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 September 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 2,909,391 shares
outstanding on November 11, 2004.
FIRSTBANK NW CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
September 30, 2004, March 31, 2004, and September 30, 2003 1
Consolidated Statements of Income
For the three months and six months ended September 30, 2004 and 2003 2
Consolidated Statements of Cash Flows
For the three months and six months ended September 30, 2004 and 2003 3
Consolidated Statements of Comprehensive Income
For the three months and six months ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
September 30, March 31, September 30,
2004 2004 2003
------------- ------------- -------------
ASSETS
Cash and cash equivalents:
Non-interest bearing deposits $ 30,793,369 $ 22,328,617 $ 12,852,496
Interest bearing deposits 246,643 16,066,608 18,973,657
Federal funds sold -- 1,524 2,455,517
------------- ------------- -------------
Total cash and cash equivalents 31,040,012 38,396,749 34,281,670
Investment securities:
Held-to-maturity 30,960,856 19,671,109 --
Available-for-sale 18,203,639 19,115,839 17,250,202
Mortgage-backed securities:
Held-to-maturity 22,536,929 22,899,093 1,873,055
Available-for-sale 45,679,689 54,128,305 5,796,131
Loans receivable, net (Note 4) 500,039,405 459,114,307 246,709,089
Loans held for sale 4,495,812 5,253,377 9,559,888
Accrued interest receivable 3,848,232 3,348,959 2,119,985
Equity securities, at cost 12,737,175 12,505,575 5,882,275
Premises and equipment, net 18,395,964 18,274,192 8,772,184
Cash surrender value of bank owned and other insurance policies 22,725,069 22,192,305 7,496,511
Mortgage servicing assets 652,415 710,258 883,042
Goodwill and other intangible assets 20,129,454 21,049,999 --
Deferred income taxes 665,823 222,136 --
Other assets 3,166,558 3,349,848 2,492,071
------------- ------------- -------------
TOTAL ASSETS $ 735,277,032 $ 700,232,051 $ 343,116,103
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 508,580,531 $ 491,034,638 $ 229,515,006
Advances from borrowers for taxes and insurance 888,176 960,648 1,013,701
Advances from FHLB and other borrowings (Note 7) 149,819,681 132,055,692 76,971,821
Deferred federal and state income taxes -- -- 284,353
Accrued expenses and other liabilities 5,819,844 6,848,792 3,938,603
------------- ------------- -------------
Total Liabilities 665,108,232 630,899,770 311,723,484
------------- ------------- -------------
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;
2,962,206, 2,940,047, and 1,390,492 shares issued;
2,887,235, 2,860,898 and 1,307,162 shares outstanding 29,622 29,400 13,942
Additional paid-in-capital 44,664,736 45,538,508 10,053,591
Retained earnings, substantially restricted 25,486,612 23,275,834 21,297,945
Unearned ESOP shares (760,560) (802,360) (844,160)
Deferred compensation -- -- (38,479)
Accumulated other comprehensive income 748,390 1,290,899 909,780
------------- ------------- -------------
Total Stockholders' Equity 70,168,800 69,332,281 31,392,619
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 735,277,032 $ 700,232,051 $ 343,116,103
============= ============= =============
See accompanying notes to consolidated financial statements
1
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Interest income:
Loans receivable $ 8,205,463 $ 4,436,067 $ 16,041,561 $ 8,943,248
Mortgage-backed securities 824,056 171,702 1,651,227 347,700
Investment securities 516,421 188,999 947,204 377,056
Other interest earning assets 365,909 210,769 781,816 437,434
-------------- -------------- -------------- --------------
Total interest income 9,911,849 5,007,537 19,421,808 10,105,438
-------------- -------------- -------------- --------------
Interest expense:
Deposits 1,747,613 1,021,499 3,394,360 2,078,230
Advances from FHLB and other borrowings 1,445,766 993,104 2,781,199 1,992,863
-------------- -------------- -------------- --------------
Total interest expense 3,193,379 2,014,603 6,175,559 4,071,093
-------------- -------------- -------------- --------------
Net interest income 6,718,470 2,992,934 13,246,249 6,034,345
Provision for loan losses 193,355 78,315 569,135 255,576
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses 6,525,115 2,914,619 12,677,114 5,778,769
-------------- -------------- -------------- --------------
Non-interest income:
Gain on sale of loans 177,683 590,493 681,726 1,370,344
Service fees and other charges 1,183,094 534,827 2,363,654 1,111,651
Commissions and other 66,989 32,939 100,428 66,546
-------------- -------------- -------------- --------------
Total non-interest income 1,427,766 1,158,259 3,145,808 2,548,541
-------------- -------------- -------------- --------------
Non-interest expense:
Compensation and employee related benefits 3,424,225 1,956,241 6,842,313 3,875,885
Occupancy 715,107 347,393 1,459,167 698,191
Other 1,568,152 842,880 3,096,519 1,720,044
-------------- -------------- -------------- --------------
Total non-interest expense 5,707,484 3,146,514 11,397,999 6,294,120
-------------- -------------- -------------- --------------
Income before income tax expense 2,245,397 926,364 4,424,923 2,033,190
Income tax expense 619,807 232,487 1,247,532 560,083
-------------- -------------- -------------- --------------
Net income $ 1,625,590 $ 693,877 $ 3,177,391 $ 1,473,107
============== ============== ============== ==============
Earnings per share (Note 9):
Net income per share - basic $ 0.56 $ 0.54 $ 1.10 $ 1.14
Net income per share - diluted $ 0.54 $ 0.51 $ 1.06 $ 1.09
Cash dividends paid per common share $ 0.17 $ 0.15 $ 0.34 $ 0.30
Weighted average shares outstanding - basic 2,893,817 1,294,267 2,880,018 1,287,650
Weighted average shares outstanding - diluted 3,006,158 1,366,142 3,002,147 1,353,745
See accompanying notes to consolidated financial statements
2
FirstBank NW Corp. and Subsidiaries,
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended September 30,
--------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income $ 3,177,391 $ 1,473,107
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 720,066 344,451
Amortization (accretion) of securities and intangibles, net (361,102) (80,341)
Provision for loan losses 569,136 255,577
Gain on sale of loans held for sale (681,726) (1,370,344)
Proceeds from sale of loans held for sale 62,489,006 103,170,583
Originations of loans held for sale (61,072,637) (106,146,050)
Recovery of impairment of mortgage servicing rights 22,922 --
FHLB stock dividends (231,600) (151,600)
ESOP compensation expense 118,272 101,268
Other (gains) losses, net 22,059 3,625
Deferred compensation expense -- 118,181
Deferred income taxes (97,372) (88,061)
Changes in assets and liabilities:
Accrued interest receivable and other assets (449,735) (802,978)
Accrued expenses and other liabilities (1,028,948) (593,984)
Income taxes receivable 660,624 (248,023)
-------------- --------------
Net cash provided by (used in) operating activities 3,856,356 (4,014,589)
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities of mortgage-backed securities; held-to-maturity 319,671 92,558
Proceeds from maturities of mortgage-backed securities; available-for-sale 11,024,992 1,695,221
Proceeds from maturities of investment securities; held-to-maturity 31,924 --
Proceeds from maturities of investment securities; available-for-sale 213,613 --
Proceeds from sale of investment securities; available-for-sale 250,000 --
Purchase of mortgage-backed securities; available-for-sale (3,028,594) --
Purchase of investment securities; available-for-sale (67,774) (309,498)
Purchase of investment securities; held-to-maturity (11,364,007) --
Other net change in loans receivable (41,549,680) 4,130,196
Purchases of premises and equipment (933,460) (1,906,595)
Proceeds from sale of premises and equipment 89,439 --
Net increase in cash surrender value of life insurance policies (532,764) (224,022)
Proceeds from sale of real estate owned 111,450 163,502
-------------- --------------
Net cash provided by (used in) investing activities (45,435,190) 3,641,362
-------------- --------------
Cash flows from financing activities:
Cash paid for dividends (973,316) (388,831)
Net change in deposits 18,025,896 15,175,009
Advances (repayments) from borrowers for taxes and insurance (72,471) (177,844)
Advances from FHLB and other borrowings 227,352,000 93,531,000
Payments on advances from FHLB and other borrowings (209,152,407) (98,375,407)
Proceeds from stock options 1,689,731 150,195
Purchase of stock (2,647,336) --
-------------- --------------
Net cash provided by (used in) financing activities 34,222,097 9,914,122
-------------- --------------
Net increase (decrease) in cash and cash equivalents (7,356,737) 9,540,895
Cash and cash equivalents, beginning of period 38,396,749 24,740,775
-------------- --------------
Cash and cash equivalents, end of period $ 31,040,012 $ 34,281,670
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,715,078 $ 4,045,225
Income taxes $ 756,809 $ 896,167
Noncash investing and financing activities:
Unrealized gains (losses) on securities; available-for-sale, net of tax $ (519,323) $ (69,050)
Unrealized gain (losses) on cash flow hedge derivative, net of tax $ (23,174) $ (56,353)
Loans receivable charged to the allowance for loan losses $ 376,729 $ 64,061
Transfer from loans converted to real estate acquired through foreclosure $ 61,350 $ 709,758
See accompanying notes to consolidated financial statements
3
FirstBank NW Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income $ 1,625,590 $ 693,877 $ 3,177,391 $ 1,473,107
-------------- -------------- -------------- --------------
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities;
available-for-sale, net of tax benefit (expense)
of ($417,271), $209,878, $331,336, and $44,670 665,939 (324,435) (519,324) (69,050)
Change in unrealized derivative gains on cash flow
hedge, net of tax benefit (expense) of $0,
$22,225, $14,991, and $36,456 -- (34,355) (23,174) (56,353)
-------------- -------------- -------------- --------------
Net other comprehensive income (loss) 665 939 (358,790) (542,498) (125,403)
-------------- -------------- -------------- --------------
Comprehensive income $ 2,291,529 $ 335,087 $ 2,634,893 $ 1,347,704
============== ============== ============== ==============
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 six months ended September 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. 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 its
market area was geographically contiguous to the Company's market area with no
overlapping branches. Oregon Trail was also considered to be a potential
candidate because of its stable deposit markets, sizable asset base, strong
asset quality, and its community banking philosophy, which is shared by the
Company. In addition, Oregon Trail and the Company have common backgrounds as
converted thrift institutions, and the Board of Directors and management of the
Company believed that a combination of the two companies would enhance the
Company's competitiveness, 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 September 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
September 30,
----------------------------
2004 2003
------------ ------------
Total interest income $ 9,912 $ 10,223
Total interest expense 3,194 3,408
------------ ------------
Net interest income 6,718 6,815
Provision for loan losses 193 120
------------ ------------
Net interest income after provision for loan losses 6,525 6,695
Total non-interest income 1,428 1,962
Total non-interest expense (5,707) (6,063)
------------ ------------
Income before income tax expense 2,246 2,594
Income tax expense (620) (719)
------------ ------------
Net income 1,626 1,875
============ ============
Pro Forma earnings per share:
Pro Forma net income per share - basic $ 0.56 $ 0.68
Pro Forma net income per share - diluted $ 0.54 $ 0.65
Pro Forma weighted average shares outstanding - basic 2,893,817 2,774,331
Pro Forma weighted average shares outstanding - diluted 3,006,158 2,903,604
(4) LOANS RECEIVABLE
Loans receivable at September 30, 2004, March 31, 2004, and September 30, 2003
consists of the following:
September 30, March 31, September 30,
2004 2004 2003
------------ ------------ ------------
Real estate loans:
Residential $114,923,050 $113,381,056 $ 45,612,190
Commercial 137,335,465 122,132,293 71,094,660
Agricultural 19,387,239 18,566,973 15,804,709
Construction 79,638,325 68,235,995 57,995,458
Other loans:
Commercial (non-real estate) 81,604,432 75,877,668 48,531,367
Other consumer 41,463,840 43,424,825 6,995,109
Home equity 33,330,573 24,529,836 15,152,644
Agricultural operating 30,087,931 24,876,236 13,748,416
------------ ------------ ------------
Total loans receivable 537,770,855 491,024,882 274,934,553
Less:
Loans in process 29,331,467 24,065,036 23,245,068
Unearned loan fees and discounts 1,806,086 1,531,794 1,364,213
Allowance for loan losses 6,593,897 6,313,745 3,616,183
------------ ------------ ------------
Loans receivable, net $500,039,405 $459,114,307 $246,709,089
============ ============ ============
Loans held for sale $ 4,495,812 $ 5,253,377 $ 9,559,888
============ ============ ============
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.
September 30, March 31, September 30,
2004 2004 2003
----------------------- ----------------------- -----------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
(Dollars in Thousands) Amount Loans Amount Loans Amount Loans
---------- ---------- ---------- ---------- ---------- ----------
Residential $ 285 21.37% $ 282 23.09% $ 134 16.59%
Construction 1,012 14.81 927 13.90 831 21.09
Agricultural 819 9.20 738 8.85 414 10.75
Commercial 3,756 40.71 3,630 40.32 2,181 43.51
Consumer and other loans 722 13.91 737 13.84 56 8.06
---------- ---------- ---------- ---------- ---------- ----------
Total allowance for loan losses $ 6,594 100.00% $ 6,314 100.00% $ 3,616 100.00%
========== ========== ========== ========== ========== ==========
The following table sets forth the changes in the Bank's allowance for loan
losses for the periods indicated.
Six Months Fiscal Year Six Months
Ended Ending Ended
September 30, March 31, September 30,
2004 2004 2003
------------ ------------ ------------
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 569,135 395,144 255,576
------------ ------------ ------------
Charge-offs:
Residential real estate 7,383 12,286 10,000
Commercial non-real estate 210,933 243,908 19,251
Consumer and other loans 158,413 223,156 34,809
------------ ------------ ------------
Total charge-offs 376,729 479,350 64,060
Recoveries 87,746 120,318 10,405
------------ ------------ ------------
Net charge-offs 288,983 359,032 53,655
------------ ------------ ------------
Balance at end of year $ 6,593,897 $ 6,313,745 $ 3,616,183
============ ============ ============
Net charge-offs to average outstanding loans 0.06% 0.10% 0.02%
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.
September 30, March 31, September 30,
2004 2004 2003
------------ ------------ ------------
Loans accounted for on a nonaccrual basis:
Real estate loans:
Residential $ 437,731 $ 700,792 $ 630,040
Construction -- 363,980 163,500
Agricultural -- 77,726 134,882
Commercial 551,103 -- 502,884
Commercial non-real estate 340,629 1,661,136 219,416
Consumer and other loans 166,150 96,325 114,179
Agricultural operating -- -- --
------------ ------------ ------------
Total 1,495,613 2,899,959 1,764,901
Accruing loans which are contractually
past due 90 days or more -- -- --
------------ ------------ ------------
Total of nonaccrual and 90 days past
due loans 1,495,613 2,899,959 1,764,901
Real estate owned and repossessed assets 527,349 604,437 663,507
------------ ------------ ------------
Total nonperforming loans 2,022,962 3,504,396 2,428,408
Restructured loans 305,969 152,234 284,032
------------ ------------ ------------
Total nonperforming assets $ 2,328,931 $ 3,656,630 $ 2,712,440
============ ============ ============
Nonaccrual and 90 days or more past due
loans as a percent of loans receivable, net 0.30% 0.63% 0.72%
Nonaccrual and 90 days or more past
due loans as a percent of total assets 0.20% 0.41% 0.51%
Nonperforming assets as a percent of
total assets 0.32% 0.50% 0.79%
Total nonperforming assets to total loans 0.43% 0.74% 0.99%
8
(5) MORTGAGE SERVICING RIGHTS
At September 30, 2004, mortgage servicing rights were $652,000, net of an
allowance for impairment on mortgage servicing rights of $404,000. At March 31,
2004, mortgage servicing rights were $710,000, net of an allowance for
impairment on mortgage servicing rights of $427,000. At September 30, 2003,
mortgage servicing rights were $883,000, with no allowance for impairment on
mortgage servicing rights. The cost of mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value of
those rights. Fair values are estimated using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. For purposes of measuring impairment, the rights
are stratified by predominant characteristics, such as interest rates and terms.
The amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceeds their fair value. The following
table is an analysis of the changes in mortgage servicing rights for the periods
indicated:
Six Months Year Six Months
Ended Ended Ended
September 30, March 31, September 30,
2004 2004 2003
------------ ------------ ------------
Beginning Balance $ 710,258 $ 825,814 $ 825,814
Additions 20,010 199,301 152,141
Amortization (100,775) (194,234) (94,913)
Impairment recovered (recognized) 22,922 (120,623) --
------------ ------------ ------------
Ending Balance $ 652,415 $ 710,258 $ 883,042
============ ============ ============
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill at September 30, 2004 was $16.8 million. No impairment loss on goodwill
was recorded for the three months ended September 30, 2004, because there were
no impairment indicators during the period.
Core deposit intangible at September 30, 2004 was $3.2 million, net of
accumulated amortization of $647,000. Amortization expense for the net carrying
amount of the core deposit intangible at September 30, 2004 is estimated to be
as follows:
(In Thousands)
For the three months ended September 30, 2004 $ 176
=======
For the year ended March 31,
2005 353
2006 705
2007 705
2008 705
After 2008 761
-------
Estimated total core deposit intangible amortization expense $ 3,229
=======
9
(7) ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
The Bank utilizes advances from the Federal Home Loan Bank of Seattle
("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, providing that the Bank holds sufficient
collateral. Advances from the FHLB-Seattle at September 30, 2004 and 2003 were
$147.8 million and $77.0 million, respectively. Advances from other borrowings
at September 30, 2004 and 2003 were $2.0 million and $0, respectively.
Scheduled maturities of advances from the FHLB-Seattle were as follows:
One Year to Five Years to
Less than One Less than Five Less than Ten Greater than
At September 30, 2004: Year Years Years Ten Years
------------- -------------- ------------- ------------
Maturities of advances $62,374,346 $40,827,405 $37,759,204 $6,826,726
Range of interest rates 1.96 - 7.01% 3.05 - 7.03% 3.42 - 7.12% 6.66 - 7.10%
Weighted average interest rate 3.41% 5.06% 5.33% 7.03%
Percentage of total advances 42.20% 27.63% 25.55% 4.62%
One Year to Five Years to
Less than One Less than Five Less than Ten Greater than
At March 31,2004: Year 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%
One Year to Five Years to
Less than One Less than Five Less than Ten Greater than
At September 30, 2003: Year Years Years Ten Years
------------- -------------- ------------- ------------
Maturities of advances $15,109,600 $38,511,804 $22,154,449 $1,195,968
Range of interest rates 1.15 - 6.62% 4.40 - 5.90% 3.33 - 6.21% 6.66%
Weighted average interest rate 4.80% 5.32% 4.27% 6.66%
Percentage of total advances 19.63% 50.04% 28.78% 1.55%
As of September 30, 2004, there were $45.8 million of advances from the
FHLB-Seattle that were callable, of which $40.0 million of one to less than five
year advances were callable within one year, $750,000 of five to less than ten
year advances were callable within one year, and $5.0 million of five to less
than ten year advances were callable within one to less than five years. As of
September 30, 2003, there were $30.8 million of advances from the FHLB-Seattle
that were callable, of which $10.0 million of one to less than five year
advances were callable within one year, $5.8 million of five to less than ten
year advances were callable within one year, and $15.0 million of five to less
than ten year advances were callable within one to less than five years.
(8) DIVIDENDS
On July 22, 2004, the Board of Directors declared a cash dividend of $0.17 per
common share to shareholders of record as of August 11, 2004. This dividend was
paid on August 25, 2004. On October 26, 2004, the Board of Directors declared a
cash dividend of $0.17 per common share to shareholders of record as of November
18, 2004. The dividend will be paid on December 3, 2004.
10
(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 September 30, 2004 For the Six Months Ended September 30, 2004
------------------------------------------------ ------------------------------------------------
Weighted- Per-Share Weighted- Per-Share
Net Income Average Shares Amount Net Income Average Shares Amount
-------------- -------------- -------------- -------------- -------------- --------------
Basic EPS:
Income available to common
Stockholders $ 1,625,590 2,893,817 $ 0.56 $ 3,177,391 2,880,018 $ 1.10
============== ==============
Effect of dilutive securities:
Stock options -- 112,341 -- 122,129
-------------- -------------- -------------- --------------
Diluted EPS:
Income available to common
Stockholders - assumed
Conversions $ 1,625,590 3,006,158 $ 0.54 $ 3,177,391 3,002,147 $ 1.06
============== ============== ============== ============== ============== ==============
For the Three Months Ended September 30, 2003 For the Six Months Ended September 30, 2003
------------------------------------------------ ------------------------------------------------
Weighted- Per-Share Weighted- Per-Share
Net Income Average Shares Amount Net Income Average Shares Amount
-------------- -------------- -------------- -------------- -------------- --------------
Basic EPS:
Income available to common
Stockholders $ 693,877 1,294,267 $ 0.54 $ 1,473,107 1,287,650 $ 1.14
============== ==============
Effect of dilutive securities:
Stock Options -- 71,875 -- 66,095
-------------- -------------- -------------- --------------
Diluted EPS:
Income available to common
Stockholders - assumed
Conversions $ 693,877 1,366,142 $ 0.51 $ 1,473,107 1,353,745 $ 1.09
============== ============== ============== ============== ============== ==============
Outstanding options to purchase 184,515 shares and 138,550 shares of the
Company's common stock were included in the computation of diluted EPS as of
September 30, 2004 and 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 compensation.
Three Months Ended September 30, Six Months Ended September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net income as previously reported $ 1,625,590 $ 693,877 $ 3,177,391 $ 1,473,107
Pro forma adjustment for effect of fair value
accounting for stock options (101) (254) (203) (508)
-------------- -------------- -------------- --------------
Pro forma net income $ 1,625,489 $ 693,623 $ 3,177,188 $ 1,472,599
============== ============== ============== ==============
Pro forma basic earnings per share $ 0.56 $ 0.54 $ 1.10 $ 1.14
============== ============== ============== ==============
Pro forma diluted earnings per share $ 0.54 $ 0.51 $ 1.06 $ 1.09
============== ============== ============== ==============
11
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. Except for certain
long-term guarantees, most guarantees expire in one year. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral supporting those
commitments, for which collateral is deemed necessary, generally amounts to one
hundred percent of the commitment amount at September 30, 2004. The Company
routinely charges a fee for these credit facilities. Such fees are amortized
into income over the life of the agreement, and unamortized amounts are not
significant as of September 30, 2004.
As of September 30, 2004 and 2003, standby letters of credit and financial
guarantees were $7,645 and $3,377, respectively.
(11) EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2004, the FASB issued Statement No. 132(R), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." Statement No. 132, as
originally issued, is effective until the provisions of Statement No. 132(R) are
fully adopted. All new disclosure requirements for the domestic plans of
publicly traded entities are effective for years ending after December 15, 2003.
Estimated future benefit payments, and all other new disclosure requirements for
foreign plans and nonpublic entities are effective for years ending after June
15, 2004. The Company intends to adopt the provisions of FASB Statement No.
132(R) effective March 31, 2005, and does not expect the initial implementation
to have a significant impact on its consolidated financial position or
consolidated results of operations.
In October 2004, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statements requires financial instruments within its scope to be classified as
liabilities (or assets in some circumstances), and is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003,
except for certain mandatorily redeemable financial instruments. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of FASB Statement No. 150 did not
have a material impact on the Company's consolidated financial statements.
In October 2004, the FASB issued Interpretation Number ("FIN") 46(R),
"Consolidation of Variable Interest Entities." This applies at different dates
to different types of enterprises and entities, and special provisions apply to
enterprises that have fully or partially applies Interpretation 46 prior to
issuance of Interpretation 46(R). Application of Interpretation 46 or 46(R) is
required in financial statements of public entities that have interests in
variable interest entities or potential variable interest entities commonly
referred to as special-purpose entities for periods ending after December 15,
2003. The adoption of FIN 46R did not have a material impact on the Company's
consolidated financial statements.
(12) 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.
12
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 and $109,655 that
were included in earnings during the six months ended September 30, 2004 and
2003, respectively. During the quarter and six months ended September 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.
During the quarter ended September 30, 2003, the Company recorded a credit of
$34,355, net of $22,225 tax, to other comprehensive income arising from the
change in value of cash flow hedges. During the six months ended September 30,
2003, the Company recorded a credit of $56,353, net of $36,456 tax, to other
comprehensive income arising from the change in value of cash flow hedges.
13
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 ("SEC"),
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. In January 1998, the Bank changed its charter to a Washington
state savings bank.
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, 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. A new loan production office in Nampa, Idaho
has been authorized and is scheduled to open during the next fiscal quarter of
2004. The staff has been hired, offices have been identified, and the loan
production office is expected to be open by November 15, 2004. The Nampa, Idaho
market is adjacent to the Boise, Idaho market and is a logical expansion of our
presence in Idaho.
In December 2004, the Company will be converting its core processing system to
increase efficiencies. The one-time expenses related to the conversion and
training will increase expenses in the next two quarters.
14
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.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND MARCH 31, 2004
Assets. Total assets increased by 5.0% to $735.3 million at September 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 $31.0 million at September 30, 2004 from
$38.4 million at March 31, 2004 as a result of an increase in non-interest
bearing deposits of $8.4 million, offset by a decrease in interest bearing
deposits of $15.8 million. Held-to-maturity investment securities increased to
$31.0 million at September 30, 2004 from $19.7 million at March 31, 2004 due to
purchases last quarter. Available-for-sale investment securities decreased
$912,000. Available-for-sale mortgage-backed securities decreased $8.4 million
due to principal pay downs. Net loans receivable, including loans held for sale,
increased to $504.5 million at September 30, 2004 from $464.4 million at March
31, 2004. This change in net loans receivable resulted from increases in
commercial loans of $20.5 million, agricultural loans of $5.9 million,
construction loans of $5.3 million, residential loans of $2.6 million and
consumer loans of $5.8 million. Loans held for sale decreased to $4.5 million at
September 30, 2004 from $5.3 million at March 31, 2004. Accrued interest
receivable increased to $3.8 million at September 30, 2004 from $3.3 million at
March 31, 2004.
Cash surrender value of bank owned and other insurance policies increased to
$22.7 million at September 30, 2004 from $22.2 million at March 31, 2004. Net
premises and equipment increased to $18.4 million at September 30, 2004 from
$18.3 million at March 31, 2004. Mortgage servicing assets decreased to $652,000
at September 30, 2004 from $710,000 at March 31, 2004 primarily due to
amortization. Goodwill and other intangible assets decreased to $20.1 million at
September 30, 2004 from $21.0 million at March 31, 2004. Deferred income taxes
increased to $666,000 at September 30, 2004 from $222,000 at March 31, 2004 due
to the change in the mark to market value on available for sale securities.
Other assets decreased to $3.2 million at September 30, 2004 from $3.3 million
at March 31, 2004 due to decreases in core deposit intangible from amortization
and goodwill from tax benefits on exercises of stock options purchased in the
acquisition of Oregon Trail.
Liabilities. Deposits increased to $508.6 million at September 30, 2004 from
$491.0 million at March 31, 2004, as a result of increases in savings deposits
of $2.2 million, money market accounts of $12.4 million, and interest checking
accounts of $7.8 million, and decreases in certificates of deposit ("CDs") of
$2.3 million. Advances from borrowers for taxes and insurance decreased to
$888,000 at September 30, 2004 from $961,000 at March 31, 2004 due to the
reduction in the loan servicing portfolio. FHLB advances and other borrowings
increased to $149.8 million at September 30, 2004 from $132.1 million at March
31, 2004 to fund loan growth. Accrued expenses and other liabilities increased
to $5.8 million at September 30, 2004 from $6.8 million at March 31, 2004.
Stockholders' Equity. Additional paid-in-capital decreased $874,000 to $44.7
million at September 30, 2004 from $45.5 million at March 31, 2004 due to $2.6
million in repurchase of common stock and $1.7 million in stock issued from the
exercise of stock options. Retained earnings increased $2.2 million to $25.5
million at September 30, 2004 from $23.3 million at March 31, 2004 as a result
of $3.2 million net income and $973,000 in dividends paid. Accumulated other
comprehensive income decreased $542,000 to $748,000 at September 30, 2004 from
$1.3 million at March 31, 2004 as a result of changes in unrealized losses on
available-for-sale securities, net of tax benefit.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
Assets. Assets increased to $735.3 million at September 30, 2004 from $343.1
million at September 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.
15
Cash and cash equivalents decreased to $31.0 million at September 30, 2004 from
$34.3 million at September 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 $16.2 million, and decreases in federal funds sold of $2.5 million
and interest bearing deposits of $79.9 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 and maturities of
$3.5 million and a $400,000 net decrease in amortization and market value.
Mortgage-backed securities increased $60.5 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 $19.5 million and a
$200,000 net decrease in amortization and market value changes. Net loans
receivable, including loans held for sale, increased to $504.5 million at
September 30, 2004 from $256.3 million at September 30, 2003. This change
resulted from the purchase of $56.8 million in commercial loans, $22.4 million
in agriculture loans, $177,000 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 $40.5 million,
construction loans of $14.6 million, consumer loans of $3.4 million, and
decreases in residential loans of $3.8 million and agricultural loans of $3.0
million. Loans held for sale decreased to $4.5 million at September 30, 2004
from $9.6 million at September 30, 2003 due to the timing of loans sold at
September 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 Company's focus has
been on commercial and construction lending. Accrued interest receivable
increased to $3.8 million at September 30, 2004 from $2.2 million at September
30, 2003 due to a $1.6 million increase attributable to the acquisition of
Oregon Trail.
Equity securities, including FHLB stock, increased to $12.7 million at September
30, 2004 from $5.9 million at September 30, 2003 due to a $6.4 million increase
attributable to the acquisition of Oregon Trail. Net premises and equipment
increased to $18.4 million at September 30, 2004 from $8.8 million at September
30, 2003 due to a $8.4 million increase attributable to the acquisition of
Oregon Trail, $810,000 attributable to construction of the Hayden, Idaho branch
and $1.8 million in other fixed asset purchases and $1.4 million in
depreciation. Cash surrender value of bank owned and other insurance policies
increased to $22.7 million at September 30, 2004 from $7.5 million at September
30, 2003 mainly due to a $14.3 million increase attributable to the acquisition
of Oregon Trail. Mortgage servicing assets include an impairment of $404,000 for
the period ending September 30, 2004. For the period ending September 30, 2003,
there was no impairment. Goodwill and other intangible assets increased to $20.1
million at September 30, 2004 due to the acquisition of Oregon Trial. Other
assets increased to $3.2 million at September 30, 2004 from $2.5 million at
September 30, 2003.
Liabilities. Deposits increased to $508.6 million at September 30, 2004 from
$229.5 million at September 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 $7.4 million in savings deposits, $14.1 million
in money market accounts, $17.8 million in interest bearing checking accounts,
and decreases of $49,000 in brokered CDs, $6.2 million in non-interest checking
accounts and $12.5 million in CDs. FHLB advances and other borrowings increased
to $147.8 million at September 30, 2004 from $77.0 million at September 30, 2003
due to a $51.0 million increase attributable to the acquisition of Oregon Trail
and $19.8 million to fund loan growth. Accrued expenses and other liabilities
increased to $5.8 million at September 30, 2004 from $3.9 million at September
30, 2003 due to the addition of the deferred change in control liability
payments of $836,000, a decrease of $1.4 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.
Stockholders' Equity. Common stock increased $15,680 to $29,622 at September 30,
2004 from $13,942 at September 30, 2003 due to $14,800 stock issued in
acquisition, $3,499 in stock issued from the exercise of stock options, and
$2,619 in repurchase of common stock. Additional paid-in-capital increased $34.6
million to $44.7 million at September 30, 2004 from $10.1 million at September
30, 2003 due to $7.6 million in repurchase of common stock, $4.4 million in
stock issued from the exercise of stock options, $33.2 million in stock issued
in acquisition, and $4.6 million in stock options issued in acquisition.
Retained earnings increased $4.2 million to $25.5 million at September 30, 2004
from $21.3 million at September 30, 2003 as a result of $6.1 million net income
and $1.9 million in dividends paid. Accumulated other comprehensive income
decreased $161,000 to $748,000 at September 30, 2004 from $910,000 at September
30, 2003 as a result of changes in unrealized losses on available-for-sale
securities, net of tax benefit.
16
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003
General. Net income increased to $1.6 million for the three months ended
September 30, 2004 from $694,000 for the three months ended September 30, 2003,
mainly due to the acquisition of Oregon Trail, the purchase of securities, and
increases in loan and deposit balances.
Interest income. Net interest income increased to $6.7 million for the three
months ended September 30, 2004 from $3.0 million for the three months ended
September 30, 2003. Total interest income increased to $9.9 million for the
three months ended September 30, 2004 from $5.0 million for the three months
ended September 30, 2003. The yield on interest earning assets decreased to
6.18% for the three months ended September 30, 2004 from 6.59% for the three
months ended September 30, 2003. The average interest earning assets increased
to $655.2 million for the three months ended September 30, 2004 from $311.4 for
the three months ended September 30, 2003. Interest income on loans receivable
increased to $8.2 million for the three months ended September 30, 2004 from
$4.4 million for the three months ended September 30, 2003. The average balance
of loans receivable, including loans held for sale, was $499.2 million in the
second quarter of fiscal 2005 compared to $264.4 million in the second quarter
of fiscal 2004. The yield on loans receivable, including loans held for sale,
decreased to 6.59% for the three months ended September 30, 2004 from 6.72% for
the three months ended September 30, 2003. Interest income from mortgage-backed
securities increased to $824,000 for the three months ended September 30, 2004
from $172,000 for the three months ended September 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 $516,000 for the three months ended September 30, 2004
from $189,000 for the three months ended September 30, 2003. Total interest
income from investment securities attributable to the purchase of Oregon Trail
was $342,000 for the three months ended September 30, 2004.
Interest expense. Interest expense increased to $3.2 million for the three
months ended September 30, 2004 from $2.0 million for the same period in 2003.
The average deposit balance for the three months ended September 30, 2004 was
$429.7 million, whereas the average deposit balance for the three months ended
September 30, 2003 was $188.0 million. The weighted average rate on deposits
decreased to 1.63% for the three months ended September 30, 2004 from 2.17% for
the three months ended September 30, 2003. The average balance of FHLB and other
advances for the three months ended September 30, 2004 was $152.1 million,
whereas the average balance of FHLB and other advances as of September 30, 2003
was $81.1 million. The weighted average rate on FHLB and other advances for the
three months ended September 30, 2004 was 3.80%, whereas the weighted average
rate on FHLB advances for the three months ended September 30, 2003 was 4.90%.
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 $193,000 for the three months
ended September 30, 2004 from $78,000 for the three months ended September 30,
2003.
Non-interest income. Non-interest income increased to $1.4 million for the three
months ended September 30, 2004 from $1.2 million for the three months ended
September 30, 2003. Gain on sale of loans decreased to $178,000 for the three
months ended September 30, 2004 from $590,000 for the three months ended
September 30, 2003. Impairment recognized on mortgage servicing rights for the
three months ended September 30, 2004 was $110,653 and $0 for the three months
ended September 30, 2003. Service fees and charges increased to $1.2 million for
the three months ended September 30, 2004 from $535,000 for the three months
ended September 30, 2003. Commissions and other income decreased to $67,000 for
the three months ended September 30, 2004 from $33,000 for the three months
ended September 30, 2003.
17
Non-interest expense. Non-interest expense increased to $5.7 million for the
three months ended September 30, 2004 from $3.1 million for the three months
ended September 30, 2003. Compensation and employee related benefits expense
increased to $3.4 million for the three months ended September 30, 2004 from
$2.0 million for the three months ended September 30, 2003. Occupancy expense
increased to $715,000 for the three months ended September 30, 2004 from
$347,000 for the three months ended September 30, 2003. The primary reason for
the $368,000 increase in occupancy expense is due to $331,000 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 $1.6 million for the three months ended
September 30, 2004 from $843,000 for the three months ended September 30, 2003.
This $725,000 increase in other non-interest expense is due to $351,000 from the
purchase of Oregon Trail and increases in data processing, postage, insurance,
consulting and merchant bank card expenses.
Income tax expense. Income tax expense increased to $620,000 for the three
months ended September 30, 2004 from $232,000 for the same time period in 2003.
The effective tax rates for the quarters ended September 30, 2004 and 2003 were
27.60% and 25.10% respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR SIX MONTHS ENDED SEPTEMBER 30, 2004 AND
2003
General. Net income increased to $3.2 million for the six months ended September
30, 2004 from $1.5 million for the six months ended September 30, 2003, mainly
due to the acquisition of Oregon Trail, the purchase of securities, and
increases in loan and deposit balances.
Interest income. Net interest income increased to $13.2 million for the six
months ended September 30, 2004 from $6.0 million for the six months ended
September 30, 2003. Total interest income increased to $19.4 million for the six
months ended September 30, 2004 from $10.1 million for the six months ended
September 30, 2003. The yield on interest earning assets decreased to 6.19% for
the six months ended September 30, 2004 from 6.68% for the six months ended
September 30, 2003, which offsets the return on the $334.5 million increase in
average interest earning assets. Interest income on loans receivable increased
to $16.0 million for the six months ended September 30, 2004 from $8.9 million
for the six months ended September 30, 2003. The average balance of loans
receivable, including loans held for sale, was $489.7 million in the first half
of fiscal 2005 compared to $262.8 million in the first half of fiscal 2004. The
yield on loans receivable, including loans held for sale, decreased to 6.57% for
the six months ended September 30, 2004 from 6.81% for the six months ended
September 30, 2003. Interest income from mortgage-backed securities increased to
$1.7 million for the six months ended September 30, 2004 from $348,000 for the
six months ended September 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. Interest income from investment
securities increased to $948,000 for the six months ended September 30, 2004
from $377,000 for the six months ended September 30, 2003. Total interest income
from investment securities attributable to the purchase of Oregon Trail was
$593,000.
Interest expense. Interest expense increased to $6.2 million for the six months
ended September 30, 2004 from $4.1 million for the same period in 2003. The
average deposit balance for the six months ended September 30, 2004 was $422.1
million, whereas the average deposit balance for the six months ended September
30, 2003 was $187.6 million. The weighted average rate on deposits decreased to
1.61% for the six months ended September 30, 2004 from 2.21% for the six months
ended September 30, 2003. The average balance of FHLB and other advances for the
six months ended September 30, 2004 was $145.0 million, whereas the average
balance of FHLB and other advances for the six months ended September 30, 2003
was $80.7 million. The weighted average rate on FHLB advances for the six months
ended September 30, 2004 was 3.83%, whereas the weighted average rate on FHLB
advances for the six months ended September 30, 2003 was 4.94%.
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 $569,000 for the six months ended
September 30, 2004 from $256,000 for the six months ended September 30, 2003.
18
Non-interest income. Non-interest income increased to $3.1 million for the six
months ended September 30, 2004 from $2.5 million for the six months ended
September 30, 2003. Gain on sale of loans decreased to $682,000 for the six
months ended September 30, 2004 from $1.4 million for the six months ended
September 30, 2003. Loans sold decreased 55.1% from $103.2 million for the six
months ended September 30, 2003 to $46.4 million for the six months ended
September 30, 2004. Service fees and charges increased to $2.4 million for the
six months ended September 30, 2004 from $1.1 million for the six months ended
September 30, 2003. Commissions and other income decreased to $100,000 for the
six months ended September 30, 2004 from $67,000 for the six months ended
September 30, 2003.
Non-interest expense. Non-interest expense increased to $11.4 million for the
six months ended September 30, 2004 from $6.3 million for the six months ended
September 30, 2003. Compensation and employee related benefits expense increased
to $6.8 million for the six months ended September 30, 2004 from $3.9 million
for the six months ended September 30, 2003. Occupancy expense increased to $1.5
million for the six months ended September 30, 2004 from $698,000 for the six
months ended September 30, 2003. The primary reason for the $761,000 increase in
occupancy expense is due to $647,000 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 $3.1 million for the six months ended September 30, 2004
from $1.7 million for the six months ended September 30, 2003. This $1.4 million
increase in other non-interest expense is due to $762,000 from the purchase of
Oregon Trail and increases in data processing, postage, insurance, consulting
and merchant bank card expenses.
Income tax expense. Income tax expense increased to $1.2 million for the six
months ended September 30, 2004 from $560,000 for the same time period in 2003.
The effective tax rates for the six months ended September 30, 2004 and 2003
were 28.19% and 27.55% 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 September 30, 2004, classified assets of the Company totaled $4.5 million.
Assets classified as loss totaled $3,000 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 $4.4 million, and consisted of $2.9 million of commercial loans,
$210,000 of consumer loans, $833,000 of residential loans, and $527,000 of real
estate owned and other repossessed assets. The aggregate amounts of the Bank's
classified assets at the dates indicated were as follows:
At September 30,
---------------------------
2004 2003
------------ ------------
(In Thousands)
Loss $ 3 $ 184
Doubtful 12 18
Substandard 4,437 3,142
------------ ------------
Total classified assets $ 4,452 $ 3,344
============ ============
19
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.
Six Months Ending Year Ending
September 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 $ 116,399 $ 3,760 6.46% $ 74,416 $ 5,065 6.81%
Commercial loans receivable 206,165 6,231 6.12 150,557 9,274 6.20
Construction loans receivable 48,958 1,954 7.98 36,356 2,832 7.79
Consumer loans receivable 73,029 2,474 6.78 43,063 3,263 7.58
Agricultural loans receivable 47,769 1,462 6.12 37,547 2,334 6.22
Unearned loan fees and
discounts and allowance
for loan losses (8,198) -- -- (6,350) -- --
------------ ------------ ------------ ------------ ------------ ------------
Loans receivable, net 484,122 15,881 6.59 335,589 22,768 6.80
Loans held for sale 5,597 160 5.72 7,584 399 5.26
Mortgage-backed securities 72,236 1,651 4.57 35,869 1,850 5.16
Investment securities 44,200 948 5.39 24,840 1,161 6.51
Other earning assets 38,514 782 5.15 36,000 1,237 4.20
------------ ------------ ------------ ------------
Total interest-earning assets 644,669 19,422 6.19 439,882 27,415 6.41
------------ ------------
Non-interest-earning assets 74,071 44,684
------------ ------------
Total assets $ 718,740 $ 484,566
============ ============
Interest-earning liabilities:
Passbook, NOW and money
market accounts $ 225,390 $ 708 0.63 $ 137,025 $ 892 0.65
Certificates of deposit 196,747 2,687 2.73 149,626 4,410 2.95
------------ ------------ ------------ ------------
Total deposits 422,137 3,395 1.61 286,651 5,302 1.85
Advances from FHLB & other 145,040 2,781 3.83 101,106 4,632 4.58
------------ ------------ ------------ ------------
Total interest-bearing
liabilities 567,177 6,176 2.18 387,757 9,934 2.56
------------ ------------
Total non-interest-bearing
deposits 74,344 0.00 43,107 0.00
Non-interest-bearing
liabilities 7,164 1.93 6,638 2.31
------------ ------------
Total liabilities 648,685 437,502
Total stockholders' equity 70,055 47,064
------------ ------------
Total liabilities and
total stockholders' equity $ 718,740 $ 484,566
============ ============
Net interest income $ 13,246 $ 17,481
============ ============
Interest rate spread 4.26% 4.10%
============ ============
Net interest margin 4.27% 4.17%
============ ============
Ratio of average interest-
earning assets to average
interest- bearing liabilities 100.49% 102.09%
============ ============
(1) Does not include interest on loans 90 days or more past due.
20
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 six months ended September 30, 2004, the Company originated loans
based upon new production in the amounts of $232.6 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 $11.8 million and $1.8 million for the six months ended September 30,
2004 and 2003, respectively. Proceeds from the sale of loans provided $62.5
million for the six months ended September 30, 2004 and $103.2 million for the
six months ended September 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-Seattle. As indicated on the Company's
Consolidated Statement of Cash Flows, deposits provided $18.0 million for the
six months ended September 30, 2004, which were branch deposits. Deposits
increased $17.5 million for the six months ended September 30, 2004 from March
31, 2004. In addition, the Company maintains a credit facility with the
FHLB-Seattle, which provides for immediately available advances. FHLB advances
totaled $147.8 million at September 30, 2004 and $77.0 million at September 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 had $2.0 million
of its $3.5 million line of credit outstanding at US Bank as of September 30,
2004. The Company did not have any amounts outstanding under the Federal Reserve
Bank of San Francisco as of September 30, 2004 and 2003. The Bank also has used
other sources of funding when the need arises, including 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 $209.2
million for the six months ended September 30, 2004 and $98.4 million for the
six months ended September 30, 2003. Cash used for payments on these advances
was $227.4 million for the six months ended September 30, 2004 and $93.5 million
for the six months ended September 30, 2003.
At September 30, 2004, the Company held cash and cash equivalents of $31.0
million. In addition, at this date, $18.2 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 September
30, 2004, the Company had loan commitments totaling $70.6 million, undisbursed
lines of credit totaling $91.0 million, and undisbursed loans in process
totaling $29.3 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,
2004 totaled $92.1 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
September 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 6.66%, 9.44% and 10.69%, respectively.
21
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Contractual obligations at September 30, 2004 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years and
(In Thousands) Total Year Years Years Greater
------------ ------------ ------------ ------------ ------------
Maturities of advances from FHLB
and other borrowings $ 149,820 $ 64,406 $ 32,645 $ 8,183 $ 44,586
Operating leases future minimum
rental payments $ 682 $ 219 $ 341 $ 92 $ 30
Other commitments at September 30, 2004 consisted of the following:
One Year to Three Years to
Less than One Less than Three Less than Five Five Years and
(In Thousands) Total Year Years Years Greater
------------ ------------ ------------ ------------ ------------
Loan commitments $ 70,567 $ 65,146 $ 768 $ 1,275 $ 3,378
Lines of credit $ 90,986 $ 44,016 $ 22,237 $ 2,848 $ 21,885
Standby letters of credit $ 7,645 $ 7,253 $ 287 $ 105 $ --
Loans in progress $ 29,331 $ 29,331 $ -- $ -- $ --
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 $968,000 for the six months ended September 30, 2004. In
addition, the Company has a contract with Wausau Financial Systems for the proof
and imaging system.
The Company had $7.6 million of performance standby letters of credit at
September 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."
22
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 September 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 3.75%, all else being equal. If rates were to sustain an
immediate 100 bp decrease, net interest income would be expected to decline by
2.31%, all else being equal. The following reflects the Company's NII
sensitivity analysis as of September 30, 2004, March 31, 2004 and September 30,
2004, as compared to the 10.00% Board approved policy limit.
September 30, 2004: -100 BP Flat +200 BP
-------- -------- --------
(Dollars in Thousands)
Year 1 NII $ 25,508 $ 26,111 $ 27,089
NII $ Change ($ 603) -- $ 978
NII % Change -2.31% -- 3.75%
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%
September 30, 2003: -100 BP Flat +200 BP
-------- -------- --------
(Dollars in Thousands)
Year 1 NII $ 10,505 $ 11,061 $ 12,000
NII $ Change ($ 556) -- $ 939
NII % Change -5.03% -- 8.49%
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.
23
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 covered by this report. The Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company
in the reports it files or submits under the Securities Exchange Act
of 1934 is (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial
Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms.
(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.
24
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 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Maximum
Number
of Shares
Total Number of that May
Shares yet be
Total Number Average Purchased as Purchased
of Shares Price Paid Part of Publicly Under the
Period Purchased per Share Announced Plan Plan
- --------------------------------------- -------------- -------------- -------------- --------------
July 1, 2004 to July 31, 2004 -- -- -- 41,432(1)
August 1, 2004 to August 31, 2004 41,432 27.26 41,432 147,866(2)
September 1, 2004 to September 30, 2004 52,500 28.91 52,500 95,366
-------------- -------------- -------------- --------------
Total 93,932 $ 28.18 93,932 95,366
============== ============== ============== ==============
(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 July 31, 2004, 105,000 shares were repurchased under
this program. The stock repurchase of this plan was completed in August
2004.
(2) On August 27, 2004, the Company's Board of Directors authorized a 5%
stock repurchase plan, or 147,866 shares of the Company's outstanding
common stock.
Item 3 - Defaults Upon Senior Securities
Not applicable.
25
Item 4 - Submission of Matters to a Vote of Security Holders
1. The following individuals were elected as directors, each for a
three-year term:
Voted For Votes Withheld
John W. Gentry 2,910,703 9,079
William J. Larson 2,861,999 57,783
Larry K. Moxley 2,907,585 12,197
The following individual was selected as director for a one-year term:
Voted For Votes Withheld
Russell H. Zenner 2,910,703 9,079
The terms of Steven R. Cox, Robert S. Coleman, Sr., W. Dean Jurgens,
James N. Marker, and Clyde E. Conklin continued after the meeting.
2. The FirstBank NW Corp. resolution to appoint Moss-Adams, LLP as
independent auditors for the Company for the fiscal year ending March
31, 2005 was approved by stockholders by the following vote:
For 2,892,424 : Against 19,765: Abstain 7,593
Item 5 - Other Information
None.
Item 6 - Exhibits
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).
26
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 12, 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
27