UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 0-22435
FIRSTBANK NW CORP.
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(Name of registrant as specified in its charter)
Washington 84-1389562
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1300 16th Avenue, Clarkston, Washington 99403
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(Address of principal executive offices)
Registrant's telephone number, including area code: (509) 295-5100
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act: Common Stock, par value
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$.01 per share
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(Title of class)
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Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act [ ] Yes [X] No
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 if disclosure of delinquent filers in response to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date: Common Stock 5,930,712 shares
outstanding on April 30, 2006.
The aggregate market value of voting and nonvoting common equity held by
nonaffiliates of the registrant was $72.9 million based on the last reported
sale price of the registrant's common stock on the Nasdaq National Market on
September 30, 2005.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Definitive Proxy Statement for its 2006 Annual
Meeting of Shareholders is incorporated by reference into Part III of this
Form 10-K.
2
FIRSTBANK NW CORP.
Table of Contents
Page
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PART I
Item 1. Business 4
Item 1A. Risk Factors 34
Item 2. Properties 37
Item 3. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 38
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholders Matters and Issuer Purchases of Equity
Securities 39
Item 6. Selected Financial Data 41
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 43
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 60
Item 8. Financial Statements and Supplementary Data 61
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 61
Item 9A. Control and Procedures 61
Item 9B. Other Information 61
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 62
Item 13. Certain Relationships and Related Transactions 63
Item 14. Principal Accounting Fees and Services 63
PART IV
Item 15. Exhibits and Financial Statement Schedules 64
Signatures 65
3
PART I
Item 1. Business
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General
FirstBank NW Corp. (formerly known as FirstBank Corp.) ("Company"), a
Washington corporation, was organized in Delaware in March 1997 to become the
holding company for FirstBank Northwest (formerly known as First Federal Bank of
Idaho, a Federal Savings Bank) ("Bank") upon the Bank's conversion from mutual
to stock form ("Conversion"). The Company completed the Conversion and initial
public offering on July 1, 1997 through the sale of 3,967,500 shares of common
stock at $5.00 per share.
The Bank is a Washington-chartered state savings bank located in
Clarkston, Washington. The Bank was formed as an Idaho mutual savings and loan
association in 1920, converted to a federal mutual savings and loan association
in 1935 and adopted the federal mutual savings bank charter in 1990. In July
1997, the Bank relocated its main office to Clarkston, Washington and on January
30, 1998, converted to a Washington-chartered savings bank. The Bank is
currently regulated by the State of Washington, its primary regulator, and the
Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The
Bank's deposits have been federally insured since 1933 and are insured up to
applicable legal limits under the Savings Association Insurance Fund ("SAIF").
The Bank has been a member of the Federal Home Loan Bank ("FHLB") system since
1933.
The Bank is a community-oriented financial institution, operating in
one business segment that engages primarily in the business of attracting
deposits from the general public and using those funds to originate residential
mortgage, commercial, and agricultural real estate loans within the Bank's
market area. The Bank also is active in originating construction, and consumer
and other non-real estate loans. The Bank has adopted a mortgage banking
strategy pursuant to which it generally sells a majority of the residential
mortgage loans it originates.
Business Combination
On October 31, 2003, the Company completed the acquisition of Oregon
Trail Financial Corp. ("Oregon Trail") and its wholly-owned subsidiary, Pioneer
Bank, a Federal Savings Bank ("Pioneer Bank"), for approximately $36.5 million
in cash and 2,960,128 shares of the Company's common stock for consideration of
the 3,108,657 shares of Oregon Trail common stock outstanding as of the
completion date of the acquisition. As a result of the issuance of common stock
for the acquisition, the Company's common stock increased $14,800 and additional
paid in capital increased $33.2 million. The Company's additional paid in
capital increased by an additional $4.6 million as a result of the purchase of
the fair value of Oregon Trail's unexercised stock options as of the completion
date of the acquisition. The acquisition doubled the Company's asset size and
its outstanding common stock.
The Company's strategic objective is to utilize capital to support
organic growth, with growth through acquisition as a longer term strategy.
Oregon Trail was an attractive candidate because its operations and business
strategies complemented those of the Company. Oregon Trail also offered the
Company the opportunity to expand into a new market area that was geographically
contiguous to the Company's existing market areas with no overlapping branches.
Oregon Trail was also considered to be a potential candidate because of its
stable deposit markets, sizable asset base, strong asset quality, and its
community banking philosophy, which was shared by the Company. In fiscal year
2005, integration of the core processing system platform was completed and the
Company now operates under one operating system.
4
Market Area
FirstBank's general market area includes northern Idaho, eastern
Washington, and eastern Oregon, as well as Ada and Canyon Counties in
southwestern Idaho. The Bank's administrative offices are located in Clarkston,
Washington. The Bank operates 20 full-service offices located in Lewiston,
Lewiston Orchards, Moscow, Grangeville, Coeur d'Alene, Post Falls, Hayden, and
Boise, Idaho, in Clarkston, Spokane, and Liberty Lake, Washington, and in Baker
City, La Grande, Island City, Ontario, Vale, John Day, Burns, Enterprise, and
Pendleton, Oregon. The Bank also operates five real estate loan production
centers located in Lewiston, Coeur d'Alene, Boise, and Nampa, Idaho and Baker
City, Oregon and five commercial and agricultural production centers located in
Lewiston, Coeur d'Alene, and Boise, Idaho, Spokane, Washington and Baker City,
Oregon. Most of the Bank's depositors reside in the communities surrounding the
Bank's offices. The majority of the Bank's loans are made to borrowers in the
counties where the Bank's offices are located or in the surrounding counties.
The northern Idaho and eastern Washington market areas served by the
Bank are dependent on agriculture, manufacturing, tourism and the forest
products industry, and the local economies reflect the health or weakness of
those industries. Agricultural activity consists primarily of dry land farming.
The primary crop is wheat and other major crops are barley, peas, lentils, beans
and grass seed. Livestock production is also a major part of the region's
economy.
The market area in eastern Oregon is largely rural, with most of the
farms and ranches being relatively small and family owned. Major employers in
this market area include Confederated Tribes of the Umatilla Indians, Eastern
Oregon Correctional Institute, Fleetwood Homes, U.S. Forest Service, Bureau of
Land Management, Snake River Correctional Institute, Oregon Department of
Transportation, Ore-Ida Foods, Powder River Correctional Facility, Treasure
Valley Community College, Eastern Oregon University, regional hospitals, local
school districts and local government.
Lewiston, Idaho serves as the regional center for state government. The
economy of Lewiston, in Nez Perce County, is connected to that of Clarkston,
Washington, which is separated from Lewiston by the Snake River. The Lewis-Clark
Valley has a population of approximately 58,000. Forest products and agriculture
are the dominant industries in the Lewiston-Clarkston area. Medical services,
light manufacturing and tourism have helped maintain the economy in recent
years. Moscow, Idaho, in Latah County, has a population of approximately 22,000
and the county has a population of approximately 35,000. Agriculture and higher
education are the primary industries in Moscow. The University of Idaho is
located in Moscow and is the city's largest employer. Pullman, Washington,
located eight miles to the west of Moscow, is the home of Washington State
University and Schweitzer Engineering Laboratories, two of the area's largest
employers. Grangeville, Idaho, in Idaho County, has an economy based primarily
on agriculture, forest products and the U.S. Forest Service. Tourism has become
increasingly important to the Grangeville economy in recent years.
Coeur d'Alene, located in Kootenai County, Idaho is the largest city in
Northern Idaho, with a population of approximately 38,000. Kootenai County has
approximately 128,000 residents. Healthcare, manufacturing, construction and
tourism are the major industries of this region. Coeur d'Alene has experienced
significant growth in the past ten years, primarily as a result of in-migration
and growth in the healthcare, retail trade, manufacturing, and tourism
industries. Real estate activity has been high with a large amount of new home
construction attributable to the population growth. The Bank's Liberty Lake,
Washington branch is located in the rapidly growing I-90 corridor between Coeur
d'Alene, Idaho and Spokane, Washington. Spokane is the largest city in eastern
Washington with a population of approximately 197,000. Spokane County has a
population of approximately 441,000.
The Boise Metropolitan Statistical Area, which includes Ada and Canyon
counties, has a population of approximately 535,000, and is the most densely
populated area in the state of Idaho. Boise is Idaho's state capital, the home
of Boise State University, and headquarters for a large number of national and
international corporations, including Micron Technology, Albertson's Inc, and JR
Simplot Corporation, and is the location of a major Hewlett-Packard copier
manufacturing facility. Boise is also a regional banking center and home to
several major hospital and medical facilities.
5
Lending Activities
General. Commercial real estate and commercial non-real estate lending
is the principal lending activity of the Bank. The Bank is also active in the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing one- to four-family residential property as well as construction
loans and agricultural real estate and production loans. To a lesser extent, the
Bank originates home equity, other consumer, and auto dealer loans. The Bank's
net loans receivable totaled $632.5 million at March 31, 2006, representing
74.8% of consolidated total assets.
Loan Portfolio Analysis. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated. The Bank
had no concentration of loans exceeding 10.0% of total gross loans other than as
disclosed below.
At March 31,
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2006 2005 2004 2003 2002
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
Real estate loans:
Residential $123,461 19.20% $117,541 20.55% $113,016 24.20% $ 50,692 19.77% $ 62,234 26.19%
Agricultural 18,792 2.92 19,434 3.40 18,567 3.98 15,921 6.21 16,264 6.84
Commercial 201,282 31.30 173,757 30.39 122,132 26.15 68,125 26.58 52,496 22.09
Construction 108,650 16.89 69,148 12.09 44,536 9.54 30,248 11.80 6,044 2.54
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans 452,185 70.31 379,880 66.43 298,251 63.87 164,986 64.36 137,038 57.66
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Other loans:
Commercial 91,628 14.25 92,780 16.23 75,878 16.25 50,603 19.74 55,568 23.38
Home equity 40,926 6.36 37,806 6.61 24,530 5.25 19,924 7.77 24,832 10.45
Other consumer 39,089 6.08 38,724 6.77 43,425 9.30 7,843 3.06 7,924 3.34
Agricultural operating 19,333 3.00 22,625 3.96 24,876 5.33 13,000 5.07 12,289 5.17
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total other loans 190,976 29.69 191,935 33.57 168,709 36.13 91,370 35.64 100,613 42.34
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans receivable 643,161 100.00% 571,815 100.00% 466,960 100.00% 256,356 100.00% 237,651 100.00%
======== ======== ======== ======== ========
Less:
Unearned loan fees and 2,480 2,460 1,532 1,137 692
discounts
Allowance for loan losses 8,138 7,254 6,314 3,414 2,563
-------- -------- -------- -------- --------
Loans receivable, net $632,543 $562,101 $459,114 $251,805 $234,396
======== ======== ======== ======== ========
Loans held for sale $ 3,785 $ 3,999 $ 5,254 $ 5,214 $ 3,740
======== ======== ======== ======== ========
Average loan balance:
Residential real estate $ 87 $ 77 $ 66 $ 74 $ 75
Agricultural real estate $ 107 $ 130 $ 121 $ 114 $ 137
Commercial real estate $ 426 $ 363 $ 289 $ 349 $ 338
Construction real estate $ 174 $ 127 $ 203 $ 153 $ 143
Other loans $ 18 $ 18 $ 24 $ 38 $ 40
Residential Real Estate Lending (Mortgage Banking). The Bank is active
in the origination of mortgage loans to enable borrowers to purchase or
refinance residential real estate. At March 31, 2006, $123.5 million, or 19.2%,
of the Bank's total gross loan portfolio consisted of loans secured by
residential real estate. The Bank presently originates both adjustable-rate
mortgage ("ARM") loans and fixed-rate mortgage loans with maturities of up to 30
years. Substantially all of the Bank's residential mortgage loans are secured by
property located in the Bank's primary market area. Very few of the properties
securing the Bank's residential mortgage loans are investment properties, second
homes or vacation properties. The Bank's conventional mortgage loans are
generally underwritten and documented in accordance with the guidelines
established by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae").
6
The Bank sells a majority of the residential mortgage loans it
originates primarily to private investors. Currently, most 10 and 15 year first
mortgage loans are added to the Bank's portfolio. The remaining loans are sold
to Fannie Mae or Freddie Mac. Loans are sold to Freddie Mac and Fannie Mae on a
servicing-retained basis, while loans sold to private investors are sold
servicing-released. Generally, loans are sold without recourse, although on
occasion, the Bank has sold loans with recourse. As of March 31, 2006, the Bank
remains contingently liable for approximately $5,000 of loans sold with
recourse. At March 31, 2006, the Bank had indemnification agreements with the
Federal Housing Administration ("FHA") for two residential mortgage loans
insured by FHA. The agreements require the Bank to reimburse FHA for any loss
incurred upon foreclosure of these loans and subsequent liquidation of the
properties held as collateral. The Bank's decision to hold or sell loans is
based on its asset/liability management policies and goals and the market
conditions for mortgages. See "Loan Originations, Sales and Purchases."
The Bank offers ARM loans at rates and terms competitive with market
conditions. The Bank currently offers ARM products that adjust annually after an
initial fixed period of one, three, five, or seven years based on the applicable
Treasury constant maturity index. ARM loans held in the Bank's portfolio do not
permit negative amortization of principal and carry no prepayment restrictions.
The periodic interest rate cap (the maximum amount by which the interest rate
may be increased or decreased in a given period) on the Bank's ARM loans is
generally 2% per adjustment period and 6% over the life of the loan. The terms
and conditions of the ARM loans offered by the Bank, including the index for
interest rates, may vary from time to time. Borrower demand for ARM loans versus
fixed-rate mortgage loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the initial interest rates and fees charged for each type of loan. The
relative amount of fixed-rate mortgage loans and ARM loans that can be
originated at any time is largely determined by the demand for each in a
competitive environment.
A significant portion of the Bank's ARM loans are not readily saleable
in the secondary market because they are not originated in accordance with the
purchase requirements of Freddie Mac, Fannie Mae, or other private investors.
The Bank requires that non-conforming loans demonstrate appropriate compensating
factors that offset their lack of conformity. Although such loans satisfy the
Bank's underwriting requirements, they are "non-conforming" because they do not
satisfy property limits, credit requirements, repayment capacities or various
other requirements imposed by the secondary market. Accordingly, the Bank's
non-conforming loans can be sold only to private investors on a negotiated
basis. At March 31, 2006, the Bank's residential loan portfolio included $16.1
million of non-conforming ARM loans. Generally, the Bank's non-conforming ARM
loans bear a higher rate of interest than similar conforming ARM loans. The Bank
has found that its origination of non-conforming loans has not resulted in
increased amounts of nonperforming loans.
The retention of ARM loans in the Bank's loan portfolio helps reduce
the Bank's exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs as a
result of increased rates to be paid by the customer. It is possible that during
periods of rising interest rates, the risk of default on ARM loans may increase
as a result of repricing and the increased payments required by the borrower.
Furthermore, because the ARM loans originated by the Bank generally provide, as
a marketing incentive, for "teaser rates" (i.e., initial rates of interest below
the rates that would apply were the adjusted index plus the applicable margin
initially used for pricing), these loans are subject to increased risks of
default or delinquency. The Bank attempts to reduce the potential for
delinquencies and defaults on ARM loans by qualifying the borrower based on the
borrower's ability to repay the ARM loan assuming a rate of 200 basis points
above the initial interest rate or the fully indexed rate, whichever is higher.
Another consideration is that although ARM loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limits. Because of these considerations, the Bank has no assurance
that yields on ARM loans will be sufficient to offset increases in the Bank's
cost of funds.
The Bank also originates residential mortgage loans that are insured by
the FHA, or guaranteed by the Veterans Administration or the U.S. Department of
Agriculture Rural Development. These loans are sold to private investors or to
the Idaho Housing and Finance Agency. A significant portion of the Bank's
residential mortgage loan originations in recent years has consisted of
government insured and guaranteed loans. Most of these loans have been
originated in the Coeur d'Alene, Idaho area, where there has been a significant
amount of entry-level housing available. The Bank generally sells the government
insured loans that it originates to private investors on a servicing-released
basis.
7
While one- to four-family residential real estate loans are generally
originated with 15 to 30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Bank's
loan portfolio contain due-on-sale clauses providing that the Bank may declare
the unpaid amount due and payable upon the sale of the property securing the
loan. Typically, the Bank enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Bank generally obtains title insurance insuring the status of its
lien on all loans where real estate is the primary source of security. The Bank
also requires that fire and casualty insurance (and, if appropriate, flood
insurance) be maintained in an amount at least equal to the outstanding loan
balance.
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or the purchase price, with the condition that
private mortgage insurance is generally required on loans with loan-to-value
ratios greater than 80%. Higher loan-to-value ratios are available on certain
government insured programs.
Residential Construction Lending. The Bank invests a portion of its
loan portfolio in residential construction loans. This activity has been
prompted by favorable economic conditions, primarily in Coeur d'Alene and Boise,
Idaho, lower long-term interest rates and an increased demand for housing units
as a result of the population growth in Idaho. At March 31, 2006, construction
loans totaled $108.7 million, or 16.9% of total loans. At that date, the average
amount of the Bank's construction loans was approximately $174,000. The largest
construction loan in the Bank's portfolio at March 31, 2006 was $2.1 million,
and was performing in accordance with its terms. Residential construction loan
originations, excluding loans purchased and loan participations, totaled $244.3
million for the year ended March 31, 2006, which constituted 43.7% of total loan
originations. During fiscal year 2003, the Bank entered the Boise area and
increased the construction loan activity. Originations of construction loans
from the Boise loan production office totaled $158.1 million and originations of
construction loans from the Coeur d'Alene office totaled $42.6 million during
the fiscal year ended March 31, 2006.
The Bank originates construction loans to professional home builders
and to individuals building their primary residences. The Bank also makes loans
to builders for the acquisition of building lots. Construction loans made by the
Bank to professional home builders include both those with a sales contract or
permanent financing in place for the finished homes and those for which
purchasers for the finished homes may be identified either during or following
the construction period (speculative loans). At March 31, 2006, speculative
loans totaled $47.9 million, or 44.1% of the total construction loan portfolio.
Construction loans to individuals are generally converted to permanent mortgage
loans upon completion of the construction period. At March 31, 2006, permanent
construction loans to individuals totaled $11.6 million or 10.6% of the total
construction loan portfolio.
At March 31, 2006 and 2005, the composition of the Company's
construction loan portfolio was as follows:
At March 31,
--------------------------------------------------
2006 2005
----------------------- -----------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
(Dollars in Thousands)
Speculative construction $ 47,907 44.09% $ 30,850 44.62%
Presold construction 37,391 34.42 26,430 38.22
Permanent construction 11,553 10.63 9,218 13.33
Land acquisition 11,799 10.86 2,650 3.83
Participation construction -- -- -- --
---------- ---------- ---------- ----------
Total $ 108,650 100.00% $ 69,148 100.00%
========== ========== ========== ==========
8
Construction lending provides the Bank with the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment. Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Speculative loans carry more risk
because the payoff for the loan is dependent on the builder's ability to sell
the property prior to the time that the construction loan is due. The Bank has
sought to address these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices. In addition, changes in the
local economy and real estate market could adversely affect the Bank's
construction loan portfolio. Accordingly, the Bank closely monitors sales and
listings in its real estate markets and will limit the amount of speculative
loans if it perceives unfavorable market conditions.
Loans to builders for the construction of one- to four-family
residences are generally made for a term of 12 months. The Bank's loan policy
permits a maximum loan-to-value ratio of 80%. The Bank maintains a list of major
builders and establishes an aggregate credit limit for each major builder based
on the builder's financial strength, experience and reputation, and monitors
each builder's borrowings on a monthly basis. Each major builder is required to
provide the Bank with annual financial statements and other credit information.
At March 31, 2006, the Bank had approved 22 major builders, the largest
borrowing capacity of which was approximately $7.0 million. At March 31, 2006,
the Bank's major builders had total loans of $61.4 million outstanding, and all
loans were performing in accordance with their terms. For all builders, the Bank
reviews the financial strength and credit of the builder on a loan by loan
basis.
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are based
on periodic on-site inspections by independent fee inspectors. At inception, the
Bank may require the builder (other than approved major builders) to deposit
funds to the loans-in-process account covering the difference between the actual
cost of construction and the loan amount. Alternatively, the Bank may require
that the borrower pay for the first portion of construction costs before the
loan proceeds are used. Major builders are permitted to utilize the loan
proceeds from the initiation of construction and to carry the short-fall between
construction costs and the loan amount, based on their financial strength, until
the property is sold.
Agricultural Lending. Agricultural lending has been an important part
of the Bank's lending strategy since the mid-1980s. The Chief Executive Officer,
the Chief Operating Officer, and the Vice President of Agricultural Lending have
31 years, 26 years, and 28 years of experience, respectively, in agricultural
lending. The existing staff's experience maintains the Bank as one of the most
experienced agricultural lenders in the area.
Agricultural Real Estate Lending. The Bank presently originates both
adjustable-rate and fixed-rate loans secured by farmland located in the Bank's
market area, primarily around Lewiston, Idaho and eastern Oregon. The Bank
offers adjustable-rate loans that adjust annually after an initial fixed period
of one, three or five years. Such loans generally provide for up to a 25-year
term. The Bank also offers fixed-rate loans including secondary marketing loans,
which are loans originated and intended for sale in secondary markets and which
have an amortization up to 30 years. At March 31, 2006, agricultural real estate
loans totaled $18.8 million, or 2.9% of the Bank's total loan portfolio.
Agricultural real estate loan originations, excluding loans purchased and loan
participations, totaled $2.7 million for the year ended March 31, 2006, which
constituted 0.5% of total loan originations.
Agricultural real estate loans generally are underwritten to Federal
Agricultural Mortgage Corporation ("Farmer Mac") standards so as to qualify for
sale in the secondary market, although the Bank currently retains most of these
loans for its portfolio. In originating an agricultural real estate loan, the
Bank considers the debt service coverage of the borrower's cash flow, the amount
of working capital available to the borrower, the financial history of the
borrower and the appraised value of the underlying property as well as the
Bank's experience with and knowledge of the borrower. An environmental
assessment is also performed. The maximum loan-to-value for agricultural real
estate loans is 75%. At March 31, 2006, the Bank's average agricultural real
estate loan was approximately $107,000, and the Bank's largest agricultural real
estate loan was $876,000, which was performing according to its terms.
9
Agricultural real estate lending provides the Bank the opportunity to
earn yields higher than those generally available on standard conforming
residential real estate lending. However, agricultural real estate lending
involves a greater degree of risk than residential real estate lending. Payments
on agricultural real estate loans are dependent on the successful operation or
management of the farm property securing the loan. The success of the farm may
be affected by many factors outside the control of the farm borrower, including
adverse weather conditions that limit crop yields (such as hail, drought and
floods), declines in market prices for agricultural products and the impact of
government regulations (including changes in price supports, subsidies and
environmental regulations). In addition, many farms are dependent on a limited
number of key individuals whose injury or death may significantly affect the
successful operation of the farm. Farming in the Bank's market area is generally
dry-land farming, with wheat being the primary crop. Accordingly, adverse
circumstances affecting the area's wheat crop could have an adverse effect on
the Bank's agricultural loan portfolio. Cattle ranching in the Bank's market
area consists of cow/calf or yearling operations and a limited number of feed
lot operations. Irrigated farming occurs primarily in Malheur County (Ontario)
and Umatilla County (Pendleton) areas with primary crops of potatoes and onions.
Annual precipitation, favorable growing weather, and commodity prices can
substantially impact agricultural economics.
The Bank is approved to originate agricultural real estate loans
qualifying for purchase by the Farmer Mac II program, which requires Farm
Service Agency guarantees up to a maximum of 90% of the principal and interest.
Once the guaranteed loan has been funded, the Bank generally sells the
guaranteed portion of the loan to Farmer Mac II, while retaining the servicing
rights on the entire loan.
Agricultural Operating Lending. At March 31, 2006, agricultural
operating loans totaled $19.3 million, or 3.0% of total loans. Agricultural
operating loan originations, excluding loans purchased and loan participations,
totaled $6.2 million for the year ended March 31, 2006, which constituted 1.1%
of total loan originations. Agricultural operating loans or lines of credit
generally are made for a term of one to three years and may be secured or
unsecured. Such loans may be secured by a first or second mortgage, or liens on
property, vehicles, accounts receivable, crop held or growing crop. Personal
guarantees are frequently required for loans made to corporations and their
business entities. Payments on agricultural operating loans depend on the
successful operation of the farm, which may be adversely affected by weather
conditions that limit crop yields, fluctuations in market prices for
agricultural products, and changes in government regulations and subsidies.
Underwriting requires substantial cash working capital and annual production
income sufficient to meet payment obligations on an annual basis.
The risk of crop damage by weather conditions can be reduced by the
farmer with multi-peril crop insurance which can guarantee set yields to provide
certainty of repayment. Unless the circumstances of the borrower merit
otherwise, the Bank generally does not require its borrowers to obtain
multi-peril crop or hail insurance. Farmers may mitigate the effect of price
declines through the use of futures contracts, options or forward contracts. The
Bank does not monitor or require the use of these instruments by its borrowers.
Of the agricultural operating loans originated, excluding loans
purchased and loan participations, in fiscal year 2006, operating loans
represent 71.8% of total loan originations, equipment loans 13.6%, working
capital loans 10.1%, and other loans 4.5%.
Commercial Real Estate Lending. Commercial real estate lending has
become a significant part of the Bank's lending strategy. At March 31, 2006, the
Bank's commercial real estate loan portfolio totaled $201.3 million, or 31.3% of
total loans. At March 31, 2006, the Bank's commercial real estate loan average
size was $426,000 and the largest loan was $6.6 million, which was performing
according to its terms. Commercial real estate loan originations, excluding
loans purchased and loan participations, totaled $99.7 million for the year
ended March 31, 2006, which constituted 17.8% of total loan originations. In
connection with the expansion of the Bank's commercial banking activities, the
Bank intends to continue commercial real estate lending, subject to market
conditions.
The Bank's commercial real estate loans include loans secured primarily
by owner-occupied buildings, storage facilities, manufactured home parks, small
office buildings, retail shops, multi-family residential properties and other
small commercial properties. The portfolio also contains a limited amount of
specialty realty (i.e., restaurants, motels, etc.). Commercial real estate loans
in the Bank's portfolio primarily consist of loans originated by the Bank.
Appraisals on properties that secure commercial real estate loans are performed
by independent appraisers engaged by the Bank before the loans are made. An
environmental assessment is also performed. Underwriting of commercial real
estate loans includes a thorough analysis of the cash flows generated by the
real estate or the borrower's business to support the debt service and the
financial resources, experience, and income level of the borrowers. Security
debt coverage ratios, total debt coverage ratios, and working capital
assessments are key underwriting criteria.
10
Commercial Business Lending. Commercial business lending is important
to the Bank's lending strategy. The Bank's real estate relationships have
resulted in commercial lending opportunities with these customers. This reflects
the Bank's objective to provide its commercial and small business customers with
a complete lending and banking relationship. At March 31, 2006, commercial
business loans totaled $91.6 million, or 14.3% of the total loan portfolio. At
March 31, 2006, the Bank's nonresidential commercial business loan average size
was $129,000 and the largest loan was $5.5 million, which was performing
according to its terms. Commercial business loan originations, excluding loans
purchased and loan participations, totaled $67.8 million for the year ended
March 31, 2006, which constituted 12.1% of total loan originations. The Bank
presently originates both adjustable-rate and fixed-rate loans secured by
equipment, accounts receivable and inventory. Loans secured by accounts
receivable and inventory are generally operating lines of credit renewed
annually while equipment secured loans are term loans of up to five years. The
indices used for adjustable-rate loans are the applicable FHLB index, the
applicable LIBOR index, and prime rate as stated in The Wall Street Journal.
Commercial business lending provides the Bank with an opportunity to
receive interest at rates higher than those generally available from residential
mortgage loans. However, the collateral for these loans is usually more
difficult to evaluate and monitor; therefore, these loans involve a higher
degree of risk than commercial real estate or one- to four-family residential
mortgage loans. Because loan payments are dependent on cash flow and
profitability of the business, and require successful operation and management
of the business entity, repayment of such loans may be affected by adverse
conditions in the commercial real estate market or the economy. Accordingly,
management strength, performance history within the business sector and other
financial resources are included in underwriting criteria for commercial
business loans. In addition, personal guarantees are typically required to
assure those strengths are backing the credit relationship.
Of the commercial business loans originated, excluding loans purchased
and loan participations, in fiscal year 2006, operating loans represent 66.9% of
total loan originations, equipment loans 15.8%, working capital loans 1.5%,
letters of credit 10.9%, and other loans 4.9%. The Bank also participates in
small business and industry guarantee programs that are designed to assist
businesses that cannot qualify for conventional financing.
Consumer and Other Lending. The Bank originates a variety of consumer
and other non-mortgage loans. Such loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. At March 31, 2006, the
Bank's consumer and other non-mortgage loans totaled approximately $80.0
million, or 12.4% of the Bank's total loans. Consumer and other loan
originations, excluding loans purchased and loan participations, totaled $37.1
million for the year ended March 31, 2006, which constituted 6.6% of total loan
originations. The Bank's consumer loans consist primarily of secured and
unsecured consumer loans, automobile loans, boat loans, recreational vehicle
loans, home improvement and equity loans and deposit account loans. The growth
of the consumer loan portfolio in recent years has consisted primarily of an
increase in home equity loans, which the Bank has marketed more aggressively.
At March 31, 2006, home equity loans totaled $40.9 million, or 6.4% of
the Bank's total loans. The Bank offers both home equity second mortgage loans
and lines of credit. The Bank's home equity loans are secured by first or second
mortgages on residential real estate located in the Bank's primary market area.
Home equity second mortgage loans are generally offered with terms of five or
ten years with fixed interest rates and 20 year term loans with adjustable
interest rates. Home equity lines of credit generally have adjustable interest
rates based on the prime rate. Home equity loans are generally underwritten at
80% loan-to-value including the first mortgage with exceptions granted for
demonstrated exceptional financial strength.
At March 31, 2006, other consumer loans totaled $39.1 million, of which
$26.1 million is dealer paper. Dealer paper consists of mainly automobile loans
originated indirectly by a network of automobile dealers located in the Bank's
market area. Only dealers that have been approved by the Bank and have signed a
written agreement with the Bank regarding the purchase of these contracts are
eligible for contract purchases. The applications for such loans are taken by
employees of the dealer, the loans are written on the dealer's contract pursuant
to the Bank's underwriting standards using the dealer's loan documents with
terms substantially similar to the Bank's. All indirect loans must be approved
by specific loan officers of the Bank who have experience with this type of
lending. The dealers are paid a premium by the Bank which is amortized over the
life of the loan.
11
Consumer and non-mortgage loans entail greater risk than do residential
mortgage loans, particularly in the case of loans that are unsecured or secured
by rapidly depreciating assets such as automobiles and farm equipment. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. The remaining deficiency
often does not warrant further substantial collection efforts against the
borrower beyond obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. The application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.
Loans Held for Sale. Loans held for sale totaled $3.8 million at March
31, 2006 and $4.0 million at March 31, 2005. Loans originated and intended for
sale in secondary markets are carried at the lower of cost or estimated market
value in the aggregate. Loan fees (net of certain direct loan origination costs)
on loans held for sale are deferred until the related loans are sold or repaid.
Gains or losses on loan sales are recognized at the time of sale and determined
on a loan by loan basis. The Bank usually sells loans a short time after
originating the loan. The change in loan balances for loans held for sale at a
specific time fluctuates with the volume of real estate residential loan
originations.
Maturity of Loan Portfolio. The following table sets forth certain
information at March 31, 2006 regarding the dollar amount of principal
repayments for loans becoming due during the years indicated, excluding loans
held for sale. All loans are included in the year in which the final contractual
payment is due. Demand loans, loans having no stated schedule of repayments and
no stated maturity, and overdrafts are reported as due within one year. The
table does not include any estimate of prepayments which significantly shortens
the average life of all loans and may cause the Bank's actual repayment
experience to differ from that shown below.
After One After 5 Years After 10 Years
Within Year Through Through Through Beyond
One Year 5 Years 10 Years 15 Years 15 Years Total
------------ ------------ ------------ ------------ ------------ ------------
Real estate loans: (In Thousands)
Residential $ 204 $ 3,848 $ 14,883 $ 26,148 $ 78,378 $ 123,461
Construction 108,650 -- -- -- -- 108,650
Commercial 28,831 64,785 19,022 28,471 60,173 201,282
Agricultural 12,476 6,690 2,837 7,501 8,621 38,125
Commercial non-real estate 44,374 27,824 15,738 297 3,395 91,628
Other loans 4,675 24,106 46,053 4,295 886 80,015
------------ ------------ ------------ ------------ ------------ ------------
Total loans receivable $ 199,210 $ 127,253 $ 98,533 $ 66,712 $ 151,453 $ 643,161
============ ============ ============ ============ ============ ============
The following table sets forth the dollar amount of all loans due after
March 31, 2007 that have fixed interest rates and have floating or adjustable
interest rates, excluding loans held for sale.
Floating or
Fixed Adjustable
Rates Rates
------------ ------------
Real estate loans: (In Thousands)
Residential $ 106,755 $ 16,502
Commercial 15,432 157,019
Agricultural 3,810 21,839
Commercial non-real estate 22,059 25,195
Other loans 58,882 16,458
------------ ------------
Total loans receivable $ 206,938 $ 237,013
============ ============
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
12
Loan Solicitation and Processing. Loan applicants come primarily
through loan officer business development calls, referrals from existing
customers, realtors, homebuilders, accountants, attorneys, and walk-ins. The
Bank also uses radio and newspaper advertising to create awareness of its loan
products. In addition to originating loans through its branch offices, the Bank
operates six loan centers located in Coeur d'Alene, Lewiston, Nampa and Boise,
Idaho, Spokane, Washington, and Baker City, Oregon to increase loan
originations. The Bank does not utilize any loan correspondents, mortgage
brokers or other forms of wholesale loan origination. Upon receipt of a loan
application from a prospective borrower, a credit report and other data are
obtained to verify specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate offered
as collateral generally is undertaken by a certified, independent fee appraiser.
Loan Approvals. Residential real estate loans that qualify for sale in
the secondary market may be approved by the Bank's underwriters. All other
portfolio real estate loans must be approved by two members of the Management
Loan Committee. Delegated loan approval authority to residential lending centers
is authorized within prescribed limits for approved major builder loans. All
other construction loans must be approved by two members of the Management Loan
Committee. Consumer loans up to $50,000 and home equity loans up to $150,000 may
be approved by designated underwriters provided that the total loan relationship
is $200,000 or less. All other consumer and home equity loans must be approved
by a member of the Management Loan Committee. All commercial and agricultural
real estate and non-real estate loans are approved within the Bank's delegated
loan approval policy. Any loan or combination of loans to one entity of $1.5
million or greater require approval by the Executive Loan Committee, which
consists of the Chief Executive Officer, Chief Loan Officer, Chief Operations
Officer, Credit Administrator, and the members of the Board of Directors.
Loan Originations, Sales and Purchases. While the Bank originates both
adjustable- and fixed-rate loans, its ability to generate each type of loan is
dependent upon relative customer demand for loans in its market. For the year
ended March 31, 2006, the Bank originated $559.0 million of loans, excluding
loans purchased and loan participations. Residential real estate loan
originations, excluding loans purchased and loan participations, totaled $101.3
million for the year ended March 31, 2006, which constituted 18.1% of total loan
originations. The loan centers have enhanced the originations of commercial and
agricultural real estate and non-real estate loans for the loan portfolio
growth.
In the early 1990s, the Bank adopted a mortgage banking strategy
pursuant to which it seeks to generate income from the sale of loans (which may
be sold either servicing-retained or servicing-released) and from servicing fees
from loans sold on a servicing-retained basis on residential real estate term
loans. Generally, the level of loan sale activity and, therefore, its
contribution to the Bank's profitability, depends on maintaining a sufficient
volume of loan originations, fee originations, servicing release premiums, and
par pricing, which is the premium or discount to sell the loan on the market.
Changes in the level of interest rates and the local economy affect the amount
of loans originated by the Bank and, thus, the amount of loan sales as well as
origination and loan fees earned. Gains on sales of loans totaled $1.8 million
and $1.0 million during the years ended March 31, 2006 and 2005, respectively.
The Bank sells loans on a loan-by-loan basis. Generally, a loan is committed to
be sold and a price for the loan is fixed at the time the interest rate on the
loan is fixed, which may be at the time the Bank issues a loan commitment or at
the time the loan closes. This eliminates the majority of the risk to the Bank
that a rise in market interest rates will reduce the value of a mortgage before
it can be sold. When a loan is committed to be sold before it is closed, the
Bank is subject to the risk that the loan fails to close or that the closing of
the loan is delayed beyond the specified delivery date. In that event, the Bank
may be required to compensate the purchaser for failure to deliver the loan.
Generally, loans are sold without recourse, although in the past the Bank has
sold loans with recourse.
13
In the past, the Bank has purchased loans and loan participations in
its primary market during periods of reduced loan demand. Through a consortium
of local financial institutions, the Bank occasionally purchases participation
interests in loans. Such loans include those secured by local low-income housing
projects, single family pre-sold and speculative housing, and commercial loans.
Management will consider any type of commercial, agricultural, and construction
participation loan. The Bank is supplementing its origination of agricultural
and commercial real estate loans and agricultural operating and nonresidential
commercial loans by purchasing participations in such loans originated by other
community banks in Idaho, Washington, and Oregon. Participations will be
utilized to facilitate market competitiveness, market diversification, and asset
allocation. Individual participating banks are required to be identified based
on asset quality, pricing, and targeted market objectives. It is intended that
participating banks are committed to a policy in this area that is consistent
with the Bank's policy. Annually, the Bank will complete a financial analysis on
each bank with active participations. All participations are monitored for
credit quality on an on-going basis like all other loans. All such purchases
will be made in conformance with the Bank's underwriting and pricing standards.
All open-end and closed-end credit participations will be based on the
participating bank being last-in and first-out of each loan. Term loans can be
repaid on a pro-rata basis. The Bank anticipates that it will purchase only a
small portion of any individual loan and that the originating institution will
retain a majority of the loan. Participation loans at March 31, 2006, 2005 and
2004 were $10.4 million, $7.3 million, and $7.5 million, respectively.
14
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended March 31,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
Total loans receivable and loans held for sale at (In Thousands)
beginning of year $ 575,814 $ 472,214 $ 261,570
---------- ---------- ----------
Loans originated:
Real estate loans:
Residential 101,259 99,694 137,242
Construction 244,257 171,625 107,188
Agricultural 2,691 2,913 1,923
Commercial 99,733 95,277 43,148
Commercial non-real estate 67,804 51,961 41,806
Agricultural non-real estate 6,177 8,236 5,725
Other loans 37,064 45,844 16,364
---------- ---------- ----------
Total loans originated 558,985 475,550 353,396
---------- ---------- ----------
Credit card advances 12,093 10,583 6,199
---------- ---------- ----------
Loans originated, not funded (85,812) (56,892) (30,615)
---------- ---------- ----------
Loans purchased and loan participations:
Real estate loans:
Residential 8,549 2,467 69,290
Construction 8,017 29 100
Agricultural -- 1,000 4,413
Commercial 10,000 21,739 36,689
Other loans -- -- 92,566
---------- ---------- ----------
Total loans purchased (1) 26,566 25,235 203,058
---------- ---------- ----------
Loans sold:
Servicing retained (4,044) (2,080) (18,265)
Servicing released (95,116) (80,237) (136,862)
---------- ---------- ----------
Total loans sold (99,160) (82,317) (155,127)
---------- ---------- ----------
Loan principal repayments (312,182) (243,220) (106,629)
---------- ---------- ----------
Refinanced loans (29,358) (25,339) (59,638)
---------- ---------- ----------
Change in total loans receivable 71,132 103,600 210,644
---------- ---------- ----------
Total loans receivable and loans held for sale at end of
year $ 646,946 $ 575,814 $ 472,214
========== ========== ==========
(1) During the fiscal year ended March 31, 2004, the Company purchased $200.6
million of loans through the acquisition of Oregon Trail.
Loan Commitments. The Bank issues commitments to originate loans
conditioned upon the occurrence of certain events. Such commitments are made on
specified terms and conditions and are honored for up to 90 days from the date
of loan approval. The Bank had outstanding loan commitments of approximately
$144.0 million at March 31, 2006. In addition, the Bank had commitments to fund
outstanding credit lines of approximately $96.8 million, commitments to fund
standby letters of credit of approximately $6.9 million and commitments to fund
credit card lines of approximately $10.4 million at March 31, 2006.
15
Loan Origination and Other Fees. The Bank, in some instances, receives
loan origination fees. Loan fees are a fixed dollar amount or a percentage of
the principal amount of the loan that is charged to the borrower for funding the
loan. Current accounting standards require fees received (net of certain loan
origination costs) for originating loans to be deferred and amortized into
interest income over the contractual life of the loan. Net deferred fees or
costs associated with loans that are prepaid are recognized as income at the
time of prepayment. The Bank had $2.5 million of unearned loan fees and
discounts at March 31, 2005 and 2006.
Loan Servicing. In the past, the Bank sold residential real estate
loans to Freddie Mac and Fannie Mae on a servicing-retained basis and received
fees in return for performing the traditional services of collecting individual
payments and managing the loans. The Bank also has sold agricultural real estate
loans to private investors on a servicing-retained basis. At March 31, 2006, the
Bank was servicing $58.3 million of loans for others. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items, such as private
mortgage insurance. When the Bank receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. In addition, the Bank retains certain
amounts in escrow for the benefit of the investor for which the Bank incurs no
interest expense but is able to invest. At March 31, 2006, the Bank held
$972,000 in escrow for its portfolio of loans serviced.
Mortgage Servicing Rights. At March 31, 2006, mortgage servicing rights
were $533,000, which includes an accumulated impairment on mortgage servicing
rights of $282,000. At March 31, 2005, mortgage servicing rights were $614,000,
which includes an accumulated impairment on mortgage servicing rights of
$346,000. The value of the loans serviced for others is significantly affected
by interest rates. In general, during periods of falling interest rates,
mortgage loans prepay at faster rates and the value of the mortgage servicing
declines. Conversely, during periods of rising interest rates, the value of the
mortgage servicing rights generally increases as a result of slower rates of
prepayment. 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 following table is an analysis of the changes in mortgage servicing rights
for the years ended March 31, 2006 and 2005:
Year Ended March 31,
------------------------
2006 2005
---------- ----------
(In Thousands)
Beginning Balance $ 614 $ 710
Additions 61 29
Amortization (206) (206)
Impairment recovered 64 81
---------- ----------
Ending Balance $ 533 $ 614
========== ==========
Goodwill and Other Intangible Assets. Goodwill at March 31, 2006 was
$16.6 million. No impairment loss on goodwill was recorded for the year ended
March 31, 2006, since there were no impairment indicators during the period.
Core deposit intangible at March 31, 2006 was $2.2 million, net of
accumulated amortization of $1.7 million. Amortization expense for the net
carrying amount of the core deposit intangible at March 31, 2006 is estimated to
be as follows:
For the year ended March 31,
(In Thousands)
2007 $ 715
2008 715
2009 715
2010 67
--------
Estimated total core deposit intangible amortization expense $ 2,212
========
16
Delinquencies and Classified Assets
Delinquent Loans. When a loan borrower fails to make a required payment
when due, the Bank institutes collection procedures. If the loan is within the
first three months of the term, the borrower is contacted by telephone
approximately ten days after the payment is due in order to permit the borrower
to make the payment before the imposition of a late fee. The first notice is
mailed to the borrower when the payment is 16 days past due. Attempts to contact
the borrower by telephone generally begin when a payment becomes 25 days past
due. If the loan has not been brought current by the 60th day of delinquency,
the Bank attempts to interview the borrower in person and to physically inspect
the property securing the loan.
In most cases, delinquencies are cured promptly; however, if by the
91st day of delinquency, or sooner if the borrower is chronically delinquent and
all reasonable means of obtaining payment on time have been exhausted,
foreclosure, according to the terms of the security instrument and applicable
law, is initiated. Interest income on loans delinquent over 90 days is reduced
by the full amount of accrued and uncollected interest.
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of generally
accepted accounting principles ("GAAP") at the years indicated. It is the policy
of the Bank to cease accruing interest on loans more than 90 days past due.
At March 31,
--------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 145 $ 294 $ 701 $ 429 $ 177
Construction -- -- 364 -- --
Agricultural 67 -- 78 10 86
Commercial -- 251 -- 175 --
Commercial non-real estate -- 1 1,661 499 89
Other loans 96 173 96 138 239
-------- -------- -------- -------- --------
Total 308 719 2,900 1,251 591
-------- -------- -------- -------- --------
Accruing loans which are contractually
past due more than 90 days 4 377 -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans 312 1,096 2,900 1,251 591
Real estate owned -- 603 552 120 424
Repossessed assets 13 18 52 -- --
Restructured loans 872 1,094 152 442 107
-------- -------- -------- -------- --------
Total nonperforming assets $ 1,197 $ 2,811 $ 3,656 $ 1,813 $ 1,122
======== ======== ======== ======== ========
Nonperforming loans as a percent of loans receivable, net 0.05% 0.19% 0.63% 0.50% 0.25%
Nonperforming loans as a percent of total assets 0.04% 0.14% 0.41% 0.38% 0.19%
Nonperforming assets as a percent of
total assets 0.14% 0.35% 0.50% 0.55% 0.36%
Total nonperforming assets to total loans 0.19% 0.49% 0.78% 0.71% 0.47%
Interest income that would have been recorded for the year ended March
31, 2006 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $10,000.
17
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned
("REO") until it is sold. When property is acquired, it is recorded at the lower
of its cost, which is the unpaid principal balance of the related loan, plus
foreclosure costs, or 90 day liquidation value. Subsequent to foreclosure, REO
is carried at the lower of the foreclosed amount or fair value, less estimated
selling costs. The Bank had no REO at March 31, 2006.
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 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 allowances 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 Bank 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 the dates indicated
were as follows:
At March 31,
------------------------------------
2006 2005 2004
---------- ---------- ----------
(In Thousands)
Doubtful:
Consumer $ -- $ 17 $ --
Residential -- -- 12
Commercial non-real estate -- -- 120
---------- ---------- ----------
Total doubtful -- 17 132
---------- ---------- ----------
Substandard:
Consumer 179 251 310
Residential 383 595 950
Commercial non-real estate 1,761 1,483 1,870
Commercial real estate 1,570 1,486 756
Real estate owned -- 603 552
Repossessed assets 13 18 --
Overdrawn checking accounts 52 56 --
---------- ---------- ----------
Total substandard 3,958 4,492 4,438
---------- ---------- ----------
Total classified assets $ 3,958 $ 4,509 $ 4,570
========== ========== ==========
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Bank increases its allowance for loan
losses by charging provisions for loan losses against income.
18
The general allowance is maintained to cover losses inherent in the
portfolio of performing loans. Management's periodic evaluation of the adequacy
of the allowance is based on management's evaluation of probable losses in the
loan portfolio. The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process. This process includes information derived from
many factors including historical loss trends, trends in classified assets,
trends in delinquency and nonaccrual loans, trends in portfolio volume,
diversification as to type of loan, size of individual credit exposure, current
and anticipated economic conditions, loan policies, collection policies and
effectiveness thereof, quality of credit personnel, effectiveness of policies,
procedures and practices, and recent loss experience of peer banking
institutions. Specific valuation allowances are established to absorb losses on
loans for which full collectibility may not be reasonably assured, based upon,
among other factors, the estimated fair market value of the underlying
collateral and estimated holding and selling costs. Generally, a provision for
losses is charged against income on a quarterly basis to maintain the
allowances.
At March 31, 2006, the Bank had an allowance for loan losses of $8.1
million. The allowance for loan losses is maintained at an amount management
considers adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
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.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the years indicated. Where specific loan loss reserves have been
established, any differences between the loss allowances and the amount of loss
realized has been charged or credited to current income.
Year Ended March 31,
------------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Allowance at beginning of year $ 7,254 $ 6,314 $ 3,414 $ 2,563 $ 1,758
Addition through acquisition -- -- 2,863 -- --
Provision for loan losses(1) 1,799 1,528 395 1,033 1,064
Recoveries 118 110 120 22 7
Charge-offs:
Real estate loans:
Residential 12 7 11 -- 41
Commercial -- 138 19 -- --
Construction -- -- -- -- 12
Commercial non-real estate 583 211 225 18 16
Other loans 438 342 223 186 197
---------- ---------- ---------- ---------- ----------
Total charge-offs 1,033 698 478 204 266
---------- ---------- ---------- ---------- ----------
Net charge-offs 915 588 358 182 259
---------- ---------- ---------- ---------- ----------
Balance at end of year $ 8,138 $ 7,254 $ 6,314 $ 3,414 $ 2,563
========== ========== ========== ========== ==========
Allowance for loan losses as a percent of
total loans receivable 1.27% 1.27% 1.35% 1. 33% 1.08%
Net charge-offs to average outstanding loans 0.15% 0.12% 0.10% 0.07% 0.12%
(1) See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Comparison of Operating Results for the Years
Ended March 31, 2005 and 2006 -- Provision for Loan Losses" for a
discussion of the factors contributing to changes in the Bank's provision
for loan losses between fiscal 2005 and 2006.
19
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the periods 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.
At March 31,
---------------------------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------------- ------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
% of % of % of % of % of
Loans Loans Loans Loans Loans
in in in in in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Residential $ 422 19.20% $ 238 20.55% $ 282 24.20% $ 243 19.77% $ 268 26.19%
Construction 1,674 16.89 1,272 12.09 927 9.54 660 11.80 133 2.54
Agricultural 565 5.92 735 7.36 738 9.31 425 11.28 365 12.01
Commercial 3,950 45.55 4,628 46.62 3,630 42.40 1,973 46.32 1,571 45.47
Other 1,527 12.44 381 13.38 737 14.55 113 10.83 226 13.79
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total allowance
for loan losses $ 8,138 100.00% $ 7,254 100.00% $ 6,314 100.00% $ 3,414 100.00% $ 2,563 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank of Seattle ("FHLB-Seattle"), certificates of deposit of federally
insured institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, the Bank may also invest a portion of its assets in
commercial paper and corporate debt securities. Savings institutions like the
Bank are also required to maintain an investment in FHLB stock.
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," requires
that investments be categorized as "held-to-maturity," "trading securities" or
"available-for-sale," based on management's intent as to the ultimate
disposition of each security. SFAS No. 115 allows debt securities to be
classified as "held-to-maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as
"held-to-maturity." Debt and equity securities held for current resale are
classified as "trading securities." Such securities are reported at fair value,
and unrealized gains and losses on such securities would be included in
earnings. Debt and equity securities not classified as either "held-to-maturity"
or "trading securities" are classified as "available-for-sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of equity. The unrealized gains and losses are also reported as a separate
component of the Statement of Other Comprehensive Income.
The Chief Executive Officer and the Chief Financial Officer determine
appropriate investments in accordance with the Board of Directors' approved
investment policies and procedures. The Bank's investment policies generally
limit investments to FHLB obligations, certificates of deposit, U.S. Government
and agency securities, municipal bonds rated AAA, mortgage-backed securities and
certain types of mutual funds. The Bank does not purchase high-risk mortgage
derivative products. Investments are made based on certain considerations, which
include the interest rate, yield, settlement date and maturity of the
investment, the Bank's liquidity position, and anticipated cash needs and
sources (which in turn include outstanding commitments, upcoming maturities,
estimated deposits and anticipated loan amortization and repayments). The effect
that the proposed investment would have on the Bank's credit and interest rate
risk, and risk-based capital is also considered during the evaluation.
20
Investment securities are purchased primarily for managing liquidity.
Generally, the Bank purchases mortgage-backed securities during times of reduced
loan demand. The Bank's investments are primarily long term, insured bank
qualified State of Idaho or Oregon municipal bonds. Most of the mortgage-backed
securities are longer-term Freddie Mac, Fannie Mae, and Ginnie Mae backed
securities.
In connection with the acquisition of Oregon Trail, $9.5 million of
investment securities were added to the held-to-maturity classification and
$771,000 of mortgage-backed securities were added to the held-to-maturity
classification during the fiscal year ended March 31, 2004. Held-to-maturity
securities were classified as such because these securities were intended to be
held-to-maturity and used to satisfy collateral requirements. For the years
ended March 31, 2006, 2005, and 2004, proceeds from maturities and sales of
securities were $9.4 million, $17.8 million, and $34.6 million and purchases of
securities were $854,000, $14.5 million, and $50.8 million, respectively.
The following table sets forth the composition of the Bank's investment
and mortgage-backed securities portfolios at the dates indicated.
At March 31,
-----------------------------------------------------------------------------------------
2006 2005 2004
--------------------------- --------------------------- ---------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Available-for-sale:
Investment securities $ 16,890 16.77% $ 17,427 15.81% $ 19,116 16.50%
Mortgage-backed securities 29,843 29.64 39,441 35.78 54,128 46.74
------------ ------------ ------------ ------------ ------------ ------------
Total available-for-sale 46,733 46.41 56,868 51.59 73,244 63.24
------------ ------------ ------------ ------------ ------------ ------------
Held-to-maturity:
Investment securities $ 31,651 31.43% $ 30,907 28.03% $ 19,671 16.99%
Mortgage-backed securities 22,312 22.16 22,463 20.38 22,899 19.77
------------ ------------ ------------ ------------ ------------ ------------
Total held-to-maturity 53,963 53.59 53,370 48.41 42,570 36.76
------------ ------------ ------------ ------------ ------------ ------------
Total $ 100,696 100.00% $ 110,238 100.00% $ 115,814 100.00%
============ ============ ============ ============ ============ ============
The table below sets forth certain information regarding the carrying
value, average tax effected weighted yields and maturities of the Bank's
investment and mortgage-backed securities at March 31, 2006.
Over Over
Less than One to Five to Over Ten
One Year Five Years Ten Years Years
------------------- ------------------- ------------------- -------------------
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Investment securities $ 555 4.48% $ 14,357 3.78% $ 8,236 7.85% $ 25,393 7.48%
Mortgage-backed
securities 4 -- -- -- 5,715 4.41 46,436 5.03
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 559 4.45% $ 14,357 3.78% $ 13,951 6.44% $ 71,829 5.90%
======== ======== ======== ======== ======== ======== ======== ========
21
Other Investment Activities. The Bank purchases bank owned life
insurance policies ("BOLI") to offset future employee benefit costs, and at
March 31, 2006, bank owned life insurance policies and cash surrender value of
life insurance policies was $24.4 million. The purchase of BOLI policies, and
its increase in cash surrender value, is classified as "bank owned and cash
surrender value of life insurance policies" in the Company's Consolidated
Statements of Financial Condition. The income related to the BOLI of $1.1
million, which is generated by the increase in the cash surrender value of the
policy, is classified in "other interest earning assets" in the Company's
Consolidated Statements of Income.
Deposit Activities and Other Sources of Funds
General. Deposits and loan repayments are the major sources of the
Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Seattle are used
to compensate for reductions in the availability of funds from other sources.
The Company also maintains additional credit facilities of $23.5 million with US
Bank.
Deposit Accounts. Deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The majority of all of the Bank's depositors are residents of Idaho, Washington
and Oregon. Deposits are attracted from within the Bank's market area through
the offering of a broad selection of deposit instruments, including checking
accounts, money market deposit accounts, regular savings accounts, certificates
of deposit and retirement savings plans. The Bank also offers "TT&L" (treasury,
taxes and loans) accounts for local businesses. Deposit account terms vary
according to the minimum balance required the time periods the funds must remain
on deposit and the interest rate, among other factors. In determining the terms
of its deposit accounts, the Bank considers current market interest rates,
profitability to the Bank, matching deposit and loan products and its customer
preferences and concerns. The Bank reviews its deposit mix and pricing weekly.
Currently, the Bank accepts brokered deposits with maturities between 90 days
and ten years. At March 31, 2006, the Bank had $44.7 million in brokered
deposits, which was 5.3% of total assets. At March 31, 2006, certificates of
deposit that are scheduled to mature in less than one year totaled $177.8
million. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The FHLB-Seattle has lowered its dividend payout and has changed its
method of calculating the dividend payout based on earnings from the prior
quarter, subject to certain limitations. As of May 18, 2005, the FHLB-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 last
dividend declared was for the quarter ended March 31, 2005 of 1.63% on class
B(1) stock and 1.50% on class B(2) stock. The Company did not recognize a return
on FHLB stock, included in equity securities, on its Consolidated Statements of
Financial Condition and Consolidated Statements of Income for the year ended
March 31, 2006.
22
The following table sets forth information concerning the Bank's
deposits at March 31, 2006.
Weighted
Average Percentage
Interest Minimum of Total
Rate Checking and Savings Deposits Amount Balance Deposits
---- ----------------------------- ------ ------- --------
(Dollars in Thousands, except Minimum Amount)
0.04% Checking Accounts $ -- $ 161,938 28.41%
1.63 Money Market Deposit 100 27,882 4.89
1.94 Money Market Deposit 1,000 23,827 4.18
3.46 Money Market Deposit 2,500 20,396 3.58
4.21 Money Market Deposit 25,000 44,752 7.85
0.25 Statement Savings 100 36,614 6.42
--------- ------
Total Checking and Savings Deposits 315,409 55.33
--------- ------
Certificates of Deposit
-----------------------
2.85 7 days to 179 days 2,500 23,901 4.19
3.26 6 months to less than 1 year 2,500 17,394 3.05
3.31 1 year to less than 2 years 2,500 13,834 2.43
2.93 2 years to less than 3 years 2,500 5,769 1.01
3.07 2 years to 5 years - Add on 500 5,535 0.97
3.27 3 years to less than 4 years 2,500 15,776 2.77
4.06 4 years to less than 5 years 2,500 6,207 1.09
4.31 5 years to less than 10 years 2,500 19,019 3.34
3.56 IRA Variable 500 1,469 0.26
4.27 Brokered 1,000 44,707 7.84
3.35 2 year Step Rate 5,000 527 0.09
4.16 3 year Step Rate 5,000 3,794 0.67
6.59 4 year Step Rate 5,000 2,557 0.45
1.63 182 days 1,000 223 0.04
3.58 8 months 1,000 21,625 3.79
4.03 11 months 10,000 32,277 5.66
1.98 1 year 1,000 3,161 0.55
4.02 27 months 5,000 8,888 1.56
2.33 2 1/2 years 1,000 2,469 0.43
3.42 3 to 5 years 1,000 7,252 1.27
4.22 5 years 1,000 15,048 2.64
4.20 6 years 1,000 1,190 0.21
3.33 18 month add on 500 1,522 0.27
1.48 20 month 1,000 27 0.01
4.49 Mini jumbo certificates 96,000 315 0.06
3.42 Various term, fixed rate 1,000 145 0.02
--------- ------
Total Certificates of Deposit 254,631 44.67
--------- ------
Total Deposits $ 570,040 100.00%
========= ======
23
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of March 31, 2006.
Jumbo certificates of deposit are certificates in amounts of more than $100,000.
Maturity Period Amount
--------------- ---------
(In Thousands)
Three months or less $ 20,138
Over three through six months 11,847
Over six through 12 months 37,809
Over 12 months 30,304
---------
Total jumbo certificates of deposit $ 100,098
=========
Deposit Flow. The following table sets forth the balances (inclusive of
interest credited) and changes in dollar amounts of deposits in the various
types of accounts offered by the Bank at the dates indicated.
At March 31,
-----------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------------- ---------------------------------- ---------------------
Percent Percent Percent
of Increase of Increase of
Amount Total (Decrease) Amount Total (Decrease) Amount Total
---------- --------- ---------- ---------- --------- ---------- ---------- ---------
(Dollars in Thousands)
Checking accounts $ 161,938 28.41% $ 20,564 $ 141,374 27.26% $ 5,902 $ 135,472 28.19%
Savings accounts 36,614 6.42 (4,575) 41,189 7.94 1,367 39,822 8.29
Money market deposit
accounts 116,857 20.50 (2,024) 118,881 22.92 14,269 104,612 21.77
Brokered certificates of deposit 44,707 7.84 1,974 42,733 8.24 18,944 23,789 4.95
Fixed-rate certificates
which mature:
Within 1 year 144,665 25.38 40,164 104,501 20.15 1,456 103,045 21.44
After 1 year, but within
2 years 40,025 7.02 13,866 26,159 5.04 (3,818) 29,977 6.24
After 2 years, but within
5 years 23,322 4.09 (19,115) 42,437 8.18 (144) 42,581 8.86
Certificates maturing
thereafter 1,912 0.34 510 1,402 0.27 152 1,250 0.26
---------- --------- ---------- ---------- --------- ---------- ---------- ---------
Total $ 570,040 100.00% $ 51,364 $ 518,676 100.00% $ 38,128 $ 480,548 100.00%
========== ========= ========== ========== ========= ========== ========== =========
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank categorized by rates at the dates indicated.
At March 31,
------------------------------------
2006 2005 2004
---------- ---------- ----------
(In Thousands)
0.0 - 2.99% $ 50,469 $ 117,771 $ 109,775
3.0 - 3.99% 88,712 47,069 30,501
4.0 - 4.99% 97,874 33,841 35,777
5.0 - 5.99% 14,274 16,144 18,728
6.0 - 6.99% 2,964 2,407 4,944
7.0 - 7.99% 338 -- 917
---------- ---------- ----------
Total $ 254,631 $ 217,232 $ 200,642
========== ========== ==========
24
The following table sets forth the amount and maturities of time deposits at
March 31, 2006.
Amount Due
------------------------------------------------------------------------------------------------------
Percent
After After After of Total
Less Than 1 to 2 2 to 3 3 to 4 After Certificate
One Year Years Years Years 4 Years Total Accounts
------------ ------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
0.0 - 2.99% $ 45,289 $ 4,272 $ 494 $ 223 $ 191 $ 50,469 19.82%
3.0 - 3.99% 47,843 26,672 6,561 4,428 3,208 88,712 34.84
4.0 -4.99% 69,028 13,919 593 9,576 4,758 97,874 38.44
5.0 - 5.99% 12,503 1,707 10 35 19 14,274 5.61
6.0 - 6.99% 2,761 112 -- -- 91 2,964 1.16
7.0% and over 338 -- -- -- -- 338 0.13
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 177,762 $ 46,682 $ 7,658 $ 14,262 $ 8,267 $ 254,631 100.00%
============ ============ ============ ============ ============ ============ ============
Deposit Activity. The following table sets forth the deposit activities
of the Bank for the years ended March 31, 2006, 2005 and 2004.
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Beginning balance $ 518,676 $ 480,548 $ 203,189
------------ ------------ ------------
Net increase
before interest credited 39,947 30,892 15,794
Purchased in Oregon Trail acquisition -- -- 256,312
Interest credited 11,417 7,236 5,253
------------ ------------ ------------
Net increase in deposits 51,364 38,128 277,359
------------ ------------ ------------
Ending balance $ 570,040 $ 518,676 $ 480,548
============ ============ ============
Borrowings. The Bank utilizes advances from the FHLB-Seattle to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank, providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Seattle, the Bank is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
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.
25
The following tables set forth certain information regarding borrowings
by the Bank at or for the years ended March 31, 2006, 2005 and 2004:
At or For the
Year Ended March 31,
--------------------------------------
2006 2005 2004
---------- ---------- ----------
(Dollars in Thousands)
Maximum amount of FHLB advances and other borrowings
outstanding at any month end during the year $ 205,404 $ 192,338 $ 144,164
Average FHLB advances and other borrowings outstanding
during the year 181,529 158,235 101,106
Balance of FHLB advances and other borrowings outstanding
at end of year 176,817 185,337 132,056
Weighted average rate paid on FHLB advances and other
borrowings at end of year 5.08% 4.28% 4.78%
Weighted average rate paid on FHLB advances and other
borrowings during the year 4.22% 3.77% 4.58%
At March 31, 2006
------------------------------------------------------------------------------
Five Years to
Less than One One Year to Less Less than Ten Greater than
Year than Five Years Years Ten Years
------------- ---------------- ------------- ------------
(Dollars in Thousands)
Maturities of FHLB advances and other
borrowings $ 111,094 $ 49,776 $ 9,320 $ 6,627
Range of interest rates 3.05% - 7.25% 3.33% - 7.12% 3.42% - 6.25% 6.66% - 7.10%
Weighted average interest rate 4.88% 5.33% 4.69% 7.03%
Percentage of total advances and other
borrowings 62.83% 28.15% 5.27% 3.75%
There were $40.8 million and $45.8 million of advances from the
FHLB-Seattle that were putable at March 31, 2006 and March 31, 2005,
respectively.
The Company also maintains additional credit facilities of $23.5
million with US Bank. Advances of $3.1 million were outstanding under these
facilities at March 31, 2006. On June 10, 2005, the Bank entered into a
Subordinate Debenture Purchase Agreement with US Bank, under which the Bank
issued an aggregated principal amount of $3.0 million in floating rate unsecured
subordinated debt. All amounts due under the subordinated debenture must be
repaid in full on June 10, 2015. If the subordinated debenture ceases to qualify
as Tier 2 capital for capital reporting purposes, or at any time after June 10,
2010, the Bank may, after receiving approval from the Federal Deposit Insurance
Corporation, prepay all or a portion of the outstanding amount of the
subordinated debenture. In addition, if the subordinated debenture no longer
qualifies as the Tier 2 capital, the Bank and the lender may restructure the
debt as a senior unsecured obligation of the Bank or the Bank may repay the
debt.
Competition
The Bank operates in a competitive market for the attraction of savings
deposits (its primary source of lendable funds) and in the origination of loans.
Its most direct competition for deposits has historically come from commercial
banks, credit unions and other thrifts operating in its market area. The Bank's
competitors include large regional and superregional banks. These institutions
are significantly larger than the Bank and therefore have greater financial and
marketing resources than the Bank. Particularly in times of high interest rates,
the Bank has faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The Bank's competition for loans comes from commercial banks and
other thrifts operating in its market as well as from mortgage bankers and
brokers, consumer finance companies, and, with respect to agricultural loans,
government sponsored lending programs. Such competition for deposits and the
origination of loans may limit the Bank's growth and profitability in the
future.
26
Subsidiary Activities
The Bank has two subsidiaries, Tri-Star Financial Corporation, and
Pioneer Development Corporation ("PDC"). Tri-Star sold life insurance and tax
deferred annuities on an agency basis. PDC purchased land sale contracts until
March 1998, and currently services those contracts. Both subsidiaries reflect
residual value of assets and income and they are not currently pursuing or
engaging in any business activity.
Personnel
As of March 31, 2006, the Bank had 222 full-time and 55 part-time
employees. The number of full-time equivalent employees at March 31, 2006 and
March 31, 2005 remained the same at 270. The Bank used temporary services to
hire employees for approximately 2,332 hours during the year ended March 31,
2006. The Bank's employees are not represented by a collective bargaining unit
and the Bank believes its relationship with its employees to be good.
The following table sets forth certain information with respect to the
executive officers of the Company and the Bank:
Executive Officers of the Company and Bank
------------------------------------------
Age at
March 31, Position
Name 2006 Company -------- Bank
- ---- ---- ------- ----
Clyde E. Conklin 54 President, Chief Executive Chief Executive Officer and Director
Officer and Director
Larry K. Moxley 55 Executive Vice President, Chief Financial Officer,
Chief Financial Officer, Secretary/Treasurer and Director
Corporate Secretary, and
Director
Terence A. Otte 49 -- Executive Vice President, Chief Operating Officer
Donn L. Durgan 52 -- Executive Vice President, Chief Lending Officer
Richard R. Acuff 45 -- Executive Vice President, Chief Information Officer
Biographical Information
Clyde E. Conklin, who joined the Bank in 1987, has served as the Chief
Executive Officer of the Bank since February 1996 and as President and Chief
Executive Officer of the Company since its formation in 1997. From September
1994 to February 1996, Mr. Conklin served as Senior Vice President - Lending. In
1993, Mr. Conklin became Vice President - Lending. Prior to that time, Mr.
Conklin served as the Agricultural Lending Manager.
Larry K. Moxley, who joined the Bank in 1973, currently serves as Chief
Financial Officer of the Bank, a position he has held since February 1996. Mr.
Moxley has served as Executive Vice President, Chief Financial Officer and
Secretary/Treasurer of the Company since its formation in 1997. Mr. Moxley
served as Senior Vice President - Finance from 1993 to February 1996 and as Vice
President - Finance from 1984 to 1993.
Terence A. Otte joined the Bank in June 1989 as an Agricultural Loan
Officer, and currently serves as Executive Vice President, Chief Operating
Officer. From 1991 to 1994, he served as manager of the Bank's Moscow, Idaho
branch. In 1994, he became Vice President, Lending and Agricultural Lending
Manager and in 1996 became Senior Vice President, Agricultural and Consumer
Lending and Compliance Officer.
Donn L. Durgan, who joined the Bank in February 1996, currently serves
as Executive Vice President, Chief Lending Officer. Prior to that time, Mr.
Durgan was employed by First Security Bank, now known as Wells Fargo Bank, for
11 years in various positions in commercial and residential real estate lending.
Richard R. Acuff, who joined the Bank in February 1983, currently
serves as Executive Vice President, Chief Information Officer. From 1983 to
1992, he served as Staff Accountant, Assistant Controller, and Asset and
Liability Manager. From 1992 to 2003, he served as Manager, Assistant Vice
President, Vice President, and Senior Vice President of Management Information
Systems.
27
Available Information
The Company's website is www.fbnw.com. The website contains a link to
the Company's filings with the Securities and Exchange Commission, including
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and any amendments. Copies of these filings are available as soon as
reasonably practicable.
REGULATION
The following is a brief description of certain laws and regulations
which are applicable to the Company and the Bank. The description of these laws
and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States
Congress and in the Washington State Legislature that may affect the operations
of the Company and the Bank. In addition, the regulations governing the Company
and the Bank, may be amended from time to time by the FDIC or the Washington
Department of Financial Institutions, Division of Banks ("Division"). Any such
legislation or regulatory changes in the future could adversely affect the
Company and the Bank. No predictions can be made whether any such changes may
occur.
FirstBank Northwest
General. As a state-chartered, federally insured depository
institution, the Bank is subject to extensive regulation. Lending activities and
other investments must comply with various statutory and regulatory
requirements, including prescribed minimum capital standards. The Bank is
regularly examined by the FDIC and the Division and files quarterly and periodic
reports concerning the Bank's activities and financial condition with its
regulators. The Bank's relationship with depositors and borrowers also is
regulated to a great extent by both federal law and state law, especially in
such matters as the ownership of deposit accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Bank, including reserves, loans, mortgages, capital, issuance
of securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks and bank holding companies if such payments
should be deemed to constitute an unsafe and unsound practice. The respective
primary federal regulators of the Company and the Bank have authority to impose
penalties, initiate civil and administrative actions and take other steps
intended to prevent banks from engaging in unsafe, unsound or noncompliant
practices.
State Regulation and Supervision. As a state-chartered savings bank,
the Bank is subject to applicable provisions of Washington law and the
regulations of the Division adopted thereunder. Washington law and regulations
govern the Bank's ability to take deposits and pay interest thereon, to make
loans on or invest in residential and other real estate, to make consumer loans,
to invest in securities, to offer various banking services to its customers, and
to establish branch offices. Under state law, savings banks in Washington also
generally have all of the powers that federal savings banks have under federal
laws and regulations. The Bank is subject to periodic examination and reporting
requirements by and of the Division.
Deposit Insurance. The Bank is a member of the SAIF, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and this insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the SAIF. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the Office of
Thrift Supervision an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged in unsafe or
unsound practices or is in an unsafe or unsound condition.
28
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Since January 1, 1997, the premium schedule for Bank Insurance Fund
("BIF") and SAIF insured institutions has ranged from 0 to 27 basis points.
However, SAIF and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s equal to approximately 1.3 points for each $100 in
domestic deposits annually. These assessments, which may be revised based upon
the level of BIF and SAIF deposits, will continue until the bonds mature in the
year 2017.
The Federal Deposit Insurance Reform Act of 2005 ("The Reform Act"),
which was enacted in 2006, revised the laws governing the federal deposit
insurance system. The Reform Act provides for the consolidation of the BIF and
the SAIF into a combined "Deposit Insurance Fund" and gives the FDIC the
authority to determine insurance premiums based on a number of factors,
primarily the risk of loss that insured institutions pose to the Deposit
Insurance Fund. The legislation eliminates the current minimum l.25% reserve
ratio for the insurance funds, the mandatory assessment when the ratio falls
1.25% and the prohibition on assessing the highest quality banks when the ratio
is above 1.25%. The Reform Act provides the FDIC with flexibility to adjust the
new insurance fund's reserve ratio between l.15% and l.5%, depending on
projected losses, economic changes and assessment rates at the end of a calendar
year.
The Reform Act increased deposit insurance coverage limits from
$100,000 to $250,000 for certain types of Individual Retirement Accounts, 401(k)
plans and other retirement savings accounts. While it preserved the $100,000
coverage for individual accounts and municipal deposits, the FDIC was furnished
with the discretion to adjust all coverage levels to keep pace with inflation
beginning in 2010. Also, institutions that become undercapitalized will be
prohibited from accepting certain employee benefit plan deposits.
At this time, management cannot predict the effect, if any, that the
Reform Act will have on insurance premiums paid by the Bank.
Capital Requirements. FDIC regulations recognize two types, or tiers,
of capital: core ("Tier 1") capital and supplementary ("Tier 2") capital. Tier 1
capital generally includes common stockholders' equity and noncumulative
perpetual preferred stock, less most intangible assets. Tier 2 capital, which is
limited to 100 percent of Tier 1 capital, includes such items as qualifying
general loan loss reserves, cumulative perpetual preferred stock, mandatory
convertible debt, term subordinated debt and limited life preferred stock;
however, the amount of term subordinated debt and intermediate term preferred
stock (original maturity of at least five years but less than 20 years) that may
be included in Tier 2 capital is limited to 50% of Tier 1 capital.
The FDIC currently measures an institution's capital using a leverage
limit together with certain risk-based ratios. The FDIC's minimum leverage
capital requirement specifies a minimum ratio of Tier 1 capital to average total
assets. Most banks are required to maintain a minimum leverage ratio of at least
4% of total assets. The Bank had a leverage ratio of 7.3% as of March 31, 2006.
The Bank has not been notified by the FDIC of any higher capital requirements
specifically applicable to it.
29
FDIC regulations also establish a measure of capital adequacy based on
ratios of qualifying capital to risk-weighted assets. Assets are placed in one
of four categories and given a percentage weight based on the relative risk of
that category. In addition, certain off-balance-sheet items are converted to
balance-sheet credit equivalent amounts, and each amount is then assigned to one
of the four categories. Under the guidelines, the ratio of total capital (Tier 1
capital plus Tier 2 capital) to risk-weighted assets must be at least 8%, and
the ratio of Tier 1 capital to risk-weighted assets must be at least 4% of total
assets. In evaluating the adequacy of a bank's capital, the FDIC may also
consider other factors that may affect the bank's financial condition. Such
factors may include interest rate risk exposure, liquidity, funding and market
risks, the quality and level of earnings, concentration of credit risk, risks
arising from nontraditional activities, loan and investment quality, the
effectiveness of loan and investment policies, and management's ability to
monitor and control financial operating risks. The Bank had a total risk-based
ratio of 11.6% and a Tier 1 risk-based capital ratio of 9.8% at March 31, 2006.
The Division requires that net worth equal at least 5% of total assets.
Intangible assets must be deducted from net worth and assets when computing
compliance with this requirement. At March 31, 2006, the Bank had a Tier 1
capital to average assets ratio of 7.3%, a Tier 1 capital to risk-weighted
assets ratio of 9.8%, and a total capital to risk-weighted assets ratio of
11.6%.
The Bank's management believes that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future. In this regard, 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 to increase the risk-weighted capital. However, events beyond
the control of the Bank, such as a downturn in the economy in areas where the
Bank has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Bank to meet its capital requirements. For
additional information concerning the Bank's capital, see Note 12 of the Notes
to the Consolidated Financial Statements.
Prompt Corrective Action. The FDIC is required to take certain
supervisory actions against undercapitalized savings institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets
of less than 4%, or a ratio of core capital to total assets of less than 4% (3%
or less for institutions with the highest examination rating) is considered to
be undercapitalized. An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that is
less than 3% is considered to be significantly undercapitalized and an
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be critically undercapitalized. Subject to a narrow exception, the
FDIC is required to appoint a receiver or conservator for a savings institution
that is critically undercapitalized. FDIC regulations also require that a
capital restoration plan be filed with the FDIC within 45 days of the date a
savings institution receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Compliance with the plan must
be guaranteed by any parent holding company in an amount of up to the lesser of
5% of the institution's assets or the amount which would bring the institution
into compliance with all capital standards. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators
and restrictions on growth, capital distributions and expansion. The FDIC also
could take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
At March 31, 2006, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.
Activities and Investments of Insured State-Chartered Banks. Federal
law generally limits the activities and equity investments of FDIC insured,
state-chartered banks to those that are permissible for national banks. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing project, provided that such limited partnership investments may not
exceed 2% of the bank's total assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors', trustees' and
officers' liability insurance coverage or bankers' blanket bond group insurance
coverage for insured depository institutions, and (iv) acquiring or retaining
the voting shares of a depository institution if certain requirements are met.
30
Washington law governs financial institution parity. Primarily, the law
affords Washington chartered commercial banks the same powers as Washington
chartered savings banks. In order for a bank to exercise these powers, it must
provide 30 days notice to the Director of Financial Institutions and the
Director must authorize the requested activity. In addition, the law provides
that Washington chartered commercial banks may exercise any of the powers that
the Federal Reserve has determined to be closely related to the business of
banking and the powers of national banks, subject to the approval of the
Director in certain situations. The law also provides that Washington chartered
savings banks may exercise any of the powers of Washington chartered commercial
banks, national banks and federally chartered savings banks, subject to the
approval of the Director in certain situations. Finally, the law provides
additional flexibility for Washington chartered commercial and savings banks
with respect to interest rates on loans and other extensions of credit.
Specifically, they may charge the maximum interest rate allowable for loans and
other extension of credit by federally chartered financial institutions to
Washington residents.
Environmental Issues Associated With Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
a federal statute, generally imposes strict liability on all prior and present
"owners and operators" of sites containing hazardous waste. However, Congress
created a safe harbor provision to protect secured creditors by providing that
the term "owner and operator" excludes a person whose ownership is limited to
protecting its security interest in the site. Since the enactment of the CERCLA,
this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.
To the extent that legal uncertainty exists in this area, all
creditors, including the Bank, that have made loans secured by properties with
potential hazardous waste contamination (such as petroleum contamination) could
be subject to liability for cleanup costs, which costs often substantially
exceed the value of the collateral property.
Federal Home Loan Bank System. The Bank is a member of the
FHLB-Seattle, which is one of 12 regional FHLBs that administer the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans or advances to members in accordance with policies
and procedures, established by the Board of Directors of the FHLB, which are
subject to the oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing. As of March 31, 2006, the Bank had advances,
including $2.2 million merger premium, totaling $170.7 million from the
FHLB-Seattle, which mature in 2006 through 2030 at interest rates ranging from
3.05% to 7.25%. See "Business -- Deposit Activities and Other Sources of Funds
- -- Borrowings."
As a member, the Bank is required to purchase and maintain stock in the
FHLB-Seattle. At March 31, 2006, the Bank had $12.8 million in FHLB stock, which
was in compliance with this requirement. In past years, the Bank has received
substantial dividends on its FHLB stock until the payment of such dividends was
suspended by the FHLB-Seattle on May 18, 2005. For the year ended March 31,
2006, the Bank received no dividends from the FHLB-Seattle compared to dividends
for the previous year, which averaged 2.25%.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal Reserve System. The Federal Reserve Board requires under
Regulation D that all depository institutions, including savings banks, maintain
reserves on transaction accounts or non-personal time deposits. These reserves
may be in the form of cash or non-interest-bearing deposits with the regional
Federal Reserve Bank. Negotiable order of withdrawal accounts and other types of
accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits at a savings bank. As of
March 31, 2006, the Bank's deposit with the Federal Reserve Bank and vault cash
exceeded its reserve requirements.
31
Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company, generally limiting a single
transaction with the Company to 10% of the Bank's capital and surplus and
limiting all such transactions to 20% of the Bank's capital and surplus. These
transactions, including extensions of credit, sales of securities or assets and
provision of services, also must be on terms and conditions consistent with safe
and sound banking practices that are substantially the same as those prevailing
at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the Community Reinvestment Act. The
Community Reinvestment Act requires the FDIC, in connection with the examination
of the Bank, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the FDIC. Due to the heightened attention being given to the Community
Reinvestment Act in the past few years, the Bank may be required to devote
additional funds for investment and lending in its local community. The Bank was
examined for Community Reinvestment Act compliance and received a rating of
satisfactory in its latest examination.
Dividends. Dividends from the Bank constitute the major source of funds
for dividends which may be paid by the Company to shareholders. The amount of
dividends payable by the Bank to the Company depend upon the Bank's earnings and
capital position, and is limited by federal and state laws, regulations and
policies. According to Washington law, the Bank may not declare or pay a cash
dividend on its capital stock if it would cause its net worth to be reduced
below (i) the amount required for its liquidation account or (ii) the net worth
requirements, if any, imposed by the Director of the Division. Dividends on the
Bank's capital stock may not be paid in an aggregate amount greater than the
aggregate retained earnings of the Bank, without the approval of the Director of
the Division.
The amount of dividends actually paid during any one period will be
strongly affected by the Bank's policy of maintaining a strong capital position.
Federal law further provides that no insured depository institution may make any
capital distribution (which would include a cash dividend) if, after making the
distribution, the institution would be "undercapitalized," as defined in the
prompt corrective action regulations. Moreover, the federal bank regulatory
agencies also have the general authority to limit the dividends paid by insured
banks if such payments should be deemed to constitute an unsafe and unsound
practice.
Privacy Standards. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), which was enacted in 1999, modernized the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. The Bank is subject to OTS regulations
implementing the privacy protection provisions of the GLBA. These regulations
require the Bank to disclose its privacy policy, including identifying with whom
it shares "non-public personal information," to customers at the time of
establishing the customer relationship and annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on October
26, 2001 in response to the terrorist events of September 11, 2001. The USA
Patriot Act gives the federal government new powers to address terrorist threats
through enhanced domestic security measures, expanded surveillance powers,
increased information sharing, and broadened anti-money laundering requirements.
In March 2006, Congress re-enacted certain expiring provisions of the USA
Patriot Act.
32
FirstBank NW Corp.
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight of the Office of Thrift Supervision ("OTS").
Accordingly, the Company is required to register and file reports with the OTS
and is subject to regulation and examination by the OTS. In addition, the OTS
has enforcement authority over the Company and its non-savings institution
subsidiaries, which also permit the OTS to restrict or prohibit activities that
are determined to present a serious risk to the subsidiary savings institution.
Mergers and Acquisitions. The Home Owners Loan Act ("HOLA") and OTS
regulations issued thereunder generally prohibit a savings and loan holding
company, without prior OTS approval, from acquiring more than 5% of the voting
stock of any other savings institution or savings and loan holding company or
controlling the assets thereof. They also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual who
owns or controls more than 25% of the voting shares of such holding company,
from acquiring control of any savings association which is not a subsidiary of
such savings and loan holding company, unless the acquisition is approved by the
OTS. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and regulatory
restrictions on their business activities specified by federal regulations,
which include performing services and holding properties used by a savings
institution subsidiary, activities authorized for savings and loan holding
companies as of March 5, 1987, and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 or authorized
for financial holding companies pursuant to the GLBA.
Qualified Thrift Lender Test. The HOLA provides that any savings and
loan holding company that fails the qualified thrift lender ("QTL") test must,
within one year after the date on which the Bank ceases to be a QTL, register as
and be deemed a bank holding company subject to all applicable laws and
regulations. Currently, the QTL test requires that either an institution qualify
as a domestic building and loan association under the Internal Revenue Code or
that 65% of an institution's "portfolio assets" (as defined) consist of certain
housing and consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion as part of the
65% requirement are: loans made to purchase, refinance, construct, improve or
repair domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets; 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Freddie Mac or Fannie Mae. Portfolio assets
consist of total assets minus the sum of (i) goodwill and other intangible
assets, (ii) property used by the savings institution to conduct its business,
and (iii) liquid assets up to 20% of the institution's total assets. At March
31, 2006, the Bank was in compliance with the QTL test.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the recent
accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies, both
U.S. and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules. The Sarbanes-Oxley Act represents significant federal
involvement in matters traditionally left to state regulatory systems, such as
the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board
of directors and its committees.
33
Item 1A. Risk Factors
- ----------------------
An investment in FirstBank NW Corp.'s stock is subject to risks
inherent to our business. Before making an investment decision, you should
carefully consider the risks and uncertainties described below together with all
of the other information included or incorporated by reference in this report.
The risks and uncertainties described below are not the only ones that affect
us. Additional risks and uncertainties that management is not aware of or
focused on or that management currently deems immaterial may also impair our
business operations. This report is qualified in its entirety by these risk
factors.
If any of the circumstances described in the following risk factors
actually occur to a significant degree, our financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly, and you could lose
all or part of your investment.
The Maturity and Repricing Characteristics of Our Assets and Liabilities are
Mismatched and Subject Us to Interest Rate Risk Which Could Adversely Affect Our
Net Earnings and Economic Value.
Our financial condition and operations are influenced significantly by
general economic conditions, including the absolute level of interest rates as
well as changes in interest rates and the slope of the yield curve. Our
profitability is dependent to a large extent on our net interest income, which
is the difference between the interest received from our interest-earning assets
and the interest expense incurred on our interest-bearing liabilities.
Significant changes in market interest rates or errors or misjudgments in our
interest rate risk management procedures could have a material adverse effect on
our net earnings and economic value.
Our activities, like most financial institutions, inherently involve
the assumption of interest rate risk. Interest rate risk is the risk that
changes in market interest rates will have an adverse impact on our earnings and
underlying economic value. Interest rate risk is determined by the maturity and
re-pricing characteristics of our assets, liabilities and off-balance sheet
contracts and commitments. Interest rate risk is measured by the variability of
financial performance and economic value resulting from changes in interest
rates. Interest rate risk is the primary market risk affecting the Company's
financial performance.
The greatest source of interest rate risk to us results from the
mismatch of maturities or re-pricing intervals for our rate sensitive assets,
liabilities and off-balance sheet contracts. This mismatch or gap is generally
characterized by a substantially shorter maturity structure for interest-bearing
liabilities than interest-earning assets. Additional interest rate risk results
from mismatched re-pricing indices and formulae (basic risk and yield curve
risk), and product caps and floors and early repayment or withdrawal provisions
(option risk), which may be contractual or market driven, that are generally
more favorable to customers than us.
Our primary monitoring tool for assessing interest rate risk is
asset/liability simulation modeling, which is designed to capture the dynamics
of balance sheet, interest rate and spread movements and to quantify variations
in net interest income resulting from those movements under different rate
environments. The sensitivity of our net interest income to changes in the
modeled interest rate environments provides a measurement of interest rate risk.
We also utilize market value analysis, which addresses changes in estimated net
market value of our equity arising from changes in the level of interest rates.
The net market value of equity is estimated by separately valuing our assets and
liabilities under varying interest rate environment. The extent to which assets
gain or lose value in relation to the gains or losses of liability values under
the various interest rate assumptions determines the sensitivity of net equity
value to changes in interest rates and provides an additional measure of
interest rate risk.
Our interest rate risk is affected largely due to the mismatch of the
maturities or re-pricing of our loans and investments compared to deposits and
borrowings. The maturity structure for our interest-bearing liabilities is much
shorter than the interest-earning assets. The on-going monitoring and management
of the risk is an important component of our asset/liability management process,
which is governed by policies established by our Board of Directors that are
reviewed and approved annually. The Board of Directors delegates responsibility
for carrying out the asset/liability management policies to the Asset/Liability
Committee ("ALCO"). In this capacity, ALCO develops guidelines and strategies
impacting our asset/liability management related activities based upon estimated
market risk sensitivity, policy limits and overall market interest rate
levels/trends. Our results of operations may be adversely affected if
management's assumptions are incorrect or interest rate management strategies
prove to be inadequate.
34
Our Loan Portfolio Includes Loans with a Higher Risk of Loss.
We originate construction and land loans, commercial and multifamily
mortgage loans, commercial loans, consumer loans, agricultural mortgage loans
and agricultural loans as well as residential mortgage loans primarily within
our market area. Generally, the types of loans other than the residential
mortgage loans have a higher risk of loss than the residential mortgage loans.
We had approximately $519.7 million outstanding in these types of higher risk
loans at March 31, 2006. Commercial and multifamily mortgage, commercial, and
consumer loans may expose a lender to a greater credit risk than loans secured
by residential real estate because the collateral securing these loans may not
be sold as easily as residential real estate. These loans also have a greater
credit risk than residential real estate for the following reasons and the
reasons discussed under Item 1, "Business-Lending Activities":
o Construction and Land Loans. This type of lending contains the
inherent difficulty in estimating both a property's value at
completion of the project and the estimated cost (including
interest) of the project. If the estimate of construction cost
proves to be inaccurate, we may be required to advance funds
beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion proves
to be inaccurate, we may be confronted at, or prior to, the
maturity of the loan with a project the value of which is
insufficient to assure full repayment. In addition,
speculative construction loans to a builder are often
associated with homes that are not pre-sold, and thus pose a
greater potential risk to us than construction loans to
individuals on their personal residences. Loans on land under
development or held for future construction also poses
additional risk because of the lack of income being produced
by the property and the potential illiquid nature of the
security.
o Commercial and Multifamily Mortgage Loans. These loans
typically involve higher principal amounts than other types of
loans, and repayment is dependent upon income being generated
from the property securing the loan in amounts sufficient to
cover operating expenses and debt service.
o Commercial Loans. Repayment is dependent upon the successful
operation of the borrower's business.
o Consumer Loans. Consumer loans (such as personal lines of
credit) are collateralized, if at all, with assets that may
not provide an adequate source of payment of the loan due to
depreciation, damage, or loss.
o Agricultural Loans. Repayment is dependent upon the successful
operation of the business, which is greatly dependent on many
things outside the control of either us or the borrowers.
These factors include weather, commodity prices, and interest
rates among others.
For additional information, see Item 1, "Business-Lending" and Item 7,
"Management's Discussion of Financial Condition and Results of Operations-Asset
Quality."
If Our Allowance for Loan Losses Is Not Sufficient to Cover Actual Losses, Our
Earnings Could Decrease.
We make various assumptions and judgments about the collectibility of
our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for
loan losses, we review our loans and the loss and delinquency experience, and
evaluate economic conditions. If our assumptions are incorrect, the allowance
for loan losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in the need for additions to our allowance. Material
additions to the allowance could materially decrease our net income. Our
allowance for loan losses of $8.1 million, or 1.27% of total loans and 2,608.33%
of non-performing loans at March 31, 2006.
In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize
further loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities may have a material
adverse effect on our financial condition and results of operations.
35
If External Funds Were Not Available, this Could Adversely Impact Our Growth and
Prospects.
We rely on deposits and advances from the FHLB-Seattle and other
borrowings to fund our operations. Although we have historically been able to
replace maturing deposits and advances if desired, no assurance can be given
that we would be able to replace such funds in the future if our financial
condition or the financial condition of the FHLB or market conditions were to
change.
Although we consider such sources of funds adequate for our liquidity
needs, we may seek additional debt in the future to achieve our long-term
business objectives. There can be no assurance additional borrowings, if sought,
would be available to us, or if available, would be on favorable terms. If
additional financing sources are unavailable or are not available on reasonable
terms, our growth and future prospects could be adversely affected.
Our Profitability Depends Significantly on Economic Conditions in the States of
Washington, Oregon and Idaho.
Our success depends primarily on the general economic conditions of the
States of Washington, Oregon and Idaho and the specific local markets in which
we operate. Unlike larger national or regional banks that are more
geographically diversified, we provide banking and financial services to
customers located primarily in 14 counties of Washington, Oregon and Idaho. The
local economic conditions in our market areas have a significant impact on the
demand for our products and services as well as the ability of our customers to
repay loans, the value of the collateral securing loans and the stability of our
deposit funding sources. Adverse economic conditions unique to these Northwest
markets could have a material adverse effect on our financial condition and
results of operations. Further, a significant decline in general economic
conditions, caused by inflation, recession, acts or terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these state and
local markets and, in turn, also have a material adverse affect of our financial
condition and results of operations.
Strong Competition Within Our Market Area May Limit Our Growth and
Profitability.
Competition in the banking and financial services industry is intense. We
compete in our market areas with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Some of these competitors have substantially greater
resources and lending limits than we do, have greater name recognition and
market presence that benefit them in attracting business, and offer certain
services that we cannot provide. In addition, larger competitors may be able to
price loans and deposits more aggressively than we do. Our profitability depends
upon our continued ability to successfully compete in our market areas. The
greater resources and deposit and loan products offered by some of our
competitors may limit our ability to increase our interest-earning assets. For
additional information see Item 1, "Business-Competition."
The Loss of Key Members of Our Senior Management Team Could Adversely Affect Our
Business.
We believe that our success depends largely on the efforts and
abilities of our senior management. Their experience and industry contacts
significantly benefit us. The competition for qualified personnel in the
financial services industry is intense, and the loss of any of our key personnel
or an inability to continue to attract, retain and motivate key personnel could
adversely affect our business.
We Are Subject to Extensive Government Regulation and Supervision.
We are subject to extensive federal and state regulation and
supervision, primarily through the FirstBank Northwest and certain non-bank
subsidiaries. Banking regulations are primarily intended to protect depositors'
funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect our lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Congress
and federal regulatory agencies continually review banking laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory
policies, including changes in interpretation or implementation of statutes,
regulations or policies, could affect us in substantial and unpredictable ways.
Such changes could subject us to additional costs, limit the types of financial
services and products we may offer and/or increase the ability of non-banks to
offer competing financial services and products, among other things. Failure to
comply with laws, regulations or policies could result in sanctions by
regulatory agencies, civil money penalties and/or reputation damage, which could
have a material adverse affect on our business, financial condition and results
of operations. While we have policies and procedures designed to prevent any
such violations, there can be no assurance that such violations will not occur.
See Item 1, "Business-Regulation".
36
Our Information Systems May Experience an Interruption or Breach in Security.
We rely heavily on communications and information systems to conduct
our business. Any failure, interruption or breach in security of these systems
could result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan and other systems. While we have policies and
procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our information systems, there can be no assurance that
any such failures, interruptions, or security breaches will not occur, or if
they do occur, that they will be adequately addressed. The occurrence of any
failure, interruptions or security breaches of our information systems could
damage our reputation, result in loss of customer business, subject us to
additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability, any of which could have a materially adverse effect on our
financial condition and results of operations.
We Rely on Dividends From Subsidiaries For Most of Our Revenue.
FirstBank NW Corp. is a separate and distinct and legal entity from its
subsidiaries. We receive substantially all of our revenue from dividends from
our subsidiaries. These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt. Various
federal and/or state laws and regulations limit the amount of dividends that
FirstBank Northwest and certain non-bank subsidiaries may pay to FirstBank NW
Corp. Also, our right to participate in a distribution of assets upon a
subsidiary's liquidation or reorganization is subject to the prior claims of the
subsidiary's creditors. In the event FirstBank Northwest is unable to pay
dividends to FirstBank NW Corp., we may not be able to service debt, pay
obligations or pay dividends on FirstBank NW Corp.'s common stock. The inability
to receive dividends from FirstBank Northwest could have a material adverse
effect on our business, financial condition and results of operations. See Item
1, "Business-Regulation."
If We Fail to Maintain an Effective System of Internal Control over Financial
Reporting, We May Not Be Able to Accurately Report Our Financial Results or
Prevent Fraud, and, as a Result, Investors and Depositors Could Lose Confidence
in Our Financial Reporting, Which Could Adversely Affect Our Business, the
Trading Price of Our Stock and Our Ability to Attract Additional Deposits.
If we fail to identify and correct any significant deficiencies in the
design or operating effectiveness of our internal control over financial
reporting or fail to prevent fraud, current and potential shareholders and
depositors could lose confidence in our Company's internal controls and
financial reporting, which could adversely affect our business, financial
condition and results of operations, the trading price of our stock and our
ability to attract additional deposits.
Changes in Accounting Standards May Affect Our Performance.
Our accounting policies and methods are fundamental to how we record
and report our financial condition and results of operations. From time to time
the FASB changes the financial accounting and reporting standards that govern
the preparation of our financial statements. These changes can be difficult to
predict and can materially impact how we report and record our financial
condition and results of operations. In some cases, we could be required to
apply a new or revised standard retroactively, resulting in restating prior
period financial statements.
Item 2. Properties
- -------------------
The Bank operates 20 full-service facilities in Lewiston, Lewiston
Orchards, Moscow, Grangeville, Coeur d'Alene, Post Falls, Boise, and Hayden,
Idaho, Clarkston, Spokane, and Liberty Lake, Washington, and Baker City, La
Grande, Ontario, John Day, Burns, Enterprise, Island City, Vale, and Pendleton,
Oregon and six loan production offices in Lewiston, Coeur d'Alene, Boise, and
Nampa, Idaho, Spokane, Washington, and Baker City, Oregon.
The Company owns the Lewiston, Lewiston Orchards, Moscow, Grangeville,
Coeur d'Alene, Hayden, Idaho, Clarkston, Washington and all Oregon facilities,
and leases the in-store location of the Post Falls branch on a one year optional
term with the initial five year term commencing on March 1, 1999. In November
1999, the Bank opened the newly constructed Liberty Lake branch, which is
located on leased land. The land lease is a ten-year lease. The Boise and
Spokane branches are located on the same property as the loan production
offices.
37
The loan production offices in Lewiston, and Coeur d'Alene, Idaho and
Baker City, Oregon are located in the same facility as the Bank's full-service
office. The loan production office in Boise is an office space leased for five
years, ten and one-half months commencing on April 15, 2002. The loan production
office in Nampa is an office space leased for one year plus five one-year
options commencing on November 1, 2004. The loan production office in Spokane is
an office space leased for 62 months commencing on August 1, 2002.
The corporate office is located in the same building as the Clarkston,
Washington full-service facility.
A portion of the Coeur d'Alene facility is leased to an unaffiliated
brokerage firm for a period of ten years expiring in 2006, with the intension to
extend an option to the terms for an additional five years until November 1,
2011.
At March 31, 2006, the net book value of the properties (including land
and buildings) and the Bank's fixtures, furniture and equipment was $17.6
million. The Company believes that its existing facilities are adequate for the
current level of operations.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 2006.
38
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- -------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
The common stock of the Company is traded on the Nasdaq National Market
under the symbol "FBNW." The table below reflects the high, low, and closing
market prices of its common stock based on the daily price, cash dividends paid
per share, and tangible book value for the last two fiscal years. All share
references reflect the two-for-one stock split paid as of the close of business
on February 9, 2006. The common stock began trading on the Nasdaq National
Market on July 2, 1997. At March 31, 2006, there were approximately 484 holders
of record of common stock of the Company.
Tangible
High Low Close Dividends Book Value*
---- --- ----- --------- -----------
2006 $ 18.620 $ 12.500 $ 18.390 $ 0.355 $10.175
----
First Quarter 14.050 12.500 0.085 9.305
Second Quarter 14.450 13.585 0.085 9.616
Third Quarter 16.000 13.620 0.085 9.896
Fourth Quarter 18.620 15.705 0.100 10.175
2005 $ 14.875 $ 12.250 $ 14.000 $ 0.340 $ 9.000
----
First Quarter 14.875 12.250 0.085 8.460
Second Quarter 14.625 13.295 0.085 8.665
Third Quarter 14.720 13.665 0.085 8.855
Fourth Quarter 14.500 13.290 0.085 9.000
*Tangible book value is computed using actual shares outstanding, excluding
unallocated Employee Stock Ownership Plan ("ESOP") shares.
The payment of dividends on the common stock is subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital and financial condition of the
Company, industry trends and general economic conditions justify the payment of
dividends. The rate of such dividends and the continued payment thereof will
depend upon various factors at the intended time of declaration and payment,
including the Bank's profitability and liquidity, alternative investment
opportunities, and regulatory restrictions on dividend payments and on capital
levels applicable to the Bank. Accordingly, there can be no assurance that any
dividends will be paid in the future. Periodically, the Board of Directors, if
market, economic and regulatory conditions permit, may combine or substitute
periodic special dividends with or for regular dividends. In addition, because
the Company has no significant source of income other than dividends from the
Bank and earnings from investment of the net proceeds of the Conversion retained
by the Company, the payment of dividends by the Company depends in part upon the
amount of the net proceeds from the Conversion retained by the Company and the
Company's earnings thereon and the receipt of dividends from the Bank, which are
subject to various tax and regulatory restrictions on the payment of dividends.
Dividend payments by the Company are subject to regulatory restriction under OTS
policy as well as to limitation under applicable provisions of Washington law.
On April 12, 2006, the Board of Directors declared a cash dividend of
$0.10 per common share to shareholders of record as of May 4, 2006. The dividend
was paid on May 18, 2006.
39
Stock Repurchases
The following table sets forth the Company's repurchases of its
outstanding Common Stock during the fourth quarter of the year ended March 31,
2006.
(c) Total Number (d) Maximum
of Shares Number of
Purchased Shares that
as part May Yet Be
(a) Total Number (b) Average of Publicly Purchased
of Shares Price Paid per Announced Under the
Purchased Share Plans Plans
------------ ------------ ------------ ------------
January 1, 2006 - January 31, 2006 -- -- -- 190,732 (2)
February 1, 2006 - February 28, 2006 -- -- -- 190,732
March 1, 2006 - March 31, 2006 -- -- -- 190,732
-------- --------- -------- -----------
TOTAL -- -- -- 190,732
===========
(1) These shares 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 295,732 shares of the Company's outstanding
common stock. As of March 31, 2006, 105,000 shares had been repurchased
under this program.
Equity Compensation Plan Information
The equity compensation plan information presented under subparagraph
(d) in Part III, Item 12 of this report is incorporated herein by reference.
40
Item 6. Selected Financial Data
- --------------------------------
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Company at the
dates and for the fiscal years indicated. All share references reflect the
two-for-one stock split paid as of the close of business on February 9, 2006.
At March 31,
------------------------------------------------------------------
FINANCIAL CONDITION DATA: 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
(In Thousands)
Total assets $ 846,003 $ 801,122 $ 700,232 $ 332,398 $ 307,840
Loans receivable, net 632,543 562,101 459,114 251,805 234,396
Loans held for sale 3,785 3,999 5,254 5,214 3,740
Cash and cash equivalents 26,903 41,801 38,397 24,741 24,012
Investment securities available-for-sale 16,890 17,427 19,116 16,813 12,524
Investment securities held-to-maturity 31,651 30,907 19,671 -- --
Mortgage-backed securities held-to-maturity 22,312 22,463 22,899 1,969 2,140
Mortgage-backed securities available-for-sale 29,843 39,441 54,128 7,649 9,293
Deposits 570,040 518,676 480,548 203,189 188,857
Securities sold under agreements to repurchase 9,636 16,023 10,487 11,151 7,265
FHLB advances and other borrowings 176,817 185,337 132,056 81,816 79,722
Stockholders' equity 79,130 72,311 69,332 30,064 27,813
Year Ended March 31,
------------------------------------------------------------------
SELECTED OPERATING DATA: 2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
(In Thousands, except per share data)
Interest income $ 52,188 $ 40,631 $ 27,415 $ 20,575 $ 20,248
Interest expense 19,314 13,319 9,934 8,710 9,992
---------- ---------- ---------- ---------- ----------
Net interest income 32,874 27,312 17,481 11,865 10,256
Provision for loan losses (1,799) (1,528) (395) (1,033) (1,064)
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 31,075 25,784 17,086 10,832 9,192
Non-interest income 6,933 6,010 5,516 4,693 4,015
Non-interest expenses 25,584 23,149 16,762 11,699 9,766
---------- ---------- ---------- ---------- ----------
Income before income tax expense 12,424 8,645 5,840 3,826 3,441
Income tax expense 3,908 2,367 1,482 1,054 1,065
---------- ---------- ---------- ---------- ----------
Net income $ 8,516 $ 6,278 $ 4,358 $ 2,772 $ 2,376
========== ========== ========== ========== ==========
Per share data:
Basic earnings per share $ 1.45 $ 1.08 $ 1.13 $ 1.08 $ 0.88
Diluted earnings per share $ 1.41 $ 1.05 $ 1.06 $ 1.04 $ 0.85
Dividends per share $ 0.36 $ 0.34 $ 0.31 $ 0.27 $ 0.22
41
At or For the Year Ended March 31,
----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- ---------- ---------- ---------- ---------
KEY FINANCIAL RATIOS:
Performance Ratios:
Return on average assets (1) 1.03% 0.84% 0.90% 0.87% 0.82%
Return on average equity (2) 11.16 8.85 9.26 9.49 8.47
Average equity to average assets (3) 9.19 9.54 9.71 9.16 9.73
Total equity to total assets at end of year 9.35 9.03 9.90 9.04 9.03
Interest rate spread (4) 4.56 4.38 4.23 4.14 3.86
Net interest margin (5) 4.59 4.38 4.28 4.27 4.05
Average interest-earning assets to average interest-bearing
liabilities 114.83 112.36 113.44 114.96 114.05
Non-interest expense as a percent of average assets 3.08 3.11 3.46 3.67 3.39
Efficiency ratio (6) 61.63 65.91 68.88 67.36 65.44
Dividend payout ratio 25.52 31.27 29.73 25.37 25.60
Bank Equity Ratios:
Tier I capital to average assets 7.28 6.67 6.51 8.40 8.79
Tier I capital to risk-weighted assets 9.81 9.04 9.24 11.84 12.28
Total capital to risk-weighted assets 11.55 10.29 10.50 13.09 13.47
Asset Quality Ratios:
Nonperforming loans as a percent of loans receivable, net 0.05 0.19 0.63 0.50 0.25
Nonperforming assets as a percent of total assets 0.14 0.35 0.50 0.55 0.36
Allowance for loan losses as a percent of total loans receivable 1.27 1.27 1.35 1.33 1.08
Allowance for loan losses as a percent of nonperforming loans 2,608.33 661.86 217.72 272.90 433.67
Net charge-offs to average outstanding loans 0.15 0.12 0.10 0.07 0.12
Allowance for loan losses as a multiple of net charge-offs 8.89 12.34 17.64 18.76 9.90
Averages are based on average daily balances.
(1) Net income divided by average assets.
(2) Net income divided by average equity.
(3) Average equity divided by average assets.
(4) Difference between weighted average yield on interest-earning assets and
weighted average rate on total deposits and borrowed funds.
(5) Net interest income and tax effects as a percentage of average
interest-earning assets.
(6) Non-interest expenses divided by the sum of tax equivalent net interest
income and non-interest income.
42
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operation
- ------------
General
Management's discussion and analysis of financial condition and results
of operation 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.
Management's discussion and analysis of financial condition and results
of operations and other portions of this Annual Report on Form 10-K 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
such safe harbor with respect to all forward-looking statements contained in its
Annual Report. 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
Company'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.
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 on 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. Additional expenses that were incurred in fiscal year
2006 include consulting fees for compliance with the certification provisions
regarding internal controls required by Section 404 of the Sarbanes-Oxley Act,
including Federal Deposit Insurance Corporation Improvement Act ("FDICIA")
certifications on management's assessments on internal controls. Additional
expenses that are expected to be incurred in fiscal year 2007 include
constructing and opening a full service branch in Meridian, Idaho and consulting
fees for additional Sarbanes-Oxley Act and FDICIA compliance. 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 January 4, 2006, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% per share stock dividend on the
Company'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. As a result of the split, 3,022,716 additional
shares were issued increasing common stock by $30,227 and retained earnings were
reduced by $30,227. All references in the accompanying financial statements to
the number of common shares and per-share amounts have been restated to reflect
the two-for-one stock split.
43
Business Strategy. The Company's strategy is to operate as a 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 strives to deliver local decisions to each community served. Our
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 our commercial banking philosophy.
Mission Statement. The mission of the Company is to exceed the expectations of
its shareholders, customers, employees and community. As an independent
community bank, the Bank will deliver excellent service to its consumer and
business customers through knowledgeable and dedicated employees. The Company
will provide convenient access to banking and financial related
products/services that meet the changing needs of our targeted customers. It is
the intent of the Company to achieve this mission profitably, and thereby
ensuring the Company's long-term commitment to all of its stakeholders.
Operating Strategy. Management's goal is to grow FirstBank on a profitable basis
consistent with its mission statement, while expanding the Company's community
banking franchise in existing markets and expanded markets. The Company plans to
achieve this by:
o maintaining a strong credit culture through disciplined credit
administration;
o continuing loan growth through focused new loan origination in the
Company's loan centers;
o enhanced branch deposit growth focused on core deposit growth from
commercial, small business, agriculture and individual customers within the
Company's communities. Existing branch market share and enhanced new branch
performance is essential to deposit growth initiatives;
o seeking to improve net interest margin through a combination of reduced
funding costs and improved pricing levels for loans relative to risk, with
emphasis on construction and commercial lending;
o analyzing profitability of product and business lines and allocating
resources accordingly. Focus will remain on the Company's community banking
mission as these initiatives are addressed;
o expanding our reach to targeted customer base through enhanced delivery
channels;
o enhancing management culture which is driven by a focus on profitability
through decentralized decisions based on clear authorities,
responsibilities and accountabilities;
o establishing a Bank-wide training program that develops employee's
knowledge of products, services, procedures, and sales culture as well as
professional development;
o utilizing technology to gain efficiencies in processing customer
information and servicing support in order to deliver consistent service
and comply with policy, processes and regulations;
o continued diversification of the loan portfolio;
o maintaining Bank capital within policy limits and consistent with the risk
profile of the loan portfolio and other relative risk factors as the Bank
continues to grow;
o maintaining interest rate risk profile within policy and consistent with
asset/liability management objectives. No inordinate interest rate risk
will be positioned into specific rate environments nor will net income
module be initiated outside of interest rate risk policies.
44
Critical Accounting Policies
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. Not all
of these critical accounting policies require management to make difficult,
subjective or complex judgments or estimates. However, management believes that
the following policies and those disclosed could be considered critical within
the SEC's definition. Management believes that the most critical accounting
policies upon which the Company's 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 and the Board of
Directors' regular review of the loan portfolio and consideration of economic
conditions which may affect the ability of borrowers to repay their loans on a
monthly basis. A loan loss grading system assists management in determining the
overall risk in the loan portfolio. Individual loans are reviewed periodically
for classification into six categories: satisfactory, acceptable, special
mention, substandard, doubtful and loss; and are assigned a standard loan loss
percentage. The change in loan types per category is multiplied by the assigned
loan loss percentage to arrive at the basic monthly adjustment to the provision
for loan loss. 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, unemployment rate 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.
Mortgage Servicing Rights ("MSRs"). Determination of the fair value of
MSRs requires the estimation of multiple interdependent variables, the most
important 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 Bank. 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 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 business combinations. The Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets effective January 1, 2002. In accordance with this
Standard, goodwill and other intangibles with indefinite lives are no longer
being amortized but instead will be tested for impairment on an annual basis or
more frequently if impairment indicators arise. Management has completed
impairment testing for the Company's intangibles with indefinite lives and
determined that there was no impairment.
45
Comparison of Financial Condition at March 31, 2006 and March 31, 2005
Assets. Total assets increased $44.9 million, or 5.6%, from $801.1
million at March 31, 2005 to $846.0 million at March 31, 2006. This increase is
primarily the result of $70.4 million in loan growth. The following table
identifies and explains the categories with notable variances for the years
ended March 31, 2006 and 2005:
Dollar Percentage
Balance at Balance at Increase Increase
March 31, 2006 March 31, 2005 (Decrease) (Decrease)
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Noninterest-bearing cash deposits $ 26,637 $ 39,769 $ (13,132) (33.02)%
Interest-bearing cash deposits 266 2,032 (1,766) (86.91)
Mortgage-backed securities,
available-for-sale 29,843 39,441 (9,598) (24.34)
Loans receivable, net 632,543 562,101 70,442 12.53
Other assets 3,313 4,130 (817) (19.78)
The decrease in noninterest bearing deposits 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 help fund loan
growth.
The decrease in available-for-sale mortgage-backed securities was the
result of payments from maturities of $8.9 million, $393,000 decrease in market
value, and $276,000 in amortization.
The increase in net loans receivable was the result of loans originated
in the Company's marketing area, especially commercial real estate and
construction loans in the Boise, Coeur d'Alene, and Spokane markets. Management
has focused on increasing loans receivable as part of the Company's operating
strategy.
The decrease in other assets, including income taxes receivable, was
primarily the result of an $881,000 decrease in the balance of settlement
accounts.
Liabilities. Total liabilities increased $38.1 million, or 5.2%, from
$728.8 million at March 31, 2005 to $766.9 million at March 31, 2006. The growth
in liabilities resulted from deposit growth, which was part of management's
focus in fiscal year 2006, partially offset by a decrease in securities sold
under agreement to repurchase and borrowings. The following table identifies and
explains the categories with notable variances for the fiscal years ended March
31, 2006 and 2005:
Balance at Balance at Dollar Percentage
March 31, 2006 March 31, 2005 Increase Increase
-------------- -------------- -------------- --------------
(Dollars in Thousands)
Noninterest-bearing deposits $ 95,304 $ 76,072 $ 19,232 25.28%
Interest-bearing deposits 474,736 442,604 32,132 7.26
-------------- -------------- -------------- --------------
Total deposits 570,040 518,676 51,364 9.90
Securities sold under agreements
to repurchase 9,636 16,023 (6,387) (39.86)
FHLB advances and other borrowings 176,817 185,337 (8,520) (4.60)
Accrued expenses and other liabilities 9,385 7,319 2,066 28.23
46
The increase in total deposits was the result of increasing the number
of customer accounts. The Company experienced good growth in checking accounts
(core accounts) and certificates of deposits, partially offset by decreases in
savings accounts and money market accounts. Management has focused on increasing
core deposits as part of the Company's operating strategy.
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, deposit
growth, and securities paydowns to repay maturing advances.
Stockholders' Equity. Total equity increased $6.8 million, or 9.4%,
from $72.3 million at March 31, 2005 to $79.1 million at March 31, 2006. This
increase was primarily the result of $8.5 million in net income partially offset
by an increase of $304,000 in unrealized losses on available-for-sale
securities, net of tax benefit, and the Company paying $2.2 million in dividends
to its shareholders during fiscal 2006.
Additional paid-in-capital increased $695,000, or 1.5%, to $45.9
million at March 31, 2006 from $45.2 million at March 31, 2005 as a result of
$432,000 in stock issued from the exercise of stock options and $162,000 in ESOP
shares released. Unearned ESOP shares decreased $84,000 to $635,000 at March 31,
2006 from $719,000 at March 31, 2005. Retained earnings increased $6.3 million
to $33.9 million at March 31, 2006 from $27.6 million at March 31, 2005 as a
result of $8.5 million net income and $2.2 million in dividends paid.
Accumulated other comprehensive income decreased $304,000 to negative $155,000
at March 31, 2006 from $149,000 at March 31, 2005 as a result of changes in
market value on available-for-sale securities.
Comparison of Operating Results for the Years Ended March 31, 2005 and 2006
General. Net income increased $2.2 million, or 35.6%, from $6.3 million
($1.08 per share - basic, $1.05 per share - diluted) for the year ended March
31, 2005 to $8.5 million ($1.45 per share - basic, $1.41 per share - diluted)
for the year ended March 31, 2006. The increase in net income is a result of an
increase in net interest income of $5.6 million, an increase in non-interest
income of $923,000, partially offset by an increase in provision for loan losses
of $271,000, an increase in non-interest expense of $2.4 million, and an
increase in income tax expense of $1.5 million.
Net Interest Income. Net interest income increased $5.6 million, or
20.4%, from $27.3 million for the year ended March 31, 2005 to $32.9 million for
the year ended March 31, 2006. Increases in the tax affected 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 years ended March 31, 2006 and 2005:
Year Ended March 31,
--------------------------------------------------
2006 2005
----------------------- -----------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
---------- ---------- ---------- ----------
(Dollars in Thousands)
Total interest-earning assets $ 753,505 7.15% $ 664,277 6.38%
Total deposits and borrowed funds $ 745,495 2.59 $ 665,003 2.00
---------- ----------
Interest rate spread 4.56% 4.38%
========== ==========
Average interest-earning assets increased as a result of the increase
in average balance of loans receivable. Average total deposits and other
borrowed funds increased as a result of deposit growth and an increase in
average FHLB advances and other borrowings.
47
Total Interest Income. Total interest income increased $11.6 million,
or 28.4%, from $40.6 million for the year ended March 31, 2005 to $52.2 million
for the year ended March 31, 2006. The increase in total interest income is a
result of an increase in interest income on interest-earning assets. The
following table compares detailed average earning asset balances, and associated
yields for the years ended March 31, 2006 and 2005:
Year Ended March 31,
--------------------------------------------------
2006 2005
----------------------- -----------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)
Loans receivable, net $ 603,833 7.66% $ 506,053 6.72%
Loans held for sale 6,184 5.03 4,708 5.67
Mortgage-backed securities 56,789 4.46 68,761 4.50
Investment securities 48,287 6.08 46,438 6.36
Other earning assets 38,412 4.86 38,317 5.56
---------- ---------- ---------- ----------
Total interest-earning assets $ 753,505 7.15% $ 664,277 6.38%
========== ========== ========== ==========
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 6.43% for the year ended March 31, 2005 to 7.70% for the year ended March
31, 2006. The yield on construction loans increased from 8.20% for the year
ended March 31, 2005 to 9.65% for the year ended March 31, 2006.
Interest income from mortgage-backed securities decreased as a result
of the decrease in the average balance on securities from payments of
maturities.
Interest income from investment securities increased as a result of an
increase in the average balance, partially offset by a decrease in the average
yield.
The decrease in interest income on other interest-earning assets is the
result of no dividends being paid on FHLB-Seattle stock, included in equity
securities, for the year ended March 31, 2006 compared to dividends of $284,000
on FHLB-Seattle stock for the year ended March 31, 2005. 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-Seattle stock, included
in equity securities, on its Consolidated Statements of Financial Condition and
Consolidated Statements of Income for the year ended March 31, 2006.
Total Interest Expense. Total interest expense increased $6.0 million,
or 45.0%, from $13.3 million for the year ended March 31, 2005 to $19.3 million
for the year ended March 31, 2006. The following table compares detailed average
balances and associated costs for the years ended March 31, 2006 and 2005:
Year Ended March 31,
--------------------------------------------------
2006 2005
----------------------- -----------------------
Average Average
Balance Costs Balance Costs
---------- ---------- ---------- ----------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 221,834 1.64% $ 219,155 0.70%
Certificates of deposit 244,112 3.19 200,980 2.84
Secutities sold under agreements to repurchase 8,694 2.80 12,808 0.93
FHLB advances and other borrowings 181,529 4.22 158,235 3.77
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 656,169 2.94% $ 591,178 2.25%
========== ========== ========== ==========
48
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.
Provision for Loan Losses. As a result of the Bank's evaluation of
allowance for loan losses, as discussed herein in "Critical Accounting
Policies", the Company's provision for loan losses increased $271,000 or 17.7%
to $1.8 million for the year ended March 31, 2006 from $1.5 million for the year
ended March 31, 2005. The increase in provision for loan losses is a result of
loan growth, mostly in commercial 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.
Non-interest Income. Total non-interest income increased $923,000, or
15.4%, from $6.0 million for the year ending March 31, 2005 to $6.9 million for
the year ending March 31, 2006. The following table summarizes the components of
non-interest income for the years ended March 31, 2006 and 2005:
Year Ended March 31, Dollar Percentage
----------------------- Increase Increase
2006 2005 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Gain on sale of loans $ 1,771 $ 1,044 $ 727 69.64%
Recovery of impairment of
mortgage servicing rights 64 81 (17) (20.99)
Service fees and charges 4,817 4,504 313 6.95
Commissions and other 281 381 (100) (26.25)
---------- ---------- ---------- ----------
Total non-interest income $ 6,933 $ 6,010 $ 923 15.36%
========== ========== ========== ==========
The gain on sale of loans increase is attributable to the increase in
loan originations and sales of loans. Proceeds from the sale of loans increased
$16.8 million, or 20.5%, from $82.3 million for the year ended March 31, 2005 to
$99.2 million for the year ended March 31, 2006.
Service fees and charges are mostly checking insufficient funds fees,
ATM service fees, Visa fees, merchant bank card fees, checking service charges,
and late charges on loans. The Company recognized an increase in fee income from
ATM cards, visa cards and merchant bank cards, partially offset by a slight
decline in fees from overdrawn accounts.
49
Non-interest Expense. Total non-interest expense increased $2.4
million, or 10.5%, from $23.1 million for the year ended March 31, 2005 to $25.6
million for the year ended March 31, 2006. The following table summarizes the
components of non-interest expense for the years ended March 31, 2006 and 2005:
Year Ended March 31, Dollar Percentage
----------------------- Increase Increase
2006 2005 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Compensation and related benefits $ 15,161 $ 14,044 $ 1,117 7.95%
Professional fees 1,135 667 468 70.16
Loan expense 623 148 475 320.95
Other 8,665 8,290 375 4.52
---------- ---------- ---------- ----------
Total non-interest expense $ 25,584 $ 23,149 $ 2,435 10.52%
========== ========== ========== ==========
Compensation and related benefits increased $1.1 million, or 8.0%, from
fiscal 2005 to fiscal 2006. The increase in compensation and related benefits
was a result of regular annual compensation increases for employees during the
year and an increase in health insurance costs. The Company also incurred an
additional expense during the year ended March 31, 2006 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 $468,000 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.
Loan expense increased $475,000 primarily as a result of increases in
loan volume, including increased construction inspection fees, appraisal fees
and credit report expenses.
All other non-interest expense increased $375,000, or 4.5%, to $8.7
million for the year ended March 31, 2006 from $8.3 million for the year ended
March 31, 2005. This increase in other non-interest expense is primarily the
result of increases in advertising and debit and credit card expense.
Income Taxes. Income tax expense increased $1.5 million, or 65.1%, from
$2.4 million for the year ended March 31, 2005 to $3.9 million for the year
ended March 31, 2006. The effective tax rates for the years ended March 31, 2006
and 2005 were 31.46% and 27.38%, 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 Years Ended March 31, 2004 and 2005
General. Net income increased $1.9 million, or 44.1%, from $4.4 million
($1.13 per share - basic, $1.06 per share - diluted) for the year ended March
31, 2004 to $6.3 million ($1.08 per share - basic, $1.05 per share - diluted)
for the year ended March 31, 2005. The Company acquired Oregon Trail on October
31, 2003. For the year ended March 31, 2004, the results of operations include
five months, starting November 2003, of Oregon Trail operations and the year
ended March 31, 2005 include a full year of combined operations. The increase in
net income is a result of an increase in net interest income of $9.8 million, an
increase in non-interest income of $494,000, partially offset by an increase in
the provision for loan losses of $1.1 million, an increase in non-interest
expense of $6.4 million, and an increase in income tax expense of $885,000.
Net Interest Income. Net interest income increased $9.8 million, or
56.2%, from $17.5 million for the year ended March 31, 2004 to $27.3 million for
the year ended March 31, 2005. The yield on interest-earning assets decreased to
6.38% from 6.54% for the fiscal years ended March 31, 2005 and 2004. The cost of
funding, on interest-earning liabilities, decreased to 2.25% from 2.56% for the
fiscal years ended March 31, 2005 and 2004. The Company's interest rate spread
between the yield on interest-earning assets and the rate paid on total deposits
and borrowed funds increased from 4.23% for fiscal 2004 to 4.38% for fiscal
2005.
50
Total Interest Income. Total interest income increased $13.2 million,
or 48.2%, from $27.4 million for the year ended March 31, 2004 to $40.6 million
for the year ended March 31, 2005. The increase in total interest income is a
result of an increase in interest income on interest-earning assets. The
following table compares detailed average earning asset balance, and associated
yields for the years ended March 31, 2005 and 2004:
Year Ended March 31,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Yield Balance Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)
Loans receivable, net $ 506,053 6.72% $ 335,589 6.83%
Loans held for sale 4,708 5.67 7,584 5.26
Mortgage-backed securities 68,761 4.50 35,869 5.16
Investment securities 46,438 6.36 24,840 7.69
Other earning assets 38,317 5.56 36,000 4.69
---------- ---------- ---------- ----------
Total interest-earning assets $ 664,277 6.38% $ 439,882 6.54%
========== ========== ========== ==========
Interest income from loans receivable increased as a result of the
acquisition of Oregon Trail on October 31, 2003. For the year ended March 31,
2004, the results of operations exclude seven months ending October 2003 of
Oregon Trail operations and the year ended March 31, 2005 include a full period
of combined operations. The areas with the largest growth during fiscal 2004
attributable to the Oregon Trail acquisition are the commercial real estate
loans and construction loans.
Interest income from mortgage-backed securities increased as a result
of additional income from the $58.7 million of mortgage-backed securities from
Oregon Trail that became assets of the Company on October 31, 2003 and from
additional income on the $3.0 million purchases of mortgage-backed securities in
the first quarter of fiscal year 2005. Also, in December 2003, the Company
engaged in a $25.0 million leveraged transaction, purchasing mortgage-backed
securities funded by cash and short term FHLB advances. This generated net
interest income, helping offset the costs of depository branches in Hayden and
Boise, Idaho.
Interest income from investment securities increases as a result of
additional income from the $14.0 million of investment securities from Oregon
Trail and from additional income on the $11.5 million purchases of short term
investment securities primarily purchased in the first quarter of fiscal year
2005 in a leveraged transaction.
The increase in other earning assets is the result of the increase in
insurance interest income and dividends from the FHLB-Seattle. Additional income
from insurance is a result of the $14.3 million of insurance policies acquired
from Oregon Trail. Interest income from FHLB dividends was $284,000 and $398,000
for the years ended March 31, 2005 and 2004, respectively.
51
Total Interest Expense. Total interest expense increased by $3.4
million, or 34.1%, from $9.9 million for the year ended March 31, 2004 to $13.3
million for the year ended March 31, 2005. The following table compares detailed
average balances and associated costs for the years ended March 31, 2005 and
2004:
Year Ended March 31,
--------------------------------------------------
2005 2004
----------------------- -----------------------
Average Average
Balance Costs Balance Costs
---------- ---------- ---------- ----------
(Dollars in Thousands)
Savings, checking and
money market accounts $ 219,155 0.70% $ 126,560 0.67%
Certificates of deposit 200,980 2.84 149,626 2.95
Securities sold under agreement to repurchase 12,808 0.93 10,465 0.46
FHLB advances and other borrowings 158,235 3.77 101,106 4.58
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 591,178 2.25% $ 387,757 2.56%
========== ========== ========== ==========
The increase in average balance of total savings, checking, money
market, and certificates of deposit accounts was attributable to the acquisition
of Oregon Trail on October 31, 2003 and management's focus to increase core
deposit accounts as part of the Company's operating strategy.
The increase in the average balance of FHLB advances and other
borrowings is a result of utilizing these sources of funds to fund loan growth
that is not covered by deposits.
Provision for Loan Losses. As a result of the Bank's evaluation of
allowance for loan losses, as discussed herein in "Critical Accounting
Policies", the Company's provision for loan losses increased to $1.5 million for
the year ended March 31, 2005 from $395,000 for the year ended March 31, 2004.
The increase in provision for loan losses is a result of the acquisition of
Oregon Trail. The Company acquired Oregon Trail on October 31, 2003 causing the
results of operations to increase for the year ended March 31, 2005 from the
year ended March 31, 2004. For the year ended March 31, 2004, the results of
operations exclude seven months ending October 2003 of Oregon Trail operations
and the year ended March 31, 2005 include a full period of combined operations.
The increase in provision for loan losses was also a result of loan growth,
mostly in commercial and construction lending.
Non-interest Income. Total non-interest income increased $494,000, or
9.0%, from $5.5 million for year ended March 31, 2004 to $6.0 million for the
year ended March 31, 2005. The following table summarizes the components of
non-interest income for the years ended March 31, 205 and 2004:
Year Ended March 31, Dollar Percentage
----------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Gain on sale of loans $ 1,044 $ 2,188 $ (1,144) (52.29)%
Recovery of impairment of
mortgage servicing rights 81 -- 81 --
Service fees and charges 4,504 3,120 1,384 44.36
Commissions and other 381 208 173 83.17
---------- ---------- ---------- ----------
Total non-interest income $ 6,010 $ 5,516 $ 494 8.96%
========== ========== ========== ==========
Gain on sale of loans decreased $1.1 million, or 52.3%, to $1.0 million
for the year ended March 31, 2005 from $2.2 million for the year ended March 31,
2004. This decrease is attributable to the decrease in refinance loan
originations and sales of loans. Proceeds from the sale of loans decreased $72.8
million, or 46.9%, from $155.1 million for the year ended March 31, 2004 to
$82.3 million for the year ended March 31, 2005.
52
Service fees and charges are mostly checking insufficient funds fees,
ATM service fees, Visa fees, merchant bank card fees, checking service charges,
and late charges on loans. The Company recognized a decline in the insufficient
funds fees as a result of fewer customers overdrawing their accounts.
Non-interest Expense. Total non-interest expense increased $6.4
million, or 38.1%, from $16.8 million for the year ended March 31, 2004 to $23.1
million for the year ended March 31, 2005. The following table summarizes the
components of non-interest expense for the years ended March 31, 2005 and 2004:
Year Ended March 31, Dollar Percentage
----------------------- Increase Increase
2005 2004 (Decrease) (Decrease)
---------- ---------- ---------- ----------
(Dollars in Thousands)
Compensation and related benefits $ 14,044 $ 10,095 $ 3,949 39.12%
Occupancy expense 2,844 2,077 767 36.93
Other 6,261 4,590 1,671 36.41
---------- ---------- ---------- ----------
Total non-interest expense $ 23,149 $ 16,762 $ 6,387 38.10%
========== ========== ========== ==========
Compensation related benefits increased $3.9 million, or 39.1%, from
fiscal 2004 to fiscal 2005. The increase in compensation and related benefits
was a result of an increase in the number of full-time equivalent employees
attributable to growth and additional employees in Oregon resulting from the
acquisition of Oregon Trail. Staff was added for the new retail branches in
Hayden and Boise, Idaho, and the new residential loan center in Nampa, Idaho.
Occupancy expense increased $767,000 primarily attributable to the
acquisition of Oregon Trail on October 31, 2003. For the year ended March 31,
2004, the results of operations exclude seven months ending October 2003 of
Oregon Trial operations and the year ended March 31, 2005 include a full period
of combined operations. Additional occupancy expenses incurred in fiscal 2005
include establishing a new loan production office in Nampa, Idaho and new
branches in Boise and Hayden, Idaho.
All other non-interest expense increased $1.7 million, or 36.4%, to
$6.3 million for the year ended March 31, 2005 from $4.6 million for the year
ended March 31, 2004. This increase in other non-interest expense is
attributable to the purchase of Oregon Trail on October 31, 2003. Professional
fees increased as a result of expenses related to the conversion and training to
convert the entire core processing system into one system to increase
efficiencies, additional regulatory examinations, and some consulting fees for
Sarbanes-Oxley Act and FDICIA compliance and certifications.
Income Taxes. Income tax expense increased $885,000, or 59.7%, from
$1.5 million for the year ended March 31, 2004 to $2.4 million for the year
ended March 31, 2005. The effective tax rates for the years ended March 31, 2005
and 2004 were 27.38% and 25.38%, respectively. The increase in the effective tax
rate is attributable to permanent tax differences on bank owned life insurance
income and tax exempt interest income on securities in relation to taxable
income.
53
Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the years
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 years indicated are
derived by dividing tax effected income or expense by the average daily balance
of assets or liabilities, respectively, for the years ended March 31, 2006, 2005
and 2004.
Year Ended March 31,
-----------------------------------------------------------------------------------------------------------
2006 2005 2004
--------------------------------- ---------------------------------- ----------------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost(1) Balance Dividends Cost(2) Balance Dividends Cost(3)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning
assets (4):
Loans receivable:
Mortgage loans
receivable $ 126,795 $ 8,028 6.33% $ 117,016 $ 7,356 6.29% $ 74,416 $ 5,065 6.81%
Commercial loans
receivable 276,950 21,194 7.70 223,158 14,193 6.43 150,557 9,274 6.25
Construction loans
receivable 85,291 8,233 9.65 53,857 4,416 8.20 36,356 2,832 7.79
Consumer loans
receivable 80,654 5,420 6.72 74,413 4,964 6.67 43,063 3,263 7.58
Agricultural loans
receivable 44,759 3,240 7.24 46,240 2,906 6.28 37,547 2,334 6.22
Unearned loan fees
and discounts
and allowance
for loan losses (10,616) -- -- (8,631) -- -- (6,350) -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans receivable,
net 603,833 46,115 7.66 506,053 33,835 6.72 335,589 22,768 6.83
Loans held for
sale 6,184 311 5.03 4,708 267 5.67 7,584 399 5.26
Mortgage-backed
securities 56,789 2,532 4.46 68,761 3,092 4.50 35,869 1,850 5.16
Investment
securities 48,287 2,069 6.08 46,438 1,991 6.36 24,840 1,161 7.69
Other earning
assets 38,412 1,161 4.86 38,317 1,446 5.56 36,000 1,237 4.69
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
earning assets 753,505 52,188 7.15 664,277 40,631 6.38 439,882 27,415 6.54
---------- ---------- ---------- ---------- ---------- ----------
Non-interest-
earning assets 76,700 78,981 44,684
---------- ---------- ----------
Total assets $ 830,205 $ 743,258 $ 484,566
========== ========== ==========
Interest-earning
liabilities:
Savings, checking
and money
market accounts $ 221,834 3,630 1.64 $ 219,155 1,538 0.70 $ 126,560 844 0.67
Certificates of
deposit 244,112 7,787 3.19 200,980 5,698 2.84 149,626 4,410 2.95
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total deposits 465,946 11,417 2.45 420,135 7,236 1.70 276,186 5,254 1.90
FHLB advances and
other borrowings 181,529 7,654 4.22 158,235 5,964 3.77 101,106 4,632 4.58
Securities sold
under agreement
to repurchase 8,694 243 2.80 12,808 119 0.93 10,465 48 0.46
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest-
bearing
liabilities 656,169 19,314 2.94 591,178 13,319 2.25 387,757 9,934 2.56
---------- ---------- ----------
Total non-interest-
bearing
deposits 89,326 -- 73,825 -- 43,107 --
---------- ---------- ---------- ---------- ---------- ----------
Total deposits and
borrowed funds 745,495 2.59 665,003 2.00 430,864 2.31
---------- ---------- ----------
Non-interest-bearing
liabilities 8,417 7,327 6,638
---------- ---------- ----------
Total liabilities 753,912 672,330 437,502
Total stockholders'
equity 76,293 70,928 47,064
---------- ---------- ----------
Total liabilities and
total stockholders'
equity $ 830,205 $ 743,258 $ 484,566
========== ========== ==========
Net interest income $ 32,874 $ 27,312 $ 17,481
========== ========== ==========
Interest rate spread 4.56% 4.38% 4.23%
========== ========== ==========
Net interest margin 4.59% 4.38% 4.28%
========== ========== ==========
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 114.83% 112.36% 113.44%
========== ========== ==========
See next page for referenced notes
54
(1) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.18% tax rate. The tax benefit on interest
income for the year ended March 31, 2006 is $1.7 million. Excluding
this tax effect, average yields on commercial loans would have been
7.65%, net loans receivable would have been 7.64%, investment
securities would have been 4.28% and other earning assets would have
been 3.02%. Excluding this tax effect, yield on total interest-earning
assets would have been 6.93%, interest rate spread would have been
4.34%, and net interest margin would have been 4.36%.
(2) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.18% tax rate. The tax benefit on interest
income for the year ended March 31, 2005 is $1.8 million. Excluding
this tax effect, average yields on commercial loans would have been
6.36%, net loans receivable would have been 6.69%, investment
securities would have been 4.29%, and other earning assets would have
been 3.77%. Excluding this tax effect, total interest-earning assets
would have been 6.11%, interest rate spread would have been 4.11%, and
net interest margin would have been 4.11%.
(3) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using 39.18% tax rate. The tax benefit on interest
income for the year ended March 31, 2004 is $1.3 million. Excluding
this tax effect, average yields on commercial loans would have been
6.16%, net loans receivable would have been 6.78%, investment
securities would have been 4.67%, and other earning assets would have
been 3.44%. Excluding this tax effect, total interest-earning assets
would have been 6.24%, interest rate spread would have been 3.93%, and
net interest margin would have been 3.97%.
(4) Does not include interest on loans more than 90 days past due or non
accruing loans.
Rate/Volume Analysis
The following table sets forth the effects of changing rates and
volumes on the interest income and interest expense of the Company. Information
is provided with respect to: (i) effects attributable to changes in rate
(changes in rate multiplied by prior volume); (ii) effects attributable to
changes in volume (changes in volume multiplied by prior rate); (iii) effects
attributable to changes in rate/volume (changes in rate multiplied by changes in
volume); and (iv) the net change (the sum of the prior columns).
Year Ended March 31, 2006 Year Ended March 31, 2005
Compared to Year Ended Compared to Year Ended
March 31, 2005 March 31, 2004
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------------- ----------------------------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Interest-earning assets:
Loans receivable (1) $ 4,812 $ 6,537 $ 929 $ 12,278 $ (330) $ 11,565 $ (168) $ 11,067
Loans held for sale (30) 84 (9) 45 31 (151) (12) (132)
Mortgage-backed securities (26) (538) 5 (559) (237) 1,696 (217) 1,242
Investment securities (1) 79 -- 78 (96) 1,009 (83) 830
Other earning assets (288) 4 (1) (285) 122 80 7 209
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net change in income
on interest-earning assets 4,467 6,166 924 11,557 (510) 14,199 (473) 13,216
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings, checking and money
market accounts 2,048 19 25 2,092 38 608 49 695
Certificates of deposit 713 1,223 153 2,089 (168) 1,514 (57) 1,289
FHLB advances and
other borrowings 708 878 104 1,690 (822) 2,617 (464) 1,331
Securities sold under
agreement to repurchase 239 (38) (77) 124 49 10 11 70
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net change in expense
on interest-bearing liabilities 3,708 2,082 205 5,995 (903) 4,749 (461) 3,385
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net
interest income $ 759 $ 4,084 $ 719 $ 5,562 $ 393 $ 9,450 $ (12) $ 9,831
========== ========== ========== ========== ========== ========== ========== ==========
(1) Does not include interest on loans more than 90 days past due or non
accruing loans.
55
Asset and Liability Management
The Company's principal financial objective is to achieve long-term
profitability while reducing its exposure to fluctuating interest rates. The
Company has sought to reduce exposure of its earnings to changes in market
interest rates by attempting to manage the mismatch between asset and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of the Company's interest-earning
assets by retaining for its portfolio shorter term loans and loans with interest
rates subject to periodic adjustment to market conditions and by selling
substantially all of its longer term, fixed-rate residential mortgage loans. The
Company has historically relied on retail deposits as its primary source of
funds. However, because loan growth has exceeded that of deposits, FHLB advances
and brokered CDs have been used to fund the loan growth. Management believes
retail core deposits, compared to brokered and CD deposits, reduce the effects
of interest rate fluctuations because they generally represent a more stable
source of funds. As part of its interest rate risk management strategy, the
Company promotes non-interest-bearing transaction accounts, interest-bearing
accounts, money market accounts, and certificates of deposit with longer
maturities (up to five years) to reduce the interest sensitivity of its
interest-bearing liabilities.
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. The Company's primary
market risk exposure is interest rate risk. The on-going monitoring and
management of the risk is an important component of the Company's
asset/liability management process, which is governed by policies established by
its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out the asset/liability
management policies to the Asset/Liability Committee ("ALCO"). In this capacity,
ALCO develops guidelines and strategies impacting the Company's asset/liability
management related activities based upon estimated market risk sensitivity,
policy limits and overall market interest rate levels/trends.
Off-Balance Sheet Arrangements and Contractual Obligations
Contractual obligations at March 31, 2006 consisted of the following:
One Year to Three Years
Less than Less than Three to Less than Five Years
Total One Year Years Five Years and Greater
--------- --------- --------- ---------- -----------
(In Thousands)
Maturities of FHLB advances and
other borrowings $ 176,817 $ 111,094 $ 13,599 $ 36,177 $ 15,947
Operating leases future minimum
rental payments $ 385 $ 218 $ 167 $ -- $ --
Other commitments at March 31, 2006 consisted of the following:
One Year to Three Years
Less than Less than Three to Less than Five Years
Total One Year Years Five Years and Greater
--------- --------- --------- ---------- -----------
(In Thousands)
Loan commitments $ 144,034 $ 79,961 $ 54,057 $ 965 $ 9,051
Credit card line commitments $ 10,428 $ 10,428 $ -- $ -- $ --
Lines of credit $ 96,830 $ 67,269 $ 8,299 $ 4,571 $ 16,691
Standby letters of credit $ 6,882 $ 6,687 $ 195 $ -- $ --
The Company has signed several contracts with vendors for its data
processing operations. The terms of the contracts expire in one year or less.
The annual fees are paid at the beginning of the terms or 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 $2.2 million for the year ended March 31, 2006.
56
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 March 31, 2006, these commitments
totaled $6.9 million. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds cash, marketable securities, or real estate as collateral
supporting those commitments for which collateral is deemed necessary. The
Company has not been required to perform on any financial guarantees during the
past three years. The Company did not incur any losses on its commitments in
fiscal 2006, 2005 or 2004. The liability recorded associated with standby
letters of credit at March 31, 2006 and 2005 was $21,000 and $25,000,
respectively.
Liquidity and Capital Resources
The primary function of asset/liability management is to ensure
adequate liquidity and 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, 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 Consolidated Statements of Cash
Flows for financial information concerning the Company's liquidity position.
The primary investing activity of the Company is the origination of
loans. During the year ended March 31, 2006, the Company originated loans,
excluding loans purchased and loan participations, based upon new production in
the amount of $559.0 million. The Company maintains a laddered maturity of
securities that provides prepayments and payments at maturity and a portfolio of
available-for-sale securities that could be converted to cash quickly. Proceeds
from maturity of securities provided $9.4 million and $17.8 million for the
years ended March 31, 2006 and 2005, respectively. Proceeds from the sale of
loans provided $99.2 million for the year ended March 31, 2006 and $82.3 million
for the year ended March 31, 2005.
For the year ended March 31, 2006, proceeds from maturities and sale of
securities were $9.4 million and purchases of securities were $854,000, with the
difference used to fund loan growth. In December 2003, the Company engaged in a
$25.0 million leveraged transaction, purchasing mortgage-backed securities
funded by cash and short term FHLB advances. This generated net interest income,
helping defray the costs of depository branches in Hayden, Idaho and Boise,
Idaho. Mortgage-backed and investment securities of $26.1 million were purchased
to minimize extension risk by shortening the maturity dates of securities given
the current interest rate environment.
57
The primary financing activities of the Company are customer deposits,
brokered deposits, and FHLB advances. As indicated on the Company's Consolidated
Statements of Cash Flows, deposits provided $51.8 million for the year ended
March 31, 2006, which consisted of a $49.8 million increase in branch deposits
and $2.0 million increase in brokered deposits. In addition, the Company
maintains a credit facility with the FHLB-Seattle, which provides for
immediately available advances. FHLB advances totaled $170.7 million, including
a $2.2 million merger premium, at March 31, 2006. 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 Bank also maintains an
additional credit facility with US Bank with available funds totaling $20.0
million. There were no outstanding balances under this facility at March 31,
2006 and 2005. The Bank maintains an additional credit facility with the Federal
Reserve Bank of San Francisco with available funds totaling 75% of pledged
loans, or $538,000 at March 31, 2006. There were no outstanding balances under
this facility at March 31, 2006 and 2005. The Company maintains an additional
credit facility with US Bank with available funds totaling $3.5 million. There
were outstanding balances of $3.1 million at March 31, 2006, and $2.2 million at
March 31, 2005 under this facility. Cash provided by advances from FHLB and
other borrowing facilities was $786.1 million for the year ended March 31, 2006.
Cash used for payments on these advances was $794.0 million for the year ended
March 31, 2006. As of March 31, 2006 and 2005, there were $40.8 million and
$45.8 million of FHLB advances that were putable, respectively. The Bank also
has used other sources of funding when the need arises including brokered
certificates of deposit (up to 15% of assets under current Board policy) and the
national certificates of deposit markets. As of March 31, 2006 and 2005, there
were brokered certificates of deposits of $44.7 million and $42.7 million,
respectively.
At March 31, 2006, the Company held cash and cash equivalents of $26.9
million, or 3.2% of total assets. In addition, at that date $46.7 million of the
Company's investment securities were classified as available-for-sale.
The Company has commitments that have a future impact on the Company's
liquidity position. Because some commitments are expected to expire without
being drawn upon, the total commitment amounts do not represent future cash
requirements. At March 31, 2006, the Company had loan commitments totaling
$144.0 million, and undisbursed lines of credit and standby letters of credit
totaling $103.7 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 March 31,
2006 totaled $177.8 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 savings certificates to retain
deposits in changing interest rate environments.
The Bank is required to maintain specific amounts of capital pursuant
to FDIC and State of Washington requirements. As of March 31, 2006, the Bank was
in compliance with all regulatory capital requirements effective as of that date
with Tier 1 Capital to average assets, Tier 1 Capital to risk-weighted assets
and total capital to risk-weighted assets of 7.3%, 9.8% and 11.6%, respectively.
For a detailed discussion of regulatory capital requirements, see "Regulation -
State Regulation and Supervision" and "--Capital Requirements."
58
Impact of New Accounting Standards
In March 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No 156, Accounting for Services of Financial Assets. This statement revises
and clarifies the criteria for derecognition of transferred financial assets and
places restrictions on the ability of a qualifying special purpose entity to
roll over beneficial interests such as short-term commercial paper. This
statement also will permit, but not require, an entity to account for one or
more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at
fair value, with changes in fair value recorded in income. The statement is
effective as of the beginning of the first fiscal year that begins after
September 15, 2006. Management is currently evaluating the effect of the
statement on the Company's results of operations and financial condition.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. This statement permits, but does not require, fair
value accounting for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance SFAS 133. The
statement also subjects beneficial interests issued by securitization vehicles
to the requirements of SFAS 133. The statement is effective as of January 1,
2007 with earlier adoption permitted. Management is currently evaluating the
effect of the statement on the Company's results of operations and financial
condition.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment.
This statement replaces SFAS No. 123, Accounting for Stock-Based Compensation
and supersedes Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 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. SFAS 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 (other than those filing as small business issuers) will be required to
apply SFAS No. 123(R) as of the first annual reporting period that begins after
June 15, 2005. The Company adopted the provisions of SFAS No. 123(R) effective
April 1, 2006.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time as a result of inflation. The primary impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
59
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
and five-year horizon, it also utilizes additional tools to monitor potential
longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on
the interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet as well as for
off-balance-sheet derivative financial instruments, if any. This sensitivity
analysis is compared to ALCO policy limits which specify a maximum tolerance
level for NII exposure over a one year horizon, assuming no balance sheet
growth, given both a 200 basis point (bp) upward and 100 or 200 bp downward
shifts in interest rates. A parallel and pro rata shift in rates over a 12-month
period is assumed. Based on the asset sensitivity of the balance sheet at March
31, 2006, the Bank is expecting to be well positioned to benefit from rising
rates and minimize negative impact of declining rates. If rates were to sustain
a 200 bp increase, net interest income would be expected to rise by 1.04%, all
else being equal. If rates were to sustain a 200 bp decrease, net interest
income would be expected to decline by 3.83%, all else being equal. The
following reflects the Company's NII sensitivity analysis as of March 31, 2006
and 2005 as compared to the 10.00% Board approved policy limit.
March 31, 2006: -200 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $ 34,002 $ 35,354 $ 35,723
NII $ Change -1,353 -- 368
NII % Change -3.83% -- 1.04%
March 31, 2005: -100 BP Flat +200 BP
------- ---- -------
(Dollars in Thousands)
Year 1 NII $ 29,070 $ 29,698 $ 30,206
NII $ Change (628) -- 508
NII % Change -2.11% -- 1.71%
The preceding sensitivity analysis does not represent a forecast for
the Company and should not be relied upon an indicator of expected future
operating results. These hypothetical estimates are based upon numerous
assumptions including the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows, and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might take in responding to or anticipating changes in interest rates.
60
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
For the Company's Consolidated Financial Statements and notes thereto
required by this item, see the index on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
Item 9A. Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rules
13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) 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 were effective as of May 31, 2006 in ensuring
that the information required to be disclosed by the Company in the
reports it files or submits under the Act 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.
(b) Changes in Internal Controls: There have not been any changes in the
Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) of the Act) during the most recent fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Company's business. 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.
Item 9B. Other Information.
- ---------------------------
None.
61
PART III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
The information required by this Item is incorporated by reference from
the sections captioned "Proposal 1 - Election of Directors" and "Meetings and
Committees of the Board of Directors" in the Company's definitive Proxy
Statement concerning the Annual Meeting of Shareholders (the "2006 Proxy
Statement").
For information regarding the executive officers of the Company and the
Bank, see the information contained herein under the section captioned "Item 1
Business - Personnel - Executive Officers of the Company and Bank" above.
Audit Committee Financial Expert
--------------------------------
The Audit Committee, consists of Directors Cox (Chairman), Jurgens,
Gentry and Powell. Each member of the Audit Committee is independent, in
accordance with the requirements for companies quoted on The Nasdaq Stock
Market. The Board of Directors has designated Director Powell as the audit
committee financial expert, as defined by the SEC's Regulation S-K. Director
Powell is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act.
Code of Ethics
--------------
On January 15, 2004, the Board of Directors adopted the Officer and
Director Code of Ethics, which was reviewed and approved by the Board on
September 16, 2004 in conjunction with the review and approval of the Bank's
Personnel Policy and Procedures. On March 3, 2005 and May 25, 2006, the Code of
Ethics was reviewed by the Corporate Governance and Nominating Committee and no
changes or amendments were recommended. The Code is applicable to each of the
Company's officers and employees, including the principal executive officer and
senior financial officers, and requires individuals to maintain the highest
standards of professional conduct. A copy of the Code of Ethics is being filed
as Exhibit 14 to this Form 10-K and is available on the Company's website at
www.fbnw.com.
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The information required by this Item with respect to Item 405 of
Regulation S-K is incorporated by reference to the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" in the 2006 Proxy Statement.
Item 11. Executive Compensation
- -------------------------------
The information required by this Item is incorporated by reference to
the sections captioned "Directors' Compensation" and "Executive Compensation" in
the 2006 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- ---------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this Item is incorporated by reference to
the sections captioned "Security Ownership of Certain Beneficial Owners
and Management" in the 2006 Proxy Statement.
(b) Security Ownership of Management
The information required by this Item is incorporated by reference to
the sections caption "Security Ownership of Certain Beneficial Owners
and Management" in the 2006 Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
62
(d) Equity Compensation Plan Information
The following table sets forth certain information with respect to
securities to be issued under the Company's equity compensation plans
as of March 31, 2006. All references reflect the two-for-one stock
split paid as of the close of business on February 9, 2006.
(a) (b) (c)
Number of Weighted- Number of securities
securities to be average remaining available for
issued upon exercise price future issuance under
exercise of of outstanding equity compensation
outstanding options, plans (excluding
options, warrants warrants and securities reflected
Plan category and rights rights in column (a))
------------------------------ --------------- --------------- ---------------
Equity compensation plans
approved by security holders:
1998 Stock Option Plan 224,480 $ 8.69 53,250
1999 Management Recognition
and Development Plan (1) -- $ -- --
Oregon Trail 1998 Stock Option
Plan 48,776 $ 7.31 --
Equity compensation plans not
approved by security holders: N/A N/A N/A
------- ------ ------
Total 273,256 $ 8.44 53,250
======= ====== ======
(1) During fiscal 1999, 158,700 shares of restricted stock were awarded to
the Company's directors and certain employees. The fair market value
at the date of the award was $7.905 per share. As of March 31, 2006,
there were no restricted shares issued and outstanding pursuant to the
1999 Management Recognition and Development Plan.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The information required by this Item is incorporated by reference to
the information under the caption "Transactions with Management" in the 2006
Proxy Statement.
Item 14. Principal Accounting Fees and Services
- -----------------------------------------------
This information set forth under the section captioned "Ratification of
Appointment of Independent Auditors" in the 2006 Proxy Statement is incorporated
herein by reference.
63
Item 15. Exhibits, Financial Statement Schedules
- ------------------------------------------------
(a) 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 Corp. and Clyde E. Conklin (4)
10.2 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Larry K. Moxley (4)
10.3 Salary Continuation Agreement between First Federal
Bank of Idaho, F.S.B. and Clyde E. Conklin (4)
10.4 Salary Continuation Agreement between First Federal
Bank of Idaho, F.S.B. and Larry K. Moxley (4)
10.5 Management Recognition and Development Plan (5)
10.5 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Richard R.
Acuff (6)
10.6 1998 Stock Option Plan (5)
10.6 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Terence A. Otte(7)
10.7 Oregon Trail 1998 Stock Option Plan (8)
10.7 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Donn L. Durgan (7)
10.8 FirstBank Northwest Executive Non-Qualified
Retirement Plan (4)
10.9 FirstBank Northwest Deferred Compensation Plan (4)
14 Code of Ethics
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting
Firm
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 exhibits 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 exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2005 filed on
November 14, 2005 and to the Registrant's Current Report on Form 8K
filed on March 17, 2005.
(3) Incorporated by reference to the exhibits 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 Quarterly Report on Form
10-Q for the quarter ended December 31, 2005 filed on February 13,
2006.
(5) Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-8 filed on September 28, 1998.
(6) Incorporated by reference to the Registrant's Current Report on Form
8-K filed on October 5, 2005.
(7) 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.
(8) Incorporated by reference to the exhibits to the Registrant's
Registration Statement on Form S-8 filed on November 5, 2003.
64
(b) Financial Statement Schedules
The Consolidated Financial Statements and Notes thereto are
included in Item 8 of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 30, 2006 By: /s/ CLYDE E. CONKLIN
-------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ---------- ----- ----
/s/ CLYDE E. CONKLIN President, Chief May 30, 2006
- ---------------------------- Executive Officer and
Clyde E. Conklin Director (Principal
Executive Officer)
/s/ LARRY K. MOXLEY Executive Vice President, May 30, 2006
- ---------------------------- Chief Financial Officer,
Larry K. Moxley and Director (Principal
Financial Officer)
/s/ CYNTHIA M. MOORE Controller May 30, 2006
- ---------------------------- (Principal Accounting Officer)
Cynthia M. Moore
/s/ STEVE R. COX Director and Chairman of May 30, 2006
- ---------------------------- the Board
Steve R. Cox
/s/ JAMES N. MARKER Director and First Vice May 30, 2006
- ---------------------------- Chairman
James N. Marker
/s/ W. DEAN JURGENS Director May 30, 2006
- ----------------------------
W. Dean Jurgens
/s/ RUSSELL H. ZENNER Director May 30, 2006
- ----------------------------
Russell H. Zenner
/s/ JOHN W. GENTRY Director May 30, 2006
- ----------------------------
John W. Gentry
/s/ SANDRA T. POWELL Director May 30, 2006
- ----------------------------
Sandra T. Powell
/s/ MICHAEL F. REULING Director May 30, 2006
- ----------------------------
Michael F. Reuling
65
INDEX TO EXHIBITS
14 Code of Ethics
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
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
66
FirstBank NW Corp. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Financial Statements:
Consolidated Statements of Financial Condition F-3 - F-4
Consolidated Statements of Income F-5
Consolidated Statements of Comprehensive Income F-6
Consolidated Statements of Changes in Stockholders' Equity F-7 - F-8
Consolidated Statements of Cash Flows F-9 - F-10
Summary of Accounting Policies F-11 - F-20
Notes to Consolidated Financial Statements F-21 - F-57
F-1
- --------------------------------------------------------------------------------
Financial Statements
- --------------------
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
FirstBank NW Corp. and Subsidiaries
Clarkston, Washington
We have audited the accompanying consolidated statement of financial condition
of FirstBank NW Corp. and subsidiaries as of March 31, 2006 and 2005, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the years ended March 31, 2006, 2005,
and 2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement in all material respects.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statements presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FirstBank NW Corp. and subsidiaries as of March 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for the years
ended March 31, 2006, 2005, and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moss Adams LLP
Spokane, Washington
May 26, 2006
F-2
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------
ASSETS
March 31,
---------------------------
2006 2005
------------ ------------
Cash and cash equivalents:
Noninterest-bearing cash deposits $ 26,637 $ 39,769
Interest-bearing cash deposits 266 2,032
------------ ------------
Total cash and cash equivalents 26,903 41,801
Investment securities: (Note 2)
Held-to-maturity, fair value of $31,440 and $30,869 31,651 30,907
Available-for-sale 16,890 17,427
Mortgage-backed securities: (Note 2)
Held-to-maturity, fair value of $21,661 and $22,147 22,312 22,463
Available-for-sale 29,843 39,441
Loans held for sale 3,785 3,999
Loans receivable, net of allowance for loan losses of
$8,138 in 2006 and $7,254 in 2005 (Note 4) 632,543 562,101
Accrued interest receivable 4,657 3,834
Equity securities, at cost (Note 3) 12,789 12,789
Premises and equipment, net (Note 6) 17,558 18,688
Bank-owned and cash surrender value of life insurance policies 24,415 23,318
Mortgage servicing rights 533 614
Goodwill (Note 7) 16,599 16,683
Other intangible assets (Note 7) 2,212 2,927
Other assets 3,313 4,130
------------ ------------
TOTAL ASSETS $ 846,003 $ 801,122
============ ============
See accompanying notes. F-3
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
---------------------------
2006 2005
------------ ------------
LIABILITIES
Deposits: (Note 9)
Noninterest-bearing deposits $ 95,304 $ 76,072
Interest-bearing deposits 474,736 442,604
------------ ------------
Total deposits 570,040 518,676
Securities sold under agreements to repurchase 9,636 16,023
Advances from borrowers for taxes and insurance 972 913
FHLB advances and other borrowings (Note 10) 176,817 185,337
Deferred income tax liability, net (Note 11) 23 543
Accrued expenses and other liabilities 9,385 7,319
------------ ------------
TOTAL LIABILITIES 766,873 728,811
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 20)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 49,500,000 and
5,000,000 shares authorized, 6,053,186 and 5,997,190
shares issued, 5,928,312 and 5,855,604 shares
outstanding at March 31, 2006 and 2005, respectively 61 30
Additional paid-in capital 45,944 45,249
Unearned ESOP shares (635) (719)
Retained earnings, substantially restricted 33,915 27,602
Accumulated other comprehensive income (loss) (155) 149
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 79,130 72,311
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 846,003 $ 801,122
============ ============
See accompanying notes. F-4
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Interest and dividend income:
Loans receivable $ 46,426 $ 34,102 $ 23,167
Mortgage-backed securities 2,532 3,092 1,850
Investment securities, taxable 726 704 416
Investment securities, tax-exempt 1,343 1,287 745
Other interest-earning assets 1,161 1,446 1,237
------------ ------------ ------------
Total interest and dividend income 52,188 40,631 27,415
------------ ------------ ------------
Interest expense:
Deposits 11,417 7,236 5,253
FHLB advances and other borrowings 7,654 5,964 4,633
Securities sold under agreements to repurchase 243 119 48
------------ ------------ ------------
Total interest expense 19,314 13,319 9,934
------------ ------------ ------------
Net interest income 32,874 27,312 17,481
Provision for loan losses (1,799) (1,528) (395)
------------ ------------ ------------
Net interest income after provision for loan losses 31,075 25,784 17,086
------------ ------------ ------------
Non-interest income:
Gain on sale of loans 1,771 1,044 2,188
Recovery of impairment of mortgage servicing rights, net 64 81 --
Service fees and charges 4,817 4,504 3,120
Commissions and other 281 381 208
------------ ------------ ------------
Total non-interest income 6,933 6,010 5,516
------------ ------------ ------------
Non-interest expenses:
Compensation and related benefits 15,161 14,044 10,095
Occupancy 2,901 2,844 2,077
Supplies and postage 912 994 681
Data and automated teller machine processing 936 963 780
Professional fees 1,135 667 283
Advertising 676 542 506
Travel and meals 272 240 154
Impairment of mortgage servicing rights, net -- -- 121
Debit and credit card expense 1,248 977 681
Telephone 417 445 294
Insurance 387 315 232
Bank service charges 77 159 170
Charitable contributions 109 75 92
Organizational dues 110 106 75
Loan expense 623 148 103
Foreclosed real estate expense -- 118 107
Other 620 512 311
------------ ------------ ------------
Total non-interest expense 25,584 23,149 16,762
------------ ------------ ------------
Income before income tax expense 12,424 8,645 5,840
Income tax expense 3,908 2,367 1,482
------------ ------------ ------------
NET INCOME $ 8,516 $ 6,278 $ 4,358
============ ============ ============
Basic earnings per share $ 1.45 $ 1.08 $ 1.13
Diluted earnings per share $ 1.41 $ 1.05 $ 1.06
Weighted average common shares outstanding - basic 5,879,598 5,792,614 3,851,608
Weighted average common shares outstanding - diluted 6,020,332 5,995,260 4,111,270
See accompanying notes. F-5
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------
(Dollars in Thousands)
- ----------------------------------------------------------------------------------------------------------
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Net income $ 8,516 $ 6,278 $ 4,358
------------ ------------ ------------
Other comprehensive income (loss):
Net change in unrealized gain (loss) on securities
available-for-sale (512) (1,844) 622
Less deferred income tax (benefit) provision 208 726 (240)
Net change in unrealized gain on cash flow hedge -- (38) (208)
Less deferred income tax provision -- 15 81
------------ ------------ ------------
Net other comprehensive income (loss) (304) (1,141) 255
------------ ------------ ------------
COMPREHENSIVE INCOME $ 8,212 $ 5,137 $ 4,613
============ ============ ============
See accompanying notes. F-6
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Retained Compre- Total
Common Stock Additional Unearned Earnings, hensive Stock-
--------------------- Paid-In ESOP Deferred Substantially Income holders'
Shares Amount Capital Shares Compensation Restricted (Loss) Equity
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2003 2,761,984 $ 14 $ 9,842 $ (884) $ (157) $ 20,214 $ 1,035 $ 30,064
Repurchase of common stock (335,964) (2) (5,121) (5,123)
Amortization of deferre
compensation 157 157
Dividends paid (1,296) (1,296)
Net change in unrealized gain
on securities available
for sale, net of tax 382 382
Net change in unrealized gain
on cash flow hedge, net of tax (127) (127)
ESOP shares released 139 82 221
Stock issued from the exercise
of stock option 493,946 2 2,811 2,813
Stock issued in acquisition 2,960,128 15 33,213 33,228
Stock options issued in
acquisition 4,563 4,563
Tax benefit of stock options
exercised 92 92
Net income 4,358 4,358
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2004 5,880,094 29 45,539 (802) -- 23,276 1,290 69,332
Repurchase of common stock (187,864) (1) (2,646) (2,647)
Dividends paid (1,952) (1,952)
Net change in unrealized gain
on securities available
for sale, net of tax (1,118) (1,118)
Net change in unrealized gain
on cash flow hedge, net of tax (23) (23)
ESOP shares released 152 83 235
Stock issued from the exercise
of stock option 304,960 2 2,142 2,144
Tax benefit of stock options
exercised 62 62
Net income 6,278 6,278
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2005 5,997,190 $ 30 $ 45,249 $ (719) $ -- $ 27,602 $ 149 $ 72,311
--------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-7
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Retained Compre- Total
Common Stock Additional Unearned Earnings, hensive Stock-
--------------------- Paid-In ESOP Deferred Substantially Income holders'
Shares Amount Capital Shares Compensation Restricted (Loss) Equity
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2005 5,997,190 $ 30 $ 45,249 $ (719) $ -- $ 27,602 $ 149 $ 72,311
Dividends paid (2,173) (2,173)
Net change in unrealized gain
on securities available
for sale, net of tax (304) (304)
ESOP shares released 162 84 246
Stock issued from the exercise
of stock options 55,996 1 432 433
Stock split 30 (30)
Tax benefit of stock options
exercised 101 101
Net income 8,516 8,516
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, March 31, 2006 6,053,186 $ 61 $ 45,944 $ (635) $ -- $ 33,915 $ (155) $ 79,130
--------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes. F-8
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,516 $ 6,278 $ 4,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,429 1,381 1,047
Amortization (accretion), net 109 (492) (422)
Provision for loan losses 1,799 1,528 395
Net increase in bank-owned and cash surrender value of life insurance (1,097) (1,062) (620)
Gain on sale of loans held for sale (1,771) (1,044) (2,188)
Proceeds from sale of loans held for sale 99,160 82,317 155,127
Originations of loans held for sale (97,175) (79,891) (154,249)
Other (gains) losses, net (44) (111) 83
Deferred income taxes (312) 953 (352)
FHLB stock dividends -- (284) (398)
Deferred compensation expense -- -- 157
ESOP compensation expense 246 235 221
Impairment (recovery) of mortgage servicing rights (64) (81) 121
Changes in assets and liabilities:
Accrued interest receivable and other assets (462) (184) 2,375
Income taxes receivable 218 282 272
Accrued expenses and other liabilities 2,025 405 (1,486)
------------ ------------ ------------
Net cash provided by operating activities 12,577 10,230 4,441
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of mortgage-backed securities; held-to-maturity 81 339 159
Proceeds from maturities of mortgage-backed securities; available-for-sale 8,928 16,408 9,724
Proceeds from maturities of investment securities; available-for-sale 367 960 289
Proceeds from maturities of investment securities; held-to-maturity 22 44 --
Proceeds from sale of mortgage-backed securities; available-for-sale -- -- 21,671
Proceeds from sale of investment securities; available-for-sale -- -- 2,774
Proceeds from call of mortgage-backed securities; held-to-maturity -- 19 --
Purchase of mortgage-backed securities; held-to-maturity -- -- (20,871)
Purchase of mortgage-backed securities; available-for-sale -- (3,028) (19,328)
Purchase of investment securities; held-to-maturity (853) (11,364) (10,217)
Purchase of investment securities; available-for-sale (1) (117) (382)
Other net change in loans receivable (72,393) (105,412) (11,321)
Net cash in acquisition -- -- 24,707
Purchases of premises and equipment (299) (1,899) (3,336)
Proceeds from disposition of assets -- 90 2
Proceeds from the sale of foreclosed and repossessed assets 821 1,015 888
------------ ------------ ------------
Net cash used by investing activities (63,327) (102,945) (5,241)
------------ ------------ ------------
See accompanying notes. F-9
- --------------------------------------------------------------------------------
FIRSTBANK NW CORP. AND SUBSIDIARIES
- -----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 51,842 $ 38,968 $ 19,331
Net increase (decrease) in securities sold under agreements to repurchase (6,387) 5,536 (664)
Net increase (decrease) in advances from borrowers for taxes
and insurance 59 (47) (237)
FHLB advances and other borrowings 786,115 636,722 165,069
Repayments on FHLB advances and other borrowings (794,037) (582,605) (165,437)
Repurchase of common stock -- (2,647) (5,123)
Cash dividends paid on common stock (2,173) (1,952) (1,296)
Proceeds from the exercise of stock options 433 2,144 2,813
------------ ------------ ------------
Net cash provided by financing activities 35,852 96,119 14,456
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (14,898) 3,404 13,656
Cash and cash equivalents, beginning of year 41,801 38,397 24,741
------------ ------------ ------------
Cash and cash equivalents, end of year $ 26,903 $ 41,801 $ 38,397
============ ============ ============
Supplemental disclosures for cash flow information:
Cash paid during the year for:
Interest $ 19,405 $ 14,069 $ 9,997
============ ============ ============
Income taxes $ 4,695 $ 2,067 $ 1,628
============ ============ ============
Noncash investing and financing activities:
Unrealized gain (loss) on securities; available for sale, net of tax $ (304) $ (1,118) $ 382
============ ============ ============
Unrealized gain on interest rate swap, net of tax $ -- $ (23) $ (127)
============ ============ ============
Transfer from loans receivable to real estate acquired
through foreclosure $ -- $ 984 $ 1,192
============ ============ ============
Transfer from loans receivable to repossessed assets acquired
through repossession $ 175 $ 117 $ 70
============ ============ ============
Loans receivable charged to allowance for loan losses $ 1,033 $ 698 $ 478
============ ============ ============
Financing of real estate sold $ -- $ 522 $ --
============ ============ ============
See accompanying notes. F-10
- --------------------------------------------------------------------------------
Note 1 - Summary of Accounting Policies
Organization and principles of consolidation:
FirstBank NW Corp. (the Company) was organized as a Delaware corporation on
March 12, 1997, to acquire all of the capital stock of FirstBank Northwest (the
Bank) as part of the Bank's conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank (the Conversion) and to
complete an initial public offering of the Company's common stock. On January
30, 1998, the Bank converted to a Washington chartered savings bank and on
September 1, 1999 the Company changed its state of incorporation from Delaware
to Washington. The Company is the parent company of the Bank and of Tri Star
Financial Corporation (Tri Star), and Pioneer Development Corp., which are
collectively referred to as the Company and constitute these consolidated
financial statements. All significant intercompany transactions and balances are
eliminated in consolidation.
On October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. (Oregon Trail) and its wholly-owned subsidiary, Pioneer Bank, A
Federal Savings Bank (Pioneer Bank), for approximately $36.5 million in cash and
2,960,128 shares of FirstBank common stock for consideration of the 3,108,657
shares of Oregon Trail common stock outstanding as of the completion date of the
acquisition. See Note 22 for additional information concerning the Company's
acquisition of Oregon Trail.
Nature of business and concentration of credit risk:
The Company's principal business consists of the operations of the Bank and Tri
Star that operate in one business segment. The Bank's operations consist of
attracting deposits from the general public through a variety of deposit
products and investing these, together with funds from on-going operations, in
the origination of residential mortgage and commercial loans and, to a lesser
extent, construction, agricultural, consumer, and other loans. The Bank
primarily originates loans to customers located in northern and southwestern
Idaho, eastern Washington, and eastern Oregon.
Use of estimates:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are susceptible to significant change in the near-term, relate to
the determination of the allowance for loan losses, the calculation of the
deferred tax assets and liabilities, the valuation of the core deposit
intangible, and the valuation of mortgage servicing rights.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.
F-11
Note 1 - Summary of Accounting Policies (Continued)
Use of estimates (continued):
The Company's loans are generally secured by specific items of collateral
including real property, business assets, and consumer assets. Although the
Company has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on local economic conditions.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Company to recognize additional
losses based on their judgments about information available to them at the time
of their examination. Because of these factors, it is reasonably possible that
the estimated losses on loans may change in the near term. However, the amount
of the change that is reasonably possible cannot be estimated.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
presentation. These reclassifications had no impact on net income or on
stockholders' equity.
Cash and cash equivalents:
Cash equivalents are any highly liquid debt instrument with a remaining maturity
of three months or less at the date of purchase. Cash and cash equivalents are
on deposit with other banks and financial institutions in amounts that
periodically exceed the federal insurance limit. The Bank evaluates the credit
quality of these banks and financial institutions to mitigate its credit risk.
In addition, the Bank sells excess funds to financial institutions on an
overnight basis.
Investments and mortgage-backed securities:
The Company accounts for securities according to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Investments
in securities are to be classified as either held-to-maturity,
available-for-sale or trading.
o Held-to-maturity - Investments in debt securities classified as
held-to-maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts using the effective interest method. The Company
has the ability and the intention to hold these investments and mortgage
backed securities to maturity and, accordingly, they are not adjusted for
temporary declines in their fair value.
F-12
Note 1 - Summary of Accounting Policies (Continued)
Investments and mortgage-backed securities (continued):
o Available-for-sale - Investments in debt and equity securities classified
as available-for-sale are stated at fair value. Unrealized gains and losses
are recognized (net of tax effect) as a separate component of stockholders'
equity.
o Trading - Investments in debt and equity securities classified as trading
are stated at fair value. Realized and unrealized gains and losses for
trading securities are included in income.
Purchase premiums and discounts are recognized in interest income using the
level yield method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans receivable:
The Company grants mortgage, commercial, consumer, and agricultural loans to
customers. A substantial portion of the loan portfolio is represented by loans
originated in northern and southwestern Idaho, eastern Washington, and eastern
Oregon.
The ability of the Company's debtors to honor their contracts is dependent upon
the general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge offs, the allowance for loan
losses, and any deferred fees or costs on originated loans. Deferred loan
origination fees and discounts are amortized over the contractual life of the
loan using the level-yield method. Interest income is accrued on any unpaid
principal balances.
The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent based upon contractual terms unless the credit is well-secured and in
process of collection. Loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income or the loan loss reserve as
appropriate. The interest on these loans is accounted for on the cash basis or
cost recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured. Suspended
interest ultimately collected is credited to interest income in the period of
recovery.
F-13
Note 1 - Summary of Accounting Policies (Continued)
Allowance for loan losses:
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect a borrower's ability to repay, estimated
value of any underlying collateral, and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The Company accounts for loan impairment according to the provisions of SFAS No.
114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which amended SFAS No. 114. These statements define the recognition
criteria for loan impairment and the measurement methods for certain impaired
loans and loans for which terms have been modified in troubled-debt
restructurings (a restructured loan). Specifically, a loan is considered
impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments or principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
Loans held for sale:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Market
values are determined by discounting future cash flows at current market rates.
Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
F-14
Note 1 - Summary of Accounting Policies (Continued)
Other real estate owned:
Assets acquired through loan foreclosure are held for sale and are initially
recorded at fair value at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, management periodically performs valuations
and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in other non-interest income or other non-interest
expense, respectively.
Stock in Federal Home Loan Bank:
Federal law requires a member institution of the Federal Home Loan Bank (FHLB)
System to hold common stock of its district FHLB according to predetermined
formulas. No readily determinable market exists for such stock and it has no
quoted market value. Accordingly, the Company reports its investment in FHLB
stock at cost.
Premises and equipment:
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from three to forty years. Expenditures for
new properties and equipment and major renewals or betterments are capitalized.
Expenditures for repairs and maintenance are charged to expense as incurred.
Upon sale or retirement, the cost and related accumulated depreciation are
removed from the respective property or equipment accounts and the resulting
gains or losses are reflected in operations.
Bank-owned and cash surrender value of life insurance policies:
Bank-owned life insurance is carried at the cash surrender value net of any
loans against any policy and surrender charges expected to be incurred. The
policies are primarily in place to provide executive life insurance benefits to
the Bank and for investment purposes. Single premium life policies at March 31,
2006 and 2005 were $20.9 million and $19.9 million, respectively. Flexible
premium life policies at March 31, 2006 and 2005 were $3.5 million and $3.4
million, respectively. At March 31, 2006 and 2005 there were no loans offset
against the cash surrender values and no restrictions against the use of the
proceeds. Bank-owned and cash surrender value of life insurance policies at
March 31, 2006 and 2005 were $24.4 million and $23.3 million, respectively.
Income taxes:
The Company accounts for income taxes according to the provisions of SFAS No.
109, Accounting for Income Taxes, which requires the use of the liability method
of accounting for deferred income taxes. Under SFAS No. 109, deferred income
taxes are provided for temporary differences between the financial reporting and
tax basis of assets and liabilities using the enacted tax rate expected to apply
to the taxable income of the period in which the deferred tax liability or asset
is expected to be settled or realized. Tax credits are accounted for as a
reduction of income taxes in the year in which the credit originates.
F-15
Note 1 - Summary of Accounting Policies (Continued)
Mortgage servicing rights:
Servicing assets are recognized as separate assets when rights are acquired
through the purchase or sale of financial assets. Capitalized servicing rights
are reported separately in the statement of financial condition and are
amortized into non-interest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms. Fair
value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized to the extent that the
capitalized amount for the stratum exceeds their fair value.
Securities Sold Under Agreements to Repurchase:
The Company enters into sales of securities under agreements to repurchase that
are treated as financing arrangements. Accordingly, the obligations to
repurchase securities sold are reflected as a liability in the consolidated
balance sheets, and the securities underlying the agreements remain in the asset
accounts.
Advertising Costs:
Advertising costs are charged to operations when incurred. Advertising expense
for the years ended March 31, 2006, 2005 and 2004 was $676,000, $542,000 and
$506,000, respectively.
Employee Stock Ownership Plan:
The Company sponsors an Employee Stock Ownership Plan (the ESOP). The ESOP is
accounted for in accordance with the American Institute of Certified Public
Accountants Statement of Position No. 93-6, Employer's Accounting for Employee
Stock Ownership Plans. Accordingly, the shares held by the ESOP are reported as
unearned shares issued to the ESOP in the statements of financial condition. As
shares are released from collateral, compensation expense is recorded equal to
the then current market price of the shares, and the shares become outstanding
for earnings per share calculations.
Stock and cash dividends on allocated shares are recorded as a reduction of
retained earnings and paid or distributed directly to participants' accounts.
Stock and cash dividends on unallocated shares are recorded as a reduction of
debt and accrued interest.
F-16
Note 1 - Summary of Accounting Policies (Continued)
Stock-based compensation:
SFAS No. 123(R), Share-Based Payment, 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. Public entities will be required to apply SFAS No. 123(R) as of the
beginning of the next fiscal year that begins after June 15, 2005. The Company
plans to adopt the provisions of SFAS No. 123(R) effective April 1, 2006. For
the year ended March 31, 2006, the Company has chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations and to furnish the pro forma disclosures required
under SFAS No. 123(R). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation at the years
ended March 31, 2006, 2005 and 2004.
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands, except per share data)
Net income as reported $ 8,516 $ 6,278 $ 4,358
Pro forma adjustment for effect of fair value
accounting for stock options (15) (9) (1)
------------ ------------ ------------
Pro forma net income $ 8,501 $ 6,269 $ 4,357
============ ============ ============
Basic earnings per share:
As reported $ 1.45 $ 1.08 $ 1.13
Pro forma $ 1.45 $ 1.08 $ 1.13
Diluted earnings per share:
As reported $ 1.41 $ 1.05 $ 1.06
Pro forma $ 1.41 $ 1.05 $ 1.06
F-17
Note 1 - Summary of Accounting Policies (Continued)
Earnings per share:
The Company reports earnings per share (EPS) in accordance with SFAS No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS No. 128 also
requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Stock options are the only potentially dilutive instruments issued by the
Company. ESOP shares that are unallocated and not yet committed to be released
are excluded from the weighted average shares outstanding calculation (see Note
15).
On January 4, 2006, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% per share stock dividend on the Company'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. As a result of the split, 3,022,716 additional
shares were issued increasing common stock by $30,227 and retained earnings were
reduced by $30,227. All references in these consolidated financial statements to
the number of common shares and per-share amounts have been restated to reflect
the two-for-one stock split.
Comprehensive income:
SFAS No. 130, Reporting Comprehensive Income, requires that certain changes in
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities and certain derivative instruments, are reported
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income.
Off-balance-sheet financial instruments:
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred or
received.
F-18
Note 1 - Summary of Accounting Policies (Continued)
Derivative financial instruments designated as hedges:
As part of the Company's asset/liability management, the Company uses a swap
agreement to hedge interest rate risk. The derivative used as part of the
asset/liability management process is linked to specific assets and has a high
correlation between the contract and the underlying item being hedged, both at
inception and throughout the hedge period. The derivative is designated as a
cash flow hedge in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137 and No. 138. SFAS
No. 133 establishes accounting and reporting standards for financial
derivatives, including certain financial derivatives embedded in other
contracts, and hedging activities. The standard requires the recognition of all
financial derivatives as assets or liabilities in the Company's statement of
financial condition at fair value. The accounting treatment of changes in fair
value is dependent upon whether or not a financial derivative is designated as a
hedge and if so, the type of hedge.
In accordance with SFAS No. 133, the Company recognizes all derivatives on the
statement of financial condition at fair value. Fair value is based on dealer
quotes, or quoted prices from instruments with similar characteristics. The
Company uses financial derivatives designated for hedging activities as cash
flow hedges. For derivatives designated as cash flow hedges, changes in fair
value are recognized in other comprehensive income, until the hedge items are
recognized in earnings.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in cash flows of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. The Company will
discontinue hedge accounting prospectively when it determines that the
derivative is no longer an effective hedge, the derivative expires or is sold,
or management discontinues the derivative's hedge designation. The Company had
entered into a swap agreement which terminated on May 29, 2004.
New accounting pronouncements:
In March 2006, the FASB issued SFAS No 156, Accounting for Services of Financial
Assets. This statement revises and clarifies the criteria for derecognition of
transferred financial assets and places restrictions on the ability of a
qualifying special purpose entity to roll over beneficial interests such as
short-term commercial paper. This statement also will permit, but not require,
an entity to account for one or more classes of servicing rights (i.e., mortgage
servicing right, or MSRs) at fair value, with changes in fair value recorded in
income. The statement is effective as of the beginning of the first fiscal year
that begins after September 15, 2006. Management is currently evaluating the
effect of the statement on the Company's results of operations and financial
condition.
F-19
Note 1 - Summary of Accounting Policies (Continued)
New accounting pronouncements (continued):
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. This statement permits, but does not require, fair value
accounting for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance SFAS No. 133.
The statement also subjects beneficial interests issued by securitization
vehicles to the requirements of SFAS No. 133. The statement is effective as of
January 1, 2007 with earlier adoption permitted. Management is currently
evaluating the effect of the statement on the Company's results of operations
and financial condition.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This
statement replaces SFAS No. 123, Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
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. SFAS 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 SFAS
No. 123(R) as of the first annual reporting period that begins after June 15,
2005. The Company adopted the provisions of SFAS No. 123(R) effective April 1,
2006.
F-20
Note 2 - Securities
The amortized cost and fair value of securities, with gross unrealized gains and
losses, at March 31, 2006 and 2005 are as follows:
March 31, 2006
------------------------------------------------------------------------
(In Thousands)
Gross
Gross Unrealized
Unrealized Losses
Gross Losses Less Greater
Amortized Unrealized Than 12 Than 12 Fair
Cost Gains Months Months Value
------------ ------------ ------------ ------------ ------------
Securities Available-for-Sale
State, county, and municipal $ 14,896 $ 498 $ -- $ (145) $ 15,249
Corporate bonds 945 104 -- -- 1,049
Other investments 619 2 (2) (27) 592
------------ ------------ ------------ ------------ ------------
Total investments securities 16,460 604 (2) (172) 16,890
Mortgage-backed securities 30,549 53 (274) (485) 29,843
------------ ------------ ------------ ------------ ------------
$ 47,009 $ 657 $ (276) $ (657) $ 46,733
============ ============ ============ ============ ============
Securities Held-to-Maturity
U.S. government and agency 14,094 -- -- (312) 13,782
State, county, and municipal 15,547 83 (63) -- 15,567
Corporate bonds 2,010 81 -- -- 2,091
------------ ------------ ------------ ------------ ------------
Total investments securities 31,651 164 (63) (312) 31,440
Mortgage-backed securities 22,312 -- (1) (650) 21,661
------------ ------------ ------------ ------------ ------------
$ 53,963 $ 164 $ (64) $ (962) $ 53,101
============ ============ ============ ============ ============
F-21
Note 2 - Securities (Continued)
March 31, 2005
------------------------------------------------------------------------
(In Thousands)
Gross
Gross Unrealized
Unrealized Losses
Gross Losses Less Greater
Amortized Unrealized Than 12 Than 12 Fair
Cost Gains Months Months Value
------------ ------------ ------------ ------------ ------------
Securities Available-for-Sale
State, county, and municipal $ 15,261 $ 622 $ (3) $ (106) $ 15,774
Corporate bonds 1,008 50 -- -- 1,058
Other investments 615 -- (2) (18) 595
------------ ------------ ------------ ------------ ------------
Total investments securities 16,884 672 (5) (124) 17,427
Mortgage-backed securities 39,748 133 (439) (1) 39,441
------------ ------------ ------------ ------------ ------------
$ 56,632 $ 805 $ (444) $ (125) $ 56,868
============ ============ ============ ============ ============
Securities Held-to-Maturity
U.S. government and agency 14,122 -- (160) -- 13,962
State, county, and municipal 14,740 53 (21) (15) 14,757
Corporate bonds 2,045 105 -- -- 2,150
------------ ------------ ------------ ------------ ------------
Total investments securities 30,907 158 (181) (15) 30,869
Mortgage-backed securities 22,463 1 (313) (4) 22,147
------------ ------------ ------------ ------------ ------------
$ 53,370 $ 159 $ (494) $ (19) $ 53,016
============ ============ ============ ============ ============
F-22
The fair value and unrealized loss of temporarily impaired securities that were
in an unrealized loss position at March 31, 2006 were as follows:
March 31, 2006
---------------------------------------------------------------------------------------
(In Thousands)
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Unrealized Unrealized Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
------------ ------------ ------------ ------------ ------------ ------------
State, county, and municipal $ 6,515 $ 63 $ 2,750 $ 145 $ 9,265 $ 208
U.S. government and agencies -- -- 13,782 312 13,782 312
Mortgage-backed securities 10,223 275 37,905 1,135 48,128 1,410
Other investments 80 2 473 27 553 29
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 16,818 $ 340 $ 54,910 $ 1,619 $ 71,728 $ 1,959
============ ============ ============ ============ ============ ============
The Bank has the ability and intent to hold these investments until a market
price recovery, therefore management does not believe that any individual
unrealized loss as of March 31, 2006 represents an other-than-temporary
impairment. The decline in fair market value of these securities is generally
attributable to changes in interest rates and changes in market-desired spreads
subsequent to their purchase. For the years ended March 31, 2006 and 2005, there
were no proceeds from sales of securities available-for-sale. There were no
gross realized gains for the years ended March 31, 2006 and 2005.
F-23
Note 2 - Securities (Continued)
The amortized cost and fair value of U.S. government, federal agency, and
mortgage-backed securities by contractual maturity at March 31, 2006, were as
follows:
March 31, 2006
-----------------------------------------------------------------------
Held-to-Maturity Available-for-Sale
----------------------------- ----------- ---------------------------
Weighted Amortized Fair Amortized Fair
Yield Cost Value Cost Value
------------ ------------ ------------ ------------ ------------
Amounts maturing in:
One year or less 4.48% $ -- $ -- $ 584 $ 555
After one year through five years 3.78 14,203 13,890 156 154
After five years through ten years 7.85 4,354 4,352 3,722 3,882
After ten years 7.48 13,094 13,198 11,998 12,299
------------ ------------ ------------ ------------ ------------
6.41 31,651 31,440 16,460 16,890
Mortgage-backed securities 4.97 22,312 21,661 30,549 29,843
------------ ------------ ------------ ------------ ------------
5.99% $ 53,963 $ 53,101 $ 47,009 $ 46,733
============ ============ ============ ============ ============
Expected maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
F-24
Note 2 - Securities (Continued)
The amortized cost and market value of securities pledged to secure obligations
or pledged as collateral by obligor at March 31, 2006 and 2005 were as follows:
March 31,
---------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
(In Thousands)
Obligations under repurchase agreements $ 14,098 $ 14,577 $ 15,270 $ 15,876
Public deposits 10,609 10,568 8,901 8,855
Deposits over $100,000 21,511 21,271 25,579 25,445
FHLB advances 43,365 42,216 50,363 49,832
Treasury, taxes and loans 321 317 462 463
Oregon Trail Consumer Cooperative 3,183 3,087 2,973 2,939
------------ ------------ ------------ ------------
$ 93,087 $ 92,036 $ 103,548 $ 103,410
============ ============ ============ ============
Note 3 - Equity Securities
Equity securities carried at cost at March 31, 2006 and 2005 consisted of the
following:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
FHLB stock $ 12,785 $ 12,785
FarmerMac stock 4 4
------------ ------------
Equity securities $ 12,789 $ 12,789
============ ============
F-25
Note 3 - Equity Securities (Continued)
The FHLB revised its capital structure from the issuance of one class of stock
to two, B(1) and B(2) stock. B(1) stock can be sold back to the FHLB at cost,
but is restricted as to purchase, sale, and redemption based on the level of
business activity the Company is doing with the FHLB. Class B(2) is not a
required investment for institutions and is not restricted as to purchase and
sale, but has the same redemption restrictions as class B(1). The Company had
$12.5 million in B(1) stock and $251,000 in B(2) stock at March 31, 2006. Stock
is a required investment for institutions that are members. The required
investment in the common stock is based on a predetermined formula and is
carried at cost on the consolidated statement of financial condition. Interest
income from FHLB dividends, in other interest-earning assets, was $0, $284,000,
and $398,000 for the years ended March 31, 2006, 2005 and 2004, respectively.
Note 4 - Loans Receivable
Loans receivable at March 31, 2006 and 2005 consisted of the following:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Real estate loans:
Residential $ 123,461 $ 117,541
Commercial 201,282 173,757
Agricultural 18,792 19,434
Construction 108,650 69,148
Other loans:
Commercial (non-real estate) 91,628 92,780
Other consumer 39,089 38,724
Home equity 40,926 37,806
Agricultural operating 19,333 22,625
------------ ------------
Total loans receivable 643,161 571,815
Less:
Unearned loan fees and discounts 2,480 2,460
Allowance for loan losses 8,138 7,254
------------ ------------
Loans receivable, net $ 632,543 $ 562,101
============ ============
F-26
Note 4 - Loans Receivable (Continued)
At March 31, 2006, the contractual principal payments due on outstanding loans
receivable are shown below. Actual payments may differ from expected payments
because borrowers have the right to prepay loans, with or without prepayment
penalties.
Year Ending March 31,
(In Thousands)
2007 $ 199,210
2008 63,853
2009 15,026
2010 24,474
2011 23,900
Thereafter 316,698
------------
$ 643,161
============
The following summarizes the changes in the allowance for loan losses at March
31, 2006, 2005 and 2004:
March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Allowance for loan losses, beginning of year $ 7,254 $ 6,314 $ 3,414
Addition through acquisition -- -- 2,863
Provision for loan losses 1,799 1,528 395
Charge offs, net (915) (588) (358)
------------ ------------ ------------
Allowance for loan losses, end of year $ 8,138 $ 7,254 $ 6,314
============ ============ ============
As of March 31, 2006 and 2005, loans on a nonaccrual status totaled
approximately $308,000 and $719,000, respectively. The effect of not recognizing
interest income on nonaccrual loans in accordance with the original terms
totaled approximately $10,000 during 2006, $68,000 during 2005, and $126,000
during 2004. The following information at March 31, 2006, 2005 and 2004 relates
to the Bank's impaired loans which include troubled debt restructurings that
meet the definition of impaired loans:
F-27
Note 4 - Loans Receivable (Continued)
March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Impaired loans with a specific allowance $ 349 $ 363 $ 1,119
Impaired loans with no specific allowance 1,315 1,406 816
------------ ------------ ------------
Total impaired loans $ 1,664 $ 1,769 $ 1,935
============ ============ ============
Total allowance related to impaired loans $ 292 $ 279 $ 424
============ ============ ============
Average aggregate balance of impaired
loans for the year $ 2,006 $ 1,977 $ 2,989
============ ============ ============
Interest income recognized on impaired
loans for cash payments received $ 148 $ 203 $ 57
============ ============ ============
Loans 90 days or more past due and
still accruing $ 4 $ 377 $ --
============ ============ ============
Outstanding commitments of the Bank to originate loans as of March 31, 2006,
were as follows:
Variable
Fixed Rate Rate Total
------------ ------------ ------------
(In Thousands)
First mortgage loans $ 14,890 $ 53,896 $ 68,786
Other loans 7,593 67,655 75,248
------------ ------------ ------------
Outstanding Loan
Commitments $ 22,483 $ 121,551 $ 144,034
============ ============ ============
F-28
Note 4 - Loans Receivable (Continued)
Interest rates on fixed rate loan commitments range from 5.00% to 8.875% and are
committed through September 25, 2006. Fees received in connection with these
outstanding loan commitments are deferred and will be recognized in income over
the life of the related loan after funding of the loan. In addition, the Bank
had commitments to fund outstanding credit lines of approximately $96.8 million,
commitments to fund standby letters of credit of $6.9 million, and commitments
to fund credit card lines of approximately $10.4 million at March 31, 2006.
Commitments to extend credit may involve elements of interest rate risk in
excess of the amount recognized in the balance sheets. Interest rate risk on
commitments to extend credit results from the possibility that interest rates
may have changed since the time the commitment was made.
The Bank remains contingently liable for $5,000 of loans sold with recourse as
of March 31, 2006. At March 31, 2006, the Bank had indemnification agreements
with the Federal Housing Administration ("FHA") for two residential mortgage
loans insured by FHA. The agreements require the Bank to reimburse FHA for any
loss incurred upon foreclosure of these loans and subsequent liquidation of the
homes held as collateral.
Note 5 - Loan Servicing
Loans serviced for others (including contract collections) are not included in
the consolidated statements of financial condition. The unpaid principal
balances of these loans at March 31, 2006 and 2005 were as follows:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Loan portfolios serviced for:
FNMA $ 3,379 $ 4,560
FHLMC 50,352 58,517
Others 4,525 4,141
------------ ------------
$ 58,256 $ 67,218
============ ============
The balance of capitalized mortgage servicing rights at March 31, 2006 and 2005
was $533,000 and $614,000, respectively. The fair value of mortgage servicing
rights was determined using discount rates ranging from 9.50% to 12.00% and
prepayment speeds ranging from 12.86% to 105.17%, depending upon the
stratification of the specific mortgage servicing right. The allowance for
impairment on mortgage servicing rights for the years ended March 31, 2006, 2005
and 2004 was $282,000, $346,000 and $427,000, respectively.
F-29
Note 5 - Loan Servicing (Continued)
Estimates of fair value on the mortgage servicing rights portfolio are based on
the objective characteristics of the servicing portfolio and are derived through
a discounted cash flow analysis. This analysis takes into consideration existing
conditions in the secondary servicing markets (levels of supply and demand), as
well as recently executed servicing transactions. Published values represent
gross price levels, with deductions that would net gross proceeds varying
dependent upon transaction composition and levels of supply and demand in the
marketplace. Deductions are most often associated with foreclosures. The
delinquent loans, loans in litigation, and potential loss associated with
foreclosures. The gross price levels assume that standard industry
representations and warranties related to the servicing and origination of the
loans would be offered by the seller (and acceptable to the buyer), and that the
financial strength of the seller would be acceptable to the buyer.
The following summarizes mortgage servicing rights activity for the years ended
March 31, 2006, 2005 and 2004:
March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Mortgage servicing asset, beginning of year $ 614 $ 710 $ 826
Capitalized 61 29 199
Amortization (206) (206) (194)
Impairment recovery/(charge) 64 81 (121)
------------ ------------ ------------
Mortgage servicing asset, end of year $ 533 $ 614 $ 710
============ ============ ============
F-30
Note 6 - Premises and Equipment
Premises and equipment at March 31, 2006 and 2005 consisted of the following:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Land, buildings, and building improvements $ 19,958 $ 19,950
Furniture, fixtures, and equipment 11,922 11,709
Construction in progress 15 523
------------ ------------
31,895 32,182
Accumulated depreciation (14,337) (13,494)
------------ ------------
Premises and equipment, net $ 17,558 $ 18,688
============ ============
Depreciation expense for the years ended March 31, 2006, 2005 and 2004, was $1.4
million $1.4 million, and $1.0 million, respectively.
Note 7 - Goodwill and Other Intangible Assets
Goodwill will be periodically evaluated for impairment. No impairment loss on
goodwill was recorded for the year ended March 31, 2006 because there were no
impairment indicators during the period. Goodwill continues to decrease due to
the tax benefits on exercises of stock options acquired in the acquisition of
Oregon Trail. Goodwill at March 31, 2006 and 2005 was $16.6 and $16.7 million,
respectively.
Core deposits are a dependable, long-term source of funds for the Company. The
core deposit intangible asset will be amortized under the straight line method
over the estimated life of the depositor relationships of 5.5 years. Core
deposit intangible at March 31, 2006 was $2.2 million, net of accumulated
amortization of $1.7 million. Core deposit intangible at March 31, 2005 was $2.9
million, net of accumulated amortization of $1.0 million. Amortization expense
for the years ended March 31, 2006, 2005 and 2004 was $715,000, $715,000 and
$297,000, respectively. Amortization expense for the net carrying amount of the
core deposit intangible at March 31, 2006 is estimated to be as follows:
F-31
Note 7 - Goodwill and Other Intangible Assets (Continued)
For the year ended March 31,
(In Thousands)
2007 $ 715
2008 715
2009 715
2010 67
----------
Estimated total core deposit intangible amortization expense $ 2,212
==========
Note 8 - Foreclosed Real Estate
There was no foreclosed real estate included in other assets on the Consolidated
Statements of Financial Condition at March 31, 2006. There was $603,000 in
foreclosed real estate included in other assets on the Consolidated Statements
of Financial Condition at March 31, 2005.
F-32
Note 9 - Deposits
Deposits and the related weighted-average interest rates at March 31, 2006 and
2005 consisted of the following:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Transaction accounts:
Checking accounts (0.04% and 0.04%) $ 161,938 $ 141,374
Statement savings accounts (0.25% and 0.25%) 36,614 41,189
Money market accounts (3.00% and 1.63%) 116,857 118,881
------------ ------------
Total transaction accounts 315,409 301,444
------------ ------------
Certificates of deposit:
0.00% to 1.99% 800 55,533
2.00% to 2.99% 49,669 62,238
3.00% to 3.99% 88,712 47,069
4.00% to 4.99% 97,874 33,841
5.00% to 5.99% 14,274 16,144
6.00% to 6.99% 2,964 2,407
7.00% to 7.99% 338 --
------------ ------------
Total certificates of deposit 254,631 217,232
------------ ------------
Total deposits $ 570,040 $ 518,676
============ ============
F-33
Note 9 - Deposits (Continued)
The scheduled maturities of certificates of deposit at March 31, 2006 were as
follows:
Year ending March 31,
(In Thousands)
2007 $ 177,762
2008 46,682
2009 7,658
2010 14,262
2011 5,309
Thereafter 2,958
------------
Total certificates of deposit $ 254,631
============
Interest expense on deposits for the years ended March 31, 2006, 2005 and 2004
consisted of the following:
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Checking and money market $ 3,535 $ 2,116 $ 1,028
Statement savings 95 127 110
Certificates of deposit . 7,787 4,993 4,115
------------ ------------ ------------
Interest expense $ 11,417 $ 7,236 $ 5,253
============ ============ ============
Certificates of deposit in excess of $100,000 totaled approximately $100.1
million and $89.0 million at March 31, 2006 and 2005, respectively. Deposit
balances in excess of $100,000 totaled approximately $249.8 million and $233.1
million at March 31, 2006 and 2005, respectively, are not insured by the Federal
Deposit Insurance Corporation (FDIC).
F-34
Note 10 - FHLB Advances and Other Borrowed Funds
FHLB advances and other borrowings had weighted average interest rates at March
31, 2006 and 2005 of 5.08% and 4.28%, respectively. Maturity dates of advances
at March 31, 2006 and 2005 were as follows:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Advances from FHLB and other borrowings due:
Less than one year $ 111,094 $ 109,681
After one year through two years 10,441 12,697
After two years through three years 3,158 10,475
After three years through four years 5,000 3,174
After four years through five years 31,177 5,000
More than five years 15,947 44,310
------------ ------------
$ 176,817 $ 185,337
============ ============
Advances are collateralized by all FHLB stock owned by the bank, deposits with
the FHLB- Seattle, and certain mortgages or deeds of trust securing such
properties.
The Bank has available credit with FHLB for up to 30% of total assets, or $253.8
million, at March 31, 2006. On March 31, 2006 the FHLB borrowings are
collateralized by $300.3 million in investment securities, residential real
estate loans, and commercial real estate loans. Interest is charged at the
market rate for federal funds purchased. There was $168.5 million and $180.4
million outstanding of FHLB advances, gross of merger premium of $2.2 million
and $2.8 million, at March 31, 2006 and 2005, respectively.
The Bank has an unsecured operating line of credit with US Bank for $20.0
million. There was no outstanding balance at March 31, 2006 and 2005. The
Company has an unsecured operating line of credit with US Bank for $3.5 million.
There was an outstanding balance of $3.1 million and $2.2 million under the line
of credit at March 31, 2006 and 2005, respectively. Interest expense recognized
for the years ended March 31, 2006 and 2005 for the US Bank borrowing was
$177,000 and $61,000, respectively.
On June 10, 2005, the Bank entered into a Subordinated Debenture Purchase
Agreement with US Bank, under which the Bank issued an aggregated principal
amount of $3.0 million in floating rate unsecured subordinated debt. All amounts
due under the subordinated debenture must be repaid in full on June 10, 2015.
There was an outstanding balance of $3.0 million at March 31, 2006. Interest
expense recognized for the year ended March 31, 2006 was $143,000.
F-35
Note 10 - FHLB Advances and Other Borrowed Funds (Continued)
If the subordinated debenture ceases to qualify as Tier 2 capital for capital
reporting purposes, or at any time after June 10, 2010, the Bank may, after
receiving approval from the Federal Deposit Insurance Corporation, prepay all or
a portion of the outstanding amount of the subordinated debenture. In addition,
if the subordinated debenture no longer qualifies as Tier 2 capital, the Bank
and the lender may restructure the debt as a senior unsecured obligation of the
Bank or the Bank may repay the debt.
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date. Securities underlying the agreements are
presented in Note 2.
Information concerning securities sold under agreements to repurchase at March
31, 2006, 2005 and 2004 are summarized as follows:
March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Average balance during the year $ 8,694 $ 12,808 $ 10,465
============ ============ ============
Average interest rate during the year 2.80% 0.93% 0.46%
============ ============ ============
Maximum month-end balance during the year $ 12,180 $ 16,023 $ 11,272
============ ============ ============
Note 11 - Income Taxes
The components of income tax expense for the years ended March 31, 2006, 2005
and 2004 are summarized as follows:
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(In Thousands)
Current tax expense $ 4,220 $ 1,414 $ 1,834
Deferred tax expense (benefit) (312) 953 (352)
------------ ------------ ------------
Income tax expense $ 3,908 $ 2,367 $ 1,482
============ ============ ============
F-36
Note 11 - Income Taxes (Continued)
Deferred tax liabilities and assets at March 31, 2006 and 2005 consisted of the
following:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Deferred tax assets:
Unearned loan fees $ 4 $ 7
Allowance for loan losses 3,180 2,834
Deferred compensation 496 433
Change of control payments 72 206
Premium on FHLB advances 834 1,063
Premium on certificates of deposits 153 336
Unrealized loss on securities available-for-sale 107 --
Other 158 137
------------ ------------
Total deferred tax assets 5,004 5,016
------------ ------------
Deferred tax liabilities:
FHLB stock dividends (2,642) (2,642)
Mortgage servicing rights (208) (240)
Depreciation (709) (705)
Unrealized gain on securities available-for-sale -- (101)
Premium on securities available-for-sale (192) (325)
Core deposit intangible (833) (1,103)
Loan fees (443) (443)
------------ ------------
Total deferred tax liabilities (5,027) (5,559)
------------ ------------
Net deferred income tax liability $ (23) $ (543)
============ ============
At March 31, 2006 and 2005, an income tax receivable of $2.3 million and $2.4
million, respectively, was included in other assets on the Consolidated
Statements of Financial Condition.
F-37
Note 11 - Income Taxes (Continued)
A reconciliation of the statutory federal income tax rate to the effective
income tax rate for the years ended March 31, 2006, 2005 and 2004 follows:
March 31,
---------------------------------------------------------------------------------------
2006 2005 2004
--------------------------- --------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Income tax expense at statutory rates $ 4,224 34.0% $ 2,939 34.0% $ 1,986 34.0%
Effect of permanent differences (857) (6.9) (949) (11.0) (749) (12.8)
Effect of state income taxes, net of
federal benefit 541 4.4 377 4.4 245 4.2
------------ ------------ ------------ ------------ ------------ ------------
$ 3,908 31.5% $ 2,367 27.4% $ 1,482 25.4%
============ ============ ============ ============ ============ ============
Note 12 - Equity
The Company is not subject to capital adequacy requirements by its primary
regulator, the Office of Thrift Supervision. The Bank, however, is subject to
various regulatory capital requirements administered by the Washington
Department of Financial Institutions (the Department) and the FDIC (collectively
referred to as the regulators). Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by the
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets and of Tier I capital
to average assets all as defined in the regulations. Management believes, as of
March 31, 2006, that the Bank meets all capital adequacy requirements to which
it is subject.
As of February 14, 2005, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since the most
recent notification that management believes have changed the Bank's
categorization.
F-38
Note 12 - Equity (Continued)
The Bank's actual regulatory capital amounts and ratios for the years ended
March 31, 2006 and 2005 are presented in the table below:
To Be Well Capitalized
Capital Adequacy Under Prompt Corrective
Purposes Action Provisions
--------------------------- ---------------------------
Actual Actual Actual
Amount Ratio Amount Rate Amount Rate
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
March 31, 2006
Tier 1 capital (to average assets) $ 60,253 7.3% $ 33,015 4.0% $ 41,269 5.0%
Tier 1 capital (to risk-weighted assets) 60,253 9.8% 24,593 4.0% 36,890 6.0%
Total capital (to risk-weighted assets) 70,939 11.6% 48,923 8.0% 61,154 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%
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends, which may be paid at any date, is generally limited to the retained
earnings of the Bank.
The payment of dividends to the Company by the Bank is subject to various
federal and state regulatory limitations. Under current guidelines, at March 31,
2006, the Bank could have declared approximately $9.8 million of aggregate
dividends in addition to amounts previously paid.
Dividends paid by the Bank to the Company would be prohibited if the effect
thereof would cause the Bank's capital to be reduced below applicable minimum
capital requirements.
On April 12, 2006, the Board of Directors of the Company declared a cash
dividend of $0.10 per common share to shareholders of record of the Company as
of May 4, 2006. The dividend was paid on May 18, 2006.
On August 27, 2004, the Company authorized a 5% stock repurchase plan, or
295,732 shares. As of March 31, 2006, 105,000 shares had been repurchased under
this program leaving 190,732 shares available for repurchase. The intent of the
stock repurchase program is to enhance trading liquidity and stock value. The
shares are purchased on the open market at market value through an authorized
broker.
F-39
Note 12 - Equity (Continued)
On January 4, 2006, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% per share stock dividend on the Company'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. As a result of the split, 3,022,716 additional
shares were issued, and retained earnings were reduced by $30,227. All
references in the accompanying financial statements to the number of common
shares and per-share amounts have been restated to reflect the two-for-one stock
split.
Note 13 - Related Party Transactions
The following schedule summarizes the activity in loans to directors and
officers at or for the years ended March 31, 2006 and 2005:
March 31,
---------------------------
2006 2005
------------ ------------
(In Thousands)
Balance, beginning of year $ 1,808 $ 1,786
Additional advances on loans 1,873 1,084
Repayments and sales proceeds (1,658) (1,062)
------------ ------------
Balance, end of year $ 2,023 $ 1,808
============ ============
The Bank also accepts deposits from its executive officers, directors, and
affiliated companies on substantially the same terms as unrelated persons. The
aggregate amount of deposits from such related parties at March 31, 2006 and
2005 was $823,000 and $571,000, respectively.
F-40
Note 14 - Employee Benefit Plans
The Company has entered into a salary continuation agreements with certain
employees. This program was funded by purchasing single premium life insurance
contracts. The program provides for aggregate continued annual compensation for
all participants totaling $144,000 for life on the insured and a guarantee
period ranging from 15 to 20 years for the beneficiaries. Participants vest
ratably each plan year until retirement, termination, death, or disability. The
Company is recording the salary obligation over the estimated remaining service
lives of the participants. Expenses related to this program were approximately
$161,000, $233,000, and $194,000 for the years ended March 31, 2006, 2005 and
2004, respectively. At March 31, 2006 and 2005, an obligation of $1.3 million
and $1.1 million, respectively, was included in accrued expenses and other
liabilities. The Bank retained bank-owned life insurance policies of Pioneer
Bank through the acquisition of Oregon Trail with a cash value of $14.3 million
at October 31, 2003. At March 31, 2006 and 2005, cash value of life insurance of
$24.4 million and $23.3 million, respectively, was recorded. Net earnings on the
life insurance contracts were $1.1 million, $1.1 million, and $620,000 for the
years ended March 31, 2006, 2005 and 2004, respectively.
The Company entered into three-year employment agreements with certain officers,
which may be extended by the Board for an additional year at each anniversary
date. The agreements provide for severance payments and other benefits in the
event of termination without cause and termination of employment in connection
with any change in control of the Company of up to 2.99 times the officer's
average annual compensation during the preceding five years. The employment
agreements provide for termination by the Company for cause at any time.
During 1995, the Bank established a profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended (Code), whereby
participants may contribute a percentage of compensation, but not in excess of
the maximum allowed under the Code. The plan was amended during 1998, making
Bank contributions discretionary. Approximately $385,000, $263,000, and $148,000
were contributed by the Company to the plan for the years ended March 31, 2006,
2005 and 2004, respectively.
Note 15 - Employee Stock Ownership Plan
The Bank established for eligible employees an ESOP and related trust in
connection with the Conversion. Eligible employees of the Bank as of June 30,
1997 and eligible employees of the Company and the Bank employed after such date
who have been credited with at least 1,000 hours during a 12-month period will
become participants. The ESOP borrowed $1.6 million from the Company in order to
purchase 317,400 shares of common stock of the Company. The loan will be repaid
principally from the Bank's contributions to the ESOP over a period of 25 years,
as amended during fiscal 1999, and the collateral for the loan is the
unreleased, restricted common stock purchased by the ESOP. Contributions to the
ESOP are discretionary; however, the Bank intends to make annual contributions
to the ESOP in an aggregate amount at least equal to the principal and interest
requirements of the debt. The stated interest rate for the loan is 8.5%.
F-41
Note 15 - Employee Stock Ownership Plan (Continued)
The cost of shares acquired by the ESOP is considered unearned compensation and
as such, is recorded as a reduction of the Company's stockholders' equity.
Shares purchased by the ESOP are held in a suspense account for allocation among
participants as the loan is repaid. Shares are released based on the ratio of
total ESOP loan payments made during the period to the remaining total payments
due on the loan. Contributions to the ESOP and shares released from the suspense
account are allocated among the participants on the basis of compensation in the
year of allocation. Participants generally become 100% vested in their ESOP
account after five years of credited service or if their service was terminated
due to death, permanent disability or a change in control. Prior to the
completion of four years of credited service, a participant who terminates
employment for reasons other than death, disability, or change in control of the
Company will not receive any benefit. Forfeitures will be reallocated among
remaining participating employees, in the same proportion as contributions.
Benefits are payable upon death, retirement, disability, or separation from
service. The contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.
Compensation expense is recorded equal to the fair value of shares held by the
ESOP which are deemed committed to be released. ESOP compensation expense was
approximately $246,000, $235,000, and $221,000 for the years ended March 31,
2006, 2005 and 2004, respectively. As of March 31, 2006, the Company has
allocated 188,348 shares to participant accounts and has 129,052 unallocated
shares. The Company has committed to release 4,178 shares of stock resulting in
124,874 unallocated, restricted shares remaining to be released. The market
value of unallocated, restricted shares held by the ESOP trust was approximately
$2.4 million at March 31, 2006.
Note 16 - Stock Award Plans
Stock Option Plans:
On July 22, 1998, the shareholders of the Company voted to approve the 1998
Stock Option Plan (the SOP) for employees, officers and directors of the
Company. The SOP is administered by the Board of Directors. Under the SOP, a
maximum of 396,750 shares were available for grant. Generally, the SOP provides
that the terms under which options may be granted are to be determined by a
Committee subject to certain requirements as follows: (1) the exercise price
will not be less than 100% of the market price per share of the common stock of
the Company at the time stock option is granted; and (2) the option purchase
price will be paid in full on the date of purchase. Generally, options vest over
a period of five years. The SOP provides that options may be transferred only by
will or by laws of descent and distribution and may be exercised during the
optionee's lifetime only by the optionee or by the optionee's guardian or legal
representative.
F-42
Note 16 - Stock Award Plans (Continued)
On November 4, 2003, the Company adopted the Oregon Trail 1998 Stock Option Plan
(the SOP) for employees, officers and directors of Oregon Trail. All of the
Oregon Trail options were vested as of the date the merger was completed. The
SOP is administered by the Board of Directors. Under the SOP, a maximum of
801,458 shares were available for grant. The SOP provides that options may be
transferred only by will or by laws of descent and distribution and may be
exercised during the optionee's lifetime only by the optionee or by the
optionee's guardian or legal representative.
Stock option transactions for the above described plan are summarized as
follows:
Weighted-
Average
Weighted- Fair Value
Average of Options
Exercise Options Granted During
Shares Price Exercisable the Year
------------ ------------ ------------ ------------
Outstanding options at March 31, 2003 294,000 $ 7.91
Granted as a result of merger 801,458 6.13
Exercised (493,946) 5.70
Forfeited (300) 7.91
------------ ------------ ------------ ------------
Outstanding options at March 31, 2004 601,212 $ 7.35 592,812 $ --
============ ============ ============ ============
Granted 28,000 13.41
Exercised (304,960) 7.03
Forfeited -- --
------------ ------------ ------------ ------------
Outstanding options at March 31, 2005 324,252 $ 8.17 290,652 $ 2.22
============ ============ ============ ============
Granted 5,000 18.39
Exercised (55,996) 7.74
Forfeited -- --
------------ ------------ ------------ ------------
Outstanding options at March 31, 2006 273,256 $ 8.44 243,056 $ 5.71
============ ============ ============ ============
F-43
Note 16 - Stock Award Plans (Continued)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for the fiscal grant:
March 31, March 31,
2006 2005
------------ ------------
Dividend yield 2.20% 2.61%
Expected volatility 29.60% 15.11%
Risk free interest rates 4.55% 3.94%
Expected option lives 7 years 7 years
The following table presents information about the options as of March 31, 2006:
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Range of Number of Contractual Price Per Number of Price Per
Exercise Price Shares Life Share Shares Share
- -------------- ------------ ------------ ------------ ------------ ------------
$5.46-$5.74 15,638 2.87 $ 5.51 15,638 $ 5.51
$5.75-$7.91 197,080 2.83 7.91 194,280 7.91
$7.92-$18.39 60,538 7.13 10.94 33,138 8.15
------------ ------------ ------------ ------------ ------------
273,256 3.79 $ 8.44 243,056 $ 7.78
============ ============ ============ ============ ============
Restricted stock:
During fiscal 1999, the shareholders of the Company approved the Management
Recognition and Development Plan (MRDP). Under the MRDP, the Company is
authorized to grant up to 158,700 shares of restricted stock to employees,
officers and directors of the Company. During fiscal 1999, 158,700 shares of
restricted stock were awarded to the deferred compensation plan. The fair market
value at the date of award was $7.905 per share. These awards vest ratably over
a five-year period. Deferred compensation resulting from these awards is
amortized as a charge to expense over the five-year period; expense recognized
by the Company was $157,000 for the year ending March 31, 2004. There was no
expense recognized for the years ending March 31, 2005 and 2006. The balance of
deferred compensation is shown as a reduction of stockholders' equity.
F-44
Note 17 - Earnings per Share
The Company reports EPS (earnings per share) in accordance with SFAS No. 128,
Earnings per Share. SFAS No. 128 establishes standards for computing and
presenting EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period. SFAS No. 128 also
requires presentation of EPS assuming dilution (diluted EPS). Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Stock options are the only potentially dilutive instruments issued by the
Company. ESOP shares that are unallocated and not yet committed to be released
are excluded from the weighted average shares outstanding calculation (see Note
16).
Information used to calculate earnings per share for the years ended March 31,
2006, 2005 and 2004 was as follows:
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
(Dollars in Thousands,
except Per Share Data)
Net income $ 8,516 $ 6,278 $ 4,358
============ ============ ============
Basic weighted-average number of
common shares outstanding 5,879,598 5,792,614 3,851,608
Dilutive effect of potential common shares 140,734 202,646 259,662
------------ ------------ ------------
Diluted weighted-average
number of shares outstanding 6,020,332 5,995,260 4,111,270
============ ============ ============
Net income per common share
Basic $ 1.45 $ 1.08 $ 1.13
Diluted $ 1.41 $ 1.05 $ 1.06
Note 18 - Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized on the balance sheet, for which it is practicable to estimate that
value. SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value estimates presented do not reflect the underlying fair value of the
Company.
F-45
Note 18 - Fair Values of Financial Instruments (Continued)
Although management is not aware of any factors that would materially affect the
estimated fair value amounts presented, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and, therefore, estimates of fair value subsequent to that date may differ
significantly from the amounts presented as follows.
March 31,
---------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
(In Thousands)
Financial Assets:
Cash and cash equivalents $ 26,903 $ 26,903 $ 41,801 $ 41,801
Investment securities held-to-maturity 31,651 31,440 30,907 30,869
Investment securities available-for-sale 16,890 16,890 17,427 17,427
Mortgage-backed securities held-to-maturity 22,312 21,661 22,463 22,147
Mortgage-backed securities available-for-sale 29,843 29,843 39,441 39,441
Loans held for sale 3,785 3,785 3,999 3,999
Loans receivable 632,543 625,657 562,101 563,307
Equity securities 12,789 12,789 12,789 12,789
Cash surrender value of life
insurance 24,415 24,415 23,318 23,318
Financial Liabilities:
Deposits $ 570,040 $ 566,838 $ 518,676 $ 517,278
Securities sold under agreements to repurchase 9,636 9,645 16,023 16,004
Advances from borrowers for
taxes and insurance 972 972 913 913
FHLB advances and other borrowings 176,817 178,527 185,337 188,178
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents:
The carrying amount of these items is a reasonable estimate of their fair value.
Investment securities and mortgaged-backed securities available for sale and
held to maturity:
The fair value of investment securities is based on quoted market prices or
dealer estimates. Estimated fair value for mortgage-backed securities issued by
quasi-governmental agencies is based on quoted market prices. The fair value of
all other mortgage-backed securities is based on dealer estimates.
F-46
Note 18 - Fair Values of Financial Instruments (Continued)
Loans held for sale:
The fair value of loans held for sale is estimated by discounting the future
cash flows at current rates.
Loans receivable:
For certain homogeneous categories of loans, such as fixed and variable rate
residential mortgages, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other loan types is estimated by discounting
the future cash flows and estimated prepayments using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining term. Some loan types were valued at carrying value because of
their floating rate or expected maturity characteristics.
Cash surrender value of bank owned and other life insurance policies:
The carrying amount of these policies approximates their fair value.
Equity securities:
The fair value is based upon the redemption value of the stock which equates to
its carrying value.
Deposits:
The fair value of demand deposits, savings accounts, and money market accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting the estimated
future cash flows using the rates currently offered for deposits with similar
remaining maturities.
Securities sold under agreements to repurchase:
The fair value of securities sold under agreements to repurchases is the amount
payable on demand at the reporting date.
Advances to borrowers for taxes and insurance:
The fair value of advances to borrowers for taxes and insurance is the amount
payable on demand at the reporting date.
FHLB Advances:
The fair value of FHLB advances and other borrowings is estimated by discounting
the estimated future cash flows using rates currently available to the Bank for
debt with similar remaining maturities.
F-47
Note 18 - Fair Values of Financial Instruments (Continued)
Off-balance sheet instruments:
The fair value of a loan commitment is determined based on the fees currently
charged to enter into similar agreements, taking into account the remaining
length of the commitment period and the present creditworthiness of the
counterparties. Neither the fees earned during the year on these instruments nor
their value at year end is significant to the Company's consolidated financial
position.
Note 19 - Liquidation Account
At the time of the Bank's conversion from mutual to stock form the Bank
established a liquidation account in an amount equal to its equity as reflected
in the latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders and supplemental eligible account holders who continue
to maintain their accounts at the Bank after the Conversion. The liquidation
account will be reduced annually to the extent that eligible account holders and
supplemental eligible account holders have reduced their qualifying deposits as
of each anniversary date. Subsequent increases will not restore an eligible
account holder's or supplemental eligible account holder's interest in the
liquidation account. In the event of a complete liquidation of the Bank, each
eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
Note 20 - Commitments and Contingencies
Periodically, there have been various claims and lawsuits involving the Bank,
such as claims to enforce liens, condemnation proceedings on properties in which
the Bank holds security interests, claims involving the making and servicing of
real property loans and other issues incident to the Bank's business. The
Company and the Bank are not a party to any pending legal proceedings that they
believe would have a material adverse effect on the financial condition or
operations of the Company.
F-48
Note 20 - Commitments and Contingencies (Continued)
The Company rents branch and office space under various operating leases. Total
rent expense recognized during the years ended March 31, 2006, 2005 and 2004,
was $229,000, $201,000, and $194,000, respectively. Future minimum rental
payments under the operating lease agreements are:
Year Ending March 31,
(In Thousands)
2007 $ 218
2008 135
Thereafter 32
------------
$ 385
============
The Company subleases portions of its branch facilities under noncancelable
operating lease agreements. Total sublease income recognized during the years
ended March 31, 2006, 2005 and 2004 was $108,000, $98,000, and $113,000,
respectively. Future minimum rental payments due to the Company under subleases
are as follows:
Year Ending March 31, 2007 (In Thousands) $ 66
============
F-49
Note 21 - Selected Quarterly Financial Data
Year ended March 31, 2006
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)
Total interest income $ 12,140 $ 12,998 $ 13,287 $ 13,763
Total interest expense 4,328 4,765 4,963 5,258
------------ ------------ ------------ ------------
Net interest income 7,812 8,233 8,324 8,505
Provision for loan losses 868 272 422 237
------------ ------------ ------------ ------------
Net interest income after provision 6,944 7,961 7,902 8,268
Non-interest income 1,657 1,766 1,794 1,716
Non-interest expense 5,950 6,436 6,552 6,646
------------ ------------ ------------ ------------
Income before income taxes 2,651 3,291 3,144 3,338
Provision for income taxes 799 1,041 978 1,090
------------ ------------ ------------ ------------
Net income $ 1,852 $ 2,250 $ 2,166 $ 2,248
============ ============ ============ ============
Basic earnings per share $ 0.316 $ 0.383 $ 0.369 $ 0.380
Diluted earnings per share $ 0.309 $ 0.374 $ 0.360 $ 0.371
Cash dividends declared $ 0.085 $ 0.085 $ 0.085 $ 0.100
F-50
Note 21 - Selected Quarterly Financial Data (Continued)
Year ended March 31, 2005
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)
Total interest income $ 9,510 $ 9,912 $ 10,369 $ 10,840
Total interest expense 2,982 3,193 3,366 3,778
------------ ------------ ------------ ------------
Net interest income 6,528 6,719 7,003 7,062
Provision for loan losses 376 194 470 488
------------ ------------ ------------ ------------
Net interest income after provision 6,152 6,525 6,533 6,574
Non-interest income 1,718 1,428 1,431 1,433
Non-interest expense 5,690 5,708 5,896 5,855
------------ ------------ ------------ ------------
Income before income taxes 2,180 2,245 2,068 2,152
Provision for income taxes 628 619 542 578
------------ ------------ ------------ ------------
Net income $ 1,552 $ 1,626 $ 1,526 $ 1,574
============ ============ ============ ============
Basic earnings per share $ 0.271 $ 0.281 $ 0.263 $ 0.269
Diluted earnings per share $ 0.259 $ 0.270 $ 0.256 $ 0.263
Cash dividends declared $ 0.085 $ 0.085 $ 0.085 $ 0.085
Year ended March 31, 2004
---------------------------------------------------------
June 30 September 30 December 31 March 31
------------ ------------ ------------ ------------
(In Thousands, Except Share Data)
Total interest income $ 5,098 $ 5,007 $ 8,011 $ 9,299
Total interest expense 2,057 2,014 2,795 3,068
------------ ------------ ------------ ------------
Net interest income 3,041 2,993 5,216 6,231
Provision for loan losses 177 78 163 (23)
------------ ------------ ------------ ------------
Net interest income after provision 2,864 2,915 5,053 6,254
Non-interest income 1,390 1,158 1,226 1,742
Non-interest expense 3,147 3,148 4,721 5,746
------------ ------------ ------------ ------------
Income before income taxes 1,107 925 1,558 2,250
Provision for income taxes 328 231 277 646
------------ ------------ ------------ ------------
Net income $ 779 $ 694 $ 1,281 $ 1,604
============ ============ ============ ============
Basic earnings per share $ 0.304 $ 0.268 $ 0.280 $ 0.280
Diluted earnings per share $ 0.288 $ 0.254 $ 0.258 $ 0.263
Cash dividends declared $ 0.075 $ 0.075 $ 0.075 $ 0.085
F-51
Note 22 - Business Combination
On October 31, 2003, the Company completed the acquisition of Oregon Trail and
its wholly-owned subsidiary, Pioneer Bank, for approximately $36.5 million in
cash and 2,960,128 shares of FirstBank common stock for consideration of the
3,108,657 shares of Oregon Trail common stock outstanding as of the completion
date of the acquisition. The value of the 2,960,128 shares of corporate stock
issued was based on the closing price of $11.23 on February 24, 2003, resulting
in a purchase price of $35.5 million. Common stock increased $14,800 and
additional paid in capital increased $33.2 million as a result of the issuance
of common stock for the acquisition. Additional paid in capital increased by
$4.6 million as a result of the purchase of the fair value of Oregon Trail's
unexercised stock options as of the completion date of the acquisition. The
statement of operations includes operations of the acquired entity, Oregon
Trail, for the five month period ended March 31, 2004.
It has been the Company's strategic objective to utilize capital to support
growth, and growth through acquisition was also a longer term strategy. Oregon
Trail complemented the Company's operations and business strategies. Oregon
Trail was a potential acquisition candidate because of its market area that is
geographically contiguous to the Company's existing market areas with no
overlapping branches. Oregon Trail was also considered to be a potential
candidate because of its stable deposit markets, sizable asset base, strong
asset quality, and its community banking philosophy, which is shared by the
Company. In addition, Oregon Trail and the Company have common backgrounds as
converted thrift institutions, and the board of directors and management of the
Company believed that a combination of the two companies would enhance the
Company's competitiveness, with a minimal impact on Oregon Trail's employees. In
fiscal year 2005, the integration for the core processing system platform was
completed and now the entire bank is operating on one operating system. This
completes the system integrations. The acquisition doubled the Company's asset
size and the common stock outstanding. The Company is the surviving holding
company with 100% ownership of the Bank, and the Bank is the surviving thrift
subsidiary.
F-52
Note 22 - Business Combination (Continued)
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
At October 31, 2003
(In Thousands)
Cash and cash equivalents $ 61,207
Securities 72,686
Loans, net 196,559
Premises and equipment, net 8,411
FHLB Stock 6,378
Bank-owned and cash surrender value of life insurance policies 14,299
Other assets 4,701
Core deposit intangible 3,876
Goodwill 18,147
------------
Total assets acquired $ 386,264
============
Deposits 258,487
Borrowings 50,969
Other liabilities 3,518
------------
Total liabilities assumed $ 312,974
============
Net assets acquired $ 73,290
Issuance of corporate stock 33,227
Fair value of stock options 4,563
------------
Aggregate purchase price $ 35,500
============
At October 31, 2003, the goodwill asset recorded in connection with the Oregon
Trail acquisition was $18.1 million. None of the goodwill is expected to be
deductible for tax purposes.
F-53
Note 22 - Business Combination (Continued)
The following table sets forth the supplemental pro forma condensed combined
statement of income for the year ended March 31, 2004, reflecting the
acquisition of Oregon Trail by the Company as if it had occurred at the
beginning of the periods shown.
FirstBank NW Corp.
Oregon Trail Financial Corp.
Pro Forma Condensed Combined Statements of Income
(Dollars in Thousands, except Per Share Data)
Year Ended
March 31,
------------
2004
------------
Total interest income $ 39,917
Total interest expense 13,083
------------
Net interest income 26,834
Provision for loan losses 1,248
------------
Net interest income after provision for loan losses 25,586
Total non-interest income 7,391
Total non-interest expense (25,187)
------------
Income before income tax expense 7,790
Income tax expense 2,006
------------
Net income $ 5,784
============
Pro Forma earnings per share:
Pro Forma net income per share - basic $ 1.04
Pro Forma net income per share - diluted $ 0.95
Pro Forma weighted average
shares outstanding - basic 5,587,136
Pro Forma weighted average
shares outstanding - diluted 6,106,390
F-54
Note 23 - Parent Company Financial Information
FirstBank NW Corp.
Statements of Financial Condition
(Dollars in Thousands)
Year Ended March 31,
---------------------------
2006 2005
------------ ------------
Assets
Cash and cash equivalents $ 25 $ 124
Investment securities; available-for-sale 1,049 1,058
Loan receivable from ESOP 732 800
Investment in subsidiaries 78,999 70,901
Income taxes receivable 1,605 1,966
Deferred federal and state taxes 25 154
Other assets 44 67
------------ ------------
TOTAL ASSETS $ 82,479 $ 75,070
============ ============
Liabilities and Stockholders' Equity
Deferred change of control payments $ 189 $ 537
Borrowing 3,147 2,162
Other liabilities 13 60
Stockholders' equity 79,130 72,311
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 82,479 $ 75,070
============ ============
F-55
Note 23 - Parent Company Financial Information (Continued)
FirstBank NW Corp.
Statements of Income
(Dollars in Thousands)
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Interest income:
ESOP loan $ 66 $ 70 $ 77
Cash and cash equivalents 1 1 3
Investment securities 14 14 7
Other income:
Equity in undistributed income of
subsidiaries, net of taxes 8,971 6,541 4,574
Other -- 3 --
------------ ------------ ------------
9,052 6,629 4,661
------------ ------------ ------------
Interest expense:
Borrowing 177 61 67
Other expense:
Compensation, payroll taxes, and fringe benefits 213 157 206
Other expense 429 303 160
------------ ------------ ------------
819 521 433
------------ ------------ ------------
Income before income tax benefit 8,233 6,108 4,228
Income tax benefit 283 170 130
------------ ------------ ------------
NET INCOME $ 8,516 $ 6,278 $ 4,358
============ ============ ============
F-56
Note 23 - Parent Company Financial Information (Continued)
FirstBank NW Corp
Statements of Cash Flows
(Dollars in Thousands)
Year Ended March 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,516 $ 6,278 $ 4,358
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of subsidiaries, net of taxes (8,971) (6,541) (4,573)
Amortization of securities 63 64 26
Amortization of deferred compensation -- -- 157
Changes in assets and liabilities:
Other assets 23 (19) 982
Income taxes receivable 524 537 (24)
Deferred federal and state taxes 109 195 103
Deferred change of control liability (348) (597) (334)
Other liabilities (25) 40 20
------------ ------------ ------------
Net cash provided (used) by operating activities (109) (43) 715
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities; available-for-sale -- -- 937
Dividends received from subsidiaries 750 -- 33,600
Net cash in acquisition -- -- (31,222)
Principal repayments on ESOP loan 68 62 56
------------ ------------ ------------
Net cash provided by investing activities 818 62 3,371
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of common stock -- (2,647) (5,123)
Proceeds from the exercise of stock options 433 2,144 2,813
Cash dividends paid on common stock (2,173) (1,952) (1,296)
Cash dividends paid on unallocated ESOP Shares to reduce debt (53) (55) (53)
Advances from borrowing 4,177 3,837 36,692
Repayments on advances from borrowing (3,192) (1,675) (36,692)
------------ ------------ ------------
Net cash used by financing activities (808) (348) (3,659)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (99) (329) 427
Cash and cash equivalents, beginning of year 124 453 26
------------ ------------ ------------
Cash and cash equivalents, end of year $ 25 $ 124 $ 453
============ ============ ============
Supplemental disclosure for cash flow information:
Cash paid during the year for:
Interest $ 177 $ 61 $ 67
============ ============ ============
Income taxes $ 4,695 $ 2,067 $ 1,628
============ ============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES
ESOP shares released $ 246 $ 236 $ 220
============ ============ ============
Unrealized gain (loss) on securities available-for-sale, net of tax $ (304) $ (1,118) $ 382
============ ============ ============
Unrealized gain on interest rate swap, net of tax $ -- $ (23) $ (127)
============ ============ ============
F-57