds (Continued)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes payable, FHLB advances maturing 1999, 5.15% fixed
rate. Requires monthly principal and interest payments $ - $ 175,000
of $752.
Notes payable, FHLB advances maturing 2028, 6.09% fixed
rate. Requires monthly principal and interest payments 111,552 112,713
of $583.
Notes payable, FHLB advances maturing 2028, 6.28% fixed
rate. Requires monthly principal and interest payments 107,960 109,001
of $581.
Notes payable, FHLB advances maturing 2027, 6.60% fixed
rate. Requires monthly principal and interest payments 58,282 60,618
of $340.
Notes payable to Baker Boyer Bank, maturing June 2000,
prime rate, currently 8.50%. Requires monthly interest
payments on unpaid balance. 529,658 -
---------- ----------
$6,984,451 $2,705,158
========== ==========
</TABLE>
The scheduled maturities of borrowed funds at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Weighted Average
Years Ending December 31, Interest Rate Amount
------------------ ----------
<S> <C> <C>
2000 6.38% $4,704,032
2001 7.03% 181,014
2002 7.00% 188,136
2003 6.96% 195,885
2004 and after 6.93% 1,715,384
----------
$6,984,451
==========
</TABLE>
Note 8 - 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 2.
Information concerning securities sold under agreements to repurchase at
December 31, 1999, is summarized as follows:
<TABLE>
<S> <C>
Average balance during the year $13,243,661
-----------
Average interest rate during the year 4.46%
-----------
Maximum month-end balance during the year $18,304,692
===========
</TABLE>
47
<PAGE>
Note 9 - 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 Northwest
Bancorporation.
The Bank has unsecured operating lines of credit with KeyBank of Washington for
$2,500,000, U.S. Bank for $1,500,000 and Zions Bank for $1,500,000. The Bank
also has a line of credit with Federal Home Loan Bank for $16,021,000. This
line is collateralized by all assets of the Bank. There were $5,954,793 and
$2,205,158 of outstanding borrowing on the Federal Home Loan Bank operating line
at December 31, 1999 and 1998, 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. The Bank uses the same
credit policies in making such commitments as they do for instruments that are
included in the consolidated statement of financial condition. These
commitments and contingent liabilities include various commitments to extend
credit and standby letters of credit. At December 31, 1999 and 1998,
commitments under standby letters of credit were $112,660 and $188,911, firm
loan commitments were $32,724,643 and $22,449,107, respectively. The
Corporation does not anticipate any material losses as a result of these
commitments.
Note 10 - 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 3. The distribution of commitments to extend credit approximates
the distribution of loans outstanding. Outstanding commitments and standby
letters of credit were granted primarily to commercial borrowers.
The Bank places its cash with high credit quality institutions. The amount on
deposit fluctuates, and at times exceeds the insured limit by the U.S. Federal
Deposit Insurance Corporation, which potentially subjects the Bank to credit
risk.
Note 11 - Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current tax expense $549,727 $405,064
Deferred tax expense (44,370) 69,799
-------- --------
FEDERAL INCOME TAX EXPENSE $505,357 $474,863
======== ========
</TABLE>
48
<PAGE>
Note 11 - Income Taxes (Continued)
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $433,577 $ 343,592
Deferred compensation 59,557 45,820
Net unrealized loss on securities available for sale 361,505 -
Non-accrual loan interest 18,047 -
-------- ---------
872,686 389,412
-------- ---------
Deferred tax liabilities:
Accumulated depreciation 256,469 213,823
Conversion from accrual to cash basis method of
accounting for tax purposes - 8,667
Deferred loan fees 78,462 117,650
Net unrealized gain on securities available for sale - 131,245
Other 39,862 39,656
-------- ---------
374,793 511,041
-------- ---------
NET DEFERRED TAX ASSET (LIABILITY) $497,893 $(121,629)
======== =========
</TABLE>
The net deferred tax asset is included in other assets on the consolidated
statements of financial condition at December 31, 1999. The net deferred tax
liability is included in accrued expenses and other liabilities on the
consolidated statement of financial condition at December 31, 1998.
At December 31, 1999, a tax liability of $115,027 was included in accrued
expenses and other liabilities on the consolidated statement of financial
condition. At December 31, 1998, a prepaid federal income tax refund of $11,536
was included in other assets on the consolidated statement of financial
condition.
The effective tax rate differs from the statutory federal tax rate for the years
presented as follows:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Federal income tax at statutory rate $500,907 $480,042
Effect of tax-exempt interest income (9,507) (12,368)
Effect of tax-exempt interest expense 1,420 2,252
Effect of nondeductible expenses 13,626 6,416
Other (1,089) (1,479)
-------- ---------
FEDERAL INCOME TAX EXPENSE $505,357 $474,863
======== =========
</TABLE>
49
<PAGE>
Note 12 - 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, 1999 and 1998, $170,164 and $134,764, 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, 1999 and 1998, was $35,400 and $35,000, respectively.
The Bank is the owner and beneficiary of life insurance policies on this officer
with a total face value of $226,274 and cash surrender value of $126,395 and
$115,995 at December 31, 1999 and 1998, respectively. The cash surrender value
is included in the consolidated statement of financial condition in other
assets.
Note 13 - 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 Northwest Bancorporation, Inc., and as a result thereof, the Corporation has
issued warrants to the founders group to purchase 392,290 shares of common stock
adjusted for stock dividends. The warrants expire on January 16, 2000. As of
December 31, 1999, 107,584 of the warrants had been exercised. Subsequent to
December 31, 1999, 284,706 stock warrants were exercised. The warrants entitled
the holder to acquire shares of the Corporation's common stock at the initial
offering price of $15 per share; as the warrants are adjusted for stock
dividends and stock splits, 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 80,000 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 1993 are eligible for stock
dividends.
50
<PAGE>
Note 13 - Common Stock Purchase Warrants and Stock Option Plan (Continued)
A summary of the status of the Bank's stock option plans and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
Actual Price Actual Price
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Outstanding options, beginning of year 48,075 $12.66 33,875 $10.80
Granted 21,500 $16.00 17,000 $16.00
Exercised (693) $11.29 (2,270) $10.50
Forfeited (6,927) $12.92 (530) $10.50
---------- ----------
Outstanding options, end of year 61,955 $13.64 48,075 $12.66
---------- ----------
Options exercisable at year end 22,215 18,976
---------- ----------
Weighted average fair value of
options granted during the year 6.21 6.21
---------- ----------
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Exercisable Options
-------------------------------------- ------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
at End of Contractual Exercise at End of Exercise
Exercise Prices: Year Life Price Year Price
----------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Price ranges ($9.20
through $10.33) 18,755 4.7 years $ 9.93 16,335 $ 9.87
----------- ----------- -------- --------- ---------
Price ranges
($12.25 through
$16.00) 43,200 9.3 years 15.25 5,880 13.81
----------- ----------- -------- --------- ---------
TOTAL 61,955 7.9 years $13.64 22,215 $12.96
=========== =========== ======== ========= =========
</TABLE>
51
<PAGE>
Note 13 - Common Stock Purchase Warrants and Stock Option Plan (Continued)
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 1999
and 1998, respectively, assuming no cash dividends declared.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net income as previously reported $916,548 $947,087
Pro forma adjustment for effect of a change in accounting (34,209) (23,318)
principle
-------- --------
Pro forma net income $882,339 $923,769
-------- --------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Per share amounts:
Earnings per share $ 0.74 $ 0.80
Pro forma adjustment for the effect of the fair value of
accounting for stock options (0.02) (0.02)
-------- --------
Pro forma net income $ 0.72 $ 0.78
======== ========
Earnings per share assuming full dilution $ 0.61 $ 0.65
Pro forma adjustment for the effect of the fair value of
accounting for stock options (0.02) (0.02)
-------- --------
Pro forma net income $ 0.59 $ 0.63
======== ========
</TABLE>
Note 14 - Common Stock
On March 19, 1999, the Board of Directors announced a 2 for 1 stock split on all
common stock, effective to stockholders of record May 1, 1999, and issued May
21, 1999. All amounts per share and weighted average shares outstanding for all
periods were retroactively adjusted to reflect the stock split.
During 1999 and 1998, the Board of Directors voted to issue 200 shares of common
stock to each Director in lieu of increasing Director's fees. Total shares
issued were 2,400 during 1999 and 1998.
Note 15 - 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.
52
<PAGE>
Vesting occurs equally at 20% each year for five years. The Bank's contribution
was $60,375 and $43,060 for years ended December 31, 1999 and 1998,
respectively.
Note 16 - 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, 1999 and 1998, were $2,160,160 and
$563,386, respectively. Aggregate deposit balances with related parties at
December 31, 1999 and 1998, were $690,006 and $1,037,303, respectively. 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 17 - Restrictions on Dividends and Retained Earnings
At December 31, 1999, the Bank's retained earnings available for the payment of
dividends was $1,897,361. Accordingly, $8,804,870 of the Corporation's equity
in the net assets of the Bank was restricted at December 31, 1999. Funds
available for loans or advances by the Bank to the Corporation amounted to
$950,661.
In addition, dividends paid by the Bank to the Corporation would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
Note 18 - 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.
53
<PAGE>
Note 18 - Regulatory Capital Requirements (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) of Tier 1 capital (as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). Under the regulatory framework
for prompt corrective action, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based, and total risk-based ratios as set forth in the table.
As of December 31, 1999, 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.
54
<PAGE>
Note 18 - Regulatory Capital Requirements (Continued)
The Corporation's and Bank's actual December 31, 1999 and 1998, capital amounts
and ratios are also presented in the table:
<TABLE>
<CAPTION>
Capital Adequacy Purposes
Actual ---------------------------------------------
December 31, 1999 Amount Ratio Amount Ratio
----------- ------- ---------- ------------------------------
<S> <C> <C> <C> <C>
Total capital (to
risk-weighted assets):
Northwest Bancorporation $13,264,687 11.70% $9,068,958 (greater than or equal to) 8%
Inland Northwest Bank 12,815,915 11.35% 9,036,421 (greater than or equal to) 8%
Tier 1 capital (to
risk-weighted assets):
Northwest Bancorporation 11,847,662 10.45% 4,534,479 (greater than or equal to) 4%
Inland Northwest Bank 11,403,974 10.10% 4,518,210 (greater than or equal to) 4%
Tier 1 capital (to average
assets):
Northwest Bancorporation 11,847,662 7.58% 6,251,832 (greater than or equal to) 4%
Inland Northwest Bank 11,403,974 7.32% 6,233,400 (greater than or equal to) 4%
December 31, 1998
Total capital (to
risk-weighted assets):
Northwest Bancorporation $11,495,443 10.99% $8,365,440 (greater than or equal to) 8%
Inland Northwest Bank 11,507,818 11.05% 8,334,560 (greater than or equal to) 8%
Tier 1 capital (to
risk-weighted assets):
Northwest Bancorporation 10,201,438 9.76% 4,182,720 (greater than or equal to) 4%
Inland Northwest Bank 10,163,252 9.76% 4,167,280 (greater than or equal to) 4%
Tier 1 capital (to average
assets):
Northwest Bancorporation 10,201,438 7.49% 5,446,052 (greater than or equal to) 4%
Inland Northwest Bank 10,163,252 7.48% 5,435,719 (greater than or equal to) 4%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
-------------------------------------------------
December 31, 1999 Amount Ratio
----------- ------------------------------
<S> <C> <C>
Total capital (to
risk-weighted assets):
Northwest Bancorporation $11,336,198 (greater than or equal to) 10%
Inland Northwest Bank 11,295,526 (greater than or equal to) 10%
Tier 1 capital (to
risk-weighted assets):
Northwest Bancorporation 6,801,719 (greater than or equal to) 6%
Inland Northwest Bank 6,777,315 (greater than or equal to) 6%
Tier 1 capital (to average
assets):
Northwest Bancorporation 7,814,790 (greater than or equal to) 5%
Inland Northwest Bank 7,791,750 (greater than or equal to) 5%
December 31, 1998
Total capital (to
risk-weighted assets):
Northwest Bancorporation $10,456,800 (greater than or equal to) 10%
Inland Northwest Bank 10,418,200 (greater than or equal to) 10%
Tier 1 capital (to
risk-weighted assets):
Northwest Bancorporation 6,274,080 (greater than or equal to) 6%
Inland Northwest Bank 6,250,920 (greater than or equal to) 6%
Tier 1 capital (to average
assets):
Northwest Bancorporation 6,807,565 (greater than or equal to) 5%
Inland Northwest Bank 6,794,649 (greater than or equal to) 5%
</TABLE>
55
<PAGE>
Note 19 - 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, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders $916,548 1,230,606 $0.74
--------- ---------
Effect of Dilutive Securities
Stock warrants 240,408
Stock options 30,064
-----------
Diluted EPS
Income available to common stockholders
plus assumed conversions $916,548 1,501,078 $0.61
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic EPS
<S> <C> <C> <C>
Income available to common stockholders $947,087 1,184,976 $0.80
--------- ---------
Effect of Dilutive Securities
Stock warrants 250,057
Stock options 25,244
-----------
Diluted EPS
Income available to common stockholders
plus assumed conversions $947,087 1,460,277 $0.65
--------- ----------- ---------
</TABLE>
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.
56
<PAGE>
Note 20 - Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments were as
follows at December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ------------- ----------- -------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 8,474,571 $ 8,474,571 $ 9,445,327 $ 9,445,327
Federal funds sold 7,333,000 7,333,000 18,673,900 18,673,900
Securities available for sale 30,982,163 30,982,163 25,852,647 25,852,647
Securities held to maturity 525,657 527,028 817,974 832,248
Loans receivable 108,120,972 104,908,818 91,561,025 90,717,901
Accrued interest receivable 1,091,831 1,091,831 931,688 931,688
Financial Liabilities:
Borrowed funds 6,984,451 5,458,231 2,705,158 2,646,222
Deposits 124,129,846 124,102,045 128,675,490 127,851,113
Accrued interest payable 422,039 422,039 415,236 415,236
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and due from banks, and federal funds sold:
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.
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.
Note 20 - Fair Value of Financial Instruments (Continued)
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.
57
<PAGE>
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, 1999, and December 31, 1998, were
insignificant. See Note 9 for the notional amount of the commitments to extend
credit.
Note 21 - 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 using 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.
Note 22 - Change in Presentation of Comparative Statements
Certain items have been reclassified or restated on the December 31, 1998,
comparative financial information to correspond with December 31, 1999,
information. Restatement was required due to a two for one common stock split
on May 1, 1999.
58
<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 28, 2000
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 21, 2000
- -----------------------------
F.M. Schunter
/s/ William E. Shelby* Chairman and Director March 21, 2000
- -----------------------------
William E. Shelby
/s/ Dwight B. Aden* Director March 21, 2000
- -----------------------------
Dwight B. Aden, Jr.
/s/ Jimmie T.G. Coulson* Director March 21, 2000
- -----------------------------
Jimmie T.G. Coulson
Director March , 2000
- -----------------------------
Harlan Douglass
Director March , 2000
- -----------------------------
Freeman B. Duncan
/s/ Donald A. Ellingsen Director March 21, 2000
- -----------------------------
Donald A. Ellingsen, M.D.
59
<PAGE>
/s/ Clark H. Gemmill* Director March 21, 2000
- -----------------------------
Clark H. Gemmill
/s/ Bryan S. Norby Director March 21, 2000
- -----------------------------
Bryan S. Norby
/s/ Richard H. Peterson* Director March 21,2000
- -----------------------------
Richard H. Peterson
/s/ Hubert F. Randall Director March 21, 2000
- -----------------------------
Hubert F. Randall
/s/ Phillip L. Sandberg* Director March 21, 2000
- -----------------------------
Phillip L. Sandberg
Director March , 2000
- -----------------------------
James R. Walker
*By: /s/ Christopher C. Jurey
------------------------
Christopher C. Jurey
Attorney-in-Fact
60
<PAGE>
Part III
Item 1. Index to Exhibits
- --------------------------------------------------------------------------------
Exhibit No. Description
- --------------------------------------------------------------------------------
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*, as amended December 21,
1999**
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
* 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-KSB.
*** 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>
INLAND NORTHWEST BANK
NON-QUALIFIED STOCK OPTION PLAN
(Approved by Directors 7/21/92)
(Revised 12/21/93)
(Revised 12/21/99)
Exhibit 10.2.3
<PAGE>
TABLE OF CONTENTS
1. Purpose.............................................................. 1
2. Shares Subject to the Plan........................................... 1
3. Administration of the Plan........................................... 1
4. Duties of Board...................................................... 1
5. Grant of Options..................................................... 1
(a) Determine Optionees........................................ 1
(b) Determine Exercisability................................... 1
(c) Determine Terms of Option Agreement........................ 1
6. Terms and Conditions of Options...................................... 1
(a) Option Price............................................... 2
(b) Number of Shares........................................... 2
(c) Exercise of Option......................................... 2
7. Specific Terms of the Option Agreement............................... 2
(a) Withholding Taxes.......................................... 2
(b) Termination of Employment.................................. 2
(i) Commission of a Crime............................... 3
(ii) Beach of Fiduciary Obligation....................... 3
(iii) Breach of Employment Terms.......................... 3
(c) Nontransferability......................................... 3
(d) Adjustments................................................ 3
(e) No Claim to Stock Option................................... 3
(f) No Rights as Shareholder................................... 3
(g) No Right to Continued Employment........................... 3
(h) Unsecured Obligation....................................... 3
(i) Compliance With Other Laws and Regulations................. 3
(j) Restrictions............................................... 4
(k) Investment Representation and Restrictions................. 4
(l) Governing Law.............................................. 4
(m) Attorneys' Fees............................................ 4
(n) Entire Agreement; Amendment................................ 4
(o) Dissolution of Bank or Issuer.............................. 4
8. Determination of Fair Market Value................................... 5
9. Reservation of Shares of Stock....................................... 5
10. Amendment and Discontinuance......................................... 5
11. Effective Date of the Plan........................................... 5
<PAGE>
INLAND NORTHWEST BANK
NON-QUALIFIED STOCK OPTION PLAN
1. Purpose. The purpose of this Plan is to provide a means whereby
INLAND NORTHWEST BANK (the "Bank") may, through the grant of non-qualified stock
options to Key Employees, as defined below, attract and retain persons of
ability as employees and motivate such employees to exert their best efforts on
behalf of the Bank. The term "Key Employees" means employees of the Bank or
other individuals rendering services to the Bank who, in the judgment of the
Board referred to in Section 3 below, are considered especially important to the
future of the Bank.
2. Shares Subject to the Plan. The number of shares which may be issued
pursuant to the options granted by the Board under this Plan shall not exceed
40,000 shares of the Common Stock of Northwest Bancorporation, Inc., the parent
company of the Bank and the Issuer herein, pursuant to authorization granted by
that company ("Stock"). Such shares are authorized and unissued shares until the
option is exercised. Any shares subject to an option which expires for any
reason or is terminated unexercised as to such shares may again be subject to an
option under this Plan.
3. Administration of the Plan. The Plan shall be administered by the
Bank's Board of Directors (the "Board").
4. Duties of Board. The Board shall interpret the Plan, prescribed,
amend and rescind any rules and regulations necessary or appropriate for the
administration of the Plan, and make such other determinations and take such
other action as it deems necessary or advisable. Any interpretation,
determination or other action made or taken by the Board shall be final, binding
and conclusive.
5. Grant of Options. Subject to the provisions of this Plan, the Board
shall:
(a) Determine Optionees. Determine and designate, from time to time,
those Key Employees to whom options are to be granted and the number of
shares of Stock subject to such options;
(b) Determine Exercisability. Determine the time or times when and
the manner in which each option shall be exercisable and the duration of
the exercise period; and
(c) Determine Terms of Option Agreement. Determine, pursuant to
Sections 6 and 7, all terms and conditions regarding each option issued
pursuant to this Plan.
The Board shall have the sole and absolute discretion to issue options for
differing numbers of shares and on differing terms even if said options are
granted at the same time.
6. Terms and Conditions of Options. Each option granted under the Plan
shall be evidenced by an Option Agreement in a form determined by the Board and
shall set forth the following:
1
<PAGE>
(a) Option Price. The per share option price shall be one hundred
percent (100%) of the fair market value of said share on the date the
option is granted.
(b) Number of Shares. Each option shall state the total number of
shares of Stock to which it pertains.
(c) Exercise of Option. The Option Agreement may permit the Optionee
to exercise the option in installments. The Option Agreement shall specify
when and/or on what events or conditions the right to exercise shall accrue
and the period for which the right to exercise any option or installment
thereof shall remain open; provided, however, that said period shall in no
event be greater than ten (10) years from the date of grant.
7. Specific Terms of the Option Agreement. Unless the Board determines
otherwise, each Option Agreement issued pursuant to this Plan shall contain the
following provisions:
(a) Withholding Taxes. Whenever shares of stock are issued pursuant
to this Plan, the Board shall (i) require the recipient of the stock to
remit to the Bank an amount sufficient to satisfy all withholding and
employment taxes, and (ii) may make such other arrangements for the payment
of taxes, including bonusing the Optionee the amount thereof, as the Board
shall determine.
(b) Termination of Employment. If an Optionee's employment with the
Bank terminates for any reason other than a discharge by the Bank "for
cause" or termination as a result of the Optionee's death or disability,
then, subject to Section 7(o), the Optionee may, within a period of ninety
(90) days beginning the day following the date of such termination of
employment, exercise any rights under outstanding Option Agreement(s), to
the extent the Optionee was entitled to exercise such rights on the date of
such employment termination. In the event of the death or disability of the
Optionee while employed by the Bank, the Personal Representative of the
Optionee's estate (or any other legal successor to the Optionee) may,
subject to Section 7(o), within a period ending on the anniversary date of
the Optionee's date of death or disability, exercise any rights under
outstanding Option Agreement(s), to the extent the Optionee was entitled to
exercise such rights on the date of the Optionee's death or disability. For
the purposes of the foregoing, Optionee's employment shall be considered to
have terminated by reason of disability if Optionee, because of a physical
or mental disability, will be unable to perform the duties of his or her
customary position of employment with the Bank for an indefinite period
which the Board determines to be of a long and continued duration and the
date of disability shall be the date of said determination by the Board. If
the Optionee's employment is terminated by the Bank "for cause," all rights
under any Option Agreement, both accrued and unaccrued, shall terminate and
lapse. Thus, upon the date of a termination by the Bank "for cause," no
unexercisable option or increment thereof shall thereafter become
exercisable and no further exercises with respect to outstanding and
exercisable options or increments thereof may occur. For the purpose of
this Section 7(b), any of the following shall constitute a basis for a "for
cause" termination:
2
<PAGE>
(i) Commission of a Crime. Commission by the Optionee of any
crime involving moral turpitude or any felony.
(ii) Beach of Fiduciary Obligation. The Optionee's wilful
breach of any fiduciary obligation owed to the Bank.
(iii) Breach of Employment Terms. The Optionee's failure (for
reasons other than death or disability) to diligently and
satisfactorily discharge any material obligation of employment.
(c) Nontransferability. All rights exercisable under Option
Agreements granted pursuant to this Plan shall be nontransferable by the
Optionee, otherwise than by will or the laws of descent and distribution,
and shall be exercisable during the Optionee's lifetime only by Optionee.
(d) Adjustments. In the event of any change in the outstanding
shares of Stock by reason of any stock dividend or split, recapitalization,
reclassification, merger, consolidation, combination or exchange of shares,
or other similar corporate change, then, if the Board shall determine, in
its sole discretion, that such change necessarily or equitably requires an
adjust in the number of shares subject to each outstanding option and the
option prices or in the maximum number of shares subject to this Plan, such
adjustments shall be made by the Board and shall be conclusive and binding
for all purposes of this Plan.
(e) No Claim to Stock Option. No employee or other person shall have
any claim or right to be granted options under this Plan.
(f) No Rights as Shareholder. An Optionee shall have no rights as a
shareholder with respect to any Stock subject to an Option Agreement prior
to the date of issuance to the Optionee of a certificate or certificates
for such Stock.
(g) No Right to Continued Employment. No option hereunder shall
confer upon Optionee any right with respect to continuance of employment by
the Bank, nor interfere in any way with the right of the Bank to terminate
the Optionee's employment at any time.
(h) Unsecured Obligation. Optionees under this Plan shall not have
any interest in any fund or specific asset of the Bank by reason of this
Plan. No trust fund shall be created in connection with this Plan or any
award hereunder, and there shall be no required funding of amounts which
may become payable to any Optionee.
(i) Compliance With Other Laws and Regulations. All options
hereunder and any obligation of the Issuer to sell and deliver shares
hereunder, shall be subject to all applicable Federal and State laws, rules
and regulations and to such approvals by any government or regulatory
agency as may, in the option of the Issuer's legal counsel, be required. In
addition, the Issuer shall not be required to issue or deliver any
certificates for Stock prior to (i) the listing of such shares on any stock
exchange on which the Stock may then be listed and (ii) the completion of
any registration or qualification of such shares under any federal or state
law, or any rule or regulation of any government body which the Issuer,
3
<PAGE>
on the advice of its legal counsel, shall determine to be necessary or
advisable. An Option hereunder may not be exercised and the Bank shall have
no liability under the Option Agreement or this Plan if its exercise, or
the receipt of Stock pursuant thereto, would, in the opinion of the
Issuer's legal counsel, be contrary to any applicable law.
(j) Restrictions. All Stock acquired pursuant to Options issued
hereunder shall be subject to any and all federal and state securities law
restrictions as well as other restrictions applicable to the Issuer's
common stock.
(k) Investment Representation and Restrictions. The Board may
require Optionee to furnish, prior to the issuance of any shares upon the
exercise of all or any part of an option, an agreement (in such form as the
Board may specify) in which Optionee represents that the shares acquired
are being acquired for investment and not with a view to the sale or
distribution thereof.
(l) Governing Law. Any Option Agreement shall be interpreted,
construed and governed according to the laws of the State of Washington. In
the event of a dispute in which court proceedings occur, the venue for such
dispute shall be Spokane County, Washington.
(m) Attorneys Fees. In the event that any party to an Option
Agreement shall bring an action in connection with the performance, breach
or interpretation of such Agreement, or in any way relating to the
transactions contemplated thereby, the prevailing party in such action
shall be entitled to recover from the losing party all reasonable costs and
expenses of litigation, including attorneys' fees, court costs, costs of
investigation, accounting and other cost reasonably related to such
litigation, in such amount as may be determined in the sole discretion of
the court having jurisdiction over such action.
(n) Entire Agreement; Amendment. The Option Agreement shall
constitute the entire agreement between the parties thereto respecting
options thereunder and may not be modified or amended, except by a written
instrument signed by each of the parties thereto expressing such
modification or amendment. The Option Agreement shall completely supersede
any other agreement (oral or written) between the parties thereto
respecting the options contemplated thereunder.
(o) Dissolution of Bank or Issuer. As soon as practicable after the
date of approval of the legal dissolution or liquidation of the Bank or
Issuer, or a merger or consolidation in which the Bank or Issuer will not
be the surviving corporation, the Board shall give written notice thereof
to the Optionee. The Optionee shall have ten (10) business days from the
date of receipt of said notice to exercise any option to the extent
Optionee was entitled to exercise such right on the date of said approval.
Except as provided in the sentence immediately preceding, upon approval of
a transaction described in this Section 7(o), any and all rights under all
Option Agreements issued pursuant to this Plan shall terminate. For
purposes of the foregoing, the Personal Representative of a deceased
Optionee's estate (or other legal successor) shall be considered the
Optionee with respect to rights which, pursuant to Section 7(b) were
exercisable on the date specified by this paragraph.
4
<PAGE>
8. Determination of Fair Market Value. Whenever this Plan or an Option
Agreement shall require the determination of fair market value of the Issuer's
stock, said determination shall be made by the Board and when made shall be
binding and conclusive on all parties.
9. Reservation of Shares of Stock. The Issuer may, during the term of
this Plan, from time to time, reserve and keep available, or seek from any
regulatory body having jurisdiction any requisite authority necessary to issue
and to sell, the number of shares of Stock that shall be sufficient to satisfy
the requirements of this Plan. The inability of the Issuer to obtain, from any
regulatory body having jurisdiction, the authority deemed necessary by legal
counsel for the Issuer to lawfully issue and sell its Stock hereunder shall
relieve the Bank of any liability with respect to the failure to issue or sell
Stock as to which the requisite authority has not been obtained.
10. Amendment and Discontinuance. The Board may amend, suspend or
discontinue the Plan. Except as authorized herein, the Board may not alter or
impair any Option Agreement previously granted under the Plan, unless the
consent of the Optionee is obtained.
11. Effective Date of the Plan. The initial effective date of the Plan is
July 21, 1992, and continues in effect as revised December 21, 1993 and December
21, 1999.
INLAND NORTHWEST BANK
By: /s/ William E. Shelby
--------------------------------------
Chairman of the Board of Directors
5
<PAGE>
[MOSS ADAMS LLP 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 Northwest Bancorporation, Inc. of our report dated
January 14, 2000 on our audit of the financial statements and financial
statement schedules of Northwest Bancorporation, Inc. as of and for the years
ended December 31, 1999 and 1998. We also consent to the reference to our firm
in such annual report.
/s/ Moss Adams LLP
Spokane, Washington
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NORTHWEST BANCORPORATION, INC. AS OF AND FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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