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A PPROAC H & A SC E N T A N N UA L R EPOR T 2017


C EO LE T T E R

2

A PPROAC H

4

A SC E N T

12

ROA D T R I P

18

H I G H LI G HT S

20

FI N A N C I A L S 23


2 017 A N N U A L R E P O R T

A WORD FROM OUR C EO In mountaineering, the approach is the journey before the

journey. It includes planning, visualizing, and even physically

acclimatizing for the more technical part of the climb:

the ascent. At INB, our team has engaged in a thoughtful

approach, putting us in a strong position to reach new heights. Our core business principles are a key aspect of this approach. We return daily to our five C’s: Customer, Competence, Confidence, Compete and Community. As we live out these values, we reflect the incredible places we serve. With a unique blend of people, cultures, and landscapes — and corresponding commercial, industrial, and agricultural diversity — the Pacific Northwest needs a community bank as balanced as the region itself, and INB's opportunity is to continue filling this need with excellence as we grow. Having done the hard work of acquiring two banks in the last three years (Bank of Fairfield in Washington’s Palouse region, and CenterPointe Bank in Hood River, Oregon), our 2017 was marked by a continual embrace of the new markets and customers we serve, from potato farmers to carbon-fiber engineers building components for space flight. Whatever their business, our core customers are entrepreneurs with a growth mindset, and at INB, there’s no need to translate from entrepreneur to banker — we understand. We are growing our business right alongside them. The success of our approach has led to excellent performance, a balanced portfolio, and enhanced service. It also has us ready for an exciting new ascent: filling a true market need for a customer-focused, mid-size community bank in Portland, Oregon. Whether you’re a current or potential customer or investor in INB, let’s explore our recent accomplishments and consider how we might grow together in the months and years ahead. RUSS LEE, CEO 2


NORTHWEST

BA N CO R P O R AT I O N

With INB, there's no need to translate from entrepreneur to banker — we understand. ­RUSS LEE, CEO

Left: Russ Lee, CEO Center: Mt. Hood, Ore. Bottom: Arlene Schnitzer Concert Hall, Portland, Ore.

3


8%

consumer

18%

agriculture

10%

land and development


45%

commercial real estate

OUR APPROACH CRE ATES FOOTHOLDS FOR THE FUTURE 19%

commercial and industrial

What does it look like to create success today that also

builds a foundation for tomorrow? At INB, it looks like a daily

commitment to service as we relate to our customers. It looks like diversification in all aspects of our business, and internal

investment in the people, technologies, and communities that will lead us upward.

Asset Mix at a Glance

As a commercial bank, we balance our asset mix at a granular level. We intentionally evaluate local economies and invest in the communities where we do business.

5


2 017 A N N U A L R E P O R T

WE BU I LD BA L A NC E WITH TRUS T In Every Field At INB, we know the power of expertise. But as we’ve seen, financial institutions often build walls around their core skills,

Our transition process was simple but powerful: we listened, we built trust and we applied our resources and expertise to help the farmers

Barely three years later, that trust

of business. At INB, we strive for

has traveled. Thanks to relationships

truly balanced growth by seeking

forged in Fairfield, we have grown

opportunities to broaden our

into the Tri-Cities and Ephrata with

knowledge base and adding to

its surrounding irrigated farmland.

our toolkit. The Pacific Northwest

We now serve the dryland farmers

itself is a partner in this, offering an

of Southeastern Washington and

incredibly diverse region for INB

have added the stability of the

to grow within.

irrigated farmlands of the North

business is a perfect case-in-point. Acquiring the century-old Bank of Fairfield in 2014 meant partnering with and retaining incredibly experienced agricultural lenders in Washington’s Palouse region, an

silent generation

36%

baby boomers

21%

generation x

Central part of the state. As a result, INB’s agricultural portfolio is now balanced between both types of farming that are prevalent in the Northwest, limiting risk and leaving us poised to grow smartly,

22%

millennials

alongside our region.

incredibly fertile land whose wheat,

The numbers in this report tell a

barley, and lentil farmers have kept

similar story about our careful

America fed for generations.

intentionality to balance real estate

6

15%

and community in the Palouse.

orbiting around just a few types

Our burgeoning agriculture

INB deposit account holders by generation

7%

generation z


NORTHWEST

59%

unirrigated crops

41%

irrigated crops

INB's agricultural loan breakdown

BA N CO R P O R AT I O N

businesses in our portfolio with

the markets we serve. Millennials

commercial and industrial cash-flow

recently eclipsed Generation X as

companies. All of our customers

our second largest customer age

are an important part of the INB

demographic. We are a “both/

community, but our commitment to

and” organization with our size and

our shareholders and to our future

mission: we’re both large enough

leads us toward a disciplined blend

to afford the digital tools emerging

of industries — and diversity even

customers expect, and we’re small

within industries.

enough to maintain the personal banker relationships that younger

Across All Generations

generations demand.

We are happy to report that, unlike

As with portfolio diversification, this

other banks, INB is earning the

balance in our clientele and service

trust of younger generations in

has us poised for a strong future.

Top Left: Field outside Fairfield, Wash. Bottom Left: Hood Crest Winery, Hood River, Ore. Top Right: Ken Carmichael, Back Country Horsemen, Spokane, Wash.

Second Right: Gayle Terry, Realtor, and Dan Klaue, homeowner Third Right: Benji Wade, Fellow Coworking, Spokane, Wash. Fourth Right: Leon Loza Jr., Loza Farms, Pasco, Wash. 7


2 017 A N N U A L R E P O R T

maintainers, the potential for us to grow alongside our customers is compelling for everyone involved. As our customers learn and succeed, our bankers and loan officers are by their side as co-entrepreneurs, finding new ways to serve their needs as we grow ourselves. With the resources of the big banks and the personal touch of a trusted partner, INB is perfectly situated to benefit business owners. Whether it’s the flexibility to structure a $10-million-dollar

A BE T TER BANK FOR BUSI NE SS We believe businesses aren't passive parts of a community; they

loan in a few different ways, or the one-on-one willingness to exchange text messages with our clients, we’re ready to serve. Because we authentically live this shared story alongside our customers, we love to tell the story of what these businesses, nonprofits, and individuals do to elevate the Northwest.

drive its prosperity, its culture, and

You’ll find dozens of these community

its relationships. That’s why we

stories, from North Idaho to Oregon, at

take our partnerships so seriously.

inb.com/community.

As a result, INB has become the region’s community bank for active, entrepreneurial wealth-builders. While there is nothing wrong with larger banks being geared more toward established wealth-

8


NORTHWEST

BA N CO R P O R AT I O N

97% C US TO M E R SAT ISFAC T I O N Results from INB's 2017 Customer Satisfaction Survey

Left: Brain Freeze Creamery, Spokane, Wash. Center: Coeur d'Alene Summer Theater, Idaho Bottom Left: Construction Services, Spokane, Wash.

Top Right: Fellow Coworking Bottom Right: Caitlyn Van Wingerden and Ollie the Yorkshire terrier, Van Wingerden Greenhouses, Spirit Lake, Idaho

9


2 017 A N N U A L R E P O R T

I N V E S TING WITH IN: PEOPLE & PL AC E On July 13, 2017, we celebrated the opening of our freshly renovated office headquarters on the 11th floor of the Paulsen Center, one of the most iconic buildings in downtown Spokane, Washington. The modern space offered our guests a peek into

professionals who seek the

the bank’s future, but the location

Northwest’s vibrant quality of life

is also a nod to our roots: in 1989,

and wonderfully low cost of living. As

the very first INB opened on the

INB also lives affordably, we reinvest

building’s ground floor. We still

in our workforce with generous

operate that location to this day.

wages and benefits — including

While Spokane is home, INB’s commitment to the city is more strategic than sentimental.

implementing a $15 minimum wage across the company — increasing retention and productivity.

Advantages abound in a still-

As we grow through acquisition

affordable place experiencing

(Oregon and the Palouse), and

a renaissance: today, we attract

through organic movement (Ephrata

and retain talented, well-rounded

and the Tri-Cities, Washington), we

10


NORTHWEST

BA N CO R P O R AT I O N

Top: Newly renovated INB office Bottom: The Paulsen Center, downtown Spokane, Wash.

I love how willing INB is to partner with us as we connect with great local nonprofits. establish INB’s strong corporate culture while maintaining the best of each place and its people.

J O N AT H A N S W E AT T Spokane restaurateur The Flying Goat & Republic Pi

Perhaps more than ever, 2017 was marked by investment in technology. By embracing the Azure Cloud, completing a host of internal updates for enterprise-wide efficiency, and rolling out new tools for consumers and merchants, we have built an infrastructure that makes INB competitive at our current size and poised to scale into the future. 11


2 017 A N N U A L R E P O R T

THE THE THE ALL THE

12

TEAM APPROACH CONDITIONS AFFEC T A SCENT


Both push and pull are at play in the current business moment for Northwest Bancorporation. Our financial performance,

and the hard, successful work of bank acquisitions and growth from 2014–2017 have us confident to push further upward. But smart growth requires the right timing with a market’s needs, and at the moment INB is also being pulled — by a need for our style of banking in Portland, Oregon.


2 017 A N N U A L R E P O R T

One example sits geographically between Spokane and Portland. Boasting the Pacific Northwest National Laboratory and a growing

FI NDING TH E BE S T GI V I NG OU R BE S T

business culture fueled by one of

At the moment of ascent, it’s important

moments to make the leap, but there

to revisit risk; to explore once again how

was something else that prevented

prepared the team is for the task ahead.

the move. “We didn’t have the right

While describing our approach, we

people in place,” remembers Russ

noted INB’s mission to limit risk exposure

Lee, CEO. “That was the missing

through diversity. Before leaping

piece, until our relationships led us to

into further growth, INB is carefully

Nancy Boettcher and Mark Gray. They

evaluating the growth of previous

had the expertise and drive for us

years, harvesting lessons learned and

to succeed for that specific market’s

preparing for contingencies.

needs. So we made the move.”

the most educated workforces in America, the Tri-Cities (Pasco, Richland & Kennewick, Washington) had long been an area of interest for INB. But to simply try to duplicate what had worked well in Spokane didn’t feel right. In the case of the Tri-Cities, there were enticing

It sounds cliché, but our bank is like family. So, I was concerned about (the acquisition), but INB has been really great. M A R K B R O W N , owner at Northwest Graphic Works 14


NORTHWEST

BA N CO R P O R AT I O N

Top: St. John's Bridge, Portland, Ore. Bottom: Valli Millard, Vice President, Ephrata, Wash.

Further down the Columbia, the acquisition of CenterPointe Bank (based in Hood River, Oregon) brought new challenges and needs. Like INB, CenterPointe was incredibly well connected to its local community. This is part of why the acquisition has made so much sense. But that connectedness came with worries that an out-oftown bank would swoop in and ruin relationships. “In that delicate situation, it is important to be very thoughtful about what to change and what to keep the same,” says Lee. “As we move deeper into the second year of that process, we’re getting a lot of good feedback, both internally, and with the customers who love their bank. This is incredibly important to us.” Since 2014, we’ve tested and refined the idea that our community focus is portable, leading to customer satisfaction and a real business case for growth. In 2018, we’re ready to take that model on the road. 15


OUR TIME IS NOW

16


NORTHWEST

BA N CO R P O R AT I O N

98% If building the INB mission and

A community-first, shop-local

culture has been a quarter-

mindset defines Portland (to the

century approach, we believe

point of national parody). Very

our ascent is now underway. Our

few banks are positioned to offer

investments inward and expansion

a solution that fits this community,

outward have been strategic and

but INB is. Our size allows us to

intentional. Without lessening

provide all the technology and

our commitment to the Inland

resources customers demand

Northwest, we have blazed a

while still maintaining a sense of

geographic trail west, across farms

personal connection.

and orchards and carbon-fiber plants — along and now across the Columbia River Gorge — creating new centers of trust along the way. Elsewhere, the bank acquisitions,

SAY T H E Y WO U L D R ECO M M E N D I N B Results from INB's 2017 Customer Satisfaction Survey

INB has demonstrated our commitment and performance in our communities, earning us the reputation to perform on a larger stage.

mergers, and failures of the last decade have created a vacuum in the Portland market, leaving one of our nation’s least corporate-minded markets without many options besides giant, nationwide banks.

Top Left: Old Town Sign, Portland, Ore. Bottom Right: Nick Smoot, Innovation Collective, Coeur d' Alene, Idaho

Top Center: Evan Lovell, Indaba Coffee, Spokane, Wash. Top Right: Portable Cedar Cabins, Spirit Lake, Idaho 17


2 017 A N N U A L R E P O R T

help us gain some big-picture insights into the area we serve. They jumped at the chance to drive from Priest Lake in the upper reaches of North Idaho, across Washington’s fertile fields to Puget Sound, down to Portland, and back to Spokane through the Columbia River gorge and the Palouse. Along the way, they stopped several times a day to meet with local entrepreneurs (and their INB bankers) to learn about those partnerships. “I’m from the area originally, and we just moved here together, so for me, this was a chance to get reacquainted with the region,” John says. “But what an experience. I was genuinely fascinated and excited by what we saw. This was a rare opportunity to experience the place, the people, and the work they are doing in these communities.”

OU R ROA D TRIP WE S T

Janna had spent time in Northwest cities, but not much in its smaller towns and countryside. “Experiencing all the geographic and climate diversity of the region that quickly was incredible,” said Janna. “But it was fascinating to see the variety of

Meet Janna. Meet John. They’re a

people and businesses across the

creative, inherently curious, recently

region.” The moment that stood out

married couple living in Spokane. They

to Janna? Meeting Steve Hill, the

once spent a year together in a van,

aeronautical engineer and parts

experiencing as much of the United

manufacturer in Enumclaw, whose

States as they could. So we recruited

problem solving and skills crafting

them to spend a few days traveling

discontinued airplane parts left her

around INB’s expanded territory to

feeling inspired and in awe.

18


NORTHWEST

BA N CO R P O R AT I O N

For John, his moment was in that

AT I N B WE BELI E V E I N PA R TN ERI NG WITH OU R CUS TOM ERS, HELPING TH EM AC H I E V E THEIR GOA L S A ND C R E ATE PROSPERIT Y. TOGE TH ER WE WILL R E AC H THE SU M MIT. Top Left: John, Janna and their Sprinter van

Bottom Center: Hood Crest Winery, Hood River, Ore.

Top Center: John and Janna in their Spokane home

Right: Patrik Barr, owner, Hood Crest Winery making pizza

most iconic Washington setting: an apple orchard. “It was a sunny day in November, but an early snow had the orchardist feeling nervous about the harvest,” he remembers. “It was an intense time for them — they only had 9 days to get all the apples off their trees.” John appreciated that they took the time to share about their business, and why they had chosen to go organic for the sake of worker safety, long before the dietary trend. He says watching the farmer with the INB ag lender was a powerful experience. “It made it clear to me that they are partners and friends, working closely together toward a goal they share.” Partners with our customers, working toward the goal of shared prosperity for the communities we serve: we couldn’t have summed up our path upward any better.

Learn more about Janna and John’s regional tour (and watch the videos) at INB.com/roadtrip 19


FINANCIAL HIGHLIGHTS FI V E -Y E A R SU M M A RY

(dollars in thousands, except per share data)

2017

2016

2015

2014

2013

FOR THE YEAR NET INCOME

$

4,129

$

5,071

$

3,060

$

3,260

$

2,599

$

0.59

$

0.78

$

0.61

$

0.78

$

0.81

TANGIBLE BOOK VALUE

$ 9.35

$

9.13

$

8.34

$

9.31

$

8.49

SHARES OUTSTANDING

7,237,251

6,419,861

6,368,798

4,157,632

4,117,673

LOANS, NET

$ 682,220

$ 490,816

$ 477,336

$ 336,421

$ 296,938

DEPOSITS

$ 722,622

$ 548,421

$ 525,884

$ 358,680

$ 320,624

ASSETS

$ 826,774

$ 636,528

$ 610,801

$ 421,807

$ 394,203

$

79,865

$

66,055

$

60,875

$

38,713

$

34,957

RETURN ON AVERAGE ASSETS

0.57%

0.82%

0.63%

0.80%

0.66%

RETURN ON AVERAGE EQUITY

5.74%

8.00%

6.39%

8.91%

6.87%

LOANS

39.0%

2.8%

41.9%

13.3%

11.6%

DEPOSITS

31.8%

4.3%

46.6%

11.9%

-3.7%

ASSETS

29.9%

4.2%

44.8%

7.0%

-1.2%

SHAREHOLDERS' EQUITY

20.9%

8.5%

57.2%

10.7%

-7.8%

PE R S H A R E EARNINGS (DILUTED)

AT D EC E M B E R 31

SHAREHOLDERS' EQUITY

F I N A N C I A L R AT I OS

G R OW T H R AT I OS

20


NORTHWEST

A SSE T S

G ROSS LOA N S $826,774

2017 2016 2015

$550

$650

$750

$850

D E POS I T S $722,622

2016 2015

$500

$600

$700

$400

$500

$600

$700

$79,865

2016 2015 2014

$38,713 $34,957

$40

$60

$300

$400

$500

$600

$700

$35,359

2017 $29,677 $22,821

2014

$19,020

2013

$19,817

$80

N E T I N CO M E

$15

$20

$25

$30

$35

$40

FU L LY D I LU T E D E A R N I N GS (E PS) $4,129

2017

$0.59

2017 2016

$5,071

2016

$0.78

2015

$3,060

$0.61

2014

$3,260

2014

$255,817

2015

$60,876

$2,599

$3

$275,402

2016

$66,055

2015

$407,018

REVENUES

2017

$20

$425,459

$200

SH A R E H O L D E R S' EQU I T Y

2013

$611,392

2013

$320,624

$2

$400

2017

2014

$358,680

2013

$300

2015

$525,885

$300

$200

2016

$548,421

2013

$303,395

CO R E D E POS I T S

2017

2014

$343,111

2013

$394,203

$450

$484,491

2014

$421,807

$350

$498,307

2015

$610,801

2013

$691,256

2017 2016

$636,528

2014

BA N CO R P O R AT I O N

$0.78 $0.81

2013

$4

$5

$6

$0

$0.25

$0.50

$0.75

$1.00

21


2 017 A N N U A L R E P O R T

COR POR ATE LE A DERSHI P SENI O R M A N AG EMEN T

B OA RD O F DIREC T O R S

Russell A. Lee President & CEO Northwest Bancorporation, Inc. INB

Nancy C. Allen Vice President of Real Estate and General Counsel Stay Alfred

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

Chad R. Burchard Executive Vice President & Chief Banking Officer

Anthony D. Bonanzino Chairman Northwest Bancorporation, Inc. INB

Russell A. Lee President & CEO Northwest Bancorporation, Inc. INB

Principal Member Century Archives Northwest, LLC

Bryan S. Norby Financial Analyst Yanke Machine Shop Ry Timber Company YMC, Inc.

Mark V. Dresback Executive Vice President & Chief Credit Officer Holly A. Poquette Executive Vice President & Chief Financial Officer David F. Hockett Senior Vice President & Chief Risk Officer Eric J. Landon Senior Vice President & Chief Technology Officer Jason W. Miller Senior Vice President & Director of Marketing and Culture Jennifer L. Nelson Senior Vice President & Director of Human Resources

22

Katie Brodie Northern Idaho Field Representative Special Assistant to Governor C.L “Butch� Otter of Idaho Harlan D. Douglass President Harlan D. Douglass, Inc. Barry A.J. Featherstone President (Retired) Graybeal Distributing Company

Frank A. Reppenhagen Partner CBC Management Partners, LLC Jennifer P. West Reputation Management Consultant


2017 FINANCIAL REPORT


REPORT OF INDEPENDENT AUDITORS The Board of Directors Northwest Bancorporation, Inc. and Subsidiary

R EP O R T O N T HE FIN A NC I A L S TAT EMEN T S 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, 2017 and 2016, 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 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 we have 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, 2017 and 2016, 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 March 16, 2018 We have served as the Company’s auditor since 1999.

25


N O R T H W E S T B A N C O R P O R A T I O N, I N C. 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 $7,274,280 and $6,263,431 Loans held for sale Premises and equipment, net Bank-owned life insurance Accrued interest receivable Goodwill Core deposit intangible, net Other real estate owned, 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 7,237,251 and 6,419,861 shares Accumulated income Accumulated other comprehensive income, net of tax Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

26

2017 $

$

826,774,336

$

636,528,071

$

722,621,801 174,351 19,597,180 4,516,273 746,909,605

548,420,858 150,600 18,567,047 3,334,408

62,552,454 17,187,991 124,286

52,733,369 13,077,733 244,056

$

$

$

2016

37,850,380 13,916,598 4,174,000 41,458,300 1,261,700 682,220,211 1,366,268 14,800,127 9,416,626 3,453,827 9,477,070 2,693,535 1,241,977 3,443,717

December 31,

79,864,731 826,774,336

$

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

570,472,913

66,055,158 636,528,071


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Consolidated Statements of Income

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

2017 $

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

 

Other noninterest expense Total noninterest expense Income before income taxes Income tax expense NET INCOME Earnings per common share - basic

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

31,344,745 987,355 389,862

$

32,721,962

1,710,934 776,507

2,487,441

30,234,521

1,135,900

29,098,621

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

Year Ended December 31,

5,124,604

13,886,110 2,321,288 1,439,269 1,146,385 304,526 (28,811) 1,917,314

27,226,071

6,997,154

2,867,964

$

4,129,190

$ $

0.61

0.59 6,794,669 6,982,182

26,045,939 941,178 278,158

1,570,072 747,481

27,265,275

2,317,553

24,947,722

363,000

24,584,722

852,286 1,447,396 2,429,423

4,729,105

6,239,990

977,060 1,396,175 2,751,369

2016

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

2,412,862

$

5,070,797

$ $

0.79

0.78 6,382,048 6,511,253 27


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Consolidated Statements of Comprehensive Income

2017 Net income Other comprehensive loss: Unrealized holding loss on securities available for sale arising during the year, net of tax of $(39,441) and $(170,416) Other comprehensive loss COMPREHENSIVE INCOME

28

Year Ended December 31,

2016

$

4,129,190

$

5,070,797

(138,702)

(330,808)

4,739,989

(138,702)

$

3,990,488

$

(330,808)


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Consolidated Statements of Changes in Shareholders’ Equity

Shares 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 Net income Restricted stock vested Stock issued to directors Issuance of common stock in merger Equity-based compensation expense One time adjustment for deferred tax writedown Other comprehensive loss, net of tax Balance, December 31, 2017

Common Stock Amount

6,368,798

44,748 6,315 6,419,861 26,865 7,383 783,142 7,237,251

$

$

52,293,570 61,461 378,338 52,733,369 90,736 9,280,233 448,116 62,552,454

Accumulated Income $

$

8,006,936 5,070,797 13,077,733 4,129,190 (18,932) 17,187,991

Accumulated Other Comprehensive Income $

$

574,864 (330,808) 244,056 18,932 (138,702) 124,286

Total $

$

60,875,370 5,070,797 61,461 378,338 (330,808) 66,055,158 4,129,190 90,736 9,280,233 448,116 (138,702) 79,864,731

29


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Consolidated Statements of Cash Flows

2017 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 Amortization of core deposit intangible Gain on sale of other real estate owned, net Increase in cash surrender value of bank-owned life insurance Deferred income tax (benefit) expense Equity-based compensation expense 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 other real estate owned Stock issued in acquisition Cash resulting from acquisition, net of cash consideration paid Net cash (used by) provided by investing activities

30

Year Ended December 31,

$

4,129,190

293,638 (756,895) (820,273) 1,135,900 (45,197,193) 49,050,765 (1,396,175) 1,439,269 422,779 328,992 (20,311) (116,223) (124,247) 448,116 90,736

2016

$

5,070,797

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

(212,008) 1,665,616 1,776 575,851 10,939,303

2,689,000

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

9,145,960 (312,700) 241,700 (95,849,990) (2,212,610) 3,000 223,500 9,280,233 4,897,952 (71,893,955)

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

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


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Consolidated Statements of Cash Flows

2017 CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits Proceeds from borrowed funds Repayment of borrowed funds Net cash provided by financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 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 Adjustment to AOCI-AFS deferred tax adjustment 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

2016

36,269,672 5,000,000 (3,990,000)

$

37,279,672 (23,674,980)

75,441,958

51,766,978

$

46,034,719

$

2,463,690 2,632,467

$

2,298,383 1,898,313

(138,702) 18,932 700,039 20,133 540,000 154,787,463 138,579,393

(330,808) 580,087 20,133 -

$

Year Ended December 31,

$

22,536,383 (1,400,000)

21,136,383 29,407,239

75,441,958

31


N O R T H W E S T B A N C O R P O R A T I O N, I N C. Notes to Consolidated Financial Statements

N O T E 1 – SU MM A R Y O F SI G NIFI C A N T ACCO U N T ING P O L I C IE S 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, Inland Properties 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 July 14, 2017, the Company acquired CenterPointe Community Bank (“CenterPointe”), pursuant to the terms and conditions of the Agreement and Plan of Merger, dated March 22, 2017. This acquisition was consistent with the Company’s strategic plan to grow through acquisitions. This is the second acquisition for the Company. In 2015 the Company acquired Fairfield Financial Holdings Corp., and its wholly owned subsidiary Bank of Fairfield (“Fairfield”). 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, 2017 and 2016. 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. 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-of-payment 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. 32


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 chargeoff 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 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 nonaccretable 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. 33


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. 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. Other real estate owned: 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. 34


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. 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 under the provisions of ASC Topic 350, Intangibles – Goodwill and Other 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. Impairment testing is performed using either a qualitative or quantitative approach. The Company only has one reporting unit, so all of the Company’s goodwill is allocated to the Company. The Company has selected the fourth quarter as the period in which it performs the annual goodwill impairment test. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. The Company performs impairment testing using a qualitative approach to determine whether it is more likely than not that the fair value is less than the carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among other things, a material change in the value of the Company due to a deterioration of macroeconomic conditions, industry or market deterioration, adverse action or assessment by a regulator, and changes in other factors that impact the Company or industry. If the qualitative assessment indicates that it is not more likely than not that impairment exists, no further testing is performed; otherwise, the Company would proceed with a quantitative two-step goodwill impairment test. In the first step, the Company compares its estimate of the fair value of the reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value exceeds its carrying amount, goodwill is not impaired and the second step is not required. If necessary, the second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by assigning the value of the reporting unit to all the assets and liabilities of that unit, including other identifiable assets. An impairment loss is recognized if the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill. Based on our annual analysis the Company determined that it is more likely than not that goodwill was not impaired and no impairment charges were recorded during the years ended December 31, 2017 and 2016. Intangibles consist of core deposit intangible assets. Identifiable intangibles with definite lives are amortized over the 10-year period benefited and are also reviewed periodically for impairment. Amortization of intangible assets is included in other noninterest expense. Core deposit intangibles were recognized apart from goodwill at the time of the Fairfield and CenterPointe acquisitions based on valuations performed. In valuing core deposit intangibles, variables such as deposit servicing costs, attrition rates and market discount rates were considered. If the estimated fair value is less than the carrying value, the core deposit intangible would be reduced to such value and the impairment recognized as noninterest expense. The Company did not recognize impairment on its core deposit intangibles for the years ended December 31, 2017 and 2016. 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. 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.

35


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 using the Treasury Stock Method. 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. 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.

R EC EN T LY IS SU ED ACCO U N T ING PR O N O U NC EMEN T S In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU was issued to address certain stranded tax effects in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act of 2017. The ASU provides companies with the option to reclassify stranded tax effects with AOCI to retained earnings in each period in which the effect of the change from the newly enacted corporate tax rate is recorded. The amount of the reclassification would be calculated on the basis of the difference between the historical and newly enacted tax rates for deferred tax liabilities and assets related to items within accumulated other comprehensive income. The ASU requires companies to disclose its accounting policy related to releasing income tax effects from AOCI, whether it has elected to reclassify the stranded tax effect, and information about the other income tax effects that are reclassified. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods, therein, and early adoption is permitted for public business entities for which financial statements have not yet been issued. As of December 31, 2017, the Company adopted the ASU and made a reclassification from accumulated other comprehensive income to retained earnings on the Consolidated Statements of Changes on Shareholders’ Equity, related to the stranded tax effects due to the change in the federal corporate tax rate applied on the unrealized gains on investments on a portfolio basis, to reflect the provisions of this ASU. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The amendments in this update are effective for years beginning after December 15, 2019, and interim periods within years beginning after December 15, 2020, however, early adoption is permitted. Under ASU 2016-02, the Company will recognize a right-of-use asset and a lease obligation liability on the consolidated balance sheet, which will increase the Company’s assets and liabilities. The Company is evaluating other potential impact of ASU 2016-02 on its consolidated financial statements. In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objectives of the ASU are to simplify accounting for the tax consequences of a stock payment and amend the manner in which excess tax benefits and a business’s payments to satisfy the tax obligation for recipients of the shares should be classified. For all nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption was permitted in any interim or annual period. The Company adopted ASU 2016-09 effective January 1, 2017. The adoption of ASU 2016-09 did not have a significant impact on the Company’s financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which requires the measurement of all expected credit losses for financial assets held at the reporting date be based on historical experience, current condition, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. This guidance also amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. For the Company, this guidance is effective for years and interim periods beginning after December 31, 2020. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements. The Company expects to recognize a one-time cumulative effect increase to the allowance for loan losses as of the beginning of the reporting period in which the ASU takes effect, however, cannot yet determine the magnitude of the impact on the consolidated financial statements.

36


In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which provides guidance on eight specific cash flow issues in order to reduce diversity in the manner in which certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments in this ASU are effective for nonpublic business entities years beginning after December 15, 2019, however, early adoption is permitted. Management expects ASU 2016-15 will not have a significant impact on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for the Company beginning January 1, 2020, with early adoption permitted for goodwill impairment tests performed after January 1, 2017. Management expects ASU 2017-04 will not have a significant impact on its consolidated financial statements.

N O T E 2 – B USINE S S CO MBIN AT I O N On July 14, 2017, the Company acquired all of the outstanding shares of CenterPointe Community Bank in an acquisition accounted for under the acquisition method of accounting in accordance with ASC 805. Acquisition expenses related to the transaction are included in earnings. Stock issuance costs were not material. There were no contingent assets or liabilities arising from the acquisition. The operating results of CenterPointe have been included in the Company’s consolidated financial statements since the date of acquisition. Under the terms of the Agreement, each CenterPointe common share was converted into the right to receive, at the election of the shareholder (subject to proration as outlined in the Agreement), either cash or Company common stock, or a combination of both. Total consideration included aggregate cash in the amount $6,927,837 and the issuance of 783,142 shares of the Company’s common stock valued at $11.85 per common share. The transaction resulted in goodwill of $3,270,734, which is nondeductible for tax purposes. Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired and reflects related synergies and cost savings expected from combined operations. Assets acquired, liabilities assumed, and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities requires significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for CenterPointe 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 Other assets Total assets acquired Liabilities assumed: Deposits Accrued interest payable Other liabilities Total liabilities assumed Acquisition consideration

$

$

7,816,622 13,289,400 2,223,000 25,779,996 157,400 95,813,480 931,117 2,246,068 599,526 3,270,734 1,761,000 899,120

154,787,463

137,931,271 21,975 626,147

138,579,393 16,208,070

37


As a result of the CenterPointe acquisition, the Company recognized $3,270,734 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 and income taxes, will be amortized or accreted to operations over the expected life of the related asset or liability. Adjustments for impaired loans 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 following table presents total revenue (interest income and noninterest income) and net income for illustrative purposes only, for the years ended December 31, 2017 and 2016, as if CenterPointe had been acquired on January  1, 2016. This unaudited estimated pro forma financial information combines the historical results of CenterPointe with the Company’s consolidated historical results. Pro forma adjustments include accretion of loan discount, amortization of core deposit intangible, and reversal of acquisition-related costs, with all adjustments tax effected. The pro forma information is not indicative of what would have occurred had the acquisition actually occurred on January 1, 2016. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loan assets at fair value. As a result, actual amounts would have differed from the unaudited pro forma information presented. The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of CenterPointe for the period July 15, 2017 to December 31, 2017. Disclosure of the amount of CenterPointe’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. 2017 Total revenue Net income Basic earnings per share Diluted earnings per share

$ $ $ $

40,823,736 5,619,605 0.78 0.77

2016 $ $ $ $

38,421,865 6,198,651 0.87 0.85

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 CenterPointe transaction that consummated during the year ended December 31, 2017:

Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Total loans at acquisition

38

Fair Value $

$

51,869,983 2,499,487 11,048,337 7,085,042 16,146,900 5,955,030 77,759

94,682,538

Gross Contractual Amounts Receivable $

$

52,067,339 2,507,407 11,170,104 6,971,582 16,982,697 6,013,155 78,704

95,790,988

Estimated Contractual Cash Flows Not Expected to be Collected $

$

148,793 6,268 76,991 30,999 666,274 116,189 3,251

1,048,765


N O T E 3 – IN V E S T MEN T S IN SEC U R I T IE S 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, 2017 and 2016. The amortized cost of securities and their approximate fair values were as follows: December 31, 2017 Gross Unrealized Gains

Amortized Cost State and municipal securities Corporate debt obligations

$

SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$

8,015,704 7,113,700

$

3,919,473 5,689,239 16,560,557 41,298,673

$

Gross Unrealized Losses

180,943 72,780

$

75,161 9,137 43,420 381,441

(8,707) (11,822)

(3,203) (138,617) (59,465) (221,814)

$

Fair Value $

8,187,940 7,174,658

3,991,431 5,559,759 16,544,512 41,458,300

$

December 31, 2016

Gross Unrealized Gains

Amortized Cost 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

$ $

Gross Unrealized Losses

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

$

$

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

Fair Value $ $

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

As of December 31, 2017 and 2016, there were 39 and 18 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: December 31, 2017

Less Than 12 Months Fair Value State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$

1,652,393 2,302,357 970,409 2,220,998 11,847,500

$ 18,993,657

12 Months or More

Unrealized Losses

$

$

(8,707) (11,822) (3,203) (13,933) (50,237)

(87,902)

Fair Value $

$

2,978,797 1,095,512

4,074,309

Total

Unrealized Losses

$

$

(124,684) (9,228)

(133,912)

Unrealized Losses

Fair Value $

1,652,393 2,302,357 970,409 5,199,795 12,943,012

$ 23,067,966

$

$

(8,707) (11,822) (3,203) (138,617) (59,465)

(221,814)

39


December 31, 2016

Less Than 12 Months

Unrealized Losses

Fair Value State and municipal securities

Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$

$

445,923

$

5,645,924

$

3,706,749 1,493,252

12 Months or More

$

(158,110)

$

(146,411) (8,417)

Unrealized Losses

Fair Value

(3,282)

Total

-

$

321,139

$

321,139

Unrealized Losses

Fair Value -

$

(1,935)

$

(1,935)

445,923

$

5,967,063

$

3,706,749 1,814,391

(3,282)

(146,411) (10,352)

(160,045)

Management has evaluated the above securities and does not believe that any individual unrealized loss as of December 31, 2017 and 2016, 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, 2017, 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

$ $

2,047,496 7,542,889 7, 355, 362 24,352,926 41,298,673

Fair Value $ $

2,06 4,859 7,670,983 7,452,514 24,269,944 41,458,300

At December 31, 2017 and 2016, securities with an amortized cost of $7,231,147 and $6,738,047, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The market value for these securities was $7,125,635 and $6,682,242 at December 31, 2017 and 2016, respectively. No securities were sold during the years ended December 31, 2017 and 2016. 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 year ending December 31, 2017 one security was called prior to maturity; there was no remaining premium or discount to report. For the year ending December 31, 2016, there were no securities called prior to maturity.

40


N O T E 4 – LOA NS REC EI VA BL E A ND A L LOWA NC E F O R L OA N L OS SE S The following table presents the Bank’s loan balances as of December 31: 2017

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

$

Allowance for loan losses Net deferred loan fees

2016

309,276,541 67,966,844 37,694,774 69,354,534 102,499,484 93,764,337 10,699,671 691,256,185

$

682,220,211

$

(7,274,280) (1,761,694)

$

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

Loans fall into the following fixed and variable components as of December 31: 2017 Fixed rate loans Variable rate loans

$

2016

138,869,762 552,386,423

$

691,256,185

$

116,688,004 381,619,363

$

498,307,367

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: December 31, 2017 Acquired Impaired

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

$

$

246,820,911 67,061,083 17,767,442 60,588,443 86,120,150 80,127,243 10,485,235

568,970,507

$

$

652,337 651,672 27,551

1,331,560

Acquired Non-impaired $

$

61,803,293 905,761 19,927,332 8,114,419 16,379,334 13,637,094 186,885

120,954,118

Total Loans $

$

309,276,541 67,966,844 37,694,774 69,354,534 102,499,484 93,764,337 10,699,671 691,256,185

41


December 31, 2016 Acquired Impaired

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

$

$

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

$

Acquired Non-impaired $

$

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

$

Acquired impaired loans: The Company acquired certain impaired loans as part of the Fairfield and CenterPointe transactions. As of December 31, 2017 and 2016, the non-accretable difference between the contractually required payments and cash flows expected to be collected was $614,200 and $51,954, respectively. The outstanding contractual unpaid principal balance of acquired impaired loans and the carrying amount of those loans as of December 31, 2017 and 2016, are summarized as follows: December 31, 2017 Unpaid Principal Balance Real estate: Commercial Residential Commercial and industrial Consumer

$

$

1,062,766 865,174 31,331 1,959,271

December 31, 2016 Unpaid Principal Balance

Carrying Value $

$

652,337 651,672 27,551 1,331,560

$

$

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

Carrying Value $

$

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

The following table summarizes the changes in accretable yield for acquired impaired loans for the years ended December 31: 2017 Balance, beginning of year Additions resulting from acquisitions Accretion to interest income Reclassification from non-accretable difference Disposals Balance, end of year

$

$

4,041 14,825 (30,952) 25,597 13,511

2016 $

$

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

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 2017: 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

42

$

$

1,745,884 (600,117)

1,145,767 (14,825)

1,130,942


Acquired non-impaired loans: The Company acquired certain non-impaired loans as part of the Fairfield and CenterPointe transactions. The unpaid principal balance and carrying value of these loans at December 31, 2017 and 2016, are as follows: December 31, 2017 Unpaid Principal Balance Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

$

$

62,267,056 916,892 20,048,661 8,017,021 16,950,911 13,655,083 186,824

122,042,448

December 31, 2016

Carrying Value $

$

61,803,293 905,761 19,927,332 8,114,419 16,379,334 13,637,094 186,885

120,954,118

Unpaid Principal Balance $

$

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

44,764,059

Carrying Value $

$

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

43,994,859

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 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.

43


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: Accruing Interest 30–59 Days Past Due

60–89 Days Past Due

90 or More Days Past Due

$

$

$

Current Real estate: Commercial $ 308,391,153 Construction and land development 67,846,655 Farmland 37,694,774 Residential 67,748,259 Commercial and industrial 102,111,123 Agriculture 93,747,241 Consumer 10,584,768 $ 688,123,973

$

50,759 242,311 155,143 17,096 74,654

539,963

372,732 12,698

$ 385,430

Accruing Interest 30-59 Days Past Due

Current Real estate: Commercial $ 226,264,140 Construction and land development 42,382,467 Farmland 18,374,964 Residential 63,534,950 Commercial and industrial 75,881,431 Agriculture 60,395,922 Consumer 8,949,171 $ 495,783,045

December 31, 2017

$

83,956 995,814 100,000 34,645

$ 1,214,415

$

124,972 124,972

Nonaccrual

Total Loans

$ 233,051 69,430 214,588 233,218 -

$ 308,624,204 67,966,844 37,694,774 68,702,862 102,499,484 93,764,337 10,672,120

Nonaccrual

Total Loans

$ 750,287

$ 689,924,625

December 31, 2016

60-89 Days Past Due

90 or More Days Past Due

$

$

378,088 5,967

$ 384,055

-

$

$

-

128,812 334,970 45,425 54,268 18,724

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

$ 582,199

$ 497,963,714

As of December 31, 2017 there was one loan over 90 days past due and still on accrual with a balance of $124,972. There were no loans over 90 days past due and still on accrual as of December 31, 2016. Nonaccrual loans, segregated by class of loans, were as follows as of December 31: Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

2017 $

$

308,839 69,430 714,225 233,218 1,325,712

2016 $

$

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

Nonaccrual loans have related government guaranteed balances of $0 and $95,273 as of December 31, 2017 and 2016, respectively. If the Bank’s nonaccrual loans had performed in accordance with their original contract terms, additional interest income of $25,613 in 2017 and $44,094 in 2016 would have been recognized.

44


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: December 31, 2017

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

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

$

$

$

$

2,156,375 145,509 498,213 433,279 17,063

3,250,439

$

237,185 69,430 214,588 254,646 775,849

$

1,919,189 275,224 88,248 -

2,282,661

Total Recorded Investment $

$

Related Allowance

2,156,374 69,430 489,812 342,894 -

$

3,058,510

108,967 54,328 12,126 -

$

175,421

December 31, 2016

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

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

$

$

$

$

2,502,513 1,182,617 275,224 328,197 41,772

4,330,323

$

128,812 334,970 26,589 1,085

491,456

$

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

Total Recorded Investment $

$

Related Allowance

2,462,513 1,140,629 275,224 173,928 18,723

$

4,071,017

$

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

The average recorded investment in impaired loans and the related interest income recognized for cash payments received were as follows: December 31, 2017 Average Recorded Investment Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer

$

$

2,500,239 5,786 633,520 712,638 128,207 46,298

4,026,688

December 31, 2016

Interest Income Recorded for Cash Payments Received $

$

137,087 13,769 25,030 6,678 1,737

184,301

Average Recorded Investment $

$

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

6,384,061

Interest Income Recorded for Cash Payments Received $

$

151,310 27,933 5,762 4,440 3,561 -

193,006

45


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: December 31, 2017

Real estate: Commercial Farmland Residential Commercial and industrial

Accruing Restructured Loans $

$

1,919,190 275,224 88,248

2,282,662

December 31, 2016

Restructured Loans Included in Nonaccrual Loans

$

Total

-

$

$

-

1,919,190 275,224 88,248

$

Restructured Loans Included in Nonaccrual Loans

Accruing Restructured Loans $

2,282,662

2,333,702 805,659 275,224 121,313

$

$

3,535,898

$

52,614

52,614

Total $

$

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

For the years ended December 31, 2017 and 2016, the Bank recognized interest income of $146,894 and $229,275, respectively, in connection with restructured accruing loans. Troubled debt restructurings for the years ended December 31, 2017 and 2016, were as follows: 2017

Commercial and industrial

Number of Contracts 0

Pre-modification Recorded Investment $

-

$

Postmodification Recorded Investment

2016 Pre-modification Recorded Investment

Number of Contracts 3

-

$

29,177

Postmodification Recorded Investment $ 29,177

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. 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, 2017. 2017 Number of Contracts Commercial and industrial

0

Recorded Investment

$

2016 Number of Contracts

-

3

Recorded Investment $

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.

46


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. 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 $

$

297,657,139 67,261,083 35,432,242 67,383,053 101,568,661 87,874,823 10,610,638 667,787,639

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

Special Mention $

$

10,344,506 636,331 251,677 492,456 88,248 3,134,003 11,249 14,958,470

Special Mention $

$

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

December 31, 2017 Substandard

$

1,274,896 69,430 2,010,855 1,479,025 842,575 2,755,511 77,784

$

8,510,076

December 31, 2016 Substandard

$

$

968,079 1,195,668 751,759 120,192 1,045,745 101,639

4,183,082

Doubtful/Loss $

Total -

$

-

Doubtful/Loss $

$

$

$

309,276,541 67,966,844 37,694,774 69,354,534 102,499,484 93,764,337 10,699,671 691,256,185

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

47


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: December 31, 2017 Balance, Beginning of Year Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

$

$

Provision for Loan Losses

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

$

6,263,431

$

371,198 515,108 121,644 (44,294) 194,744 366,266 (3,450) (385,316)

1,135,900

Charge-offs $

$

(129,623) (105,718) (156,754) -

Balance, End of Year

Recoveries $

(392,095)

$

58,730 3,998 85,801 118,515 -

$

267,044

$

2,633,596 1,256,782 189,098 830,457 834,466 750,801 179,930 599,150 7,274,280

December 31, 2016 Balance, Beginning of Year Real estate: Commercial Construction and land development Farmland Residential Commercial and industrial Agriculture Consumer Unallocated

48

$

$

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


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: December 31, 2017 Collectively Evaluated for Impairment Loans Real estate: Commercial $ 306,467,830 Construction and land development 67,897,414 Farmland 37,694,774 Residential 68,213,050 Commercial and industrial 102,156,590 Agriculture 93,764,337 Consumer 10,672,120 Unallocated $ 686,866,115

Individually Evaluated for Impairment

Related Allowance $ 2,518,628 1,256,782 189,098 776,129 822,340 750,801 160,412 599,150 $ 7,073,340

Related Allowance

Loans $

2,156,374 69,430 489,812 342,894 -

$ 3,058,510

Loans Acquired with Deteriorated Credit Quality

$

$

108,967 54,328 12,126 -

175,421

Related Allowance

Loans $

652,337 651,672 27,551 -

$ 1,331,560

$

$

6,001 19,518 -

25,519

December 31, 2016 Collectively Evaluated for Impairment Loans Real estate: Commercial $ 223,930,439 Construction and land development 42,466,423 Farmland 17,947,393 Residential 64,300,965 Commercial and industrial 75,861,771 Agriculture 60,395,922 Consumer 8,989,784 Unallocated $ 493,892,697

Individually Evaluated for Impairment

Related Allowance

Loans

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

$ 2,462,513 1,140,629 275,224 173,928 18,723 -

$ 6,065,438

$

4,071,017

Loans Acquired with Deteriorated Credit Quality

Related Allowance $

$

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

Related Allowance

Loans $

$

92,969 155,440 64,989 30,255 -

343,653

$

$

6,000 11,801 22,758 -

40,559

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.

49


N O T E 5 – PR EMISE S A ND EQ U IPMEN T Components of premises and equipment included in the consolidated statements of financial condition were as follows as of December 31: 2017 Land Buildings and improvements Furniture, fixtures and equipment Leasehold improvements Construction in progress Total cost Less accumulated depreciation and amortization Premises and equipment, net

$

3,216,680 12,452,515 6,208,471 3,391,981 296,437

2016 $

25,566,084 (10,765,957)

$

14,800,127

3,415,050 12,337,985 7,448,238 2,010,615 373,646

$

25,585,534 (11,524,086)

14,061,448

The Bank leases certain facilities for its office locations under non-cancelable operating lease agreements that expire on various dates through 2039 and that have various renewal options. Total lease payments under these leases and other month-to-month rentals for the years ended December 31, 2017 and 2016, were $881,578 and $655,172, 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, 2017, the future minimum lease payments under non-cancelable operating leases and future minimum income receivable under non-cancelable operating leases: Lease Payments

Year ending December 31, 2018 2019 2020 2021 2022 Thereafter Total minimum payments required

$

1,108,442 1,226,408 1,243,980 1,118,877 1,123,779 5,353,625

$

11,175,111

Sublease Income $

$

12,000 12,900 13,200 13,200 14,100 32,400 97,800

Premises and equipment held for sale was $458,389 for the years ended December 31, 2017 and 2016. Premises and equipment held for sale is included in other assets.

N O T E 6 – G O O DW IL L A ND IN TA NG IBL E A S SE T S The following table summarizes the changes in the Company’s goodwill and intangible assets: 2017 Goodwill Balance, beginning of year Acquired Amortization Balance, end of year

50

$

$

6,206,336 3,270,734 -

9,477,070

$

$

2016

Core Deposit Intangible 1,261,527 1,761,000 (328,992)

2,693,535

Goodwill $

$

6,206,336 6,206,336

$

$

Core Deposit Intangible 1,493,451 (231,924)

1,261,527


The following table presents the forecasted amortization expense for 2018 through 2022 for intangible assets acquired in the CenterPointe and Fairfield transactions: 2018 2019 2020 2021 2022 Thereafter

$

$

434,232 389,665 352,797 324,305 298,500 894,037

2,693,535

N O T E 7 – O T HER RE A L E S TAT E The following table presents the changes in other real estate, net of any related valuation allowance: 2017 Balance, beginning of year Additions through acquisition Transfers from loans Dispositions of property Balance, end of year

$

$

745,127 700,039 (203,189)

1,241,977

2016 $

$

308,250 580,087 (143,210) 745,127

Other 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, 2017 and 2016, the Bank had a valuation allowance on other real estate totaling $1,575,000.

N O T E 8 – DEP OSI T S Classifications of deposits at December 31, were as follows: 2017 Noninterest bearing demand deposits Money market accounts NOW accounts Savings accounts Time deposits, $250,000 and over Time deposits, under $250,000

$

$

249,540,660 120,919,926 149,088,543 91,842,047 29,459,151 81,771,474 722,621,801

2016 $

$

164,026,796 80,205,456 96,791,033 84,435,229 42,356,317 80,606,027

548,420,858

Overdraft deposit accounts with balances of $297,150 and $129,954 at December 31, 2017 and 2016, respectively, were reclassified as loans receivable. Maturities for time deposits at December 31, 2017, are summarized as follows: 2018 2019 2020 2021 2022 Total

$

$

60,494,990 34,208,956 12,670,978 2,303,698 1,552,003

111,230,625

51


N O T E 9 – B O RR OW ED F U NDS Borrowed funds consist of the following at December 31: 2017 Federal Home Loan Bank advances Subordinated debentures Junior subordinated debentures

$

$

8,540,476 5,901,704 5,155,000

19,597,180

2016 $

$

7,530,476 5,881,571 5,155,000

18,567,047

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, 2017, are as follows: Amount 2018 2019 2020 2021 2022

$

$

2,127,778 4,523,809 1,055,556 500,000 333,333 8,540,476

Weighted Average Interest Rate 1.89% 1.83% 1.89% 1.89% 1.89%

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. 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 3.39% at December 31, 2017. 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.

52


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, 2017 Outstanding Balance

Line Amount Federal Home Loan Bank Pacific Coast Bankers Bank Zions Bank

$

$

226,470,101 10,000,000 5,000,000

241,470,101

December 31, 2016

$

$

Outstanding Balance

Line Amount -

$

$

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

$

$

-

The FHLB line is secured by a blanket pledge on Bank assets as well as $235,010,576 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.

N O T E 10 – CO MMI T MEN T S A ND CO N T ING ENC IE S 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, 2017 and 2016, commitments under standby letters of credit were $1,754,493 and $1,639,743, respectively, and firm loan commitments were $218,694,312 and $202,885,660, 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, 2017 and 2016, 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. We also have a purchase obligation related to the agreement with our third-party data processing service. The actual obligation for data processing is unknown and dependent on certain factors including volume and activities. Data processing expense was $672 thousand and $409 thousand for the years ended December 31, 2017 and 2016, respectively. Our current agreement expires October 1, 2022.

N O T E 11 – CO NC EN T R AT I O NS O F C RED I T R ISK 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.

53


N O T E 12 – O T HER N O NIN T ER E S T INCO ME A ND E X PENSE 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 Data processing fees B&O tax Telephone expense Other OTHER NONINTEREST EXPENSE

2017 $

2016 $

$

1,936,150 815,219

2,751,369

$

2,429,423

$

1,050,751 818,475 672,722 404,613 396,577 2,896,852

$

998,669 509,410 409,176 353,400 410,332 3,048,558

$

6,239,990

1,817,217 612,206

$

5,729,545

N O T E 13 – INCO ME TA X E S The Tax Reform Act (the “Act”) was enacted December 22, 2017. The law includes significant changes to the U.S. corporate system, including a Federal corporate rate reduction from 34% to 21%. As a result of when the Act was signed into law, the Bank’s deferred tax assets and liabilities were required to be remeasured using the lower 21% federal rate as of December 31, 2017. This resulted in a one-time unfavorable charge to tax expense of $417,900. The components of income tax expense are as follows: 2017 Current tax expense Deferred tax (benefit) expense Federal rate change - tax reform INCOME TAX EXPENSE

$

$

2,992,211 (542,147) 417,900

2,867,964

2016 $

$

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

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% and the Oregon income tax rate of 6.6%. 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. In addition, the one-time, unfavorable charge to income tax expense arising from the Tax Reform Act increased the effective tax rate by approximately 6.0% over what it would have been without the measurement adjustment. The differences between tax expense at the statutory rates and actual tax expense were as follows for the years ended December 31: 2017 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 Federal rate change-tax reform Other INCOME TAX EXPENSE

54

$

$

2,379,032 (144,532) 3,220 152,491 62,803 417,900 (2,950) 2,867,964

2016 $

$

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


The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate for the years ended December 31: 2017 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 Federal rate change-tax reform Other EFFECTIVE TAX RATE

2016 34.0% (2.1%) 0.1% 2.2% 0.9% 6.0% (0.1%)

34.0% (2.3%) 0.0% 0.4% 0.4% 0.0% (0.3%)

41.0%

32.2%

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 other real estate owned 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

2017 $

$

1,056,569 457,634 380,490 196,333 98,903 9,306 2,930 309,805

2016 $

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

2,511,970

2,541,025

681,746 596,349 297,752 97,336 35,341 60,152 4,843

967,156 432,578 355,556 129,048 125,726 92,375 7,501

1,773,519 738,451

$

2,109,940 431,085

At December 31, 2017, an income tax payable of $8,794 was included in other liabilities and a net deferred tax asset of $738,451 was included in other assets on the consolidated statements of financial condition. At December 31, 2016, an income tax receivable of $372,511 and a net deferred tax asset of $431,085 were included in other assets on the consolidated statements of financial condition. No valuation allowance for deferred tax assets was recorded at December 31, 2017 and 2016, as management believes it is more likely than not that all of the deferred tax assets will be realized. 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, 2017 and 2016. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2017 and 2016 the Company recognized no interest and penalties. The Company files a United States federal income tax return and an Idaho income tax return, beginning with the year ended December 31, 2017 the Company will also file an Oregon income tax return. 55


N O T E 14 – C H A NG E S IN ACC U M U L AT ED O T HER CO MPR EHENSI V E INCO ME BY CO MP O NEN T 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 One time adjustment for deferred tax writedown Balance, end of year

2017 $

$

244,056 (138,702) 18,932 124,286

2016 $

$

574,864 (330,808) 244,056

N O T E 15 – EMPL OY EE BENEFI T S 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 six-year graded vesting schedule. Expenses associated with the plan were $311,289 and $225,113 for the years ended December 31, 2017 and 2016, 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 $6,383 and $7,716 for the years ended December 31, 2017 and 2016, respectively. Liabilities associated with the plan were $205,358 and $195,166 for December 31, 2017 and 2016, respectively. Included in other liabilities is also a salary continuance agreement from the Fairfield acquisition, which had a balance of $0 and $15,559 at December 31, 2017 and 2016, 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, 2017 and 2016, the cash value of these policies was $9,416,626 and $7,054,335, 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 $15,546 and $17,431 for the years ended December 31, 2017 and 2016, respectively. Liabilities associated with these plans were $241,358 and $273,812 as of December 31, 2017 and 2016, respectively.

N O T E 16 – S T O C K- B A SED CO MPENS AT I O N 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, 2017, there were 332,555 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.

56


Restricted stock award activity is summarized in the following table: Weighted Average Fair Value

Number of Shares Outstanding, December 31, 2015 Granted Vested Forfeited Outstanding, December 31, 2016 Granted Vested Forfeited Outstanding, December 31, 2017

242,250 34,500 (44,748) (14,202)

$

217,800

38,500 (26,865) (11,500) 217,935

7.78 9.43 6.44 8.37 8.28 11.97 8.45 8.67 8.89

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. Stock option activity is summarized in the following table: 2017 Weighted Average Exercise Price

Shares Outstanding options, beginning of year Granted Exercised Expired Forfeited/cancelled Outstanding options, end of year Options exercisable, end of year

2016

-

$

-

-

Weighted Average Exercise Price

Shares 5,000 (5,000) -

$

17.00 17.00 -

For the year ended December 31, 2017 and 2016, 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, 2017: Restricted Stock 2018 2019 2020 2021 2022

$

$

488,728 450,193 264,774 25,634 5,911

1,235,240

57


N O T E 17 – CO MM O N S T O C K No cash dividends or stock dividends on common stock were declared during the years ended 2017 and 2016. During 2017 and 2016, the Board of Directors voted to issue 7,383 and 6,315 shares, respectively, of Company stock to nonemployee Directors pursuant to the Company’s Director Compensation Plan.

N O T E 18 – REL AT ED PA R T Y T R A NS AC T I O NS 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: 2017 Balance, beginning of year Advances Payments No longer related parties Balance, end of year

$

$

112,934 121,612 (1,050) (48,975)

184,521

2016 $

$

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

Aggregate deposit balances with related parties at December 31, 2017 and 2016, were $2,259,906 and $1,340,046, 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.

N O T E 19 – RE S T R I C T I O NS O N DI V IDENDS A ND R E TA INED E A RNING S 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 $27,041,181 at December 31, 2017. Accordingly, $62,661,516 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2017.

N O T E 20 – REG U L AT O R Y C A PI TA L REQ U IREMEN T S 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. 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, 2017, 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.

58


The Company’s and Bank’s actual December 31, 2017 and 2016, capital amounts and ratios are presented in the following table: Actual

December 31, 2017

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

Adequately Capitalized

Amount

Ratio

Amount

$ 86,591,000 85,527,000

11.23% 11.10%

$ 61,668,560 61,617,040

73,108,000 77,946,000

9.48% 10.12%

68,108,000 77,946,000

Ratio

Well Capitalized

Amount

Ratio

8.00% 8.00%

NA $ 77,021,300

NA 10.00%

46,251,420 46,212,780

6.00% 6.00%

NA 61,617,040

NA 8.00%

8.84% 10.12%

34,688,565 34,659,585

4.50% 4.50%

NA 50,063,845

NA 6.50%

73,108,000 77,946,000

8.89% 9.49%

32,895,760 32,847,440

4.00% 4.00%

NA 41,059,300

NA 5.00%

$ 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%

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

59


N O T E 21 – E A RNING S PER SH A RE Earnings per share and the calculated effect of dilutive securities on loss per share are as follows for the year ended December 31: 2017

Numerator: Net income Denominator: Weighted average shares outstanding Dilutive effect of stock-based compensation Dilutive effect of outstanding warrants

$

2016

4,129,190

$

6,794,669 110,495 77,018

6,382,048 84,446 44,759

6,982,182

Basic earnings per common share Diluted earnings per common share

$ $

5,070,797

6,511,253

0.61 0.59

$ $

0.79 0.78

Anti-dilutive shares as of December 31, 2017 and 2016, were 19,839 and 15,446, respectively.

N O T E 22 – FA IR VA L U E S 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. 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: State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

60

December 31, 2017

Level 1 $

Level 2 -

$

8,187,940 7,174,658 3,991,431 5,559,759 16,544,512

Level 3

$

Total -

$

8,187,940 7,174,658 3,991,431 5,559,759 16,544,512


Securities available for sale: State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

December 31, 2016

Level 1 $

Level 2 -

$

Level 3

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

$

Total -

$

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

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 lowerof-cost-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: December 31, 2017

Level 1 Impaired loans Other real estate owned

$

Level 2 -

$

$

-

$

2,107,240 1,241,977

Total $

December 31, 2016

Level 1 Impaired loans Other real estate owned

Level 3

Level 2 -

$

Level 3

-

$

3,422,127 745,127

2,107,240 1,241,977

Total $

3,422,127 745,127

61


The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis: December 31, 2017

Impaired loans: Commercial real estate

Fair Value $

Residential real estate Commercial and industrial

Valuation Technique(s)

Unobservable Input(s)

Range (Wtd Avg)

1,810,223

Income approach

Adjustment for differences in net operating income

41%-69% (53%)

220,896

Sales comparison

Adjustment for differences between comparable sales

15%-15% (15%)

76,122

Income approach

Adjustment for differences in net operating income

80%-80% (80%)

89%-89% (89%)

$

2,107,240

$

125,000

Income approach

Adjustment for differences in net operating income

Commercial real estate

590,000

Sales comparison

Adjustment for differences between comparable sales

0%-71% (17%)

Construction and land development

438,977

Sales comparison

Adjustment for differences between comparable sales

39%-73% (50%)

88,000

Sales comparison

Adjustment for differences between comparable sales

27%-27% (27%)

Other real estate owned: Commercial real estate

Residential real estate $

1,241,977

December 31, 2016

Impaired loans: Commercial real estate

Fair Value $

Construction and land development Residential real estate Commercial and industrial Consumer

Unobservable Input(s)

Range (Wtd Avg)

3,031,377

Income approach

Adjustment for differences in net operating income

6%-69% (50%)

254,590

Income approach

Adjustment for differences in net operating income

12%-12% (12%)

12,514

Sales comparison

Adjustment for differences between comparable sales

111,008

Income approach

Adjustment for differences in net operating income

71%-93% (73%)

12,638

Sales comparison

Adjustment for differences between comparable sales

67%-67% (67%)

100%-100% (100%)

$

3,422,127

$

125,000

Sales comparison

Adjustment for differences between comparable sales

50%-50% (50%)

Construction and land development

438,977

Sales comparison

Adjustment for differences between comparable sales

39%-73% (50%)

Residential real estate

181,150

Sales comparison

Adjustment for differences between comparable sales

19%-46% (35%)

Other real estate owned: Commercial real estate

$

62

Valuation Technique(s)

745,127


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. Other real estate owned: 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: December 31, 2017 Carrying Amount 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

51,766,978 4,174,000 41,458,300 689,494,491 1,366,268 3,453,827

Fair Value $

722,621,801 174,351 19,597,180

51,766,978 4,153,698 41,458,300 684,462,029 1,366,268 3,453,827

Level 1 $

721,776,836 174,351 17,954,414

51,766,978 -

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

75,441,958 4,640,000 25,328,057 497,078,943 3,823,665 2,642,293 548,420,858 150,600 18,567,047

Fair Value $

75,441,958 4,622,749 25,328,057 492,294,769 3,823,665 2,642,293 547,923,997 150,600 16,704,679

$

611,391,176 December 31, 2016

Carrying Amount

Fair Value Measurements Level 2

Level 1 $

75,441,958 425,458,514 -

4,153,698 41,458,300 1,366,268 3,453,827

Level 3 $

174,351 17,954,414

110,385,660 -

Fair Value Measurements Level 2 $

4,622,749 25,328,057 3,823,665 2,642,293 150,600 16,704,679

684,462,029 -

Level 3 $

492,294,769 122,465,483 -

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. 63


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 fixedmaturity 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, 2017 and 2016. 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, 2017 and 2016.

N O T E 23 – PA R EN T CO MPA N Y- O NLY FIN A NC I A L INF O R M AT I O N The following Northwest Bancorporation, Inc. parent company-only financial information should be read in conjunction with the other notes to consolidated financial statements. The accounting policies for the parent company-only financial statements are the same as those used in the presentation of the consolidated financial statements other than the parent company-only financial statements account for the parent company’s investments in its subsidiaries under the equity method. Condensed Statements of Condition:          

ASSETS Cash   Investment in trust equities   Investment in subsidiaries   Deferred tax asset   Other assets     TOTAL ASSETS       LIABILITIES AND SHAREHOLDERS’ EQUITY   Junior subordinated debentures   Subordinated debentures, net of debt issuance costs   Shareholders’ equity     TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

64

2017

$

$   $

$

December 31,

18,018 155,000 89,702,697 91,490 954,230 90,921,435

2016

     

$

    5,155,000   5,901,704   79,864,731 90,921,435  

$

394,342 155,000 75,708,074 154,285 680,028 77,091,730

$

5,155,000 5,881,571 66,055,159 77,091,730

  $


Condensed Statements of Operations:      

Interest Income: Interest bearing deposits       Other (Expense) Income:   Equity in undistributed (loss) income of consolidated subsidiaries   Interest expense   Other expenses           Net income before income taxes Income tax benefit     Net income applicable to common shares

$  

$  

$

489     5,278,134   (637,695)   (809,805) 3,830,635   3,831,124   (298,067) 4,129,190  

Condensed Statements of Cash Flows:      

CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash used by operating activities: Equity in undistributed income of consolidated subsidiaries   Change in deferred taxes   Increase in other assets   Increase (decrease) in other liabilities     Net cash used by operating activities       CASH FLOWS FROM INVESTING ACTIVITIES:   Investments in subsidiaries   Outlays for business acquisitions     Net cash used by investing activities       CASH FLOWS FROM FINANCING ACTIVITIES:   Proceeds from issuance of common stock     Net cash provided by financing activities           NET CHANGE IN CASH     Cash, beginning of year     Cash, end of year       SUPPLEMENTAL CASH FLOWS INFORMATION:     Interest paid

2017

2017 $  

 

 

$   $

Year Ended December 31,

$

Year Ended December 31,

4,129,190   (5,278,134)   62,795   (274,202)   20,133   (1,340,218)       7,352,879   (16,208,070)   (8,855,191)       9,819,085   9,819,085     (376,324)   394,342   18,018       637,695  

2016

 

$

 

 

$   $

1,024

5,587,596 (616,954) (176,574)

4,794,068 4,795,093 (275,704)

5,070,797

2016 5,070,797 (5,587,596) 7,040 (12,532) (421,653) (943,946)

-

439,799 439,799 (504,147) 898,488 394,342

616,954

65


B R A N C H LOC AT I O NS Airway Heights 11917 West Sunset Highway Airway Heights, WA 99001 509.244.440

Kennewick 8127 West Grandridge Suite # 110 Kennewick, WA 99336

Bingen 111 N. Oak St. Bingen, WA 98605 509.493.0303

Lake Oswego 5285 Meadows Rd. Suite 400 Lake Oswego, OR 97035 503.858.2851

Coeur d’Alene 955 Ironwood Drive Coeur d’Alene, ID 83814 208.664.8747 Colfax 402 S Main St PO Box 283 Colfax, WA 99111 509.397.1007 Downtown 421 W. Riverside Ave Spokane, WA 99201 509.456.8888 Ephrata 66 Basin Street SW Ephrata, WA 98823 509.717.2255 Fairfield 213 East Main St. PO Box 267 Fairfield, WA 99012 509.283.2126 Northside 518 West Francis Avenue Spokane, WA 99205 509.323.1144 Hayden 30 West Prairie Avenue Coeur d’Alene, ID 83815 208.762.1155 Hood River 2500 Cascade Ave. Hood River, OR 97031 541.308.1300

Rockford 5 West Emma PO Box 260 Rockford, WA 99030 509.291.5029 Rosalia 523 South Whitman PO Box 77 Rosalia, WA 99170 509.523.3208 University District 2110 N. Ruby Street Spokane, WA 99207 509.232.4666 South Hill 2905 E. 57th Ave Spokane, WA 99223 509.448.7770 Spangle 130 West 1st PO Box 189 Spangle, WA 99031 509.245.3226 Spirit Lake 31845 North 5th Ave Spirit Lake, ID 83869 208.623.5700 The Dalles 1100 W. Sixth St. The Dalles, OR 97058 541. 298.2600 Valley 15015 E. Sprague Spokane Valley, WA 99216 509.924.1033

CO R PO R AT E I N FO R M AT I O N

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 14, 2018, 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 462 South 4th Street, Suite 1600 Louisville, KY 40202 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.


2017 Annual Report  

This year's annual report reflects on the past year's success and celebrates our expansion into Central Washington and Northern Oregon.

2017 Annual Report  

This year's annual report reflects on the past year's success and celebrates our expansion into Central Washington and Northern Oregon.

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