UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2006
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _________
Commission file number 0-22435
FIRSTBANK NW CORP.
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(Name of registrant as specified in its charter)
Washington 84-1389562
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 16th Avenue Clarkston, WA 99403
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(Address of principal executive offices)
(509) 295-5100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: Common Stock 5,947,168 shares
outstanding on October 31, 2006.
FIRSTBANK NW CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
September 30, 2006 and March 31, 2006 1
Consolidated Statements of Income
For the three months and six months ended September 30, 2006 and 2005 2
Consolidated Statements of Comprehensive Income
For the three months and six months ended September 30, 2006 and 2005 3
Consolidated Statements of Cash Flows
For the six months ended September 30, 2006 and 2005 4
Notes to Consolidated Financial Statements 5 - 14
Item 2. Management's Discussion and Analysis of Financial 15 - 28
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 31
SIGNATURES 32
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in Thousands)
September 30, March 31,
2006 2006
------------ ------------
ASSETS
Cash and cash equivalents:
Non-interest bearing cash deposits $ 19,106 $ 26,637
Interest bearing cash deposits 7,859 266
------------ ------------
Total cash and cash equivalents 26,965 26,903
Investment securities:
Held-to-maturity 31,811 31,651
Available-for-sale 16,058 16,890
Mortgage-backed securities:
Held-to-maturity 22,232 22,312
Available-for-sale 27,923 29,843
Equity securities, at cost 12,789 12,789
Loans receivable, net (Note 2) 671,157 632,543
Loans held for sale 4,337 3,785
Accrued interest receivable 5,777 4,657
Premises and equipment, net 17,761 17,558
Bank-owned and cash surrender value of life insurance policies 24,987 24,415
Mortgage servicing assets (Note 3) 505 533
Goodwill and other intangible assets (Note 4) 18,453 18,811
Other assets 3,412 3,313
------------ ------------
TOTAL ASSETS $ 884,167 $ 846,003
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Interest bearing demand deposits $ 222,601 $ 183,491
Non-interest bearing demand deposits 99,999 95,304
Savings 32,051 36,614
Certificates of deposit 278,767 254,631
------------ ------------
Total deposits 633,418 570,040
Securities sold under agreements to repurchase 9,454 9,636
Advances from borrowers for taxes and insurance 1,036 972
FHLB advances and other borrowings (Note 5) 151,202 176,817
Deferred federal and state income taxes, net -- 23
Accrued expenses and other liabilities 6,293 9,385
------------ ------------
Total Liabilities 801,403 766,873
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $0.01 par value, 500,000 shares authorized;
0 shares issued and outstanding -- --
Common stock, $0.01 par value, 49,500,000 shares authorized;
6,062,186 and 6,053,186 shares issued;
5,945,668 and 5,928,312 shares outstanding (Note 10) 61 61
Additional paid-in capital 46,200 45,944
Retained earnings, substantially restricted 37,098 33,915
Unearned ESOP shares (593) (635)
Accumulated other comprehensive loss (2) (155)
------------ ------------
Total Stockholders' Equity 82,764 79,130
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 884,167 $ 846,003
============ ============
See accompanying notes to consolidated financial statements
1
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(Dollars in Thousands, except per share data)
Three months ended September 30, Six months ended September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Interest income:
Loans receivable $ 14,595 $ 11,584 $ 28,216 $ 22,261
Mortgage-backed securities 559 608 1,180 1,279
Investment securities, taxable 182 182 363 365
Investment securities, tax-exempt 359 333 700 667
Other interest earning assets 309 291 629 566
-------------- -------------- -------------- --------------
Total interest income 16,004 12,998 31,088 25,138
-------------- -------------- -------------- --------------
Interest expense:
Deposits 4,682 2,846 8,530 5,215
Securities sold under agreements to repurchase 136 60 255 110
FHLB advances and other borrowings 1,878 1,859 4,050 3,768
-------------- -------------- -------------- --------------
Total interest expense 6,696 4,765 12,835 9,093
-------------- -------------- -------------- --------------
Net interest income 9,308 8,233 18,253 16,045
Provision for loan losses 165 272 537 1,140
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 9,143 7,961 17,716 14,905
-------------- -------------- -------------- --------------
Non-interest income:
Gain on sale of loans 264 492 616 811
Recovery (impairment) of mortgage servicing rights, net -- (44) 55 (25)
Service fees and other charges 1,384 1,266 2,599 2,483
Other 70 52 112 154
-------------- -------------- -------------- --------------
Total non-interest income 1,718 1,766 3,382 3,423
-------------- -------------- -------------- --------------
Non-interest expense:
Compensation and employee related benefits 3,737 3,729 7,891 7,368
Occupancy 718 763 1,450 1,469
Supplies and postage 197 231 425 449
Data and automated teller machine processing 344 248 690 427
Professional fees 401 304 1,194 537
Advertising 90 123 308 354
Travel and meals 72 71 169 129
Debit and credit card expense 366 305 691 582
Other 436 662 875 1,071
-------------- -------------- -------------- --------------
Total non-interest expense 6,361 6,436 13,693 12,386
-------------- -------------- -------------- --------------
Income before income tax expense 4,500 3,291 7,405 5,942
Income tax expense 1,536 1,041 2,440 1,840
-------------- -------------- -------------- --------------
Net income $ 2,964 $ 2,250 $ 4,965 $ 4,102
============== ============== ============== ==============
Earnings per share (Notes 6, 7 and 10):
Net income per share - basic $ 0.50 $ 0.38 $ 0.84 $ 0.70
Net income per share - diluted $ 0.48 $ 0.37 $ 0.81 $ 0.68
Weighted average shares outstanding - basic 5,943,579 5,867,066 5,939,604 5,862,414
Weighted average shares outstanding - diluted 6,126,446 5,999,644 6,113,303 5,990,800
Cash dividends paid per common share (Note 10) $ 0.10 $ 0.085 $ 0.20 $ 0.17
See accompanying notes to consolidated financial statements
2
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in Thousands)
Three months ended September 30, Six months ended September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net income $ 2,964 $ 2,250 $ 4,965 $ 4,102
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on
securities; available-for-sale, net of tax
benefit (expense) of $(236), $100, and
$(97), $(51) 367 (152) 153 84
-------------- -------------- -------------- --------------
Comprehensive income $ 3,331 $ 2,098 $ 5,118 $ 4,186
============== ============== ============== ==============
See accompanying notes to consolidated financial statements
3
FirstBank NW Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Six months ended September 30,
--------------------------------
2006 2005
-------------- --------------
Cash flows from operating activities:
Net income $ 4,965 $ 4,102
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 729 711
Accretion of securities and intangibles, net 146 33
Provision for loan losses 537 1,140
Net increase in cash surrender value of life insurance policies (571) (533)
Gain on sale of loans held for sale (616) (811)
Loss on sale of securities 2 --
Proceeds from sale of loans held for sale 37,402 55,165
Originations of loans held for sale (37,339) (57,175)
Impairment (recovery) of mortgage servicing rights (55) 25
ESOP compensation expense 203 132
Other (gains) losses, net 17 (44)
Deferred federal and state income taxes, net (286) (369)
Equity compensation expense 12 --
Changes in assets and liabilities:
Accrued interest receivable and other assets (1,379) (780)
Accrued expenses and other liabilities (3,685) (85)
Income taxes receivable 484 623
-------------- --------------
Net cash provided by operating activities 566 2,134
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities; held-to-maturity 44 39
Proceeds from maturities of mortgage-backed securities; available-for-sale 2,081 5,549
Proceeds from maturities of investment securities; available-for-sale 735 269
Proceeds from sale of investment securities; available-for-sale 80 --
Purchase of investment securities; held-to-maturity (200) --
Net change in loans receivable (39,238) (34,881)
Purchases of premises and equipment (951) (132)
Proceeds from sale of premises and equipment 2 --
Proceeds from sale of foreclosed and repossessed assets 31 768
-------------- --------------
Net cash used in investing activities (37,416) (28,388)
-------------- --------------
Cash flows from financing activities:
Cash paid for dividends on common stock (1,186) (995)
Net change in deposits 63,528 42,994
Net change in securities sold under agreements to repurchase (182) (9,097)
Advances from borrowers for taxes and insurance 63 38
Advances from FHLB and other borrowings 482,604 312,404
Repayments on advances from FHLB and other borrowings (507,986) (336,829)
Proceeds from the exercise of stock based compensation 71 78
-------------- --------------
Net cash provided by financing activities 36,912 8,593
-------------- --------------
Net increase (decrease) in cash and cash equivalents 62 (17,661)
Cash and cash equivalents, beginning of period 26,903 41,801
-------------- --------------
Cash and cash equivalents, end of period $ 26,965 $ 24,140
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 12,570 $ 9,047
Cash paid during the period for income taxes $ 2,241 $ 2,256
Noncash investing and financing activities:
Common stock cash dividends accrued $ 593 $ --
Unrealized gains on securities; available-for-sale, net of tax $ 153 $ 84
Loans receivable charged to the allowance for loan losses $ 173 $ 262
Transfer from loans converted to real estate and repossessed assets acquired
through foreclosure and repossession $ 94 $ 117
See accompanying notes to consolidated financial statements
4
FIRSTBANK NW CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. These statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Annual Report on Form 10-K of FirstBank NW Corp.
(the "Company") for the year ended March 31, 2006. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation have been included. The results of operations and other data
for the six months ended September 30, 2006 are not necessarily indicative of
results that may be expected for the entire fiscal year ending March 31, 2007.
The Company's unaudited consolidated financial statements include the accounts
of its wholly-owned subsidiary, FirstBank Northwest (the "Bank"), and the Bank's
wholly-owned subsidiaries, TriStar Financial Corporation and Pioneer Development
Corporation. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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 of the loan portfolio and
consideration of economic conditions which may affect the ability of borrowers
to repay their loans on a monthly basis. The Board of Directors reviews on a
quarterly basis the provision for loan losses and the allowance for loan losses.
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 MSRs is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of MSRs 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 MSRs for a stratum exceeds their fair value.
5
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 Statement of Financial Accounting
Standards ("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.
(2) LOANS RECEIVABLE
Loans receivable at September 30, 2006 and March 31, 2006 consisted of the
following:
September 30, March 31,
2006 2006
------------ ------------
(In Thousands)
Real estate loans:
Residential $ 129,775 $ 123,461
Commercial 208,064 201,282
Agricultural 19,193 18,792
Construction 113,859 108,650
Other loans:
Commercial (non-real estate) 104,972 91,628
Other consumer 37,809 39,089
Home equity 42,996 40,926
Agricultural operating 24,806 19,333
------------ ------------
Total loans receivable 681,474 643,161
Less:
Unearned loan fees and discounts 1,756 2,480
Allowance for loan losses 8,561 8,138
------------ ------------
Loans receivable, net $ 671,157 $ 632,543
============ ============
The following table sets forth the breakdown of the allowance for loan losses
by loan category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any other category.
September 30, March 31,
2006 2006
--------------------------- ---------------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Amount Loans Amount Loans
------------ ------------ ------------ ------------
(Dollars in Thousands)
Residential $ 467 19.04% $ 422 19.20%
Commercial (real estate and non-real estate) 4,156 45.93 3,950 45.55
Agricultural (real estate and non-real estate) 417 6.46 565 5.92
Construction 1,782 16.71 1,674 16.89
Consumer and other loans 1,739 11.86 1,527 12.44
------------ ------------ ------------ ------------
Total allowance for loan losses $ 8,561 100.00% $ 8,138 100.00%
============ ============ ============ ============
6
The following table sets forth the changes in the Bank's allowance for loan
losses for the periods indicated.
Six Months Six Months
Ended Ended
September 30, September 30,
2006 2005
------------ ------------
(Dollars in Thousands)
Balance at beginning of period $ 8,138 $ 7,254
------------ ------------
Provision for loan losses 537 1,140
------------ ------------
Charge-offs:
Residential (real estate) -- 12
Commercial (non-real estate) -- 15
Consumer and other loans 173 235
------------ ------------
Total charge-offs 173 262
Recoveries 59 54
------------ ------------
Net charge-offs 114 208
------------ ------------
Balance at end of period $ 8,561 $ 8,186
============ ============
Net charge-offs to average outstanding loans 0.02% 0.03%
The following table sets forth information with respect to the Bank's
nonperforming assets and restructured loans within the meaning of GAAP at the
dates indicated. The Bank's policy is to cease accruing interest on loans more
than 90 days past due, with exceptions made for special circumstances.
September 30, March 31,
2006 2006
------------ ------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 87 $ 145
Agricultural 342 67
Other loans 28 96
------------ ------------
Total 457 308
Accruing loans which are contractually
past due more than 90 days 193 4
------------ ------------
Total nonperforming loans 650 312
Real estate owned -- --
Repossessed assets 76 13
Restructured loans 888 872
------------ ------------
Total nonperforming assets $ 1,614 $ 1,197
============ ============
Nonperforming loans as a percent of loans
receivable, net 0.10% 0.05%
Nonperforming loans as a percent of total assets 0.07% 0.04%
Nonperforming assets as a percent of total assets 0.18% 0.14%
Total nonperforming assets to total loans 0.24% 0.19%
7
(3) MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights ("MSRs") is amortized in proportion to,
and over the period of, estimated net servicing revenues. Impairment of MSRs 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 MSRs for a stratum exceeds their fair value. The
accumulated allowance for impairment on MSRs at September 30, 2006 and 2005 was
$227,000 and $371,000, respectively.
The following table is an analysis of the changes in MSRs for the periods
indicated:
Six Months Six Months
Ended Ended
September 30, September 30,
2006 2005
------------ ------------
(In Thousands)
Beginning Balance $ 533 $ 614
Additions 22 24
Amortization (105) (102)
Recovery (impairment) 55 (25)
------------ ------------
Ending Balance $ 505 $ 511
============ ============
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at September 30, 2006 and March 31, 2006 was $16.6 million. No
impairment loss on goodwill and other intangible assets was recorded for the six
months ended September 30, 2006 as there were no impairment indicators during
the period.
The core deposit intangible at September 30, 2006 was $1.8 million, net of
accumulated amortization of $2.1 million. The core deposit intangible at March
31, 2006 was $2.2 million, net of accumulated amortization of $1.7 million.
8
(5) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The Bank utilizes advances from the Federal Home Loan Bank ("FHLB") to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB functions as a central reserve bank, providing credit for
savings associations and certain other member financial institutions. As a
member of the FHLB, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of the stock and certain of its
mortgage loans and other assets (principally securities that are obligations of,
or guaranteed by, the U.S. Government) provided certain creditworthiness
standards have been met. Advances are made pursuant to several different credit
programs. Each credit program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of advances are based on the
financial condition of the member institution and the adequacy of collateral
pledged to secure the credit. The Bank is currently authorized to borrow from
the FHLB up to an amount equal to 30% of total assets, provided that the Bank
holds sufficient collateral. Advances from the FHLB were $146.6 million and
$170.7 million, including merger premium of $1.9 million and $2.2 million, at
September 30, 2006 and March 31, 2006, respectively. The Bank also maintains an
additional credit facility of $20.0 million with US Bank. There were no
outstanding balances under this facility at September 30, 2006 and March 31,
2006. The Company maintains an additional credit facility of $3.5 million with
US Bank. There were outstanding balances of $1.6 million and $3.1 million at
September 30, 2006 and March 31, 2006, respectively. The Bank maintains an
additional credit facility with the Portland Branch Office of the Federal
Reserve Bank of San Francisco. There were no outstanding balances under this
facility at September 30, 2006 and March 31, 2006. On June 10, 2005, the Bank
entered into a Subordinated Debenture Purchase Agreement with US Bank of $3.0
million to be repaid in full on June 10, 2015.
Scheduled maturities of FHLB advances and other borrowings were as follows:
One Year to Five Years to
Less than One Less than Less than Ten Years or
At September 30, 2006: Year than Five Years Years Greater
---- --------------- ----- -------
(Dollars in Thousands)
Maturities of advances and other borrowings $ 95,905 $ 39,180 $ 9,320 $ 6,797
Range of interest rates 4.42% - 7.75% 3.33% - 7.12% 3.42% - 6.88% 6.66% - 7.10%
Weighted average interest rate 5.48% 5.21% 4.89% 7.03%
Percentage of total advances and other borrowings 63.43% 25.91% 6.16% 4.50%
At March 31, 2006:
Maturities of 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 of advances from the FHLB that were putable at
September 30, 2006 and March 31, 2006.
(6) DIVIDENDS
On June 29, 2006, the Board of Directors declared a cash dividend of $0.10 per
common share to stockholders of record as of August 2, 2006. The dividend was
paid on August 16, 2006. On September 13, 2006, the Board of Directors declared
a cash dividend of $0.10 per common share to stockholders of record as of
September 27, 2006. The dividend was paid on October 11, 2006.
9
(7) EARNINGS PER SHARE
Earnings per share ("EPS") is computed by dividing net income by the weighted
average number of common shares outstanding in accordance with SFAS No. 128,
Earnings Per Share. Diluted earnings per share takes into account the potential
dilutive impact of such instruments as stock options and uses average market
price for the period in determining the number of incremental shares to add to
the weighted-average number of shares outstanding.
The following table reconciles the number of common shares used in the basic and
diluted EPS calculations, as adjusted to reflect the two-for-one stock split as
referenced in Note 10:
For the Three Months Ended For the Three Months Ended
September 30, 2006 September 30, 2005
------------------------------------------ ------------------------------------------
Weighted- Weighted-
Average Per-Share Average Per-Share
Net Income Shares Amount Net Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands, except per share data)
Basic EPS:
Income available to common
stockholders $ 2,964 5,943,579 $ 0.50 $ 2,250 5,867,066 $ 0.38
============ ============
Effect of dilutive securities:
Stock options -- 182,867 -- 132,578
------------ ------------ ------------ ------------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 2,964 6,126,446 $ 0.48 $ 2,250 5,999,644 $ 0.37
============ ============ ============ ============ ============ ============
For the Six Months Ended For the Six Months Ended
September 30, 2006 September 30, 2005
------------------------------------------ ------------------------------------------
Weighted- Weighted-
Average Per-Share Average Per-Share
Net Income Shares Amount Net Income Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands, except per share data)
Basic EPS:
Income available to common
stockholders $ 4,965 5,939,604 $ 0.84 $ 4,102 5,862,414 $ 0.70
============ ============
Effect of dilutive securities:
Stock options -- 173,699 -- 128,386
------------ ------------ ------------ ------------
Diluted EPS:
Income available to common
stockholders - assumed
conversions $ 4,965 6,113,303 $ 0.81 $ 4,102 5,990,800 $ 0.68
============ ============ ============ ============ ============ ============
Outstanding options to purchase 264,256 shares and 314,148 shares of the
Company's common stock were included in the computation of diluted EPS as of
September 30, 2006 and as of September 30, 2005, respectively. There were no
outstanding options to purchase shares of the Company's common stock excluded in
the computation of diluted EPS.
10
(8) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Standby letters of credit and financial guarantees are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. These guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. At September 30, 2006 and March 31, 2006, these commitments
totaled $7.8 million and $6.9 million, respectively. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. The Company holds cash, marketable securities, or
real estate as collateral supporting those commitments for which collateral is
deemed necessary. The Company has not been required to perform on any financial
guarantees and has not incurred any losses on its commitments during the past
three years. The liability recorded associated with standby letters of credit at
September 30, 2006 and March 31, 2006 was $36,000 and $21,000, respectively.
(9) EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, Fair Value Measurements. This statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. This statement
does not require any new fair value measurements. The statement is effective as
of the first annual reporting period that begins after November 15, 2007.
Management is currently evaluating the effect of the statement on the Company's
results of operations and financial condition.
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 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 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 Accounting Principles Board Opinion ("APB") 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.
(10) STOCK SPLIT
In January 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. The Company's common stock outstanding shares,
weighted average shares outstanding, and earnings per share have been adjusted
in the Consolidated Statements of Financial Condition and the Consolidated
Statements of Income to reflect the two-for-one stock split.
11
(11) STOCK BASED COMPENSATION
The Company has stock option plans for the benefit of officers, other key
employees and directors. As of September 30, 2006, the plans were authorized to
grant additional options to purchase 53,250 shares of the Company's common
stock. Under such plans, the option price is not to be less than the fair market
value of the common stock on the date the option is granted, and the stock
options are exercisable at any time within the maximum term of 10 years and one
day from the grant date. The options are nontransferable and are forfeited upon
termination of employment, except in case of retirement, in which case the
options are exercisable for three years after date of retirement. The Company
issues new common shares to satisfy exercises of stock options.
Prior to March 31, 2006, the Company accounted for the plans under the
recognitions and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations ("APB 25"). Accordingly,
because all stock options granted had an exercise price equal to the market
value of the underlying common stock on the date of the grant, no expense
related to employee stock options was recognized. Effective April 1, 2006, the
Company adopted the fair value recognition provisions of SFAS No. 123(R),
Share-Based Payment. Under the modified prospective method of adoption selected
by the Company, compensation expense related to stock options is recognized
beginning April 1, 2006 for any new awards issued after this date, as well as,
for any previously issued awards vesting on or after April 1, 2006. Compensation
cost in previous periods related to stock options continues to be disclosed on a
pro forma basis only. As required by SFAS No. 123R, the Company also estimates
forfeitures over the vesting period of the awards.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions to stock-based
employee compensation for the three and six months ended September 30, 2005:
Three Months Ended Six Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
(Dollars in Thousands, except per share data)
Net income $ 2,250 $ 4,102
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (2) (4)
------------------ ------------------
Pro forma net income $ 2,248 $ 4,098
================== ==================
Earnings per share - basic:
Net income $ 0.38 $ 0.70
Pro forma net income $ 0.38 $ 0.70
Earnings per share - diluted:
Net income $ 0.37 $ 0.68
Pro forma net income $ 0.37 $ 0.68
For the three months ended September 30, 2006, the pre-tax compensation cost
charged against income was $6,000, and the related income tax benefit recognized
in the income statement was $2,000. For the six months ended September 30, 2006,
the pre-tax compensation cost charged against income was $12,000 and the related
income tax benefit recognized in the income statement was $4,000. The Company
estimates the fair value of each option on the date of the grant using the Black
Scholes model. The Black Scholes model uses the following assumptions: 1)
expected life in years which is based on historical employee behavior; 2)
annualized volatility which is based on the price volatility of the Company's
stock over the expected life of the option; 3) annual rate of quarterly
dividends based on most recent historical rate; and 4) the discount rate based
on the zero coupon bond with a term equal to the expected life of the option.
There were no options granted in the quarters ended September 30, 2006 and 2005.
12
The following is a summary of the stock option activity for the six month period
ended September 30, 2006 and the stock options outstanding at the end of the
period:
Weighted-
Weighted- Average
Average Remaining Average
Exercise Contractual Intrinsic
Shares Price Term Value
------------ ------------ ------------ ------------
(Dollars in Thousands, except per share data)
Outstanding options at March 31, 2006 273,256 $ 8.44
============
Granted -- --
Exercised (9,000) 7.905
Forfeited -- --
------------ ------------ ------------ ------------
Outstanding options at September 30, 2006 264,256 $ 8.46 3.32 $ 5,121
============ ============ ============ ============
Exercisable options at September 30, 2006 236,856 $ 7.78 2.72 $ 4,751
============ ============ ============ ============
As of September 30, 2006, there was approximately $24,000 of unrecognized
compensation cost related to the unvested shares; that cost is expected to be
recognized over the remaining vesting period, which approximates 4.33 years.
There were no options granted during the six month periods ended September 30,
2006 and 2005. The total intrinsic value of options exercised during the six
months ended September 30, 2006 was $107,000. For the six months ended September
30, 2006, the Company received $71,000 from stock options exercised.
(12) BUSINESS COMBINATION
On June 4, 2006, Sterling Financial Corporation, a Washington corporation
("Sterling"), entered into an Agreement and Plan of Merger (the "Merger
Agreement") with FirstBank NW Corp., a Washington corporation ("FirstBank").
Under the terms of the Merger Agreement, FirstBank will be merged with and into
Sterling with Sterling being the surviving corporation of the merger. The Merger
Agreement also provides for the merger of FirstBank's financial institution
subsidiary, FirstBank Northwest, with and into Sterling's financial institution
subsidiary, Sterling Savings Bank, with Sterling Savings Bank being the
surviving institution.
Under the terms of the Merger Agreement, which has been unanimously approved by
the Boards of Directors of both companies, each share of FirstBank common stock
will be converted into 0.789 shares of Sterling common stock and $2.55 in cash,
subject to certain conditions. Based upon the closing price for Sterling's
common stock on June 2, 2006 of $31.19 per share, the consideration is
equivalent to $27.16 per share of FirstBank common stock. The transaction, which
is valued at approximately $169.6 million, is expected to close in the fourth
quarter of 2006, pending FirstBank shareholder and regulatory approval and the
satisfaction of other customary closing conditions.
13
(13) PRO FORMA EARNINGS PER SHARE
Management believes that providing non-GAAP financial measures provides
investors with information useful in understanding our financial performance.
The Pro forma earnings per share measures are based on "Pro forma net income",
which exclude merger related expenses. Pro forma net income per basic and
diluted share is calculated by dividing pro forma net income by the same basic
and diluted share totals used in determining basic and diluted earnings per
share.
A reconciliation of this non-GAAP measure to the most comparable GAAP equivalent
is included in the following financial table:
For the Three Months Ended For the Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Dollars in Thousands, except per share data)
Net income $ 2,964 $ 2,250 $ 4,965 $ 4,102
Add back: Merger related expenses, net of tax 145 -- 546 --
------------ ------------ ------------ ------------
Pro forma net income $ 3,109 $ 2,250 $ 5,511 $ 4,102
============ ============ ============ ============
Earnings per share - basic:
Net income $ 0.50 $ 0.38 $ 0.84 $ 0.70
Pro forma net income $ 0.52 $ 0.38 $ 0.93 $ 0.70
Earnings per share - diluted:
Net income $ 0.48 $ 0.37 $ 0.81 $ 0.68
Pro forma net income $ 0.51 $ 0.37 $ 0.90 $ 0.68
14
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto in the Company's Annual Report on Form 10-K for the
year ended March 31, 2006.
Management's discussion and analysis of financial condition and results of
operations and other portions of this Form 10-Q contain certain forward-looking
statements concerning the future operations of the Company. Management desires
to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing the Company of the protections of the safe harbor with
respect to all forward-looking statements. The Company has used forward-looking
statements to describe future plans and strategies, including expectations of
the Company's future financial results. Management's ability to predict results
or the effect of future plans or strategies is inherently uncertain. Factors
which could affect the results include interest rate trends, the general
economic climate in the 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.
EXECUTIVE OVERVIEW
The profitability of the Company's operations depends primarily on its net
interest income, its non-interest income (principally from loan origination fees
and transaction account service charges) and its non-interest expense. Net
interest income is the difference between the income the Company receives on its
loan and investment portfolio and its cost of funds, which consists of interest
paid on deposits and borrowings. Net interest income is a function of the
Company's interest rate spread, which is the difference between the yield earned
on interest earning assets and the rate paid on total deposits and borrowed
funds, as well as a function of the average balance of interest earning assets
as compared to the average balance of total deposits 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. The Company's results of operations may be adversely
affected during periods of reduced loan demand to the extent that non-interest
expenses associated with mortgage banking activities are not reduced
commensurate with the decrease in loan originations.
On July 1, 1997, FirstBank Northwest converted from mutual to stock form and
became a wholly owned subsidiary of a newly formed Delaware holding company,
FirstBank Corp. The Company sold 3,967,500 shares of common stock at $5.00 per
share in conjunction with a subscription offering to the Bank's Employee Stock
Ownership Plan ("ESOP") and eligible account holders. The net proceeds were
approximately $18.9 million. The Company used approximately $9.5 million of the
net proceeds to purchase all the capital stock of the Bank. In addition, the
Company loaned approximately $1.6 million to the ESOP for the purchase of shares
in the offering. In January 1998, the Bank changed its charter to a Washington
state savings bank. In September 1999, the Company changed its state of
incorporation from Delaware to Washington.
The Company's principal business is the business of the Bank. Management
believes that the Company operates under a single business segment; therefore,
the discussion in Management's Discussion and Analysis of Financial Conditions
and Results of Operations relates to the Bank and its operations. At September
30, 2006, the Bank had eight depository offices in Idaho, three in Washington,
and nine in Oregon. The Bank also operates five real estate loan production
centers and five commercial and agricultural production centers.
On October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. ("Oregon Trail") and its wholly-owned subsidiary, Pioneer Bank,
for approximately $36.5 million in cash and 2,960,128 shares of the Company's
common stock. The acquisition doubled the Company's asset size and shares of
common stock outstanding. The Company is the surviving holding company with 100%
ownership of the Bank, and the Bank is the surviving thrift subsidiary.
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. 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 split.
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.
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 of the loan portfolio and
consideration of economic conditions which may affect the ability of borrowers
to repay their loans on a monthly basis. The Board of Directors reviews on a
quarterly basis the provision for loan losses and the allowance for loan losses.
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 MSRs is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of MSRs 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 MSRs 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.
16
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.
Comparison of Financial Condition at September 30, 2006 and March 31, 2006
Assets. Total assets increased $38.2 million, or 4.5%, from $846.0 million at
March 31, 2006 to $884.2 million at September 30, 2006. This increase was
primarily the result of $38.6 million in loan growth. The following table
identifies the categories with notable variances between September 30, 2006 and
March 31, 2006:
Dollar Percentage
Balance at Balance at Increase Increase
September 30, 2006 March 31, 2006 (Decrease) (Decrease)
------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Non-interest bearing cash deposits $ 19,106 $ 26,637 $ (7,531) (28.27)%
Interest bearing cash deposits 7,859 266 7,593 2,854.51
Mortgage-backed securities,
available-for-sale 27,923 29,843 (1,920) (6.43)
Loans receivable, net 671,157 632,543 38,614 6.10
Accrued interest receivable 5,777 4,657 1,120 24.05
The decrease in non-interest bearing cash was the result of the Company
implementing a deposit reclassification program for purposes of regulatory
reporting which reduced the amount of funds required to be held in cash. This
reduced the Company's non-interest cash by approximately $9.0 million.
The increase in interest bearing cash deposits was the result of deposit growth
exceeding the cash necessary to fund loan growth and the repayment of advances.
The decrease in available-for-sale mortgage-backed securities was the result of
payments from maturities.
The increase in net loans receivable was the result of loans originated in the
Company's main market area, primarily from commercial loans in the Boise, and
Spokane markets, and construction lending in the Boise market.
The increase in accrued interest receivable was the result of an increase in the
accrued interest on loans receivable as the result of the increased loan
balances.
Liabilities. Total liabilities increased $34.5 million, or 4.5%, from $766.9
million at March 31, 2006 to $801.4 million at September 30, 2006. The growth in
liabilities resulted from deposit growth, which is part of management's focus,
partially offset by a decrease in FHLB and other borrowings. The following table
identifies the categories with notable variances between September 30, 2006 and
March 31, 2006:
Dollar Percentage
Balance at Balance at Increase Increase
September 30, 2006 March 31, 2006 (Decrease) (Decrease)
------------------ ------------------ ------------- -------------
(Dollars in Thousands)
Non-interest bearing deposits $ 99,999 $ 95,304 $ 4,695 4.93%
Interest bearing deposits 533,419 474,736 58,683 12.36
------------------ ------------------ ------------- -------------
Total deposits 633,418 570,040 63,378 11.12
FHLB advances and other borrowings 151,202 176,817 (25,615) (14.49)
Accrued expenses and other liabilities 6,293 9,385 (3,092) (32.95)
17
The non-interest bearing deposit gain was the result of an increase in business
checking accounts. Interest bearing deposits increased due to increases in
checking and money market accounts, primarily as a result of growth in business
money market accounts. Certificates of deposit increased primarily as a result
of a five month certificate of deposit special offered in our local markets.
The decrease in FHLB advances and other borrowings was the result of utilizing
excess funds not needed to fund net loan growth to repay advances.
Stockholders' Equity. Total stockholders' equity increased $3.7 million from
$79.1 million at March 31, 2006 to $82.8 million at September 30, 2006. This
increase was primarily the result of $5.0 million in net income, an increase of
$153,000 in unrealized gains on available-for-sale securities, net of tax
benefit, offset by the Company paying $1.2 million in dividends to its
stockholders and accruing $593,000 in dividends to its stockholders of record as
of September 27, 2006.
Comparison of Operating Results for the Three Months Ended September 30, 2005
and 2006
General. Net income increased $714,000, or 31.7%, from $2.3 million ($0.38 per
share - basic, $0.37 per share - diluted) for the three months ended September
30, 2005 to $3.0 million ($0.50 per share - basic, $0.48 per share - diluted)
for the three months ended September 30, 2006. The increase in net income was a
result of an increase in net interest income of $1.1 million, a decrease in the
provision for loan losses of $107,000, a decrease in non-interest expense of
$75,000, partially offset by decreases in non-interest income of $48,000 and an
increase in income tax expense of $495,000.
Non-interest expense includes merger related costs of $239,000 ($145,000 tax
effected). Had these expenses not been incurred, tax effected net income would
have been $3.1 million ($0.52 per share - basic, $0.51 per share - diluted).
Net Interest Income. Net interest income increased $1.1 million, or 13.1%, from
$8.2 million for the three months ended September 30, 2005 to $9.3 million for
the three months ended September 30, 2006. Increases in the tax effected yield
on interest earning assets and the average balance on interest earning assets
were partially offset by increases in the cost of total deposits and borrowed
funds and the average balance on total deposits and borrowed funds. The
following table compares the average interest earning asset balances, average
total deposits and other borrowed funds, associated tax effected yield and cost,
and interest rate spread, for the three months ended September 30, 2006 and
2005:
For the Three Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Total interest earning assets $ 816,897 8.06% $ 755,761 7.11%
Total deposits and borrowed funds 790,524 3.39 755,288 2.52
------------ ------------
Interest rate spread 4.67% 4.59%
============ ============
Average interest earning assets increased as a result of the increase in average
balance of loans receivable. Loans receivable increased as a result of loans
originated in the Company's main market area, primarily from small business
commercial real estate in the Boise and Spokane markets and single family
construction loans in the Boise market. Management focuses on increasing loans
receivable as part of the Company's operating strategy.
Average total deposits and other borrowed funds increased as a result of
increases in core accounts and certificates of deposit, partially offset by a
decrease in borrowings. The Company's operating strategy focuses on deposit
growth to fund loan originations and to repay borrowings.
Total Interest Income. Total interest income increased $3.0 million, or 23.1%,
from $13.0 million for the three months ended September 30, 2005 to $16.0
million for the three months ended September 30, 2006. The increase in total
interest income was a result of the increase in interest income on loans
receivable from loan growth and the increase in the yield on loans. The
following table compares detailed average earning asset balances and associated
tax effected yields for the three months ended September 30, 2006 and 2005:
18
For the Three Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Average
Balance Yield Balance Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Loans receivable, net $ 675,501 8.63% $ 602,022 7.64%
Loans held for sale 3,337 6.59 8,002 5.65
Securities 98,671 5.40 106,337 5.06
Other earning assets 39,388 5.01 39,400 4.69
------------ ------------ ------------ ------------
Total interest earning assets $ 816,897 8.06% $ 755,761 7.11%
============ ============ ============ ============
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the average yield on loans receivable. The commercial
real estate loans and construction loans were the major areas of growth. The tax
effected yield on commercial loans increased from 7.74% during the three months
ended September 30, 2005 to 8.90% during the three months ended September 30,
2006. The yield on construction loans increased from 9.47% during the three
months ended September 30, 2005 to 11.23% during the three months ended
September 30, 2006.
Interest income from securities decreased as a result of a lower average balance
on securities from payments of maturities partially offset by a higher yield on
the securities.
Total Interest Expense. Total interest expense increased $1.9 million, or 40.5%,
from $4.8 million for the three months ended September 30, 2005 to $6.7 million
for the three months ended September 30, 2006. The following table compares
detailed average balances and associated costs for the three months ended
September 30, 2006 and 2005:
For the Three Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Average
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Savings, checking and money market accounts $ 251,682 2.86% $ 222,394 1.23%
Certificates of deposit 285,864 4.03 253,746 3.40
Securities sold under agreements to repurchase 12,124 4.49 9,365 2.56
FHLB advances and other borrowings 146,739 5.12 178,630 4.16
------------ ------------ ------------ ------------
Total interest bearing liabilities $ 696,409 3.85% $ 664,135 2.87%
============ ============ ============ ============
The increase in the average balance of total savings, checking, and money market
accounts was a result of management's focus to increase core deposit accounts as
part of the Company's operating strategy.
The increase in the average balance of certificates of deposit was mainly due to
a five month certificate of deposit special offered in our local market. The
balance in five month certificates of deposit was $43.3 million at September 30,
2006 and was not offered for the quarter ended September 30, 2005.
The decrease in the average balance of FHLB advances and other borrowings was a
result of utilizing the excess funds after funding loan growth to pay down
advances.
Provision for Loan Losses. As a result of the Company's evaluation of allowance
for loan losses discussed in the critical accounting policies, the Company's
provision for loan losses decreased $107,000, or 39.3%, to $165,000 for the
three months ended September 30, 2006 from $272,000 for the three months ended
September 30, 2005. The decrease in provision for loan losses was a result of a
reduction in classified assets, net charge-offs, and nonperforming loans for the
quarter ended September 30, 2006 compared to the quarter ended September 30,
2005.
19
The Company makes various assumptions and judgments about the collectibility of
its loan portfolio, including the creditworthiness of its borrowers and the
value of the real estate and other assets serving as collateral for the
repayment of many of its loans. In determining the amount of the allowance for
loan losses, the Company reviews several factors including its loan loss and
delinquency experience, underwriting practices and economic conditions. If its
assumptions are incorrect, its allowance for loan losses may not be sufficient
to cover future losses in the loan portfolio, resulting in the need for greater
additions to its allowance. Material additions to the allowance could materially
decrease the Company's net income. The Company's allowance for loan losses was
1.28% of net loans and 1,317.08% of non-performing loans at September 30, 2006.
In addition, bank regulators periodically review the Company's allowance for
loan losses and may require the Company to increase its provision for loan
losses or recognize further loan charge-offs. Any increase in the Company's
allowance for loan losses or loan charge-offs as required by these regulatory
authorities may have a material adverse effect on the Company's financial
condition and results of operations.
Non-interest Income. Total non-interest income decreased $48,000, or 2.7%, from
$1.8 million to $1.7 million for the three months ended September 30, 2005 and
2006, respectively. The following table summarizes the components of
non-interest income for the three months ended September 30, 2006 and 2005:
For the Three Months Ended
September 30, Dollar Percentage
------------------------------- Increase Increase
2006 2005 (Decrease) (Decrease)
-------------- -------------- ------------ ------------
(Dollars in Thousands)
Gain on sale of loans $ 264 $ 492 $ (228) (46.34)%
Impairment of mortgage servicing rights, net -- (44) 44 (100.00)
Service fees and charges 1,384 1,266 118 9.32
Commissions and other 70 52 18 34.62
-------------- -------------- ------------ ------------
Total non-interest income $ 1,718 $ 1,766 $ (48) (2.72)%
============== ============== ============ ============
The decrease in gain on sale of loans is attributed to the decreased volume of
residential real estate loans sold in the secondary market.
Non-interest Expense. Total non-interest expense decreased $75,000, or 1.2%,
from $6.4 million for the three months ended September 30, 2005 to $6.4 million
for the three months ended September 30, 2006. This decrease included $239,000
in merger related expenses. The following table summarizes the components of
non-interest expense for the three months ended September 30, 2006 and 2005:
For the Three Months Ended
September 30, Dollar Percentage
------------------------------- Increase Increase
2006 2005 (Decrease) (Decrease)
-------------- -------------- ------------ ------------
(Dollars in Thousands)
Compensation and related benefits $ 3,737 $ 3,729 $ 8 0.21%
Data and automated teller machine processing 344 248 96 38.71
Professional fees 401 304 97 31.91
Other 1,879 2,155 (276) (12.81)
-------------- -------------- ------------ ------------
Total non-interest expense $ 6,361 $ 6,436 $ (75) (1.17)%
============== ============== ============ ============
Data and automated teller machine processing increased $96,000, or 38.7%, as a
result of an increase in Federal Reserve Bank service charges, FISERV automated
teller machine charges, and an increase in the Company's core processing system
expenses.
Professional fees increased $97,000 due to $218,000 in merger related
professional expenses partially offset by a reduction in services required to
comply with regulations, such as regulatory examinations, compliance with the
certification provisions regarding internal controls required by Section 404 of
the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and Federal Deposit
Insurance Corporation Improvement Act ("FDICIA").
Other non-interest expenses decreased primarily due to decreased loan expenses,
occupancy, supplies and advertising costs.
20
Income Taxes. Income tax expense increased $495,000, or 47.6%, from $1.0 million
for the three months ended September 30, 2005 to $1.5 million for the three
months ended September 30, 2006. The effective tax rates for the three months
ended September 30, 2006 and 2005 were 34.1% and 31.6%, respectively. The
increase in the effective tax rate was attributable to an increase in income
without a corresponding increase in tax-exempt income.
Comparison of Operating Results for the Six Months Ended September 30, 2005 and
2006
General. Net income increased $863,000, or 21.0%, from $4.1 million ($0.70 per
share - basic, $0.68 per share - diluted) for the six months ended September 30,
2005 to $5.0 million ($0.84 per share - basic, $0.81 per share - diluted) for
the six months ended September 30, 2006. The increase in net income is a result
of increases in net interest income of $2.2 million and a decrease in the
provision for loan losses of $603,000, partially offset by a decrease in
non-interest income of $41,000 and increases in non-interest expense of $1.3
million and income tax expense of $600,000.
Non-interest expense includes merger related costs of $898,000 ($546,000 tax
effected). Had these expenses not been incurred, tax effected net income would
have been $5.5 million ($0.93 per share - basic, $0.90 per share - diluted).
Net Interest Income. Net interest income increased $2.2 million, or 13.8%, from
$16.0 million for the six months ended September 30, 2005 to $18.3 million for
the six months ended September 30, 2006. Increases in the tax effected yield on
interest earning assets and the average balance on interest earning assets were
partially offset by increases in the cost of total deposits and borrowed funds
and the average balance on total deposits and borrowed funds. The following
table compares the average interest earning asset balances, average total
deposits and other borrowed funds, associated tax effected yield and cost, and
interest rate spread, for the six months ended September 30, 2006 and 2005:
For the Six Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Yield/ Average Yield/
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Total interest earning assets $ 806,334 7.93% $ 746,643 6.96%
Total deposits and borrowed funds 783,930 3.27 749,263 2.43
------------ ------------
Interest rate spread 4.66% 4.53%
============ ============
Average interest earning assets increased as a result of the increase in average
balance of loans receivable. Loans receivable increased as a result of loans
originated in the Company's main market area, primarily from commercial real
estate in the Boise and Spokane markets and construction loans in the Boise
market. Management has focused on increasing commercial loans receivable as part
of the Company's operating strategy.
Average total deposits and borrowed funds increased as a result of increases in
core accounts and certificates of deposit, partially offset by a decrease in
borrowings. The Company's operating strategy is to focus on deposit growth to
fund loan growth and repay borrowings with the difference.
Total Interest Income. Total interest income increased $6.0 million, or 23.7%,
from $25.1 million for the six months ended September 30, 2005 to $31.1 million
for the six months ended September 30, 2006. The following table compares
detailed average earning asset balances, and associated tax effected yields for
the six months ended September 30, 2006 and 2005:
21
For the Six Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Average
Balance Yield Balance Yield
------------ ------------ ------------ ------------
(Dollars in Thousands)
Loans receivable, net $ 663,712 8.49% $ 593,800 7.46%
Loans held for sale 3,462 6.53 6,638 5.81
Securities 99,350 5.42 107,803 5.11
Other earning assets 39,810 5.01 38,402 4.73
------------ ------------ ------------ ------------
Total interest earning assets $ 806,334 7.93% $ 746,643 6.96%
============ ============ ============ ============
Interest income from loans receivable increased as a result of loan growth as
well as an increase in the yield on loans receivable. The commercial real estate
loans and construction loans were the major areas of growth. The tax effected
yield on commercial loans increased from 7.42% during the six months ended
September 30, 2005 to 8.74% during the six months ended September 30, 2006. The
yield on construction loans increased from 9.46% during the six months ended
September 30, 2005 to 10.87% during the six months ended September 30, 2006.
Interest income from securities decreased as a result of a lower average balance
on securities from payments of maturities, partially offset by a higher average
yield.
The increase in interest income on other interest earning assets is the result
of an increase in the average balance of interest earning cash and cash
surrender value of life insurance in addition to an increase in the average
yield.
Total Interest Expense. Total interest expense increased $3.7 million, or 41.2%,
from $9.1 million for the six months ended September 30, 2005 to $12.8 million
for the six months ended September 30, 2006. The following table compares
detailed average balances and associated costs for the six months ended
September 30, 2006 and 2005:
For the Six Months Ended September 30,
----------------------------------------------------------
2006 2005
--------------------------- ---------------------------
Average Average
Balance Cost Balance Cost
------------ ------------ ------------ ------------
(Dollars in Thousands)
Savings, checking and money market accounts $ 240,499 2.61% $ 222,548 1.13%
Certificates of deposit 276,701 3.90 240,940 3.28
FHLB advances and other borrowings 162,070 5.00 189,112 3.98
Securities sold under agreements to repurchase 11,870 4.30 9,568 2.30
------------ ------------ ------------ ------------
Total interest bearing liabilities $ 691,140 3.71% $ 662,168 2.75%
============ ============ ============ ============
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 a five month certificate of deposit special offered in our local
market. The balance in five month certificates of deposit was $43.3 million at
September 30, 2006 and was not offered for the six months ended September 30,
2005.
The decrease in the average balance of FHLB advances and other borrowings is a
result of utilizing the excess funds after funding loan growth to pay down
advances.
Provision for Loan Losses. As a result of the Bank's evaluation of allowance for
loan losses discussed in the critical accounting policies, the Company's
provision for loan losses decreased $603,000, or 52.9%, to $537,000 for the six
months ended September 30, 2006 from $1.1 million for the six months ended
September 30, 2005. The decrease in provision for loan losses is a result of a
reduction in classified assets, net charge-offs, and nonperforming loans for the
six months ended September 30, 2006 compared to the quarter ended September 30,
2005.
22
In determining the amount of the allowance for loan losses, the Company reviews
several factors including its loan loss and delinquency experience, underwriting
practices and economic conditions. The Company makes various assumptions and
judgments about the collectibility of its loan portfolio, including the
creditworthiness of its borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of its loans. If its
assumptions are incorrect, its allowance for loan losses may not be sufficient
to cover future losses in the loan portfolio, resulting in the need for greater
additions to its allowance. Material additions to the allowance could materially
decrease the Company's net income.
In addition, bank regulators periodically review the Company's allowance for
loan losses and may require the Company to increase its provision for loan
losses or recognize further loan charge-offs. Any increase in the Company's
allowance for loan losses or loan charge-offs as required by these regulatory
authorities may have a material adverse effect on the Company's financial
condition and results of operations. The Company's allowance for loan losses was
1.28% of net loans and 1,317.08% of non-performing loans at September 30, 2006.
Non-interest Income. Total non-interest income decreased $41,000, or 1.2%, to
remain at $3.4 million for the six months ended September 30, 2005 and 2006. The
following table summarizes the components of non-interest income for the six
months ended September 30, 2006 and 2005:
For the Six Months Ended September 30, Dollar Percentage
----------------------------------- Increase Increase
2006 2005 (Decrease) (Decrease)
---------------- ---------------- ------------ ------------
(Dollars in Thousands)
Gain on sale of loans $ 616 $ 811 $ (195) (24.04)%
Recovery (impairment) of mortgage servicing rights, net 55 (25) 80 (320.00)
Servicing fees, commissions and other 2,711 2,637 74 2.81
---------------- ---------------- ------------ ------------
Total non-interest income $ 3,382 $ 3,423 $ (41) (1.20)%
================ ================ ============ ============
Non-interest Expense. Total non-interest expense increased $1.3 million, or
10.6%, from $12.4 million for the six months ended September 30, 2005 to $13.7
million for the six months ended September 30, 2006. The following table
summarizes the components of non-interest expense for the six months ended
September 30, 2006 and 2005:
For the Six Months Ended September 30,
----------------------------------- Dollar Percentage
2006 2005 Increase Increase
---------------- ---------------- ------------ ------------
(Dollars in Thousands)
Compensation and employee related benefits $ 7,891 $ 7,368 $ 523 7.10%
Professional fees 1,194 537 657 122.35
Debit and credit card expense 691 582 109 18.73
Other 3,917 3,899 18 0.46
---------------- ---------------- ------------ ------------
Total non-interest expense $ 13,693 $ 12,386 $ 1,307 10.55%
================ ================ ============ ============
Compensation and related benefits increased $523,000, or 7.1%, from $7.4 million
for the six months ended September 30, 2005 to $7.9 million for the six months
ended September 30, 2006. The increase is a result of the regular annual
compensation increases for employees during the year, increased production and
goal bonuses, and an increase in board of director compensation related to
additional meetings held.
Professional fees increased $657,000 due to $857,000 in merger related
professional expenses partially offset by a reduction in services required to
comply with regulations, such as regulatory examinations, compliance with the
certification provisions regarding internal controls required by Section 404 of
the Sarbanes-Oxley Act and FDICIA.
Debit and credit card expenses increased due to increased merchant fees as well
as increased processing fees.
Income Taxes. Income tax expense increased $600,000, or 32.6%, from $1.8 million
for the six months ended September 30, 2005 to $2.4 million for the six months
ended September 30, 2006. The effective tax rates for the six months ended
September 30, 2006 and 2005 were 33.0% and 31.0%, respectively. The increase in
the effective tax rate is due to an increase in income without a corresponding
increase in tax-exempt income.
23
Asset Classification
The State of Washington has adopted various regulations regarding problem assets
of savings institutions. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, State of Washington examiners have
the authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific 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 insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
which require additional monitoring by the Bank are classified as special
mention.
The aggregate amounts of the Bank's classified assets at September 30, 2006 and
2005 were as follows:
September 30,
-----------------------
2006 2005
---------- ----------
(In Thousands)
Doubtful:
Consumer $ 4 $ 59
---------- ----------
Total doubtful 4 59
---------- ----------
Substandard:
Consumer 108 363
Residential 576 319
Commercial non-real estate 1,153 2,877
Commercial real estate 1,760 1,190
Real estate owned -- --
Repossessed assets 76 7
Overdrawn checking accounts 57 80
---------- ----------
Total substandard 3,730 4,836
---------- ----------
Total classified assets $ 3,734 $ 4,895
========== ==========
24
Average Balances, Interest and Average Yields/Costs
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest earning assets and interest
expense on average interest bearing liabilities and average tax effected yields
and costs. Such yields and costs for the periods indicated are derived by
dividing tax effected income or expense by the average daily balance of assets
or liabilities, respectively, for the periods presented.
Three Months Ended Three Months Ended
September 30, 2006 September 30, 2005
------------------------------------------- -------------------------------------------
Interest Average Interest Average
Average And Yield/ Average And Yield/
Balance Dividends Cost (1) Balance Dividends Cost (2)
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Interest earning assets (3):
Loans receivable, net $ 675,501 $ 14,540 8.63% $ 602,022 $ 11,471 7.64%
Loans held for sale 3,337 55 6.59 8,002 113 5.65
Securities 98,671 1,100 5.40 106,337 1,123 5.06
Other earning assets 39,388 309 5.01 39,400 291 4.69
------------ ------------ ------------ ------------ ------------ ------------
Total interest earning assets 816,897 16,004 8.06 755,761 12,998 7.11
------------ ------------ ------------ ------------
Non-interest earning assets 62,970 83,322
------------ ------------
Total assets $ 879,867 $ 839,083
============ ============
Interest bearing liabilities:
Savings, checking and money
market accounts $ 251,682 1,801 2.86 $ 222,394 686 1.23
Certificates of deposit 285,864 2,881 4.03 253,746 2,160 3.40
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 537,546 4,682 3.48 476,140 2,846 2.39
FHLB advances & other borrowings 146,739 1,878 5.12 178,630 1,859 4.16
Securities sold under agreements
to repurchase 12,124 136 4.49 9,365 60 2.56
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing liabilities 696,409 6,696 3.85 664,135 4,765 2.87
------------ ------------
Total non-interest bearing deposits 94,115 0.00 91,153 0.00
------------ ------------ ------------ ------------
Total deposits and borrowed funds 790,524 3.39 755,288 2.52
------------ ------------ ------------ ------------
Non-interest bearing liabilities 7,176 8,434
------------ ------------
Total liabilities 797,700 763,722
Total stockholders' equity 82,167 75,361
------------ ------------
Total liabilities and
total stockholders' equity $ 879,867 $ 839,083
============ ============
Net interest income $ 9,308 $ 8,233
============ ============
Interest rate spread 4.67% 4.59%
============ ============
Net interest margin 4.78% 4.58%
============ ============
See next page for referenced notes.
25
Six Months Ended Six Months Ended
September 30, 2006 September 30, 2005
------------------------------------------- -------------------------------------------
Interest Average Interest Average
Average And Yield/ Average And Yield/
Balance Dividends Cost (4) Balance Dividends Cost (5)
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Interest earning assets (3):
Loans receivable, net $ 663,712 $ 28,103 8.49% $ 593,800 $ 22,068 7.46%
Loans held for sale 3,462 113 6.53 6,638 193 5.81
Securities 99,350 2,243 5.42 107,803 2,311 5.11
Other earning assets 39,810 629 5.01 38,402 566 4.73
------------ ------------ ------------ ------------ ------------ ------------
Total interest earning assets 806,334 31,088 7.93 746,643 25,138 6.96
------------ ------------ ------------ ------------
Non-interest earning assets 65,780 85,291
------------ ------------
Total assets $ 872,114 $ 831,934
============ ============
Interest bearing liabilities:
Savings, checking and money
market accounts $ 240,499 3,141 2.61 $ 222,548 1,262 1.13
Certificates of deposit 276,701 5,389 3.90 240,940 3,953 3.28
------------ ------------ ------------ ------------ ------------ ------------
Total deposits 517,200 8,530 3.30 463,488 5,215 2.25
FHLB advances & other 162,070 4,050 5.00 189,112 3,768 3.98
Securities sold under agreements
to repurchase 11,870 255 4.30 9,568 110 2.30
------------ ------------ ------------ ------------ ------------ ------------
Total interest bearing
liabilities 691,140 12,835 3.71 662,168 9,093 2.75
------------ ------------
Total non-interest bearing
deposits 92,790 0.00 87,095 0.00
------------ ------------ ------------ ------------
Total deposits and borrowed
funds 783,930 3.27 749,263 2.43
------------ ------------
Non-interest bearing
liabilities 6,822 8,126
------------ ------------
Total liabilities 790,752 757,389
Total stockholders' equity 81,362 74,545
------------ ------------
Total liabilities and
stockholders' equity $ 872,114 $ 831,934
============ ============
Net interest income $ 18,253 $ 16,045
============ ============
Interest rate spread 4.66% 4.53%
============ ============
Net interest margin 4.75% 4.53%
============ ============
(1) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using a tax rate of 39.18%. The tax benefit on
interest income for the three months ended September 30, 2006 was
$449,000. Excluding this tax effect, average yields on commercial
loans would have been 8.85%, net loans receivable would have been
8.61%, investment securities would have been 4.46%, and other earning
assets would have been 3.14%. Excluding this tax effect, yield on
total interest earning assets would have been 7.84%, interest rate
spread would have been 4.45%, and net interest margin would have been
4.56%.
(2) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using a tax rate of 39.18%. The tax benefit on
interest income for the three months ended September 30, 2005 was
$427,000. Excluding this tax effect, average yields on commercial
loans would have been 7.69%, net loans receivable would have been
7.62%, investment securities would have been 4.22%, and other earning
assets would have been 2.95%. Excluding this tax effect, yield on
total interest earning assets would have been 6.88%, interest rate
spread would have been 4.36%, and net interest margin would have been
4.36%.
(3) Does not include interest on loans more than 90 days past due or non
accruing loans.
26
(4) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using a tax rate of 39.18%. The tax benefit on
interest income for the six months ended September 30, 2006 is
$882,000. Excluding this tax effect, average yields on net loans
receivable would have been 8.47%, securities would have been 4.52%,
and other earning assets would have been 3.16%. Excluding this tax
effect, yield on total interest earning assets would have been 7.71%,
interest rate spread would have been 4.44%, and the net interest
margin would have been 4.53%.
(5) Interest on tax-exempt securities and loans are presented on a tax
equivalent basis, using a tax rate of 39.18%. The tax benefit on
interest income for the six months ended September 30, 2005 was
$855,000. Excluding this tax effect, average yields on net loans
receivable would have been 7.43%, securities would have been 4.28%,
and other earning assets would have been 2.95%. Excluding this tax
effect, yield on total interest earning assets would have been 6.73%,
interest rate spread would have been 4.30% and the net interest margin
would have been 4.30%.
LIQUIDITY AND CAPITAL RESOURCES
The primary function of asset/liability management is to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive
earning assets and liabilities. Management actively analyzes and manages the
Company's liquidity position. The objective of liquidity management is to ensure
the availability of sufficient cash flows to support loan growth and deposit
withdrawals, to satisfy financial commitments, and to take advantage of
investment opportunities. Liquidity is defined as being able to raise funds in
30 days without a loss of principal.
The Company's primary recurring sources of funds are customer deposits, proceeds
from principal and interest payments on loans, proceeds from sales of loans,
maturing securities, FHLB advances and borrowings from US Bank. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. See the Company's Consolidated Statement of
Cash Flows to assist in analyzing our liquidity position.
The primary investing activity of the Company is the origination of loans.
During the six months ended September 30, 2006, the Company originated $226.6
million of loans, excluding loans purchased and loan participations. Proceeds
from maturity and sale of securities provided $2.9 million and $5.9 million for
the six months ended September 30, 2006 and 2005, respectively. Proceeds from
the sale of loans provided $37.4 million for the six months ended September 30,
2006 and $55.2 million for the six months ended September 30, 2005.
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 $63.5 million for the six months
ended September 30, 2006, which were $62.4 million in branch deposits and $1.1
million in brokered certificates of deposit. Deposits increased $43.0 million
for the six months ended September 30, 2005. In addition, the Company maintains
a credit facility with the FHLB, which provides for immediately available
advances. FHLB advances totaled $146.6 million, including a $1.9 million merger
premium, at September 30, 2006 and $154.9 million, including a $2.4 million
merger premium, at September 30, 2005. 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 September 30, 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. There were
no outstanding balances under this facility at September 30, 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 $1.6 million at
September 30, 2006, and $2.7 million at September 30, 2005 at this facility.
Cash provided by advances from FHLB and other borrowing facilities was $482.6
million and $312.4 million for the six months ended September 30, 2006 and 2005,
respectively. Cash used for payments on these advances was $508.0 million and
$336.8 million for the six months ended September 30, 2006 and 2005,
respectively. As of September 30, 2006 and 2005, there were $40.8 million of
FHLB advances that were putable. The Bank also has used other sources of funding
when the need arises: brokered certificates of deposit (up to 15% of assets
under current Board policy) and the national certificate of deposit markets.
At September 30, 2006, the Company held cash and cash equivalents of $27.0
million. In addition, at that date, $44.0 million of the Company's investment
and mortgage-backed securities were classified as available-for-sale.
The Company has commitments that have a future impact on its liquidity position.
Because some commitments are expected to expire without being drawn upon, the
total commitment amounts do not represent future cash requirements. At September
30, 2006, the Company had loan commitments totaling $83.6 million, and
undisbursed lines of credit and standby letters of credit totaling $100.3
million. The Company anticipates that it will have sufficient funds available to
meet its current loan origination commitments. Certificates of deposit that are
scheduled to mature in less than one year from September 30, 2006 totaled $220.5
27
million. Historically, the Company has been able to retain a significant amount
of its deposits as they mature. In addition, management believes that it can
adjust the offering rates of certificates of deposit to retain deposits in
changing interest rate environments.
The Bank is required to maintain specific amounts of capital pursuant to Federal
Deposit Insurance Corporation and State of Washington requirements. As of
September 30, 2006, the Bank was in compliance with all regulatory capital
requirements effective as of that date.
The Bank's actual regulatory capital amounts and ratios at September 30, 2006
and March 31, 2006 are presented in the table below:
To Be Well Capitalized
Under Prompt
Capital Adequacy Corrective Action
Purposes Provisions
----------------------- -----------------------
Actual Actual Actual
Amount Ratio Amount Rate Amount Rate
------------ -------- ------------ -------- ------------ --------
September 30, 2006 (Dollars in Thousands)
Tier 1 capital (to average assets) $ 63,101 7.4% $ 34,109 4.0% $ 42,636 5.0%
Tier 1 capital (to risk-weighted assets) 63,101 9.6% 26,292 4.0% 39,438 6.0%
Total capital (to risk-weighted assets) 74,331 11.3% 52,624 8.0% 65,780 10.0%
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%
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Contractual obligations at September 30, 2006 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years
Total Year Years Years and Greater
--------------- --------------- --------------- --------------- ---------------
(In Thousands)
Maturities of FHLB advances and
other borrowings $ 151,202 $ 95,905 $ 8,150 $ 31,030 $ 16,117
Operating leases future minimum
rental payments $ 281 $ 185 $ 96 $ -- $ --
Other commitments at September 30, 2006 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years
Total Year Years Years and Greater
--------------- --------------- --------------- --------------- ---------------
(In Thousands)
Undisbursed loan commitments $ 83,614 $ 46,828 $ 27,599 $ 680 $ 8,507
Undisbursed credit card line commitments $ 10,120 $ 10,120 $ -- $ -- $ --
Undisbursed lines of credit $ 92,543 $ 62,376 $ 11,887 $ 5,049 $ 13,231
Standby letters of credit $ 7,789 $ 7,647 $ 142 $ -- $ --
The Company has signed several contracts with vendors for its data processing
operations. The terms of the contracts are one year or less. The annual fees are
paid at the beginning of the terms or are paid monthly based upon usage,
transactions or number of customers. The data processing, automated teller
machine, merchant bank card and visa credit card expense, which include these
contracts, was $1.4 million for the six months ended September 30, 2006. In
addition, the Company has a contract with Wausau Financial Systems for the proof
and imaging system.
28
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
There have been no material changes regarding the Company's market risk position
from the information provided under the caption "Quantitative and Qualitative
Disclosures about Market Risk" in the Company's Form 10-K filing with the SEC on
May 30, 2006 covering the fiscal year ended March 31, 2006.
Item 4 - Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) was
carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management as of the end of the
period covered by this report. The Company's Chief Executive Officer and
Chief Financial Officer concluded that as of this filing the Company's
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934 is (i) accumulated and
communicated to the Company's management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
While the Company believes the present design of its disclosure controls
and procedures is effective to achieve its goal, future events affecting
its business may cause the Company to modify its disclosure controls and
procedures. The Company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
errors and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that breakdowns in controls or procedures can occur because of simple error
or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any control procedure is based in
part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls
become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements
due to error or fraud may occur and not be detected.
29
FIRSTBANK NW CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, the Company or its subsidiaries are engaged in legal
proceedings in the ordinary course of business, none of which are currently
considered to have a material impact on the Company's financial position,
results of operations, or cash flows.
Item 1A - Risk Factors
There have been no material changes regarding the Company's risk factors from
the information provided under the caption "Risk Factors" in the Company's Form
10-K filing with the SEC on May 30, 2006 covering the fiscal year ended March
31, 2006.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Maximum
Total Number of Number of
Shares Purchased Shares that
Total Number Average as Part of May yet be
of Shares Price Paid Publicly Purchased
Period Purchased per Share Announced Plan Under the Plan
- ------------------------------------ --------- ---------- -------------- --------------
July 1, 2006 - July 31, 2006 -- $ -- -- 190,732 (1)
August 1, 2006 - August 31, 2006 190,732
September 1, 2006 - September 30, 2006 -- -- -- 190,732
--------- ---------- -------------- --------------
TOTAL -- $ -- -- 190,732
========= ========== -------------- ==============
(1) 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 September 30, 2006, 105,000 shares had been repurchased under
this program.
Item 3 - Defaults Upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
30
Item 6 - Exhibits
2.1 Agreement and Plan of Merger between the Registrant
and Sterling Financial Corporation (1)
3.1 Articles of Incorporation of the Registrant (2)
3.2 Amendment to the Articles of Incorporation (3)
3.3 Bylaws of the Registrant (2)
3.4 Bylaws Amendment adopted by the Board of Directors on
May 23, 2002 (4)
10.1 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Clyde E. Conklin (5)
10.2 Employment Agreement between FirstBank Northwest,
FirstBank NW Corp. and Larry K. Moxley (5)
10.3 Salary Continuation Agreement between First Federal
Bank of Idaho, FSB and Clyde E. Conklin (5)
10.4 Salary Continuation Agreement between First Federal
Bank of Idaho, FSB and Larry K. Moxley (5)
10.5 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Richard R. Acuff(6)
10.6 Change in Control Agreement between FirstBank
Northwest, FirstBank NW Corp. and Terence A. Otte (7)
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 (5)
10.9 FirstBank Northwest Deferred Compensation Plan (5)
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 Current
Report on Form 8-K filed on June 5, 2006.
(2) 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.
(3) 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 8-K filed on March 17, 2005.
(4) 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.
(5) Incorporated by reference to the exhibits to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2005
file on February 13, 2006.
(6) Incorporated by reference to the exhibits to the Registrant's Current
Report on Form 8-K filed on October 5, 2005.
(7) 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.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTBANK NW CORP.
DATED: November 6, 2006 BY: /s/ CLYDE E. CONKLIN
---------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
DATED: November 6, 2006 BY: /s/ LARRY K. MOXLEY
---------------------------------------
Larry K. Moxley
Secretary and Chief Financial Officer
32
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer of FirstBank
NW Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer of FirstBank
NW Corp. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer of FirstBank
NW Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer of FirstBank
NW Corp. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
33