10KSB 1 d10ksb.htm FORM 10-KSB Prepared by R.R. Donnelley Financial -- Form 10-KSB
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-KSB
 
(Mark One)
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the fiscal year ended December 31, 2001
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _______ to ___________
 
Commission file number 000-24151
 
 
NORTHWEST BANCORPORATION, INC.
(Name of small business issuer in its charter)
 
Washington
   
91-1574174
(State or other jurisdiction
   
(I.R.S. Employer
of incorporation or organization)
   
Identification Number)
421 W. Riverside,
   
99201-0403
(Address of principal executive offices)
   
(Zip Code)
 
(Issuer’s telephone number) (509) 456-8888
Securities to be registered under Section 12(b) of the Act:
 
 
Title of each class
None
 
Name of each exchange on which registered
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
(Title of Class)
 
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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.   Yes x   No ¨
 
Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.   ¨
 
State issuer’s revenues for its most recent fiscal year: $15,981,622.
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: $17,840,694. Based on average bid/ask price as of March 18, 2002.
 
(Applicable only to corporate registrants) State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 1,719,585
 
DOCUMENTS INCORPORATED BY REFERENCE
 
If the following documents are incorporated by reference, briefly describe them and identify the part of the Form l0-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (‘‘Securities Act’’). The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990).
 
Transitional Small Business Disclosure Format (check one):   Yes  x   No  ¨
 

 
PART I
 
(ALTERNATIVE 2)
 
ITEM 1.     DESCRIPTION OF BUSINESS
 
Business Development By Issuer and Subsidiaries
 
Northwest Bancorporation, Inc. (“the Company’’) was incorporated as a Washington corporation on December 10, 1991. Effective June 10, 1993, the Company became the bank holding company parent of Inland Northwest Bank (the “Bank’’) by acquiring all the outstanding shares of common stock of the Bank in exchange for an equal number of shares of common stock of the Company pursuant to a Plan of Exchange dated March 23, 1993, as amended April 1, 1993, between the Company and the Bank. The Bank has been a wholly owned subsidiary of the Company since that date. The Bank had commenced operations on October 2, 1989 as a Washington state-chartered commercial bank. During 1995, it transferred its corporate domicile and state bank charter to Idaho in order to implement branching activity in that state. During 1997, it re-transferred its corporate domicile and state bank charter to Washington; it continues to have authorization to establish and operate branch facilities in Idaho.
 
On February 27, 1998, the Company established a second subsidiary through the acquisition of all the outstanding common stock of Hege Company, Inc., a Washington corporation engaged in business as a non-supervised mortgage loan correspondent, in exchange for 4,770 shares of common stock of the Company. The shares were considered to have an agreed market value of $14 per share (adjusted for the stock split on May 28, 1999) for total consideration of $66,780; the purchase price also included an additional cash payment of $145,554. In connection with the acquisition, the subsidiary’s name was changed to INB Mortgage Company (“INB Mortgage”). In October 2000, INB Mortgage was merged with and into the Bank, with the mortgage origination function continuing as a department of the Bank.
 
General
 
The Company.    During the past five fiscal years, the Company’s assets and revenues have increased because of the growth of the Bank. Although the Company’s management continues to consider the possibility of other business opportunities, the Company currently has not established any independent business activity apart from acting as the parent company of the Bank. Expenses associated with any new business activity initially would need to be funded through dividends received by the Company from the Bank. Consequently, the Company would not be able to engage in any new business activity if the associated costs and expenses would require the payment of a dividend from the Bank that would adversely affect the ability of the Bank to conduct its business.
 
The primary asset of the Company is the common stock of the Bank. The Bank’s operating results, financial position, and power and ability to provide dividends to the Company will directly and materially affect the operating results, financial position and liquidity of the Company. The operating results of the Bank depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on earning assets, primarily loans and investment securities, and (ii) interest expense on interest bearing liabilities, which primarily consist of deposits and borrowed funds. Also affecting the Bank’s operating results are the level of the provision for loan losses, the level of other operating income, such as service charges on deposits and gains or losses on the sale of investment securities, the level of operating expenses, and income taxes. Specific information concerning the effect of these items upon the Bank’s operating results for the fiscal years 2001 and 2000 is set forth in the sections entitled “Summary Performance Information” and “Statistical Disclosure” on pages 7-13. At such time as the Company decides to engage in any other business activities, the success or failure of any new business activities and the associated costs and expenses would be additional factors affecting the operating results, financial position and liquidity of the Company.

1

 
The Bank.    The Bank’s principal office and main branch is located in the downtown business core of Spokane, Washington, and it has eight other branches located in the Spokane, Washington, Coeur d’Alene, Idaho and Post Falls, Idaho areas. The Bank considers eastern Washington and northern Idaho to be its primary market area. The majority of the Bank’s deposits and loans are generated in Spokane County, Washington, with a population of approximately 417,939 and Kootenai County, Idaho, with a population of approximately 108,685; the population figures are based upon estimates provided by the U.S. Census Bureau as of July 1, 2000. There is little concentration of industry in the two counties. A historical reliance on natural resources industries (timber, agriculture, and mining) has been replaced by a focus on trades and services, including high-tech products. The City of Spokane serves as the hub of an area known as the Inland Northwest that includes thirty-six counties in eastern Washington, northern Idaho, western Montana and northeastern Oregon, home to 1.7 million residents. As a regional trade center, the Spokane market area extends to southern British Columbia and Alberta with a population base exceeding 3 million. The market area is considered strong and stable.
 
Banking Services.    A variety of commercial and retail banking services have been offered by the Bank as its principal products during the past five years. The Bank strives to occupy a niche market wherein it specializes in the delivery of depository, cash management, and lending arrangements to professionals in business and medical related services and to small businesses employing from several to 150 or more employees.
 
The financial products and services include a full range of deposit accounts including checking accounts, money market accounts, and time deposits of various types. Transaction accounts and time certificates are offered at rates competitive in the primary market area. In addition, retirement accounts such as Individual Retirement Accounts are also available. All deposit accounts are insured by the FDIC up to the maximum amount.
 
The Bank also offers a full range of short-to medium-term commercial and personal loans. These credit services include:
 
To businesses:
 
 
(1)
 
Operating loans and lines;
 
 
(2)
 
Equipment loans;
 
 
(3)
 
Commercial real estate and construction loans; and,
 
 
(4)
 
Guaranteed or subsidized loan programs for small businesses.
 
To individuals:
 
 
(1)
 
Installment loans for vehicle, professional services, and personal lines of credit;
 
 
(2)
 
Home loans (conventional and insured);
 
 
(3)
 
Home improvement and rehabilitation loans;
 
 
(4)
 
Guaranteed or subsidized loan programs; and
 
 
(5)
 
National credit card (Visa, Mastercard, etc.).
 
Other services that the Bank offers include cash management services, investment services, wire transfers, direct deposit of payroll and social security checks, automated teller machine access, PC and Internet banking, and automatic drafts and transfers to and from various accounts.
 
INB Mortgage.    In October 2000 the Company merged its mortgage-lending subsidiary, INB Mortgage, with and into its banking subsidiary, with the Bank as the surviving company. A merger of the two subsidiaries was anticipated and discussed in the Company’s Annual Report on Form 10-KSB filed March 30, 2000.

2

 
Merger of INB Mortgage into the Bank resulted in certain non-recurring, non-cash losses being realized in the year ending December 31, 2000. Remaining goodwill, booked at the time of the acquisition of INB Mortgage, was carried on the books of the Company and totaled $167,621 when the decision to merge INB Mortgage with and into the Bank was made. While management felt that there was significant value to retaining INB Mortgage personnel in a department of the Bank and that the licenses and approvals transferred to the Bank had meaningful value, the exact value of those intangibles was difficult to determine. To comply with generally accepted accounting principles; the full remaining value of goodwill was eliminated, for book purposes, as a charge to earnings during 2000. The effective date of the merger was October 23, 2000.
 
As a department of the Bank, the mortgage loan origination operation is subject to significantly lower break-even requirements than as an independent company. Additionally, with the mortgage department part of a much larger organization, management of the Bank is better able to adjust resources and expenses in response to changes in the mortgage market and the volume of business generated.
 
The mortgage department is housed in two Bank branches and the Bank has retained all previous correspondent relationships originally in place with INB Mortgage, as well as internal underwriting authority. The mortgage department offers virtually all mortgage products available in the market, specializing in Conventional, FHA & VA home loans for purchase or refinance of 1-4 family residential living units. All loans produced, as well as loan servicing rights, are sold to third-party investors.
 
Competition
 
The Bank.    Competition in the banking and financial services industry is significant and has intensified in recent years. Competitors include financial institutions within the traditional banking system, such as commercial banks, savings banks and credit unions. Furthermore, financial institutions from outside the traditional banking system, such as investment banking and brokerage firms, insurance companies, credit card issuers, mortgage companies, and related industries offering bank-like products, have widened the competition. With liberalization of interstate banking limitations and other financial institution regulations, increased competition and consolidation in the overall financial services industry, and other recent developments, it is anticipated that competition will increase in the future. Competition in the Bank’s market area is not greater than competition in other parts of the United States. Consequently, neither the Bank nor the Company believe that the Bank faces unusual competitive conditions.
 
At present, there are 17 other local, independent community-based banks operating in the Bank’s primary market area which offer services similar to, and which are in direct competition with, the Bank. Two of these community-based competitors are of a significantly larger size than the Bank and may have some or all of the competitive advantage enjoyed by the branch offices of larger, out-of-area institutions.
 
Based on industry information there are 18 commercial banks and savings banks in Spokane County, Washington, having a total of 110 locations and an estimated total of $3,645 million in deposits as of June 30, 2001, the most recent date for which information is readily available. Based on the same information there are 12 commercial banks and savings banks in Kootenai County, Idaho having a total of 35 locations and an estimated total of $949 million in deposits.
 
The Bank also faces numerous non-bank competitors, which have some or all of the competitive advantages enjoyed by branch offices of larger, out-of-area institutions and may have further competitive advantages because they are not subject to the extensive bank regulatory structure and restrictive policies which apply to the Bank.

3

 
Regulation
 
General.    Bank holding companies and banks are extensively regulated under both federal and state law. The following information describes certain aspects of regulations applicable to the Company and its subsidiary, but does not purport to be complete and is qualified in its entirety by reference to the particular provisions of these regulations. In addition, federal and state regulations are subject to future changes that may have significant impact on the way in which bank holding companies and their subsidiaries (including banks) may conduct business. The likelihood and potential effects of such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, savings banks, thrift institutions and non-banking companies, including insurance companies, securities brokerage firms, mutual funds, investment banks and major retailers. Recent legislation also has broadened the regulatory powers of the federal banking agencies in a number of areas.
 
The Company.    As a bank holding company, the Company is subject to various regulations, including the following, some of which may have a material impact upon the Company’s future financial performance.
 
Bank Holding Company Regulation.    The Company is subject to the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and related federal statutes, and is subject to supervision, regulation and inspection by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of San Francisco (collectively, the ‘‘Federal Reserve”). The Company is required to file with the Federal Reserve an annual report and any additional information that the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve possesses cease and desist powers over bank holding companies and their non-bank subsidiaries if their actions represent unsafe or unsound practices.
 
Bank Acquisitions.    The BHC Act requires, among other things, the prior approval of the Federal Reserve if the Company proposes to (i) acquire all or substantially all the assets of any bank, (ii) acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank, or (iii) merge or consolidate with any other bank holding company. The BHC Act currently permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide and state-imposed concentration limits. The establishment of new interstate branches also will be possible in those states with laws that expressly permit it. Interstate branches will be subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets.
 
Non-Bank Acquisitions.    The BHC Act also prohibits a bank holding company, with certain exceptions, from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, and from engaging in any activities other than those of banking, managing or controlling banks, or activities which the Federal Reserve has determined to be so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.
 
Restrictions on the Acquisition of the Company.    The acquisition of 10% or more of the Company’s outstanding shares by any person or group of persons may, in certain circumstances, be subject to the provisions of the Change in Bank Control Act of 1978, as amended, and the acquisition of control of the Company by another company would be subject to regulatory approval under the BHC Act.
 
Source of Strength Policy.    Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each such bank. Consistent with its “source of strength’’ policy for subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common shareholders has been sufficient to fund fully the dividends, and the prospective rate of earnings retention appears to be consistent with the corporation’s capital needs, asset quality and overall financial condition.

4

 
Effect of Other Legislation.    The Gramm-Leach-Bliley (GLB) Financial Modernization Act, effective March 11, 2000, authorizes a bank holding company to affiliate with any financial company (for example, insurance or securities companies) and to cross-sell an affiliate’s products, subject to added privacy restrictions, thus allowing the Company to offer its customers any financial product or service. Certain restrictions regarding capital and Community Reinvestment Act (CRA) performance are specified. The Company meets the standard to be considered “well-capitalized” and the Bank has a “Satisfactory” CRA rating, meeting the requirements contained in the Act. The Company will consider opportunities to expand its financial offerings as they become available. At this time, however, the Company has not identified additional financial products or services that it intends to offer in the near future, nor does it anticipate the establishment of additional subsidiaries this year.
 
GLB contains provisions related to Bank customer’s rights to financial privacy and requires that financial institutions implement policies and procedures that control the use and reuse of customer and consumer non-public information. The Bank provided its customers with an initial notification of their rights under GLB in the first quarter 2001 and, as provided for in the legislation, has established policies and procedures for notification to new customers, as they open their accounts, and to all customers annually.
 
The Bank.    As a Washington state-chartered commercial bank, the deposits of which are insured by the Bank Insurance Fund (the “BIF”) of the Federal Deposit Insurance Corporation (the “FDIC”), the Bank is subject to various regulations, including the following.
 
Bank Regulation.    The Bank is subject to supervision, regulation and examination by the Divisions of Banking of the States of Washington and Idaho and by the FDIC. The Bank is subject to various requirements and restrictions under federal and state law, including (i) requirements to maintain reserves against deposits, (ii) restrictions on the types, amount and terms and conditions of loans that may be granted, (iii) limitations on the types of investments that may be made, the activities that may be engaged in, and the types of services that may be offered, and (iv) standards relating to asset quality, earnings, and employee compensation.
 
As a qualified FHA Direct Endorsement lender, the Bank is governed by the regulations established by the Department of Housing and Urban Development (HUD) and is subject to their audit criteria and quality control requirements. Additionally, depending upon the type of mortgage loan originated and the investor to whom the loan is sold, the Bank is subject to rules and requirements established by various federal and state agencies and housing authorities, as well as investment and quality criteria established by individual investor institutions.
 
The approval of a Bank’s primary regulator is required prior to any merger or consolidation or the establishment or relocation of any office. Various consumer laws and regulations also affect the operations of the Banks.
 
Affiliate Transactions.    The Bank is subject to federal laws that limit the transactions by subsidiary banks to or on behalf of their parent company and to or on behalf of any non-bank subsidiaries. Such transactions by a subsidiary bank to its parent company or to any non-bank subsidiary are limited to 10% of a bank subsidiary’s capital and surplus and, with respect to such parent company and all such non-bank subsidiaries, to an aggregate of 20% of such bank subsidiary’s capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also prohibits banks from purchasing ‘‘low-quality” assets from affiliates.
 
FDIC Assessments.    The deposits of the Bank are insured by the BIF up to a maximum of $100,000 per depositor and are subject to FDIC insurance assessments. The amount of FDIC assessments paid by individual insured depository institutions is based on their relative risk as measured by regulatory capital ratios and certain other factors. During 1995, the FDIC’s Board of Directors significantly reduced premium rates assessed on deposits insured by the BIF. In 1996, legislation was enacted that provides that the Financing Corporation (“FICO”) bond repayment obligations would be shared by institutions insured by the BIF and the Savings Association Insurance Fund (“SAIF”). For the years 1997 through 1999, BIF-assessable deposits were assessed

5

at a FICO premium rate of 1/5 of the rate imposed on SAIF-assessable deposits. In 2000 the differential between BIF and SAIF was eliminated and BIF insured institutions began paying premiums at the same rate as SAIF insured institutions. The annual rate during 2001 was 1.96 basis points for the first quarter, 1.90 for the second quarter, 1.88 for the third quarter and 1.84 for the fourth quarter.
 
Prompt Corrective Action.    Federal banking agencies possess broad powers to take corrective action as deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered “well capitalized”, “adequately capitalized”, ‘‘undercapitalized”, “significantly undercapitalized” or “critically undercapitalized”. The required Tier 1 capital to average assets ratio, Tier I capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio for classification as “adequately capitalized” are 4.0%, 4.0% and 8.0%, respectively. (See discussion of the components of these ratios in “The Company and the Bank—Risk-Based Capital Requirements” below.) The required Tier 1 capital to average assets ratio, Tier l capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio for classification as “well-capitalized” are 5.0%, 6.0% and 10.0%, respectively. As of December 31, 2001, the Bank exceeded the required Tier 1 capital to average assets ratio, Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted assets ratio for classification as “well capitalized”, with ratios of 8.21%, 10.70% and 12.07%, respectively.
 
Federal Home Loan Bank.    The Bank is a member of the Federal Home Loan Bank of Seattle (the “FHLB”), which is one of twelve regional Federal Home Loan Banks. The FHLB serves as a reserve or central bank for its members and makes advances to its members in accordance with the FHLB’s policies and procedures. As a member of the FHLB, the Bank is required to purchase and hold stock in the FHLB. As of December 31, 2001, the Bank held stock in the FHLB in the amount of $556,900.
 
The Company and the Bank.    As a bank holding company and state-chartered bank, the Company and the Bank are also subject to the following further regulation:
 
Risk-Based Capital Requirements.    Under the risk-based capital guidelines applicable to the Company and the Bank, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities) is 8.0%. At least half of the total capital must be “Tier 1” capital, which primarily includes common shareholders’ equity and qualifying preferred stock, less goodwill and other disallowed intangibles. “Tier 2’’ capital includes, among other items, partial recognition of increases in the market value of qualifying equity securities, certain cumulative and limited-life preferred stock, qualifying subordinated debt and the allowance for credit losses, subject to certain limitations, less required deductions as prescribed by regulation.            
 
In addition, the federal bank regulators established leverage ratio (Tier 1 capital to total adjusted average assets) guidelines providing for a minimum leverage ratio of 3.0% for bank holding companies and banks meeting certain specified criteria, including that such institutions have the highest regulatory examination rating and are not contemplating significant growth or expansion. Institutions not meeting these criteria are expected to maintain a ratio that exceeds the 3.0% minimum by at least 100 to 200 basis points. The federal bank regulatory agencies may, however, set higher capital requirements when particular circumstances warrant. Under the federal banking laws, failure to meet the minimum regulatory capital requirements could subject a bank to a variety of enforcement remedies available to federal bank regulatory agencies, including the termination of deposit insurance by the FDIC and seizure of the institution.
 
Community Reinvestment.    Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977, as amended (“CRA”). Under the terms of the CRA, a bank’s record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods, is generally annually assessed by the bank’s primary federal regulator. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will

6

review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. As of December 31, 2001 the Bank was rated “Satisfactory” with respect to CRA.
 
Other Regulations.    The policies of regulatory authorities, including the Federal Reserve and the FDIC, have had a significant effect on the operating results of financial institutions in the past and are expected to do so in the future. An important function of the Federal Reserve is to regulate aggregate national credit and money supply through such means as open market dealings in securities, establishment of the discount rate on bank borrowings and changes in reserve requirements against bank deposits. Policies of these agencies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States government. Supervision, regulation or examination of the Company by these regulatory agencies is not intended for the protection of the Company’s shareholders.
 
Employees
 
The Bank employed 104 employees, representing 94.2 full time equivalent positions as of December 31, 2001; the Company, separate from the Bank, does not have any compensated employees.
 
Summary Performance Information
 
Certain summary recent performance information for the Bank is set forth below. All information in this section should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in Part F/S of this Form 10-KSB.
 
The Bank has experienced growth in total assets of 11.1% and 8.4% for the fiscal years ended December 31, 2001 and 2000, respectively. Net loan growth was 8.6% and 11.5% for these same periods. Also for these same periods, loan losses net of recoveries were $1,065,724 and $395,450, respectively. The Bank continues to provide for anticipated future losses through increases in the allowance for loan loss reserve which was at $1,649,034 or 1.26% of outstanding loans, on December 31, 2001 and $1,624,758, or 1.36% of outstanding loans, on December 31, 2000. For information on the Bank’s capital ratios as of December 31, 2001, see “Regulation—The Bank—Prompt Corrective Action” and “Regulation—The Company and the Bank—Risk-Based Capital Requirements” above.
 
Statistical Disclosure
 
Certain statistical and other information is set forth below. All information in this sub-section should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in Part F/S of this Form 10-KSB.
 
All references in this sub-section to historical statistical and other information are to the historical consolidated information of the Company and the Bank for the two most recently ended fiscal years.

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I.    DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST     RATES AND INTEREST DIFFERENTIAL.
 
AVERAGE BALANCE/INTEREST INCOME AND EXPENSE RATES
(Dollars in Thousands)
 
    
2001
     
2000
  
    
Average
Balance
     
Interest
Income/
Expense
   
Average
Yield
Earned/
Rate Paid
     
Average
Balance
     
Interest
Income/
Expense
   
Average
Yield
Earned/
Rate Paid
  
ASSETS
                                              
Investment Securities:
                                              
Taxable Investments
   
$
41,618
 
   
$
2,609
   
6.27
%
   
$
34,978
 
   
$
2,385
   
6.82
%
Nontaxable Investments
   
 
225
 
   
 
10
   
4.44
%
   
 
450
 
   
 
21
   
4.67
%
    
  
  
  
  
  
Total Investment Securities
   
 
41,843
 
   
 
2,619
   
6.26
%
   
 
35,428
 
   
 
2,406
   
6.79
%
Interest-bearing Deposits with Banks
   
 
80
 
   
 
1
   
1.25
%
   
 
163
 
   
 
4
   
2.45
%
Fed Funds Sold
   
 
6,064
 
   
 
210
   
3.46
%
   
 
6,338
 
   
 
393
   
6.20
%
    
  
  
  
  
  
Total Investments
   
 
47,987
 
   
 
2,830
   
5.90
%
   
 
41,929
 
   
 
2,803
   
6.69
%
Real Estate Loans
   
 
19,476
 
   
 
1,607
   
8.25
%
   
 
22,841
 
   
 
2,289
   
10.02
%
Consumer Loans
   
 
7,645
 
   
 
677
   
8.86
%
   
 
7,929
 
   
 
755
   
9.52
%
VISA/MC
   
 
1,373
 
   
 
196
   
14.28
%
   
 
1,219
 
   
 
151
   
12.39
%
Commercial Loans
   
 
98,574
 
   
 
8,732
   
8.86
%
   
 
81,579
 
   
 
8,021
   
9.83
%
    
  
  
  
  
  
Total Loans
   
 
127,068
 
   
 
11,212
   
8.82
%
   
 
113,568
 
   
 
11,216
   
9.88
%
    
  
  
  
  
  
Total Earning Assets
   
 
175,055
 
   
 
14,042
   
8.02
%
   
 
155,497
 
   
 
14,019
   
9.02
%
Less Reserve for Possible Loan Losses
   
 
-1,589
 
                 
 
-1,603
 
              
Cash and Due from Banks
   
 
7,261
 
                 
 
7,723
 
              
Other Non-earning Assets
   
 
5,511
 
                 
 
5,486
 
              
    
                
             
Total Assets
   
$
186,238
 
                 
$
167,103
 
              
    
                
             
LIABILITIES AND STOCKHOLDER’S EQUITY
                                              
NOW Accounts
   
$
11,519
 
   
$
218
   
1.89
%
   
$
6,317
 
   
$
131
   
2.07
%
Money Market Accounts
   
 
32,741
 
   
 
941
   
2.87
%
   
 
30,585
 
   
 
1,319
   
4.31
%
Savings Accounts
   
 
3,729
 
   
 
56
   
1.50
%
   
 
3,697
 
   
 
83
   
2.25
%
Other Time Deposits
   
 
69,376
 
   
 
3,819
   
5.50
%
   
 
60,868
 
   
 
3,604
   
5.92
%
    
  
  
  
  
  
Total Interest-bearing Deposits
   
 
117,365
 
   
 
5,034
   
4.29
%
   
 
101,467
 
   
 
5,137
   
5.06
%
Securities Sold Under Repurchase Agreements/Borrowed Funds
   
 
23,257
 
   
 
716
   
3.08
%
   
 
23,120
 
   
 
1,371
   
5.93
%
    
  
  
  
  
  
Total Interest-bearing Liabilities
   
 
140,622
 
   
$
5,750
   
4.09
%
   
 
124,587
 
   
$
6,508
   
5.22
%
Demand Deposits
   
 
29,247
 
                 
 
28,498
 
              
Other Liabilities
   
 
1,339
 
                 
 
534
 
              
Stockholder’s Equity
   
 
15,030
 
                 
 
13,484
 
              
    
                
             
Total Liabilities and Stockholders’ Equity
   
$
186,238
 
                 
$
167,103
 
              
    
                
             
Net Interest Income
   
$
8,292
 
                 
$
7,511
 
              
Net Average Yield on Interest-earning Assets
   
 
4.74
%
                 
 
4.83
%
              
 
COMMENTS
1.
 
There were no out-of-period adjustments.
2.
 
Interest income has been adjusted to include loan fees earned.
3.
 
Yields have not been adjusted on tax-exempt investments to determine a tax-equivalent yield.
4.
 
The Bank was not involved in any foreign activities.

8

 
The following table illustrates the changes in the Company’s net interest income due to changes in volume, interest rate or a combination of both.
 
   
2001
  
2000
   
Variance
  
2000 Rate
     
Change in income
due to change
in volume
   
Change in rate
     
Difference
in income
on 2000
volume due to rate
change
   
Change in income
due to
change in
rate and
volume
   
Net change
in income
due to
rate and volume
changes
   
($ in thousands)
ASSETS
                                                            
Loans
  
$
127,068
  
$
113,568
   
$
13,500
  
9.88
%
   
$
1,333
   
-1.05
%
   
-$
1,195
   
-$
142
   
-$
4
Securities
  
 
41,843
  
 
35,428
   
 
6,415
  
6.79
%
   
 
436
   
-0.53
%
   
 
-189
   
 
-34
   
 
213
Fed Funds Sold/Interest Bearing Bank Balances
  
 
6,144
  
 
6,501
   
 
-357
  
6.11
%
   
 
-22
   
-2.67
%
   
 
-174
   
 
10
   
 
-186
                
                                        
                
$
19,558
                                         
                
                                        
Net Change in Income on Total Earning Assets
                                                        
$
23
                                                         
LIABILITIES
                                                            
NOW Accounts
  
$
11,519
  
$
6,317
   
$
5,202
  
2.07
%
   
$
108
   
-0.18
%
   
-$
11
   
-$
9
   
$
87
Money Market Accounts
  
 
32,741
  
 
30,585
   
 
2,156
  
4.31
%
   
 
93
   
-1.44
%
   
 
-440
   
 
-31
   
 
-378
Savings Accounts
  
 
3,729
  
 
3,697
   
 
32
  
2.25
%
   
 
1
   
-0.74
%
   
 
-27
   
 
0
   
 
-27
Time Deposits
  
 
69,376
  
 
60,868
   
 
8,508
  
5.92
%
   
 
504
   
-0.42
%
   
 
-253
   
 
-35
   
 
215
Securities Sold under Repurchase Agreements
  
 
23,257
  
 
23,120
   
 
137
  
5.93
%
   
 
8
   
-2.85
%
   
 
-659
   
 
-4
   
 
-655
Net Change in Expense on Total Interest Bearing Deposits
                                                        
-$
758
                                                         
Net Increase in Net Interest Income
                                                        
$
781
                                                         

9

 
II.    INVESTMENT PORTFOLIO.
 
Securities
 
The book & market values of the major classifications of investment securities were as follows ($ in thousands):
 
    
December 31, 2001
   
December 31, 2000
    
Amortized
Cost
   
Fair Value
   
Amortized Cost
   
Fair
Value
Securities available-for-sale:
                            
US Treasury securities
   
$
5,527
   
$
5,661
   
$
2,509
   
$
2,556
Obligations of federal government agencies
   
 
26,290
   
 
26,681
   
 
28,128
   
 
28,263
Mortgage backed securities
   
 
7,769
   
 
7,876
   
 
8,528
   
 
8,636
Corporate debt obligations
   
 
721
   
 
720
   
 
0
   
 
0
    
  
  
  
Total
   
$
40,307
   
$
40,938
   
$
39,165
   
$
39,455
    
  
  
  
Securities held-to-maturity:
                            
Obligations of states, municipalities and political
subdivisions
   
$
225
   
$
235
   
$
225
   
$
228
    
  
  
  
 
Analysis of Investment Securities
 
The following table sets forth the maturities of investment securities at December 31, 2001 ($ in thousands, at amortized cost.):
 
    
Within 1 year
maturity
   
Weighted average
yield
    
After 1 year but within 5 years
maturity
   
Weighted average
yield
    
After 5 years but within 10 years maturity
   
Weighted average yield
     
After 10 years maturity
   
Weighted average yield
    
Total
   
Weighted total average yield
  
U.S. Treasury
   
$
1,988
   
2.96
%
  
$
2,531
   
4.51
%
  
$
1,088
   
5.99
%
   
$
0
   
n/a
 
  
$
5,527
   
4.22
%
U.S. Government Agencies
   
 
151
   
4.64
%
  
 
9,999
   
5.40
%
  
 
14,142
   
5.96
%
   
 
1,998
   
7.01
%
  
$
26,290
   
5.82
%
MBS
(GNMA/FNMA)
   
 
0
   
n/a
 
  
 
0
   
n/a
 
  
 
0
   
n/a
 
   
 
7,769
   
6.94
%
  
$
7,769
   
6.94
%
Corporate Bonds
   
 
0
   
n/a
 
  
 
721
   
6.03
%
  
 
0
   
n/a
 
   
 
0
   
n/a
 
  
$
721
   
6.03
%
State and Political Subdivisions
   
 
0
   
n/a
 
  
 
225
   
6.49
%
  
 
0
   
n/a
 
   
 
0
   
n/a
 
  
$
225
   
6.49
%
    
  
 
  
 
  
  
  
 
  
Total by Maturity
and yield
   
$
2,139
   
3.08
%
  
$
13,476
   
5.28
%
  
$
15,150
   
5.96
%
   
$
9,767
   
6.95
%
  
$
40,532
   
5.82
%
    
  
 
  
 
  
  
  
 
  
 
Comment 1.     Yields have been adjusted on tax-exempt investments to determine a tax-equivalent yield.
 
With the exception of U.S. Government and U.S. Government agencies and corporations, no securities issued by any one issuer exceed ten percent of stockholders’ equity.

10

 
III.     LOAN PORTFOLIO.
 
The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loan ($ in thousands):
 
    
December 31,
    
2001
   
2000
Commercial loans
   
$
105,457
   
$
91,398
Real estate loans
   
 
16,943
   
 
19,416
Installment loans
   
 
4,446
   
 
5,132
Consumer and other loans
   
 
3,726
   
 
4,462
    
  
Total Loans
   
$
130,572
   
$
120,408
    
  
Allowance for loan losses
   
 
-1,649
   
 
-1,625
Deferred loan fees, net of deferred costs
   
 
-322
   
 
-340
    
  
Net Loans
   
$
128,601
   
$
118,443
    
  
 
The following table shows the amounts and earlier of maturity/re-pricing of commercial, real estate and other loans outstanding as of December 31, 2001 ($ in thousands):
 
    
Within 1 year
   
After 1 year but within
5 years
   
After 5 years
   
Total
Commercial
   
$
44,680
   
$
52,872
   
$
7,905
   
$
105,457
Real Estate Loans
   
 
8,229
   
 
4,457
   
 
4,257
   
 
16,943
Installment
   
 
1,128
   
 
2,329
   
 
989
   
 
4,446
Consumer and Other
   
 
1,646
   
 
0
   
 
2,080
   
 
3,726
    
  
  
  
    
$
55,683
   
$
59,658
   
$
15,231
   
$
130,572
    
  
  
  
 
Loans maturing after one year with:
Fixed Rates
   
$
9,885
   
$
18,945
   
$
14,071
   
$
42,901
Variable Rates
   
 
45,798
   
 
40,713
   
 
1,160
   
 
87,671
    
  
  
  
Totals
   
$
55,683
   
$
59,658
   
$
15,231
   
$
130,572
    
  
  
  
 
Loans are placed in a non-accrual status when they are not adequately collateralized and when, in the opinion of management the collection of interest is questionable. Thereafter, no interest is taken into income unless received in cash or until such time as the borrower demonstrates the ability to resume payments of principal and interest. Interest previously accrued but not collected is reversed and charged against income at the time the loan is placed on non-accrual status.
 
    
2001
   
2000
    
($ in thousands)
Loans accounted for on a non-accrual basis
   
$
1,431
   
$
543
Loans contractually past due ninety days or more as to interest or principal
   
$
492
   
$
77
Gross interest income which would have been recorded under original terms
   
$
210
   
$
68
Gross interest income recorded during the period.
   
$
69
   
$
18
 
C.2.
 
As of the end of the most recent reported period, 12/31/2001, management has no knowledge of additional loans where the financial condition of its borrowers is likely to result in the inability of the borrower to comply with current loan repayment terms. All such credits known to management are identified in the table (above) and any identified potential loss has already been recognized by charge to the Loan Loss Reserve.

11

 
IV.     SUMMARY OF LOAN LOSS EXPERIENCE.
 
The following table provides an analysis of net losses by loan type for the past two years:
 
    
December 31,
  
    
2001
     
2000
  
    
($ in thousands)
  
Total loans net of deferred fees at end of period
   
$
130,250
 
   
$
120,068
 
YTD average net loans
   
 
127,068
 
   
 
113,568
 
Balance of allowance for possible loan losses at beginning of period
   
 
1,625
 
   
 
1,480
 
Loan charge-offs:
                  
Commercial
   
 
808
 
   
 
277
 
Real Estate
   
 
98
 
   
 
66
 
Installment
   
 
173
 
   
 
90
 
    
  
Total Charge-offs
   
 
1,079
 
   
 
433
 
Recoveries of loans previously charged-off:
                  
Commercial
   
 
8
 
   
 
29
 
Real Estate
   
 
1
 
   
 
7
 
Installment
   
 
4
 
   
 
2
 
    
  
Total Recoveries
   
 
13
 
   
 
38
 
    
  
Net Charge-offs
   
 
1,066
 
   
 
395
 
Provision charged to expense
   
 
1,090
 
   
 
540
 
    
  
Balance of allowance for possible loan losses at end of period
   
 
1,649
 
   
 
1,625
 
    
  
Ratio of net charge-offs during period to average loans outstanding
   
 
0.84
%
   
 
0.35
%
 
Breakdown of Allowance for Loan Losses ($ in thousands):
 
    
December 31,
  
    
2001
     
2000
  
    
Amount
   
% of Allowance
to Total Allowance
     
Amount
   
% of Allowance
To Total Allowance
  
Risk Category 1 (Excellent)
   
$
1
   
0.06
%
   
$
1
   
0.06
%
Risk Category 2 (Good)
   
 
3
   
0.18
%
   
 
6
   
0.37
%
Risk Category 3 (Pass)
                            
Commercial
   
 
432
   
26.20
%
   
 
376
   
23.14
%
Consumer
   
 
64
   
3.88
%
   
 
65
   
4.00
%
Risk Category 4 (Pass/Monitor)
   
 
81
   
4.91
%
   
 
136
   
8.37
%
Risk Category 5 (Watch)
   
 
*
          
 
*
       
Risk Category 6 (Substandard)
   
 
*
          
 
*
       
Risk Category 7 (Doubtful)
   
 
*
          
 
*
       
SBA Loans Sold (Retained Portion)
   
 
40
   
2.43
%
   
 
51
   
3.14
%
Bankcard Loans
   
 
72
   
4.37
%
   
 
70
   
4.31
%
Specifically Identified Potential Loss *
   
 
414
   
25.11
%
   
 
280
   
17.23
%
Commitments to Lend under Lines of Credit
   
 
286
   
17.34
%
   
 
265
   
16.31
%
Supplementary Allowance Not Specifically Allocated
   
 
256
   
15.52
%
   
 
375
   
23.08
%
    
  
  
  
    
$
1,649
   
100.00
%
   
$
1,625
   
100.00
%
    
  
  
  
*
 
Risk category 5,6 & 7 loans are individually analyzed at least quarterly to determine loss potential. Allocated reserves related to loans classified 5,6 & 7 are reported as “Specifically Identified Potential Loss.”

12

 
V.    DEPOSITS.
 
The average amount of deposits and average rates paid on such deposits is summarized for the periods indicated in the following table ($ in thousands):
 
    
Years Ended December 31,
    
2001
   
2000
    
Amount
   
Rate
   
Amount
   
Rate
Non-interest Bearing Demand Deposits
   
$
29,247
   
n/a
   
$
28,498
   
n/a
    
  
  
  
Interest Bearing Deposits:
                        
NOW Accounts
   
 
11,519
   
1.89%
   
 
6,317
   
2.07%
Money Market Accounts
   
 
32,741
   
2.87%
   
 
30,585
   
4.31%
Savings Accounts
   
 
3,729
   
1.50%
   
 
3,697
   
2.25%
Time Deposits
   
 
69,376
   
5.50%
   
 
60,868
   
5.92%
    
  
  
  
Total Interest Bearing Deposits
   
$
117,365
   
4.29%
   
$
101,467
   
5.06%
    
  
  
  
 
Maturities of Time Certificates of Deposit over $100,000 are shown below ($ in thousands):
 
    
December 31,
    
2001
   
2000
3 Months or Less
   
$
15,544
   
$
5,078
Over 3 through 6 Months
   
 
3,393
   
 
7,406
Over 6 through 12 Months
   
 
3,672
   
 
4,585
Over 1 year through 5 years
   
 
846
   
 
1,040
Over 5 years
   
 
0
   
 
0
    
  
    
$
23,455
   
$
18,109
    
  
 
VI.    RETURN ON EQUITY AND ASSETS.
 
Ratios for the two-year periods ended December 31, 2001 and December 31, 2000 are as follows:
 
    
2001
   
2000
Ratio:
          
Return on Average Assets
   
0.64%
   
0.48%
Return on Average Equity
   
7.91%
   
5.93%
Average Equity to Average Assets
   
8.07%
   
8.07%
Dividend Payout Ratio
   
0.00%
   
0.00%
 
VII.    SHORT-TERM BORROWINGS.
 
As of the most recent reporting period, 12/31/2001, the Company has not borrowed any funds on a short-term basis.
 
Rate Shock
 
Periodically, the Bank commissions an analysis of the effect that a sudden increase or decrease in interest rates would have on net interest income and the value of the Bank’s equity. The Seattle Branch of the Federal Home Loan Bank generally performs the analyses, semi-annually.

13

 
The Rate Shock Analysis presents estimates of the effect of an immediate change in rates of between +300 basis points and –300 basis points (+3% to -3%) as applied to all earning assets and interest bearing liabilities. Depending upon the re-pricing characteristics of the Bank’s assets and liabilities, such a sudden change in rates can be expected to have either a positive or negative effect on Bank net interest income. If, for example, substantially all of the Bank’s deposits are fixed rate and substantially all of the Bank’s loans are variable rate, an increase in interest rates would, initially, cause interest income to rise, while interest expense would not change. As a result, net interest income would increase until such time as deposits renewed or matured and were replaced with higher rate deposits. On the other hand, if rates were to decrease, the Bank would experience a decrease in net interest income. Sudden changes in interest rates will have a similar effect on the value of the Bank’s equity. Non-interest income and non-interest expense are assumed to remain constant.
 
Presented below are the results of the analysis performed on financial information as of December 31, 2001. Generally, our analyses have been supportive of Bank management’s desire to limit volatility of net interest income to no more than plus or minus ten-percent when applying an interest rate shock of plus or minus two-hundred basis points. The analysis performed December 31, 2001 was somewhat higher than previous years, at twelve-plus percent change. There is currently no specific discipline that applies to change in economic value of equity; however, it has been management’s recent thought to allow slightly more volatility in net interest income in order to achieve less volatility in economic value of equity.
 
Net Interest Income and Market Value
Summary Performance
December 31, 2001
($ in thousands)
 
    
Net Interest Income
     
Economic Value of Equity
  
Projected
Interest
Rate Scenario
   
Estimated Value
   
$ Change From Base
   
% Change From Base
     
Estimated Value
   
$ Change From Base
   
% Change From Base
  
+300
   
$
10,188
   
$
1,598
   
18.60
%
   
$
19,794
   
$
1,799
   
10.00
%
+200
   
$
9,658
   
$
1,068
   
12.43
%
   
$
19,451
   
$
1,456
   
8.09
%
+100
   
$
9,128
   
$
538
   
6.26
%
   
$
18,912
   
$
917
   
5.10
%
Base
   
$
8,590
   
$
0
   
0.00
%
   
$
17,995
   
$
0
   
0.00
%
-100
   
$
7,626
   
-$
964
   
-11.22
%
   
$
15,402
   
-$
2,593
   
-14.41
%
-200
   
$
6,904
   
-$
1,686
   
-19.63
%
   
$
13,799
   
-$
4,196
   
-23.32
%
-300
   
$
5,988
   
-$
2,603
   
-30.30
%
   
$
13,352
   
-$
4,643
   
-25.80
%
 
Forward-looking Statements
 
This section, as well as certain other sections of this Annual Report, may contain forward-looking statements regarding, among other possible items, anticipated trends in the Company’s business. These forward-looking statements are based on the Company’s current expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. Actual results could differ materially from these forward-looking statements as a result of various factors, including, among other possible ones, competition, regulatory, economic and business influences, services and products, business and growth plans and strategies, and other relevant market conditions. In light of these risks and uncertainties, there can be no assurance that any forward-looking statements contained in this Annual Report will in fact take place or prove to be accurate.
 
Assessment of Year 2000 Issues
 
As noted in its Annual Report on Form 10-KSB for the fiscal year 2000, filed on March 30, 2001, the Company, and its subsidiaries, did not experience any internal equipment or software issues related to Y2K considerations. Certain “critical” dates remained as concerns to the banking industry and its regulators in the year

14

2000. For example, October 10, 2000 was the first date that included two digits in the month-field, two digits in the day-field and two or four digits in the year-field. December 31, 2000 was the 366th day of the year, testing appropriate programming for the leap year. The Company did not experience any problems related to those, or other, dates; and, it appears that Y2K concerns are now behind us.
 
ITEM 2.     DESCRIPTION OF PROPERTY
 
Prior to 2000, the Company did not own or lease any real property and did not own any personal property other than the shares of common stock of its subsidiaries. As a consequence of the merger of INB Mortgage and the Bank, the Company did assume the remaining lease obligation of INB Mortgage for its facilities located on Third Avenue in Spokane, Washington, as well as the remaining unamortized book value of leasehold improvements at two former INB Mortgage Company sites. The Company expensed the remaining leasehold improvements in 2001, in the amount of $15,000. The Company is obligated to pay monthly rental on the Third Avenue site through the expiration of the lease, on September 30, 2002. The total remaining obligation under the lease is approximately $22,000. The Lessor has agreed, however, to terminate the lease effective March 31, 2002. As a result, the Company’s remaining obligation will be reduced by approximately $6,000. For its other business, the Company utilizes the premises and equipment of the Bank.
 
The Bank owns the real property for the Northpointe branch located in north Spokane, Washington and, in 2001, purchased additional real property for the construction of a new branch in Coeur d’Alene, Idaho. The Bank owns the building for the South Hill branch located in south Spokane, Washington, which is constructed on leased land. The new Coeur d’Alene branch is currently under construction, with an estimated opening date of June 3, 2002; the Bank will own the building.
 
The Bank leases its principal office and main branch located at the Paulsen Center in downtown Spokane, Washington. The Bank also leases additional, adjacent space, which is used for a drive-through banking station and parking facilities. The Bank leases a branch in Coeur d’Alene, Idaho (the Sherman Avenue branch); that lease expires on May 31, 2002, at which time the Sherman Avenue branch will be closed and the new, Bank owned, Coeur d’Alene branch will open.
 
The Bank leases a total of five other branches situated inside retail grocery stores. Four of the branches are located in or around Spokane, Washington, including the Spokane Valley, Airway Heights and north Spokane (the Spokane Valley branch, the Airway Heights branch, the North Foothills branch and the Indian Trail branch). The remaining such branch is located in Post Falls, Idaho (the Post Falls branch.)
 
The Bank leases one additional office situated in the same retail grocery store as its Spokane Valley branch. The office formerly housed the Spokane Valley branch, which was relocated to more spacious quarters in 1999; this office is used by four employees of the Bank’s mortgage department.
 
In addition to the two owned locations, the Bank has made significant improvements in the one ground-lease location and in the leasehold improvements in the seven leased locations. As of December 31, 2001, the total net book value of the Bank’s consolidated premises and equipment was $3,277,157.
 
Directors, Executive Officers and Significant Employees
 
Directors
 
The Board of Directors of the Company currently consists of fourteen members and is divided into three classes. Directors within each class are elected to three-year terms, meaning that under ordinary circumstances, at any given time, approximately one-third of the Board would be in its second year of service and another one-third would be in its third year of service. The same persons currently serve as directors of the Bank and are elected in the same manner.

15

 
Dwight B. Aden, Jr.—Mr. Aden is 59 and has been a director of the Bank and the Company since May 20, 1996. His term as a director will expire at the annual meeting of shareholders to be held in 2002. For the five years prior to his retirement, in 1997, Mr. Aden was a senior member and an owner of Jones & Mitchell Insurance Co., an insurance brokerage firm in Spokane, Washington.
 
Jimmie T.G. Coulson—Mr. Coulson is 68 and has been a director of the Bank since its incorporation on May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Coulson’s current term as director will expire at the annual meeting of shareholders to be held in 2002. During the past five years, Mr. Coulson has been the President and Chief Executive Officer of The Coeur d’Alenes Company, a steel service center and fabrication facility located in Spokane, Washington.
 
Harlan D. Douglass—Mr. Douglass is 64 and has been a director of the Bank since May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Douglass’s current term as a director of the Bank will expire at the annual meeting of shareholders to be held in 2002. Mr. Douglass’s primary business activities consist of the management of a diversified real estate business, including multifamily and commercial projects.
 
Freeman B. Duncan—Mr. Duncan is 55 and has been a director of the Bank and the Company since May 20, 1996. His term as a director will expire at the annual meeting of shareholders to be held in 2002. Mr. Duncan is an attorney specializing in real estate matters.
 
Donald A. Ellingsen, M.D.—Dr. Ellingsen is 65 and has been a director of the Bank and the Company since May 20, 1996. His term as a director will expire at the annual meeting of shareholders to be held in 2002. Prior to his retirement on June 30, 1998, Dr. Ellingsen was an ophthalmologist and a member of the Spokane Eye Clinic, Spokane, Washington.
 
Clark H. Gemmill—Mr. Gemmill is 59. He has been a director of the Bank since its incorporation on May 26, 1989 and a director of the Company since March 30, 1992. Mr. Gemmill’s current term as a director will expire at the annual meeting of shareholders to be held in 2004. During the past five years, he has been a Vice President with UBS Paine Webber, a financial investment firm with a branch office in Spokane, Washington.
 
Randall L. Fewel—Mr. Fewel is 53; he is a director, President and Chief Executive Officer of the Bank. He has been a director of the Bank since May 16, 2000 and has served as President of the Company and President and Chief Executive Officer of the Bank since July 1, 2001. Mr. Fewel has been employed by the Bank since 1994. He previously served as its Chief Operating Officer and, prior to that, as its Senior Loan Officer. Mr. Fewel’s current term as a director will expire at the annual meeting of shareholders to be held in 2003.
 
Bryan S. Norby—Mr. Norby is 44. He has been a director of the Bank since August 15, 1989, and a director of the Company since March 30, 1992. Mr. Norby’s current term as a director will expire at the annual meeting of the Shareholders to be held in 2003. During the past five years Mr. Norby has been a certified public accountant and is Treasurer and Financial Analyst for a Boise, Idaho based business enterprise.
 
Richard H. Peterson—Mr. Peterson is 67 and has been a director of the Bank since its incorporation on May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Peterson’s current term as a director will expire at the annual meeting of the shareholders to be held in 2003. During the past five years, Mr. Peterson was a Senior Vice President of First Union Securities at its branch in Spokane and currently is a Senior Vice President with Ragen MacKenzie, a financial investment firm, also with a branch office in Spokane, Washington.
 
Hubert F. Randall—Mr. Randall is 73. He has been a director of the Bank since its incorporation on May 26, 1989 and has been a director of the Company since March 30, 1992. Mr. Randall’s current term as a director will expire at the annual meeting of the shareholders to be held in 2003. Mr. Randall retired in July 1990. For the five years prior to his retirement, he was the Executive Vice President and Chief Executive Officer of Kim Hotstart Manufacturing Company, Inc., a Spokane company specializing in the design and manufacture of heating systems for industrial engines.

16

 
Phillip L. Sandberg—Mr. Sandberg is 69 and has been a director of the Bank since its incorporation on May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Sandberg’s current term as a director will expire at the annual meeting of shareholders to be held in 2004. For the five years prior to his retirement on October 20, 1998, Mr. Sandberg had been the President and Chief Executive Officer of Sandberg Securities, an independent investment services firm in Spokane, Washington.
 
Frederick M. Schunter—Mr. Schunter is 65; he has been a director of the Bank since its incorporation on May 26, 1989 and, until his retirement on June 30, 2001, was President and Chief Executive Officer of the Bank. He has been a director of the Company since December 10, 1991 and was President of the Company prior to his retirement. Mr. Schunter’s current term as a director will expire at the annual meeting of shareholders to be held in 2004.
 
William E. Shelby—Mr. Shelby is 63 and has been a director of the Bank since its incorporation on May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Shelby’s current term as a director will expire at the annual meeting of shareholders to be held in 2004. During the past five years Mr. Shelby has been the Vice President of Store Development for U.R.M. Stores, Inc.
 
James R. Walker—Mr. Walker is 68 and has been a director of the Bank since its incorporation on May 26, 1989. He has been a director of the Company since March 30, 1992. Mr. Walker’s current term as a director will expire at the annual meeting of the shareholders to be held in 2004. Mr. Walker retired in 1995. For the five years prior to his retirement, he was the President and Chief Executive Officer of Hazen & Clark, Inc., a general contracting firm located in Spokane, Washington.
 
Officers
 
In addition to Mr. Fewel, the executive officers of the Company and its subsidiary are:
 
Holly A. Austin—Ms. Austin is 31 and is an officer of the Bank and Secretary of the Company. She has been employed by the Bank since June 1997. Prior to that time, between 1992 and 1997, Ms. Austin worked for a public accounting firm with offices in Spokane. She currently is Vice President and Cashier of the Bank.
 
Ronald M. Bower—Mr. Bower is 60 and joined the Bank in January 2000. For the five years prior to that time, Mr. Bower was Senior Vice President and Manager of Credit Risk Management for Eastern Washington and Northern Idaho for a regional financial institution with offices in Spokane. He currently is Executive Vice President and Chief Credit Officer of the Bank.
 
Christopher C. Jurey—Mr. Jurey is 52 and has been an officer of the Bank since 1991. He currently is Executive Vice President of the Bank and Chief Financial Officer of the Bank and the Company.
 
There are no family relationships among these directors and executive officers.
 
Significant Employees
 
James M. Abrahamson—Mr. Abrahamson is 60 and has been an officer of the Bank since 1996. He currently is a Senior Vice President, Commercial Loan Officer and team leader.
 
Douglas J. Beaudoin—Mr. Beaudoin is 51 and has been an officer of the Bank since 1998. Prior to that time, between 1996 and 1998, Mr. Beaudoin worked as a Vice President in the commercial real estate division of a regional financial institution with offices in Spokane. He currently is a Senior Vice President and manager of the Bank’s mortgage department.

17

 
Richard L. Brittain—Mr. Brittain is 50 and has been an officer of the Bank since 1995. He currently is a Vice President, Commercial Loan Officer and team leader.
 
Elizabeth A. Herndon—Ms. Herndon is 48 and has been an officer of the Bank since 1995. She currently is a Vice President and Branch Administrator.
 
Ronald G. Jacobson—Mr. Jacobson is 46 and has been an officer of the bank since 2001. Prior to that time, between 1989 and 2001, Mr. Jacobson worked as a Vice President in the private banking department of a community based financial institution headquartered in Spokane. He currently is a Senior Vice President and North Idaho Division Manager.
 
ITEM 4.    REMUNERATION OF DIRECTORS AND OFFICERS
 
The following table sets forth information as to remuneration received by the three highest paid executive officers of the Bank in the 2001 fiscal year. No officer or director of the Company has received any other remuneration or indirect financial benefit to date.
 
Name of individual
or identity of group
   
Capacities in which
remuneration was received
     
Aggregate annual Remuneration for last fiscal year
  
      Frederick M. Schunter
   
Former President and Chief Executive Officer (retired effective June 30, 2001)
     
$
86,231
(1)
      Randall L. Fewel
   
President and Chief Executive Officer (effective July 1, 2001 – previously Executive Vice President and Chief Operating Officer)
     
 
129,395
 
      Christopher C. Jurey
   
Executive Vice President and Chief Financial Officer
     
 
108,983
 
(1)
 
Does not include salary and bonus in the amount of $92,228 expensed by the Bank during the year but deferred as to payment until subsequent years by agreement of the parties. Does not include benefits under a retirement plan for Mr. Schunter, which is further described below. The net post-retirement cost recognized for this plan in fiscal year 2001 was $25,410.
 
Directors of the Bank (excluding the Chairman, Mr. Schunter (prior to his retirement) and Mr. Fewel) received an attendance fee in the amount of $200 per meeting and $100 per committee meeting. The Chairman receives a $400 attendance fee per meeting. Director/employees are not compensated for meeting attendance. Each director other than the Board Chairman, Mr. Schunter and Mr. Fewel also received 200 shares of Common Stock of the Company as additional compensation. The Board Chairman received 300 shares of Common Stock of the Company as additional compensation. No other compensation arrangement has been established for the directors of the Company as yet. The aggregate annual remuneration of executive and corporate officers and directors of the Bank as a group was $673,750 for fiscal year 2001.
 
The Bank has entered into employment agreements with Mr. Fewel, Mr. Jurey, Mr. Bower and Ms. Austin; these employment agreements provide for a continuous employment term until such time as the Bank notifies the employee that the Bank will establish an employment term of one (1) year commencing with the date of receipt of notice by the employee. For the fiscal year 2002, the fixed salary for Randall L. Fewel is $132,500 and for Christopher C. Jurey is $105,400.
 
The Bank has purchased and maintains a term life insurance policy on the life of the former Chief Executive Officer in the aggregate amount of $250,000. The Bank is the owner and beneficiary of life insurance policies on Mr. Schunter with a total face value of $226,274 and cash surrender value of $182,755 and $151,665 at December 31, 2001 and 2000, respectively.

18

 
Mr. Schunter has an un-funded retirement plan, which vested in full at retirement. The plan provides for monthly payments to the executive upon his retirement and, alternatively, to his surviving spouse in the event of his death, for a period of fifteen years following retirement. At December 31, 2001 and 2000, $213,216 and $205,564, respectively, had been accrued under this plan. This liability is recognized in accrued interest and other liabilities in the financial statements. The present value at retirement of the retirement benefit obligation was approximately $220,173. The un-funded benefit has been expensed over the period of service through the retirement date. The net post-retirement benefit cost recognized was $25,410 and $35,400 during the years ended December 31, 2001 and 2000, respectively.
 
Both the Bank and the Company are and will be highly dependent upon the services of Mr. Fewel and Mr. Jurey. Other than the Employment Agreements described herein, neither the Bank nor the Company have any specific arrangement with these individuals to assure that they will remain with the Bank or the Company and not compete upon termination of their employment.
 
Security Ownership of Management and Certain Security Holders
 
This information has been provided for the executive officers of the Bank. The Company does not have any compensated officers.
 
Title of Class
   
Name and Address of Owner
     
Amount Owned
     
Percent of Class (as of March 19, 2002)
  
Common Stock
   
Randall L. Fewel
421 W. Riverside, Suite 113 Spokane, WA 99201-0403
     
10,115
     
.59
%
Common Stock
   
Frederick M. Schunter
3259 S. High Drive Spokane, WA 99203
     
48,005
     
2.79
%
Common Stock
   
Christopher C. Jurey
421 W. Riverside, Suite 113 Spokane, WA 99201-0403
     
14,349
     
.83
%

19

 
Officers and directors as a group own of record, to the knowledge of the Company, 470,761 shares of common stock of the Company, representing 27.38% of the outstanding shares of common stock. No shareholder presently owns more than ten percent (10%) of the outstanding shares of common stock of the Company.
 
Name of Holder
  
Title and Amount of Securities Called for by Options, Warrants or Rights
     
Effective Exercise Price(1)
     
Date Exercisable (if not currently vested)(2)
   
Expiration Date
Randall L. Fewel
  
option—1,467
option—1,334
option—1,213
option—2,205
option—2,205
option—3,150
  option—10,000
     
8.35
9.37
10.72
14.51
14.51
9.52
10.00
     
n/a
n/a
20%—12/16/2002
40%—12/15/2003
60%—12/21/2004
80%—12/19/2005
100%—7/01/2006
   
January 1, 2005 December 16, 2006 December 15, 2007 December 14, 2008 December 20, 2009 December 18, 2010 June 30, 2011
Frederick M. Schunter(3)
  
option—2,935
option—2,668
option—1,940
option—1,985
option—1,323
     
8.35
9.37
10.72
14.51
14.51
     
n/a
n/a
n/a
n/a
n/a
   
January 1, 2005 December 16, 2006 December 15, 2007 December 14, 2008 December 20, 2009
Christopher C. Jurey
  
option—1,467
option—1,334
option—1,213
option—2,205
option—2,205
option—2,100
     
8.35
9.37
10.72
14.51
14.51
9.52
     
n/a
n/a
20%—12/16/2002
40%—12/15/2003
60%—12/21/2004
80%—12/19/2005
   
January 1, 2005 December 16, 2006 December 15, 2007 December 14, 2008 December 20, 2009 December 18, 2010
(1)
 
The number of shares subject to the option has been increased to reflect the declaration of stock dividends after the options were granted and the stock split effective May 28, 1999; the exercise price also has been adjusted to correspond with the increase in shares.
 
(2)
 
The options granted to the above persons expiring December 16, 2006, December 15, 2007, December 14, 2008, December 20, 2009, December 18, 2010, and June 30, 2011 respectively, are subject to a vesting schedule of 20% per year after the first year. The non-vested percentage of options granted is shown for each year, along with the date when all options for each particular year will be fully vested.
 
(3)
 
Vested options as of December 31, 2001. Mr. Schunter’s last day of employment, for purposes of the vesting provision, is December 31, 2001 by agreement of the parties. Therefore, no options will vest after that date. The number of options and the price of each option set forth above will be adjusted for stock splits that may be declared prior to exercise.
 
Interest of Management and Others in Certain Transactions
 
The Bank has had, and may be expected to have in the future, deposits and loans in the ordinary course of business with directors, officers, their immediate families and affiliated companies in which they are principal shareholders, all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable banking transactions with others. The loan balance of any one related party is not material. The aggregate loan balances with related parties at December 31, 2001, was $2,315,205. Unused commitments were $2,157,657.

20

 
PART II
 
ITEM 1.    MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY                    AND OTHER SHAREHOLDER MATTERS
 
Market Information
 
There is no established public trading market for the Company’s shares of common stock. Transactions take place from time to time and the Company becomes aware of those transactions if certificates are presented for transfer. Quotations are published in a daily newspaper in Spokane, Washington and may be obtained on the Internet by researching the symbol “NBCT,” but those quotations are not necessarily reflective of actual transactions. The newspaper quotations are derived from information published on the Internet by various quotation services and are intended as a guide to shareholders intending to engage in a transaction. The high and low range of those quotations by quarters for the Company’s last two fiscal years is set forth below.
 
    
(adjusted for 5% stock dividends in May 2001 and 2000)
    
2001
   
2000
    
High
   
Low
   
High
   
Low
January 1 – March 31
   
$
8.57
   
$
7.62
   
$
13.61
   
$
11.79
April 1 – June 30
   
$
9.52
   
$
8.57
   
$
12.38
   
$
11.43
July 1 – September 30
   
$
10.50
   
$
8.75
   
$
11.43
   
$
9.52
October 1 – December 31
   
$
9.00
   
$
9.00
   
$
10.48
   
$
7.62
 
The Company declared a 5% stock dividend, payable June 15, 2001, to holders of record May 15, 2001; 82,800 shares were issued on June 15, 2001.
 
The above quotations also do not reflect inter-dealer prices and should not be considered over-the-counter market quotations as that term is customarily used. To the best knowledge of the Company, the price per share paid in actual transactions during the quarter ended December 31, 2001 was $9.00.
 
Holders
 
As of December 31, 2001, there were approximately 468 holders of record of the Company’s common stock, including shares held, to the best knowledge of the Company, by non-affiliated depositories. The Company has relied upon information received from those depositories in determining the number of record holders.
 
Dividends
 
In the last two fiscal years, the Company has not declared or paid any cash dividends on its common stock.
 
Under the Washington Business Corporation Act, dividends may not be paid if, after the payment is made, the corporation would not be able to pay its debts as they become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities (plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders, if any, whose preferential rights are superior to those receiving the distribution).
 
The principal source of the Company’s revenue and cash flow is dividends from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends or otherwise make distributions or supply funds to the Company. In addition, bank regulators may have authority to prohibit a bank subsidiary from paying dividends, depending on the bank subsidiary’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.

21

 
Earnings appropriated to bad debt reserves for losses and deducted for federal income tax purposes are not available for dividends without the payment of taxes at the current income tax rates on the amount used.
 
ITEM 2.    LEGAL PROCEEDINGS
 
Other than routine litigation incidental to the business of the subsidiary, there are no pending legal proceedings in which the Company or its subsidiary is a party or any of their respective properties is subject. There are no pending legal proceedings in which any director, officer or affiliate of the Company, any owner of record or beneficiary of more than 5% of the common stock of the Company, or any security holder of the Company is a party adverse to the Company or its subsidiary or has a material interest adverse to the Company or its subsidiary.
 
ITEM 3.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
 
During the Company’s two most recent fiscal years, there has been no resignation (or declination to stand for re-election) or dismissal of the principal independent accountant of the Company or its subsidiary.
 
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matter was submitted to a vote of security holders during the fourth quarter of the 2001 fiscal year.
 
ITEM
 
5.    COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 
Based on the Company’s review of the copies of reports filed on Forms 3, 4 and 5 by officers and directors of the Company, pursuant to Section 16(a) of the Exchange Act, the Company believes that all filing requirements applicable to such persons have been timely complied with in 2001.
 
ITEM
 
6.    REPORTS ON FORM 8-K
 
No reports were filed on Form 8-K during the last quarter of the fiscal year 2001.

22

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS
 
DECEMBER 31, 2001 AND 2000
 
TABLE OF CONTENTS
 

23

 
INDEPENDENT AUDITOR’S REPORT
 
To the Board of Directors
Northwest Bancorporation, Inc.    
and Subsidiary
Spokane, Washington
 
We have audited the accompanying consolidated statements of financial condition of Northwest Bancorporation, Inc. and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Bancorporation, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Moss Adams LLP
 
Spokane, Washington
January 18, 2002

24

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

 
    
December 31,
    
2001
   
2000
A S S E T S
     
Cash and due from banks
   
$
8,710,181
   
$
8,643,770
Federal funds sold
   
 
6,620,000
   
 
699,000
Securities available for sale
   
 
40,937,748
   
 
39,454,896
Securities held to maturity
   
 
225,000
   
 
225,000
Federal Home Loan Bank stock, at cost
   
 
556,900
   
 
520,400
Loans receivable, net of allowance for loan losses 2001 $1,649,034; 2000 $1,624,758
   
 
128,600,767
   
 
118,442,664
Loans held for sale
   
 
932,860
   
 
628,682
Premises and equipment
   
 
3,277,157
   
 
2,792,969
Accrued interest receivable
   
 
1,096,975
   
 
1,336,382
Foreclosed real estate and other repossessed assets
   
 
317,276
   
 
468,101
Other assets
   
 
1,592,611
   
 
528,806
    
  
Total assets
   
$
192,867,475
   
$
173,740,670
    
  
L I A B I L I T I E S  A N D  S T O C K H O L D E R S’  E Q U I T Y
          
Deposits
   
$
152,176,973
   
$
138,886,129
Securities sold under agreements to repurchase
   
 
22,409,164
   
 
17,580,815
Accrued interest and other liabilities
   
 
898,659
   
 
1,052,312
Borrowed funds
   
 
1,803,974
   
 
1,885,622
    
  
Total liabilities
   
 
177,288,770
   
 
159,404,878
    
  
Commitments and Contingencies (Note 10)
              
Stockholders’ Equity
              
Common stock, no par value, authorized 5,000,000 shares issued 1,720,530 and 1,656,766 shares outstanding
   
 
13,495,186
   
 
12,836,358
Retained earnings
   
 
1,666,961
   
 
1,308,515
Accumulated comprehensive income
   
 
416,558
   
 
190,919
    
  
Total stockholders’ equity
   
 
15,578,705
   
 
14,335,792
    
  
Total Liabilities and Stockholders’ Equity
   
$
192,867,475
   
$
173,740,670
    
  
 
See accompanying notes.

25

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF INCOME
 
    
Year Ended December 31,
  
    
2001
     
2000
  
Interest Income:
                  
Loans receivable, including fees
   
$
11,212,303
 
   
$
11,216,849
 
Investment securities:
                  
U.S. Treasury securities
   
 
229,382
 
   
 
200,764
 
U.S. government agency securities
   
 
2,341,018
 
   
 
2,151,232
 
Other securities
   
 
49,139
 
   
 
57,488
 
Federal funds sold
   
 
210,188
 
   
 
393,020
 
    
  
Total interest income
   
 
14,042,030
 
   
 
14,019,353
 
    
  
Interest Expense:
                  
Deposits
   
 
5,033,980
 
   
 
5,135,594
 
Borrowed funds and securities sold under agreements to repurchase
   
 
716,034
 
   
 
1,372,418
 
Total interest expense
   
 
5,750,014
 
   
 
6,508,012
 
    
  
Net interest income
   
 
8,292,016
 
   
 
7,511,341
 
Provision for loan losses
   
 
1,090,000
 
   
 
540,000
 
    
  
Net interest income after provision for loan losses
   
 
7,202,016
 
   
 
6,971,341
 
    
  
Noninterest Income:
                  
Service charges on deposits
   
 
844,561
 
   
 
792,983
 
Net gains from sale of loans
   
 
542,580
 
   
 
462,414
 
Gain (loss) on sale of securities
   
 
115,667
 
   
 
(1,997
)
Other income
   
 
436,784
 
   
 
444,336
 
    
  
    
 
1,939,592
 
   
 
1,697,736
 
    
  
Noninterest Expense:
                  
Salaries and employee benefits
   
 
4,346,222
 
   
 
4,252,042
 
Occupancy expense
   
 
627,691
 
   
 
624,881
 
Equipment expense
   
 
565,059
 
   
 
519,700
 
Loss (gain) on foreclosed real estate
   
 
(30,989
)
   
 
61,575
 
Impairment loss on goodwill
   
 
—  
 
   
 
174,237
 
Other operating expenses
   
 
1,832,508
 
   
 
1,841,644
 
    
  
    
 
7,340,491
 
   
 
7,474,079
 
    
  
Net income before federal income taxes
   
 
1,801,117
 
   
 
1,194,998
 
Federal income tax expense
   
 
612,302
 
   
 
395,813
 
    
  
Net Income
   
$
1,188,815
 
   
$
799,185
 
    
  
Basic earnings per share
   
$
0.68
 
   
$
0.46
 
    
  
Diluted earnings per share assuming full dilution
   
$
0.68
 
   
$
0.46
 
    
  
 
See accompanying notes.

26

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
 
      
Shares of Common Stock
     
Total
     
Common Stock
     
Retained Earnings
       
Accumulated Comprehensive Income (Loss)
     
Comprehensive Income
Balance, December 31, 1999
     
1,276,051
 
   
$
11,145,919
 
   
$
10,312,307
 
   
$
1,535,355
 
     
$
(701,743
)
       
Net income for 2000
            
 
799,185
 
   
 
—  
 
   
 
799,185
 
     
 
—  
 
   
$
799,185
Repurchase of 751 shares
     
(751
)
   
 
(5,825
)
   
 
(5,825
)
   
 
—  
 
     
 
—  
 
       
Exercise of 284,674
stock warrants
     
298,991
 
   
 
1,458,271
 
   
 
1,458,271
 
   
 
—  
 
     
 
—  
 
       
Issuance of stock to directors, 2,500 shares
     
2,625
 
   
 
32,500
 
   
 
32,500
 
   
 
—  
 
     
 
—  
 
       
5% stock dividend 78,925 shares of common stock
     
78,925
 
   
 
—  
 
   
 
1,026,025
 
   
 
(1,026,025
)
     
 
—  
 
       
Net change in unrealized gain on available for sale securities, net of taxes of $459,856
     
—  
 
   
 
892,662
 
   
 
—  
 
   
 
—  
 
     
 
892,662
 
   
 
892,662
Exercise of 881 stock appreciation rights
     
925
 
   
 
13,080
 
   
 
13,080
 
   
 
—  
 
     
 
—  
 
       
      
  
  
  
    
  
Comprehensive income
                                                  
$
1,691,847
                                                   
Balance, December 31, 2000
     
1,656,766
 
   
 
14,335,792
 
   
 
12,836,358
 
   
 
1,308,515
 
     
 
190,919
 
       
Net income for 2001
     
—  
 
   
 
1,188,815
 
   
 
—  
 
   
 
1,188,815
 
     
 
—  
 
   
$
1,188,815
Repurchase of 24,314 shares
     
(24,314
)
   
 
(221,532
)
   
 
(221,532
)
   
 
—  
 
     
 
—  
 
       
Exercise of 2,542 stock options
     
2,542
 
   
 
25,000
 
   
 
25,000
 
   
 
—  
 
     
 
—  
 
       
Sale of 236 shares
     
236
 
   
 
2,360
 
   
 
2,360
 
   
 
—  
 
     
 
—  
 
       
Issuance of stock to directors, 2,500 shares
     
2,500
 
   
 
25,000
 
   
 
25,000
 
   
 
—  
 
     
 
—  
 
       
5% stock dividend 82,800 shares of common stock
     
82,800
 
   
 
—  
 
   
 
828,000
 
   
 
(828,000
)
     
 
—  
 
       
Payment of fractional shares
     
—  
 
   
 
(2,369
)
   
 
—  
 
   
 
(2,369
)
     
 
—  
 
       
Net change in unrealized gain on available for sale securities, net of taxes of $116,241
     
—  
 
   
 
225,639
 
   
 
—  
 
   
 
—  
 
     
 
225,639
 
   
 
225,639
      
  
  
  
    
  
Comprehensive income
                                                  
$
1,414,454
                                                   
Balance, December 31, 2001
     
1,720,530
 
   
$
15,578,705
 
   
$
13,495,186
 
   
$
1,666,961
 
     
$
416,558
 
       
      
  
  
  
    
      
 
 
See accompanying notes.

27

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF CASH FLOWS
 
    
Year Ended December 31,
  
    
2001
     
2000
  
CASH FLOWS FROM OPERATING ACTIVITIES
                  
Net income
   
$
1,188,815
 
   
$
799,185
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation
   
 
460,686
 
   
 
450,177
 
Impairment loss on goodwill
   
 
—  
 
   
 
174,237
 
Provision for loan losses
   
 
1,090,000
 
   
 
540,000
 
Provision for losses on foreclosed real estate and other repossessed assets
   
 
30,000
 
   
 
38,523
 
Accretion of securities discounts
   
 
(97,982
)
   
 
(28,301
)
Amortization of securities premiums
   
 
32,984
 
   
 
4,851
 
Loss on disposal of assets
   
 
10,019
 
   
 
2,381
 
Net gain on sale of foreclosed real estate and other repossessed
assets
   
 
(60,989
)
   
 
(16,097
)
Stock dividends received
   
 
(36,500
)
   
 
(41,000
)
Issuance of stock appreciation rights
   
 
—  
 
   
 
13,080
 
Deferred income taxes
   
 
86,196
 
   
 
(77,072
)
(Gain) loss on sale of securities
   
 
(115,667
)
   
 
1,997
 
Change in assets and liabilities:
                  
Accrued interest receivable
   
 
239,407
 
   
 
(244,551
)
Other assets
   
 
(1,266,242
)
   
 
233,229
 
Loans held for sale
   
 
(304,178
)
   
 
351,993
 
Accrued interest and other liabilities
   
 
(153,653
)
   
 
62,466
 
    
  
Net cash provided by operating activities
   
 
1,102,896
 
   
 
2,265,098
 
    
  
CASH FLOWS FROM INVESTING ACTIVITIES
                  
Net decrease (increase) in federal funds sold
   
 
(5,921,000
)
   
 
6,634,000
 
Securities available for sale:
                  
Proceeds from maturities or principal payments
   
 
30,737,901
 
   
 
1,015,732
 
Proceeds from sales
   
 
2,104,500
 
   
 
997,500
 
Purchases
   
 
(33,802,708
)
   
 
(9,111,337
)
Securities held to maturity:
                  
Proceeds from maturities or principal payments
   
 
—  
 
   
 
300,000
 
Purchases of premises and equipment
   
 
(960,271
)
   
 
(462,811
)
Proceeds from sale of premises and equipment
   
 
5,378
 
   
 
5,304
 
Proceeds from sale of foreclosed real estate and other repossessed assets
   
 
579,548
 
   
 
742,866
 
Net increase in loans
   
 
(11,645,837
)
   
 
(13,012,713
)
    
  
Net cash used by investing activities
   
 
(18,902,489
)
   
 
(12,891,459
)
    
  
 
See accompanying notes

28

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENT OF CASH FLOWS—(continued)
 
    
Year Ended December 31,
  
    
2001
     
2000
  
CASH FLOWS FROM FINANCING ACTIVITIES
                  
Net increase in deposits
   
$
13,290,844
 
   
$
14,756,283
 
Net increase (decrease) in securities sold under agreements to repurchase
   
 
4,828,349
 
   
 
(346,840
)
Proceeds from issuance of capital stock
   
 
52,360
 
   
 
1,490,771
 
Payment of fractional shares
   
 
(2,369
)
   
 
—  
 
Repurchase of capital stock
   
 
(221,532
)
   
 
(5,825
)
Repayment of borrowed funds
   
 
(81,648
)
   
 
(4,569,171
)
Net decrease in other borrowed funds
   
 
—  
 
   
 
(529,658
)
Net cash provided by financing activities
   
 
17,866,004
 
   
 
10,795,560
 
    
  
NET CHANGE IN CASH AND DUE FROM BANKS
   
 
66,411
 
   
 
169,199
 
Cash and due from banks, beginning of year
   
 
8,643,770
 
   
 
8,474,571
 
Cash and due from banks, end of year
   
$
8,710,181
 
   
$
8,643,770
 
    
  
SUPPLEMENTAL CASH FLOWS INFORMATION
                  
Cash paid during the year for:
                  
Interest
   
$
5,957,407
 
   
$
6,391,733
 
    
  
Income taxes
   
$
606,459
 
   
$
523,886
 
    
  
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
                  
Net change in unrealized gain on securities available for sale
   
$
341,880
 
   
$
1,352,518
 
    
  
Acquisition of real estate and other repossessed assets in settlement of loans
   
$
398,068
 
   
$
379,949
 
    
  
 
 
See accompanying notes.

29

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Note 1.    Summary of Significant Accounting Policies
 
Basis of presentation and consolidation:
 
The consolidated financial statements include the accounts of Northwest Bancorporation, Inc. (the Corporation) and its wholly-owned subsidiaries, Inland Northwest Bank (the Bank) and INB Mortgage Company (the Mortgage Company). The Mortgage Company’s operations were merged with Inland Northwest Bank on October 31, 2000. The consolidated financial statements include the Mortgage Company’s results of operations for the ten months ended October 31, 2000. All significant intercompany balances and transactions have been eliminated in consolidation.
 
Nature of business:
 
The Bank is a state chartered commercial bank under the laws of the state of Washington, and provides banking services primarily throughout eastern Washington and northern Idaho. The Corporation and its subsidiary are subject to competition from other financial institutions, as well as nonfinancial intermediaries. The Corporation and its subsidiary are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies.
 
Use of estimates:
 
In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated statements of financial condition and certain revenues and expenses for the period. Actual results could differ, either positively or negatively, from those estimates.
 
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, and the valuation of real estate acquired in connection with foreclosures, or in satisfaction of loans.
 
Management believes that the allowance for loan losses and other real estate owned is adequate. While management uses currently available information to recognize losses on loans and other real estate (when owned), future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and other real estate owned. Such agencies may require the Bank to recognize additions to the allowances based on their judgments of information available to them at the time of their examination.
 
Cash equivalents:
 
For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks.”
 
Securities held to maturity:
 
Bonds and notes for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

30

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 1.    Summary of Significant Accounting Policies—(Continued)
 
Securities available for sale:
 
Securities available for sale consist of bonds and notes not classified as securities held to maturity. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in other comprehensive income. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
 
Declines in the fair value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. No such write-downs have occurred.
 
Loans held for sale:
 
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Gains or losses on the sale of such loans are based on the specific identification method.
 
Loans:
 
The Corporation grants mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans throughout eastern Washington and northern Idaho. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
 
The accrual of interest on impaired loans is discontinued generally when the loan becomes 90 days delinquent or when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, if the Bank does not feel they are adequately secured, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.
 
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Allowance for loan losses:
 
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

31

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 1.    Summary of Significant Accounting Policies—(Continued)
 
Allowance for loan losses (continued):
 
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
 
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments or principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
 
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.
 
Premises and equipment:
 
Land is carried at cost. Buildings, furniture and equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the estimated useful lives of the assets. Normal costs of maintenance and repairs are charged to expense as incurred.
 
Goodwill:
 
Goodwill related to the purchase of the Mortgage Company was originally amortized on a straight-line basis over 15 years. The remaining goodwill was considered completely impaired during 2000 due to the continuing losses incurred by the Mortgage Company. All of the remaining goodwill of $174,237 was expensed and is shown on the income statement as “Impairment loss on goodwill.”
 
Foreclosed real estate and other repossessed assets:
 
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less selling cost. An allowance for impairment losses is used for fluctuations in estimated fair value.
 
Income taxes:
 
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

32

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 1.    Summary of Significant Accounting Policies—(Continued)
 
Stock compensation plans:
 
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or the measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Corporation’s stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Corporation has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995 (see Note 14).
 
Earnings per share:
 
Earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Earnings per share assuming full dilution reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation related solely to outstanding stock options, and are determined using the treasury stock method (see Note 20).
 
Comprehensive income:
 
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as separate components of the equity section of the balance sheet, such items, along with net income are components of comprehensive income.
 
The components of other comprehensive income and related tax effects are as follows:
 
    
Years Ended December 31
  
    
2001
     
2000
  
Unrealized holding gains on available for sale securities
   
$
457,547
 
   
$
1,350,521
 
Reclassification adjustment for (gains) losses realized in income
   
 
(115,667
)
   
 
1,997
 
    
  
Net unrealized gains
   
 
341,880
 
   
 
1,352,518
 
Tax effect
   
 
(116,241
)
   
 
(459,856
)
    
  
Net of Tax Amount
   
$
225,639
 
   
$
892,662
 
    
  
 
Recent accounting pronouncements:
 
SFAS No. 141, Business Combinations, requires that all business combinations be accounted for using the purchase method and establishes the accounting and reporting standards for recognition of intangible assets including goodwill. The provisions of this Statement apply to all business combinations initiated after June 30,

33

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 1.    Summary of Significant Accounting Policies—(Continued)
 
Recent accounting pronouncements (continued):
 
2001, and also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Corporation was not involved in a business combination during 2001; therefore, this statement does not apply to the Bank.
 
SFAS No. 142, Goodwill and Other Intangible Assets, requires goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. The Corporation will implement this statement effective January 1, 2002. The Corporation does not expect the statement will result in a material impact on its financial position or results of operations.
 
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) the normal operations of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.
 
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes Financial Accounting Standards Board (FASB) Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of this Statement generally are to be applied prospectively.
 
Advertising costs:
 
Advertising costs are charged to operations when incurred. Advertising expense for the years ended December 31, 2001 and 2000, was $116,105 and $132,370, respectively.

34

 
NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
 
Note 2.    Investments in Securities
 
Securities held by the Corporation have been classified in the consolidated statements of financial condition according to management’s intent. The amortized cost of securities and their approximate fair values at December 31, 2001 and 2000, were as follows:
 
    
December 31, 2001
    
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
     
Fair Value
Securities available for sale:
                              
U.S. government agency securities
   
$
26,290,089
   
$
421,240
   
$
(30,620
)
   
$
26,680,709
U.S. treasury securities
   
 
5,526,893
   
 
134,157
   
 
—  
 
   
 
5,661,050
Corporate debt obligations
   
 
720,683
   
 
2,254
   
 
(2,494
)
   
 
720,443
Mortgage backed securities
   
 
7,768,934
   
 
157,712
   
 
(51,100
)
   
 
7,875,546
    
  
  
  
    
$
40,306,599
   
$
715,363
   
$
(84,214
)
   
$
40,937,748
    
  
  
  
    
December 31, 2000
Securities available for sale:
                              
U.S. government agency securities
   
$
28,128,434
   
$
238,269
   
$
(103,480
)
   
$
28,263,223
U.S. treasury securities
   
 
2,509,052
   
 
46,573
   
 
—  
 
   
 
2,555,625
Mortgage backed securities
   
 
8,528,141
   
 
137,955
   
 
(30,048
)
   
 
8,636,048
    
  
  
  
    
$
39,165,627
   
$
422,797
   
$
(133,528
)
   
$
39,454,896
    
  
  
  
 
    
December 31, 2001
    
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
Securities held to maturity:
                            
State and municipal securities
   
$
225,000
   
$
9,718
   
$
—  
   
$
234,718
    
  
  
  
    
December 31, 2000
State and municipal securities
   
$
225,000
   
$
2,824
   
$
—  
   
$
227,824
    
  
  
  
 
At December 31, 2001 and 2000, securities available for sale with an amortized cost of $26,982,527 and $26,937,317, respectively, were pledged to secure the Bank’s performance of its obligations under repurchase agreements. The approximate market value of these securities was $27,406,233 and $27,177,549 at December 31, 2001 and 2000, respectively. Securities available for sale with an amortized cost of $2,996,513 and $3,074,618 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits for purposes required or permitted by law. The approximate market value of these securities was $3,049,491 and $3,048,594 at December 31, 2001 and 2000, respectively. Securities available for sale with an amortized cost of $6,176,893 and $7,159,052 at December 31, 2001 and 2000, were pledged to the Federal Reserve Bank. The approximate market value of these securities was $6,334,925 and $7,188,313 at December 31, 2001 and 2000, respectively.

35

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 2.    Investments in Securities—(Continued)
 
For the years ended December 31, 2001 and 2000, proceeds from sales of securities available for sale amounted to $2,104,500 and $997,500, respectively. Gross realized gains (losses) during the years ended December 31, 2001 and 2000, were $115,667 and $(1,997), respectively.
 
The scheduled maturities of securities held to maturity and securities available for sale at December 31, 2001, are as follows:
 
    
Held to maturity
   
Available for sale
    
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
Due in one year or less
   
$
—  
   
$
—  
   
$
2,138,627
   
$
2,143,770
Due from one year to five years
   
 
225,000
   
 
234,718
   
 
13,400,663
   
 
13,669,638
Due from five to ten years
   
 
—  
   
 
—  
   
 
15,000,611
   
 
15,213,915
Due after ten years
   
 
—  
   
 
—  
   
 
1,997,764
   
 
2,034,879
Mortgage backed securities
   
 
—  
   
 
—  
   
 
7,768,934
   
 
7,875,546
    
  
  
  
    
$
225,000
   
$
234,718
   
$
40,306,599
   
$
40,937,748
    
  
  
  
 
Note 3.    Federal Home Loan Bank Stock
 
The Corporation’s investment in Federal Home Loan Bank (FHLB) stock is carried at par value ($100 per share), which reasonably approximates its fair value. As a member of the FHLB system, the Corporation is required to maintain a minimum level of investment in FHLB stock based on specified percentages of its outstanding FHLB advances. The Corporation may request redemption at par value of any stock in excess of the amount the Corporation is required to hold. Stock redemptions are at the discretion of the FHLB.
 
Note 4.    Loans Receivable and Allowance for Loan Losses
 
The components of loans in the consolidated statement of financial condition were as follows:
 
    
December 31,
  
    
2001
     
2000
  
Commercial
   
$
105,456,668
 
   
$
91,397,470
 
Real estate
   
 
16,943,339
 
   
 
19,415,669
 
Installment
   
 
4,446,156
 
   
 
5,131,668
 
Consumer and other
   
 
3,726,124
 
   
 
4,462,406
 
    
  
    
 
130,572,287
 
   
 
120,407,213
 
Allowance for loan losses
   
 
(1,649,034
)
   
 
(1,624,758
)
Net deferred loan fees
   
 
(322,486
)
   
 
(339,791
)
    
  
    
$
128,600,767
 
   
$
118,442,664
 
    
  
 
An analysis of the change in the allowance for loan losses follows:
 
    
December 31,
  
    
2001
     
2000
  
Balance, beginning of year
   
$
1,624,758
 
   
$
1,480,208
 
Provision charged to operations
   
 
1,090,000
 
   
 
540,000
 
Loans charged off, net of recoveries
   
 
(1,065,724
)
   
 
(395,450
)
    
  
Balance, end of year
   
$
1,649,034
 
   
$
1,624,758
 
    
  

36

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 4.    Loans Receivable and Allowance for Loan Losses—(Continued)
 
The loans fall into the following fixed and variable components:
 
    
December 31,
    
2001
   
2000
Fixed rate loans
   
$
42,900,767
   
$
32,736,560
Variable rate loans
   
 
87,671,520
   
 
87,670,653
    
  
    
$
130,572,287
   
$
120,407,213
    
  
 
Impairment of loans having recorded investments of $1,431,311 and $542,771 at December 31, 2001 and 2000, has been recognized in conformity with FASB Statement No. 114 as amended by FASB Statement No. 118. The total allowance for loan losses related to these loans was $281,671 and $175,160 at December 31, 2001 and 2000, respectively. The Bank is not committed to lend additional funds to debtors whose loans have been modified. The average recorded investment in impaired loans during the years ended December 31, 2001 and 2000, was $573,430 and $825,438, respectively. Interest income on impaired loans of $68,946 and $18,215 was recognized for cash payments received in 2001 and 2000, respectively.
 
Note 5.    Premises and Equipment
 
Components of premises and equipment included in the consolidated statements of financial condition at December 31, 2001 and 2000, were as follows:
 
    
December 31,
  
    
2001
     
2000
  
Land
   
$
669,457
 
   
$
269,204
 
Construction in progress
   
 
239,588
 
   
 
2,870
 
Furniture, equipment, and building
   
 
3,287,708
 
   
 
3,056,977
 
Leasehold improvements
   
 
1,472,897
 
   
 
1,396,841
 
Vault
   
 
48,483
 
   
 
48,483
 
Land improvements
   
 
314,088
 
   
 
313,098
 
    
  
Total cost
   
 
6,032,221
 
   
 
5,087,473
 
Accumulated depreciation
   
 
(2,755,064
)
   
 
(2,294,504
)
    
  
Net book value
   
$
3,277,157
 
   
$
2,792,969
 
    
  
 
Depreciation expense was $460,686 and $450,177 for the years ended December 31, 2001 and 2000, respectively.
 
The Corporation leases its main office and eight of its nine branches under lease agreements that expire on various dates through 2009. The lease agreements have various renewal options.

37

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 5.    Premises and Equipment—(Continued)
 
The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2001:
 
Year ending
December 31,
     
2002
   
$
378,706
2003
   
 
357,457
2004
   
 
349,113
2005
   
 
329,983
2006
   
 
314,963
Thereafter
   
 
517,432
    
Total minimum payments required
   
$
2,247,654
    
 
Total lease payments under the above mentioned operating leases and other month-to-month rentals for the years ended December 31, 2001 and 2000, were $406,589 and $384,834, respectively.
 
Note 6.    Foreclosed Real Estate and Other Repossessed Assets
 
An allowance for losses on foreclosed real estate and other repossessed assts has been established. Activity in the account is as follows:
 
    
2001
   
2000
  
Balance, beginning of year
   
$
—  
   
$
—  
 
Provision charged to income
   
 
30,000
   
 
38,523
 
Charge offs, net of recoveries
   
 
—  
   
 
(38,523
)
    
  
Balance, end of year
   
$
30,000
   
$
—  
 
    
  
 
Included in the losses on foreclosed real estate and other repossessed assets in the consolidated statement of income for the years ending December 31, 2001 and 2000, are impairment losses of $30,000 and $38,523, respectively, on real estate and other repossessed assets held for sale. Realized gains (losses) of $60,989 and $(16,097) are included in (gain) loss on foreclosed real estate for the years ended December 31, 2001 and 2000, respectively.
 
Note 7.    Deposits
 
Major classifications of deposits at December 31, 2001 and 2000, were as follows:
 
    
2001
   
2000
Demand deposits
   
$
32,998,101
   
$
26,755,816
Money market
   
 
35,197,991
   
 
32,874,482
NOW accounts
   
 
13,729,806
   
 
10,601,861
Savings deposits
   
 
4,296,046
   
 
3,575,830
Time deposits, $100,000 and over
   
 
23,337,187
   
 
18,109,858
Other time deposits
   
 
42,617,842
   
 
46,968,282
    
  
    
$
152,176,973
   
$
138,886,129
    
  

38

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 7.    Deposits—(Continued)
 
Maturities for time deposits at December 31, 2001, are summarized as follows:
 
Maturing one year or less
   
$
56,423,646
Maturing one to five years
   
 
9,367,259
Maturing five to ten years
   
 
164,124
    
    
$
65,955,029
    
 
Note 8.    Borrowed Funds
 
Borrowed funds at December 31 consisted of the following:
 
    
2001
   
2000
Notes payable, FHLB advances maturing 2013, 6.15% fixed rate. Principal and interest payments vary month to month based on the Terms of the debt agreement with the FHLB. At December 31, 2001, the payment was approximately $14,300.
   
$
1,534,608
   
$
1,611,778
Notes payable, FHLB advances maturing 2028, 6.09% fixed rate Principal and interest payments vary month to month based on the Terms of the debt agreement with the FHLB. At December 31 2001, the payment was approximately $670.
   
 
109,254
   
 
110,494
Notes payable, FHLB advances maturing 2028, 6.28% fixed rate Principal and interest payments vary month to month based on the terms of the debt agreement with the FHLB. At December 31 2001, the payment was approximately $660.
   
$
105,881
   
$
107,005
Notes payable, FHLB advances maturing 2027, 6.60% fixed rate Principal and interest payments vary month to month based on the terms of the debt agreement with the FHLB. At December 31 2001, the payment was approximately $491.
   
 
54,231
   
 
56,345
    
  
    
$
1,803,974
   
$
1,885,622
    
  
 
The scheduled maturities of borrowed funds at December 31, 2001, are as follows:
 
Years Ending
December 31,
     
Weighted-Average
Interest Rate
   
Amount
2002
     
6.16%
   
$
88,658
2003
     
6.16%
   
 
96,287
2004
     
6.16%
   
 
104,589
2005
     
6.16%
   
 
113,622
2006 and after
     
6.17%
   
 
1,400,818
           
           
$
1,803,974
           

39

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 9.    Other Borrowed Funds
 
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Securities underlying the agreements are presented in Note 2.
 
Information concerning securities sold under agreements to repurchase at December 31, 2001, is summarized as follows:
 
Average balance during the year
   
$
21,262,216
 
    
Average interest rate during the year
   
 
2.80
%
    
Maximum month-end balance during the year
   
$
23,947,843
 
    
 
Note 10.    Commitments and Contingencies
 
The Bank is a party to various legal collection actions normally associated with financial institutions, the aggregate effect of which, in management’s and legal counsel’s opinion, would not be material to the financial condition of Northwest Bancorporation.
 
The Bank has unsecured operating lines of credit with KeyBank of Washington for $2,600,000, maturing April 1, 2002, U.S. Bank for $1,500,000, maturing November 30, 2002, and Zions Bank for $1,500,000 which matures November 9, 2002. The Bank also has a line of credit with Federal Home Loan Bank for $19,135,700. This line is collateralized by all assets of the Bank. There were $1,803,974 and $1,885,622 of outstanding advances on the Federal Home Loan Bank line at December 31, 2001 and 2000, respectively (see Note 8).
 
In the ordinary course of business, the Corporation, through its Bank subsidiary makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The Bank uses the same credit policies in making such commitments as they do for instruments that are included in the consolidated statement of financial condition. These commitments and contingent liabilities include various commitments to extend credit and standby letters of credit. At December 31, 2001 and 2000, commitments under standby letters of credit were $30,300 and $84,160, and firm loan commitments were $34,776,307 and $32,065,064, respectively. The Corporation does not anticipate any material losses as a result of these commitments.
 
Note 11.    Concentrations of Credit Risk
 
The majority of the Bank’s loans, commitments, and standby letters of credit have been granted to customers in the Bank’s market area, which is the eastern Washington and northern Idaho area. Substantially all such customers are depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Outstanding commitments and standby letters of credit were granted primarily to commercial borrowers.
 
The Bank places its cash with high credit quality institutions. The amount on deposit fluctuates, and at times exceeds the insured limit by the U.S. Federal Deposit Insurance Corporation, which potentially subjects the Bank to credit risk.

40

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 12.    Income Taxes
 
The components of income tax expense are as follows:
 
    
2001
   
2000
  
Current tax expense
   
$
526,106
   
$
472,885
 
Deferred tax (benefit) expense
   
 
86,196
   
 
(77,072
)
    
  
Federal income tax expense
   
$
612,302
   
$
395,813
 
    
  
 
The components of the net deferred tax asset (liability) are as follows:
 
    
2001
     
2000
Deferred tax assets:
                
Allowance for loan losses
   
$
400,628
 
   
$
464,667
Deferred compensation
   
 
105,051
 
   
 
71,947
Nonaccrual loan interest
   
 
4,983
 
   
 
17,380
Goodwill amortization
   
 
54,168
 
   
 
58,799
    
  
    
 
564,830
 
   
 
612,793
    
  
Deferred tax liabilities:
                
Accumulated depreciation
   
 
259,076
 
   
 
259,832
Deferred loan fees
   
 
106,688
 
   
 
88,334
Net unrealized gain on securities available for sale
   
 
214,593
 
   
 
98,352
Other
   
 
71,801
 
   
 
51,166
    
  
    
 
652,158
 
   
 
497,684
    
  
Net deferred tax asset (liability)
   
$
(87,328
)
   
$
115,109
    
  
 
The net deferred tax liabilities are included in accrued interest and other liabilities on the consolidated statements of financial condition at December 31, 2001. The net deferred tax assets are included in other assets on the consolidated statement of financial condition at December 31, 2000.
 
At December 31, 2001, an income tax receivable of $9,184 was included in other assets on the consolidated statement of financial condition. At December 31, 2000, an income tax payable of $71,272 was included in accrued expenses and other liabilities on the consolidated statement of financial condition.
 
The effective tax rate differs from the statutory federal tax rate for the years presented as follows:
 
    
2001
     
2000
  
Federal income tax at statutory rate
   
$
612,380
 
   
$
406,279
 
Effect of tax-exempt interest income
   
 
(10,404
)
   
 
(10,179
)
Effect of tax-exempt interest expense
   
 
698
 
   
 
983
 
Effect of nondeductible expenses
   
 
15,978
 
   
 
16,369
 
Other
   
 
(6,350
)
   
 
(17,639
)
    
  
Federal income tax expense
   
$
612,302
 
   
$
395,813
 
    
  

41

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 13.    Executive Retirement Plan
 
Inland Northwest Bank maintains an unfunded supplemental executive retirement plan for the benefit of the Bank’s former chief executive officer which is fully vested. The plan provides for monthly payments for a period of fifteen years to the executive, which began on June 30, 2001. In the event of his death, the plan provides payment to his designated beneficiary.
 
At December 31, 2001 and 2000, $213,216 and $205,564, respectively, has been accrued under this plan. This liability is recognized in accrued interest and other liabilities in the financial statements.
 
The net post-retirement benefit cost recognized during the years ended December 31, 2001 and 2000, was $25,410 and $35,400, respectively.
 
The Bank is the owner and beneficiary of life insurance policies on this former officer with a total face value of $226,274 and cash surrender value of $182,755 and $151,665 at December 31, 2001 and 2000, respectively. Also during 2001, the Bank purchased life insurance policies on several officers of the Bank with a total face value of $1,000,000 and cash surrender value of $1,000,000 at December 31, 2001. The cash surrender values are included in the consolidated statement of financial condition in other assets.
 
Note 14.    Common Stock Purchase Warrants and Stock Option Plan
 
In 1989, Inland Northwest Bank issued one common stock purchase warrant to individuals defined as founders for each share purchased in the initial offering of 115,145 warrants. Additionally, 19,000 warrants were issued to the Pre-Organization Steering Committee. During 1993, those warrants were transferred to Northwest Bancorporation, Inc., and as a result thereof, the Corporation issued warrants to the founders group to purchase 392,290 shares of common stock adjusted for stock dividends. As of December 31, 2000, all of the outstanding warrants had been exercised.
 
During 1992, the Board of Directors of the Bank authorized key employees of the Bank to be eligible to participate in a nonqualified stock option plan. Under the Plan, the Board of Directors may grant options to purchase shares of common stock of the Corporation, not to exceed 106,722 shares. The per option price for options granted shall be the fair market value of said share on the date the option is granted. Stock options granted after 1993 are eligible for stock dividends.
 
A summary of the status of the Bank’s stock option plans and changes during the years ending on those dates is presented below:
 
    
2001
   
2000
    
Shares Actual
       
Weighted-Average Exercise Price
   
Shares Actual
       
Weighted-Average Exercise Price
Outstanding options, beginning of year
   
 
84,025
 
     
$
11.62
   
 
67,395
 
     
$
12.54
Granted
   
 
15,000
 
     
$
10.00
   
 
25,725
 
     
$
9.52
Exercised
   
 
(2,542
)
     
$
9.83
   
 
(925
)
     
$
9.57
Forfeited
   
 
(7,897
)
     
$
11.02
   
 
(8,170
)
     
$
12.90
    
           
        
Outstanding options, end of year
   
 
88,586
 
     
$
11.45
   
 
84,025
 
     
$
11.62
    
           
        
Options exercisable at year end
   
 
37,199
 
            
 
22,215
 
         
    
           
        
Weighted-average fair value of options granted during the year
   
$
2.68
 
            
$
3.71
 
         
    
           
        

42

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 14.    Common Stock Purchase Warrants and Stock Option Plan—(Continued)
 
The following table summarizes information about stock options outstanding at December 31, 2001:
 
    
Options Outstanding
   
Exercisable Options
    
Number Outstanding at End of Year
     
Weighted-
Average Remaining Contractual Life
   
Weighted-
Average Exercise Price
   
Number Exercisable at End of Year
   
Weighted-
Average Exercise Price
Price ranges ($8.34 through $10.72)
   
56,062
     
7.9
   
$
9.67
   
21,545
   
$
9.49
Price ranges ($10.73 through $14.52)
   
32,524
     
7.6
   
 
14.51
   
15,654
   
 
14.51
    
    
  
  
  
Total
   
88,586
     
7.8
   
$
11.45
   
37,199
   
$
11.60
    
    
  
  
  
 
The pro forma income statement below presents the effect on net income as reported if the fair value of accounting for the nonqualified stock options had been adopted by the Bank. The fair value assumptions are based on a risk-free interest rate of 6%, 10 and 9 year expected life for the options granted in 2001 and 2000, respectively, no expected volatility and no cash dividends declared.
 
    
2001
     
2000
  
Net income as previously reported
   
$
1,188,815
 
   
$
799,185
 
Pro forma adjustment for effect of a change in accounting principle
   
 
(49,359
)
   
 
(44,053
)
    
  
Pro forma net income
   
$
1,139,456
 
   
$
755,132
 
    
  
    
2001
     
2000
  
Per share amounts:
                  
Basic earnings per share
   
$
0.68
 
   
$
0.46
 
Pro forma adjustment for the effect of the fair value of accounting for
stock options
   
 
(0.03
)
   
 
(0.02
)
    
  
Pro forma basic earnings per share
   
$
0.65
 
   
$
0.44
 
    
  
Diluted earnings per share
   
$
0.68
 
   
$
0.46
 
Pro forma adjustment for the effect of the fair value of accounting for
stock options
   
 
(0.03
)
   
 
(0.03
)
    
  
Pro forma net income diluted earnings per share
   
$
0.65
 
   
$
0.43
 
    
  
 
Note 15.    Common Stock
 
On April 18, 2000, the Board of Directors announced a 5% stock dividend on all common stock, effective to stockholders of record June 1, 2000, and issued June 15, 2000. All amounts per share and weighted-average shares outstanding for all periods presented have been retroactively adjusted to reflect the stock dividends. The Corporation recorded a transfer from retained earnings to common stock for the book value of the additional shares issued at June 1, 2000.
 
On April 17, 2001, the Board of Directors announced a 5% stock dividend on all common stock, effective to stockholders of record May 15, 2001, and issued June 15, 2001. All amounts per share and weighted-average shares outstanding for all periods presented have been retroactively adjusted to reflect the stock dividends. The

43

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Corporation recorded a transfer from retained earnings to common stock for the book value of the additional shares issued at May 15, 2001.
 
Note 15.    Common Stock—(Continued)
 
During 2001 and 2000, the Board of Directors voted to issue shares of common stock to each Director in lieu of increasing Director’s fees. Total shares issued were 2,500 during 2001 and 2000.
 
Note 16.    Profit Sharing Plan
 
The Bank has a 401(k) profit sharing plan covering all employees who meet the eligibility requirements. The Plan provides for employees to elect up to 15% of their compensation to be paid into the fund. The Bank’s policy is to match contributions equal to 50% of the participant’s contribution not to exceed 2.5% of the participant’s compensation. Vesting occurs equally at 20% each year for five years. The Bank’s contribution was $71,752 and $51,778 for years ended December 31, 2001 and 2000, respectively.
 
Note 17.    Related Party Transactions
 
The Corporation, through its Bank subsidiary has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families, and affiliated companies in which they are principal stockholders. Aggregate loan balances with related parties at December 31, 2001 and 2000, were $2,157,657 and $3,172,950, respectively. During the year ended December 31, 2001 and 2000, total principal additions were $93,122 and $1,226,348 and total principal payments were $1,108,415 and $272,354, respectively. Aggregate deposit balances with related parties at December 31, 2001 and 2000, were $1,379,905 and $984,258, respectively. All related party loans and deposits which have been made, in the opinion of management, are on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.
 
Note 18.    Restrictions on Dividends and Retained Earnings
 
At December 31, 2001, the Bank’s retained earnings available for the payment of dividends was $4,083,217. Accordingly, $11,370,171 of the Corporation’s equity in the net assets of the Bank was restricted at December 31, 2001.
 
In addition, dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.
 
Note 19.    Regulatory Capital Requirements
 
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines on the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted

44

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 19.    Regulatory Capital Requirements—(Continued)
 
assets (as defined). Under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the table.
 
As of December 31, 2001, the most recent notification from the Bank’s regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum capital ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s category.
 
The Corporation’s and Bank’s actual December 31, 2001 and 2000, capital amounts and ratios are also presented in the table:
 
                
Capital Adequacy Purposes
     
To Be Well Capitalized Under Prompt
Corrective Action Provisions
  
    
Actual Amount
   
Ratio
     
Actual Amount
   
Ratio
     
Actual Amount
   
Ratio
  
December 31, 2001
                                          
Total capital (to risk-weighted assets):
                                          
Northwest Bancorporation
   
$
17,095,198
   
12.16
%
   
$
11,247,896
   
³8
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
16,969,882
   
12.07
%
   
 
11,243,121
   
³8
%
   
$
14,053,901
   
³10
%
Tier 1 capital (to risk-weighted assets):
                                          
Northwest Bancorporation
   
 
15,162,147
   
10.78
%
   
 
5,623,948
   
³4
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
15,036,831
   
10.70
%
   
 
5,621,560
   
³4
%
   
 
8,432,341
   
³6
%
Tier 1 capital (to average assets):
                                          
Northwest Bancorporation
   
 
15,162,147
   
8.27
%
   
 
7,330,416
   
³4
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
15,036,831
   
8.21
%
   
 
7,327,431
   
³4
%
   
 
9,159,288
   
³5
%
December 31, 2000
                                          
Total capital (to risk-weighted assets):
                                          
Northwest Bancorporation
   
$
15,876,799
   
12.39
%
   
$
10,251,228
   
³8
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
15,651,040
   
12.22
%
   
 
10,248,765
   
³8
%
   
$
12,810,956
   
³10
%
Tier 1 capital (to risk-weighted assets):
                                          
Northwest Bancorporation
   
 
14,144,873
   
11.04
%
   
 
5,125,614
   
³4
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
13,919,499
   
10.87
%
   
 
5,124,382
   
³4
%
   
 
7,686,574
   
³6
%
Tier 1 capital (to average assets):
                                          
Northwest Bancorporation
   
 
14,144,873
   
8.45
%
   
 
6,698,503
   
³4
%
   
 
n/a
   
n/a
 
Inland Northwest Bank
   
 
13,919,499
   
8.34
%
   
 
6,679,159
   
³4
%
   
 
8,348,949
   
³5
%

45

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 20.    Earnings Per Share
 
The calculation of earnings per share and earnings per share assuming full dilution is as follows:
 
    
Year Ended December 31, 2001
    
Income (Numerator)
   
Shares (Denominator)
   
Per Share Amount
Basic EPS
                   
Income available to common stockholders
   
$
1,188,815
   
1,741,816
   
$
0.68
    
       
Effect of Dilutive Securities
                   
Stock options
          
881
       
           
      
Diluted EPS
                   
Income available to common stockholders
plus assumed conversions
   
$
1,188,815
   
1,742,697
   
$
0.68
    
  
  
    
Year Ended December 31, 2000
    
Income (Numerator)
   
Shares (Denominator)
   
Per Share Amount
Basic EPS
                   
Income available to common stockholders
   
$
799,185
   
1,732,271
   
$
0.46
    
       
Effect of Dilutive Securities
                   
Stock warrants
          
6,252
       
Stock options
          
4,264
       
           
      
Diluted EPS
                   
Income available to common stockholders
plus assumed conversions
   
$
799,185
   
1,742,787
   
$
0.46
    
  
  
 
The Bank’s stock is quoted only locally over the counter and traded on a limited basis. The average market price per share used in the determination of the dilutive effect of stock options and warrants was the average price of month end closing market values.
 
Note 21.    Fair Value of Financial Instruments
 
The estimated fair values of the Corporation’s financial instruments were as follows at December 31:
 
    
2001
   
2000
    
Carrying Amount
   
Estimated Fair Value
   
Carrying Amount
   
Estimated Fair Value
Financial Assets:
                          
Cash and due from banks
   
$
8,710,181
   
$
8,710,181
   
$
8,643,770
   
8,643,770
Federal funds sold
   
 
6,620,000
   
 
6,620,000
   
 
699,000
   
699,000
Securities available for sale
   
 
40,937,748
   
 
40,937,748
   
 
39,454,896
   
39,454,896
Securities held to maturity
   
 
225,000
   
 
234,718
   
 
225,000
   
227,824
Federal Home Loan Bank Stock
   
 
556,900
   
 
556,900
   
 
520,400
   
520,400
Loans and loans held for sale, net
   
 
129,533,627
   
 
129,911,558
   
 
119,071,346
   
118,062,554
Accrued interest receivable
   
 
1,096,975
   
 
1,096,975
   
 
1,336,382
   
1,336,382
Financial Liabilities:
                          
Borrowed funds
   
 
1,803,974
   
 
1,871,707
   
 
1,885,622
   
1,898,875
Deposits
   
 
152,176,973
   
 
153,204,745
   
 
138,886,129
   
139,208,249
Accrued interest payable
   
 
341,458
   
 
341,458
   
 
538,318
   
538,318

46

NORTHWEST BANCORPORATION, INC. AND SUBSIDIARY
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Note 21.    Fair Value of Financial Instruments—(Continued)
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
 
Cash and due from banks, and federal funds sold:
 
The carrying amount approximates fair value because of the short maturity of these investments.
 
Securities available for sale, securities held to maturity, and other investments:
 
The fair values of marketable securities are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
 
Loans receivable:
 
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate, consumer, credit card, and other. Each loan category is further segmented into fixed and adjustable rate interest terms. The fair values for fixed-rate loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values.
 
Deposits:
 
The fair value of demand deposits, savings accounts, NOW, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
 
Borrowed funds:
 
The fair values of the Bank’s long-term debt are estimated using discounted cash flow analyses based on the Bank’s current incremental borrowing rates for similar types of borrowing arrangements.
 
Accrued interest:
 
The carrying amounts of accrued interest approximate their fair values.
 
Off-balance-sheet instruments:
 
Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. The fair value of the fees at December 31, 2001 and 2000, were insignificant. See Note 10 for the notional amount of the commitments to extend credit.

47

 
Signatures
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Dated: March 29, 2002
NORTHWEST BANCORPORATION, INC.
By:
  
/s/    Randall L. Fewel        
   
Randall L. Fewel, President and
Chief Executive Officer
 
Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated.
 
Signature
     
Title
   
Date
/s/    RANDALL L. FEWEL        
Randall L. Fewel
     
Director and President
   
March 19, 2002
             
/s/    WILLIAM E. SHELBY        
William E. Shelby
     
Chairman and Director
   
March 19, 2002
             
/s/    DWIGHT B. ADEN        
Dwight B. Aden, Jr.
     
Director
   
March 19, 2002
             
/s/    JIMMIE T.G. COULSON
Jimmie T.G. Coulson
     
Director
   
March 19, 2002
             
Harlan Douglass
     
Director
   
March   , 2002
             
/s/    FREEMAN B. DUNCAN
Freeman B. Duncan
     
Director
   
March 19, 2002

48

 
Signature
     
Title
   
Date
/s/    DONALD A. ELLINGSEN, M.D.  
Donald A. Ellingsen, M.D.
     
Director
   
March 19, 2002
             
/s/    CLARK H. GEMMILL
Clark H. Gemmill
     
Director
   
March 19, 2002
             
/s/    BRYAN S. NORBY
Bryan S. Norby
     
Director
   
March 19, 2002
             
/s/    RICHARD H. PETERSON
Richard H. Peterson
     
Director
   
March 19, 2002
             
Hubert F. Randall
     
Director
   
March  , 2002
             
/s/    PHILLIP L. SANDBERG
Phillip L. Sandberg
     
Director
   
March 19, 2002
             
/s/    FREDERICK M. SCHUNTER
Frederick M. Schunter
     
Director
   
March 19, 2002
             
James R. Walker
     
Director
   
March  , 2002
             
*By:    /s/    CHRISTOPHER C. JUREY
Christopher C. Jurey
Attorney-in-Fact
            

49

 
Part III
 
Item 1.    Index to Exhibits
 
Exhibit
No.
   
Description
3.1.1  
   
Articles of Incorporation****
3.1.2  
   
Amendment to Articles of Incorporation****
3.1.3  
   
Amendment to Articles of Incorporation****
3.2     
   
Bylaws****
4        
   
See Exhibit Nos. 3.1.1 through 3.2 above****
10.1.1  
   
Lease Agreement Dated 08/01/89 and Amendment dated 07/13/95—The Paulsen Center (Main Branch)*
10.1.2  
   
Lease—15111 East Sprague Avenue (Valley Branch)*
10.1.3  
   
Lease—12825-14th Avenue (Airway Heights Branch)*
10.1.4  
   
Lease—East 210 North Foothills Drive (North Foothills Drive Branch)*
10.1.5  
   
Lease—805 East Polston Ave., Post Falls, Idaho (Post Falls Branch)*
10.1.6  
   
Ground Lease dated 09/24/96* and Amendment dated August 12, 1997 for South Hill Branch
10.1.7  
   
Lease—3321 W. Indian Trail Road (Indian Trail Branch)*
10.1.9  
   
Lease—622 Sherman Avenue, Coeur d’Alene, Idaho (Sherman Avenue Branch)****
10.2.1  
   
F.M. Schunter Employment Agreement dated 01/01/94*
10.2.2  
   
Unfunded Supplemental Executive Retirement Plan for F.M. Schunter*
10.2.21
   
F.M. Schunter Retirement Agreement, Covenant Not to Compete and Release 6/29/01**
10.2.3  
   
Non-Qualified Stock Option Plan*, as amended December 21, 1999*****
10.2.4  
   
Christopher C. Jurey Employment Agreement dated 01/01/94*
10.2.6  
   
Randall L. Fewel Employment Agreement dated 03/14/94*
10.2.7  
   
Ronald M. Bower Employment Agreement dated 01/17/2000******
10.2.8  
   
Holly A. Austin Employment Agreement dated 01/01/2001******
23.1     
   
Consent of Accountant**
 
  *
 
Previously filed (in paper format) as an Exhibit to the Company’s Form 1-A Offering Statement Under Regulation A (Registration No. 24-3714) and incorporated herein by reference.
 
 
**
 
Only Exhibits being filed (in electronic format) with this Form 10-KSB.
 
      ***
 
Exhibit numbers determined by reference to Regulation S-T Exhibit numbering requirements, rather than Exhibit numbering requirements of Part III of Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III of Form 10-SB. Included Exhibits respond to Exhibits required under Part III of Form 10-SB and/or Part III of Form 1-A as cross-referred to in Part III of Form 10-SB, specifically those documents required to be filed as Exhibit nos. 2, 3, 5, 6 and 7 in Part III of Form 1-A.
 
    ****
 
Previously filed in electronic format as an Exhibit to the Company’s Form 10-SB (Registration No. 0-24151) on April 30, 1998, and incorporated herein by reference.
 
  *****
 
Previously filed in electronic format as an Exhibit to the Company’s Form 10-KSB on March 30, 2000, and incorporated herein by reference.
 
******
 
Previously filed in electronic format as an Exhibit to the Company’s Form 10-KSB on March 30, 2001, and incorporated herein by reference.

50