UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2004
( ) 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.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Washington 84-1389562
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1300 16th Avenue. Clarkston, WA 99403
----------------------------------------
(Address of Principal Executive Offices)
(509) 295-5100
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). ( ) Yes (X) No
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: Common Stock 2,875,260 shares
outstanding on August 16, 2004
FIRSTBANK NW CORP.
TABLE OF CONTENTS
Page
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
June 30, 2004, March 31, 2004, and June 30, 2003 1
Consolidated Statements of Income
For the three months ended June 30, 2004, 2003 and 2002 2
Consolidated Statements of Cash Flows
For the three months ended June 30, 2004, 2003 and 2002 3
Consolidated Statements of Comprehensive Income
For the three months ended June 30, 2004, 2003 and 2002 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Financial Condition
June 30, March 31, June 30,
2004 2004 2003
------------- ------------- -------------
(Unaudited) (Unaudited)
ASSETS
Cash and cash equivalents:
Non-interest bearing deposits $ 30,316,533 $ 22,328,617 $ 14,770,597
Interest bearing deposits 6,688,904 16,066,608 3,829,571
Federal funds sold 1,528 1,524 8,008,514
------------- ------------- -------------
Total cash and cash equivalents 37,006,965 38,396,749 26,608,682
Investment securities:
Held-to-maturity 31,014,971 19,671,109 --
Available-for-sale 18,311,039 19,115,839 17,468,677
Mortgage-backed securities:
Held-to-maturity 22,599,523 22,899,093 1,922,701
Available-for-sale 48,580,930 54,128,305 6,751,567
Loans receivable, net (Note 4) 487,861,149 459,114,307 254,373,502
Loans held for sale 5,284,760 5,253,377 10,589,734
Accrued interest receivable 3,656,907 3,348,959 2,178,370
Equity securities, at cost 12,627,775 12,505,575 5,805,575
Premises and equipment, net 18,166,973 18,274,192 8,296,145
Cash surrender value of bank owned and other insurance policies 22,458,687 22,192,305 7,384,500
Mortgage servicing assets 807,520 710,258 871,110
Goodwill and other intangible assets 20,801,510 21,049,999 --
Deferred income taxes 1,031,421 222,136 --
Other assets 2,452,356 3,349,848 1,942,654
------------- ------------- -------------
TOTAL ASSETS $ 732,662,486 $ 700,232,051 $ 344,193,217
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 487,649,718 $ 491,034,638 $ 229,182,284
Advances from borrowers for taxes and insurance 466,116 960,648 596,798
Advances from FHLB (Note 7) 168,196,557 132,055,692 78,236,875
Income taxes payable -- -- 378,024
Deferred federal and state income taxes -- -- 471,530
Accrued expenses and other liabilities 6,678,607 6,848,792 4,318,065
------------- ------------- -------------
Total Liabilities 662,990,998 630,899,770 313,183,576
------------- ------------- -------------
Commitments and contingencies
Stockholders' Equity (Note 8):
Preferred stock, $0.01 par value, 500,000 shares authorized;
0 shares issued and outstanding -- -- --
Common stock, $0.01 par value, 5,000,000 shares authorized;
2,965,268, 2,940,047 and 1,382,392 shares issued;
2,888,206, 2,860,898 and 1,282,023 shares outstanding 29,653 29,400 13,861
Additional paid-in-capital 45,994,817 45,538,508 9,890,861
Retained earnings, substantially restricted 24,346,028 23,275,834 20,798,978
Unearned ESOP shares (781,460) (802,360) (865,060)
Deferred compensation -- -- (97,569)
Accumulated other comprehensive income 82,450 1,290,899 1,268,570
------------- ------------- -------------
Total Stockholders' Equity 69,671,488 69,332,281 31,009,641
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 732,662,486 $ 700,232,051 $ 344,193,217
============= ============= =============
See accompanying notes to consolidated financial statements
1
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Income
Three-months ended June 30,
------------------------------------
2004 2003 2002
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
Interest income:
Loans receivable $7,836,207 $4,507,180 $4,492,766
Mortgage-backed securities 807,589 175,998 184,865
Investment securities 447,185 188,057 156,805
Other interest earning assets 419,087 226,666 240,388
---------- ---------- ----------
Total interest income 9,510,068 5,097,901 5,074,824
---------- ---------- ----------
Interest expense:
Deposits 1,646,747 1,056,731 1,219,778
Advances from FHLB and other borrowings 1,335,433 999,759 1,007,358
---------- ---------- ----------
Total interest expense 2,982,180 2,056,490 2,227,136
---------- ---------- ----------
Net interest income 6,527,888 3,041,411 2,847,688
Provision for loan losses 375,780 177,262 209,406
---------- ---------- ----------
Net interest income after provision for loan losses 6,152,108 2,864,149 2,638,282
---------- ---------- ----------
Non-interest income:
Gain on sale of loans 504,043 779,851 418,895
Service fees and other charges 1,180,451 576,824 507,085
Commissions and other 33,439 33,607 48,983
---------- ---------- ----------
Total non-interest income 1,717,933 1,390,282 974,963
---------- ---------- ----------
Non-interest expense:
Compensation and employee related benefits 3,418,089 1,919,643 1,688,649
Occupancy 744,060 350,798 327,069
Other 1,528,367 877,164 757,447
---------- ---------- ----------
Total non-interest expense 5,690,516 3,147,605 2,773,165
---------- ---------- ----------
Income before income tax expense 2,179,525 1,106,826 840,080
Income tax expense 627,724 327,596 209,125
---------- ---------- ----------
Net income $1,551,801 $ 779,230 $ 630,955
========== ========== ==========
Earnings per share (Note 9):
Net income per share - basic $ 0.54 $ 0.61 $ 0.48
Net income per share - diluted $ 0.52 $ 0.58 $ 0.47
Cash dividends paid per common share $ 0.17 $ 0.15 $ 0.12
Weighted average shares outstanding - basic 2,866,090 1,280,984 1,302,529
Weighted average shares outstanding - diluted 2,996,698 1,351,654 1,357,513
See accompanying notes to consolidated financial statements
2
FirstBank NW Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
Three-months ended June 30,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,551,801 $ 779,230 $ 630,955
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 376,362 164,947 161,519
Amortization (accretion) of securities and intangibles, net (163,222) (33,639) (2,395)
Provision for loan losses 375,780 177,262 209,406
Gain on sale of loans held for sale (504,043) (779,851) (418,895)
Proceeds from sale of loans held for sale 42,197,636 56,284,309 24,441,508
Originations of loans held for sale (41,858,551) (60,880,115) (22,496,326)
Impairment of mortgage servicing rights 133,575 -- --
FHLB stock dividends (122,200) (74,900) (80,400)
ESOP compensation expense 59,356 45,618 38,270
Other (gains) losses, net 21,309 -- (20,975)
Deferred compensation expense -- 59,091 59,090
Deferred income taxes (45,699) (132,987) (133,208)
Changes in assets and liabilities:
Accrued interest receivable and other assets (330,172) (1,116,647) (564,527)
Accrued expenses and other liabilities (170,185) (214,522) (643,472)
Income taxes receivable 818,385 460,583 340,776
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,340,132 (5,261,621) 1,521,326
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities; held-to-maturity 281,961 44,764 40,811
Proceeds from maturities of mortgage-backed securities;
available-for-sale 7,314,335 824,675 442,642
Proceeds from maturities of investment securities: available-for-sale 55,653 -- --
Purchase of mortgage-backed securities; available-for-sale (3,028,594) -- --
Purchase of investment securities; available-for-sale (28,358) (127,104) --
Purchase of investment securities; held-to-maturity (11,364,007) -- --
Other net change in loans receivable (29,141,670) (2,746,144) (7,754,365)
Purchases of premises and equipment (357,642) (1,251,052) --
Proceeds from sale of premises and equipment 89,439 -- --
Purchase of bank owned and other insurance policies -- -- (162,725)
Net increase in cash surrender value of life insurance policies (266,382) (112,011) (121,776)
Proceeds from sale of real estate owned 46,400 -- 315,691
------------ ------------ ------------
Net cash used in investing activities (36,398,865) (3,366,872) (7,239,722)
------------ ------------ ------------
Cash flows from financing activities:
Cash paid for dividends (485,232) (193,921) (159,983)
Net change in deposits (3,121,755) 14,842,287 (4,634,673)
Advances (repayments) from borrowers for taxes and insurance (494,532) (594,747) (648,176)
Advances from FHLB and other borrowings 82,234,000 31,147,000 14,572,353
Payments on advances from FHLB and other borrowings (45,874,054) (34,726,353) (10,776,407)
Proceeds from stock options 410,522 22,134 --
Purchase of stock -- -- (301,820)
------------ ------------ ------------
Net cash provided by (used in) financing activities 32,668,949 10,496,400 (1,948,706)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (1,389,784) 1,867,907 (7,667,102)
Cash and cash equivalents, beginning of period 38,396,749 24,740,775 24,011,902
------------ ------------ ------------
Cash and cash equivalents, end of period $ 37,006,965 $ 26,608,682 $ 16,344,800
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,303,582 $ 1,973,284 $ 2,482,620
Income taxes -- $ -- $ --
Noncash investing and financing activities:
Unrealized gains (losses) on securities; available-for-sale,
net of tax $ (1,185,263) $ 255,385 $ 502,653
Unrealized gain on cash flow hedge derivative, net of tax $ (23,174) $ (21,998) $ 42,900
Loans receivable charged to the allowance for loan losses $ -- $ 7,105 $ 89,956
Transfer from loans converted to real estate acquired through
foreclosure $ 22,000 $ -- $ --
See accompanying notes to consolidated financial statements
3
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three-months ended June 30,
-------------------------------------------
2004 2003 2002
----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
Net income $ 1,551,801 $ 779,230 $ 630,955
----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities;
available-for-sale, net of tax benefit (expense)
of $748,607, ($165,208), and ($325,168) (1,185,263) 255,385 502,653
Change in unrealized derivative gains on cash
flow hedge, net of tax benefit (expense) of
$14,991, $14,231 and ($27,752) (23,174) (21,998) 42,900
----------- ----------- -----------
Net other comprehensive income (loss) (1,208,437) 233,387 545,553
----------- ----------- -----------
Comprehensive income $ 343,364 $ 1,012,617 $ 1,176,508
=========== =========== ===========
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-KSB of FirstBank NW Corp.
(the "Company") for the year ended March 31, 2004. 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 three months ended June 30, 2004 are not necessarily indicative of
results that may be expected for the entire fiscal year ending March 31, 2005.
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.
(2) BUSINESS COMBINATION
On October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. ("Oregon Trail") and its wholly-owned subsidiary, Pioneer Bank,
a Federal Savings Bank ("Pioneer Bank"), for approximately $36.5 million in cash
and 1,480,064 shares of the Company's common stock in exchange for the 3,108,657
shares of Oregon Trail common stock outstanding as of the completion date of the
acquisition. Common stock increased $14,800 and additional paid in capital
increased $33,212,637 as a result of the issuance of common stock for the
acquisition. Additional paid in capital increased by $4,563,100 as a result of
the purchase of the fair value of Oregon Trail's unexercised stock options as of
the completion date of the acquisition.
It has been the Company's strategic objective to utilize capital to support
growth and growth through merger and acquisition was also a longer-term
strategy. Oregon Trail complements the Company's operations and business
strategies. Oregon Trail was a potential acquisition candidate because of its
market area that is geographically contiguous to the Company's existing market
areas with no overlapping branches. Oregon Trail was also considered to be a
potential candidate because of its stable deposit markets, sizable asset base,
strong asset quality, and its community banking philosophy, which is shared by
the Company. In addition, Oregon Trail and the Company have common backgrounds
as converted thrift institutions, and the Board of Directors and management of
the Company believed that a combination of the two companies would enhance the
existing Company's competitiveness, and would have a minimal impact on the staff
of Oregon Trail. 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.
Operations have been combined since November 1, 2003.
5
(3) SUPPLEMENTAL PRO FORMA INFORMATION
The following table sets forth the supplemental pro forma unaudited pro forma
condensed combined statement of income for the three months ended June 30, 2004
and 2003, reflecting the acquisition of Oregon Trail by the Company as if it had
occurred at the beginning of the periods presented.
FirstBank NW Corp.
Oregon Trail Financial Corp.
Unaudited Pro Forma Condensed Combined Statements of Income
(In thousands, except share data)
Three Months Ended June 30,
---------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Total interest income $ 9,510 $ 10,664
Total interest expense 2,982 3,687
----------- -----------
Net interest income 6,528 6,977
Provision for loan losses 376 243
----------- -----------
Net interest income after provision for loan losses 6,152 6,734
Total non-interest income 1,718 2,354
Total non-interest expense (5,690) (5,856)
----------- -----------
Income before income tax expense 2,180 3,232
Income tax expense (628) (985)
----------- -----------
Net income 1,552 2,247
=========== ===========
Pro Forma earnings per share:
Pro Forma net income per share - basic $ 0.54 $ 0.81
Pro Forma net income per share - diluted $ 0.52 $ 0.78
Pro Forma weighted average shares outstanding - basic 2,866,090 2,761,048
Pro Forma weighted average shares outstanding - diluted 2,996,698 2,885,249
(4) LOANS RECEIVABLE
Loans receivable at June 30, 2004, March 31, 2004, and June 30, 2003 consisted
of the following:
June 30, March 31, June 30,
2004 2004 2003
------------ ------------ ------------
(Unaudited) (Unaudited)
Real estate loans:
Residential $117,582,382 $113,381,056 $ 48,195,352
Commercial 126,590,446 122,132,293 70,200,038
Agricultural 19,647,548 18,566,973 15,691,566
Construction 76,003,729 68,235,995 50,970,059
Other loans:
Commercial (non-real estate) 81,550,884 75,877,668 54,620,476
Other consumer 42,692,889 43,424,825 7,348,827
Home equity 31,430,356 24,529,836 16,556,815
Agricultural operating 29,078,823 24,876,236 15,771,509
------------ ------------ ------------
Total loans receivable 524,577,057 491,024,882 279,354,642
Less:
Loans in process 28,555,833 24,065,036 20,140,502
Unearned loan fees and discounts 1,738,753 1,531,794 1,251,745
Allowance for loan losses 6,421,322 6,313,745 3,588,893
------------ ------------ ------------
Loans receivable, net $487,861,149 $459,114,307 $254,373,502
============ ============ ============
Loans held for sale $ 5,284,760 $ 5,253,377 $ 10,589,734
============ ============ ============
6
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any other category.
June 30, 2004 March 31, 2004 June 30, 2003
-------------------- ------------------------ -----------------------
(Unaudited) (Unaudited)
As a As a As a
Percentage Percentage Percentage
of Total of Total of Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans
------- ---------- -------- ---------- ------- ----------
Residential $ 283 22.41% $ 282 23.09% $ 241 17.25%
Construction 982 14.49 927 13.90 722 18.25
Agricultural 802 9.29 738 8.85 434 11.26
Commercial 3,617 39.68 3,630 40.32 2,110 44.68
Consumer and other loans 737 14.13 737 13.84 82 8.56
------- ------ ------- ------ ------- ------
Total allowance for loan losses $ 6,421 100.00% $ 6,314 100.00% $ 3,589 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth the changes in the Bank's allowance for loan
losses for the periods indicated.
Three Months Fiscal Year Three Months
Ended Ended Ended
June 30, March 31, June 30,
2004 2004 2003
------------ ----------- ------------
(Unaudited) (Unaudited)
Balance at beginning of period $ 6,313,745 $ 3,414,262 $ 3,414,262
----------- ----------- -----------
Addition through acquisition of Oregon Trail -- 2,863,371 --
Provision for loan losses 375,780 395,144 177,262
Charge-offs:
Residential real estate 3,314 12,286 --
Commercial non-real estate 205,969 243,908 --
Consumer and other loans 84,811 223,156 7,105
----------- ----------- -----------
Total charge-offs 294,094 479,350 7,105
Recoveries 25,891 120,318 4,474
----------- ----------- -----------
Net charge-offs 268,203 359,032 2,631
----------- ----------- -----------
Balance at end of year $ 6,421,322 $ 6,313,745 $ 3,588,893
=========== =========== ===========
Net charge-offs to average outstanding loans 0.06% 0.10% 0.00%
7
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.
June 30, March 31, June 30,
2004 2004 2003
---------- ---------- ----------
(Unaudited) (Unaudited)
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 593,892 $ 700,792 $ 373,036
Construction -- 363,980 17,250
Agricultural -- 77,726 --
Commercial -- -- 674,009
Commercial non-real estate 450,868 1,661,136 510,688
Consumer and other loans 114,049 96,325 149,622
Agricultural operating -- -- --
---------- ---------- ----------
Total 1,158,809 2,899,959 1,724,605
Accruing loans which are contractually
past due 90 days or more -- -- --
---------- ---------- ----------
Total of nonaccrual and 90 days past
due loans 1,158,809 2,899,959 1,724,605
Real estate owned 553,059 604,437 119,755
---------- ---------- ----------
Total nonperforming loans 1,711,868 3,504,396 1,844,360
Restructured loans 827,444 152,234 358,469
---------- ---------- ----------
Total nonperforming assets $2,539,312 $3,656,630 $2,202,829
========== ========== ==========
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 0.24% 0.63% 0.68%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.16% 0.41% 0.50%
Nonperforming assets as a percent of
total assets 0.35% 0.50% 0.64%
Total nonperforming assets to total loans 0.48% 0.74% 0.79%
8
(5) MORTGAGE SERVICING RIGHTS
At June 30, 2004, mortgage servicing rights were $808,000, net of an allowance
for impairment on mortgage servicing rights of $293,000. At March 31, 2004,
mortgage servicing rights were $710,000, net of an allowance for impairment on
mortgage servicing rights of $427,000. At June 30, 2003, mortgage servicing
rights were $871,000, which is net of an allowance for impairment on mortgage
servicing rights of $306,000. The cost of mortgage servicing rights is amortized
in proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. For purposes of measuring impairment, the rights
are stratified by predominant characteristics, such as interest rates and terms.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceeds their fair value. The following
table is an analysis of the changes in mortgage servicing rights for the
quarters and year ended:
June 30, March 31, June 30,
2004 2004 2003
--------- --------- ---------
(Unaudited) (Unaudited)
Beginning Balance $ 710,258 $ 825,814 $ 825,814
Additions 13,981 199,301 91,801
Amortization (50,294) (194,234) (46,505)
Impairment recovered (recognized) 133,575 (120,623) --
--------- --------- ---------
Ending Balance $ 807,520 $ 710,258 $ 871,110
========= ========= =========
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at June 30, 2004 was $20.8 million. No impairment loss on goodwill was
recorded for the three months ended June 30, 2004, because there were no
impairment indicators during the period.
Core deposit intangible at June 30, 2004 was $3.4 million, net of accumulated
amortization of $470,224. Amortization expense for the net carrying amount of
the core deposit intangible at June 30, 2004 is estimated to be as follows:
(Dollars in Thousands)
For the three months ended June 30, 2004 $ 176
For the year ended March 31,
2005 529
2006 715
2007 715
2008 715
2009 782
-------
Estimated total core deposit intangible amortization expense $ 3,406
=======
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank utilizes advances from the Federal Home Loan Bank ("FHLB-Seattle") to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Seattle functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Seattle, the Bank is required to own capital stock in
the FHLB-Seattle and is authorized to apply for advances on the security of such
stock and certain of its mortgage loans and other assets (principally securities
that are obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit. The Bank is currently
authorized to borrow from the FHLB-Seattle up to an amount equal to 30% of total
assets, provided that the Bank holds sufficient collateral. Advances from the
FHLB-Seattle at June 30, 2004 and June 30, 2003 were $168,196,557 and
$78,236,875 respectively.
9
Scheduled maturities of advances from the FHLB-Seattle were as follows:
Five Years to
One Year to Less Less than Ten Greater than
At June 30, 2004: Less than One Year than Five Years Years Ten Years
------------------ ---------------- -------------- ------------
Maturities of advances $ 72,119,765 $ 46,357,286 $ 42,841,400 $ 6,878,106
Range of interest rates 1.17% - 5.64% 3.05% - 7.03% 3.33% - 7.12% 6.66% - 7.10%
Weighted average interest rate 2.48% 5.58% 5.10% 7.03%
Percentage of total advances 42.88% 27.56% 25.47% 4.09%
Five Years to
One Year to Less Less than Ten Greater than
At March 31, 2004: Less than One Year than Five Years Years Ten Years
------------------ ---------------- -------------- ------------
Maturities of advances $ 36,640,894 $ 45,537,886 $ 42,939,774 $ 6,937,138
Range of interest rates 1.17% - 5.51% 4.42% - 7.03% 3.33% - 7.12% 6.66% - 7.10%
Weighted average interest rate 2.89% 5.81% 5.10% 7.03%
Percentage of total advances 27.75% 34.48% 32.52% 5.25%
Five Years to
One Year to Less Less than Ten Greater than
At June 30, 2003: Less than One Year than Five Years Years Ten Years
------------------ ---------------- -------------- ------------
Maturities of advances $ 12,476,300 $ 42,393,604 $ 22,158,503 $ 1,208,468
Range of interest rates 4.60% - 6.62% 4.40% - 5.90% 3.33% - 6.21% 6.66%
Weighted average interest rate 5.31% 5.30% 4.27% 6.66%
Percentage of total advances 15.95% 54.19% 28.32% 1.54%
As of June 30, 2004, there were $45.8 million of advances from the FHLB-Seattle
that were callable, of which $40.0 million of five to less than ten year
advances were callable within one year, $750,000 of one to less than five year
advances were callable within one to less than five years and $5.0 million of
five to less than ten year advances were callable within one to less than five
years. As of June 30, 2003, there were $30.8 million of advances from the
FHLB-Seattle that were callable, of which $10.8 million of five to less than ten
year advances were callable within one year and $20.0 million of five to less
than ten year advances were callable within one to less than five years.
(8) DIVIDENDS
On April 21, 2004, the Board of Directors declared a cash dividend of $0.17 per
common share to stockholders of record as of May 20, 2004. This dividend was
paid on June 3, 2004. On July 22, 2004, the Board of Directors declared a cash
dividend of $0.17 per common share to stockholders of record as of August 11,
2004. The dividend will be paid on August 25, 2004.
(9) EARNINGS PER SHARE
Earnings per share ("EPS") is computed by dividing net income by the weighted
average number of common shares outstanding in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Diluted
earnings per share takes into account the potential dilutive impact of such
instruments as stock options and uses average market price for the period in
determining the number of incremental shares to add to the weighted-average
number of shares outstanding.
The following table reconciles the number of common shares used in the basic and
diluted EPS calculations:
For the Three Months Ended June 30, 2004
----------------------------------------
Weighted- Per-Share
Net Income Average Shares Amount
----------- -------------- ---------
Basic EPS:
Income available to common
Stockholders $ 1,551,801 2,866,090 $ 0.54
======
Effect of dilutive securities:
Stock options -- 130,608
----------- ---------
Diluted EPS:
Income available to common
Stockholders - assumed
Conversions $ 1,551,801 2,996,698 $ 0.52
=========== ========= ======
10
For the Three Months Ended June 30, 2003
----------------------------------------
Weighted- Per-Share
Net Income Average Shares Amount
----------- -------------- ---------
Basic EPS:
Income available to common
Stockholders $ 779,230 1,280,984 $ 0.61
======
Effect of dilutive securities:
Stock options -- 70,670
----------- ---------
Diluted EPS:
Income available to common
Stockholders - assumed
Conversions $ 779,230 1,351,654 $ 0.58
=========== ========= ======
Outstanding options to purchase 271,187 shares and 145,600 shares of the
Company's common stock were included in the computation of diluted EPS as of
June 30, 2004 and as of June 30, 2003, respectively.
The following table illustrates the effect on net income if the Bank had applied
the fair value recognition provisions of Financial Accounting Standards Board
("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation.
Three Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Net income as previously reported $ 1,551,801 $ 779,230
Pro forma adjustment for effect of fair value
accounting for stock options (152) (1,278)
----------- -----------
Pro forma net income $ 1,551,649 $ 777,952
=========== ===========
Pro forma basic earnings per share $ 0.54 $ 0.61
=========== ===========
Pro forma diluted earnings per share $ 0.52 $ 0.58
=========== ===========
11
(10) EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer." The SOP is effective for loans acquired in
fiscal years beginning after December 15, 2004. The SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes loans acquired in business combinations.
The SOP does not apply to loans originated by the Company. The Company intends
to adopt the provisions of SOP 03-3 effective March 31, 2005, and does not
expect the initial implementation to have a significant effect on its
consolidated financial position or consolidated results of operations.
(11) DERIVATIVE FINANCIAL INSTRUMENT DESIGNATED AS HEDGES
As part of the Company's asset/liability management, it uses a swap agreement to
hedge interest rate risk. The derivative used as part of the asset/liability
management process is linked to specific assets and has a high correlation
between the contract and the underlying item being hedged, both at inception and
throughout the hedge period. These derivatives are designated and qualify as
fair value and cash flow hedges of certain assets and liabilities in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes
accounting and reporting standards for financial derivatives, including certain
financial derivatives embedded in other contracts, and hedging activities. The
Statement requires the recognition of all financial derivatives as assets or
liabilities in the Company's statement of financial condition at fair value. The
accounting treatment of changes in fair value is dependent upon whether or not a
financial derivative is designated as a hedge and if so, the type of hedge.
In accordance with SFAS No. 133, the Company recognizes all derivatives on the
statement of financial condition at fair value. Fair value is based on dealer
quotes, or quoted prices from instruments with similar characteristics. The
Company uses financial derivatives designated for hedging activities as cash
flow hedges. For derivatives designated as cash flow hedges, changes in fair
value are recognized in other comprehensive income until the hedged item is
recognized in earnings.
The Company formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. The Company also formally assesses (both
at the hedge's inception and on an ongoing basis) whether the derivatives that
are used in hedging transactions have been highly effective in offsetting
changes in cash flows of hedged items and whether those derivatives may be
expected to remain highly effective in future periods. The Company will
discontinue hedge accounting prospectively when it determines that the
derivative is no longer an effective hedge, the derivative expires or is sold,
or management discontinues the derivative's hedge designation.
The Company had a swap agreement to exchange monthly payments on a notional
amount of $10 million that terminated May 29, 2004. Under this two year
agreement, the Company swapped a variable rate payment equal to the prime rate
for a 6.32% fixed rate payment. Amounts paid or received on the interest rate
swap were included into earnings upon the receipt of interest payments on the
underlying hedged loans, including amounts totaling $38,137 that were included
in earnings during the three months ended June 30, 2004. During the quarter
ending June 30, 2004, the Company recorded a debit of $23,174, net of $14,991
tax, to other comprehensive income arising from the change in value of cash flow
hedges.
12
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters in this Quarterly Report on Form 10-Q may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements may relate to,
among others, expectations of the business environment in which the Company
operates, projections of future performance, including operating efficiencies,
perceived opportunities in the market, potential future credit experience and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may, therefore,
involve risks and uncertainties. The Company's actual results, performance, and
achievements may differ materially from those suggested, expressed or implied by
forward-looking statements due to a wide range of factors including, but not
limited to, the general business environment, interest rates, the real estate
market in Washington, Idaho and Oregon, the demand for mortgage loans, the
Company's ability to successfully integrate the business of Oregon Trail, the
realization of expected cost savings or accretion to earnings because of the
acquisition of Oregon Trail, competitive conditions between banks and non-bank
financial service providers, regulatory changes, and other risks detailed in the
Company's reports filed with the Securities and Exchange Commission, including
its Annual Report on Form 10-KSB for the fiscal year ended March 31, 2004.
GENERAL
On July 1, 1997, FirstBank Northwest converted from mutual to stock form and
became a wholly owned subsidiary of a newly formed Delaware holding company,
FirstBank Corp. The Company sold 1,983,750 shares of common stock at $10.00 per
share in conjunction with a subscription offering to the Bank's Employee Stock
Ownership Plan ("ESOP") and eligible account holders. The net proceeds were
approximately $18.9 million. The Company used approximately $9.5 million of the
net proceeds to purchase all the capital stock of the Bank. In addition, the
Company loaned approximately $1.6 million to the ESOP for the purchase of shares
in the offering.
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 the Management's Discussion and Analysis of Financial
Conditions and Results of Operations relates to the Bank and its operations. In
January 1998, the Bank changed its charter to a Washington state savings bank.
At June 30, 2004 the Bank had eight depository offices in Idaho, three in
Washington, and nine in Oregon.
In October 31, 2003, the Company completed the acquisition of Oregon Trail
Financial Corp. and its wholly-owned subsidiary, Pioneer Bank, for approximately
$36.5 million in cash and 1,480,064 shares of the Company's common stock. The
acquisition doubled the Company's asset size and shares of common stock
outstanding. The Company is the surviving holding company with 100% ownership of
the Bank, and the Bank is the surviving thrift subsidiary.
In April 2002, the Bank opened a loan production office in Boise, Idaho for
mortgage real estate lending. In August 2002, the Bank opened a loan production
office in Spokane, Washington for commercial lending. In May 2003, the Bank
completed remodeling and expanding its Orchards Branch in Lewiston, Idaho. In
July 2003, the Bank completed the construction of the Clarkston, Washington
building. In November 2003, the Bank opened a commercial loan center in the
current mortgage real estate loan center in Boise, Idaho. In January 2004, the
Bank opened a residential loan center in the current commercial loan center in
Spokane, Washington. In February 2004, the Bank completed construction and
opened a new branch in Hayden, Idaho. In April 2004, the Bank opened a retail
deposit facility in Boise, Idaho.
CRITICAL ACCOUNTING POLICIES
Various elements of our accounting policies are, by their nature, inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. In particular, we have identified three policies that, due to the
judgments, estimates, and assumptions inherent in those policies, are critical
to an understanding of our financial statements. These policies relate to the
valuation of our mortgage servicing rights, the methodology for the
determination of our allowance for loan losses, and the valuation of real estate
held for sale. We believe that the judgments, estimates, and assumptions used in
the preparation of our Consolidated Financial Statements are appropriate given
the factual circumstances at the time. However, given the sensitivity of our
Consolidated Financial Statements to these critical accounting policies, the use
of other judgments, estimates and assumptions could result in material
differences in our results of operations or financial condition.
13
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND MARCH 31, 2004
Assets. Total assets increased by 4.6% to $732.7 million at June 30, 2004 from
$700.2 million at March 31, 2004. This increase is mainly due to loan growth and
purchases of securities.
Cash and cash equivalents decreased to $37.0 million at June 30, 2004 from $38.4
million at March 31, 2004 as a result of an increase in non-interest bearing
deposits of $8.0 million, offset by a decrease in interest bearing deposits of
$9.4 million. Held-to-maturity investment securities increased to $31.0 million
at June 30, 2004 from $19.7 million at March 31, 2004 due to purchases this
quarter. Available-for-sale investment securities decreased $805,000.
Available-for-sale mortgage-backed securities decreased $5.5 million due to
principal pay downs. Net loans receivable, including loans held for sale,
increased to $493.1 million at June 30, 2004 from $464.4 million at March 31,
2004. This change in net loans receivable resulted from increases in commercial
loans of $10.1 million, agricultural loans of $5.3 million, construction loans
of $7.8 million, residential loans of $4.2 million and consumer loans of $6.2
million. Loans held for sale remained at $5.3 million at June 30, 2004. Accrued
interest receivable increased to $3.7 million at June 30, 2004 from $3.3 million
at March 31, 2004.
Cash surrender value of bank owned and other insurance policies increased to
$22.5 million at June 30, 2004 from $22.2 million at March 31, 2004. Net
premises and equipment decreased to $18.2 million at June 30, 2004 from $18.3
million at March 31, 2004 mainly due to depreciation. Mortgage servicing assets
increased to $808,000 at June 30, 2004 from $710,000 at March 31, 2004 primarily
due to an impairment allowance recovery of $134,000. Goodwill and other
intangible assets decreased to $20.8 million at June 30, 2004 from $21.0 million
at March 31, 2004. Deferred income taxes increased to $1.0 million at June 30,
2004 from $200,000 at March 31, 2004 due to the change in the mark to market
value on available for sale securities. Other assets decreased to $2.5 million
at June 30, 2004 from $3.3 million at March 31, 2004 due to decreases in prepaid
service fees on the Bank's core processing operations and software, merger
costs, and prepaid insurance.
Liabilities. Deposits decreased to $487.6 million at June 30, 2004 from $491.0
million at March 31, 2004 as a result of and increases in savings deposits of
$1.2 million, money market accounts of $1.0 million, and interest checking
accounts of $1.7 million, and decreases in certificates of deposit ("CDs") of
$3.0 million, and non-interest checking accounts of $4.3 million. Advances from
borrowers for taxes and insurance decreased to $466,000 at June 30, 2004 from
$961,000 at March 31, 2004 due to the timing of payments due on taxes and
insurance. FHLB advances increased to $168.2 million at June 30, 2004 from
$132.1 million at March 31, 2004 to fund loan growth. Accrued expenses and other
liabilities decreased to $6.7 million at June 30, 2004 from $6.8 million at
March 31, 2004.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2004 AND JUNE 30, 2003
Assets. Assets increased to $732.7 million at June 30, 2004 from $344.2 million
at June 30, 2003. On October 31, 2003, assets increased by $371.1 million in
connection with the acquisition of Oregon Trail. This increase is mainly due to
the purchase of Oregon Trail, related goodwill, loan growth, and purchases of
securities. The Company also used $36.5 million in cash to purchase shares of
Oregon Trial common stock.
Cash and cash equivalents increased to $37.0 million at June 30, 2004 from $26.6
million at June 30, 2003 as a result of a $62.9 million increase attributable to
Oregon Trail at acquisition, an increase in non-interest bearing deposits of
$13.6 million, and decreases in federal funds sold of $8.0 million and interest
bearing deposits of $58.1 million. Investment securities increased $31.9
million, which is due to a $14.0 million increase attributable to the
acquisition of Oregon Trail, purchases of $21.8 million, sales of $3.0 million
and a $900,000 net decrease in amortization and market value. Mortgage-backed
securities increased $62.5 million due to a $58.7 million increase attributable
to the acquisition of Oregon Trail, purchases of $43.2 million, sales of $21.7
million, payments from maturities of $16.6 million and a $1.1 million net
decrease in amortization and market value changes. Net loans receivable,
including loans held for sale, increased to $493.1 million at June 30, 2004 from
$265.0 million at June 30, 2003. This change resulted from the purchase of $56.8
million in commercial loans, $22.4 million in agriculture loans, $200,000 in
construction loans, $49.1 million in consumer loans, and $68.0 million in
residential loans in connection with the acquisition of Oregon Trail, as well as
increases in commercial loans of $24.8 million, construction loans of $13.8
million, consumer loans of $0.9 million, and decreases in residential loans of
$2.3 million and agricultural loans of $5.6 million. Loans held for sale
decreased to $5.3 million at June 30, 2004 from $10.6 million at June 30, 2003
due to the timing of loans sold at June 30, 2003. The mix of loans has changed
reflecting the Company's community banking strategy. The acquisition of Oregon
Trail resulted in increases in consumer and residential loans, however, the
focus has been on commercial and construction lending. Accrued interest
receivable increased to $3.7 million at June 30, 2004 from $2.2 million at June
30, 2003 due to a $1.6 million increase attributable to the acquisition of
Oregon Trail.
Equity securities, including FHLB stock, increased to $12.6 million at June 30,
2004 from $5.8 million at June 30, 2003 due to a $6.4 million increase
attributable to the acquisition of Oregon Trail. Net premises and equipment
increased to $18.2 million at June 30, 2004 from $8.3 million at June 30, 2003
due to a $8.4 million increase attributable to the acquisition of Oregon Trail,
$767,000 attributable to construction of the Clarkston, Washington building,
$700,000 attributable to construction of the Hayden, Idaho branch, $82,000 of
14
the Boise, Idaho retail branch office, $1.1 million in other fixed asset
purchases and $1.2 million in depreciation. Cash surrender value of bank owned
and other insurance policies increased to $22.5 million at June 30, 2004 from
$7.4 million at June 30, 2003 mainly due to a $14.3 million increase
attributable to the acquisition of Oregon Trail. Mortgage servicing assets
include an impairment of $293,000 and $306,000 for the periods ending June 30,
2004 and 2003, respectively. Goodwill and other intangible assets increased to
$20.8 million at June 30, 2004 due to the acquisition of Oregon Trial. Other
assets increased to $2.5 million at June 30, 2004 from $1.9 million at June 30,
2003.
Liabilities. Deposits increased to $487.6 million at June 30, 2004 from $229.2
million at June 30, 2003 as a result of a $258.5 million increase attributable
to the acquisition of Oregon Trail, as well as a change in the mix of deposits,
with increases of $6.8 million in savings deposits, $3.8 million in money market
accounts, $11.9 million in interest bearing checking accounts, and decreases of
$1.0 million in brokered CDs, $10.0 million in non-interest checking accounts
and $11.6 million in CDs. FHLB advances increased to $168.2 million at June 30,
2004 from $78.2 million at June 30, 2003 due to a $51.0 million increase
attributable to the acquisition of Oregon Trail and $39.0 million to fund loan
growth. Accrued expenses and other liabilities increased to $6.7 million at June
30, 2004 from $4.3 million at June 30, 2003 due to the addition of the deferred
change in control liability payments of $984,000, a decrease of $1.8 million in
the balance of sold loan principal accounts, and various other liabilities
relating to additional employees including accrued vacation, employee insurance
withholdings, deferred compensation and accrued pension.
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 2004 AND
2003
General. Net income increased to $1.6 million for the three months ended June
30, 2004 from $631,000 for the three months ended June 30, 2003, mainly due to
the acquisition of Oregon Trail, the purchase of securities, increase in loan
balance and increase in deposit balance.
Interest income. Net interest income increased to $6.5 million for the three
months ended June 30, 2004 from $3.0 million for the three months ended June 30,
2003 Total interest income increased to $9.5 million for the three months ended
June 30, 2004 from $5.1 million for the three months ended June 30, 2003. The
yield on interest earning assets decreased to 6.19% for the three months ended
June 30, 2004 from 6.77% for the three months ended June 30, 2003, which offsets
the return on the $325.1 million increase in average interest earning assets.
Interest income on loans receivable increased to $7.8 million for the three
months ended June 30, 2004 from $4.5 million for the three months ended June 30,
2003. The average balance of loans receivable, including loans held for sale,
was $480.1 million in the first quarter of 2004 compared to $261.2 million in
the first quarter of 2003. The yield on loans receivable, including loans held
for sale, decreased to 6.55% for the three months ended June 30, 2004 from 6.90%
for the three months ended June 30, 2003. Interest income from mortgage-backed
securities increased to $808,000 for the three months ended June 30, 2004 from
$176,000 for the three months ended June 30, 2003. The increase is due to
interest income from mortgage-backed securities attributable to Oregon Trail and
additional income on the purchases of mortgage-backed securities. In December
2003, the Company engaged in a $25.0 million leveraged transaction, purchasing
mortgage-backed securities funded by cash and short term FHLB advances. This
generated net interest income, helping defray the costs of depository branches
in Hayden and Boise, Idaho. Interest income from investment securities increased
to $447,000 for the three months ended June 30, 2004 from $188,000 for the three
months ended June 30, 2003. Total interest income from investment securities
attributable to the purchase of Oregon Trail was $251,000.
Interest expense. Interest expense increased to $3.0 million for the three
months ended June 30, 2004 from $2.1 million for the same period in 2003. The
average deposit balance for the three months ended June 30, 2004 was $414.4
million, whereas the average deposit balance as of June 30, 2003 was $187.3
million. The weighted average rate on deposits decreased to 1.59% for the three
months ended June 30, 2004 from 2.26% for the three months ended June 30, 2003.
The average FHLB advances balance for the three months ended June 30, 2004 was
$137.9 million, whereas the average FHLB advances balance as of June 30, 2003
was $80.4 million. The weighted average rate on FHLB advances for the three
months ended June 30, 2004 was 3.87%, whereas the weighted average rate on FHLB
advances for the three months ended June 30, 2003 was 4.97%.
Provision for loan losses. 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 and by the Board of Directors on a
regular basis. A loan loss grading system assists management in determining the
overall risk in the loan portfolio. Individual loans are reviewed periodically
for classification into six categories: satisfactory, acceptable, special
mention, substandard, doubtful and loss; and are assigned a standard loan loss
percent. The change in loan types per category is multiplied by the assigned
loan loss percent to arrive at the basic monthly adjustment to the provision for
loan loss expense. The second element of the provision for loan losses is based
on management's review and evaluation of the allowance for loan losses based on
an analysis of historical trends, individual loans for which full collectibility
may not be reasonably assured, estimated fair value of the underlying
collateral, industry comparisons, unemployment rate in the Bank's market, and
inherent risks in the Bank's portfolio. As a result of this evaluation, the
Bank's provision for loan losses increased to $376,000 for the three months
ended June 30, 2004 from $177,000 for the three months ended June 30, 2003.
15
Non-interest income. Non-interest income increased to $1.7 million for the three
months ended June 30, 2004 from $1.4 million for the three months ended June 30,
2003. Gain on sale of loans decreased to $504,000 for the three months ended
June 30, 2004 from $780,000 for the three months ended June 30, 2003. Service
fees and charges increased to $1.2 million for the three months ended June 30,
2004 from $577,000 for the three months ended June 30, 2003. Commissions and
other income decreased to $33,000 for the three months ended June 30, 2004 from
$34,000 for the three months ended June 30, 2003.
Non-interest expense. Non-interest expense increased to $5.7 million for the
three months ended June 30, 2004 from $3.1 million for the three months ended
June 30, 2003. Compensation and employee related benefits expense increased to
$3.4 million for the three months ended June 30, 2004 from $1.9 million for the
three months ended June 30, 2003. Occupancy expense increased to $744,000 for
the three months ended June 30, 2004 from $351,000 for the three months ended
June 30, 2003. The primary reason for the $393,000 increase in occupancy expense
is due to $316,000 from the purchase of Oregon Trail and an increase in
additional depreciation from the remodel and expansion of the Orchards branch in
Lewiston, Idaho, construction of the Clarkston, Washington building, and new
branches in Hayden and Boise, Idaho. Other non-interest expense increased to
$1.5 million for the three months ended June 30, 2004 from $877,000 for the
three months ended June 30, 2003. This $651,000 increase in other non-interest
expense is due to $411,000 from the purchase of Oregon Trail and increases in
data processing, postage, insurance, consulting and merchant bank card expenses.
Income tax expense. Income taxes expense increased to $628,000 for the three
months ended June 30, 2004 from $328,000 for the same time period in 2003. The
effective tax rates for the quarters ended June 30, 2004 and 2003 were 28.80%
and 29.60% respectively.
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
are classified as special mention and are monitored by the Company.
At June 30, 2004, classified assets of the Company totaled $4.0 million. Assets
classified as loss totaled $2,000 and consisted of overdrawn negotiable order of
withdrawal ("NOW") accounts. Assets classified as doubtful totaled $12,000 and
consisted of one residential loan. Assets classified as substandard totaled $4.0
million, which consisted of $2.4 million of commercial loans, $182,000 of
consumer loans, $910,000 of residential loans, and $553,000 of real estate
owned. The aggregate amounts of the Bank's classified assets at the dates
indicated were as follows:
At June 30,
----------------------------
2004 2003
------- -------
(In Thousands)
Loss $ 2 $ 14
Doubtful 12 18
Substandard 4,021 3,155
------- -------
Total classified assets $ 4,035 $ 3,187
======= =======
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 years indicated are derived by dividing
tax effected income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented.
16
Three Months Ending Year Ending
June 30, 2004 March 31, 2004
----------------------------------- -----------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
--------- --------- ------- --------- --------- -------
(Dollars in Thousands)
Interest-earning assets (1):
Loans receivable:
Mortgage loans receivable $ 116,905 $ 1,908 6.53% $ 74,416 $ 5,065 6.81%
Commercial loans receivable 200,685 2,989 6.03 150,557 9,274 6.20
Construction loans receivable 47,824 941 7.87 36,356 2,832 7.79
Consumer loans receivable 71,651 1,223 6.83 43,063 3,263 7.58
Agricultural loans receivable 45,391 693 6.11 37,547 2,334 6.22
Unearned loan fees and
discounts and allowance
for loan losses (8,122) -- -- (6,350) -- --
--------- --------- ------- --------- --------- -------
Loans receivable, net 474,334 7,754 6.57 335,589 22,768 6.80
Loans held for sale 5,782 82 5.67 7,584 399 5.26
Mortgage-backed securities 74,874 827 4.42 35,869 1,850 5.16
Investment securities 39,191 431 6.13 24,840 1,161 6.51
Other earning assets 39,847 416 5.22 36,000 1,237 4.20
--------- --------- --------- ---------
Total interest-earning assets 634,028 9,510 6.20 439,882 27,415 6.41
--------- ---------
Non-interest-earning assets 70,733 44,684
--------- ---------
Total assets $ 704,761 $ 484,566
========= =========
Interest-earning liabilities:
Passbook, NOW and money
market accounts $ 217,194 $ 348 0.64 $ 137,025 $ 892 0.65
Certificates of deposit 197,252 1,299 2.63 149,626 4,410 2.95
--------- --------- --------- ---------
Total deposits 414,446 1,647 1.59 286,651 5,302 1.85
Advances from FHLB & other 137,932 1,335 3.87 101,106 4,632 4.58
--------- --------- --------- ---------
Total interest-bearing
liabilities 552,378 2,982 2.16 387,757 9,934 2.56
--------- ---------
Total non-interest-bearing
deposits 75,321 43,107 0.00
Non-interest-bearing
liabilities 7,450 6,638 2.31
--------- ---------
Total liabilities 635,149 437,502
Total stockholders' equity 69,612 47,064
--------- ---------
Total liabilities and
total stockholders' equity $ 704,761 $ 484,566
========= =========
Net interest income $ 6,528 $ 17,481
========= =========
Interest rate spread 4.29% 4.10%
======= =========
Net interest margin 4.31% 4.17%
========= =========
Ratio of average interest-
earning assets to average
interest- bearing liabilities 101.01% 102.09%
========= =========
- ---------------
(1) Does not include interest on loans 90 days or more past due.
17
LIQUIDITY AND CAPITAL RESOURCES
The primary function of asset/liability management is to ensure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Management actively analyzes and manages the Company's
liquidity position. The objective of liquidity management is to ensure the
availability of sufficient cash flows to support loan growth and deposit
withdrawals, to satisfy financial commitments, and to take advantage of
investment opportunities.
The Company's primary recurring sources of funds are customer deposits, proceeds
from principal and interest payments on loans, proceeds from sales of loans,
maturing securities, FHLB advances, and borrowings from the Portland Branch
Office of the Federal Reserve Bank of San Francisco. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition. See the 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 three months ended June 30, 2004, the Company originated loans based
upon new production in the amounts of $127.3 million. The Company maintains a
ladder of securities that provides prepayments and payments at maturity and a
portfolio of available-for-sale securities that could be converted to cash
quickly. Proceeds from maturity and sale of securities provided $7.7 million and
$869,000 for the three months ended June 30, 2004 and 2003, respectively.
Proceeds from the sale of loans provided $42.2 million for the three months
ended June 30, 2004 and $56.3 million for the three months ended June 30, 2003.
In connection with the acquisition of Oregon Trail, the Company issued 1.48
million shares of common stock and paid approximately $36.5 million in cash. The
Company had a $42.5 million bridge loan available to provide for the $36.5
million in cash to purchase shares of Oregon Trail common stock. The Company
used $36.5 million of the bridge loan from an independent party for four days.
The merger was completed after the close of business on October 31, 2003.
The primary financing activities of the Company are customer deposits, brokered
deposits and advances from the FHLB. As indicated on the Company's Consolidated
Statement of Cash Flows, deposits utilized $3.1 million for the three months
ended June 30, 2004, which were branch deposits. Deposits increased $14.8
million for the three months ended June 30, 2003. In addition, the Company
maintains a credit facility with the FHLB of Seattle, which provides for
immediately available advances. FHLB advances totaled $168.2 million at June 30,
2004 and $78.2 million at June 30, 2003, with $51.0 million of the increase
attributable to the acquisition of Oregon Trail. The Company also maintains
additional credit facilities with US Bank and the Federal Reserve Bank of San
Francisco. The Company did not have any amounts outstanding under these
facilities as of June 30, 2004 and 2003. The Bank also has used other sources of
funding when the need arises; brokered CDs (up to 15% of assets under current
Board policy) and the national CD markets. Cash provided by advances from the
FHLB-Seattle and other borrowing facilities was $82.2 million for the three
months ended June 30, 2004 and $31.1 million for the three months ended June 30,
2003. Cash used for payments on these advances was $45.9 million for the three
months ended June 30, 2004 and $34.7 million for the three months ended June 30,
2003.
At June 30, 2004, the Company held cash and cash equivalents of $37.0 million.
In addition, at this date, $18.3 million of the Company's investment 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 June 30,
2004, the Company had loan commitments totaling $76.0 million, undisbursed lines
of credit totaling $72.2 million, and undisbursed loans in process totaling
$28.6 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 June 30, 2004
totaled $99.5 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 CDs 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 June
30, 2004, the Bank was in compliance with all regulatory capital requirements
effective as of that date with Tier 1 Capital to average assets, Tier 1 Capital
to risk-weighted assets and Total Capital to risk-weighted assets of 6.64%,
9.20% and 10.45%, respectively.
18
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Contractual obligations at June 30, 2004 consisted of the following:
Three Years to
Less than One One Year to Less Less than Five Five Years
(Dollars in Thousands) Total Year than Three Years Years and Greater
--------- ------------- ---------------- -------------- -----------
Maturities of advances from FHLB $ 168,197 $ 72,120 $ 37,601 $ 8,756 $ 49,720
Operating leases future minimum
rental payments $ 665 $ 173 $ 334 $ 128 $ 30
Construction and equipment
contractual payments $ -- $ -- $ -- $ -- $ --
Other commitments at June 30, 2004 consisted of the following:
Three Years to
Less than One One Year to Less Less than Five Five Years
(Dollars in Thousands) Total Year than Three Years Years and Greater
--------- ------------- ---------------- -------------- -----------
Loan commitments $ 75,992 $ 70,373 $ 1,223 $ 637 $ 3,759
Lines of credit $ 72,232 $ 37,214 $ 13,154 $ 2,614 $ 19,250
Standby letters of credit $ 6,172 $ 5,573 $ 494 $ 105 $ --
Loans in progress $ 28,556 $ 28,556 $ -- $ -- $ --
Forward contracts on residential
sold loans $ 248 $ 248 $ -- $ -- $ --
The Company has signed several contracts with vendors for its data processing
operations. The terms of the contracts expire in one year or less. The annual
fees are paid at the beginning of the terms or 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 $475,000 for the three months ended June 30, 2004. In
addition, the Company has a contract with Wausau Financial Systems for the proof
and imaging system.
The Company has $6.2 million of performance standby letters of credit at June
30, 2004. The Company records fee income in accordance with FASB Statement No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Accordingly, a liability
related to these guarantees has not been recorded in accordance with FIN 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others."
19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change, thereby
impacting net interest income ("NII") which is the primary component of the
Company's earnings. The asset/liability management committee ("ALCO") utilizes
the results of a detailed and dynamic simulation model to quantify the estimated
exposure of NII to sustained interest rate changes. While ALCO routinely
monitors simulated NII sensitivity over a rolling two-year horizon, it also
utilizes additional tools to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet as well as for off balance sheet
derivative financial instruments, if any. This sensitivity analysis is compared
to ALCO policy limits which specify a maximum tolerance level for NII exposure
over a one year horizon, assuming no balance sheet growth, given both a 200
basis point (bp) upward and 100 or 200 bp downward shift in interest rates. A
parallel and pro rata shift in rates over a 12 month period is assumed. Based on
the asset sensitivity of the balance sheet at June 30, 2004, the Bank expects to
be well positioned to benefit from rising and declining rates. If rates were to
sustain an immediate 200 bp increase, net interest income would be expected to
rise by .65%, all else being equal. If rates were to sustain an immediate 100 bp
decrease, net interest income would be expected to decline by 1.47%, all else
being equal. The following reflects the Company's NII sensitivity analysis as of
June 30, 2004, March 31, 2004 and June 30, 2003, as compared to the 10.00% Board
approved policy limit.
June 30, 2004: -100 BP Flat +200 BP
--------- -------- --------
(Dollars in Thousands)
Year 1 NII $ 25,802 $ 26,187 $ 26,357
NII $ Change ($ 385) -- $ 170
NII % Change -1.47% -- .65%
March 31, 2004: -100 BP Flat +200 BP
--------- -------- --------
(Dollars in Thousands)
Year 1 NII $ 25,187 $ 25,593 $ 25,995
NII $ Change ($ 406) -- $ 402
NII % Change -1.59% -- 1.57%
June 30, 2003: -100 BP Flat +200 BP
--------- -------- --------
(Dollars in Thousands)
Year 1 NII $ 10,977 $ 11,510 $ 12,412
NII $ Change ($ 533) -- $ 902
NII % Change -4.63% -- 7.84%
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected future operating
results. These hypothetical estimates are based upon numerous assumptions
including the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and liability
cash flows, and others. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make any assurances as
to the predictive nature of these assumptions including how customer preferences
or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
20
Item 4 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section
13a-15(e) and 15d-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 covering this report. The Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company
in the reports it files or submits under the Securities Exchange Act
of 1934 is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms.
(b) Changes in Internal Controls: 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.
21
FIRSTBANK NW CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
There are no material legal proceedings to which the Company or the Bank is
a party or of which any of their property is subject. From time to time,
the Bank is a party to various legal proceedings incident to its business.
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Issuer Purchases of Equity Securities
Maximum
Number of
Shares
Total Number of that May
Shares Purchased yet be
Total Number as Part of Purchased
of Shares Average Price Publicly Under the
Period Purchased Paid per Share Announced Plan Plan
- -------------------------------- ------------ -------------- ---------------- -----------
April 1, 2004 to April 30, 2004 -- $ -- --
May 1, 2004 to May 31, 2004 -- -- --
June 1, 2004 to June 30, 2004 -- -- --
-------- --------
Total -- $ -- -- 41,432(1)
======== ======== ======== ========
- -------------
(1) On November 21, 2003 the Company's Board of Directors authorized a 5% stock
repurchase plan, or 146,432 shares of the Company's outstanding common
stock. As of June 30, 2004, 105,000 shares have 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.
22
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Articles of Incorporation of the Registrant (1)
3.2(a) Bylaws of the Registrant (1)
3.2(b) Bylaws Amendment adopted by the Board of Directors on
May 23, 2002 (2)
10.1 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Clyde E. Conklin (3)
10.2 Employment Agreement between FirstBank Northwest,
FirstBank Corp. and Larry K. Moxley (3)
10.3 Salary Continuation Agreement between First Federal Bank
of Idaho, F.S.B. and Clyde E. Conklin (3)
10.4 Salary Continuation Agreement between First Federal Bank
of Idaho, F.S.B. and Larry K. Moxley (3)
31.1 Certification of Chief Executive Officer of FirstBank NW
Corp.
31.2 Certification of Chief Financial Officer of FirstBank NW
Corp.
32.1 Certification of Chief Executive Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Chief Financial Officer of FirstBank NW
Corp. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended March 31, 2000.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-KSB
for the year ended March 31, 2002.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, (File No. 333-23395).
(b) Reports on Form 8-K
Form 8-K filed on April 28, 2004 (Items 7 and 12), announcing
quarterly earnings and attaching related press release. Form 8-K
filed on May 26, 2004 (Items 5 and 7), announcing annual meeting
date and attaching related press release.
23
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: August 16, 2004 BY: /s/ CLYDE E. CONKLIN
-------------------------------------
Clyde E. Conklin
President and Chief Executive Officer
BY: /s/ LARRY K. MOXLEY
-------------------------------------
Larry K. Moxley
Secretary and Chief Financial Officer
24