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 December 31, 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.
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(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
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(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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 2,958,190 shares
outstanding on January 31, 2006. These shares do not reflect the increased
shares issued at the close of business on February 9, 2006 as a result of a
two-for-one stock split in the form of a 100% per share stock dividend on the
Company's outstanding common stock.
FIRSTBANK NW CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
December 31, 2005 and March 31, 2005 1
Consolidated Statements of Income
For the three months and nine months ended
December 31, 2005 and 2004 2
Consolidated Statements of Comprehensive Income
For the three months and nine months ended
December 31, 2005 and 2004 3
Consolidated Statements of Cash Flows
For the nine months ended December 31, 2005 and 2004 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial 13 - 27
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29 - 30
SIGNATURES 31
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in Thousands)
December 31, March 31,
2005 2005
------------ ------------
ASSETS
Cash and cash equivalents:
Non-interest bearing cash deposits $ 23,579 $ 39,769
Interest-bearing cash deposits 82 2,032
------------ ------------
Total cash and cash equivalents 23,661 41,801
Investment securities:
Held-to-maturity 31,475 30,907
Available-for-sale 16,984 17,427
Mortgage-backed securities:
Held-to-maturity 22,346 22,463
Available-for-sale 31,372 39,441
Equity securities, at cost 12,789 12,789
Loans receivable, net (Note 2) 611,051 562,101
Loans held for sale 5,712 3,999
Accrued interest receivable 4,333 3,834
Premises and equipment, net 17,842 18,688
Bank-owned and cash surrender value of life insurance policies 24,145 23,318
Mortgage servicing assets (Note 3) 545 614
Goodwill and other intangible assets (Note 4) 19,049 19,610
Other assets 3,555 4,130
------------ ------------
TOTAL ASSETS $ 824,859 $ 801,122
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing demand deposits $ 174,361 $ 184,183
Non-interest bearing demand deposits 92,177 76,072
Savings 36,846 41,189
Certificates of deposit 250,077 217,232
------------ ------------
Total deposits 553,461 518,676
Securities sold under agreements to repurchase 6,016 16,023
Advances from borrowers for taxes and insurance 527 913
FHLB advances and other borrowings (Note 5) 179,992 185,337
Deferred federal and state income taxes, net 24 543
Accrued expenses and other liabilities 7,548 7,319
------------ ------------
Total Liabilities 747,568 728,811
------------ ------------
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; 6,014,494 and 5,997,190 shares issued;
5,885,442 and 5,855,604 shares outstanding (Note 10) 30 30
Additional paid-in-capital 45,526 45,249
Retained earnings, substantially restricted 32,287 27,602
Unearned ESOP shares (656) (719)
Accumulated other comprehensive income 104 149
------------ ------------
Total Stockholders' Equity 77,291 72,311
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 824,859 $ 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 Nine months ended
December 31, December 31,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Interest income:
Loans receivable $ 11,879 $ 8,747 $ 34,140 $ 24,789
Mortgage-backed securities 593 745 1,872 2,396
Investment securities, taxable 182 199 547 522
Investment securities, tax-exempt 330 329 997 953
Other interest-earning assets 303 349 869 1,131
------------ ------------ ------------ ------------
Total interest income 13,287 10,369 38,425 29,791
------------ ------------ ------------ ------------
Interest expense:
Deposits 3,007 1,863 8,222 5,233
Securities sold under agreements to repurchase 54 41 164 64
FHLB advances and other borrowings 1,902 1,462 5,670 4,244
------------ ------------ ------------ ------------
Total interest expense 4,963 3,366 14,056 9,541
------------ ------------ ------------ ------------
Net interest income 8,324 7,003 24,369 20,250
Provision for loan losses 422 470 1,562 1,040
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 7,902 6,533 22,807 19,210
------------ ------------ ------------ ------------
Non-interest income:
Gain on sale of loans 474 216 1,285 874
Recovery of mortgage servicing rights, net 69 44 44 67
Service fees and other charges 1,191 1,130 3,674 3,494
Other 60 41 214 142
------------ ------------ ------------ ------------
Total non-interest income 1,794 1,431 5,217 4,577
------------ ------------ ------------ ------------
Non-interest expense:
Compensation and employee related benefits 3,757 3,680 11,125 10,522
Occupancy 720 668 2,189 2,127
Supplies and postage 231 266 680 712
Data and automated teller machine processing 280 213 707 723
Professional fees 377 207 914 500
Advertising 153 118 507 390
Debit and credit card expense 328 242 910 745
Other 706 502 1,906 1,575
------------ ------------ ------------ ------------
Total non-interest expense 6,552 5,896 18,938 17,294
------------ ------------ ------------ ------------
Income before income tax expense 3,144 2,068 9,086 6,493
Income tax expense 978 542 2,818 1,789
------------ ------------ ------------ ------------
Net income $ 2,166 $ 1,526 $ 6,268 $ 4,704
============ ============ ============ ============
Earnings per share (Notes 6, 7 and 10):
Net income per share - basic $ 0.37 $ 0.26 $ 1.07 $ 0.81
Net income per share - diluted $ 0.36 $ 0.26 $ 1.04 $ 0.78
Weighted average shares outstanding - basic 5,877,524 5,809,438 5,867,469 5,776,562
Weighted average shares outstanding - diluted 6,016,034 5,968,888 5,999,569 5,994,290
Cash dividends paid per common share (Note 10) $ 0.10 $ 0.08 $ 0.27 $ 0.26
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 Nine months ended
December 31, December 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income $ 2,166 $ 1,526 $ 6,268 $ 4,704
------------ ------------ ------------ ------------
Other comprehensive loss, net of tax:
Change in unrealized losses on securities;
available-for-sale, net of tax benefit of $85,
$121, $34, and $452 (129) (191) (45) (710)
Change in unrealized derivative gains on cash flow
hedge, net of tax benefit of $0, $0, $0 and $15 -- -- -- (23)
------------ ------------ ------------ ------------
Net other comprehensive loss (129) (191) (45) (733)
------------ ------------ ------------ ------------
Comprehensive income $ 2,037 $ 1,335 $ 6,223 $ 3,971
============ ============ ============ ============
See accompanying notes to consolidated financial statements
3
FirstBank NW Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine months ended December 31,
----------------------------
Cash flows from operating activities: 2005 2004
------------ ------------
Net income $ 6,268 $ 4,704
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,072 1,035
Accretion of securities and intangibles, net 84 (447)
Provision for loan losses 1,562 1,040
Net increase in cash surrender value of life insurance policies (827) (799)
Gain on sale of loans held for sale (1,285) (874)
Proceeds from sale of loans held for sale 78,588 65,839
Originations of loans held for sale (78,942) (63,021)
Recovery of mortgage servicing rights (44) (67)
FHLB stock dividends -- (305)
ESOP compensation expense 172 177
Other (gains) losses, net (44) 27
Deferred federal and state income taxes, net (486) (428)
Changes in assets and liabilities:
Accrued interest receivable and other assets (833) 680
Accrued expenses and other liabilities 252 702
Income taxes receivable 446 805
------------ ------------
Net cash provided by operating activities 5,983 9,068
------------ ------------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities; held-to-maturity 65 338
Proceeds from maturities of mortgage-backed securities; available-for-sale 7,751 13,956
Proceeds from maturities of investment securities; held-to-maturity -- 32
Proceeds from maturities of investment securities; available-for-sale 367 214
Proceeds from sale of investment securities; available-for-sale -- 730
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 (630) (11,364)
Net change in loans receivable (50,690) (72,463)
Purchases of premises and equipment (226) (1,482)
Proceeds from sale of premises and equipment -- 89
Proceeds from sale of real estate owned 773 201
------------ ------------
Net cash used in investing activities (42,590) (72,845)
------------ ------------
Cash flows from financing activities:
Cash paid for dividends (1,581) (1,467)
Net change in deposits 35,167 11,757
Net change in securities sold under agreements to repurchase (10,007) 1,440
Repayments from borrowers for taxes and insurance (386) (495)
Advances from FHLB and other borrowings 560,241 393,602
Payments on advances from FHLB and other borrowings (565,102) (338,441)
Proceeds from stock options 135 2,009
Purchase of stock -- (2,647)
------------ ------------
Net cash provided by financing activities 18,467 65,758
------------ ------------
Net (decrease) increase in cash and cash equivalents (18,140) 1,981
Cash and cash equivalents, beginning of period 41,801 38,397
------------ ------------
Cash and cash equivalents, end of period $ 23,661 $ 40,378
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for: Interest $ 14,113 $ 10,465
Cash paid during the period for: Income taxes $ 3,547 $ 1,485
Noncash investing and financing activities:
Unrealized losses on securities; available-for-sale, net of tax $ (45) $ (710)
Unrealized gain on cash flow hedge derivative, net of tax $ -- $ (23)
Loans receivable charged to the allowance for loan losses $ 378 $ 535
Transfer from loans converted to real estate and repossessed assets
acquired through foreclosure and repossession $ 150 $ 100
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 nine months ended December 31, 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 (unaudited).
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(Dollars in Thousands)
Net income as previously reported $ 2,166 $ 1,526 $ 6,268 $ 4,704
Pro forma adjustment for effect of fair value
accounting for stock options (2) -- (6) --
------------ ------------ ------------ ------------
Pro forma net income $ 2,164 $ 1,526 $ 6,262 $ 4,704
============ ============ ============ ============
Pro forma basic earnings per share (Note 10) $ 0.37 $ 0.26 $ 1.07 $ 0.81
============ ============ ============ ============
Pro forma diluted earnings per share (Note 10) $ 0.36 $ 0.26 $ 1.04 $ 0.78
============ ============ ============ ============
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. 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
loan loss percentage. 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 goodwill and other 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 December 31, 2005 and March 31, 2005 consisted of the
following:
December 31, March 31,
2005 2005
------------ ------------
(In Thousands)
Real estate loans:
Residential $ 117,800 $ 117,541
Commercial 190,584 173,757
Agricultural 19,301 19,434
Construction 100,101 69,148
Other loans:
Commercial (non-real estate) 86,973 92,780
Other consumer 40,689 38,724
Home equity 41,008 37,806
Agricultural (non-real estate) 25,615 22,625
------------ ------------
Total loans receivable 622,071 571,815
Less:
Unearned loan fees and discounts 2,501 2,460
Allowance for loan losses 8,519 7,254
------------ ------------
Loans receivable, net $ 611,051 $ 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.
December 31, March 31,
2005 2005
----------------------- -----------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
---------- ---------- ---------- ----------
(Dollars in Thousands)
Residential $ 434 18.94% $ 238 20.55%
Commercial (real and non-real estate) 3,967 44.62 4,628 46.62
Agricultural (real and non-real estate) 953 7.22 735 7.36
Construction 1,570 16.09 1,272 12.09
Consumer and other loans 1,595 13.13 381 13.38
---------- ---------- ---------- ----------
Total allowance for loan losses $ 8,519 100.00% $ 7,254 100.00%
========== ========== ========== ==========
7
The following table sets forth the changes in the Bank's allowance for loan
losses for the periods indicated.
Nine Months Nine Months
Ended Ended
December 31, December 31,
2005 2004
------------ ------------
(Dollars in Thousands)
Balance at beginning of period $ 7,254 $ 6,314
------------ ------------
Provision for loan losses 1,562 1,040
------------ ------------
Charge-offs:
Residential (real estate) 12 7
Commercial (non-real estate) 15 211
Consumer and other loans 351 317
------------ ------------
Total charge-offs 378 535
Recoveries 81 98
------------ ------------
Net charge-offs 297 437
------------ ------------
Balance at end of period $ 8,519 $ 6,917
============ ============
Net charge-offs to average outstanding loans 0.05% 0.09%
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.
December 31, March 31,
2005 2005
------------ ------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 146 $ 294
Construction 174 --
Commercial -- 251
Commercial non-real estate 910 1
Consumer and other loans 320 173
------------ ------------
Total 1,550 719
Accruing loans which are contractually
past due more than 90 days -- 377
------------ ------------
Total of nonaccrual and more than
90 days past due loans 1,550 1,096
Real estate owned -- 603
Repossessed assets 35 18
------------ ------------
Total nonperforming loans 1,585 1,717
Restructured loans 895 1,094
------------ ------------
Total nonperforming assets $ 2,480 $ 2,811
============ ============
Nonaccrual and more than 90 days past due
loans as a percent of loans receivable, net 0.25% 0.19%
Nonaccrual and more than 90 days past
due loans as a percent of total assets 0.19% 0.14%
Nonperforming assets as a percent of total assets 0.30% 0.35%
Total nonperforming assets to total loans 0.40% 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 December 31, 2005 and
2004 was $302,000 and $360,000, respectively.
The following table is an analysis of the changes in mortgage servicing rights
for the periods indicated:
Nine Months Nine Months
Ended Ended
December 31, December 31,
2005 2004
------------ ------------
(In Thousands)
Beginning Balance $ 614 $ 710
Additions 41 20
Amortization (154) (135)
Impairment recovery 44 67
------------ ------------
Ending Balance $ 545 $ 662
============ ============
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at December 31, 2005 was $16.7 million. No impairment loss on goodwill
and other intangible assets was recorded for the nine months ended December 31,
2005 as there were no impairment indicators during the period.
The core deposit intangible at December 31, 2005 was $2.3 million, net of
accumulated amortization of $1.6 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 December 31, 2005 and
March 31, 2005 were $173.6 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 December 31, 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 $3.3 million
and $2.2 million at December 31, 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 December 31, 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
Year Years Years Greater
At December 31, 2005: ------------ ------------ ------------ ------------
(Dollars in Thousands)
Maturities of advances $ 114,139 $ 39,864 $ 19,320 $ 6,669
Range of interest rates 3.05% - 6.75% 3.33% - 7.12% 3.42% - 6.21% 6.66% - 7.10%
Weighted average interest rate 4.41% 5.45% 4.73% 7.03%
Percentage of total advances 63.41% 22.15% 10.73% 3.71%
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 December 31, 2005 and March 31, 2005, there were $40.8 million and $45.8
million, respectively, of advances from the FHLB that were callable.
(6) DIVIDENDS
On October 7, 2005, the Board of Directors declared a cash dividend of $0.10 per
common share to stockholders of record as of the close of business on November
7, 2005. This dividend was paid on December 2, 2005. At the close of business on
February 9, 2006, the Board of Directors declared a cash dividend of $0.10 per
common share to stockholders of record as of the close of business on February
23, 2006. The dividend will be paid on March 9, 2006. These cash dividends
reflect the increased shares issued at the close of business on February 9, 2006
as a result of a two-for-one stock split in the form of a 100% per share stock
dividend on the Company's outstanding common stock as referenced in Note 10.
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, as adjusted to reflect the two-for-one stock split as
referenced in Note 10:
For the Three Months Ended For the Three Months Ended
December 31, 2005 December 31, 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 $ 2,166 5,877,524 $ 0.37 $ 1,526 5,809,438 $ 0.26
============ ============
Effect of dilutive securities:
Stock options -- 138,510 -- 159,450
------------ ------------ ------------ ------------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 2,166 6,016,034 $ 0.36 $ 1,526 5,968,888 $ 0.26
============ ============ ============ ============ ============ ============
For the Nine Months Ended For the Nine Months Ended
December 31, 2005 December 31, 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 $ 6,268 5,867,469 $ 1.07 $ 4,704 5,776,562 $ 0.81
============ ============
Effect of dilutive securities:
Stock options -- 132,100 -- 217,728
------------ ------------ ------------ ------------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 6,268 5,999,569 $ 1.04 $ 4,704 5,994,290 $ 0.78
============ ============ ============ ============ ============ ============
Outstanding options to purchase 306,948 shares and 314,918 shares of the
Company's common stock were included in the computation of diluted EPS as of
December 31, 2005 and as of December 31, 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 December 31, 2005 and March 31, 2005, these commitments
totaled $7.8 million and $4.8 million, respectively. 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 December 31, 2005 and March 31,
2005 was $25,000.
(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.
(10) SUBSEQUENT EVENT
In January 2006, the Corporation's Board of Directors declared a two-for-one
stock split in the form of a 100% per share stock dividend on the Corporation's
outstanding common stock. The stock dividend was paid as of the close of
business on February 9, 2006. Each shareholder of record as of the close of
business on January 26, 2006 received one additional share for every share
outstanding on the record date. The Company's common stock outstanding shares,
weighted average shares outstanding, and earnings per share have been adjusted
in the Consolidated Statements of Financial Condition and the Consolidated
Statements of Income to reflect the two-for-one stock split.
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 December
31, 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. 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
loan loss percentage. 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 goodwill and other intangibles
with indefinite lives and determined that there was no impairment.
Comparison of Financial Condition at December 31, 2005 and March 31, 2005
Assets. Total assets increased $23.8 million, or 3.0%, from $801.1 million at
March 31, 2005 to $824.9 million at December 31, 2005. This increase is
primarily the result of $49.0 million in net loan growth. The following table
identifies the categories with notable variances between December 31, 2005 and
March 31, 2005:
Balance at Balance at Dollar Percentage
December 31, March 31, Increase Increase
2005 2005 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Non-interest-bearing cash $ 23,579 $ 39,769 $ (16,190) (40.71)%
Interest-bearing cash deposits 82 2,032 (1,950) (95.96)
Mortgage-backed securities,
available-for-sale 31,372 39,441 (8,069) (20.46)
Loans held for sale 5,712 3,999 1,713 42.84
Loans receivable, net 611,051 562,101 48,950 8.71
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. These funds, along
with funds from interest-bearing cash deposits were used 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.
15
Liabilities. Total liabilities increased $18.8 million, or 2.6%, from $728.8
million at March 31, 2005 to $747.6 million at December 31, 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
December 31, 2005 and March 31, 2005:
Balance at Balance at Dollar Percentage
December 31, March 31, Increase Increase
2005 2005 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Deposits:
Interest bearing demand deposits $ 174,361 $ 184,183 $ (9,822) (5.33)%
Non-interest bearing demand deposits 92,177 76,072 16,105 21.17
Savings 36,846 41,189 (4,343) (10.54)
Certificates of deposit 250,077 217,232 32,845 15.12
------------ ------------ ------------ ------------
Total deposits 553,461 518,676 34,785 6.71
Securities sold under agreements
to repurchase 6,016 16,023 (10,007) (62.45)
FHLB advances and other borrowings 179,992 185,337 (5,345) (2.88)
Deferred federal and state income taxes 24 543 (519) (95.58)
Interest bearing demand deposits decreased primarily as a result of the decrease
in personal 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, 11 month and 27 month certificate
of deposit specials offered in our local markets.
The decrease in securities sold under agreements to repurchase was the result of
one municipal account moving its 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 to repay maturing
advances.
The decrease in deferred federal and state income taxes is attributable to the
temporary tax difference in the provision for loan losses.
Stockholders' Equity. Total stockholders' equity increased $5.0 million, or
6.9%, from $72.3 million at March 31, 2005 to $77.3 million at December 31,
2005. This increase was primarily the result of $6.3 million in net income,
partially offset by an increase of $45,000 in unrealized losses on
available-for-sale securities, net of tax benefit, and by the Company paying
$1.6 million in dividends to its stockholders.
Comparison of Operating Results for the Three Months Ended December 31, 2005 and
2004
General. Net income increased $640,000, or 41.9%, from $1.5 million ($0.26 per
share - basic, $0.26 per share - diluted) for the three months ended December
31, 2004 to $2.2 million ($0.37 per share - basic, $0.36 per share - diluted)
for the three months ended December 31, 2005. The increase in net income is a
result of an increase in net interest income of $1.3 million, an increase in
non-interest income of $363,000, and a decrease in the provision for loan losses
of $48,000, partially offset by an increase in non-interest expense of $656,000,
and income tax expense of $436,000.
16
Net Interest Income. Net interest income increased $1.3 million, or 18.9%, from
$7.0 million for the three months ended December 31, 2004 to $8.3 million for
the three months ended December 31, 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 an 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 December
31, 2005 and 2004:
For the Three Months Ended December 31,
-------------------------------------------------------
2005 2004
------------------------- -------------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Total interest-earning assets $ 756,691 7.26 % $ 668,797 6.42 %
Total deposits and borrowed funds 739,708 2.68 671,425 2.01
------------ ------------
Interest rate spread 4.58 % 4.41 %
============ ============
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 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 $2.9 million, or 28.1%,
from $10.4 million for the three months ended December 31, 2004 to $13.3 million
for the three months ended December 31, 2005. The following table compares
detailed average earning asset balances, and associated tax effected yields for
the three months ended December 31, 2005 and 2004:
For the Three Months Ended December 31,
---------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Average Average
Balance Yield Balance Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Loans receivable, net $ 608,671 7.79 % $ 509,922 6.85 %
Loans held for sale 7,152 2.96 4,811 4.66
Securities 103,107 5.14 115,707 4.92
Other earning assets 37,761 5.22 38,357 5.43
------------ ------------ ------------ ------------
Total interest-earning assets $ 756,691 7.26 % $ 668,797 6.42 %
============ ============ ============ ============
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the yield on loans receivable from rising interest rates.
The commercial real estate loans and construction loans were the primary areas
of growth. The tax effected yield on commercial loans increased from 6.67%
during the three months ended December 31, 2004 to 7.91% during the three months
ended December 31, 2005. The yield on construction loans increased from 8.53%
during the three months ended December 31, 2004 to 9.84% during the three months
ended December 31, 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 December 31, 2005 compared to $73,000 for the three months
ended December 31, 2004. As of May 18, 2005, the FHLB of Seattle 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 December 31, 2005.
17
Total Interest Expense. Total interest expense increased $1.6 million, or 47.4%,
from $3.4 million for the three months ended December 31, 2004 to $5.0 million
for the three months ended December 31, 2005. The following table compares
detailed average balances and associated costs for the three months ended
December 31, 2005 and 2004:
For the Three Months Ended December 31,
---------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Average Average
Balance Costs Balance Costs
------------ ------------ ------------ ------------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 225,365 1.44 % $ 225,712 0.66 %
Certificates of deposit 241,868 3.63 203,696 2.92
FHLB advances and other borrowings 172,190 4.42 153,079 3.82
Securities sold under agreements
to repurchase 6,863 3.15 14,012 1.14
------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 646,286 3.07 % $ 596,499 2.26 %
============ ============ ============ ============
Certificates of deposit interest expense increased as a result of average
balance growth and an increase in the average cost as a result of eight month,
11 month and 27 month certificate of deposit specials offered by the Bank to
fund loan growth.
The increase in interest expense for FHLB advances and other borrowings is a
result of the increase in the average balance as a result of utilizing these
sources of funds to fund loan growth that is not covered by deposits, as well as
an increase in the cost of these funds.
Interest expense on securities sold under agreements to repurchase increased for
the three months ended December 31, 2005 as a result of the increase in the cost
partially offset by the decrease in average balance.
Provision for Loan Losses. As a result of the Bank's evaluation of its allowance
for loan losses discussed in the critical accounting policies, the Company's
provision for loan losses decreased $48,000, or 10.2%, to $422,000 for the three
months ended December 31, 2005 from $470,000 for the three months ended December
31, 2004. The decrease in provision for loan losses was the result of a larger
increase in commercial real estate and construction lending in the three months
ended December 31, 2004 compared to the same period in 2005. These loans have
greater credit risk than residential real estate loans and as a result have a
higher rate for the provision for loan losses.
Non-interest Income. Total non-interest income increased $363,000, or 25.4%,
from $1.4 million for the three months ended December 31, 2004 to $1.8 million
for the three months ended December 31, 2005. The following table summarizes the
components of non-interest income for the three months ended December 31, 2005
and 2004:
For the Three Months Ended
December 31, Dollar Percentage
--------------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Gain on sale of loans $ 474 $ 216 $ 258 119.44 %
Recovery of mortgage servicing rights, net 69 44 25 56.82
Servicing fees, commissions and other 1,251 1,171 80 6.83
------------ ------------ ------------ ------------
Total non-interest income $ 1,794 $ 1,431 $ 363 25.37 %
============ ============ ============ ============
Gain on sale of loans increased $258,000, or 119.4%, to $474,000 for the three
months ended December 31, 2005 from $216,000 for the three months ended December
31, 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 $656,000, or 11.1%,
from $5.9 million for the three months ended December 31, 2004 to $6.6 million
for the three months ended December 31, 2005. The following table summarizes the
components of non-interest expense for the three months ended December 31, 2005
and 2004:
For the Three Months
Ended December 31, Dollar Percentage
--------------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Compensation and employee related benefits $ 3,757 $ 3,680 $ 77 2.09 %
Professional fees 377 207 170 82.13
Other 2,418 2,009 409 20.36
------------ ------------ ------------ ------------
Total non-interest expense $ 6,552 $ 5,896 $ 656 11.13 %
============ ============ ============ ============
Compensation and employee related benefits increased $77,000, or 2.1%, from $3.7
million for the three months ended December 31, 2004 to $3.8 million for the
three months ended December 31, 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.
Professional fees increased as a result of additional services required to
comply with additional regulations, such as 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 $436,000, or 80.4%, from $542,000 for
the three months ended December 31, 2004 to $1.0 million for the three months
ended December 31, 2005. The effective tax rates for the three months ended
December 31, 2005 and 2004 were 31.1% and 26.2%, respectively. The increase in
the effective tax rate is attributable to an increase in income without a
corresponding increase in tax-exempt income.
Comparison of Operating Results for the Nine Months Ended December 31, 2005 and
2004
General. Net income increased $1.6 million, or 33.2%, from $4.7 million ($0.81
per share - basic, $0.78 per share - diluted) for the nine months ended December
31, 2004 to $6.3 million ($1.07 per share - basic, $1.04 per share - diluted)
for the nine months ended December 31, 2005. The increase in net income is a
result of increases in net interest income of $4.1 million and in non-interest
income of $640,000, partially offset by increases in the provision for loan
losses of $522,000, non-interest expense of $1.6 million, and income tax expense
of $1.0 million.
Net Interest Income. Net interest income increased $4.1 million, or 20.3%, from
$20.3 million for the nine months ended December 31, 2004 to $24.4 million for
the nine months ended December 31, 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 nine months ended December 31, 2005 and 2004:
For the Nine Months Ended December 31,
-----------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Total interest-earning assets $ 750,005 7.06 % $ 652,741 6.33 %
Total deposits and borrowed funds 746,066 2.51 651,525 1.95
------------ ------------
Interest rate spread 4.55 % 4.38 %
============ ============
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 $8.6 million, or 29.0%,
from $29.8 million for the nine months ended December 31, 2004 to $38.4 million
for the nine months ended December 31, 2005. The following table compares
detailed average earning asset balances, and associated tax effected yields for
the nine months ended December 31, 2005 and 2004:
For the Nine Months Ended December 31,
-----------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Average Average
Balance Yield Balance Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Loans receivable, net $ 598,775 7.57 % $ 492,753 6.68 %
Loans held for sale 6,810 4.82 5,334 5.40
Securities 106,233 5.12 116,192 5.07
Other earning assets 38,187 4.89 38,462 5.70
------------ ------------ ------------ ------------
Total interest-earning assets $ 750,005 7.06 % $ 652,741 6.33 %
============ ============ ============ ============
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the yield on loans receivable from rising interest rates.
The commercial real estate loans and construction loans were the primary areas
of growth. The tax effected yield on commercial loans increased from 6.31%
during the nine months ended December 31, 2004 to 7.58% during the nine months
ended December 31, 2005. The yield on construction loans increased from 8.18%
during the nine months ended December 31, 2004 to 9.59% during the nine months
ended December 31, 2005.
Interest income from securities decreased as a result of a lower average balance
on securities from payments of maturities, partially offset by a higher 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
nine months ended December 31, 2005 compared to $305,000 for the nine months
ended December 31, 2004. Since May 18, 2005, the FHLB of Seattle 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 nine months ended December 31, 2005.
20
Total Interest Expense. Total interest expense increased $4.6 million, or 47.3%,
from $9.5 million for the nine months ended December 31, 2004 to $14.1 million
for the nine months ended December 31, 2005. The following table compares
detailed average balances and associated costs for the nine months ended
December 31, 2005 and 2004:
For the Nine Months Ended December 31,
-----------------------------------------------------------
2005 2004
--------------------------- ---------------------------
Average Average
Balance Costs Balance Costs
------------ ------------ ------------ ------------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 223,491 1.24 % $ 216,930 0.65 %
Certificates of deposit 241,250 3.40 200,050 2.78
FHLB advances and other borrowings 183,451 4.12 147,729 3.83
Securities sold under agreements
to repurchase 8,663 2.52 14,727 0.58
------------ ------------ ------------ ------------
Total interest-bearing liabilities $ 656,855 2.85 % $ 579,436 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, 11 month and 27 month certificate of deposit specials
offered by the Bank to fund loan growth.
The increase in interest expense for FHLB advances and other borrowings is a
result of the increase in the average balance as a result of utilizing these
sources of funds to fund loan growth that is not covered by deposits, as well as
an increase in the cost of these funds.
Interest expense on securities sold under agreement to repurchase increased for
the nine months ended December 31, 2005 as a result of the increase in cost
partially offset by the decrease in average balance for the period.
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 $522,000, or 50.2%, to $1.6 million for the
nine months ended December 31, 2005 from $1.0 million for the nine months ended
December 31, 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
$82.5 million, or 15.3%. Commercial and construction loans increased $75.9
million, or 25.1% from December 31, 2004 to December 31, 2005.
Non-interest Income. Total non-interest income increased $640,000, or 14.0%,
from $4.6 million for the nine months ended December 31, 2004 to $5.2 million
for the nine months ended December 31, 2005. The following table summarizes the
components of non-interest income for the nine months ended December 31, 2005
and 2004:
For the Nine Months
Ended December 31, Dollar Percentage
--------------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Gain on sale of loans $ 1,285 $ 874 $ 411 47.03 %
Recovery of mortgage servicing rights, net 44 67 (23) (34.33)
Servicing fees, commissions and other 3,888 3,636 252 6.93
------------ ------------ ------------ ------------
Total non-interest income $ 5,217 $ 4,577 $ 640 13.98 %
============ ============ ============ ============
Gain on sale of loans increased $411,000, or 47.0%, to $1.3 million for the nine
months ended December 31, 2005 from $874,000 for the nine months ended December
31, 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 $1.6 million, or
9.5%, from $17.3 million for the nine months ended December 31, 2004 to $18.9
million for the nine months ended December 31, 2005. The following table
summarizes the components of non-interest expense for the nine months ended
December 31, 2005 and 2004:
For the Nine Months
Ended December 31, Dollar Percentage
--------------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
------------ ------------ ------------ ------------
(Dollars in Thousands)
Compensation and employee related benefits $ 11,125 $ 10,522 $ 603 5.73 %
Professional fees 914 500 414 82.80
Advertising 507 390 117 30.00
Other 6,392 5,882 510 8.67
------------ ------------ ------------ ------------
Total non-interest expense $ 18,938 $ 17,294 $ 1,644 9.51 %
============ ============ ============ ============
Compensation and related benefits increased $603,000, or 5.7%, from $10.5
million for the nine months ended December 31, 2004 to $11.1 million for the
nine months ended December 31, 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 nine months
ended December 31, 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 as a result of additional services required to
comply with additional regulations, such as 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 nine months ended December 31, 2005.
Income Taxes. Income tax expense increased $1.0 million, or 57.5%, from $1.8
million for the nine months ended December 31, 2004 to $2.8 million for the nine
months ended December 31, 2005. The effective tax rates for the nine months
ended December 31, 2005 and 2004 were 31.0% and 27.6%, respectively. The
increase in the effective tax rate is attributable 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 December 31, 2005 and
March 31, 2005 were as follows:
At December 31, At March 31,
2005 2005
------------ ------------
(In Thousands)
Doubtful:
Consumer $ 33 $ 17
------------ ------------
Total doubtful 33 17
------------ ------------
Substandard:
Consumer 415 251
Residential 755 595
Commercial non-real estate 2,915 1,483
Commercial real estate 1,179 1,486
Real estate owned -- 603
Repossessed assets 35 18
Credit cards 1 --
Overdrawn checking accounts 78 56
------------ ------------
Total substandard 5,378 4,492
------------ ------------
Total classified assets $ 5,411 $ 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
December 31, 2005 December 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 $ 608,671 $ 11,826 7.79% $ 509,922 $ 8,691 6.85%
Loans held for sale 7,152 53 2.96 4,811 56 4.66
Securities 103,107 1,105 5.14 115,707 1,273 4.92
Other earning assets 37,761 303 5.22 38,357 349 5.43
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 756,691 13,287 7.26 668,797 10,369 6.42
------------ ------------ ------------ ------------
Non-interest-earning assets 68,446 81,031
------------ ------------
Total assets $ 825,137 $ 749,828
============ ============
Interest-bearing liabilities:
Savings, checking and money
market accounts $ 225,365 814 1.44 $ 225,712 374 0.66
Certificates of deposit 241,868 2,193 3.63 203,696 1,489 2.92
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 467,233 3,007 2.57 429,408 1,863 1.74
FHLB advances and other
borrowings 172,190 1,902 4.42 153,079 1,462 3.82
Securities sold under agreements
to repurchase 6,863 54 3.15 14,012 41 1.14
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities 646,286 4,963 3.07 596,499 3,366 2.26
------------ ------------
Total non-interest-bearing
deposits 93,422 0.00 74,926 0.00
------------ ------------ ------------ ------------
Total deposits and borrowed
funds 739,708 2.68 671,425 2.01
------------ ------------
Non-interest-bearing
liabilities 8,374 7,207
------------ ------------
Total liabilities 748,082 678,632
Total stockholders' equity 77,055 71,196
------------ ------------
Total liabilities and
stockholders' equity $ 825,137 $ 749,828
============ ============
Net interest income $ 8,324 $ 7,003
============ ============
Interest rate spread 4.58% 4.41%
============ ============
Net interest margin 4.63% 4.40%
============ ============
See next page for referenced notes.
24
Nine Months Ended Nine Months Ended
December 31, 2005 December 31, 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 $ 598,775 $ 33,894 7.57% $ 492,753 $ 24,573 6.68%
Loans held for sale 6,810 246 4.82 5,334 216 5.40
Securities 106,233 3,416 5.12 116,192 3,871 5.07
Other earning assets 38,187 869 4.89 38,462 1,131 5.70
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 750,005 38,425 7.06 652,741 29,791 6.33
------------ ------------ ------------ ------------
Non-interest-earning assets 79,655 76,400
------------ ------------
Total assets $ 829,660 $ 729,141
============ ============
Interest-bearing liabilities:
Savings, checking and money
market accounts $ 223,491 2,076 1.24 $ 216,930 1,057 0.65
Certificates of deposit 241,250 6,146 3.40 200,050 4,176 2.78
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 464,741 8,222 2.36 416,980 5,233 1.67
FHLB advances and other
borrowings 183,451 5,670 4.12 147,729 4,244 3.83
Securities sold under agreements
to repurchase 8,663 164 2.52 14,727 64 0.58
------------ ------------ ------------ ------------ ------------ ------------
Total interest-bearing
liabilities 656,855 14,056 2.85 579,436 9,541 2.20
------------ ------------
Total non-interest-bearing
deposits 89,211 0.00 72,089 0.00
------------ ------------ ------------ ------------
Total deposits and borrowed
funds 746,066 2.51 651,525 1.95
------------ ------------
Non-interest-bearing
liabilities 8,209 7,179
------------ ------------
Total liabilities 754,275 658,704
Total stockholders' equity 75,385 70,437
------------ ------------
Total liabilities and
stockholders' equity $ 829,660 $ 729,141
============ ============
Net interest income $ 24,369 $ 20,250
============ ============
Interest rate spread 4.55% 4.38%
============ ============
Net interest margin 4.56% 4.38%
============ ============
(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 December 31, 2005 was $443,000. Excluding this
tax effect, average yields on net loans receivable would have been
7.72%, securities would have been 4.29%, and other earning assets would
have been 3.21%. Excluding this tax effect, yield on total
interest-earning assets would have been 7.02%, interest rate spread
would have been 4.34%, and net interest margin would have been 4.40%.
(2) 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 December 31, 2004 was $360,000. Excluding this
tax effect, average yields on net loans receivable would have been
6.80%, securities would have been 4.40%, and other earning assets would
have been 3.64%. Excluding this tax effect, yield on total
interest-earning assets would have been 6.20%, interest rate spread
would have been 4.19% and the net interest margin would have been
4.19%.
(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 nine months ended December 31, 2005 is $1.3 million. Excluding this
tax effect, average yields on net loans receivable would have been
7.52%, securities would have been 4.29%, and other earning assets would
have been 3.03%. Excluding this tax effect, yield on total
interest-earning assets would have been 6.83%, interest rate spread
would have been 4.32%, and the net interest margin would have been
4.33%.
(5) 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 nine months ended December 31, 2004 was $1.2 million. Excluding
this tax effect, average yields on net loans receivable would have been
6.64%, securities would have been 4.44%, and other earning assets would
have been 3.92%. Excluding this tax effect, yield on total
interest-earning assets would have been 6.09%, interest rate spread
would have been 4.14% and the net interest margin would have been
4.14%.
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 its liquidity
position.
The primary investing activity of the Company is the origination of loans.
During the nine months ended December 31, 2005, the Company originated loans
based upon new production of $439.5 million. Proceeds from maturity and sale of
securities provided $8.2 million and $15.3 million for the nine months ended
December 31, 2005 and 2004, respectively. Proceeds from the sale of loans
provided $78.6 million for the nine months ended December 31, 2005 and $65.8
million for the nine months ended December 31, 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 $35.2 million for the nine months ended
December 31, 2005. Deposits increased $11.8 million for the nine months ended
December 31, 2004. In addition, the Company maintains a credit facility with the
FHLB, which provides for immediately available advances. FHLB advances totaled
$173.6 million at December 31, 2005 and $184.1 million at December 31, 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 $3.3 million at December 31, 2005, and
$2.5 million outstanding at December 31, 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
December 31, 2005 and December 31, 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 December 31, 2005 and December 31, 2004, there were brokered
certificates of deposits of $44.6 million and $29.7 million, respectively. As of
December 31, 2005, there were $40.8 million of FHLB advances that were callable.
At December 31, 2005, the Company held cash and cash equivalents of $23.7
million. In addition, at this date, $48.4 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 December
31, 2005, the Company had loan commitments totaling $138.7 million, undisbursed
lines of credit totaling $90.0 million, and undisbursed credit card line
commitments totaling $10.3 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
December 31, 2005 totaled $162.4 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
December 31, 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 December 31, 2005 and
March 31, 2005 are presented in the table below:
To Be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Purposes Provisions
----------------------- -----------------------
Actual Actual Actual
Amount Ratio Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
December 31, 2005 (Dollars in Thousands)
Tier 1 capital (to average assets) $ 58,332 7.3% $ 31,963 4.0% $ 39,953 5.0%
Tier 1 capital (to risk-weighted assets) 58,332 9.8% 23,809 4.0% 35,713 6.0%
Total capital (to risk-weighted assets) 68,773 11.6% 47,430 8.0% 59,287 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 December 31, 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
------------ ------------ ------------ ------------ ------------
(In Thousands)
Maturities of FHLB advances and
other borrowings $ 179,992 $ 114,139 $ 12,876 $ 26,988 $ 25,989
Operating leases future minimum
rental payments $ 411 $ 209 $ 202 $ -- $ --
Other commitments at December 31, 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
------------ ------------ ------------ ------------ ------------
(In Thousands)
Undisbursed loan commitments $ 138,712 $ 81,848 $ 41,089 $ 800 $ 14,975
Undisbursed credit card line commitments $ 10,323 $ 10,323 $ -- $ -- $ --
Lines of credit $ 89,958 $ 59,250 $ 9,658 $ 4,458 $ 16,592
Standby letters of credit $ 7,802 $ 7,208 $ 594 $ -- $ --
Forward contracts on residential sold loans $ 239 $ 239 $ -- $ -- $ --
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 $1.7 million for the nine months ended December 31, 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
There have been no material changes regarding the Company's market risk position
from the information provided under the caption "Quantitative and Qualitative
Disclosures about Market Risk" in the Company's Form 10-K filing with the SEC on
June 17, 2005, covering the fiscal year ended March 31, 2005.
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.
28
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
Number of
Shares
Total Number of that May
Shares Purchased yet be
Total Number Average as Part of Purchased
of Shares Price Paid Publicly Under the
Period Purchased per Share Announced Plan Plan(1)
- --------------------------------------------- --------- --------- ---------------- ---------
October 1, 2005 - October 31, 2005 -- $ -- -- 95,366 (2)
November 1, 2005 - November 30, 2005 95,366
December 1, 2005 - December 31, 2005 -- -- -- 95,366
--------- --------- --------------- ---------
TOTAL -- $ -- -- 95,366
========= ========= =============== =========
(1) These shares do not reflect the increased shares issued at the close of
business on February 9, 2006 as a result of a two-for-one stock split in
the form of a 100% per share stock dividend on the Company's outstanding
common stock.
(2) 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 December 31, 2005, 52,500 shares had been repurchased
under this program.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
29
Item 6 - Exhibits
3.1 (a) Articles of Incorporation of the Registrant (1)
3.1 (b) Amendment to the Articles of Incorporation (2)
3.2 (a) Bylaws of the Registrant (1)
3.2 (b) Bylaws Amendment adopted by the Board of Directors on
May 23, 2002 (3)
10.1 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Clyde E. Conklin
10.2 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Larry K. Moxley
10.3 Salary Continuation Agreement between FirstBank
Northwest and Clyde E. Conklin
10.4 Salary Continuation Agreement between FirstBank
Northwest and Larry K. Moxley
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 (2)
10.7 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Donn L. Durgan (2)
10.8 FirstBank Northwest Executive Non-Qualified
Retirement Plan
10.9 FirstBank Northwest Deferred Compensation Plan
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 filed on June 19, 2000.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2005 filed on November 14,
2005.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 2002 filed on June 26, 2002.
(4) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on October 5, 2005.
30
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: February 13, 2006 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
31
EXHIBIT INDEX
10.1 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Clyde E. Conklin
10.2 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Larry K. Moxley
10.3 Salary Continuation Agreement between FirstBank Northwest
and Clyde E. Conklin
10.4 Salary Continuation Agreement between FirstBank Northwest
and Larry K. Moxley
10.8 FirstBank Northwest Executive Non-Qualified Retirement
Plan
10.9 FirstBank Northwest Deferred Compensation Plan
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
32