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2016 ANNUAL REPORT

WE BUILD POTENTIAL. WE BUILD RETURNS. WE BUILD.


INSIDE THIS REPORT: BUILDING THE FUTURE, PAGES 1– 4. RE ACHING NEW HEIGHTS, PAGES 5 –10. INVES TING IN OPPORTUNIT Y, PAGES 11 –16. FINANCIAL HIGHLIGHTS, PAGES 17–18. CORPOR ATE LE ADERSHIP, PAGE 19. LOC ATIONS & CORPOR ATE INFORMATION, IBC.


2016 ANNUAL REPORT

W H AT W E BU I L D B E G I N S W I T H C .

CUSTOMER. COMPETENCE. CONFIDENCE. COMPETE. COMMUNITY.


BU I L DI N G THE FUTUR E.

Building. It’s a word that represents an interesting contrast. In one immediate sense, it is a structure, a base of operations, a physical space. And this year has seen us make strides in that area with our new headquarters, our new location in the Tri-Cities, and our re-imagining of what a physical banking location can be—all across the board. But embedded in that is also the more active sense of what “building” means: creation. We are building a new model of what banking means, even as our customers and our markets are building their dreams. Whereas banking was once tied to locations and expected transactions, today’s most important location is: wherever the customer is. Our customers want access to mobile tools, advice and support wherever they are, however they choose. And we’re giving it to them. But it’s not simply about relying on customer expectations to guide what we do. It’s anticipating customer expectations, and creating a model that empowers both INB and our customers to move forward into a future of profit and success.

1

“We are building a company that is not physically bound... because our customers, our society, and our opportunities are not physically bound.” – Russell Lee, CEO


2016 ANNUAL REPORT

In the past year, we have notable accomplishments borne of our commitment to building a future. We have acquired Bank of Fairfield and completed a successful first year of operations. We have

65.7%

Our top line vision has enabled us to do this.

moved into the Tri-Cities market and opened up the opportunities it presents. We have enhanced our physical infrastructure, our back-end infrastructure, our technology, and our training. Again, all focused on the top line vision of profit,

2016 Net Income: $ 5.07 Million, ď ˘ Up 65.7% over 2015

success and stability for our brand. Top line vision translates into bottom line results. Even with these investments in the future, our financial performance has been solid; in fact, we have grown overall profits by $2 million in the past year. That speaks to a balance of profit,

30%

performance, and potential. We firmly believe this: it is better to enact change than to react to change. You control your destiny when you enact change. It is exactly why we have

2016 Revenues: $ 29.7 Million, ď ˘ Up 30% over 2015

embraced the power of technology to not only transform the lives of our customers, but our own communication and efficiency.

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8.5% 2016 Shareholders’ Equity: $ 66.1 Million,  Up 8.5% over 2015

“We are showing that we can lead and be innovative, being problem-solvers rather than transactiontakers. And our financial results are proving that our innovation is fueling growth.” – Russell Lee, CEO

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2016 ANNUAL REPORT

We have focused our brand, distilling the essence of who we are: a true community bank. With consolidation, the ends of the banking spectrum are disappearing (as is the case with small local banks) or magnifying (as is the case with large multinational banks). In between, there is a sweet spot for INB: a bank that values community and competency equally, being nimble enough to provide a full range of offerings without abandoning focus. We are taking our model into new markets and expanding it in new directions, as we see opportunity for growth and strength. This is a model focused on today, yes. But also a model built on tomorrow, and where we want to be in the longterm. Our investments are paying off in the short-term...and more importantly, as the Inland Northwest is poised for what I believe to be a period of sustained growth, our investments will pay off equally in the long-term. Our performance is proving the power of our vision. We are building. And we will continue. ď ?

Rus sell Lee

CEO and President

4


R E AC H I N G N E W H E IG H T S .

Best Business Bank Gold Award Catalyst Magazine Best Credit Card Processing Gold Award Catalyst Magazine

WE GO ABOVE. WE GO BEYOND. WE GO. 5

ď„


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2016 ANNUAL REPORT


In 2016, we implemented in an internal set of

5 s C

values, or what we refer to as the 5 Cs, that help to drive our culture and celebrate what makes us unique in the market place.

At INB, everyone owns the CUSTOMER experience. It is our goal to improve the level of COMPETENCE for every employee, elevating their CONFIDENCE to deliver at a high level. Every day, we COMPETE to win trust and better serve our COMMUNITY. To measure and support our core values, we conducted an internal survey to help guide us as we implement new internal communication channels, upgrade new technologies, and celebrate our wins as an organization. We have implemented a revised employee awards program. We will host several all-employee meetings. We are creating a customer experience enhancement class. And we are launching an intranet to easily share information internally. Yes, these are new, transforming initiatives designed at serving a more modular customer who wants access and tools primarily...but also wants advisors to help offer guidance when needed. It’s how we are reaching new heights, by helping our customers reach new heights.

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Rick Hastings and Austin Dickey represent the pioneering spirit of the Inland Northwest finding

2016 ANNUAL REPORT

INB customers and Liberty Ciderworks founders

success outside our borders. Their Stonewall Cider recently received “Best of Show” at the world’s largest cider competition. 

Our future, and our ultimate performance, hinge on innovative thinkers who offer innovative solutions. Reaching new heights means technological and operational enhancements. It is imperative that we continue to invest in strong talent and improved technologies to help with all of our operational efficiencies. We have added Debbie Arbuckle as the Director of Deposit Operations. She has been instrumental in reforming the department to streamline efficiencies, manage policies, and implement new systems. Another key role is the addition of Eric Landon, INB’s first Chief

Technology Officer. He too has

Typically, crabapple trees are

restructured the IT department with

planted in Washington State solely

a focus on security, communication,

to pollinate orchards; the fruits

and software installations meant to improve efficiencies.

themselves are discarded. Liberty Ciderworks looked into this practice and saw opportunity, using them as an adjunct in their varietals.

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We have also enhanced and expanded our presence and abilities in our key North Idaho markets. We hired a new Commercial Banking Team Leader, Rob Parkinson, to help lead INB efforts in North Idaho. A Coeur d’Alene resident, Rob joined INB from another prominent local bank. Shortly thereafter, he built a strong team of Commercial and Personal Line bankers: Laszlo Suto, Ben Marshall, and Allison Johnson. They joined Kelly Hagen, Manager in Spirit Lake, Jessica Chavolla, Manager in Coeur d’Alene, and Steve Speer, Manager in Hayden. In addition, we have strengthened and expanded our mortgage and construction departments. In 2016, Doug Beaudoin, long-time INB Mortgage and Construction Lending Manager, retired. Doug built a strong reputation in the market for construction lending and working closely with developers and custom home builders. His ability to grow the department led to the addition of two key roles following his retirement: INB hired Aaron Fielder as the Construction Lending Manager, and Rob Helgesen as the Mortgage Manager. Between them, Aaron and Rob brought extensive experience in commercial banking and mortgage management. Aaron and Rob also added seasoned Home Loan Consultant Rudy Duenas. With new staff, new perspectives and new opportunities, our growth across all locations and departments is poised to continue for years to come.

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Q.

Q.

How would you rate your overall experience

How would you rate the professionalism

with INB?

of your INB banker?

A.

A.

4.85 / 5*

4.95 / 5*

* Results from INB’s 2016 Customer Satisfaction Survey.


2016 ANNUAL REPORT

“(We empower) the entrepreneur who is excited to build something of significance.” - Nick Smoot,

Innovation Collective

  Nick Smoot’s Innovation Collective (above and right) is a coworking hub bringing startup innovation to downtown Coeur d’Alene. XCraft’s unique drones (below) offer efficient forward flight—the only drone design in the world to do so.

REATE

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I N V ESTI NG I N OPP ORT U N I T Y.

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2016 ANNUAL REPORT

WE CREATE DREAMS. WE CREATE GROWTH. WE CREATE.


GROW 13


2 0 1 6 A N2 0 N 1U 6A LA NR NE PU O A LR TR E P O R T

This year, we have invested in real estate, tech innovation, medicine, health and agriculture. All by simply investing in the Tri-Cities. We are writing a story of growth, innovation and opportunity in the Tri-Cities market. And in many ways, that story began 41 years ago when Nancy Boettcher began her career as the first woman to provide ag lending services in Yakima and the Tri-Cities. After four decades of working at several regional and national banks, she still felt there had to be a better way to tap the potential of the market. And so she and Mark Gray began talking to INB. The connection, and the understanding, were immediate. In INB, Nancy and Mark saw an organization that understood the future. “I knew right away this was a different environment,” Nancy says. “From the top down, everyone has a vision. Everyone takes ownership.” At the same time, INB saw the opportunity to implement that vision through Nancy, Mark and their team. The Tri-Cities is one of the

(left to right) Mark Gray, Nancy Boettcher, Stacy Dumas, and Terri LeBlanc at INB Tri-Cities are helping customers

fastest-growing regions in the United States, with Washington’s highest

dream bigger dreams.

job growth rate for 2016. In the past year, it’s seen double digit growth

in the residential real estate market. And it’s one of the ten best destinations for STEM jobs according to Forbes magazine...thanks in no small part to an entrepreneurial mindset and research encompassing categories such as agriculture, manufacturing, health/medical equipment, and technology. “INB understands investment isn’t about location anymore, the old way of banking,” says Nancy. “It’s about putting money into the community and getting it to work.”

14 14


“We are succeeding, even as we keep planting the seeds for future success: we are looking for growth opportunities. And that will always be part of our story.” - Russell Lee, CEO

This year, INB was awarded “Best Business Bank” and “Best Credit Card Processor” in the Catalyst Business Magazine Reader’s Poll. In addition, INB was also awarded Silver for the category of “Best Bank” in the Spokane/Coeur d’Alene Living Magazine Reader’s Poll, and was also included on the national list of “The Top 200 Healthiest U.S. Banks.” These results showed the strength of both our brand and our performance in the marketplace. It demonstrates that our customers are responding to our unique differentiators...and equally shows that we are delivering on our promises. And while these awards are further evidence of our success, we don’t look at them as short-term accomplishments. We look at them as long-term investments.

Q. How would you rate the time it took to open your account with INB? A.

4.88 / 5*

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** Results INB’s 2016 CustomerSatisfaction SatisfactionSurvey. Survey. Results from of INB’s 2016 Customer


16

BUILD

2016 ANNUAL REPORT


F I NA NC I A L H IG H L IG H T S.

5-Year Summary (dollars in thousands, except per share data)

2016

2015

2014

2013

2012

For the year Net income

$

5,071

$

3,060

$

3,260

$

2,599

$

687

Net income

$

0.78

$

0.61

$

0.78

$

0.81

$

0.22

Tangible book value

$

9.13

$

8.34

$

9.31

$

8.49

$

8.74

Per Share

Shares outstanding

6,419,861

6,368,798

4,157,632

4,117,673

3,089,957

At December 31 Loans, net of reserves

$

490,816

$

477,336

$

336,421

$

296,938

$

266,078

Deposits

$

548,421

$

525,884

$

358,680

$

320,624

$

333,104

Assets

$

636,528

$

610,801

$

421,807

$

394,203

$

398,869

Shareholders’ equity

$

66,055

$

60,875

$

38,713

$

34,957

$

37,916

Financial Ratios Return on average assets

0.82%

0.63%

0.80%

0.66%

0.18%

Return on average equity

8.00%

6.39%

8.91%

6.87%

1.86%

Loans

2.8%

41.9%

13.3%

11.6%

2.9%

Deposits

4.3%

46.6%

11.9%

-3.7%

0.3%

Assets

4.2%

44.8%

7.0%

-1.2%

3.4%

Shareholders’ equity

8.5%

57.2%

10.7%

-7.8%

4.2%

Growth Ratios

17


Gross Loans

2016

$

2015

$

2014

$

2013

$

2012 $

421,807

398,869

2012

$

$

2014 2013

350

$

2015

394,203

$

250

610,801

2016

450

$

550

$

650

$ $

100

$

$

200

498,307

484,491

343,111

303,395

$

271,718

$

300

$

400

$

500

$

636,528

2016 ANNUAL REPORT

Total Assets

Deposits

Core Deposits

2016

$

2015

$ $

2014 2013

$

2012 $

525,885

358,680

$

333,104

350

$

400

$

450

$

500

$

550

Shareholders’ Equity

2015

2013

34,957 37,916

2012

$

$

30

$

40

$

50

$

60

$

70

Net Income $

2015

$

$

2012 $

0

5,071

3,060 $

2014

$

100

$

$

425,459

407,018

275,402

255,817 253,765

200

$

300

$

400

$

500

29,677

$ $

22,821

19,020

$

2013

$

2012

$

19,817 19,766

18

$

$

20

$

22

$

24

$

26

$

28

$

30

Fully Diluted Earnings (eps)

2016

2013

$

2014

$

20

2012

2015

38,713

$

$

$

60,876

$

2014

10

$

2013

2016

$

$

2015

$

66,055

0

$

Revenues

2016

$

2016

2014

320,624 $

300

548,421

2016

$

2015

3,260

$

2013

2,599

687 3

$

6

0.78 $

2012 $

0.61 $

2014

0.78

$

$

0

0.81

0.22 $

0.50

1.00

$

18


CORPOR ATE LEADERSHIP BOARD OF DIRECTORS

DIRECTORS EMERITI

SENIOR MANAGEMENT

Dwight B. Aden, Jr. Insurance Broker (Retired) Jones & Mitchell

Jimmie T.G. Coulson (deceased) Director 1989 — 2008

Chad R. Burchard Executive Vice President & Chief Banking Officer

Anthony D. Bonanzino Chairman Northwest Bancorporation, Inc. INB

Robert J. Davidson (deceased) Director 1989 — 1996

Mark V. Dresback Executive Vice President & Chief Credit Officer

Freeman Duncan Director 1996 — 2015

David F. Hockett Senior Vice President & Chief Risk Officer

Principal Member Century Archives Northwest, LLC Katie Brodie Northern Idaho Field Representative Special Assistant to Governor C.L “Butch” Otter of Idaho

Clark H. Gemmill Director 1989 — 2016

Harlan D. Douglass President Harlan D. Douglass, Inc.

William A. Griffith (deceased) Director 1989 — 1996

Randall L. Fewel President & CEO (Retired) Northwest Bancorporation, Inc. INB

Richard H. Peterson Director 1989 — 2009

Russell A. Lee President & CEO Northwest Bancorporation, Inc. INB Bryan S. Norby Financial Analyst Yanke Machine Shop Ry Timber Company YMC, Inc. Frank A. Reppenhagen Partner CBC Management Partners, LLC Byron J. Wernz President & CEO (Retired) Fairfield Financial Holding Corp. Bank of Fairfield Jennifer P. West Reputation Management Consultant

19

Donald A Ellingsen, M.D. Director 1996 — 2011

Edward E. Ralph Director 1989 — 1997 Hubert F. Randall (deceased) Director 1989 — 2003 Phillip L. Sandberg Director 1989 — 2007 Frederick M. Schunter Director 1989 — 2011 President & CEO 1989 — 2001 Robert P. Shanewise (deceased) Director 1989  — 1996 William E. Shelby Director 1989 — 2015 J. Rod Walker Director 1989 — 2007

Eric J. Landon Senior Vice President & Chief Technology Officer Russell A. Lee President & CEO Northwest Bancorporation, Inc. INB Jason W. Miller Senior Vice President & Director of Marketing and Culture Jennifer L. Nelson Senior Vice President & Director of Human Resources Holly A. Poquette Executive Vice President & Chief Financial Officer


2 016 F I N A N C I A L R E P OR T


R EPORT OF INDEPENDENT AU DITOR S

The Board of Directors Northwest Bancorporation, Inc. and Subsidiary

Report on Financial Statements We have audited the accompanying consolidated financial statements of Northwest Bancorporation, Inc. and subsidiary, Inland Northwest Bank (Company), which comprise the consolidated statements of financial condition as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northwest Bancorporation, Inc. and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Spokane, Washington February 21, 2017

22


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Financial Condition

Assets: Cash and due from banks Interest bearing deposits Time deposits held for investment Securities available for sale, at fair value Federal Home Loan Bank stock, at cost Loans receivable, net of allowance for loan losses of $6,263,431 and $6,024,008 Loans held for sale Premises and equipment, net Bank-owned life insurance Accrued interest receivable Goodwill Core deposit intangible, net Foreclosed real estate, net Other assets TOTAL ASSETS Liabilities: Deposits Accrued interest payable Borrowed funds Other liabilities Total liabilities

$

$ $

Shareholders’ Equity: Common stock, no par value, authorized 30,000,000 shares; issued and outstanding 6,419,861 and 6,368,798 shares Accumulated income Accumulated other comprehensive income Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

See accompanying notes.

23

2016

December 31,

22,182,520 53,259,438 4,640,000 25,328,057 1,033,300 490,815,512 3,823,665 14,061,448 7,054,335 2,642,293 6,206,336 1,261,527 745,127 3,474,513 636,528,071 548,420,858 150,600 18,567,047 3,334,408 570,472,913

52,733,369 13,077,733 244,056 66,055,158 636,528,071

$

$ $

$

2015 21,253,288 24,781,431 14,946,000 34,241,856 1,040,800 477,335,599 1,971,275 14,079,827 6,923,517 2,705,847 6,206,336 1,493,451 308,250 3,513,441 610,800,918 525,884,475 131,430 19,946,914 3,962,729 549,925,548

52,293,570 8,006,936 574,864 60,875,370 610,800,918


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Income

Year Ended December 31, 2016 2015

Interest and dividend income: Loans receivable, including fees Investment securities Other Total interest and dividend income

$

Interest expense: Deposits Borrowed funds Total interest expense

Net interest income Provision for loan losses Net interest income after provision for loan losses

Noninterest income: Service charges on deposits Gains from sale of loans, net Other noninterest income Total noninterest income

Noninterest expense: Salaries and employee benefits Occupancy and equipment Depreciation and amortization Advertising and promotion FDIC assessments Gain on foreclosed real estate, net Acquisition-related costs Other noninterest expense Total noninterest expense

Income before income taxes

26,045,939 941,178 278,158 27,265,275 1,570,072 747,481 2,317,553 24,947,722 363,000 24,584,722   852,286 1,447,396 2,429,423 4,729,105 11,619,741 1,661,327 1,214,549 917,298 288,260 (54,023) 453,471 5,729,545 21,830,168   7,483,659

$

19,792,591 1,105,348 92,902 20,990,841 1,421,337 740,903 2,162,240 18,828,601 220,000 18,608,601   897,372 1,259,176 1,835,404 3,991,952 9,379,708 1,410,739 1,130,209 648,944 265,921 (141,887) 1,014,439 4,392,693 18,100,766   4,499,787

Income tax expense NET INCOME

$

2,412,862 5,070,797

$

1,439,902 3,059,885

Earnings per common share — basic Earnings per common share — diluted Weighted average common shares outstanding — basic Weighted average common shares outstanding — diluted

$ $

0.79 0.78 6,382,048 6,511,253

$ $

0.62 0.61 4,910,233 4,999,185

See accompanying notes.

24


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Comprehensive Income

Year Ended December 31, 2016 2015 Net income

$

5,070,797

$

3,059,885

Other comprehensive loss: Unrealized holding loss on securities available for sale arising during the year, net of tax of $(170,416) and $(118,998) Other comprehensive loss COMPREHENSIVE INCOME

$

(330,808) (330,808) 4,739,989

$

(230,997) (230,997) 2,828,888

See accompanying notes.

25


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Changes in Shareholders’ Equity

Common Stock Shares Amount Balance, December 31, 2014 Net income Restricted stock vested Stock issued to directors Issuance of common stock, net of issuance costs of $1,053,861 Equity-based compensation expense Tax effect of vested stock awards Other comprehensive loss, net of tax Balance, December 31, 2015 Net income Restricted stock vested Stock issued to directors Equity-based compensation expense Other comprehensive loss, net of tax Balance, December 31, 2016

4,157,632

$ 32,960,356

— 45,750 3,254

— — 31,922

2,162,162 — — — 6,368,798

18,946,138 290,330 64,824 — 52,293,570

— 44,748 6,315 — — 6,419,861

— — 61,461 378,338 — $ 52,733,369

Accumulated Other Comprehensive Income

Accumulated Income $

4,947,051

805,861

$ 38,713,268

3,059,885 — —

— — —

3,059,885 — 31,922

— — — — 8,006,936

— — — (230,997) 574,864

18,946,138 290,330 64,824 (230,997) 60,875,370

5,070,797 — — — — $ 13,077,733

$

Total

$

— — — — (330,808) 244,056

5,070,797 — 61,461 378,338 (330,808) $ 66,055,158

See accompanying notes.

26


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Cash Flows

Year Ended December 31, 2016 2015 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization of securities premiums and discounts, net Accretion of net deferred loan fees Accretion of discounts on acquired loans Provision for loan losses Origination of loans held for sale Proceeds from sales of loans held for sale Gain on sale of loans held for sale, net Depreciation and amortization Loss on disposal of premises and equipment Impairment on property held for sale Amortization of core deposit intangible Gain on sale of foreclosed real estate, net Increase in cash surrender value of bank-owned life insurance Deferred income tax expense (benefit) Equity-based compensation expense Tax effect of equity-based compensation Issuance of common stock under directors’ compensation plan Change in assets and liabilities: Accrued interest receivable Other assets Accrued interest payable Other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Time deposits held for investment: Purchases Proceeds from maturities and calls Securities available for sale: Purchases Proceeds from maturities, calls and principal payments Purchases of FHLB stock Proceeds from redemption of FHLB stock Net increase in loans Purchases of premises and equipment Proceeds from sale of premises and equipment Proceeds from sale of foreclosed real estate Cash resulting from acquisition, net of cash consideration paid Net cash provided by (used by) investing activities

See accompanying notes.

27

$

5,070,797

$

3,059,885

431,144 (999,892) (1,130,390) 363,000 (56,809,251) 56,404,257 (1,447,396) 1,214,549 5,450 — 231,924 (49,120) (130,818) 648,508 399,761 — 61,461

534,268 (461,844) (164,568) 220,000 (46,249,714) 46,277,615 (1,259,176) 1,130,209 34,671 140,000 50,395 (141,805) (122,270) (61,128) 290,330 (64,824) 31,922

63,554 (460,587) 19,170 (608,188) 3,277,933

204,976 504,173 (8,343) 160,210 4,104,982

(3,185,000) 13,491,000

(490,000) 2,125,000

(3,940,991) 11,922,422 (48,500) 56,000 (12,292,718) (1,207,710) 6,090 192,330 — 4,992,923

— 9,920,731 (386,500) 947,200 (26,316,142) (404,554) 437,807 991,805 (18,863,162) (32,037,815)


NORTH W EST BA NCOR POR ATION, INC . Consolidated Statements of Cash Flows

Year Ended December 31, 2016 2015 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Net decrease in federal funds purchased Repayment of borrowed funds Proceeds from issuance of common stock, net Tax effect of equity-based compensation Net cash provided by financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS

22,536,383 — (1,400,000) — — 21,136,383 29,407,239

Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

$

46,034,719 75,441,958

$

17,782,215 46,034,719

$

2,298,383 1,898,313

$

2,155,024 1,146,967

$

SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Interest Income taxes Noncash investing and financing activities: Decrease in fair value of securities available for sale, net Acquisition of real estate in settlement of loans Accretion of discount on subordinated debentures Transfer of fixed assets to property held for sale Fair value of assets acquired in acquisition Fair value of liabilities assumed in acquisition

(330,808) 580,087 20,133 — — —

$

45,454,825 (6,880,450) (1,400,000) 18,946,138 64,824 56,185,337 28,252,504

(230,997) — 20,133 1,128,555 150,255,738 129,505,738

See accompanying notes.

28


Note 1 – Summary of Significant Accounting Policies Basis of presentation and consolidation: The consolidated financial statements include the accounts of Northwest Bancorporation, Inc. (the “Company”), its wholly-owned subsidiary, Inland Northwest Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Northwest Property LLC. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Nature of business: The Bank is a state-chartered commercial bank under the laws of the state of Washington, and provides banking services primarily in eastern Washington and northern Idaho. The Bank is subject to competition from other financial institutions, as well as nonfinancial intermediaries. The Company and the Bank are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. Segment reporting: The Company has not established any independent business activity apart from acting as the parent company of the Bank. The Company and the Bank are managed as a single entity and not by departments or lines of business. Based on management’s analysis, no department or line of business meets the criteria established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, for reporting of selected information about operating segments. Business combinations: Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at estimated fair value at the date of acquisition. Any difference in purchase consideration over the fair value of assets acquired and liabilities assumed results in recognition of goodwill should purchase consideration exceed net estimated fair values, or a bargain purchase gain should estimated fair values exceed purchase consideration. Expenses incurred in connection with a business combination are expensed as incurred. Changes in deferred tax asset valuation allowances and acquired tax uncertainties after the measurement period are recognized in net income. On October 16, 2015, the Company acquired Fairfield Financial Holdings Corp., and its wholly-owned subsidiary Bank of Fairfield, pursuant to the terms and conditions of the Agreement and Plan of Merger, dated June 23, 2015. This acquisition was consistent with the Company’s strategic plan to grow through acquisitions. 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, the valuation of foreclosed real estate, goodwill and other intangibles, deferred taxes, stock options and awards, and fair value measurements. Cash and cash equivalents: For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated statements of financial condition caption “cash and due from banks” and “interest bearing deposits,” which have an original maturity of three months or less. The Bank is required to maintain a reserve balance with the Federal Reserve Bank, or maintain such reserve in cash on hand. Cash balances on hand were sufficient to meet the required reserves at December 31, 2016 and 2015. Securities available for sale: For securities designated as available for sale, unrealized holding gains and losses, net of tax, are reported as a net amount in accumulated other comprehensive income. Gains and losses on the sale of securities available for sale are determined using the specific-identification method.

29


Premiums and discounts are recognized in interest income using the methodology that is most appropriate for each type of security. For agency, municipal and corporate bonds, the constant yield method is used. For collateralized mortgage obligations (“CMOs”), the amortization/accretion is a two-step process. The first step decreases the bond’s premium or discount with respect to the percentage of the current principal paydown. The second step is based on a calculated final amortization/accretion date. These dates are reviewed monthly using constant prepayment rates (“CPRs”) and take into consideration call features and end-ofpayment dates as they relate to the current period. For mortgage-backed securities and SBA participation certificates, the amortization/accretion is a two-step process. The first step is consistent with the methodology used for CMOs. The second step is computed using the rolling three-month historical CPR and the periodic discounted cash flow yield. Prepayment trends are monitored to determine if a change is needed. Federal Home Loan Bank stock: As a condition of membership in the Federal Home Loan Bank of Des Moines (“FHLB”), the Bank is required to purchase and hold a certain amount of FHLB stock, which is based in part upon the outstanding principal balance of advances from the FHLB and is calculated in accordance with the Capital Plan of the FHLB. FHLB stock has a par value of $100 per share, is carried at cost, and is subject to impairment testing. Other-than-temporary impairment: Management reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”), taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of the amortized cost basis of the investment, which may be at maturity, and other factors. The evaluation includes a consideration of the risk profile specific to each class of security; for example, the contractual terms of U.S. government agency securities do not permit the issuer to settle the securities at a price less than par. The Bank’s securities portfolio does not include any private label mortgage backed securities or investments in trust preferred securities. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. If there is an indication of additional credit losses, the security is re-evaluated in accordance with the procedures described above. 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, if any, 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: Loans are stated at the amount of unpaid principal outstanding, net of any discounts on acquired loans and net of any deferred fees or costs on originated loans. All net deferred fees and costs are recognized over the estimated life of the loan, with adjustments for prepayments, as yield adjustments. Interest on loans is calculated by the simple-interest method on daily balances of the principal amount outstanding. All impaired loans acquired and aggregated into pools are grouped based on common risk characteristics such as risk rating, underlying collateral, type of interest rate (fixed, variable, or adjustable), types of amortization, and other similar factors. A pool is then accounted for as a single asset with a single interest rate, cumulative loss rate, and cash flow expectation. A loan will be removed from the pool at its carrying value if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan. If an individual loan is paid off, it is removed from a pool of loans and the difference between its relative carrying amount and the cash received is recognized in the statement of income immediately as interest income on loans. If a loan is sold, it is removed from a pool of loans and the difference between its relative carrying amount and the cash received is recognized in income immediately as noninterest income. If collateral or other assets are received in satisfaction of a loan, any excess of carrying value over the fair value of the collateral or other assets received is recognized as a charge-off within the respective pool of loans. The removal of an individual loan would not, in and of itself, affect the effective yield used to recognize the accretable yield on the remaining pool. Loans originally placed into a pool are not reported as past due or nonaccrual, or accounted for as a troubled debt restructuring, as the pool is the unit of accounting. Rather, the performance and underlying characteristics related to the loans within a pool are considered in an ongoing assessment and

30


estimates of future cash flows. If, at acquisition, loans are collateral dependent and acquired primarily for the rewards of ownership of the underlying collateral, or if cash flows expected to be collected cannot be reasonably estimated, the accrual of income is inappropriate. Such loans are considered for placement into nonperforming (nonaccrual) loan pools at the time of acquisition. Aggregate expected cash flows are estimated for each pool. The cash flows expected to be received over the life of the pool are estimated by management with the assistance of a third party. These cash flows are input into a loan accounting model which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity, recovery lags, estimated extensions, and prepayment speed assumptions are periodically reassessed and input into the loan accounting model to update expectations of future cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows. The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the non-accretable difference. The non-accretable difference represents management’s estimate of the credit losses expected to occur and is considered in determining the fair value of the loan pools at the acquisition date. Subsequent to the acquisition date, any increase in expected cash flows to be received over those previously projected is adjusted through an increase to the accretable yield on a prospective basis. Any subsequent decrease in expected cash flows over those previously projected that is attributed to credit deterioration is recognized as impairment of the pool balance by recording a provision for loan losses and a related increase to the allowance for loan losses. All acquired non-impaired loans are individually recorded at fair value at the time of acquisition. The fair value representing an adjustment to a loan’s outstanding principal balance is accreted or amortized over the life of the related loan as a yield adjustment. Any previously recognized allowance for loan losses and unearned fees or discounts are not carried over and recognized at the date of acquisition. The balance of the loan is then evaluated periodically pursuant to the Company’s allowance for loan losses accounting policy and any adjustment required for credit risk is recorded within the allowance for loan losses. Originated loans or acquired non-impaired loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying value of impaired loans is based on the present value of expected future cash flows (discounted at each loan’s effective interest rate) or, for collateral dependent loans, at fair value of the collateral less estimated selling costs. If the measurement of each impaired loan’s value is less than the recorded investment in the loan, impairment is recognized and the carrying value of the loan is adjusted to fair value through the allowance for loan losses. The impairment is either recognized as a specific component provided for in the allowance for loan losses or through charging off the impaired portion of the loan. The accrual of interest on impaired loans is discontinued when the loan is 90 days past due or when, in management’s opinion, the borrower may be unable to make payments as they become due. When the accrual of interest is discontinued, all unpaid accrued interest is reversed. Payments received during the time a loan is on nonaccrual status are applied to principal. Interest income is not recognized until the loan is returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured as evidenced by agreed upon performance for a period of not less than six months. A troubled debt restructuring is a formal restructuring of a loan in which the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrower. The concessions may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. Troubled debt restructurings are considered to be impaired and are subject to the Bank’s impaired loan accounting policy. Allowance for loan losses: The allowance for loan losses is maintained at a level management believes is adequate to provide for probable loan losses as of the date of the statement of financial condition. The allowance for loan losses is based upon an ongoing review of the originated and acquired non-impaired loan portfolio, which includes consideration of actual loss experience, changes in the size and character of the portfolio, identification of individual problem loan situations which may affect a borrower’s ability to repay, and evaluation of the prevailing and anticipated economic conditions. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revision of the estimate in future periods.

31


The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio. The Bank’s principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators. The Bank’s primary regulators regularly conduct reviews of the allowance for loan losses as an integral part of their examination process. Should the regulators determine that the allowance for loan losses is not, in their opinion, adequate, the Bank may be required to recognize additional provision for loan losses. In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements and standby letters of credit. Such financial instruments are recorded when they are funded. Transfers of financial assets: Transfers of entire financial assets, or participating interest in entire financial assets, are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Foreclosed real estate: 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, less costs to sell, which establishes a new carrying value. 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 declines in estimated fair value, and the corresponding expense is netted with gains on sales of foreclosed real estate and included in the consolidated statements of income under the caption “Gain on foreclosed real estate, net.” Any improvements that increase the sales value of the property are capitalized. Premises and equipment: Buildings, furniture and equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization over estimated useful lives or the related lease terms of the assets, which range from 3 to 39 years. Land is carried at cost. Depreciation and amortization expense is calculated using the straight-line method for financial statement purposes. Normal costs of maintenance and repairs are charged to expense as incurred. Any premises and equipment held for sale is recorded at the lower of depreciated cost or fair value and is included in “other assets” on the consolidated statements of financial condition. Bank-owned life insurance: The carrying amount of bank-owned life insurance approximates its fair value. Fair value of bank-owned life insurance is estimated using the cash surrender value, net of surrender charges. Goodwill and intangibles: Net assets of businesses acquired in purchase transactions are recorded at their fair value on the date of acquisition. Identifiable intangibles consist of core deposit intangible assets. Identifiable intangibles with definite lives are amortized over the 10-year period benefited. Goodwill, which represents the excess of the fair value of net assets acquired in a business combination and purchase consideration, is not amortized but is reviewed for potential impairment on an annual basis, or more frequently if events or circumstances indicate a potential impairment exists. A goodwill or identifiable intangible asset impairment loss is recognized to the extent that the carrying amount of goodwill or identifiable intangible assets exceeds its implied fair value. During the years ended December 31, 2016 and 2015, the Company recorded no impairment charges associated with its goodwill or core deposit intangible. Valuation of long-lived assets: The Company, using its best estimates based on reasonable and supportable assumptions and projections, reviews assets for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. In accordance with FASB ASC 360-10-45, Impairment or Disposal of Long-Lived Assets, impaired assets are reported at the lower of cost or fair value. Certain property held for sale was considered impaired and was written down by $140,000 in 2015.

32


Subordinated debentures and detachable warrants: Subordinated debentures are treated as a liability and recorded net of the discount on the subordinated debentures, which reflects the value attributed to the detachable warrants. In accordance with ASC 470-20-05-02, since the warrants are detachable from the debt security and can exist independently, they are treated as separate securities. Proceeds from issuance are allocated between the subordinated debentures and the warrants based upon the relative fair values at the time of issuance. The portion allocated to the warrants is accounted for in accumulated income. In addition, debt issuance costs are allocated to the subordinated debentures and the warrants based upon the proportional fair value of each instrument. Costs allocated to the subordinated debentures are amortized over the expected life of the warrants, and the portion allocated to the warrants is accounted for in accumulated income. Stock-based compensation: The Company has in effect several stock-based employee compensation plans, including a Director compensation plan, which are described more fully in Note 16. Costs recognized for stock options and restricted stock awards are based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation — Stock Compensation. ASU 2016-09 includes provisions intended to simplify several aspects of accounting for share-based payment transactions and is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. The Company adopted ASU 2016-09 effective January 1, 2016. The adoption of ASU 2016-09 did not have a significant impact on the Company’s financial statements. 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. Earnings per share: Earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potentially dilutive common shares that may be issued by the Company relate to stock options and unvested restricted stock for all periods presented. In accordance with FASB ASC 260, Earnings per Share, there is no dilutive effect when the Company reports a net loss. Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are components of comprehensive income and are reported in a separate statement following the statements of operations, along with net income. Advertising costs: Costs associated with advertising and promotional efforts are expensed as incurred. Reclassifications: Certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period’s presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity. Additionally, certain items in prior financial statements have been restated to reflect adjustments to initially reported provisional amounts recognized in business combinations so that the prior financial statements are reported as if the adjusted amounts had been known as of the measurement date of the business combination. In that regard, during 2016, we made acquisition valuation adjustments impacting certain assets acquired in connection with the acquisition of Fairfield Financial Holdings Corp. (See Note 2 – Business Combination). As a result of these adjustments, our consolidated Statement of Condition as of December 31, 2015 reflects an $83,402 decrease in goodwill and an $83,402 increase in other assets. Subsequent events: The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were available to be issued.

33


Note 2 – Business Combination On October 16, 2015, the Company acquired all of the outstanding shares of Fairfield Financial Holdings Corp., and its wholly-owned subsidiary Bank of Fairfield (collectively “Fairfield”), in an acquisition accounted for under the acquisition method of accounting. Acquisition expenses related to the transaction are included in earnings. The operating results of Fairfield have been included in the Company’s consolidated financial statements since the date of acquisition. The aggregate purchase price included $20,750,000 of cash paid to selling shareholders. The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed for Fairfield at the acquisition date: Assets acquired: Cash and due from banks Interest bearing deposits Time deposits held for investment Securities available for sale Federal Home Loan Bank stock Loans receivable Premises and equipment Bank-owned life insurance Accrued interest receivable Goodwill Core deposit intangible Foreclosed real estate Other assets Total assets acquired Liabilities assumed: Deposits Accrued interest payable Federal funds purchased Other liabilities Total liabilities assumed Acquisition consideration

$

$

1,845,989 40,849 14,646,000 4,760,181 453,800 114,192,300 1,658,171 2,600,018 1,588,926 6,206,336 1,543,846 108,250 611,072 150,255,738 121,749,696 15,559 6,880,450 860,033 129,505,738 20,750,000

As a result of the Fairfield acquisition, the Company recognized $6,206,336 in goodwill which will not be amortized but will be evaluated for potential impairment on an annual basis or earlier if a triggering event merits evaluation. All other acquisition accounting adjustments, with the exception of those for impaired loans, foreclosed assets and income taxes, will be amortized or accreted to operations over the expected life of the related asset or liability. Adjustments for impaired loans and foreclosed assets will be realized in accordance with the Company’s accounting policy when the underlying assets are resolved or liquidated. Changes in acquired tax uncertainties after the measurement period are recognized in net income. The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Fairfield for the period October 16, 2015 to December 31, 2015. Disclosure of the amount of Fairfield’s revenue and net income (excluding integration costs) included in the Company’s consolidated statements of operations is impracticable due to the integration of the operations, systems and accounting for this acquisition occurring in different stages.

34


Note 3 – Investments in Securities Securities held by the Bank have been classified in the consolidated statements of financial condition according to management’s intent. All securities were classified as available for sale at December 31, 2016 and 2015. The amortized cost of securities and their approximate fair values were as follows: December 31, 2016 Gross Gross Unrealized Unrealized Gains Losses

Amortized Cost U.S. government agency securities State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$ — 8,465,152 4,275,157 3,912,060 5,136,670 3,169,236 $ 24,958,275

$ — 280,598 90,998 127,179 24,277 6,775 $ 529,827

35

$

$

1,008,266 11,602,605 6,570,150 5,040,465 2,107,069 7,042,295 33,370,850

$

$

December 31, 2015 Gross Gross Unrealized Unrealized Gains Losses

Amortized Cost U.S. government agency securities State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$ — (3,282) — — (146,411) (10,352) $ (160,045)

Fair Value

$

$

2,074 477,543 152,066 200,778 37,758 26,294 896,513

$ — (243) (215) — — (25,049) $ (25,507)

— 8,742,468 4,366,155 4,039,239 5,014,536 3,165,659 25,328,057

Fair Value $

$

1,010,340 12,079,905 6,722,001 5,241,243 2,144,827 7,043,540 34,241,856


As of December 31, 2016 and 2015, there were 18 and 20 securities with unrealized losses, respectively. The following tables show the investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

Less Than 12 Months Fair Unrealized Value Losses State and municipal securities Mortgage backed securities Collateralized mortgage obligations

$ $

445,923 3,706,749 1,493,252 5,645,924

$ $

(3,282) (146,411) (8,417) (158,110)

Less Than 12 Months Fair Unrealized Value Losses State and municipal securities Corporate debt obligations Collateralized mortgage obligations

$ $

172,229 751,254 3,186,995 4,110,478

$ $

(243) (215) (25,049) (25,507)

December 31, 2016 12 Months or More Fair Unrealized Value Losses $ — — 321,139 $ 321,139

$ — — (1,935) $ (1,935)

$ $

December 31, 2015 12 Months or More Fair Unrealized Value Losses $ — — — $ —

$ — — — $ —

Total

Fair Value 445,923 3,706,749 1,814,391 5,967,063

$

$

Total

Fair Value $

$

172,229 751,254 3,186,995 4,110,478

$ $

Unrealized Losses (3,282) (146,411) (10,352) (160,045)

Unrealized Losses (243) (215) (25,049) (25,507)

Management has evaluated the above securities and does not believe that any individual unrealized loss as of December 31, 2016 and 2015, represents an other-than-temporary impairment (“OTTI”). The decline in fair market value of these securities was generally due to changes in market interest rates or the widening of market spreads since purchase and was not related to any known decline in the creditworthiness of the issuer. Management does not intend to sell any impaired securities nor does available evidence suggest it is more likely than not that management will be required to sell any impaired securities. Management believes there is a high probability of collecting all contractual amounts due, because the majority of the securities in the Bank’s investment portfolio are backed by government agencies or government-sponsored enterprises. However, a recovery in value may not occur for some time, if at all, and may be delayed for greater than the one-year time horizon or perhaps even until maturity. Scheduled maturities of securities available for sale at December 31, 2016, are listed below according to contractual maturity date. Expected or actual maturities may differ from contractual maturities, because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Due in one year or less Due from one to five years Due from five to ten years Due after ten years

$ $

3,994,688 5,711,734 4,653,985 10,597,868 24,958,275

Fair Value $ $

4,020,834 5,921,723 4,805,174 10,580,326 25,328,057

At December 31, 2016 and 2015, securities with an amortized cost of $6,738,047 and $5,448,016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The market value for these securities was $6,682,242 and $5,482,721 at December 31, 2016 and 2015, respectively. No securities were sold during the years ended December 31, 2016 and 2015. When a security is called by the issuer prior to maturity, any remaining premium or discount is reported in noninterest income as a gain or loss. During the years ended December 31, 2016 and 2015, there were no securities called prior to maturity.

36


Note 4 – Loans Receivable and Allowance for Loan Losses The following table presents the Bank’s loan balances as of December 31: 2016

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

$

Allowance for loan losses Net deferred loan fees

$

Loans fall into the following fixed and variable components as of December 31:

226,485,921 42,466,423 19,088,022 64,731,629 76,100,688 60,395,922 9,038,762 498,307,367 (6,263,431) (1,228,424) 490,815,512

2015 $

$

2016

Fixed rate loans Variable rate loans

$ $

116,688,004 381,619,363 498,307,367

219,246,952 37,934,808 20,593,284 60,126,411 71,847,024 52,028,587 22,714,243 484,491,309 (6,024,008) (1,131,702) 477,335,599

2015 $ $

142,135,092 342,356,217 484,491,309

Total loans consist of originated loans, acquired impaired loans and acquired non-impaired loans. The following table summarizes the balances for each respective loan category as of December 31:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

37

December 31, 2016 Acquired Acquired Impaired Non-impaired

Originated $

$

211,020,877 41,529,681 7,307,807 60,574,357 75,156,296 49,617,221 8,762,616 453,968,855

$

$

92,969 — — 155,440 64,989 — 30,255 343,653

$

$

15,372,075 936,742 11,780,215 4,001,832 879,403 10,778,701 245,891 43,994,859

Total Loans $

$

226,485,921 42,466,423 19,088,022 64,731,629 76,100,688 60,395,922 9,038,762 498,307,367


Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

December 31, 2015 Acquired Acquired Impaired Non-impaired

Originated $

$

195,880,955 36,400,319 3,885,925 51,693,605 69,905,271 10,015,200 17,572,996 385,354,271

$

$

93,459 — — 281,372 115,588 — 32,617 523,036

$

$

23,272,538 1,534,489 16,707,359 8,151,434 1,826,165 42,013,387 5,108,630 98,614,002

Total Loans $

$

219,246,952 37,934,808 20,593,284 60,126,411 71,847,024 52,028,587 22,714,243 484,491,309

Acquired impaired loans: The Company acquired certain impaired loans as part of the Fairfield transaction. As of December 31, 2016 and 2015, the nonaccretable difference between the contractually required payments and cash flows expected to be collected was $51,954 and $173,954, respectively. The outstanding contractual unpaid principal balance of acquired impaired loans and the carrying amount of those loans as of December 31, 2016 and 2015, are summarized as follows:

Real estate: Commercial Residential Commercial and industrial Consumer

December 31, 2016 Unpaid Principal Carrying Balance Value $ $

98,018 164,276 102,860 34,494 399,648

$ $

92,969 155,440 64,989 30,255 343,653

December 31, 2015 Unpaid Principal Carrying Balance Value $ $

124,739 363,415 201,505 37,400 727,059

$ $

93,459 281,372 115,588 32,617 523,036

The following table summarizes the changes in accretable yield for acquired impaired loans for the years ended December 31:

Balance, beginning of year Additions resulting from acquisitions Accretion to interest income Reclassification from nonaccretable difference Disposals Balance, end of year

$

$

2016

30,783 — (56,512) 36,715 (6,945) 4,041

$

2015

— 35,893 (5,110) — — $ 30,783

The following table presents a reconciliation of the undiscounted contractual cash flows, non-accretable difference, accretable yield, and fair value of acquired impaired loans at the acquisition date during the year ended 2015: Undiscounted contractual cash flows Undiscounted cash flows not expected to be collected (non-accretable difference) Undiscounted cash flows expected to be collected Accretable yield at acquisition Total impaired loans at acquisition

$ $

793,452 (206,413) 587,039 (35,893) 551,146

38


Acquired non-impaired loans: The Company acquired certain non-impaired loans as part of the Fairfield transaction. The unpaid principal balance and carrying value of these loans as of December 31, 2016 and 2015, are as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

December 31, 2016 Unpaid Principal Carrying Balance Value $

$

15,993,894 974,547 11,784,152 4,046,376 899,858 10,815,497 249,735 44,764,059

$

$

15,372,075 936,742 11,780,215 4,001,832 879,403 10,778,701 245,891 43,994,859

December 31, 2015 Unpaid Principal Carrying Balance Value $

$

24,730,648 1,649,274 16,622,713 8,293,941 1,889,311 42,108,263 3,874,280 99,168,430

$

$

23,272,538 1,534,489 16,707,359 8,151,434 1,826,165 42,013,387 5,108,630 98,614,002

The following table presents the fair value of acquired non-impaired loans, gross contractual amounts receivable, and estimated contractual cash flows not expected to be received (fair value adjustments related to credit) as of the acquisition date for the Fairfield transaction that consummated during the year ended December 31, 2015: Estimated Gross Contractual Contractual Cash Flows Fair Amounts Not Expected Value Receivable to be Collected Real estate: 24,333,080 $ 25,866,101 $ 1,186,421 Commercial $ Construction and land development 1,853,567 1,988,250 174,850 Farmland 18,991,519 18,910,358 30,355 Residential 8,861,208 9,019,865 260,604 Commercial and industrial 1,891,208 1,960,225 78,813 Agriculture 51,532,517 51,656,808 46,801 6,047,446 6,122,529 54,960 Consumer Total loans at acquisition $ 113,510,545 $ 115,524,136 $ 1,832,804 Loan origination/risk management: The Bank has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, nonperforming loans, and other potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions. In general, loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently and to repay their obligations as agreed. Cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and typically incorporate a personal guarantee. However, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. In the case of loans secured by real estate, the properties are diverse in terms of type, but are concentrated to

39


a large extent in the Bank’s primary market area, which is eastern Washington and Kootenai County, Idaho. This concentration may increase the Bank’s exposure to adverse economic events that affect a single market or industry. Construction loans are generally based upon estimates of costs and value associated with the complete project with repayment substantially dependent on the success of the ultimate project such as sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. The Bank originates consumer loans utilizing an individualized underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. The Bank engages a third party to perform an independent review to validate the credit risk program on a periodic basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the Bank’s loan officers and credit personnel, as well as the Bank’s policies and procedures. Past due and nonaccrual loans: The following table presents an aging analysis of past due loans, segregated by class of loans, excluding purchase credit impaired loans:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

30-59 Days Past Due

60—89 Days Past Due

$ — 83,956 — 995,814 100,000 — 35,730 $ 1,215,500

$ — — 378,088 — 27,852 — 5,967 $ 411,907

30—59 Days Past Due

60—89 Days Past Due

$

$

199,151 — — 82,902 67,518 — 25,286 374,857

$

$

168,812 — 150,262 47,321 58,949 — 41,968 467,312

December 31, 2016 90 or More Days Total Past Due Past Due $

$

128,812 — 334,970 45,425 18,013 — 17,638 544,858

$

$

128,812 83,956 713,058 1,041,239 145,865 — 59,335 2,172,265

December 31, 2015 90 or More Days Total Past Due Past Due $ — — 126,345 — — — 36,379 $ 162,724

$

$

367,963 — 276,607 130,223 126,467 — 103,633 1,004,893

Current

Total Loans

$ 226,264,140 42,382,467 18,374,964 63,534,950 75,889,834 60,395,922 8,949,172 $ 495,791,449

$ 226,392,952 42,466,423 19,088,022 64,576,189 76,035,699 60,395,922 9,008,507 $ 497,963,714

Current

Total Loans

$ 218,785,530 37,934,808 20,316,677 59,714,816 71,604,969 52,028,587 22,577,993 $ 482,963,380

$ 219,153,493 37,934,808 20,593,284 59,845,039 71,731,436 52,028,587 22,681,626 $ 483,968,273

There were no loans over 90 days past due and still on accrual as of December 31, 2016. As of December 31 2015, there were four loans over 90 days past due and still on accrual with a balance of $15,201.

40


Nonaccrual loans, segregated by class of loans, were as follows as of December 31: 2016

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Consumer

$

$

2015

221,781 — 334,970 45,425 119,257 18,724 740,157

$

1,003,431 — 126,345 — 83,610 28,417 1,241,803

$

Nonaccrual loans have related government guaranteed balances of $95,273 and $113,612 as of December 31, 2016 and 2015, respectively. If the Bank’s nonaccrual loans had performed in accordance with their original contract terms, additional interest income of $44,094 in 2016 and $40,506 in 2015 would have been recognized. Impaired loans: Loans are considered impaired when, based on current information and events, it is improbable the Bank will be able to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smallerbalance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are applied to principal if the loan is on nonaccrual. Impaired loans, or portions thereof, are charged off if management determines them to be uncollectible. Impaired loan balances were as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Consumer

41

Unpaid Contractual Principal Balance $

$

2,502,513 — 1,182,617 275,224 328,197 41,772 4,330,323

Recorded Investment With No Allowance $

$

128,812 — 334,970 .— 26,589 1,085 491,456

December 31, 2016 Recorded Investment With Allowance $

$

2,333,701 — 805,659 275,224 147,339 17,638 3,579,561

Total Recorded Investment $

$

2,462,513 — 1,140,629 275,224 173,928 18,723 4,071,017

Related Allowance $

$

101,347 — 6,636 20,634 23,817 5,000 157,434


Unpaid Contractual Principal Balance

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Consumer

$

$

4,594,679 275,224 990,935 198,880 580,816 88,697 6,729,231

Recorded Investment With No Allowance $

$

December 31, 2015 Recorded Investment With Allowance

2,488,887 — 955,935 — 179,090 7,239 3,631,151

$

$

2,087,333 275,224 — 198,880 221,043 21,178 2,803,658

Total Recorded Investment $

$

4,576,220 275,224 955,935 198,880 400,133 28,417 6,434,809

Related Allowance $

$

110,000 21,000 — 50,000 173,734 5,000 359,734

The average recorded investment in impaired loans and the related interest income recognized for cash payments received were as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

December 31, 2016 Interest Income Average Recorded for Recorded Cash Payments Investment Received $

$

3,614,228 548,207 1,253,234 365,356 463,896 56,807 82,333 6,384,061

$

151,310 — 27,933 5,762 4,440 3,561 — $ 193,006

December 31, 2015 Interest Income Average Recorded for Recorded Cash Payments Investment Received $

$

5,697,317 — 90,706 298,896 537,725 — 23,313 6,647,957

$

$

451,466 — 4,804 13,238 34,369 — 3,637 507,514

42


Troubled debt restructuring (“TDR”): A troubled debt restructuring occurs when, due to a borrower’s financial difficulties, the Bank grants a concession that it would not otherwise consider. The concession can take the form of an interest rate or principal reduction or an extension of payments of principal or interest, or both. Restructured loans are included in impaired loans until such time as the restructured loan performs according to the new terms for an acceptable duration, typically one year or longer depending on the circumstances specific to each loan, and the interest rate at the time of restructure must also be at or above the market rate for a comparable loan. Restructured loans performing in accordance with their new terms are not included in nonaccrual loans unless there is uncertainty as to the ultimate collection of principal or interest. The recorded investment in restructured loans was as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Accruing Restructured Loans $

$

2,333,702 — 805,659 275,224 121,313 — — 3,535,898

December 31, 2016 Restructured Loans Included in Nonaccrual Loans $ — — — — 52,614 — — $ 52,614

Accruing Restructured Loans

Total $

2,333,702 — 805,659 275,224 173,927 — — $ 3,588,512

$

4,483,368 275,224 — — 178,550 — — $ 4,937,142

December 31, 2015 Restructured Loans Included in Nonaccrual Loans $

$

812,913 — — — — — 1,033 813,946

Total $

$

5,296,281 275,224 — — 178,550 — 1,033 5,751,088

For the years ended December 31, 2016 and 2015, the Bank recognized interest income of $229,275 and $301,886, respectively, in connection with restructured accruing loans. Troubled debt restructurings for the years ended December 31, 2016 and 2015, were as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Number of Contracts

2016 Pre-modification Recorded Investment

Post-modification Recorded Investment

Number of Contracts

$ — — — — 29,177 — — $ 29,177

$ — — — — 29,177 — — $ 29,177

0 0 0 0 3 0 0 3

1 1 0 0 2 0 0 4

2015 Pre-modification Recorded Investment

Post-modification Recorded Investment

$

$

829,590 275,224 — — 29,284 — — $ 1,134,098

829,590 275,224 — — 29,284 — — $ 1,134,098

In each case, the loans listed above were modified to either forgive some principal debt and/or allow the borrower an additional period of interest-only payments, and in some cases, the interest rate was decreased. The Bank is not committed to lend additional funds to debtors whose loans have been restructured.

43


Troubled debt restructurings modified within the previous 12 months for which there was a declaration of default which remains unresolved to report during the year ended December 31, 2016, are shown below. There were none to report during the year ended December 31, 2015.

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Number of Contracts

0 0 0 0 3 0 0 3

2016 Recorded Investment $ — — — — 44,211 — — $ 44,211

The Bank may declare a borrower to be in default when an event of default, such as a payment more than 30 days past due, has occurred and is not remedied in a reasonable amount of time. Restructured loans for which there was a declared and continuing default during the period are included in the calculation of the allowance for loan losses as deemed appropriate for each defaulted credit. Credit quality indicators: The Bank utilizes a risk grading system to monitor credit quality of the loan portfolio. These risk grades can generally be described by the following groupings: Pass/Watch – These loans range from minimal credit risk to lower than average, but still acceptable, credit risk. Special Mention – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the Bank’s credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification. A Special Mention loan has potential weaknesses such as inadequate working capital or underperformance compared to plan, which if not checked or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Unlike a Substandard credit, there should be a reasonable expectation that these temporary issues will be corrected in a reasonable period of time, without liquidation of assets and within the normal course of business. Substandard – A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified as Substandard. Loans are classified as Substandard when they have unsatisfactory characteristics causing unacceptable levels of risk, such as cash flow trends that are of a magnitude as to jeopardize current and future payments, or prolonged unsuccessful business operations or economic trends to which the borrower has not been able to adjust. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is a key distinction between Special Mention and Substandard. Doubtful/Loss – Loans classified as Doubtful have all the same weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the loan, classification as a Loss (and immediate charge-off) is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. A Loss rating is assigned to loans considered uncollectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged off now, even though partial or full recovery may be possible in the future.

44


The following table summarizes the Bank’s internal risk rating by loan class:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

Pass/Watch

Special Mention

$ 214,573,334 42,307,213 16,875,457 63,371,537 75,187,189 58,435,535 8,917,079 $ 479,667,344

$ 10,944,508 159,210 1,016,897 608,333 793,307 914,642 20,044 $ 14,456,941

Pass/Watch

Special Mention

$ 212,140,976 36,224,038 19,049,334 59,016,146 70,658,101 51,476,815 22,558,748 $ 471,124,158

$

$

3,716,394 1,435,546 528,590 392,697 194,670 551,772 94,461 6,914,130

December 31, 2016 Substandard Doubtful/Loss $

$

968,079 — 1,195,668 751,759 120,192 1,045,745 101,639 4,183,082

$ — — — — — — — $ —

Total $ 226,485,921 42,466,423 19,088,022 64,731,629 76,100,688 60,395,922 9,038,762 $ 498,307,367

December 31, 2015 Substandard Doubtful/Loss $

$

3,389,582 275,224 1,015,360 717,568 994,253 — 61,034 6,453,021

$ — — — — — — — $ —

Total $ 219,246,952 37,934,808 20,593,284 60,126,411 71,847,024 52,028,587 22,714,243 $ 484,491,309

Allowance for loan losses: The allowance for loan losses evaluation includes acquired impaired loans with deteriorated credit quality, acquired non-impaired loans and originated loans. Although all acquired non-impaired loans are included in the following allowance tables, only those loans without a remaining discount or that have incurred credit deterioration subsequent to acquisition date are included in the allowance for loan losses calculation. Activity in the allowance for loan losses was as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

45

December 31, 2016

Balance, Beginning of Year $

$

2,470,438 726,906 23,165 926,325 922,495 56,586 274,916 623,177 6,024,008

Provision for Loan Losses $

$

4,026 11,552 44,289 (139,059) (221,252) 327,949 (25,794) 361,289 363,000

Charge-offs $

$

(141,173) — — (6,765) (122,756) — (49,189) — (319,883)

Balance, End of Year

Recoveries $ — 3,216 — 90,252 81,152 — 21,686 — $ 196,306

$

$

2,333,291 741,674 67,454 870,753 659,639 384,535 221,619 984,466 6,263,431


December 31, 2015

Balance, Beginning of Year

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

$

$

1,994,652 817,300 2,154 944,706 601,565 — 181,754 1,186,210 5,728,341

Provision for Loan Losses $

$

430,966 (153,659) 56,011 (30,514) 303,019 56,586 120,624 (563,033) 220,000

Charge-offs $ — — (35,000) — (23,632) — (43,508) — $ (102,140)

Balance, End of Year

Recoveries $

44,820 63,265 — 12,133 41,543 — 16,046 — $ 177,807

$

$

2,470,438 726,906 23,165 926,325 922,495 56,586 274,916 623,177 6,024,008

The Bank’s recorded investment in loans and the related allowance for loan losses by portfolio segment, disaggregated on the basis of the Bank’s impairment methodology, was as follows:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

December 31, 2016 Individually Evaluated for Impairment Related Loans Allowance

Collectively Evaluated for Impairment Related Loans Allowance $ 223,930,439 42,466,423 17,947,393 64,300,965 75,861,771 60,395,922 8,989,784 — $ 493,892,697

$

$

2,225,944 741,674 60,818 838,318 635,822 384,535 193,861 984,466 6,065,438

$

2,462,513 — 1,140,629 275,224 173,928 — 18,723 — $ 4,071,017

$

$

2,360,438 705,906 23,165 876,325 748,761 56,586 269,916 623,177 5,664,274

101,347 — 6,636 20,634 23,817 — 5,000 — $ 157,434

$

92,969 — — 155,440 64,989 — 30,255 — $ 343,653

December 31, 2015 Individually Evaluated for Impairment Related Loans Allowance

Collectively Evaluated for Impairment Related Loans Allowance $ 214,577,273 37,659,584 19,637,349 59,646,159 71,331,303 52,028,587 22,653,209 — $ 477,533,464

$

Loans Acquired with Deteriorated Credit Quality Related Loans Allowance

$

4,576,220 275,224 955,935 198,880 400,133 — 28,417 — $ 6,434,809

$

110,000 21,000 — 50,000 173,734 — 5,000 — $ 359,734

$

6,000 — — 11,801 — — 22,758 — $ 40,559

Loans Acquired with Deteriorated Credit Quality Related Loans Allowance $

93,459 — — 281,372 115,588 — 32,617 — $ 523,036

$ — — — — — — — — $ —

Management also evaluates the risk of loss associated with commitments to lend funds, such as with a letter or line of credit. A reserve has been established to absorb inherent losses with unfunded commitments using a blended rate of historical charge-off experience and is monitored on a regular basis.

46


Note 5 – Premises and Equipment Components of premises and equipment included in the consolidated statements of financial condition were as follows as of December 31: 2016 Land Buildings and improvements Furniture, fixtures and equipment Leasehold improvements Construction in progress Total cost Less accumulated depreciation and amortization Premises and equipment, net

$

$

2015

3,415,050 12,337,985 7,448,238 2,010,615 373,646 25,585,534 (11,524,086) 14,061,448

$

$

3,415,050 11,380,924 6,841,296 1,991,211 16,209 23,644,690 (9,564,863) 14,079,827

The Bank leases certain facilities for its office locations under non-cancelable operating lease agreements that expire on various dates through 2027 and that have various renewal options. Total lease payments under these leases and other month-to-month rentals for the years ended December 31, 2016 and 2015, were $655,172 and $544,873, respectively. The Company leases some of its facilities to third parties under non-cancellable operating lease agreements extending through 2025. The following table sets forth, as of December 31, 2016, the future minimum lease payments under non-cancelable operating leases and future minimum income receivable under non-cancelable operating leases:

Year ending December 31, 2017 2018 2019 2020 2021 Thereafter Total minimum payments required

$

$

Lease Payments 903,486 836,372 951,413 980,190 1,009,115 5,303,785 9,984,361

$

$

Sublease Income 80,400 12,000 12,900 13,200 13,200 46,500 178,200

Premises and equipment held for sale was $458,389 and $769,555 for the years ended December 31, 2016 and 2015, respectively. Premises and equipment held for sale is included in other assets.

Note 6 – Goodwill and Intangible Assets The following table summarizes the changes in the Company’s goodwill and intangible assets: 2016 Goodwill Balance, beginning of year Acquired Amortization Balance, end of year

47

$

6,206,336 — — $ 6,206,336

$ $

Core Deposit Intangible 1,493,451 — (231,924) 1,261,527

2015 Goodwill

Core Deposit Intangible

$ — 6,206,336 — $ 6,206,336

$ — 1,543,846 (50,395) $ 1,493,451


The following table presents the forecasted amortization expense for 2017 through 2021 for intangible assets acquired in the Fairfield transaction: 2017 2018 2019 2020 2021 Thereafter

$

$

189,332 169,956 153,856 142,389 136,562 469,432 1,261,527

Note 7 – Foreclosed Real Estate The following table presents the changes in foreclosed real estate, net of any related valuation allowance: 2016 Balance, beginning of year Additions through acquisition Transfers from loans Dispositions of property Balance, end of year

$ $

308,250 — 580,087 (143,210) 745,127

2015 $ $

1,050,000 108,250 — (850,000) 308,250

Foreclosed real estate is carried at the lower of the recorded investment in the loan (prior to foreclosure) or the fair market value of the property less expected selling costs. Valuation allowances on foreclosed real estate are based on updated appraisals of the underlying collateral as received during the period or management’s authorization to reduce the selling price of a property during the period. As of December 31, 2016 and 2015, the Bank had a valuation allowance on foreclosed real estate totaling $1,575,000.

Note 8 – Deposits Classifications of deposits at December 31, were as follows: 2016 Noninterest bearing demand deposits Money market accounts NOW accounts Savings accounts Time deposits, $100,000 and over Time deposits, under $100,000

$

$

164,026,796 80,205,456 96,791,033 84,435,229 79,587,984 43,374,360 548,420,858

2015 $

$

158,575,808 80,728,448 80,206,707 87,506,635 78,281,614 40,585,263 525,884,475

Overdraft deposit accounts with balances of $129,954 and $142,330 at December 31, 2016 and 2015, respectively, were reclassified as loans receivable. Time deposits $250,000 and over totaled $42,356,317 and $38,012,374 at December 31, 2016 and 2015, respectively.

48


Maturities for time deposits at December 31, 2016, are summarized as follows: 2017 2018 2019 2020 2021 Total minimum payments required

$

$

57,195,082 26,430,306 29,361,088 8,453,285 1,522,583 122,962,344

Note 9 – Borrowed Funds Borrowed funds consist of the following at December 31: 2016 Federal Home Loan Bank advances Subordinated debentures Junior subordinated debentures

$ $

7,530,476 5,881,571 5,155,000 18,567,047

2015 $ $

8,930,476 5,861,438 5,155,000 19,946,914

FHLB advances: FHLB advances are secured by a blanket pledge on Bank assets, including certain qualified loans. Scheduled maturities and weighted average interest rates of FHLB advances at December 31, 2016, are as follows:

Amount 2017 2018 2019

$ $

3,545,556 794,444 3,190,476 7,530,476

Weighted Average Interest Rate 1.89% 1.99% 1.99%

Subordinated debentures: In November 2013, the Company issued $6,000,000 in subordinated debentures pursuant to subordinated debenture purchase agreements, subordinated debenture notes, and stock purchase warrants. The subordinated debentures are unsecured, bear interest at a fixed rate of 7.5% per annum, have a term of 9 years with no prepayment allowed during the first 5 years, and were made in conjunction with 9-year detachable warrants to purchase an aggregate of 200,000 shares of the Company’s common stock at an exercise price, subject to anti-dilution adjustments, of $7.25 per share. The subordinated debentures were purchased by two accredited investors: Harlan D. Douglass, a current shareholder and member of the Company’s board of directors, purchased 25% of the debentures and stock purchase warrants, and an unrelated private investment fund purchased the remainder of the debentures and stock purchase warrants. The subordinated debenture purchase agreements impose certain restrictions and obligations on the Company including, in the event of default on the notes, restrictions on the payment of dividends and distributions to shareholders, repurchase and redemption of the Company’s securities and payment on certain debts or guarantees. Under current capital guidelines, the subordinated debentures qualify as Tier 2 capital subject to a 20% reduction per year beginning in 2018 and which accumulates by 20% per year through maturity in 2022.

49


Junior subordinated debentures: In June 2005, the Company issued junior subordinated debentures with an aggregate value of $5,155,000 to Northwest Bancorporation Capital Trust I (the “Trust”), with interest fixed at 5.95% through June 30, 2010, thereafter re-pricing quarterly at three-month LIBOR plus 1.70%, which was 2.70% at December 31, 2016. The Trust issued $155,000 of common securities to the Company and capital securities with an aggregate liquidation amount of $5,000,000 to thirdparty investors. The common securities are included in “other assets” and the subordinated debentures are included in “borrowed funds” on the consolidated statements of financial condition. The subordinated debentures are includable as Tier 1 capital for regulatory purposes. The subordinated debentures and the capital securities pay interest and dividends, respectively, on a quarterly basis, which are included in interest expense. The subordinated debentures will mature on June 30, 2035, at which time the capital securities must be redeemed. As of June 30, 2010, the subordinated debentures and capital securities became subject to redemption by the Company at par value. The Company has provided a full and unconditional guarantee of the obligations of the Trust under the capital securities in the event of default. Pursuant to ASC 810, Consolidation, the Trust is not consolidated in these financial statements. Lines of credit and federal funds purchased: The Bank has operating lines of credit with various correspondent banks, which are detailed below. Also included below are the outstanding balances of federal funds purchased, which are short-term borrowings that typically mature within one to ninety days. December 31, 2016 Line Outstanding Amount Balance Federal Home Loan Bank Pacific Coast Bankers Bank Zions Bank

$ $

166,064,463 10,000,000 5,000,000 181,064,463

$ — — — $ —

December 31, 2015 Line Outstanding Amount Balance $ $

147,224,339 10,000,000 5,000,000 162,224,339

$ — — — $ —

The FHLB line is secured by a blanket pledge on Bank assets as well as $173,594,940 in certain specific loans; advances on the FHLB line may require additional purchases of FHLB stock. The Pacific Coast Bankers Bank and Zions Bank lines are unsecured.

Note 10 – Commitments and Contingencies In the ordinary course of business, the Bank 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 statements of financial condition. These commitments and contingent liabilities include various commitments to extend credit and standby letters of credit. At December 31, 2016 and 2015, commitments under standby letters of credit were $1,639,743 and $1,577,506, respectively, and firm loan commitments were $202,885,660 and $162,662,973, respectively. The Bank has not experienced any losses and does not anticipate any material losses as a result of these commitments. In the ordinary course of business, the Bank sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults, and fraud. When a loan sold to an investor without recourse fails to perform, the investor will typically review the loan file to determine whether defects in the origination process occurred. If a defect is identified, the Bank may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Bank has no commitment to repurchase the loan. As of December 31, 2016 and 2015, these guarantees represent the balance of all such loans sold. The Bank has recorded no reserve to cover loss exposure related to these guarantees. The Bank is a party to various claims and lawsuits that are brought by and against the Bank and Company in the ordinary course of business, the aggregate effect of which are not expected to be material to the financial condition of the Company. The Bank has an agreement with the Spokane Public Facilities District (“PFD”) for the purchase of naming rights to the INB Performing Arts Center in Spokane. Under the agreement, the Bank will pay the PFD $180,000 per year for a period of ten years with the final payment due in 2025.

50


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 financial 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. The Bank evaluates the credit quality and liquidity of these financial institutions to mitigate its credit risk.

Note 12 – Other Noninterest Income and Expense Other noninterest income and expense totals are presented in the following tables, with components of these totals that exceed 1% of the aggregate of total net interest income and total noninterest income itemized separately.

Other noninterest income: Debit and credit card income Other OTHER NONINTEREST INCOME Other noninterest expense: Debit and credit card costs Software expense Telephone expense Data processing fees B&O tax Audit and accounting fees Other OTHER NONINTEREST EXPENSE

2016 $

$ $

$

2015

1,817,217 612,206 2,429,423

$ $

1,334,032 501,372 1,835,404

998,669 509,410 410,332 409,176 353,400 276,876 2,771,682 5,729,545

$

747,792 458,663 284,547 182,986 242,090 315,060 2,161,555 4,392,693

$

Note 13 – Income Taxes The components of income tax expense are as follows: 2016 Current tax expense Deferred tax expense (benefit) INCOME TAX EXPENSE

51

$ $

1,764,354 648,508 2,412,862

2015 $ $

1,501,030 (61,128) 1,439,902


The Company’s normal, expected statutory income tax rate is 34.7%, representing a blend of the statutory federal income tax rate of 34.0% and apportioned effects of the Idaho income tax rate of 7.4%. The ratio of tax expense to net income before tax (referred to as the effective tax rate) differs from statutory tax rates due to permanent differences arising primarily from nontaxable interest income on state and municipal securities and nontaxable increases in the value of bank-owned life insurance. The differences between tax expense at the statutory rates and actual tax expense were as follows for the years ended December 31: 2016 Federal income tax at statutory rate Effect of tax-exempt interest income Effect of nondeductible interest expense Effect of other nondeductible expenses Effect of state income taxes Other INCOME TAX EXPENSE

$

$

2,544,444 (172,149) 2,088 33,648 28,524 (23,693) 2,412,862

2015 $

$

1,529,928 (198,697) 2,951 115,251 36,039 (45,570) 1,439,902

The components of the deferred tax assets and deferred tax liabilities are as follows at December 31:

Deferred tax assets: Allowance for loan losses Writedown of foreclosed real estate Loan discounts Stock-based compensation Deferred compensation Nonaccrual loan interest Goodwill amortization Other Deferred tax assets Deferred tax liabilities: Fixed asset basis differentials Core deposit intangible Deferred loan fees and costs Prepaid expenses Net unrealized gain on securities available for sale Federal Home Loan Bank stock Other Deferred tax liabilities NET DEFERRED TAX ASSET

2016 $

943,625 703,047 283,641 233,608 164,743 14,992 4,499 192,870 2,541,025

$

967,156 432,578 355,556 129,048 125,726 92,375 7,501 2,109,940 431,085

2015 $

820,205 716,647 721,162 216,534 263,959 17,847 4,499 330,483 3,091,336

$

744,207 512,104 299,058 141,123 313,058 120,896 7,501 2,137,947 953,389

At December 31, 2016, an income tax receivable of $372,511 was included in other assets and a net deferred tax asset of $431,085 was included in other assets on the consolidated statements of financial condition. At December 31, 2015, an income tax payable of $98,438 was included in other liabilities and a net deferred tax asset of $953,389 was included in other assets on the consolidated statements of financial condition. No valuation allowance for deferred tax assets was recorded at December 31, 2016 and 2015, as management believes it is more likely than not that all of the deferred tax assets will be realized.

52


The Company follows the provisions of FASB ASC 740, Income Taxes, relating to the accounting for uncertainty in income taxes. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment. The Company had no unrecognized tax benefits at December 31, 2016 and 2015. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2016 and 2015 the Company recognized no interest and penalties. The Company files a United States federal income tax return and an Idaho income tax return.

Note 14 – Changes in Accumulated Other Comprehensive Income by Component The following table presents the changes in accumulated other comprehensive income by component, net of taxes, for the years ended December 31:

Unrealized gains and losses on securities available for sale: Balance, beginning of year Unrealized losses on securities available for sale Balance, end of year

2016 $ $

574,864 (330,808) 244,056

2015 $ $

805,861 (230,997) 574,864

Note 15 – Employee Benefits The Bank maintains a 401(k) profit sharing plan covering all employees who meet certain eligibility requirements. The plan provides for employees to elect up to 50% of their compensation to be paid into the plan. During 2016 the Bank’s policy was modified to match contributions equal to 50% of the participant’s contribution, not to exceed 4% of the participant’s compensation, previously it was not to exceed 3% of the participant’s compensation. Vesting occurs over a sixyear graded vesting schedule. Expenses associated with the plan were $225,113 and $144,828 for the years ended December 31, 2016 and 2015, respectively. The Bank maintains a nonqualified deferred compensation plan under which eligible participants may elect to defer a portion of their compensation, with prior annual approval of the Board of Directors. The Bank does not match contributions to this plan, but does credit interest on amounts deferred based on the tax-equivalent rate earned on its bank-owned life insurance products. Expenses associated with the plan were $7,716 and $15,719 for the years ended December 31, 2016 and 2015, respectively. Liabilities associated with the plan were $195,166 and $422,442 for December 31, 2016 and 2015, respectively. Included in other liabilities is also a salary continuance agreement from the Fairfield acquisition, which had a balance of $15,559 and $37,491 at December 31, 2016 and 2015, respectively. To fund benefits under the nonqualified deferred compensation plan, the Bank is the owner and beneficiary of single premium life insurance policies on certain current and past employees. Also included in this balance is a split-dollar life insurance policy, which provides a death benefit to a beneficiary, with the balance paid to the Bank. At December 31, 2016 and 2015, the cash value of these policies was $7,054,335 and $6,923,517, respectively. The Bank maintains unfunded, nonqualified executive income and retirement plans for certain of its current and retired senior executives under which participants designated by the Board of Directors are entitled to supplemental income or retirement benefits. Expenses associated with these plans were $17,431 and $30,197 for the years ended December 31, 2016 and 2015, respectively. Liabilities associated with these plans were $273,812 and $316,418 as of December 31, 2016 and 2015, respectively.

53


Note 16 – Stock-Based Compensation On May 20, 2014, shareholders approved the Inland Northwest Bank 2014 Share Incentive Plan and the issuance of shares of common stock of the Company pursuant to the Plan. This Plan is an amendment and restatement of the Inland Northwest Bank Nonqualified Stock Option Plan originally effective in July 1992, as revised in December 1993, December 1999, April 2002, May 2006 and September 2013. The decision as to whether to grant restricted stock awards or options for purposes of employee recruitment, retention or reward is at the discretion of the Compensation Committee. The maximum number of stock options and restricted stock awards that may be granted under the current Plan, as adjusted for any stock dividends, is 500,000. At December 31, 2016, there were 359,555 shares and/or options available for grant to employees. Restricted stock awards either vest over time or cliff-vest over a period of one to five years depending on the individual grant. The fair value of these awards is recognized ratably over the vesting period as compensation expense. Restricted stock award activity is summarized in the following table:

Weighted Average Fair Value

Number of Shares Outstanding, December 31, 2014 Granted Vested Forfeited Outstanding, December 31, 2015 Granted Vested Forfeited Outstanding, December 31, 2016

174,000 123,000 (45,750) (9,000) 242,250 34,500 (44,748) (14,202) 217,800

$

5.90 9.24 4.57 5.64 7.78 9.43 6.44 8.37 8.28

Stock options vest over a five-year period and expire ten years from the date of grant. The fair value of these awards is recognized ratably over the vesting period as compensation expense. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions: the risk-free rate is based on the Treasury yield curve in effect at the time of grant; the expected life of options granted represents the period of time that options granted are expected to be outstanding; expected volatilities are based on historical volatility of the Company’s stock; and the estimated dividend yield reflects the Company’s expected future dividend rate.

54


Stock option activity is summarized in the following table: 2016 Shares Outstanding options, beginning of year Granted Exercised Expired Forfeited/cancelled Outstanding options, end of year Options exercisable, end of year

5,000 — — — (5,000) — —

$

Weighted Average Exercise Price 17.00 — — — 17.00 — —

2015 Shares 5,000 — — — — 5,000 5,000

$

Weighted Average Exercise Price 17.00 — — — — 17.00 17.00

For the year ended December 31, 2016 and 2015, no cash proceeds were received from the exercise of options. It is the Company’s policy to issue new shares for the exercise of stock options. The pre-tax compensation expense yet to be recognized for stock-based awards that have been awarded but not vested is as follows as of December 31, 2016: Restricted Stock 2017 2018 2019 2020 2021

$

$

408,221 375,715 320,641 181,348 13,714 1,299,639

Note 17 – Common Stock No cash dividends or stock dividends on common stock were declared during the years ended 2016 and 2015. During 2016 and 2015, the Board of Directors voted to issue 6,315 shares and 3,254 shares, respectively, of Company stock to nonemployee Directors pursuant to the Company’s Director Compensation Plan. On August 31, 2015, the Company concluded a private placement offering with the issuance of 2,162,162 shares of common stock to accredited investors for an aggregate purchase price of $20,000,000, or $9.25 per share. Net proceeds to the Company, after expenses, were $18,946,138.

55


Note 18 – Related Party Transactions The Company, 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 shareholders. Loan balances with related parties were as follows at December 31: 2016 Balance, beginning of year Advances Payments No longer related parties Balance, end of year

$ $

202,963 37,349 (25,755) (101,623) 112,934

2015 $

209,988 49,586 (56,611) — $ 202,963

Aggregate deposit balances with related parties at December 31, 2016 and 2015, were $1,340,046 and $2,844,662, respectively. All related party loans and deposits have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

Note 19 – Restrictions on Dividends and Retained Earnings Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends, which may be paid at any date, is generally limited to the retained earnings of the Bank, which was $29,134,858 at December 31, 2016. Accordingly, $46,573,216 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2016.

Note 20 – 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. Prompt corrective action provisions are not applicable to bank holding companies. Prior to January 1, 2015, these regulatory capital rules were based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). The Federal Reserve and the Federal Deposit Insurance Corporation approved new capital rules in July 2013, which substantially amended the previous capital rules. These new rules reflect, in part, certain standards initially adopted by the Basel Committee in December 2010 (“Basel III”) as well as certain provisions of the Dodd-Frank Act. Basel III capital rules became effective on January 1, 2015, subject to phase-in of between 2015 and 2019 for some of the Tier 1 and Tier 2 capital components. The Basel III capital rules: (1) introduced a new measure of capital called Common Equity Tier 1 (“CET1”); (2) specified that Tier 1 capital consists of CET1 and “additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements; (3) mandated that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (4) expanded the scope of the deductions from and adjustments to capital, compared to previous regulations. The Basel III capital rules also prescribed a new standardized approach for risk weightings that expanded the risk weighting categories to a larger and more risk-sensitive number of categories.

56


Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios which are set forth in the regulations and shown in the table below. As of December 31, 2016, the Bank was categorized 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. No conditions or events exist that management believes have changed the Company’s category. The Company’s and Bank’s actual December 31, 2016 and 2015, capital amounts and ratios are presented in the following table:

December 31, 2016 Total capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Tier 1 capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Common equity Tier 1 capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Tier 1 capital (to average assets): Northwest Bancorporation, Inc. Inland Northwest Bank December 31, 2015 Total capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Tier 1 capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Common equity Tier 1 capital (to risk weighted assets): Northwest Bancorporation, Inc. Inland Northwest Bank Tier 1 capital (to average assets): Northwest Bancorporation, Inc. Inland Northwest Bank

57

Amount

Actual

Ratio

Adequately Capitalized Amount Ratio

Well Capitalized Amount Ratio

$ 76,283,000 75,054,000

13.16% 12.97%

$ 46,372,480 46,305,760

8.00% 8.00%

NA $ 57,882,200

NA 10.00%

63,848,000 68,501,000

11.01% 11.83%

34,779,360 34,729,320

6.00% 6.00%

NA 46,305,760

NA 8.00%

58,848,000 68,501,000

10.15% 11.83%

26,084,520 26,046,990

4.50% 4.50%

NA 37,623,430

NA 6.50%

63,848,000 68,501,000

10.06% 10.81%

25,378,520 25,339,240

4.00% 4.00%

NA 31,674,050

NA 5.00%

$ 70,588,000 69,303,000

12.63% 12.42%

$ 44,711,680 44,651,600

8.00% 8.00%

NA $ 55,814,500

NA 10.00%

58,413,000 62,989,000

10.45% 11.29%

33,533,760 33,488,700

6.00% 6.00%

NA 44,651,600

NA 8.00%

53,413,000 62,989,000

9.56% 11.29%

25,150,320 25,116,525

4.50% 4.50%

NA 36,279,425

NA 6.50%

58,413,000 62,989,000

10.96% 11.00%

21,314,200 22,901,680

4.00% 4.00%

NA 28,627,100

NA 5.00%


Note 21 – Earnings Per Share Earnings per share and the calculated effect of dilutive securities on loss per share are as follows for the year ended December 31:

Numerator: Net income Denominator: Weighted average shares outstanding Dilutive effect of stock-based compensation Dilutive effect of outstanding warrants Basic earnings per common share Diluted earnings per common share

2016

2015

$

5,070,797

6,382,048 84,446 44,759 6,511,253

$ $

0.79 0.78

$

3,059,885

4,910,233 43,348 45,604 4,999,185

$ $

0.62 0.61

Anti-dilutive shares as of December 31, 2016 and 2015, were 15,446 and 115,021, respectively.

Note 22 – Fair Values Fair value hierarchy: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels: Level 1:

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.

Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Management reviews and updates the fair value hierarchy classifications of the Company’s assets and liabilities on a quarterly basis.

58


Assets and liabilities measured at fair value on a recurring basis: The following table presents the Company’s financial instruments measured at fair value on a recurring basis:

Securities available for sale: U.S. government agency securities State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

Securities available for sale: U.S. government agency securities State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

December 31, 2016 Level 2 Level 3

Level 1 $ — — — — — —

$ — 8,742,468 4,366,155 4,039,239 5,014,536 3,165,659

$ — 8,742,468 4,366,155 4,039,239 5,014,536 3,165,659

December 31, 2015 Level 2 Level 3

Level 1 $ — — — — — —

$ — — — — — —

Total

$

1,010,340 12,079,905 6,722,001 5,241,243 2,144,827 7,043,540

$ — — — — — —

Total $

1,010,340 12,079,905 6,722,001 5,241,243 2,144,827 7,043,540

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This service provides pricing information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/ dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications. Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models. In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes. Assets and liabilities measured at fair value on a nonrecurring basis: Certain financial instruments are measured at fair value on a nonrecurring basis. Adjustments to fair value generally result from the application of lower-ofcost-or-market accounting or impairments of individual assets. The following table presents the Company’s financial instruments measured at fair value on a nonrecurring basis:

Level 1 Impaired loans Foreclosed real estate

$ — — Level 1

Impaired loans Foreclosed real estate

59

$ — —

December 31, 2016 Level 2 Level 3 $ — —

$

3,422,127 745,127

Total $

December 31, 2015 Level 2 Level 3 $ — —

$

2,443,924 308,250

3,422,127 745,127 Total

$

2,443,924 308,250


The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis:

Impaired loans: Commercial real estate

Valuation Technique(s)

Fair Value $

3,031,378

Income approach

254,590

Income approach

Commercial and industrial

12,514

Sales comparison

Commercial and industrial

111,008

Income approach

12,638

Sales comparison

Residential real estate

Consumer

Foreclosed real estate: Commercial real estate

$

3,422,127

$

125,000

Sales comparison

438,977

Sales comparison

181,150

Sales comparison

Construction and land development Residential real estate

Impaired loans: Commercial real estate

$

745,127

Fair Value $

Valuation Technique(s)

1,977,333

Income approach

Construction and land development

254,224

Sales comparison

Residential real estate

148,880

Sales comparison

47,309

Sales comparison

16,178

Sales comparison

Commercial and industrial Consumer

Foreclosed real estate: Commercial real estate

$

2,443,924

$

125,000

Sales comparison

75,000

Sales comparison

108,250

Sales comparison

Construction and land development Residential real estate

$

308,250

December 31, 2016 Unobservable Input(s)

Range (Wtd Avg)

Adjustment for differences in net operating income Adjustment for differences in net operating income Adjustment for differences between comparable sales Adjustment for differences in net operating income Adjustment for differences between comparable sales

6% – 69% (50%) 12% – 12% (12%) 100% – 100% (100%) 71% – 93% (73%) 67% – 67% (67%)

Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales

50% – 50% (50%) 39% – 73% (50%) 19% – 46% (35%)

December 31, 2015 Unobservable Input(s)

Range (Wtd Avg)

Adjustment for differences in net operating income Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales

0% – 21% (11%) 8% – 8% (8%) 71% – 71% (71%) 67% – 96% (94%) 60% – 60% (60%)

Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales

26% – 26% (26%) 34% – 34% (34%) 19% – 27% (25%)

60


Impaired loans: The loan amount above represents impaired, collateral dependent loans held by the Bank at the balance sheet date that have been adjusted to fair value. When collateral dependent loans are identified as impaired, the impairment is measured using the current fair value of the collateral securing these loans, less selling costs. The fair value of real estate collateral is determined using independent appraisals. The fair value of business equipment, inventory and accounts receivable collateral is typically based on the net book value on the business’ financial statements, but in some cases, an appraisal is obtained for equipment and inventory. Appraised and reported values are discounted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge of the client and the client’s business. Foreclosed real estate: The amount shown above represents impaired real estate properties that have been adjusted to fair value, which is typically determined using an independent appraisal. At the time of foreclosure, these assets are measured and recorded at the lower of carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any impairment based on the asset’s fair value at the date of acquisition is charged to the allowance for loan losses. After foreclosure, management periodically re-assesses the value so that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Appraised values may be discounted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge of the client and the client’s business. Fair value adjustments on foreclosed real estate are recognized in the consolidated statements of operations. Disclosures about fair value of financial instruments: The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31:

Financial Instruments — Assets: Cash and cash equivalents Time deposits held for investment Securities available for sale Loans receivable Loans held for sale Accrued interest receivable Financial Instruments — Liabilities: Deposits Accrued interest payable Borrowed funds

Financial Instruments — Assets: Cash and cash equivalents Time deposits held for investment Securities available for sale Loans receivable Loans held for sale Accrued interest receivable Financial Instruments — Liabilities: Deposits Accrued interest payable Borrowed funds

61

December 31, 2016 Fair Value Measurements Level 1 Level 2

Carrying Amount

Fair Value

$ 75,441,958 4,640,000 25,328,057 497,078,943 3,823,665 2,642,293

$ 75,441,958 4,622,749 25,328,057 492,294,769 3,823,665 2,642,293

$ 75,441,958 — — — — —

$ — 4,622,749 25,328,057 — 3,823,665 2,642,293

$ — — — 492,294,769 — —

548,420,858 150,600 18,567,047

547,923,997 150,600 16,704,679

425,458,514 — —

— 150,600 16,704,679

122,465,483 — —

Carrying Amount

Fair Value

$ 46,034,719 14,946,000 34,241,856 483,359,607 1,971,275 2,705,847

$ 46,034,719 15,061,542 34,241,856 480,595,088 1,971,275 2,705,847

$ 46,034,719 — — — — —

$ — 15,061,542 34,241,856 — 1,971,275 2,705,847

$ — — — 480,595,088 — —

525,884,475 131,430 19,946,914

525,629,416 131,430 17,851,567

407,017,598 — —

— 131,430 17,851,567

118,611,818 — —

December 31, 2015 Fair Value Measurements Level 1 Level 2

Level 3

Level 3


The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which is it practicable to estimate that value: Cash and cash equivalents: The carrying value approximates fair value because of the short maturity of these instruments. Time deposits held for investment: Fair values of time deposits held for investment were estimated using the discounted value of contractual cash flows. The discount rates used for these estimates were based on rates currently offered for time deposits with similar remaining maturities. Securities available for sale: The estimated fair values of securities are based on quoted market prices of similar securities. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, commercial and industrial, and consumer. 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. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. For variable rate loans that re-price frequently and have no significant change in credit risk, fair values are based on carrying values. Loans held for sale: The carrying value approximates fair value because of the short maturity of these instruments. Accrued interest receivable and payable: The carrying value approximates fair value because of the short maturity of these instruments. Deposits: The fair value of deposits with no stated maturity such as noninterest bearing demand deposits, money market accounts, NOW accounts, and savings accounts is equal to the amount payable on demand at the reporting date, and such deposits are classified as Level 1 instruments. The fair value of fixed-maturity time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Time deposits are classified as Level 3 instruments. Federal funds purchased: The carrying value approximates fair value because of the short maturity of these instruments. Borrowed funds: The fair values of term debt, junior subordinated debentures, and capital lease obligations are estimated using the discounted value of contractual cash flow using the Company’s current incremental borrowing rate for similar types of borrowing arrangements. Subordinated debentures were booked at fair value, therefore the carrying value approximates the fair value. 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 values of these commitments were not significant as of December 31, 2016 and 2015. Amounts could be transferred between levels if the inputs used for valuation change and become more or less observable. The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between levels during the years ended December 31, 2016 and 2015.

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LOCATIONS Airway Heights 11917 W. Sunset Hwy. Airway Heights, WA 99001 509.244.4840 Coeur d’Alene 955 Ironwood Dr. Coeur d’Alene, ID 83814 208.664.8747 Colfax 402 S. Main St. P.O. Box 283 Colfax, WA 99111 509.397.1007 Downtown 421 W. Riverside Ave. Spokane, WA 99201 509.456.8888 Fairfield 213 E. Main St. P.O. Box 267 Fairfield, WA 99012 509.283.2126 Northside 518 W. Francis Ave. Spokane, WA 99205 509.323.1144 Hayden 30 W. Prairie Ave. Coeur d’Alene, ID 83815 208.762.1155

CORPOR ATE INFORMATION Oakesdale Loan Center 114 W. Steptoe Ave. P.O. Box 65 Oakesdale, WA 99158 509.285.6213 Kennewick 8127 W. Grandridge Ste. # 210 Kennewick, WA 99336 509.456.8888 Rockford 5 W. Emma P.O. Box 260 Rockford, WA 99030 509.291.5029 Rosalia 518 S. Whitman P.O. Box 77 Rosalia, WA 99170 509.523.3208 University District 2110 N. Ruby St. Spokane, WA 99207 509.232.4666 South Hill 2905 E. 57th Ave. Spokane, WA 99223 509.448.7770 Spangle 130 W. 1st PO Box 189 Spangle, WA 99031 509.245.3226 Spirit Lake 31845 N. 5th Ave. Spirit Lake, ID 83869 208.623.5700 Valley 15015 E. Sprague Ave. Spokane Valley, WA 99216 509.924.1033

Corporate Headquarters Northwest Bancorporation, Inc. 421 W. Riverside Ave., Ste. 113 Spokane, WA 99201 Phone: 509.456.8888 Toll Free: 888.509.7922 Fax: 509.464.6280 Email: inb@inb.com Annual Meeting The Annual meeting of shareholders will be held on Monday, May 15, 2017, at 5:30 pm at the Airway Heights Location of INB located at 11917 W. Sunset Hwy., Airway Heights, Washington. All shareholders are invited to attend. Stock Listing Northwest Bancorporation, Inc.’s common stock is listed on the electronic bulletin board under the symbol NBCT. Shareholder Inquiries General shareholder inquiries regarding address changes, corrections to tax identification numbers or reissuance of stock certificates should be directed to our transfer agent: Computershare 211 Quality Circle, Ste. 210 College Station, TX 77845 Toll Free: 800.368.5948 www.computershare.com Internet Site: www.inb.com Forward-Looking Statements: This annual report contains forward-looking statements that are not historical facts and that are intended to be “forward-looking statements” as that term is defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include, but are not limited to, statements about the Company’s plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts and pertain to the Company’s future operating results. When used in this report, the words “expects,” “anticipates,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘seeks,’’ ‘‘estimates’’ and similar expressions are generally intended to identify forward-looking statements. Actual results may differ materially from the results discussed in these forward-looking statements, because such statements are inherently subject to significant assumptions, risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These include but are not limited to: the possibility of adverse economic developments that may, among other things, increase default and delinquency risks in the Company’s loan portfolios; shifts in interest rates; shifts in the rate of inflation; shifts in demand for the Company’s loan and other products; unforeseen increases in costs and expenses; lower than expected revenue or cost savings in connection with acquisitions; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; and changes in laws, regulations and the competitive environment. Unless legally required, the Company disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

This statement has not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit Insurance Corporation.


2016 Annual Report  

2016 was a building year for INB and Northwest Bancorporation. Building for the future. Building for efficiency. And building infrastructure...

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