UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2005
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______ to _________
Commission file number 0-22435
FIRSTBANK NW CORP.
------------------------------------------------
(Name of registrant as specified in its charter)
Washington 84-1389562
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 16th Avenue Clarkston, WA 99403
------------------------------------
(Address of principal executive offices)
(509) 295-5100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: Common Stock 2,937,032 shares
outstanding on October 31, 2005.
FIRSTBANK NW CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
September 30, 2005 and March 31, 2005 1
Consolidated Statements of Income
For the three months and six months ended
September 30, 2005 and 2004 2
Consolidated Statements of Comprehensive Income
For the three months and six months ended
September 30, 2005 and 2004 3
Consolidated Statements of Cash Flows
For the six months ended September 30, 2005 and 2004 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
SIGNATURES 32
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in Thousands)
September 30, March 31,
2005 2005
------------ ------------
ASSETS
Cash and cash equivalents:
Non-interest bearing cash deposits $ 24,045 $ 39,769
Interest-bearing cash deposits 95 2,032
------------ ------------
Total cash and cash equivalents 24,140 41,801
Investment securities:
Held-to-maturity 30,850 30,907
Available-for-sale 17,207 17,427
Mortgage-backed securities:
Held-to-maturity 22,389 22,463
Available-for-sale 33,763 39,441
Equity securities, at cost 12,789 12,789
Loans receivable, net (Note 2) 595,743 562,101
Loans held for sale 6,776 3,999
Accrued interest receivable 4,732 3,834
Premises and equipment, net 18,105 18,688
Bank-owned and cash surrender value of life insurance policies 23,851 23,318
Mortgage servicing assets (Note 3) 511 614
Goodwill and other intangible assets (Note 4) 19,228 19,610
Other assets 2,899 4,130
------------ ------------
TOTAL ASSETS $ 812,983 $ 801,122
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing demand deposits $ 188,215 $ 184,183
Non-interest bearing demand deposits 94,732 76,072
Savings 38,155 41,189
Certificates of deposit 240,301 217,232
------------ ------------
Total deposits 561,403 518,676
Securities sold under agreements to repurchase 6,926 16,023
Advances from borrowers for taxes and insurance 951 913
FHLB advances and other borrowings (Note 5) 160,554 185,337
Deferred federal and state income taxes, net 226 543
Accrued expenses and other liabilities 7,211 7,319
------------ ------------
Total Liabilities 737,271 728,811
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized;
0 shares issued and outstanding -- --
Common stock, $0.01 par value, 49,500,000 and 5,000,000
shares authorized; 3,003,647 and 2,998,595 shares issued;
2,937,032 and 2,927,802 shares outstanding 30 30
Additional paid-in-capital 45,418 45,249
Retained earnings, substantially restricted 30,708 27,602
Unearned ESOP shares (677) (719)
Accumulated other comprehensive income 233 149
------------ ------------
Total Stockholders' Equity 75,712 72,311
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 812,983 $ 801,122
============ ============
See accompanying notes to consolidated financial statements
1
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands, except per share data)
Three months ended Six months ended
September 30, September 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest income:
Loans receivable $ 11,584 $ 8,205 $ 22,261 $ 16,042
Mortgage-backed securities 608 824 1,279 1,651
Investment securities, taxable 182 198 365 323
Investment securities, tax-exempt 333 318 667 624
Other interest-earning assets 291 367 566 782
----------- ----------- ----------- -----------
Total interest income 12,998 9,912 25,138 19,422
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,846 1,731 5,215 3,370
Securities sold under agreements to repurchase 60 15 110 23
FHLB advances and other borrowings 1,859 1,447 3,768 2,782
----------- ----------- ----------- -----------
Total interest expense 4,765 3,193 9,093 6,175
----------- ----------- ----------- -----------
Net interest income 8,233 6,719 16,045 13,247
Provision for loan losses 272 194 1,140 570
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 7,961 6,525 14,905 12,677
----------- ----------- ----------- -----------
Non-interest income:
Gain on sale of loans 492 288 811 658
Recovery (impairment) of mortgage servicing rights, net (44) (111) (25) 23
Service fees and other charges 1,266 1,183 2,483 2,364
Other 52 68 154 101
----------- ----------- ----------- -----------
Total non-interest income 1,766 1,428 3,423 3,146
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee related benefits 3,729 3,424 7,368 6,842
Occupancy 763 715 1,469 1,459
Supplies and postage 231 200 449 446
Data and automated teller machine processing 248 259 427 510
Professional fees 304 125 537 293
Advertising 123 124 354 272
Debit and credit card expense 305 252 582 503
Other 733 609 1,200 1,073
----------- ----------- ----------- -----------
Total non-interest expense 6,436 5,708 12,386 11,398
----------- ----------- ----------- -----------
Income before income tax expense 3,291 2,245 5,942 4,425
Income tax expense 1,041 619 1,840 1,248
----------- ----------- ----------- -----------
Net income $ 2,250 $ 1,626 $ 4,102 $ 3,177
=========== =========== =========== ===========
Earnings per share (Notes 6 and 7):
Net income per share - basic $ 0.77 $ 0.56 $ 1.40 $ 1.10
Net income per share - diluted $ 0.75 $ 0.54 $ 1.37 $ 1.06
Weighted average shares outstanding - basic 2,933,533 2,893,817 2,931,207 2,880,018
Weighted average shares outstanding - diluted 2,999,822 3,006,158 2,995,400 3,002,147
Cash dividends paid per common share $ 0.17 $ 0.17 $ 0.34 $ 0.34
See accompanying notes to consolidated financial statements
2
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in Thousands)
Three months ended Six months ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income $ 2,250 $ 1,626 $ 4,102 $ 3,177
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on
securities; available-for-sale, net of
tax benefit (expense) of $100, ($417),
($51), and $331 (152) 666 84 (519)
Change in unrealized derivative gains on cash flow
hedge, net of tax benefit of $0, $0, $0 and $15 -- -- -- (23)
--------- --------- --------- ---------
Net other comprehensive income (loss) (152) 666 84 (542)
--------- --------- --------- ---------
Comprehensive income $ 2,098 $ 2,292 $ 4,186 $ 2,635
========= ========= ========= =========
See accompanying notes to consolidated financial statements
3
FirstBank NW Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Six months ended September 30,
Cash flows from operating activities: 2005 2004
---------- ----------
Net income $ 4,102 $ 3,177
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 711 720
Accretion of securities and intangibles, net 33 (361)
Provision for loan losses 1,140 569
Gain on sale of loans held for sale (811) (658)
Proceeds from sale of loans held for sale 55,165 62,489
Originations of loans held for sale (57,175) (61,073)
(Recovery) impairment of mortgage servicing rights 25 (23)
FHLB stock dividends -- (231)
ESOP compensation expense 132 118
Other (gains) losses, net (44) 22
Deferred federal and state income taxes, net (369) (97)
Changes in assets and liabilities:
Accrued interest receivable and other assets (780) (428)
Accrued expenses and other liabilities (85) (1,029)
Income taxes receivable 623 661
---------- ----------
Net cash provided by operating activities 2,667 3,856
---------- ----------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities; held-to-maturity 39 320
Proceeds from maturities of mortgage-backed securities; available-for-sale 5,549 11,025
Proceeds from maturities of investment securities; held-to-maturity -- 32
Proceeds from maturities of investment securities; available-for-sale 269 214
Proceeds from sale of investment securities; available-for-sale -- 250
Purchase of mortgage-backed securities; available-for-sale -- (3,028)
Purchase of investment securities; available-for-sale -- (68)
Purchase of investment securities; held-to-maturity -- (11,364)
Net change in loans receivable (34,881) (41,550)
Purchases of premises and equipment (132) (933)
Proceeds from sale of premises and equipment -- 89
Net increase in cash surrender value of life insurance policies (533) (533)
Proceeds from sale of real estate owned 768 111
---------- ----------
Net cash used in investing activities (28,921) (45,435)
---------- ----------
Cash flows from financing activities:
Cash paid for dividends (995) (973)
Net change in deposits 42,994 16,585
Net change in securities sold under agreements to repurchase (9,097) 1,440
Advances (repayments) from borrowers for taxes and insurance 38 (72)
Advances from FHLB and other borrowings 312,404 227,352
Payments on advances from FHLB and other borrowings (336,829) (209,152)
Proceeds from stock options 78 1,689
Purchase of stock -- (2,647)
---------- ----------
Net cash provided by financing activities 8,593 34,222
---------- ----------
Net decrease in cash and cash equivalents (17,661) (7,357)
Cash and cash equivalents, beginning of period 41,801 38,397
---------- ----------
Cash and cash equivalents, end of period $ 24,140 $ 31,040
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for: Interest $ 9,047 $ 6,715
Cash paid during the period for: Income taxes $ 2,256 $ 757
Noncash investing and financing activities:
Unrealized gains (losses) on securities; available-for-sale, net of tax $ 84 $ (519)
Unrealized gain on cash flow hedge derivative, net of tax $ -- $ (23)
Loans receivable charged to the allowance for loan losses $ 262 $ 377
Transfer from loans converted to real estate and repossessed assets
acquired through foreclosure and repossession $ 117 $ 61
See accompanying notes to consolidated financial statements
4
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. These statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Annual Report on Form 10-K of FirstBank NW Corp.
(the "Company") for the year ended March 31, 2005. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation have been included. The results of operations and other data
for the six months ended September 30, 2005 are not necessarily indicative of
results that may be expected for the entire fiscal year ending March 31, 2006.
The Company's unaudited consolidated financial statements include the accounts
of its wholly-owned subsidiary, FirstBank Northwest (the "Bank"), and the Bank's
wholly-owned subsidiaries, TriStar Financial Corporation and Pioneer Development
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based compensation. See also Note 9 of these Notes to Consolidated
Financial Statements.
Three Months Ended Six Months Ended
September 30, September 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Dollars in Thousands)
Net income as previously reported $ 2,250 $ 1,626 $ 4,102 $ 3,177
Pro forma adjustment for effect of fair value
accounting for stock options (2) -- (4) --
---------- ---------- ---------- ----------
Pro forma net income $ 2,248 $ 1,626 $ 4,098 $ 3,177
========== ========== ========== ==========
Pro forma basic earnings per share $ 0.77 $ 0.56 $ 1.40 $ 1.10
========== ========== ========== ==========
Pro forma diluted earnings per share $ 0.75 $ 0.54 $ 1.37 $ 1.06
========== ========== ========== ==========
Critical Accounting Policies. Critical accounting policies are defined as those
that reflect significant judgments and uncertainties, and could result in
materially different results under different assumptions and conditions. Not all
critical accounting policies require management to make difficult, subjective or
complex judgments or estimates. However, management believes that the following
policies could be considered critical within the Securities and Exchange
Commission ("SEC") definition. We believe that our most critical accounting
policies upon which our financial condition depends, and which involve the most
complex or subjective decisions or assessments are as follows:
5
Allowance for Loan Losses. Arriving at an appropriate level of reserve for loan
losses involves a high degree of judgment. The provision for loan losses is
based upon management's ongoing review and evaluation of the loan portfolio and
consideration of economic conditions which may affect the ability of borrowers
to repay their loans on their due date. In addition, the Board of Directors also
reviews these factors on a regular basis. A loan loss grading system assists
management in determining the overall risk in the loan portfolio. Individual
loans are reviewed periodically for classification into six categories:
satisfactory, acceptable, special mention, substandard, doubtful and loss; and
are assigned a standard loan loss percent. The change in loan types per category
is multiplied by the assigned loan loss percent to arrive at the basic monthly
adjustment to the provision for loan loss expense. The second element of the
provision for loan losses is based on management's review and evaluation of the
allowance for loan losses based on an analysis of historical trends, individual
loans for which full collectibility may not be reasonably assured, estimated
fair value of the underlying collateral, industry comparisons, current and
anticipated economic conditions in the Bank's market, and inherent risks in the
Bank's portfolio. The reserve may be affected by changing economic conditions
and various external factors, which may impact the portfolio in ways currently
unforeseen. The reserve is increased by provisions for loan losses and by
recoveries of loans previously charged-off and reduced by loans charged-off.
While the Bank believes it has established its existing allowance for loan
losses in accordance with GAAP, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses would adversely affect the Bank's and the
Company's financial condition and results of operations.
Mortgage Servicing Rights ("MSRs"). Determination of the fair value of MSRs
requires the estimation of multiple interdependent variables, the most
significant of which is mortgage prepayment speeds. Prepayment speeds are
estimates of the pace and magnitude of future mortgage payoff or refinance
behavior of customers whose loans are serviced by the Company. At least
quarterly, the Company engages a qualified third party to provide an estimate of
the fair value of MSRs using a discounted cash flow model with assumptions and
estimates based upon observable market-based data and methodology common to the
mortgage servicing market. Management believes the model applies reasonable
assumptions under the circumstances, however, because of possible volatility in
the market price of MSRs, and the vagaries of any relatively illiquid market,
there can be no assurance that risk management and existing accounting practices
will prevent impairment charges in future periods.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. For purposes of measuring impairment, the rights are
stratified by predominant characteristics, such as interest rates and terms. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceeds their fair value.
Securities. Estimates are used in the presentation of the securities portfolio
and these estimates impact the presentation of the Company's financial condition
and results of operations. Many of the securities included in the securities
portfolio are purchased at a premium or discount. The premiums or discounts are
amortized or accreted over the life of the security. For mortgage-related
securities, including collateralized mortgage obligations ("CMOs"), the
amortization or accretion is based on estimated lives of the securities. The
lives of the securities can fluctuate based on the amount of prepayments
received on the underlying collateral of the securities. The Company uses
estimates for the lives of these mortgage-related securities based on
information provided by third parties. The Company adjusts the rate of
amortization or accretion regularly to reflect changes in the estimated lives of
these securities.
Goodwill and Other Intangible Assets. Analysis of the fair value of recorded
goodwill for impairment involves a substantial amount of judgment, as well as
establishing and monitoring estimated lives of other amortizable intangible
assets. The Company has goodwill and other intangible assets as a result of a
business combination. The Company adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. In accordance
with the standard, goodwill and other intangibles with indefinite lives are no
longer being amortized but instead will be tested for impairment on an annual
basis or more frequently if impairment indicators arise. Management has
completed impairment testing for the Company's intangibles with indefinite lives
and determined that there was no impairment. There has not been any material
change in the goodwill and other intangible assets disclosure contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2005.
6
(2) LOANS RECEIVABLE
Loans receivable at September 30, 2005 and March 31, 2005 consisted of the
following:
September 30, March 31,
2005 2005
---------- ----------
(In Thousands)
Real estate loans:
Residential $ 116,292 $ 117,541
Commercial 178,144 173,757
Agricultural 20,824 19,434
Construction 92,486 69,148
Other loans:
Commercial (non-real estate) 88,258 92,780
Other consumer 41,928 38,724
Home equity 40,901 37,806
Agricultural (non-real estate) 27,384 22,625
---------- ----------
Total loans receivable 606,217 571,815
Less:
Unearned loan fees and discounts 2,288 2,460
Allowance for loan losses 8,186 7,254
---------- ----------
Loans receivable, net $ 595,743 $ 562,101
========== ==========
The following table sets forth the breakdown of the allowance for loan losses by
loan category for the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any other category.
September 30, March 31,
2005 2005
--------------------- ---------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
-------- -------- -------- --------
(Dollars in Thousands)
Residential $ 393 19.18% $ 238 20.55%
Construction 1,453 15.26 1,272 12.09
Agricultural 820 7.95 735 7.36
Commercial 3,948 43.95 4,628 46.62
Consumer and other loans 1,572 13.66 381 13.38
-------- -------- -------- --------
Total allowance for loan losses $ 8,186 100.00% $ 7,254 100.00%
======== ======== ======== ========
7
The following table sets forth the changes in the Bank's allowance for loan
losses for the periods indicated.
Six Months Six Months
Ended Ended
September 30, September 30,
2005 2004
------------- -------------
(Dollars in Thousands)
Balance at beginning of period $ 7,254 $ 6,314
-------- --------
Provision for loan losses 1,140 570
-------- --------
Charge-offs:
Residential real estate 12 7
Commercial non-real estate 15 211
Consumer and other loans 235 159
-------- --------
Total charge-offs 262 377
Recoveries 54 87
-------- --------
Net charge-offs 208 290
-------- --------
Balance at end of period $ 8,186 $ 6,594
======== ========
Net charge-offs to average outstanding loans 0.03% 0.06%
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of GAAP at the
dates indicated. The Bank's policy is to cease accruing interest on loans more
than 90 days past due.
September 30, March 31,
2005 2005
------------ ------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 15 $ 294
Commercial -- 251
Commercial non-real estate 908 1
Consumer and other loans 224 173
-------- --------
Total 1,147 719
Accruing loans which are contractually
past due more than 90 days -- 377
-------- --------
Total of nonaccrual and more than
90 days past due loans 1,147 1,096
Real estate owned -- 603
Repossessed assets 7 18
-------- --------
Total nonperforming loans 1,154 1,717
Restructured loans 970 1,094
-------- --------
Total nonperforming assets $ 2,124 $ 2,811
======== ========
Nonaccrual and more than 90 days past due
loans as a percent of loans receivable, net 0.19% 0.19%
Nonaccrual and more than 90 days past
due loans as a percent of total assets 0.14% 0.14%
Nonperforming assets as a percent of
total assets 0.26% 0.35%
Total nonperforming assets to total loans 0.35% 0.49%
8
(3) MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. For purposes of measuring impairment, the rights are
stratified by predominant characteristics, such as interest rates and terms. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceeds their fair value. The accumulated
allowance for impairment on mortgage servicing rights at September 30, 2005 and
2004 was $371,000 and $404,000, respectively.
The following table is an analysis of the changes in mortgage servicing rights
for the periods indicated:
Six Months Six Months
Ended Ended
September 30, September 30,
2005 2004
------------- -------------
(In Thousands)
Beginning Balance $ 614 $ 710
Additions 24 20
Amortization (102) (101)
Impairment recovery/(charge) (25) 23
-------- --------
Ending Balance $ 511 $ 652
======== ========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at September 30, 2005 was $16.7 million. No impairment loss on goodwill
was recorded for the six months ended September 30, 2005 as there were no
impairment indicators during the period.
The core deposit intangible at September 30, 2005 was $2.5 million, net of
accumulated amortization of $1.4 million.
9
(5) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The Bank utilizes advances from the Federal Home Loan Bank of Seattle ("FHLB")
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB functions as a central reserve bank, providing credit for
savings associations and certain other member financial institutions. As a
member of the FHLB, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of the stock and certain of its
mortgage loans and other assets (principally securities that are obligations of,
or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. The Bank is currently authorized to borrow from
the FHLB up to an amount equal to 30% of total assets, provided that the Bank
holds sufficient collateral. Advances from the FHLB at September 30, 2005 and
March 31, 2005 were $154.9 million and $183.2 million respectively. The Bank
also maintains an additional credit facility of $20.0 million with US Bank.
There were no outstanding balances under this facility at September 30, 2005 and
March 31, 2005. The Holding Corporation maintains an additional credit facility
of $3.5 million with US Bank. There were outstanding balances of $2.7 million
and $2.2 million at September 30, 2005 and March 31, 2005, respectively. The
Bank maintains an additional credit facility with the Portland Branch Office of
the Federal Reserve Bank of San Francisco. There were no outstanding balances
under this facility at September 30, 2005 and March 31, 2005. On June 10, 2005,
the Bank entered into a Subordinated Debenture Purchase Agreement with US Bank
of $3.0 million to be repaid in full on June 10, 2015.
Scheduled maturities of FHLB advances and other borrowings were as follows:
One Year to Five Years to
Less than One Less than Five Less than Ten Ten Years or
At September 30, 2005: Year Years Years Greater
---- ----- ----- -------
(Dollars in Thousands)
Maturities of advances $ 91,960 $ 32,194 $ 29,686 $ 6,714
Range of interest rates 3.05% - 6.25% 3.33% - 7.12% 3.42% - 6.21% 6.66% - 7.10%
Weighted average interest rate 4.26% 5.47% 4.81% 7.03%
Percentage of total advances 57.28% 20.05% 18.49% 4.18%
At March 31, 2005:
Maturities of advances $ 109,681 $ 31,346 $ 37,589 $ 6,721
Range of interest rates 2.36% - 7.01% 3.05% - 7.03% 3.42% - 7.12% 6.66% - 7.10%
Weighted average interest rate 3.59% 4.87% 5.32% 7.03%
Percentage of total advances 59.18% 16.91% 20.28% 3.63%
As of September 30, 2005 and March 31, 2005, there were $45.8 million of
advances from the FHLB that were callable.
(6) DIVIDENDS
On July 20, 2005, the Board of Directors declared a cash dividend of $0.17 per
common share to stockholders of record as of August 10, 2005. This dividend was
paid on August 24, 2005. On October 7, 2005, the Board of Directors declared a
cash dividend of $0.20 per common share to stockholders of record as of November
7, 2005. The dividend will be paid on December 2, 2005.
10
(7) EARNINGS PER SHARE
Earnings per share ("EPS") is computed by dividing net income by the weighted
average number of common shares outstanding in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Diluted
earnings per share takes into account the potential dilutive impact of such
instruments as stock options and uses average market price for the period in
determining the number of incremental shares to add to the weighted-average
number of shares outstanding.
The following table reconciles the number of common shares used in the basic and
diluted EPS calculations:
For the Three Months Ended For the Three Months Ended
September 30, 2005 September 30, 2004
------------------------------------------- -------------------------------------------
Weighted- Weighted-
Average Per-Share Average Per-Share
Net Income Shares Amount Net Income Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Basic EPS:
Income available to common
stockholders $ 2,250 2,933,533 $ 0.77 $ 1,626 2,893,817 $ 0.56
=========== ===========
Effect of dilutive securities:
Stock options -- 66,289 -- 112,341
----------- ----------- ----------- -----------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 2,250 2,999,822 $ 0.75 $ 1,626 3,006,158 $ 0.54
=========== =========== =========== =========== =========== ===========
For the Six Months Ended For the Six Months Ended
September 30, 2005 September 30, 2004
------------------------------------------- -------------------------------------------
Weighted- Weighted-
Average Per-Share Average Per-Share
Net Income Shares Amount Net Income Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Basic EPS:
Income available to common
stockholders $ 4,102 2,931,207 $ 1.40 $ 3,177 2,880,018 $ 1.10
=========== ===========
Effect of dilutive securities:
Stock options -- 64,193 -- 122,129
----------- ----------- ----------- -----------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 4,102 2,995,400 $ 1.37 $ 3,177 3,002,147 $ 1.06
=========== =========== =========== =========== =========== ===========
Outstanding options to purchase 157,074 shares and 184,515 shares of the
Company's common stock were included in the computation of diluted EPS as of
September 30, 2005 and as of September 30, 2004, respectively. There were no
outstanding options to purchase shares of the Company's common stock excluded in
the computation of diluted EPS as their effect would have been antidilutive.
11
(8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. These guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. At September 30, 2005 and March 31, 2005, these
commitments totaled $4.8 million. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company holds cash, marketable securities, or real estate as
collateral supporting those commitments for which collateral is deemed
necessary. The Company has not been required to perform on any financial
guarantees during the past three years. The Company has not incurred any losses
on its commitments during the past three years. The liability recorded
associated with standby letters of credit at September 30, 2005 and March 31,
2005 was $32,000 and $25,000, respectively.
(9) EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued Statement No. 123(R), "Share-Based Payment."
This Statement replaces FASB Statement No. 123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees". Statement No. 123(R) requires that the compensation cost relating to
share-based payment transactions (for example, stock options granted to
employees of the Company) be recognized in financial statements. That cost will
be measured based on the fair value of the equity or liability instruments used.
Statement 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Public entities will be
required to apply Statement No. 123(R) as of the beginning of the next fiscal
year that begins after June 15, 2005. The Company intends to adopt the
provisions of FASB Statement No. 123(R) effective April 1, 2006, and is in the
process of evaluating the impact on its consolidated financial position and
consolidated results of operations.
12
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto in the Company's Annual Report on Form 10-K for the
year ended March 31, 2005.
Management's discussion and analysis of financial condition and results of
operations and other portions of this Form 10-Q contain certain forward-looking
statements concerning the future operations of the Company. Management desires
to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing the Company of the protections of the safe harbor with
respect to all forward-looking statements. The Company has used forward-looking
statements to describe future plans and strategies, including expectations of
the Company's future financial results. Management's ability to predict results
or the effect of future plans or strategies is inherently uncertain. Factors
which could affect the results include interest rate trends, the general
economic climate in the Bank's market area and the country as a whole, the real
estate market in Washington, Idaho and Oregon, the demand for mortgage loans,
the ability of the Company to control costs and expenses, competition and
pricing, loan delinquency rates, and changes in federal and state regulation.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements. The Company does not
undertake to update any forward-looking statements.
EXECUTIVE OVERVIEW
The profitability of the Company's operations depends primarily on its net
interest income, its non-interest income (principally from loan origination fees
and transaction account service charges) and its non-interest expense. Net
interest income is the difference between the income the Company receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. Net interest income is a function of the
Company's interest rate spread, which is the difference between the yield earned
on interest-earning assets and the rate paid on total deposits and borrowed
funds, as well as a function of the average balance of interest-earning assets
as compared to the average balance of total deposits and borrowed funds.
Non-interest income is comprised of income from mortgage banking activities,
transaction service charge fees, gain on the occasional sale of assets and
miscellaneous fees and income. Mortgage banking generates income from the sale
of mortgage loans and from servicing fees on loans serviced for others. The
contribution of mortgage banking activities to the Company's results of
operations is highly dependent on the demand for loans by borrowers and
investors, and therefore the amount of gain on sale of loans may vary
significantly from period to period as a result of changes in market interest
rates and the local and national economy. The Company's profitability is also
affected by the level of non-interest expense. Non-interest expenses include
compensation and benefits, occupancy and maintenance expenses, deposit insurance
premiums, data servicing expenses, advertising expenses, supplies and postage,
and other operating costs. The Company's results of operations may be adversely
affected during periods of reduced loan demand to the extent that non-interest
expenses associated with mortgage banking activities are not reduced
commensurate with the decrease in loan originations.
On July 1, 1997, FirstBank Northwest converted from mutual to stock form and
became a wholly owned subsidiary of a newly formed Delaware holding company,
FirstBank Corp. The Company sold 1,983,750 shares of common stock at $10.00 per
share in conjunction with a subscription offering to the Bank's Employee Stock
Ownership Plan ("ESOP") and eligible account holders. The net proceeds were
approximately $18.9 million. The Company used approximately $9.5 million of the
net proceeds to purchase all the capital stock of the Bank. In addition, the
Company loaned approximately $1.6 million to the ESOP for the purchase of shares
in the offering. In January 1998, the Bank changed its charter to a Washington
state savings bank. In September 1999, the Company changed its state of
incorporation from Delaware to Washington.
The Company's principal business is the business of the Bank. Management
believes that the Company operates under a single business segment; therefore,
the discussion in Management's Discussion and Analysis of Financial Conditions
and Results of Operations relates to the Bank and its operations. At September
30, 2005, the Bank had eight depository offices in Idaho, three in Washington,
and nine in Oregon. The Bank also operates six real estate loan production
centers and five commercial and agricultural production centers.
On October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. ("Oregon Trail") and its wholly-owned subsidiary, Pioneer Bank,
for approximately $36.5 million in cash and 1,480,064 shares of the Company's
common stock. The acquisition doubled the Company's asset size and shares of
common stock outstanding. The Company is the surviving holding company with 100%
ownership of the Bank, and the Bank is the surviving thrift subsidiary.
13
In April 2004, the Bank opened a retail deposit facility in Boise, Idaho. In
October 2004, the Bank opened a loan production office in Nampa, Idaho for
mortgage real estate lending.
Business Strategy. The Company's strategy is to operate as an independent
community-based financial institution serving commercial, agricultural, small
business, and individual financial needs. The Company focuses on providing
exceptional customer service in the delivery of quality and competitive deposit
and loan products, and it strives to deliver local decisions to each community
served. The principal business is to attract deposits from individuals,
businesses and public entities, which are invested primarily in commercial,
agricultural, small business and consumer loans, both real estate and non-real
estate. The Company intends to pursue this strategy and endeavors to continue to
diversify the loan portfolio consistent with its commercial banking philosophy.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could result in materially different results
under different assumptions and conditions. Not all critical accounting policies
require management to make difficult, subjective or complex judgments or
estimates. However, management believes that the following policies could be
considered critical within the SEC definition. The Company believes that its
most critical accounting policies upon which our financial condition depends,
and which involve the most complex or subjective decisions or assessments are as
follows:
Allowance for Loan Losses. Arriving at an appropriate level of reserve for loan
losses involves a high degree of judgment. The provision for loan losses is
based upon management's ongoing review and evaluation of the loan portfolio and
consideration of economic conditions which may affect the ability of borrowers
to repay their loans on their due date. In addition, the Board of Directors also
reviews these factors on a regular basis. A loan loss grading system assists
management in determining the overall risk in the loan portfolio. Individual
loans are reviewed periodically for classification into six categories:
satisfactory, acceptable, special mention, substandard, doubtful and loss; and
are assigned a standard loan loss percent. The change in loan types per category
is multiplied by the assigned loan loss percent to arrive at the basic monthly
adjustment to the provision for loan loss expense. The second element of the
provision for loan losses is based on management's review and evaluation of the
allowance for loan losses based on an analysis of historical trends, individual
loans for which full collectibility may not be reasonably assured, estimated
fair value of the underlying collateral, industry comparisons, current and
anticipated economic conditions in the Bank's market, and inherent risks in the
Bank's portfolio. The reserve may be affected by changing economic conditions
and various external factors, which may impact the portfolio in ways currently
unforeseen. The reserve is increased by provisions for loan losses and by
recoveries of loans previously charged-off and reduced by loans charged-off.
While the Bank believes it has established its existing allowance for loan
losses in accordance with GAAP, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase
significantly its allowance for loan losses. In addition, because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses would adversely affect the Bank's financial
condition and results of operations.
Mortgage Servicing Rights ("MSRs"). Determination of the fair value of MSRs
requires the estimation of multiple interdependent variables, the most
significant of which is mortgage prepayment speeds. Prepayment speeds are
estimates of the pace and magnitude of future mortgage payoff or refinance
behavior of customers whose loans are serviced by the Company. At least
quarterly, the Company engages a qualified third party to provide an estimate of
the fair value of MSRs using a discounted cash flow model with assumptions and
estimates based upon observable market-based data and methodology common to the
mortgage servicing market. Management believes the model applies reasonable
assumptions under the circumstances, however, because of possible volatility in
the market price of MSRs, and the vagaries of any relatively illiquid market,
there can be no assurance that risk management and existing accounting practices
will prevent impairment charges in future periods.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. For purposes of measuring impairment, the rights are
stratified by predominant characteristics, such as interest rates and terms. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceeds their fair value.
14
Securities. Estimates are used in the presentation of the securities portfolio
and these estimates impact the presentation of the Company's financial condition
and results of operations. Many of the securities included in the securities
portfolio are purchased at a premium or discount. The premiums or discounts are
amortized or accreted over the life of the security. For mortgage-related
securities, including CMOs, the amortization or accretion is based on estimated
lives of the securities. The lives of the securities can fluctuate based on the
amount of prepayments received on the underlying collateral of the securities.
The Company uses estimates for the lives of these mortgage-related securities
based on information provided by third parties. The Company adjusts the rate of
amortization or accretion regularly to reflect changes in the estimated lives of
these securities.
Goodwill and Other Intangible Assets. Analysis of the fair value of recorded
goodwill for impairment involves a substantial amount of judgment, as well as
establishing and monitoring estimated lives of other amortizable intangible
assets. The Company has goodwill and other intangible assets as a result of a
business combination. The Company adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. In accordance
with the standard, goodwill and other intangibles with indefinite lives are no
longer being amortized but instead will be tested for impairment on an annual
basis or more frequently if impairment indicators arise. Management has
completed impairment testing for the Company's intangibles with indefinite lives
and determined that there was no impairment.
Comparison of Financial Condition at September 30, 2005 and March 31, 2005
Assets. Total assets increased $11.9 million, or 1.5%, from $801.1 million at
March 31, 2005 to $813.0 million at September 30, 2005. This increase is
primarily the result of $33.6 million in net loan growth. The following table
identifies the categories with notable variances between September 30, 2005 and
March 31, 2005:
Balance at Balance at Dollar Percentage
September 30, March 31, Increase Increase
2005 2005 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Non-interest-bearing cash $ 24,045 $ 39,769 $ (15,724) (39.54)%
Interest-bearing cash deposits 95 2,032 (1,937) (95.32)
Mortgage-backed securities,
available-for-sale 33,763 39,441 (5,678) (14.40)
Loans held for sale 6,776 3,999 2,777 69.44
Loans receivable, net 595,743 562,101 33,642 5.99
Other assets 2,899 4,130 (1,231) (29.81)
The decrease in non-interest bearing cash was primarily the result of
implementing Check 21 with the Federal Reserve Bank. Check 21 uses images
instead of actual checks, which reduced the Bank's float. The decrease in
interest-bearing cash deposits was the result of using these additional funds to
pay down FHLB advances.
The decrease in available-for-sale mortgage-backed securities was the result of
payments from maturities.
The increase in loans held for sale was the result of increased loan activity in
selling mortgage loans.
The increase in net loans receivable was the result of loans originated in the
Company's primary market area, especially commercial real estate and
construction loans in the Boise, Coeur d'Alene, and Spokane markets.
The decrease in other assets was primarily the result of the $620,000 decrease
in income taxes receivable and a $613,000 decrease in repossessed assets from
the sale of three real estate properties and fourteen non-real estate
properties.
Liabilities. Total liabilities increased $8.5 million, or 1.2%, from $728.8
million at March 31, 2005 to $737.3 million at September 30, 2005. The growth in
liabilities resulted from deposit growth, which is part of management's focus.
The following table identifies the categories with notable variances between
September 30, 2005 and March 31, 2005:
15
Balance at Balance at Dollar Percentage
September 30, March 31, Increase Increase
2005 2005 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Deposits:
Interest bearing demand deposits $ 188,215 $ 184,183 $ 4,032 2.19%
Non-interest bearing demand deposits 94,732 76,072 18,660 24.53
Savings 38,155 41,189 (3,034) (7.37)
Certificates of deposit 240,301 217,232 23,069 10.62
---------- ---------- ---------- ----------
Total deposits 561,403 518,676 42,727 8.24
Securities sold under agreements
to repurchase 6,926 16,023 (9,097) (56.77)
FHLB advances and other borrowings 160,554 185,337 (24,783) (13.37)
Interest bearing demand deposits increased primarily as a result of the increase
in business money market accounts. The non-interest bearing demand deposit gain
is a result of an increase in business checking accounts. Certificates of
deposit increased as a result of eight month and 27 month certificate of deposit
specials offered in our local markets.
The decrease in securities sold under agreements to repurchase was a result of
one municipal account moving their funds.
The decrease in FHLB advances and other borrowings resulted from using funds
available from decreased float with the Federal Reserve Bank, interest-bearing
cash deposits, and mortgage-backed securities paydowns.
Stockholders' Equity. Total stockholders' equity increased $3.4 million, or
4.7%, from $72.3 million at March 31, 2005 to $75.7 million at September 30,
2005. This increase was primarily the result of $4.1 million in net income and
an increase of $84,000 in unrealized gains on available-for-sale securities, net
of tax benefit, partially offset by the Company paying $995,000 in dividends to
its stockholders.
Comparison of Operating Results for the Three Months Ended September 30, 2005
and 2004
General. Net income increased $624,000, or 38.4%, from $1.6 million ($0.56 per
share - basic, $0.54 per share - diluted) for the three months ended September
30, 2004 to $2.3 million ($0.77 per share - basic, $0.75 per share - diluted)
for the three months ended September 30, 2005. The increase in net income is a
result of an increase in net interest income of $1.5 million and an increase in
non-interest income of $338,000, partially offset by increases in the provision
for loan losses of $78,000, non-interest expense of $728,000, and income tax
expense of $422,000.
Net Interest Income. Net interest income increased $1.5 million, or 22.5%, from
$6.7 million for the three months ended September 30, 2004 to $8.2 million for
the three months ended September 30, 2005. Increases in the tax effected yield
on interest-earning assets and the average balance on interest-earning assets
were partially offset by the increase in the cost of total deposits and borrowed
funds as well as a increase in the average balance on total deposits and
borrowed funds. The following table compares the average interest-earning asset
balances, average total deposits and other borrowed funds, associated tax
effected yields, and interest rate spread, for the three months ended September
30, 2005 and 2004:
For the Three Months Ended September 30,
---------------------------------------------------
2005 2004
------------------------ -----------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total interest-earning assets $ 755,761 7.11% $ 655,195 6.25%
Total deposits and borrowed funds 755,288 2.52 655,193 1.95
---------- ----------
Interest rate spread 4.59% 4.30%
========== ==========
16
Average interest-earning assets increased as a result of the increase in average
balance of loans receivable. Loans receivable increased as a result of loans
originated in the Company's primary market area, especially commercial real
estate and construction loans in the Boise, Coeur d'Alene, and Spokane markets.
Loan originations have increased in small business, commercial real estate, and
single family construction loans. Management has focused on increasing
commercial loans receivable as part of the Company's operating strategy.
Average total deposits and other borrowed funds increased as a result of
increases in core accounts, certificates of deposit, and borrowings used to fund
loan growth. The Company's operating strategy is to focus on deposit growth to
fund loan growth and use borrowings for the difference.
Total Interest Income. Total interest income increased $3.1 million, or 31.1%,
from $9.9 million for the three months ended September 30, 2004 to $13.0 million
for the three months ended September 30, 2005. The following table compares
detailed average earning asset balances, and associated tax effected yields for
the three months ended September 30, 2005 and 2004:
For the Three Months Ended September 30,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)
Loans receivable, net $ 602,022 7.64% $ 493,804 6.61%
Loans held for sale 8,002 5.65 5,413 5.76
Securities 106,337 5.06 118,782 4.92
Other earning assets 39,400 4.69 37,196 5.78
---------- ---------- ---------- ----------
Total interest-earning assets $ 755,761 7.11% $ 655,195 6.25%
========== ========== ========== ==========
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the yield on loans receivable. The commercial real estate
loans and construction loans were the major areas of growth. The tax effected
yield on commercial loans increased from 6.20% during the three months ended
September 30, 2004 to 7.74% during the three months ended September 30, 2005.
The yield on construction loans increased from 8.09% during the three months
ended September 30, 2004 to 9.47% during the three months ended September 30,
2005.
Interest income from securities decreased as a result of a lower average balance
on securities from payments of maturities.
The decrease in interest income on other interest-earning assets is the result
of no dividends received from FHLB stock, included in equity securities, for the
three months ended September 30, 2005 compared to $94,000 for the three months
ended September 30, 2004. As of May 18, 2005, the FHLB of Seattle has suspended
the payment of dividends on all classes of stock. For additional information see
`News' under `Our Company' on the fhlbsea.com website. The Company did not
recognize a return on FHLB stock, included in equity securities, on its
Consolidated Statement of Financial Condition and Consolidated Statements of
Income for the three months ended September 30, 2005.
17
Total Interest Expense. Total interest expense increased $1.6 million, or 49.2%,
from $3.2 million for the three months ended September 30, 2004 to $4.8 million
for the three months ended September 30, 2005. The following table compares
detailed average balances and associated costs for the three months ended
September 30, 2005 and 2004:
For the Three Months Ended September 30,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Costs Balance Costs
---------- ---------- ---------- ----------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 222,394 1.23% $ 221,662 0.62%
Certificates of deposit 253,746 3.40 196,248 2.83
FHLB advances and other borrowings 178,630 4.16 152,070 3.80
Securities sold under agreements
to repurchase 9,365 2.56 11,835 0.54
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 664,135 2.87% $ 581,815 2.20%
========== ========== ========== ==========
The increase in the average balance of total savings, checking, and money market
accounts is a result of management's focus to increase core deposit accounts as
part of the Company's operating strategy. Certificates of deposit increased as a
result of eight month and 27 month certificate of deposit specials offered by
the Bank to fund loan growth.
The increase in the average balance of FHLB advances and other borrowings is a
result of utilizing these sources of funds to fund loan growth that is not
covered by deposits.
Provision for Loan Losses. As a result of the Bank's evaluation of allowance for
loan losses discussed in the critical accounting policies, the Company's
provision for loan losses increased $78,000, or 40.2%, to $272,000 for the three
months ended September 30, 2005 from $194,000 for the three months ended
September 30, 2004. The increase in provision for loan losses is a result of
loan growth, mostly in commercial real estate and construction lending, which
have a greater credit risk than mortgage loans on residential real estate
properties and as a result have a higher rate for the provision for loan losses.
Total loans receivable increased $97.8 million, or 19.2%. Commercial and
construction loans increased $89.5 million, or 33.2% from September 30, 2004 to
September 30, 2005.
Non-interest Income. Total non-interest income increased $338,000, or 23.7%,
from $1.4 million for the three months ended September 30, 2004 to $1.8 million
for the three months ended September 30, 2005. The following table summarizes
the components of non-interest income for the three months ended September 30,
2005 and 2004:
For the Three Months
Ended September 30, Dollar Percentage
------------------------ Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Gain on sale of loans $ 492 $ 288 $ 204 70.83%
Impairment of mortgage servicing rights, net (44) (111) 67 60.36
Servicing fees, commissions and other 1,318 1,251 67 5.36
---------- ---------- ---------- ----------
Total non-interest income $ 1,766 $ 1,428 $ 338 23.67
========== ========== ========== ==========
Gain on sale of loans increased $204,000, or 70.8%, to $492,000 for the three
months ended September 30, 2005 from $288,000 for the three months ended
September 30, 2004. This increase is attributable to the increase in volume of
residential real estate loans sold to the secondary market.
18
Non-interest Expense. Total non-interest expense increased $728,000, or 12.8%,
from $5.7 million for the three months ended September 30, 2004 to $6.4 million
for the three months ended September 30, 2005. The following table summarizes
the components of non-interest expense for the three months ended September 30,
2005 and 2004:
For the Three Months
Ended September 30, Dollar Percentage
------------------------ Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Compensation and employee related benefits $ 3,729 $ 3,424 $ 305 8.91%
Professional fees 304 125 179 143.20
Other 2,403 2,159 244 11.30
---------- ---------- ---------- ----------
Total non-interest expense $ 6,436 $ 5,708 $ 728 12.75
========== ========== ========== ==========
Compensation and employee related benefits increased $305,000, or 8.9%, from
$3.4 million for the three months ended September 30, 2004 to $3.7 million for
the three months ended September 30, 2005. The increase is a result of new
employees that were added to staff the Bank's new loan production office for
mortgage real estate lending that opened in Nampa, Idaho in October 2004 and
regular annual compensation increases for employees during the year. The Company
also incurred an additional expense during the three months ended September 30,
2005 as a result of a severance payment made in connection with the Company's
acquisition of Oregon Trail in 2003. The severance payment was made to an
individual in accordance with the terms of the merger agreement between the
Company and Oregon Trail.
Professional fees increased due to services required to comply with additional
regulations, such as regulatory examinations, compliance with the certification
provisions regarding internal controls required by Section 404 of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") compliance, and certifications on
management's assessments on internal controls.
Income Taxes. Income tax expense increased $422,000, or 68.2%, from $619,000 for
the three months ended September 30, 2004 to $1.0 million for the three months
ended September 30, 2005. The effective tax rates for the three months ended
September 30, 2005 and 2004 were 31.6% and 27.6%, respectively. The increase in
the effective tax rate is due to an increase in income without a corresponding
increase in tax-exempt income.
Comparison of Operating Results for the Six Months Ended September 30, 2005 and
2004
General. Net income increased $925,000, or 29.1%, from $3.2 million ($1.10 per
share - basic, $1.06 per share - diluted) for the six months ended September 30,
2004 to $4.1 million ($1.40 per share - basic, $1.37 per share - diluted) for
the six months ended September 30, 2005. The increase in net income is a result
of increases in net interest income of $2.8 million and in non-interest income
of $277,000, partially offset by increases in the provision for loan losses of
$570,000, non-interest expense of $988,000, and income tax expense of $592,000.
Net Interest Income. Net interest income increased $2.8 million, or 21.1%, from
$13.2 million for the six months ended September 30, 2004 to $16.0 million for
the six months ended September 30, 2005. Increases in the tax effected yield on
interest-earning assets and the average balance on interest-earning assets were
partially offset by increases in the cost of total deposits and borrowed funds
and the average balance on total deposits and borrowed funds. The following
table compares the average interest-earning asset balances, average total
deposits and other borrowed funds, associated tax effected yields, and interest
rate spread, for the six months ended September 30, 2005 and 2004:
For the Six Months Ended September 30,
---------------------------------------------------
2005 2004
------------------------ -----------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total interest-earning assets $ 746,643 6.96% $ 644,669 6.28%
Total deposits and borrowed funds 749,263 2.43 641,521 1.93
---------- ----------
Interest rate spread 4.53% 4.35%
========== ==========
19
Average interest-earning assets increased as a result of the increase in average
balance of loans receivable. Loans receivable increased as a result of loans
originated in the Company's primary market area, especially commercial real
estate and construction loans in the Boise, Coeur d'Alene, and Spokane markets.
Loan originations have increased in small business, commercial real estate, and
single family construction loans. Management has focused on increasing
commercial loans receivable as part of the Company's operating strategy.
Average total deposits and borrowed funds increased as a result of increases in
core accounts, certificates of deposit, and borrowings used to fund loan growth.
The Company's operating strategy is to focus on deposit growth to fund loan
growth and use borrowings for the difference.
Total Interest Income. Total interest income increased $5.7 million, or 29.4%,
from $19.4 million for the six months ended September 30, 2004 to $25.1 million
for the six months ended September 30, 2005. The following table compares
detailed average earning asset balances, and associated tax effected yields for
the six months ended September 30, 2005 and 2004:
For the Six Months Ended September 30,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)
Loans receivable, net $ 593,800 7.46% $ 484,122 6.59%
Loans held for sale 6,638 5.81 5,597 5.72
Securities 107,803 5.11 116,436 5.15
Other earning assets 38,402 4.73 38,514 5.84
---------- ---------- ---------- ----------
Total interest-earning assets $ 746,643 6.96% $ 644,669 6.28%
========== ========== ========== ==========
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the yield on loans receivable. The commercial real estate
loans and construction loans were the major areas of growth. The tax effected
yield on commercial loans increased from 6.12% during the six months ended
September 30, 2004 to 7.42% during the six months ended September 30, 2005. The
yield on construction loans increased from 7.98% during the six months ended
September 30, 2004 to 9.46% during the six months ended September 30, 2005.
Interest income from securities decreased as a result of a lower average balance
on securities from payments of maturities and a lower average yield.
The decrease in interest income on other interest-earning assets is the result
of no dividends received from FHLB stock, included in equity securities, for the
six months ended September 30, 2005 compared to $232,000 for the six months
ended September 30, 2004. Since May 18, 2005, the FHLB of Seattle has suspended
the payment of dividends on all classes of stock. For additional information see
`News' under `Our Company' on the fhlbsea.com website. The Company did not
recognize a return on FHLB stock, included in equity securities, on its
Consolidated Statement of Financial Condition and Consolidated Statements of
Income for the six months ended September 30, 2005.
20
Total Interest Expense. Total interest expense increased $2.9 million, or 47.3%,
from $6.2 million for the six months ended September 30, 2004 to $9.1 million
for the six months ended September 30, 2005. The following table compares
detailed average balances and associated costs for the six months ended
September 30, 2005 and 2004:
For the Six Months Ended September 30,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Cost Balance Cost
---------- ---------- ---------- ----------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 222,548 1.13% $ 213,985 0.64%
Certificates of deposit 240,940 3.28 196,747 2.73
FHLB advances and other borrowings 189,112 3.98 145,040 3.83
Securities sold under agreements
to repurchase 9,568 2.30 11,405 0.42
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 662,168 2.75% $ 567,177 2.18%
========== ========== ========== ==========
The increase in the average balance of total savings, checking, and money market
accounts is a result of management's focus to increase core deposit accounts as
part of the Company's operating strategy. Certificates of deposit increased as a
result of eight month and 27 month certificate of deposit specials offered by
the Bank to fund loan growth.
The increase in the average balance of FHLB advances and other borrowings is a
result of utilizing these sources of funds to fund loan growth that is not
covered by deposits.
Provision for Loan Losses. As a result of the Bank's evaluation of allowance for
loan losses discussed in the critical accounting policies, the Company's
provision for loan losses increased $570,000, or 100.0%, to $1.1 million for the
six months ended September 30, 2005 from $570,000 for the six months ended
September 30, 2004. The increase in provision for loan losses is a result of
loan growth, mostly in commercial real estate and construction lending, which
have greater credit risk than residential real estate loans and as a result have
a higher rate for the provision for loan losses. Total loans receivable
increased $97.8 million, or 19.2%. Commercial and construction loans increased
$89.5 million, or 33.2% from September 30, 2004 to September 30, 2005.
Non-interest Income. Total non-interest income increased $277,000, or 8.8%, from
$3.1 million for the six months ended September 30, 2004 to $3.4 million for the
six months ended September 30, 2005. The following table summarizes the
components of non-interest income for the six months ended September 30, 2005
and 2004:
For the Six Months
Ended September 30, Dollar Percentage
------------------------ Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Gain on sale of loans $ 811 $ 658 $ 153 23.25%
Recovery (impairment) of mortgage servicing rights, net (25) 23 (48) (208.70)
Servicing fees, commissions and other 2,637 2,465 172 6.98
---------- ---------- ---------- ----------
Total non-interest income $ 3,423 $ 3,146 $ 277 8.80
========== ========== ========== ==========
Gain on sale of loans increased $153,000, or 23.3%, to $811,000 for the six
months ended September 30, 2005 from $658,000 for the six months ended September
30, 2004. This increase is attributable to the increased volume of residential
real estate loans sold to the secondary market.
21
Non-interest Expense. Total non-interest expense increased $988,000, or 8.7%,
from $11.4 million for the six months ended September 30, 2004 to $12.4 million
for the six months ended September 30, 2005. The following table summarizes the
components of non-interest expense for the six months ended September 30, 2005
and 2004:
For the Six Months
Ended September 30, Dollar Percentage
----------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Compensation and employee related benefits $ 7,368 $ 6,842 $ 526 7.69%
Professional fees 537 293 244 83.28
Advertising 354 272 82 30.15
Other 4,127 3,991 136 3.41
---------- ---------- ---------- ----------
Total non-interest expense $ 12,386 $ 11,398 $ 988 8.67
========== ========== ========== ==========
Compensation and related benefits increased $526,000, or 7.7%, from $6.8 million
for the six months ended September 30, 2004 to $7.4 million for the six months
ended September 30, 2005. The increase is a result of the new loan production
office for mortgage real estate lending that opened in Nampa, Idaho in October
2004 and regular annual compensation increases for employees during the year.
The Company also incurred an additional expense during the three months ended
September 30, 2005 as a result of a severance payment made in connection with
the Company's acquisition of Oregon Trail in 2003. The severance payment was
made to an individual in accordance with the terms of the merger agreement
between the Company and Oregon Trail.
Professional fees increased due to services required to comply with additional
regulations, such as regulatory examinations, compliance with the certification
provisions regarding internal controls required by Section 404 of the
Sarbanes-Oxley Act, FDICIA compliance, and certifications on management's
assessments on internal controls.
Advertising expenses increased due to sponsorship of community events and a
spring image campaign for public relations and deposit program in Oregon
incurred during the six months ended September 30, 2005.
Income Taxes. Income tax expense increased $592,000, or 47.4%, from $1.2 million
for the six months ended September 30, 2004 to $1.8 million for the six months
ended September 30, 2005. The effective tax rates for the six months ended
September 30, 2005 and 2004 were 31.0% and 28.2%, respectively. The increase in
the effective tax rate is due to an increase in income without a corresponding
increase in tax-exempt income.
22
Asset Classification
The State of Washington has adopted various regulations regarding problem assets
of savings institutions. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, State of Washington examiners have
the authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowance for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
which require additional monitoring by the Bank are classified as special
mention.
The aggregate amounts of the Bank's classified assets at September 30, 2005 and
March 31, 2005 were as follows:
At September 30, At March 31,
2005 2005
--------------- ---------------
(In Thousands)
Doubtful:
Consumer $ 59 $ 17
--------- ---------
Total doubtful 59 17
--------- ---------
Substandard:
Consumer 363 251
Residential 319 595
Commercial non-real estate 2,877 1,483
Commercial real estate 1,190 1,486
Real estate owned -- 603
Repossessed assets 7 18
Overdrawn checking accounts 80 56
--------- ---------
Total substandard 4,836 4,492
--------- ---------
Total classified assets $ 4,895 $ 4,509
========= =========
23
Average Balances, Interest and Average Yields/Costs
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average tax effected yields
and costs. Such yields and costs for the periods indicated are derived by
dividing tax effected income or expense by the average daily balance of assets
or liabilities, respectively, for the periods presented.
Three Months Ended Three Months Ended
September 30, 2005 September 30, 2004
------------------------------ -------------------------------
Interest Average Interest Average
Average And Yield/ Average And Yield/
Balance Dividends Cost (1) Balance Dividends Cost (2)
------- --------- -------- ------- --------- --------
(Dollars in Thousands)
Interest-earning assets (3):
Loans receivable, net $602,022 $11,471 7.64% $493,804 $8,127 6.61%
Loans held for sale 8,002 113 5.65 5,413 78 5.76
Securities 106,337 1,123 5.06 118,782 1,340 4.92
Other earning assets 39,400 291 4.69 37,196 367 5.78
------ --- ---- ------ --- ----
Total interest-earning assets 755,761 12,998 7.11 655,195 9,912 6.25
------ ---- ----- ----
Non-interest-earning assets 83,322 77,373
------ ------
Total assets $839,083 $732,568
======== ========
Interest-bearing liabilities:
Savings, checking and money
market accounts $222,394 686 1.23 $221,662 344 0.62
Certificates of deposit 253,746 2,160 3.40 196,248 1,387 2.83
------- ----- ---- ------- ----- ----
Total deposits 476,140 2,846 2.39 417,910 1,731 1.66
FHLB advances & other 178,630 1,859 4.16 152,070 1,447 3.80
Securities sold under agreements
to repurchase 9,365 60 2.56 11,835 15 0.54
----- -- ---- ------ -- ----
Total interest-bearing
liabilities 664,135 4,765 2.87 581,815 3,193 2.20
----- -----
Total non-interest-bearing
deposits 91,153 0.00 73,378 0.00
------ ---- ------ ----
Total deposits and borrowed
funds 755,288 2.52 655,193 1.95
---- ----
Non-interest-bearing
liabilities 8,434 6,882
----- -----
Total liabilities 763,722 662,075
Total stockholders' equity 75,361 70,493
------ ------
Total liabilities and
stockholders' equity $839,083 $732,568
======== ========
Net interest income $8,233 $6,719
====== ======
Interest rate spread 4.59% 4.30%
===== =====
Net interest margin 4.58% 4.30%
===== =====
See next page for referenced notes.
24
Six Months Ended Six Months Ended
September 30, 2005 September 30, 2004
------------------------------ --------------------------------
Interest Average Interest Average
Average And Yield/ Average And Yield/
Balance Dividends Cost (4) Balance Dividends Cost (5)
------- --------- -------- ------- --------- --------
(Dollars in Thousands)
Interest-earning assets (3):
Loans receivable, net $593,800 $22,068 7.46% $484,122 $15,882 6.59%
Loans held for sale 6,638 193 5.81 5,597 160 5.72
Securities 107,803 2,311 5.11 116,436 2,598 5.15
Other earning assets 38,402 566 4.73 38,514 782 5.84
------ --- ---- ------ --- ----
Total interest-earning assets 746,643 25,138 6.96 644,669 19,422 6.28
------ ---- ------ ----
Non-interest-earning assets 85,291 74,071
------ ------
Total assets $831,934 $718,740
======== ========
Interest-bearing liabilities:
Savings, checking and money
market accounts $222,548 1,262 1.13 $213,985 684 0.64
Certificates of deposit 240,940 3,953 3.28 196,747 2,686 2.73
------- ----- ---- ------- ----- ----
Total deposits 463,488 5,215 2.25 410,732 3,370 1.64
FHLB advances & other 189,112 3,768 3.98 145,040 2,782 3.83
Securities sold under agreements
to repurchase 9,568 110 2.30 11,405 23 0.42
----- --- ---- ------ -- ----
Total interest-bearing
liabilities 662,168 9,093 2.75 567,177 6,175 2.18
----- -----
Total non-interest-bearing
deposits 87,095 0.00 74,344 0.00
------ ---- ------ ----
Total deposits and borrowed
funds 749,263 2.43 641,521 1.93
---- ----
Non-interest-bearing
liabilities 8,126 7,164
----- -----
Total liabilities 757,389 648,685
Total stockholders' equity 74,545 70,055
------ ------
Total liabilities and
stockholders' equity $831,934 $718,740
======== ========
Net interest income $16,045 $ 13,247
======= ========
Interest rate spread 4.53% 4.35%
===== =====
Net interest margin 4.53% 4.36%
===== =====
(1) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.18%. The tax benefit on interest income for the
three months ended September 30, 2005 was $427,000. Excluding this tax
effect, average yields on net loans receivable would have been 7.60%,
securities would have been 4.22%, and other earning assets would have been
2.95%. Excluding this tax effect, yield on total interest-earning assets
would have been 6.88%, interest rate spread would have been 4.36%, and net
interest margin would have been 4.36%.
(2) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.28%. The tax benefit on interest income for the
six months ended September 30, 2004 was $330,000. Excluding this tax
effect, average yields on net loans receivable would have been 6.57%,
securities would have been 4.52%, and other earning assets would have been
3.94%. Excluding this tax effect, yield on total interest-earning assets
would have been 6.05%, interest rate spread would have been 4.10% and the
net interest margin would have been 4.10%.
(3) Does not include interest on loans more than 90 days past due or non
accruing loans.
25
(4) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.18%. The tax benefit on interest income for the
six months ended September 30, 2005 is $855,000. Excluding this tax effect,
average yields on net loans receivable would have been 7.43%, securities
would have been 4.28%, and other earning assets would have been 2.95%.
Excluding this tax effect, yield on total interest-earning assets would
have been 6.73%, interest rate spread would have been 4.30%, and the net
interest margin would have been 4.30%.
(5) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.28%. The tax benefit on interest income for the
six months ended September 30, 2004 was $817,000. Excluding this tax
effect, average yields on net loans receivable would have been 6.57%,
securities would have been 4.46%, and other earning assets would have been
4.06%. Excluding this tax effect, yield on total interest-earning assets
would have been 6.03%, interest rate spread would have been 4.10% and the
net interest margin would have been 4.11%.
LIQUIDITY AND CAPITAL RESOURCES
The primary function of asset/liability management is to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive
earning assets and liabilities. Management actively analyzes and manages the
Company's liquidity position. The objective of liquidity management is to ensure
the availability of sufficient cash flows to support loan growth and deposit
withdrawals, to satisfy financial commitments, and to take advantage of
investment opportunities. Liquidity is defined as being able to raise funds in
30 days without a loss of principal.
The Company's primary recurring sources of funds are customer deposits, proceeds
from principal and interest payments on loans, proceeds from sales of loans,
maturing securities, FHLB advances, borrowings from US Bank, and borrowings from
the Portland Branch Office of the Federal Reserve Bank of San Francisco. While
maturities and scheduled amortization of loans are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. See the Company's
Consolidated Statement of Cash Flows to assist in analyzing our liquidity
position.
The primary investing activity of the Company is the origination of loans.
During the six months ended September 30, 2005, the Company originated loans
based upon new production of $293.4 million. Proceeds from maturity and sale of
securities provided $5.9 million and $11.8 million for the six months ended
September 30, 2005 and 2004, respectively. Proceeds from the sale of loans
provided $55.2 million for the six months ended September 30, 2005 and $62.5
million for the six months ended September 30, 2004.
The primary financing activities of the Company are customer deposits, brokered
deposits and FHLB advances. As indicated on the Company's Consolidated Statement
of Cash Flows, deposits provided $43.0 million for the six months ended
September 30, 2005, which were branch deposits, excluding brokered deposits.
Deposits increased $17.5 million for the six months ended September 30, 2004. In
addition, the Company maintains a credit facility with the FHLB, which provides
for immediately available advances. FHLB advances totaled $154.9 million at
September 30, 2005 and $147.8 million at September 30, 2004. The Bank is
currently authorized to borrow from the FHLB up to an amount equal to 30% of
total assets, provided that the Bank holds sufficient collateral. The Company
also maintains an additional credit facility of $3.5 million with US Bank. There
were outstanding balances of $2.7 million at September 30, 2005, and $2.0
million outstanding at September 30, 2004 under this facility. The Bank
maintains an additional credit facility of $20.0 million with US Bank and a
credit facility with the Portland Branch Office of the Federal Reserve Bank of
San Francisco. There were no outstanding balances under these facilities at
September 30, 2005 and September 30, 2004. The Bank also has used other sources
of funding when the need arises: brokered certificates of deposit (up to 15% of
assets under current Board policy) and the national certificate of deposit
markets. As of September 30, 2005 and September 30, 2004, there were brokered
certificates of deposits of $42.1 million and $23.7 million, respectively. As of
September 30, 2005, there were $45.8 million of FHLB advances that were
callable.
At September 30, 2005, the Company held cash and cash equivalents of $24.1
million. In addition, at this date, $51.0 million of the Company's investment
and mortgage-backed securities were classified as available-for-sale.
The Company has commitments that have a future impact on its liquidity position.
Because some commitments are expected to expire without being drawn upon, the
total commitment amounts do not represent future cash requirements. At September
30, 2005, the Company had loan commitments totaling $133.3 million, and
undisbursed lines of credit totaling $86.9 million. The Company anticipates that
it will have sufficient funds available to meet its current loan origination
commitments. Certificates of deposit that are scheduled to mature in less than
one year from September 30, 2005 totaled $145.3 million. Historically, the
Company has been able to retain a significant amount of its deposits as they
mature. In addition, management believes that it can adjust the offering rates
of certificates of deposit to retain deposits in changing interest rate
environments.
The Bank is required to maintain specific amounts of capital pursuant to Federal
Deposit Insurance Corporation and State of Washington requirements. As of
September 30, 2005, the Bank was in compliance with all regulatory capital
requirements effective as of that date.
26
The Bank's actual regulatory capital amounts and ratios at September 30, 2005
and March 31, 2005 are presented in the table below:
To Be Well
Capitalized Under
Capital Adequacy Prompt Corrective
Purposes Action Provisions
--------------------- ---------------------
Actual Actual Actual
Amount Ratio Amount Rate Amount Rate
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
September 30, 2005
Tier 1 capital (to average assets) $ 55,757 6.8% $ 32,798 4.0% $ 40,998 5.0%
Tier 1 capital (to risk-weighted assets) 55,757 9.6% 23,232 4.0% 34,848 6.0%
Total capital (to risk-weighted assets) 66,023 11.4% 46,332 8.0% 57,915 10.0%
March 31, 2005
Tier 1 capital (to average assets) $ 51,006 6.7% $ 30,451 4.0% $ 38,064 5.0%
Tier 1 capital (to risk-weighted assets) 51,006 9.0% 22,669 4.0% 34,004 6.0%
Total capital (to risk-weighted assets) 58,063 10.3% 45,097 8.0% 56,372 10.0%
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Contractual obligations at September 30, 2005 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years and
Total Year Years Years Greater
----- ---- ----- ----- -------
(Dollars in Thousands)
Maturities of FHLB advances and
other borrowings $ 160,554 $ 91,960 $ 15,452 $ 16,742 $ 36,400
Operating leases future minimum
rental payments $ 448 $ 180 $ 236 $ 32 $ --
Other commitments at September 30, 2005 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years and
Total Year Years Years Greater
----- ---- ----- ----- -------
(Dollars in Thousands)
Loan commitments $ 133,272 $ 61,902 $ 41,312 $ 1,837 $ 28,221
Credit card line commitments $ 10,243 $ 10,243 $ -- $ -- $ --
Lines of credit $ 86,853 $ 47,064 $ 18,499 $ 4,791 $ 16,499
Standby letters of credit $ 4,848 $ 4,254 $ 594 $ -- $ --
The Company has signed several contracts with vendors for its data processing
operations. The terms of the contracts are one year or less. The annual fees are
paid at the beginning of the terms or are paid monthly based upon usage,
transactions or number of customers. The data processing, automated teller
machine, merchant bank card and visa credit card expense, which include these
contracts, was $1.0 million for the six months ended September 30, 2005. In
addition, the Company has a contract with Wausau Financial Systems for the proof
and imaging system.
27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change, thereby
impacting net interest income ("NII") which is the primary component of the
Company's earnings. The asset/liability management committee ("ALCO") utilizes
the results of a detailed and dynamic simulation model to quantify the estimated
exposure of NII to sustained interest rate changes. While ALCO routinely
monitors simulated NII sensitivity over a rolling two-year horizon, it also
utilizes additional tools to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet as well as for off-balance sheet
derivative financial instruments, if any. This sensitivity analysis is compared
to ALCO policy limits which specify a maximum tolerance level for NII exposure
over a one-year horizon, assuming no balance sheet growth, given both a 200
basis point (bp) upward and 100 or 200 bp downward shifts in interest rates. A
parallel and pro rata shift in rates over a 12 month period is assumed. Based on
the asset sensitivity of the balance sheet at September 30, 2005, the Bank
expects to be well positioned to benefit from rising rates and minimize negative
impact of declining rates. If rates were to sustain a 200 bp increase over a 12
month period, net interest income would be expected to rise by 1.92%, all else
being equal. If rates were to sustain a 200 bp decrease in a 12 month period,
net interest income would be expected to decline by 5.58%, all else being equal.
The following reflects the Company's NII sensitivity analysis as of September
30, 2005 and March 31, 2005, as compared to the 10.00% Board approved policy
limit.
September 30, 2005: -200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $ 30,952 $ 32,781 $ 33,412
NII $ Change ($ 1,829) -- $ 631
NII % Change -5.58% -- 1.92%
March 31, 2005: -100 BP Flat +200 BP
------- ---- -------
Year 1 NII $ 29,070 $ 29,698 $ 30,206
NII $ Change ($ 628) -- $ 508
NII % Change -2.11% -- 1.71%
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as indicating expected future operating results. These
hypothetical estimates are based upon numerous assumptions including the nature
and timing of interest rate levels including yield curve shape, prepayments on
loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment/replacement of asset and liability cash flows, and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
28
Item 4 - Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) was
carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management as of the end of the
period covered by this report. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures as currently in effect are effective in ensuring that the
information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934 is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
While the Company believes the present design of its disclosure controls
and procedures is effective to achieve its goal, future events affecting
its business may cause the Company to modify its disclosure controls and
procedures. The Company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
error and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that breakdowns in controls or procedures can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure is based in
part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls
become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements
due to error or fraud may occur and not be detected.
29
FIRSTBANK NW CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are currently
considered to have a material impact on the Company's financial position,
results of operations, or cash flows.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Maximum
Total Number Number
of Shares of Shares
Purchased that May
as Part of yet be
Total Number Average of Publicly Purchased
of Shares Price Paid Announced Under the
Period Purchased per Share Plan Plan
- ---------------------------------------- --------- --------- --------- ---------
July 1, 2005 - July 31, 2005 -- $ -- -- 95,366 (1)
August 1, 2005 - August 31, 2005 95,366
September 1, 2005 - September 30, 2005 -- -- -- 95,366
--------- --------- --------- ---------
TOTAL -- $ -- -- 95,366
========= ========= ========= =========
(1) On August 27, 2004, the Company's Board of Directors authorized a 5% stock
repurchase plan, or 147,866 shares of the Company's outstanding common
stock. As of September 30, 2005, 52,500 shares had been repurchased under
this program.
Item 3 - Defaults Upon Senior Securities
Not applicable.
30
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held at the Quality Inn, 700
Port Drive, Clarkston, Washington, on Wednesday, July 20, 2005, at 2:00 p.m.,
local time. The results of the vote on the items presented at the meeting were
as follows:
1. The following individuals were elected as directors, each for a
three-year term:
Votes For Votes Withheld
James N. Marker 2,777,932 67,473
Sandra T. Powell 2,752,199 93,206
Russell H. Zenner 2,789,017 56,388
The terms of Steven R. Cox, W. Dean Jurgens, John W. Gentry, Clyde E.
Conklin and Larry K. Moxley continued after the meeting.
2. The FirstBank NW Corp. resolution that the amendment to the Articles
of Incorporation to increase the authorized number of shares of common
stock from 5,000,000 to 49,500,000 was approved by the following vote:
For 2,076,543 Against 758,373 Abstain 10,489
3. The FirstBank NW Corp. resolution to appoint Moss-Adams, LLP as
independent auditors for the Company for the fiscal year ending March
31, 2006 was approved by the following vote:
For 2,765,770 Against 37,326 Abstain 19,455 Broker Non-votes 22,854
Item 5 - Other Information
None.
Item 6 - Exhibits
3.1(a) Articles of Incorporation of the Registrant (1)
3.1(b) Amendment to the Articles of Incorporation
3.2(a) Bylaws of the Registrant (1)
3.2(b) Bylaws Amendment adopted by the Board of Directors on May
23, 2002 (2)
10.1 Employment Agreement between FirstBank Northwest, FirstBank
NW Corp. and Clyde E. Conklin (3)
10.2 Employment Agreement between FirstBank Northwest, FirstBank
BW Corp. and Larry K. Moxley (3)
10.3 Salary Continuation Agreement between First Federal Bank of
Idaho, F.S.B. and Clyde E. Conklin (3)
10.4 Salary Continuation Agreement between First Federal Bank of
Idaho, F.S.B. and Larry K. Moxley (3)
10.5 Change in Control Agreement between FirstBank Northwest,
FirstBank NW Corp. and Richard R. Acuff (4)
10.6 Change in Control Agreement between FirstBank Northwest,
FirstBank NW Corp. and Terence A. Otte
10.7 Change in Control Agreement between FirstBank Northwest,
FirstBank NW Corp. and Donn L. Durgan
31.1 Certification of Chief Executive Officer of FirstBank NW
Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer of FirstBank NW
Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 2000.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 2002.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed on March 14, 1997, (File No. 333-23395).
(4) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on October 5, 2005.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTBANK NW CORP.
DATED: November 14, 2005 BY: /s/ CLYDE E. CONKLIN
------------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
BY: /s/ LARRY K. MOXLEY
------------------------------------------
Larry K. Moxley
Secretary and Chief Financial Officer
32
EXHIBIT INDEX
3.1(b) Amendment to the Articles of Incorporation of the Registrant
10.6 Change in Contol Agreement between FirstBank Northwest,
FirstBank NW Corp. and Terence A. Otte
10.7 Change in Control Agreement between FirstBank Northwest,
FirstBank NW Corp. and Donn L. Durgan
31.1 Certification of Chief Executive Officer of FirstBank NW
Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer of FirstBank NW
Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
33