2014 INB Annual Report by INB Bank

Community is Our Strength

2014 ANNUAL REPORT

CONTENTS:

Let ter to Shareholders

Client Perspec tives

Growing For ward

Financial Highlights

Corporate Leadership

Financial Statements

Bank Of ficers

Corporate Information

To Our Shareholders

In honor of our 25-year anniversary celebrated on

October 2, 2014, this year’s Annual Report is dedicated

to our employees and our customers who make it all possible—

and to the communities in which we do business. From day one, when Fred Schunter founded Inland Northwest Bank back in 1989, it has been in our DNA to always be a good corporate

citizen. The Annual Report this year will highlight some of the things we do to live up to that core value, and how we plan to continue our success in the future.

The year 2014 is arguably one of the most successful in the

history of Northwest Bancorporation, Inc. (the “Company”).

The Company reported consolidated net income of $3.3 million, or $0.78 per fully diluted share; this compares to $2.6 million, or $0.81 per fully diluted share, for 2013. Our primary

subsidiary, Inland Northwest Bank (the “Bank” or “INB”), generated net income of $3.8 million—which marked the single most profitable year in the history of the Bank.

That’s where we’ve been, of course. But it’s also where

we’re going. So let’s spend a few moments talking about

our successes—our commitment to the core value that has always guided us—and how that culture permeates our plans for the future.

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HIGHLIGHTS OF 2014: }} Record earnings: For both the Company and the Bank. }} Record size: The Company had $421.8 million in total assets at year end. }} Core deposits: Grew 8% in 2014. This marks the sixth consecutive year of solid growth. }} Checking accounts: Number of accounts grew 7% in 2014, after 15% growth in 2013 and 10% in 2012. We continue to attract more communitybased businesses.

Celebrating 25 Years: A Look Back.

Our history is tied to our communities. We formed a holding company (Northwest Bancorporation, Inc.) in 1992, and in four short years, we opened our first Idaho branch in 1996. INB is believed to be the first state chartered bank in the country to cross state lines to do business in more than one state. Today we have seven branches in Spokane County, Washington and four in Kootenai County, Idaho. We purchased a mortgage company in 1998, which allowed us to begin residential lending. On June 30, 2001, founding CEO, Fred Schunter, retired after leading the Bank as it grew from zero to $183 million in assets in his twelve years. And of course, those are just a few of the milestones in our early years. More important than our own operational milestones are the lifechanging and community-changing impacts weâ&#x20AC;&#x2122;ve been able to have as a bank born in, and committed to, the Inland Northwest. For instance, in our history, INB has loaned out more than $1.7 billion in business and consumer loans. INB has paid out more than $100 million in interest to its depositors. INB has financed the purchase of more than 6,400 homes, totaling $1.1 billion. To go along with that, INB has financed the construction of over 1,000 homes, for a total of $200 million. Yes, those are impressive figures, and those figures should make all of us

93%

proud. But our community-building impact is felt in the region in many other ways, as well. Since our inception, INB has paid out more than $100 million to our employees in salaries and benefits; we currently have an annual payroll of about $7.3 million, with about two-thirds in Spokane County and one-third in Kootenai County. Out of 117 current employees, 28 have been with the Bank for more than ten years; 19 of those have been with the Bank more than 15 years; nine of those have been with the

For every dollar deposited, INB loans 93% locally.

Bank over 20 years, and three employees have been with the Bank for 25 years! Those three employees with 25 years with INB are Betty Bonilla, Leilani McKernan, and Brenda Blair. We, and our employees, arenâ&#x20AC;&#x2122;t just committed to excellent service for our customers. We are committed to creating a better place to work and live (hearkening back, once again, to our founding core value).

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HIGHLIGHTS OF 2014: Since inception, INB has paid out over $2 million to support the communities in Spokane and North Idaho in which we do business. In addition, INB employees have donated literally thousands of hours of community service, helping non-profit organizations and other worthy causes throughout the Inland Northwest. But commitment and longevity among our employees is really just part of the story; our customer base demonstrates long, sustained relationships as well. We have many customers who have banked with us for 25 years, including several businesses such as:

ALSC Architects; Joseph Blumel, Attorney-at-Law; Copy Rite, Inc.; Gates Realty; August Systems, Inc. and Screen Tek, Inc.

}} Loan portfolio: Grew 13% in 2014. The Bankâ&#x20AC;&#x2122;s loan portfolio has grown by $70 million in the last two years. }} Non-performing assets: Reduced by 73%. NPAs are loans that are no longer accruing interest together with foreclosed real estate. Most of our credit quality numbers are better than industry averages.

Company Stock

At the beginning of 2014, the Companyâ&#x20AC;&#x2122;s common stock traded at a price of $7.45 per share and ended 2014 at a price of $8.65 per share, increasing $1.20, or 16%. Approximately 280,000 shares of Company stock were traded during 2014, up from 277,000 in 2013. The book value of the Company was $8.49 per share of common stock at the beginning of 2014, and at the end of the year book value was $9.31 per share. This is an increase in book value of $0.82 per share for the year, or +10%.

17%

Annual Meeting

The Board of Directors thanks you for your continued support and cordially invites you to attend our annual meeting scheduled for 5:30 p.m. on Monday, May 18, 2015. This year we are again holding the annual meeting at our Airway Heights Branch located at 11917 West Sunset Highway, Airway Heights, Washington. In the

Market capitalization increased 17%, from $31 million at the beginning of the year to $36 million at year end.

meantime, we encourage you to contact us at any time if you want to share your thoughts about the Company.

Anthony D. Bonanzino Chairman

Randall L. Fewel President & CEO

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FOR 25 YEARS:

B U I L D I N G T H E B U S I N E S S E S T H AT B U I L D C O M M U N I T Y.

Itâ&#x20AC;&#x2122;s not a celebration of us. Itâ&#x20AC;&#x2122;s a celebration of vision, of commitment, of determination. Meet some of the businesses committed to building the fabric of our community right here in the Inland Northwest.

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S TA N C R A F T

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SEVEN2

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FRED’S APPLIANCE

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D Ū R ĀT U S

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RESCUE P.1 4

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Stancraft S T A N C R A F T:

A 12 - Y E A R - O L D , 8 2 - Y E A R - O L D C O M P A N Y .

What do you do after earning an engineering degree in Colorado, then pursuing an MBA and a law degree in Seattle? For Robb and Amy Bloem, the obvious answer was the not-so-obvious answer: move back to Coeur d’Alene to helm the Stancraft Boats family business. “I wanted to get any degree I could so I had the freedom to work anywhere in the world,” says Robb. “Turns out ‘anywhere in the world’ was here.” Amy’s father, Sid Young, took over the custom-boat business

from his father Stan, who established the Stancraft name in 1933.

But the business has seen its greatest growth since Robb and

Stancraft’s commitment creates ~ generational jobs. Many of the company’s current employees are the sons and daughters of people who also worked at Stancraft.

| Known for true handcrafted artisanship, Stancraft creates custom-made designs for each and every customer. That’s a rarity with today’s mass-production mentality, and just one of the keys to the company’s success.

Amy took over as the third generation. “Believing in ourselves,

knowing we could do it on our own…that was the key,” says Robb.

“We have a great story, a great history. But really, we’re a 12-yearold, 82-year-old company.”

Robb and Amy turned to INB to help fuel their success. “It’s hard for most banks to comprehend a one-off custom boat manufacturer. INB has done a good job of understanding what we do and how we operate. And they’ve helped us manage our phenomenal growth rate.” But their future—including plans for a new 26,000-square-foot corporate headquarters and a major presence on the west coast—still ties to the deep family roots in craftsmanship. “We don’t know who originally said it, but Amy and I found a quote that’s a perfect fit for us: ‘We build good ships, at a profit if we can, at a loss if we must. But we always build good ships.’”

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Seven2 SEVEN2:

P I X E L S D R I V E N B Y PA S S I O N .

The year was 2004. There was no such thing as the iPad. Or the smart phone. Or even, for that matter, YouTube. And yet, Nick Murto and Tyler Lafferty had already glimpsed the future of marketing, opening their digital agency Seven2 to work on projects in the interactive realm. Soon, they were doing work for powerhouse brands such as AT&T, Disney, Nickelodeon, Expedia, GoDaddy, and dozens of others… in Spokane. And that was by design. “We wanted to do this in Spokane. We knew we could do this in Spokane,” says Tyler. The challenge was finding a banking partnership that shared their vision. It’s a path that eventually led them to INB. “We have a very loyal relationship,” says Nick. “We feel like we have someone who understands our business, someone who fights for us, someone who looks at everything through the lens of helping us succeed.” In fact, that banking relationship has helped Nick and Tyler open three other businesses: 14Four (a digital shop focused on partnering with advertising agencies), Method Juice Café, and The Union yoga and spinning studio. It’s no surprise their companies are built on a framework of community. “Most of our clients are in Seattle, Atlanta, New York and L.A. We love those cities, but we love the quality of life right here,” explains Tyler. “That’s important to us.” “Our secret is passion,” adds Nick. “It’s in the work we do, and in the people we hire. It’s even in our mission statement: Do great

work for great clients, and have fun doing it.”

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Tyler Lafferty (left) and Nick Murto built ~ Seven2 on a single word: Passion. Seven2’s roster of clients reads like a who’s-who of successful brands, stretching from Seattle to Atlanta and New York to Los Angeles.

~ A familiar refrain for Nick and Tyler is â&#x20AC;&#x153;culture is contagious.â&#x20AC;? They attribute much of their success to that mantra, citing employees who have created other successful startup ventures (ranging from apps to community events) and clients who keep returning for new projects.

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~ Stock it deep and sell it cheap. It’s a simplification, but it describes the success of Fred’s Appliance. Fred’s keeps a larger selection and more inventory than its big box competitors, meaning customers don’t have to wait for orders. And, Fred’s is part of one of the nation’s largest buying groups, giving them the volume to pass along savings to customers.

Fred’s Appliance FRED’S APPLIANCE: NEVER SIT STILL.

Since its inception in 1962, Fred’s Appliance has succeeded in a world of box stores and “everything to everyone” retailers. Focus, in no small part, explains why Fred’s Appliance has grown to eight stores in Washington, Idaho and Montana…with plans for more on the way. “It’s because we know who we are,” explains President John Amistoso. “In every market where we operate, we pretty much stand alone as the ‘local’ alternative to the big box stores.” General Manager, Troy Varness, agrees. “We compete very well with the big box stores, because we have the selection, the stock, Another differentiator for Fred’s ~ Appliance? Staff who are trained to answer questions and to educate their customers.

and the people. You aren’t waiting for your appliances on order

| In the markets it serves, Fred’s Appliance typically stands as the only local/regional choice against box stores. And while some might see that as a challenge, Fred’s Appliance sees it as an opportunity.

INB has helped write the Fred’s Appliance success story. “They’ve

for 14 to 17 days—and you’re working with trained staff who know what they’re doing.”

taken care of us from day one,” John says. “They’ve always been there. Free accounts for our employees to help them transition into direct deposit, for instance. And INB set up our electronic capture system for checks, helping us head off NSF problems and giving us immediate funds transfer.” In the end, both John and Troy say the mindset is what sets

Fred’s Appliance apart. “We succeed, I think, because we don’t

sit still,” says John. “Instead of sitting here and thinking we have the world by the tail, we’re constantly trying to find a better way

of getting it done.”

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Dūrātus D Ū R ĀT U S :

B U I L D F I T N E S S B Y B U I L D I N G C O M M U N I T Y.

Dūrātus (dur-ah-toos). It’s a Latin word meaning “endure.” And yet, at the same time, it means “harden.” That dual meaning, that combination of growth and challenge, inspired Kevin Longmeier to open Crossfit Dūrātus in 2013. Just a few short years later, the gym is a home base for nine trainers and more than 150 members. “Fitness has always been part of my life,” Kevin explains. “It’s a very personal way of seeking change and transformation. That’s why Dūrātus fit as a name: it’s helping people achieve more than they ever thought they could.” Founding Dūrātus represented that kind of achievement for Kevin.

“This was my first business, so it was a little like learning a whole

The principles of Crossfit are simple: ~ Focus on functional movement rather than isolated exercises. Kevin says it at INB understood the goals and the vision. They’re very accessible, powers clients to better performance, just a text or a phone call away. And they’ve been phenomenal to better health...and ultimately, a better work with.” community.

new language,” he says. “I created a business plan, and the people

But Dūrātus is more than a mere gym. It’s a community. Kevin emphasizes that means sharing successes and failures. “We have a member who had stopped going to the gym after losing her brother, because fitness had been a shared passion for them. After her first workout here—her first workout in more than ten years—she wept because she felt re-engaged, and because she felt total freedom. She’s since lost 70 pounds, and seen significant improvements in her blood pressure, cholesterol and overall health. And that’s really just one story that represents multiple stories.” Kevin pauses, takes a moment to think. “That confirms and affirms the opening of Dūrātus. It’s an honor to be part of that.”

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Fitness is a very personal way of seeking change and transformation. Dūrātus helps people achieve more than they ever thought they could.

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~ Rod Schneidmiller is deeply committed to the values of integrity, honesty, compassion, and entrepreneurialismâ&#x20AC;&#x201D;so much so that he has established a Presidentâ&#x20AC;&#x2122;s Award that recognizes those characteristics in an employee every year. P.14

| Rescueâ&#x20AC;&#x2122;s products are on the shelves at retail giants such as WalMart and Home Depot.

Rescue RESCUE:

T H E O R D I N A R Y I S E X T R A O R D I N A R Y.

The early 1980s represented a time of discovery in the new field of pheromone research. And while most research focused on largescale farming operations, Rod Schneidmiller saw opportunity with consumers. He began creating insect traps, first in his kitchen and then—as with so many entrepreneurial success stories—in his garage. Today, that “garage” has grown to 168,000 square feet of space devoted to developing non-toxic, environmentally friendly pest traps, a solution called “bio-pesticides.” Rescue’s success—with a full line of globally-distributed products

at retail giants such as WalMart and Home Depot—ties back to Rod’s dream began in his kitchen, ~ then grew to his garage...and today, occupies 168,000 square feet of space in Spokane Valley. The company produces dozens of bio-pesticides for a variety of pests, with new products in constant development.

Rod’s beginnings in his kitchen and his garage. Or perhaps back to

his earliest beginnings as a rural farm kid instilled with solid values.

“The ordinary can be extraordinary,” he says. “Keep your word and

do what you say you’re going to do. Deliver on time. It surprises me how many businesses, even giant multinational competitors, don’t follow through. We do.”

Rod recognized that same philosophy in INB. “I talked to a lot of banks, but I felt INB was the right match. They didn’t pretend they knew my business better than I do; instead, they made the effort to understand where I was going.” Today, Rescue is going, well, everywhere. And the brand name resonates with customers. “It was exciting getting into places such as Ace Hardware and Home Depot. But now, they’re coming to us, asking us to develop products for specific pests, because the Rescue name has a cachet.” Rod stops and smiles. “It’s gratifying to hear that.”

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Growing Forward DISRUPTIONS AND OPPORTUNITIES }} Umpqua Bank bought Sterling Savings Bank in 2014. }} Columbia State Bank bought Intermountain Community Bank and Panhandle Bank in 2014. }} Banner Bank acquired American West Bank in March 2015. }} INB, more than ever, is now positioned as the premier community-based bank in the marketplace. }} To capitalize on our position as a community bank, we must also offer convenience. }} Investments in technology and service delivery demonstrate our commitment to customer convenience.

The Inland Northwest has seen a major disruption in the banking industry over the past year. Umpqua Bank bought Sterling Savings Bank; Columbia State Bank purchased Intermountain Community Bank and Panhandle State Bank; Banner Bank has announced they are purchasing American West Bank. We believe this turmoil means opportunity for INB, and we are working hard to take advantage. We are taking some major steps forward in 2015 as we launch a mobile banking platform, undergo a major upgrade to our online banking product, upgrade our ATM machines to touch screen, redesign our website, and more. While we still consider ourselves to be more high-touch than high-tech, we want to be as convenient as possible to our customers. That requires us to make a significant investment in technology. Excellent momentum in commercial lending has been generated at INB over the past two years, and we have every reason to believe this will continue in 2015 and beyond. Our biggest challenge is growth in core deposits sufficient to fund increased loan demand. But we have the branch network and the people to do just that. At the retail level, we are committed to growing our branches through a series of initiatives including hiring additional staff, implementing a dedicated service delivery program, investing in innovative customer experience projects, and launching a new marketing strategy. As one of the few remaining regional community banks, we also plan to strengthen our support to the local community. For every dollar

deposited at INB, you will see most invested back into our community to help businesses, customers, staff, and non-profits grow and thrive

in our region.

This truly is an exciting time for INB. We have a unique position in the marketplace. We have the technology and the guiding principles to move forward. We have the vision and the people to make it all happen. In a world thatâ&#x20AC;&#x2122;s becoming more impersonal, we at INBâ&#x20AC;&#x201D;and the customers we serveâ&#x20AC;&#x201D;show true success is built on great service. P.16

} We launched a new mobile banking platform in February 2015, just the most visible of many important technologybased initiatives. Â&#x20AC; Our investment in technology runs counter to conventional wisdom. We donâ&#x20AC;&#x2122;t invest in technology to replace personal interaction; we invest in technology to enhance it.

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Financial Highlights hip 5-YEAR SUMMARY (dollars in thousands, except per share data) 2014

2013

2012

2011

2010

For the year Net income applicable to to common shareholders

3,260

2,599

687

(1,423)

267

Net income

0.78

0.81

0.22

(0.46)

0.10

Equity (book value)

9.31

8.49

8.74

8.30

8.12

Per Share

Shares outstanding

4,117,673

4,157,632

3,089,957

3,084,548

3,076,848

At December 31 Loans, net of reserves

336,421

296,938

266,078

258,586

274,416

Deposits

358,680

320,624

333,104

332,134

346,237

Assets

421,807

394,203

398,869

385,733

394,575

Shareholdersâ&#x20AC;&#x2122; equity

38,713

34,957

37,916

36,399

35,687

Financial Ratios Return on average assets

0.80%

0.66%

0.18%

-0.36%

0.07%

Return on average equity

8.91%

6.87%

1.86%

-3.89%

0.76%

Loans

13.3%

11.6%

2.9%

-5.8%

-12.6%

Deposits

11.9%

-3.7%

0.3%

-4.1%

2.5%

7.0%

-1.2%

3.4%

-2.2%

0.2%

10.7%

-7.8%

4.2%

2.0%

5.6%

Growth Ratios

Assets Shareholdersâ&#x20AC;&#x2122; equity

TOTAL ASSETS

TOTAL LOANS (gross)

$450,000

$400,000

$300,000

$350,000 $200,000

$300,000 $250,000

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2010

2011

2012

2013

2014

$100,000

2010

2011

2012

2013

2014

Financial Highlights

TOTAL DEPOSITS

SHAREHOLDERS’ EQUIT Y

$360,000

$40,000 $38,000

$345,000

$36,000

$330,000

$24,000

$315,000 $300,000

$32,000 2010

2011

2012

2013

2014

$30,000

2010

CORE DEPOSITS

REVENUES

$300,000

$21,000

$250,000

2011

2012

2013

2014

2011

2012

2013

2014

$19,000

$200,000 $17,000

$150,000 $100,000

2010

2011

2012

2013

2014

NET INCOME

$15,000

FULLY DILUTED EARNINGS (EPS)

$4,000

$1.00

$2,000

$0.50

-$2,000

2010

2011

2012

2013

2014

$0.50

2010

2011

2012

2013

2014

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Corporate Leadership

BOARD OF DIRECTORS

DIRECTORS EMERITI

SENIOR MANAGEMENT

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

Jimmie T.G. Coulson (deceased)

Mark V. Dresback Executive Vice President Chief Revenue Officer

Anthony D. Bonanzino Chairman Northwest Bancorporation, Inc. Inland Northwest Bank Principal Member Century Archives Northwest, LLC

Director 1989-2008 Robert J. Davidson (deceased)

Director 1989-1996 Donald A. Ellingsen, M.D. Director 1996-2011

Randall L. Fewel President Chief Executive Officer Elizabeth A. Herndon Senior Vice President Chief Retail Banking Officer

William A. Griffith Katie Brodie Northern Idaho Field Representative Special Assistant to Governor C.L â&#x20AC;&#x153;Butchâ&#x20AC;? Otter of Idaho Harlan D. Douglass President Harlan D. Douglass, Inc.

(deceased)

Director 1989-1996 Richard H. Peterson Director 1989-2009 Edward E. Ralph Director 1989-1997

Freeman B. Duncan Attorney (retired) Law Offices of Freeman B. Duncan

Hubert F. Randall

Randall L. Fewel President & C.E.O. Northwest Bancorporation, Inc. Inland Northwest Bank

Phillip L. Sandberg Director 1989-2007

Clark H. Gemmill Vice President (retired) UBS Financial Services, Inc.

(deceased)

Director 1989-2003

Frederick M. Schunter Director 1989-2011 President & CEO 1989-2001 Robert P. Shanewise (deceased)

Bryan S. Norby Financial Analyst Yanke Machine Shop Ry Timber Company YMC, Inc. William E. Shelby Immediate Past Chairman Northwest Bancorporation, Inc. Inland Northwest Bank Vice President (retired) U.R.M. Stores, Inc. Jennifer P. West Reputation Management Consultant

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Director 1989-1996 J. Rod Walker Director 1989-2007

David F. Hockett Senior Vice President Chief Risk Officer Holly A. Poquette Executive Vice President Chief Financial Officer Scott W. Southwick Executive Vice President Chief Credit Officer

2014 Financial Report

REPORT OF INDEPENDENT AUDITORS

The Board of Directors Northwest Bancorporation, Inc. and Subsidiary

Report on Financial Statements We have audited the accompanying consolidated financial statements of Northwest Bancorporation, Inc. and subsidiary, Inland Northwest Bank (Company), which comprise the consolidated statements of financial condition as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northwest Bancorporation, Inc. and subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Spokane, Washington February 18, 2015

NORTHWEST BANCORPOR ATION, INC. Consolidated Statements of Financial Condition

2014

December 31,

2013

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 $5,728,341 and $5,803,145 Loans held for sale Premises and equipment, net Accrued interest receivable Foreclosed real estate, net Bank owned life insurance Other assets TOTAL ASSETS

14,397,672 3,384,543 1,935,000 40,286,670 1,147,700 336,420,745 740,000 14,888,344 1,321,897 1,050,000 4,201,229 2,033,036 421,806,836

13,951,365 2,129,282 2,655,000 51,705,739 1,193,900 296,938,429 1,139,248 15,614,174 1,260,348 1,674,970 4,159,756 1,780,812 394,203,023

LIABILITIES Deposits Accrued interest payable Federal funds purchased Borrowed funds Other liabilities Total liabilities

358,679,954 124,214 – 21,326,781 2,962,619 383,093,568

32,960,356 4,947,051 805,861 38,713,268 421,806,836

$ 320,624,406 131,039 12,170,000 23,256,163 3,064,189 359,245,797

SHAREHOLDERS’ EQUITY Common stock, no par value, authorized 5,000,000 shares; issued and outstanding 4,157,632 and 4,117,673 shares Accumulated income Accumulated other comprehensive income Total shareholders’ equity TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying notes.

32,657,037 1,687,179 613,010 34,957,226 394,203,023

NORTHWEST BANCORPOR ATION, INC. Consolidated Statements of Income

Interest and dividend income: Loans receivable, including fees Investment securities Other Total interest and dividend income Interest expense: Deposits Borrowed funds Total interest expense

Year Ended December 31, 2014 2013 $

16,211,611 1,406,279 48,264 17,666,154

15,762,445 1,632,398 53,162 17,448,005

1,393,147 768,953 2,162,100

1,617,835 453,436 2,071,271

Net interest income

15,504,054

Provision for loan losses Net interest income after provision for loan losses Noninterest income: Service charges on deposits Gains from sale of loans, net Gain on investment securities, net Other noninterest income Total noninterest income Noninterest expense: Salaries and employee benefits Occupancy and equipment Depreciation and amortization Advertising and promotion FDIC assessments Loss on foreclosed real estate, net Other noninterest expense Total noninterest expense

266,667 15,237,387

945,374 839,211 64,532 1,666,552 3,515,669

7,115,716 1,330,946 1,143,892 463,091 271,178 49,723 3,692,878 14,067,424

Income before income taxes

15,376,734

1,500,000 13,876,734

1,074,950 1,404,010 196,512 1,764,425 4,439,897

7,090,586 1,299,647 1,221,138 373,409 418,766 208,944 4,113,041 14,725,531

4,685,632

3,591,100

Income tax expense NET INCOME

1,425,760 3,259,872

317,634 3,273,466

Preferred stock dividends and discount accretion, net Net income applicable to common shares

– 3,259,872

674,148 2,599,318

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

$ $

0.79 0.78 4,122,863 4,199,018

$ $

0.82 0.81 3,152,160 3,208,917

See accompanying notes.

NORTHWEST BANCORPOR ATION, INC. Consolidated Statements of Comprehensive Income

Year Ended December 31, 2014 2013 Net income

Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale, net of tax of $121,288 and $(557,497) Reclassification adjustment for gains on securities available for sale included in net income, net of tax of $(21,941) and $(66,814) Other comprehensive income (loss) COMPREHENSIVE INCOME

See accompanying notes.

3,259,872

3,273,466

235,442

(1,082,200)

(42,591) 192,851 3,452,723

(129,698) (1,211,898) 2,061,568

NORTHWEST BANCORPOR ATION, INC.

Consolidated Statements of Changes in Shareholders’ Equity

Preferred Stock

Accumulated Income (Deficit)

Common Stock Shares Amount

Balance, December 31, 2012

$ 10,906,875

3,089,957

$ 26,096,105

Net income Restricted stock granted Stock issued to directors Redemption of preferred stock Series A Redemption of preferred stock Series B Loss on early redemption of preferred stock Issuance of common stock, net of issuance costs of $425,836 Dividends on preferred stock Accretion of preferred stock discount, net Equity-based compensation expense Tax effect of vested stock awards Fair value of warrants, net of expenses of $4,884 Other comprehensive income, net of tax Balance, December 31, 2013

– – –

– 23,383 4,333

– – 30,461

(10,500,000)

–

(525,000) 13,125

Net income Restricted stock granted Stock issued to directors Equity-based compensation expense Tax effect of vested stock awards Other comprehensive income, net of tax Balance, December 31, 2014

Accumulated Other Comprehensive Income 1,824,908

$ 37,915,749

3,273,466 – –

– – –

3,273,466 – 30,461

–

(10,500,000)

–

(525,000)

–

13,125

1,000,000 –

6,074,164 –

– (569,148)

– –

6,074,164 (569,148)

105,000

–

(105,000)

–

– –

279,546 445

– –

279,546 445

–

176,316

–

176,316

– –

– 4,117,673

– 32,657,037

– 1,687,179

– – –

– 36,402 3,557

– – 30,483

3,259,872 – –

– – –

3,259,872 – 30,483

– –

230,421 42,415

– –

230,421 42,415

– $ –

– 4,157,632

– $ 32,960,356

– $ 4,947,051

192,851 805,861

192,851 $ 38,713,268

– –

See accompanying notes.

(912,139)

Total

(1,211,898) 613,010

(1,211,898) 34,957,226

NORTHWEST BANCORPOR ATION, INC. Consolidated Statements of Cash Flows

Year Ended December 31, 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 Gain on sale or call of securities, net Accretion of net deferred loan fees 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 Provision for losses on foreclosed real estate Gain on sale of foreclosed real estate, net Increase in cash surrender value of bank owned life insurance Deferred income tax provision Equity-based compensation expense Tax effect of equity-based compensation Issuance of common stock under directorsâ&#x20AC;&#x2122; 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: Proceeds from maturities and calls Securities available for sale: Proceeds from maturities, calls and principal payments Proceeds from sales Proceeds from redemption of FHLB stock Net increase in loans Purchases of premises and equipment Proceeds from sale of foreclosed real estate Net cash used by investing activities

2014 $

See accompanying notes.

3,259,872

2013 $

3,273,466

603,140 (64,532) (243,695) 266,667 (29,143,213) 30,381,672 (839,211) 1,143,932 4,373 200,000 (150,277) (41,473) 249,907 230,421 (42,415) 30,483

1,005,064 (196,512) (124,703) 1,500,000 (53,016,523) 59,765,390 (1,404,010) 1,221,138 2,034 993,320 (784,375) (121,362) 18,672 279,546 (445) 30,461

(61,549) (559,064) (6,825) (81,438) 5,136,775

160,129 1,020,633 (509,013) (8,186,951) 4,925,959

720,000

485,000

7,830,794 3,341,867 46,200 (39,710,288) (422,475) 780,247 (27,413,655)

9,650,022 9,555,860 44,700 (34,324,210) (381,942) 4,634,451 (10,336,119)

NORTHWEST BANCORPOR ATION, INC. Consolidated Statements of Cash Flows

Year Ended December 31, 2014 2013

CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits Net (decrease) increase in federal funds purchased Proceeds from borrowed funds Repayment of borrowed funds Proceeds from issuance of common stock, net Proceeds from issuance of subordinated debentures, net Tax effect of equity-based compensation Redemption of preferred stock Dividends paid on preferred stock 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: Increase (decrease) in fair value of securities available for sale, net Acquisition of real estate in settlement of loans Foreclosed real estate financed in-house Accretion of discount on subordinated debentures

38,055,548 (12,170,000) – (1,949,515) – – 42,415 – – 23,978,448 1,701,568

(12,479,837) 10,915,204 5,000,000 (620,516) 6,074,164 5,838,295 445 (11,011,875) (2,214,367) 1,501,513 (3,908,647)

16,080,647 17,782,215

19,989,294 16,080,647

2,168,925 1,305,717

2,580,284 317,634

192,851 205,000 294,634 20,133

See accompanying notes.

(1,211,898) 2,088,323 2,070,440 2,372

Note 1 — Summary of Significant Accounting Policies Basis of presentation and consolidation: The consolidated financial statements include the accounts of Northwest Bancorporation, Inc. (the “Company”), its wholly-owned subsidiary, Inland Northwest Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Northwest Property LLC. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Nature of business: The Bank is a state-chartered commercial bank under the laws of the state of Washington, and provides banking services primarily in eastern Washington and northern Idaho. The Bank is subject to competition from other financial institutions, as well as nonfinancial intermediaries. The Company and the Bank are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. Segment reporting: The Company has not established any independent business activity apart from acting as the parent company of the Bank. The Company and the Bank are managed as a single entity and not by departments or lines of business. Based on management’s analysis, no department or line of business meets the criteria established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, for reporting of selected information about operating segments. 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, deferred taxes, stock options, and fair value measurements. Management believes that the allowance for loan losses is adequate. While management uses currently available information to recognize losses on loans, future changes to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Real estate acquired in connection with foreclosures or in satisfaction of a loan is recorded 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. The Bank periodically reevaluates the value of the property and records a valuation allowance against the asset when it is determined to have decreased in value. Valuation allowances on foreclosed real estate are based on information related to the property received during the period, including updated appraisals of the underlying properties, or upon management’s authorization to reduce the selling price of a property. Consistent with the provisions of ASC Topic 718, Stock Compensation, the Company recognizes expense for the grant-date fair value of stock options and restricted stock awards issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each stock option is estimated as of the grant date using the Black-Scholes option-pricing model. The fair value of each restricted stock award is estimated as of the grant date by calculating the average of the most recent trade prices of the Company’s stock. The management assumptions used at the time of grant impact the fair value of each stock-based award, and ultimately, the expense that will be recognized over the life of the award. FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources,

while unobservable inputs reflect our estimates about market data. In general, fair values determined by Level 1 inputs use quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. 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, 2014 and 2013. 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-ofpayment dates as they relate to the current period. For mortgage-backed securities and SBA participation certificates, the amortization/accretion is a two-step process. The first step is consistent with the methodology used for CMOs. The second step is computed using the rolling three-month historical CPR and the periodic discounted cash flow yield. Prepayment trends are monitored to determine if a change is needed. Federal Home Loan Bank stock: As a condition of membership in the Federal Home Loan Bank of Seattle (“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: The Bank grants real estate mortgage, commercial and consumer loans to its customers. A substantial portion of the loan portfolio is represented by loans throughout eastern Washington and northern Idaho. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the effective interest method. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is both well secured and in process of collection. Management may also discontinue accrual of interest if management feels the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Generally, any cash payments are applied as a reduction of principal outstanding. In cases where the future collectability of the principal balance in full is expected, interest income may be recognized on a cash basis only to the extent cash payments are received, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired since the Bank will not collect all of the principal and interest due in accordance with the terms of the original loan agreement. 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. Allowance for loan losses: As loan losses are estimated to have occurred, the allowance for loan losses is established by recording a provision for loan losses against earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect borrowers’ abilities to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments, principal, or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Transfers of assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Foreclosed real estate: Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of cost or 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 “Loss on foreclosed real estate.”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. 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. 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. 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 14. The Company applies the fair value recognition provision of FASB ASC 718, Stock Compensation, to its stock-based employee compensation. Income taxes: Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Earnings per share: Earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potentially dilutive common shares that may be issued by the Company relate to stock options and unvested restricted stock for all periods presented. In accordance with FASB ASC 260, Earnings per Share, there is no dilutive effect when the Company reports a net loss.

Comprehensive income: Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are components of comprehensive income and are reported in a separate statement following the statements of operations, along with net income. Advertising costs: Advertising costs are charged to operations when incurred. Advertising expense for the years ended December 31, 2014 and 2013 was $107,512 and $65,382, respectively. Reclassifications: Certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period’s presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity. Subsequent events: The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were issued.

Note 2 — Investments in Securities Securities held by the Bank have been classified in the consolidated statements of financial condition according to management’s intent. All securities were classified as available for sale at December 31, 2014 and 2013, and all SBA participation certificates, mortgage backed securities, and collateralized mortgage obligations are government guaranteed. The amortized cost of securities and their approximate fair values were as follows: December 31, 2014 Gross Gross Unrealized Unrealized Gains Losses

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

1,547,227 13,934,808 7,931,051 6,265,822 2,813,428 6,573,332 39,065,668

3,087,006 18,450,564 9,726,250 7,481,512 3,528,666 8,502,938 50,776,936

(2,397) – (2,100) (203) (8,784) (13,821) (27,305)

December 31, 2013 Gross Gross Unrealized Unrealized Gains Losses

12,518 625,026 267,800 205,906 56,407 80,650 1,248,307

Fair Value

17,530 540,589 408,233 111,585 32,163 109,224 1,219,324

(45,846) (121,148) (13,774) (48,476) (16,569) (44,707) (290,520)

1,557,348 14,559,834 8,196,751 6,471,525 2,861,051 6,640,161 40,286,670

Fair Value $

3,058,690 18,870,005 10,120,709 7,544,621 3,544,260 8,567,454 51,705,739

As of December 31, 2014 and 2013, there were 8 and 24 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, 2014 12 Months or More Fair Unrealized Value Losses

Less Than 12 Months Fair Unrealized Value Losses U.S. government agency securities State and municipal securities Corporate debt obligations SBA participation certificates Mortgage backed securities Collateralized mortgage obligations

$ – – 539,260 – 478,899 850,287 $ 1,868,446

$ – – 2,100 – 8,784 2,068 $ 12,952

1,454,030 2,811,409 547,645 1,344,837 2,151,729 1,644,382 9,954,032

45,846 72,661 4,606 48,476 16,569 44,654 232,812

497,603 – – 405,672 – 907,950 1,811,225

2,397 – – 203 – 11,753 14,353

December 31, 2013 12 Months or More Fair Unrealized Value Losses $ – 500,930 240,833 – – 226,328 $ 968,091

$ – 48,487 9,168 – – 53 $ 57,708

Total

Fair Value 497,603 – 539,260 405,672 478,899 1,758,237 3,679,671

1,454,030 3,312,339 788,478 1,344,837 2,151,729 1,870,710 $ 10,922,123

2,397 – 2,100 203 8,784 13,821 27,305

Total

Fair Value

Unrealized Losses

Unrealized Losses 45,846 121,148 13,774 48,476 16,569 44,707 290,520

Management has evaluated the above securities and does not believe that any individual unrealized loss as of December 31, 2014 and 2013, 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, 2014, 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 year to five years Due from five to ten years Due after ten years

$ $

3,592,845 12,723,535 7,953,662 14,795,626 39,065,668

Fair Value $ $

3,639,687 13,193,807 8,274,113 15,179,063 40,286,670

At December 31, 2014 and 2013, securities with an amortized cost of $3,340,878 and $2,608,527, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. The market value for these securities was $3,391,483 and $2,612,711 at December 31, 2014 and 2013, respectively. Nine securities were sold during the year ended December 31, 2014, resulting in gross gains of $88,788 and gross losses of $24,256. Twenty-three securities were sold during the year ended December 31, 2013, resulting in gross gains of $280,433 and gross losses of $85,774. 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 ended December 31, 2014, there were no securities called prior to maturity. During the year ended December 31, 2013, one security was called prior to maturity, resulting in a net gain of $1,853. At December 31, 2014 and 2013, the Bank owned $1,147,700 and $1,193,900, respectively, of stock of the Federal Home Loan Bank of Seattle. At December 31, 2014, the Bank’s minimum required investment in FHLB stock was $464,900. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.

Note 3 — Loans Receivable and Allowance for Loan Losses The following table presents the Bank’s loan balances as of December 31: Real estate: Commercial Construction and land development Residential Commercial and industrial Consumer Allowance for loan losses Net deferred loan fees

2014 $

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

Fixed rate loans Variable rate loans

176,619,849 36,985,599 49,645,936 72,815,579 7,043,758 343,110,721 (5,728,341) (961,635) 336,420,745

2013 $

2014 $ $

82,485,526 260,625,195 343,110,721

157,817,064 26,414,439 38,751,412 73,129,077 7,283,126 303,395,118 (5,803,145) (653,544) 296,938,429

2013 $ $

96,103,367 207,291,751 303,395,118

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 Spokane County, Washington and Kootenai County, Idaho. This concentration may increase the Bank’s exposure to adverse economic events that affect a single market or industry. Construction loans are generally based upon estimates of costs and value associated with the complete project with repayment substantially dependent on the success of the ultimate project such as sales of developed property or an

interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing. The Bank originates consumer loans utilizing an individualized underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. The Bank engages a third party to perform an independent review to validate the credit risk program on a periodic basis. Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by the Bank’s loan officers and credit personnel, as well as the Bank’s policies and procedures. Past due and nonaccrual loans: The following table presents an age analysis of past due loans, segregated by class of loans:

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

30–59 Days Past Due $

2,368,359 30,239 603,456 67,521 6,381 3,075,956

30–59 Days Past Due $

179,819 191,916 387,445 452,073 46,304 1,257,557

60–89 Days Past Due $

165,260 – 53,767 126,477 – $ 345,504

60–89 Days Past Due $ – – – 6,876 14,858 $ 21,734

December 31, 2014 90 or More Days Total Past Due Past Due $ – – – 88,387 – $ 88,387

2,533,619 30,239 657,223 282,385 6,381 3,509,847

$ $

December 31, 2013 90 or More Days Total Past Due Past Due $

388,945 31,882 – – – $ 420,827

568,764 223,798 387,445 458,949 61,162 1,700,118

Total Loans

Current 174,086,230 36,955,360 48,988,713 72,533,194 7,037,377 339,600,874

$ 176,619,849 36,985,599 49,645,936 72,815,579 7,043,758 $ 343,110,721

Current

Total Loans

$ 157,248,300 26,190,641 38,363,967 72,670,128 7,221,964 $ 301,695,000

$ 157,817,064 26,414,439 38,751,412 73,129,077 7,283,126 $ 303,395,118

No loans over 90 days past due were still on accrual status as of December 31, 2014 and 2013. Nonaccrual loans, segregated by class of loans, were as follows as of December 31: Real estate: Commercial Construction and land development Residential Commercial and industrial Consumer

2014 $ – – 518 336,098 17,114 $ 353,730

2013 $

2,647,380 71,197 158,098 709,693 27,377 3,613,745

If the Bank’s nonaccrual loans had performed in accordance with their original contract terms, additional interest income of $22,656 in 2014 and $172,479 in 2013 would have been recognized.

Impaired loans: Loans are considered impaired when, based on current information and events, it is improbable the Bank will be able to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smallerbalance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are applied to principal if the loan is on nonaccrual. Impaired loans, or portions thereof, are charged off if management determines them to be uncollectible. Impaired loan balances were as follows:

Unpaid Contractual Principal Balance

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

7,184,776 – 453,756 1,036,480 71,356 8,746,368

Recorded Investment With No Allowance $

Unpaid Contractual Principal Balance

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

$ 11,528,844 367,861 562,982 1,211,158 76,032 $ 13,746,877

2,570,423 – – 405,985 17,114 2,993,522

Recorded Investment With No Allowance $

December 31, 2014 Recorded Investment With Allowance $

2,928,952 – 398,852 356,923 – 3,684,727

Total Recorded Investment $

December 31, 2013 Recorded Investment With Allowance

4,852,157 163,874 158,098 238,035 10,060 5,422,224

4,557,542 129,232 254,884 969,513 17,319 5,928,490

5,499,375 – 398,852 762,908 17,114 6,678,249

Related Allowance $

Total Recorded Investment $

9,409,699 293,106 412,982 1,207,548 27,379 $ 11,350,714

447,500 – 85,000 125,600 – 658,100

Related Allowance $

700,000 65,000 89,905 381,700 9,500 1,246,105

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

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

December 31, 2014 Interest Income Average Recorded for Recorded Cash Payments Investment Received $

7,864,258 169,486 352,878 956,327 22,315 9,365,264

427,084 9,127 23,510 40,153 – $ 499,874

December 31, 2013 Interest Income Average Recorded for Recorded Cash Payments Investment Received $

11,185,030 1,051,486 525,313 1,182,568 49,564 13,993,961

631,250 22,981 25,417 62,753 2,059 744,460

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

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

Accruing Restructured Loans

December 31, 2014 Restructured Loans Included in Nonaccrual Loans

4,843,128 – – 174,349 – $ 5,017,477

$ – – – – 5,344 $ 5,344

Accruing Restructured Loans

Total $

4,843,128 – – 174,349 5,344 5,022,821

5,751,045 124,560 – 201,864 – $ 6,077,469

December 31, 2013 Restructured Loans Included in Nonaccrual Loans $

2,258,436 39,315 – – – $ 2,297,751

Total $

8,009,481 163,875 – 201,864 – $ 8,375,220

For the years ended December 31, 2014 and 2013, the Bank recognized interest income of $282,387 and $336,202, respectively, in connection with restructured accruing loans. Troubled debt restructurings the years ended December 31, 2014 and 2013, were as follows:

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

Number of Contracts

2014 Pre–modification Recorded Investment

0 $ 0 0 1 1 2 $

– – – 232,647 5,344 237,991

Post–modification Recorded Investment $

– – – 232,647 5,344 237,991

Number of Contracts

2 1 0 0 0 3

2013 Pre–modification Recorded Investment

Post–modification Recorded Investment

3,174,497 124,560 – – – 3,299,057

3,174,497 124,560 – – – $ 3,299,057

In each case, the loans listed above were modified to 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. There were no troubled debt restructurings modified within the previous 12 months for which there was a declaration of default which remains unresolved to report during the years ended December 31, 2014 and 2013. The Bank may declare a borrower to be in default when an event of default, such as a payment more than 30 days past due, has occurred and is not remedied in a reasonable amount of time. Restructured loans for which there was a declared and continuing default during the period are included in the calculation of the allowance for loan losses as deemed appropriate for each defaulted credit.

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

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

Pass/Watch $ 167,431,030 35,753,784 48,550,679 70,563,654 7,006,269 $ 329,305,416

December 31, 2014 Special Mention Substandard $

Pass/Watch $ 142,892,406 25,074,083 37,080,028 69,485,589 7,209,539 $ 281,741,645

3,994,510 1,136,209 431,486 1,525,663 20,375 7,108,243

Special Mention $

6,102,230 1,171,809 988,479 2,285,309 45,186 $ 10,593,013

5,194,309 95,606 663,771 726,262 17,114 6,697,062

December 31, 2013 Substandard $

8,822,428 168,547 682,905 1,358,179 28,401 $ 11,060,460

Doubtful/Loss

Total Loans

$ – – – – – $ –

$ 176,619,849 36,985,599 49,645,936 72,815,579 7,043,758 $ 343,110,721

Doubtful/Loss $ – – – – – $ –

Total Loans $ 157,817,064 26,414,439 38,751,412 73,129,077 7,283,126 $ 303,395,118

Allowance for Loan Losses: The allowance for loan losses is a reserve established through a provision for loan losses charged to expense. The allowance for loan losses represents management’s best estimate of probable losses within the existing loan portfolio. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Bank’s allowance for loan loss methodology is based on guidance from ASC Topic 310, Receivables, and ASC Topic 450, Contingencies. The Bank’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank’s control, including, among other things, the performance of the Bank’s loan portfolio, the economy, changes in interest rates and the view of regulatory authorities toward loan classifications. The Bank’s allowance for loan losses consists of two elements: (1) general valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted as necessary to reflect the impact of current economic conditions and other qualitative risk factors both internal and external to the Bank; and (2) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans. The allowances established for expected losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (1) the borrower’s ability to repay; (2) the financial condition of the borrower; (3) the quality of the borrower’s management; (4) the underlying collateral, if any; (5) the strength of the guarantors; (6) the structure of the loan; (7) the quality, availability and timeliness of financial information; and (8) the industry and economic environment in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has been classified as Substandard or worse, a special assets officer analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Impairment is determined in accordance with ASC Topic 310, which specifies that a loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, including principal and interest, as scheduled in the loan agreement. Indicators of impairment include evidence the borrower is experiencing problems such as operating losses, marginal working capital, inadequate cash flow, or business interruptions; loans that are secured with collateral that is no longer readily marketable or that is subject to deterioration in realizable value; loans to borrowers in industries that are currently experiencing economic instability; and other factors. If a loan is determined to be impaired, the balance is segregated from the pool of loans and a specific valuation allowance is established by measuring the impairment. Most loans are collateral dependent and as such, impairment is measured by comparing the loan balance with the current market value of the collateral, less selling and holding costs. A deficiency is recorded as a specific valuation allowance, and is included as a component of the allowance for loan losses. If the deficiency on a collateral dependent loan remains for more than 90 days, it is charged off. General valuation allowances are calculated based on the historical loss experience of specific types of loans, plus general economic conditions and other qualitative internal and external risk factors. The Bank calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced compared to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual chargeoff experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool.

Added to the Bank’s historical loss experience are metrics of general economic conditions and other qualitative risk factors both internal and external to the Bank. The risk factors believed by management to be most relevant to the loan portfolio are: (1) current unemployment levels in our operating areas, as compared to normal levels of unemployment; (2) the current level of past due and nonaccrual loans as compared to levels during years of low charge-offs; (3) a consideration of the trend of median home prices and foreclosure rates as they relate to construction and land loans; (4) a consideration of the trend of new housing starts and absorption rates as they relate to construction loans; (5) commercial and apartment vacancy rates and their relationship to multi-family and other commercial real estate loans; and (6) the change in the average risk rating of our portfolio, by loan type, as it relates to charge-off experience. Each component is used to calculate a risk factor, which is input into a “general reserve” matrix along with the historical loss rates discussed above. The total combined risk factor for each loan type is then applied to the loan balances that remain after impaired loans are segregated from the pool to determine an appropriate general valuation allowance. Management evaluates the change each one of these components has on the quality of the loan portfolio on a quarterly basis. In addition, management evaluates and documents intangible factors such as: (1) the experience, ability and effectiveness of the Bank’s lending management and staff; (2) the effectiveness of the Bank’s loan policies, procedures and internal controls; (3) the composition and concentrations of credit; and (4) the effectiveness of the internal loan review function. Activity in the allowance for loan losses was as follows:

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

Year Ended December 31, 2014

Balance, Beginning of Year $

2,587,608 813,004 992,584 833,381 101,451 475,117 5,803,145

Provision for Loan Losses $

2,362,100 709,645 958,830 839,214 82,277 308,378 5,260,444

(110,381) (1,882) (96,525) (595,351) (87,387) – (891,526)

Recoveries $

413,411 21,229 44,019 36,817 34,579 – 550,055

Year Ended December 31, 2013

Balance, Beginning of Year $

(893,832) (15,051) 4,628 326,718 133,111 711,093 266,667

Charge-offs

Balance, End of Year

Provision for Loan Losses $

707,675 260,884 190,925 27,909 145,868 166,739 1,500,000

Charge-offs $

(656,549) (166,119) (197,805) (147,911) (146,527) – $ (1,314,911)

Balance, End of Year

Recoveries $

174,382 8,594 40,634 114,169 19,833 – 357,612

1,996,806 817,300 944,706 601,565 181,754 1,186,210 5,728,341

2,587,608 813,004 992,584 833,381 101,451 475,117 5,803,145

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

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

December 31, 2014 Collectively Evaluated Individually Evaluated for Impairment for Impairment Related Related Loans Allowance Loans Allowance $

171,120,474 36,985,599 49,247,084 72,052,671 7,026,644 – $ 336,432,472

1,549,306 817,300 859,706 475,965 181,754 1,186,210 5,070,241

5,499,375 – 398,852 762,908 17,114 – $ 6,678,249

447,500 – 85,000 125,600 – – $ 658,100

December 31, 2013 Collectively Evaluated Individually Evaluated for Impairment for Impairment Related Related Loans Allowance Loans Allowance $

148,407,365 26,121,332 38,338,430 71,921,528 7,255,749 – $ 292,044,404

1,887,608 748,004 902,679 451,681 91,951 475,117 4,557,040

9,409,699 293,107 412,982 1,207,549 27,377 – $ 11,350,714

700,000 65,000 89,905 381,700 9,500 – $ 1,246,105

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.

Note 4 — Premises and Equipment Components of premises and equipment included in the consolidated statements of financial condition were as follows as of December 31: 2014 Land Buildings and improvements Furniture, fixtures and equipment Leasehold improvements Construction in progress Total cost Less accumulated depreciation and amortization Premises and equipment, net

4,475,329 11,735,410 6,170,106 1,988,495 49,463 24,418,803 (9,530,459) 14,888,344

2013 $

4,475,437 11,733,301 6,270,536 1,987,533 – 24,466,807 (8,852,633) $ 15,614,174

The Bank has operating leases on a number of its branches that expire on various dates through 2026. The lease agreements have various renewal options. The following is a schedule by year of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2014: Year ending December 31, 2015 2016 2017 2018 2019 Thereafter Total minimum payments required

524,385 531,186 528,851 517,380 200,752 660,105 2,962,658

Total lease payments under the above mentioned operating leases and other month-to-month rentals for the years ended December 31, 2014 and 2013, were $520,809 and $520,646, respectively.

Note 5 — Foreclosed Real Estate The following table presents the changes in foreclosed real estate, net of any related valuation allowance, for the years ended December 31: 2014 Balance, beginning of year Transfers from loans Dispositions of property Provision charged to income Balance, end of year

$ $

1,674,970 205,000 (629,970) (200,000) 1,050,000

2013 $ $

4,430,042 2,088,323 (3,850,075) (993,320) 1,674,970

Foreclosed real estate is carried at the lower of the recorded investment in the loan (prior to foreclosure) or the fair market value of the property less expected selling costs. Valuation allowances on foreclosed real estate are based on updated appraisals of the underlying collateral as received during the period or management’s authorization to reduce the selling price of a property during the period. As of December 31, 2014 and 2013, the Bank had valuation allowances on foreclosed real estate totaling $200,000 and $993,320, respectively.

Note 6 — Deposits Classifications of deposits at December 31, were as follows: 2014 Noninterest bearing demand deposits Money market accounts NOW accounts Savings accounts Time deposits, $100,000 and over Time deposits, under $100,000

96,385,974 63,382,641 70,312,396 45,321,362 55,083,794 28,193,787 358,679,954

2013 $

83,062,985 65,088,652 63,532,572 44,133,059 32,885,180 31,921,958 320,624,406

Maturities for time deposits at December 31, 2014, are summarized as follows: 2015 2016 2017 2018 2019

43,984,130 11,726,610 15,168,734 5,964,329 6,433,777 83,277,581

Overdraft deposit accounts with balances of $66,594 and $83,028 at December 31, 2014 and 2013, respectively, were reclassified as loans receivable.

Note 7 — Borrowed Funds Borrowed funds consist of the following at December 31:

Federal Home Loan Bank advances Subordinated debentures Junior subordinated debentures Capital lease obligation

2014 $

10,330,476 5,841,305 5,155,000 – $ 21,326,781

2013 $ $

11,730,476 5,821,172 5,155,000 549,515 23,256,163

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, 2014, are as follows:

Amount 2015 2016 2017 2018 2019

1,400,000 1,400,000 3,545,555 794,445 3,190,476 10,330,476

Weighted Average Interest Rate 1.57% 1.62% 1.89% 1.99% 1.99%

Subordinated debentures: In November 2013, the Company issued $6,000,000 in subordinated debentures pursuant to subordinated debenture purchase agreements, subordinated debenture notes, and stock purchase warrants. The subordinated debentures are unsecured, bear interest at a fixed rate of 7.5% per annum, have a term of 9 years with no prepayment allowed during the first 5 years, and were made in conjunction with 9-year detachable warrants to purchase an aggregate of 200,000 shares of the Company’s common stock at an exercise price, subject to anti-dilution adjustments, of $7.25 per share. The subordinated debentures were purchased by two accredited investors: Harlan D. Douglass, a current shareholder and member of the Company’s board of directors, purchased 25% of the debentures and stock purchase warrants, and an unrelated private investment fund purchased the remainder of the debentures and stock purchase warrants; both of these parties also participated in the Company’s common stock offering during 2013 (see Note 15). 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 1.96% at December 31, 2014. 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. Capital lease obligation: The capital lease obligation is related to a ground lease that the Bank entered into in 2005 for one of its branch locations. The Bank exercised its purchase option on this lease during 2014. The purchase price was $546,918, which was equal to the present value of the remaining lease payments. As a “capitalized” lease, the value of the property is included as an asset on the consolidated statements of financial condition in “Premises and equipment, net,” and the net present value of future payments is included in “Borrowed funds.” 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, 2014 Line Outstanding Amount Balance Federal Home Loan Bank Pacific Coast Bankers Bank Zions Bank

$ $

94,750,274 10,000,000 5,000,000 109,750,274

13,570,000 – – $ 13,570,000

December 31, 2013 Line Outstanding Amount Balance $ $

82,782,282 10,000,000 5,000,000 97,782,282

12,170,000 – – $ 12,170,000

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

Note 8 — Commitments and Contingencies In the ordinary course of business, the Bank makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The Bank uses the same credit policies in making such commitments as they do for instruments that are included in the consolidated statements of financial condition. These commitments and contingent liabilities include various commitments to extend credit and standby letters of credit. At December 31, 2014 and 2013, commitments under standby letters of credit were $1,372,764 and $1,629,260, respectively, and firm loan commitments were $112,065,859 and $103,578,839, respectively. The Bank has not experienced any losses and does not anticipate any material losses as a result of these commitments. 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 $150,000 per year for a period of ten years, with the final payment due in 2015.

Note 9 — Concentrations of Credit Risk The majority of the Bank’s loans, commitments, and standby letters of credit have been granted to customers in the Bank’s market area, which is the eastern Washington and northern Idaho area. Substantially all such customers are depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 3. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Outstanding commitments and standby letters of credit were granted primarily to commercial borrowers. The Bank places its cash with high credit quality financial institutions. The amount on deposit fluctuates, and at times exceeds the insured limit by the U.S. Federal Deposit Insurance Corporation, which potentially subjects the Bank to credit risk. The Bank evaluates the credit quality and liquidity of these financial institutions to mitigate its credit risk.

Note 10 — Other Noninterest Income and Expense Other noninterest income and expense totals are presented in the following tables, with components of these totals that exceed 1% of the aggregate of total net interest income and total noninterest income itemized separately.

Other noninterest income: Debit and credit card income Foreclosed real estate income Other OTHER NONINTEREST INCOME Other noninterest expense: ATM and debit card costs Software expense Audit and accounting fees B&O tax Legal fees Foreclosed real estate expense Other OTHER NONINTEREST EXPENSE

2014 $ $ $

1,156,823 42,095 467,634 1,666,552 473,796 374,124 208,544 201,779 127,218 99,625 2,207,792 3,692,878

2013 $ $ $

243,810 1,067,425 453,190 1,764,425 404,076 360,138 173,873 216,748 111,713 338,721 2,507,772 4,113,041

Note 11 — Income Taxes The components of income tax expense are as follows:

Current tax expense Deferred tax expense (benefit) Decrease in deferred tax valuation allowance INCOME TAX EXPENSE

2014 $ $

1,675,667 (249,907) – 1,425,760

2013 $ $

336,306 723,328 (742,000) 317,634

The Company’s normal, expected statutory income tax rate is 35.3%, representing a blend of the statutory federal income tax rate of 34.0% and apportioned effects of the Idaho income tax rate of 7.4%. The ratio of tax expense to net income before tax (referred to as the effective tax rate) differs from statutory tax rates due to permanent differences arising primarily from nontaxable interest income on state and municipal securities and nontaxable increases in the value of bank owned life insurance. The differences between tax expense at the statutory rates and actual tax expense were as follows for the years ended December 31: 2014 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 Decrease in deferred tax valuation allowance Other INCOME TAX EXPENSE

1,593,115 (212,612) 4,194 26,841 28,209 – (13,987) 1,425,760

2013 $

1,220,974 (225,943) 5,684 20,587 39,897 (742,000) (1,565) 317,634

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

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

2014 $

743,697 778,029 275,122 338,477 135,291 174,007 4,499 7,703 2,456,825

1,023,644 415,141 304,091 92,375 81,117 1,916,368 540,457

2013 $

822,521 848,532 – 331,234 160,435 155,817 7,628 40,267 2,366,434

1,186,491 315,793 297,169 92,375 84,708 1,976,536 389,898

At December 31, 2014, an income tax payable of $51,174 was included in other liabilities and a net deferred tax asset of $540,457 was included in other assets on the consolidated statements of financial condition. At December 31, 2013, an income tax payable of $335,811 was included in other liabilities and a net deferred tax asset of $389,898 was included in other assets on the consolidated statements of financial condition. During 2009, the Company recorded a valuation allowance of $742,000 against a portion of its deferred tax assets due to uncertainty about the Company’s ability to generate future taxable income sufficient to realize the benefits of temporary deductible differences that could not have been realized through carrybacks to prior years or through the reversal of future temporary taxable differences. In June 2013, management analyzed the Company’s performance and trends over the prior five quarters, focusing strongly on trends in asset quality, loan loss provisioning, capital position, net interest margin, core operating income and net income. Based on this analysis, management determined that the valuation allowance was no longer appropriate and the full amount of the valuation allowance was reversed. As of December 31, 2014 and 2013, there was no valuation allowance. The ultimate realization of deferred tax assets is dependent upon the existence, or generation, of taxable income in the periods when those temporary differences are deductible. Management considered the scheduled reversal of deferred tax assets and liabilities, taxes paid in carryback years, projected future taxable income, available tax planning strategies, and other factors in making its assessment to reverse the deferred tax valuation allowance. 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, 2014 and 2013. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2014 and 2013 the Company recognized no interest and penalties. The Company files a United States federal income tax return and an Idaho income tax return. With few exceptions, the Company is no longer subject to U.S. federal or state/local income tax examinations by tax authorities for years before 2011.

Note 12 — Changes in Accumulated Other Comprehensive Income by Component The following table presents the changes in accumulated other comprehensive income by component, net of taxes, for the years ended December 31: 2014 Unrealized gains and losses on securities available for sale: Balance, beginning of year Unrealized gains (losses) on securities available for sale Amounts reclassified from accumulated other comprehensive income Balance, end of year

$ $

613,010 235,442 (42,591) 805,861

2013 $ $

1,824,908 (1,082,200) (129,698) 613,010

The amounts reclassified from accumulated other comprehensive income is included in “Gain on investment securities, net” in the accompanying consolidated statements of income.

Note 13 — Employee Benefits The Bank maintains a 401(k) profit sharing plan covering all employees who meet certain eligibility requirements. The plan provides for employees to elect up to 50% of their compensation to be paid into the plan. The Bank’s policy is to match contributions equal to 50% of the participant’s contribution, not to exceed 3% of the participant’s compensation. Vesting occurs over a six-year graded vesting schedule. Expenses associated with the plan were $131,968 and $142,053 for the years ended December 31, 2014 and 2013, 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 $11,414 and $8,399 for the years ended December 31, 2014 and 2013, respectively. Liabilities associated with the plan were $294,002 and $225,130 for December 31, 2014 and 2013, respectively. To fund benefits under this plan, the Bank is the owner and beneficiary of single premium life insurance policies on certain current and past employees. At December 31, 2014 and 2013, the cash value of these policies was $4,201,229 and $4,159,756, 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 $71,449 and $132,136 for the years ended December 31, 2014 and 2013, respectively. Liabilities associated with these plans were $701,519 and $749,088 as of December 31, 2014 and 2013, respectively.

Note 14 — Stock-Based Compensation On May 20, 2014, shareholders approved the Inland Northwest Bank 2014 Share Incentive Plan and the issuance of shares of common stock of the Company pursuant to the Plan. This Plan is an amendment and restatement of the Inland Northwest Bank Nonqualified Stock Option Plan originally effective in July 1992, as revised in December 1993, December 1999, April 2002, May 2006 and September 2013. The decision as to whether to grant restricted stock awards or options for purposes of employee recruitment, retention or reward is at the discretion of the Compensation Committee. The maximum number of stock options and restricted stock awards that may be granted under the Plan, as adjusted for any stock dividends, is 500,000. At December 31, 2014, there were 484,853 shares and/or options available for grant to employees. Restricted stock awards either vest over time or cliff-vest over a period of one to five years depending on the individual grant. The fair value of these awards is recognized ratably over the vesting period as compensation expense. Restricted stock award activity is summarized in the following table: Number of Shares Outstanding at December 31, 2012 Granted Vested Forfeited Outstanding at December 31, 2013 Granted Vested Forfeited Outstanding at December 31, 2014

90,785 152,750 (23,383) (16,500) 203,652 14,750 (36,402) (8,000) 174,000

Weighted Average Fair Value $

3.98 6.58 6.81 4.46 5.57 8.56 4.91 6.87 5.90

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: 2014 Shares Outstanding options, beginning of year Granted Exercised Expired Forfeited/cancelled Outstanding options, end of year Options exercisable, end of year

13,103 – – – (8,103) 5,000 5,000

2013

Weighted Average Exercise Price

$ 13.83 – – – 11.87 17.00 17.00

13,682 – – – (579) 13,103 13,103

Weighted Average Exercise Price

$ 13.75 – – – 11.96 13.83 13.83

Options outstanding at December 31, 2014 were as follows:

Exercise price: $ 17.00

Number Outstanding at Year End 5,000

Options Outstanding Remaining Contractual Exercise Life (Years) Price 2.44

$ 17.00

Intrinsic Value of Stock Options(1) $

–

Number Exercisable at Year End 5,000

Exercisable Options Exercise Price $ 17.00

Intrinsic Value of Stock Options(1) $ 15.55

Options that are calculated to have a negative intrinsic value are excluded from the calculated total.

(1)

For the year ended December 31, 2014 and 2013, 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, 2014: Stock Options 2015 2016 2017 2018

$ – – – – $ –

Restricted Stock $ $

235,588 204,900 176,590 92,862 709,940

Total Awards $ $

235,588 204,900 176,590 92,862 709,940

Note 15 — Common and Preferred Stock Common Stock: No cash dividends or stock dividends on common stock were declared during the years ended 2014 and 2013. During 2014 and 2013, the Board of Directors voted to issue 3,557 shares and 4,333 shares, respectively, of Company stock to nonemployee Directors pursuant to the Company’s Director Compensation Plan. On December 11, 2013, the Company concluded a private placement offering with the issuance of 1,000,000 shares of common stock to accredited investors for an aggregate purchase price of $6,500,000, or $6.50 per share. Net proceeds to the Company, after expenses, were $6,074,164. Preferred Stock: On February 14, 2009, as part of the Capital Purchase Program of the Treasury, the Company entered into a Letter Agreement incorporating an attached Securities Purchase Agreement-Standard Terms (collectively, the “Purchase Agreement”) with the Treasury. Under the Purchase Agreement, the Company agreed to issue and sell to the Treasury (1) 10,500 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), with a liquidation value of $1,000 per share, and (2) a warrant (the “Warrant”) to purchase 525 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), with an exercise price of $0.01 per share, for an aggregate purchase price of $10,500,000. The Treasury immediately exercised the Warrant. The Company is obligated to pay cumulative dividends on the Series A Preferred Stock at a rate of 5% per annum until February 2014, when the dividend rate rises to 9% per annum. The Company is obligated to pay cumulative dividends on the Series B Preferred Stock of 9% per annum. The Company may, at its option, redeem the Series A Preferred Stock and the Series B Preferred Stock (together, the “Preferred Stock”) at the issue price, plus accrued and unpaid dividends. The Preferred Stock is generally non-voting and qualifies as Tier 1 capital. On March 11, 2013, Treasury sold the Company’s Preferred Stock to certain domestic qualified institutional buyers and domestic institutional accredited investors. As long as any shares of the Preferred Stock continue to be held by a third party, the Company will be prohibited under the terms of the Preferred Stock from paying dividends on common stock or any shares of capital stock that rank equal to or junior to the Company’s Preferred Stock if the Company is not current in its payment of dividends on the Preferred Stock, except in the case of parity, or pari passu, preferred stock that may be paid pro rata with the Preferred Stock, so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of the Preferred Stock and all parity stock payable on such a scheduled dividend payment date bear to each other. As of December 31, 2013, the Company had redeemed all 10,500 shares of Series A Preferred Stock and 525 shares of Series B Preferred Stock from the third parties that had purchased the Preferred Stock from Treasury. The Company paid 100% of the stated liquidation value, or $1,000 per share, plus $2,500,000 of accrued dividends and interest, for a total repurchase price of $13,500,000. The Company funded the redemption with the proceeds of a private placement of common stock and issuance of subordinated debentures, as well as from retained earnings. Subsequent to the payment made on February 16, 2010, the Company began deferring payment of dividends on its Preferred Stock but continued to accrue the liability for the dividends. As of December 31, 2013 the Company had brought all dividends current, including those dividends that had been previously deferred.

Note 16 — Related Party Transactions The Company, through its Bank subsidiary, has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families, and affiliated companies in which they are principal shareholders. Loan balances with related parties were as follows at December 31: 2014 Balance, beginning of year Advances Payments Balance, end of year

$ $

232,737 146,260 (169,009) 209,988

2013 $ $

71,315 168,174 (6,752) 232,737

Aggregate deposit balances with related parties at December 31, 2014 and 2013, were $1,655,481 and $1,046,576, respectively. All related party loans and deposits have been made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

Note 17 — Restrictions on Dividends and Retained Earnings Federal and state banking regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends, which may be paid at any date, is generally limited to the retained earnings of the Bank, which was $21,623,151 at December 31, 2014. Accordingly, $26,385,021 of the Company’s equity in the net assets of the Bank was restricted at December 31, 2014.

Note 18 — Regulatory Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines on the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). Under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 riskbased capital, and total risk-based capital ratios as set forth in the table. As of December 31, 2014, 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 institution’s category.

The Company’s and Bank’s actual December 31, 2014 and 2013, capital amounts and ratios are presented in the table:

December 31, 2014: Total capital (to risk-weighted assets): Northwest Bancorporation Inland Northwest Bank Tier 1 capital (to risk-weighted assets): Northwest Bancorporation Inland Northwest Bank Tier 1 capital (to average assets): Northwest Bancorporation Inland Northwest Bank

Amount

Actual

Ratio

Capital Adequacy Purposes Amount Ratio

To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio

$ 53,625,000 52,067,000

13.79% 13.42%

$ 31,117,920 31,049,440

> 8% > 8%

NA $ 38,811,800

NA > 10%

42,907,000 47,202,000

11.03% 12.16%

15,558,960 15,524,720

> 4% > 4%

NA 23,287,080

NA > 6%

42,907,000 47,202,000

10.28% 11.08%

16,688,320 17,044,760

> 4% > 4%

NA 21,305,950

NA > 5%

13.89% 13.40%

$ 28,599,360 28,599,360

> 8% > 8%

NA $ 35,749,200

NA > 10%

11.01% 12.14%

14,299,680 14,299,680

> 4% > 4%

NA 21,449,520

NA > 6%

10.02% 11.00%

15,706,880 15,788,320

> 4% > 4%

NA 19,735,400

NA > 5%

December 31, 2013: Total capital (to risk-weighted assets): Northwest Bancorporation $ 49,653,000 Inland Northwest Bank 47,903,000 Tier 1 capital (to risk-weighted assets): Northwest Bancorporation 39,344,000 Inland Northwest Bank 43,415,000 Tier 1 capital (to average assets): Northwest Bancorporation 39,344,000 Inland Northwest Bank 43,415,000

The Federal Reserve and the Federal Deposit Insurance Corporation approved final capital rules in July 2013, which substantially amend the existing capital rules for banks. These new rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act. Under the new capital rules, the Bank will be required to meet certain minimum capital requirements that differ from current capital requirements. The rules implement a new capital ratio of common equity Tier 1 capital to risk-weighted assets. Common equity Tier 1 capital generally consists of retained earnings and common stock (subject to certain adjustments) as well as accumulated other comprehensive income (“AOCI”), except to the extent that the Bank exercises a one-time irrevocable option to exclude certain components of AOCI as of March 31, 2015. The Bank will also be required to establish a “conservation buffer,” consisting of a common equity Tier 1 capital amount equal to 2.5% of risk-weighted assets to be phased in by 2019. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases, and discretionary bonuses to executive officers. The prompt corrective action rules are modified to include the common equity Tier 1 capital ratio and to increase the Tier 1 capital ratio requirements for the various thresholds. For example, the requirements for the Bank to be considered well-capitalized under the rules will be a 5.0% leverage ratio, a 6.5% common equity Tier 1 capital ratio, an 8.0% Tier 1 capital ratio, and a 10.0% total capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively. The rules modify the manner in which certain capital elements are determined. The rules make changes to the methods of calculating the risk-weighting of certain assets, which in turn affects the calculation of the risk-weighted capital ratios. Higher risk weights are assigned to various categories of assets, including commercial real estate loans, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credit that are 90 days past due or are nonaccrual, securitization exposures, and in certain cases mortgage servicing rights and deferred tax assets. The Bank is required to comply with the new capital rules on January 1, 2015, with a measurement date of March 31, 2015. The conservation buffer will be phased-in beginning in 2016, and will take full effect on January 1, 2019. Certain calculations under the rules will also have phase-in periods.

Note 19 — Earnings Per Share Earnings per share and the calculated effect of dilutive securities on loss per share are as follows for the year ended December 31:

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

2014

2013

3,259,872

4,122,863 62,732 13,423 4,199,018

3,152,160 56,757 – $ 3,208,917

$ $

0.79 0.78

$ $

2,599,318

0.82 0.81

Anti-dilutive shares as of December 31, 2014 and 2013, were 61,146 and 16,896, respectively.

Note 20 — Fair Values Fair Value Hierarchy: Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels: Level 1:

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

Level 2:

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

Level 3:

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis: The following table presents the Company’s financial instruments measured at fair value on a recurring basis:

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

December 31, 2014 Level 2 Level 3

Level 1 $ – – – – – –

$ – – – – – –

December 31, 2013 Level 2 Level 3

Level 1 $ – – – – – –

1,557,348 14,559,834 8,196,751 6,471,525 2,861,051 6,640,161

Total

3,058,690 18,870,005 10,120,709 7,544,621 3,544,260 8,567,454

$ – – – – – –

1,557,348 14,559,834 8,196,751 6,471,525 2,861,051 6,640,161

Total $

3,058,690 18,870,005 10,120,709 7,544,621 3,544,260 8,567,454

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

Level 1 Impaired loans Foreclosed real estate

$ – – Level 1

Impaired loans Foreclosed real estate

$ – –

December 31, 2014 Level 2 Level 3 $ – –

3,026,627 1,050,000

Total $

December 31, 2013 Level 2 Level 3 $ – –

4,682,385 1,674,970

3,026,627 1,050,000 Total

4,682,385 1,674,970

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

Impaired loans: Commercial real estate

Fair Value 415,300

Sales comparison

Commercial real estate

2,066,152

Income approach

Residential real estate

313,852

Sales comparison

231,323

Sales comparison

Commercial and industrial

Foreclosed real estate: Commercial real estate Construction and land development

Impaired loans: Commercial real estate

3,026,627

975,000

Sales comparison

75,000

Sales comparison

1,050,000

Fair Value $

Valuation Technique(s)

2,931,778

Sales comparison

925,764

Income approach

64,232

Sales comparison

Residential real estate

164,979

Sales comparison

Commercial and industrial

587,813

Sales comparison

7,819

Sales comparison

Commercial real estate Construction and land development

Consumer

Foreclosed real estate: Commercial real estate Construction and land development

Valuation Technique(s)

4,682,385

1,474,970

Sales comparison

200,000

Sales comparison

1,674,970

December 31, 2014 Unobservable Input(s)

Range (Wtd Avg)

35% –100% (34%) 0% – 22% (10%) 10% – 49% (29%) 46% –100% (69%)

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

17% – 50% (21%) 73% – 73% (73%)

December 31, 2013 Unobservable Input(s)

Range (Wtd Avg)

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

13% – 43% (28%) 22% – 22% (22%) 24% – 86% (30%) 44% –100% (44%) 23% – 61% (51%) 77% – 77% (77%)

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

27% – 49% (30%) 31% – 73% (47%)

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. The loss represents charge-offs or impairments on collateral dependent loans for adjustments made based on the fair value of the collateral. Foreclosed real estate: The amount shown above represents impaired real estate properties that have been adjusted to fair value, which is typically determined using an independent appraisal. At the time of foreclosure, these assets are measured and recorded at the lower of carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any impairment based on the asset’s fair value at the date of acquisition is charged to the allowance for loan losses. After foreclosure, management periodically re-assesses the value so that the property is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Appraised values may be discounted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge of the client and the client’s business. Fair value adjustments on foreclosed real estate are recognized in the consolidated statements of operations. Losses from nonrecurring valuations represent impairments on foreclosed real estate made based on the fair value of the property. Disclosures about Fair Value of Financial Instruments: The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31:

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

December 31, 2014 Fair Value Measurements Level 1 Level 2

Carrying Amount

Fair Value

$ 17,782,215 1,935,000 40,286,670 336,420,745 740,000 1,321,897

$ 17,782,215 2,016,312 40,286,670 341,292,974 740,000 1,321,897

$ 17,782,215 – 40,286,670 – – –

$ – 2,016,312 – – 740,000 1,321,897

358,679,954 124,214 – 21,326,781

358,886,233 124,214 – 18,581,737

275,402,374 – – –

– 124,214 – 18,581,737

Carrying Amount

Fair Value

$ 16,080,647 2,655,000 51,705,739 296,938,429 1,139,248 1,260,348

$ 16,080,647 2,692,290 51,705,739 293,934,057 1,139,248 1,260,348

$ 16,080,647 – 51,705,739 – – –

$ – 2,692,290 – – 1,139,248 1,260,348

320,624,406 131,039 12,170,000 23,256,163

321,280,227 131,039 12,170,000 20,460,783

255,817,267 – 12,170,000 –

– 131,039 – 20,460,783

Level 3 – – – 341,292,974 – – 83,483,859 – – –

December 31, 2013 Fair Value Measurements Level 1 Level 2 $

Level 3 – – – 293,934,057 – – 65,462,960 – – –

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which is it practicable to estimate that value: Cash and cash equivalents: The carrying value approximates fair value because of the short maturity of these instruments. Time deposits held for investment: Fair values of time deposits held for investment were estimated using the discounted value of contractual cash flows. The discount rates used for these estimates were based on rates currently offered for time deposits with similar remaining maturities. Securities available for sale: : The estimated fair values of securities are based on quoted market prices of similar securities. Loans: Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as real estate, commercial and industrial, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms. The fair values for fixed-rate loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments. For variable rate loans that re-price frequently and have no significant change in credit risk, fair values are based on carrying values. Loans held for sale: The carrying value approximates fair value because of the short maturity of these instruments. Accrued interest receivable and payable: The carrying value approximates fair value because of the short maturity of these instruments. Deposits: The fair value of deposits with no stated maturity such as noninterest bearing demand deposits, money market accounts, NOW accounts, and savings accounts is equal to the amount payable on demand at the reporting date, and such deposits are classified as Level 1 instruments. The fair value of fixed-maturity time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Time deposits are classified as Level 3 instruments. Federal funds purchased: The carrying value approximates fair value because of the short maturity of these instruments. Borrowed funds: The fair values of term debt, junior subordinated debentures, and capital lease obligations are estimated using the discounted value of contractual cash flow using the Company’s current incremental borrowing rate for similar types of borrowing arrangements. Subordinated debentures were booked at fair value, therefore the carrying value approximates the fair value. Off-balance sheet instruments: Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. The fair values of these commitments were not significant as of December 31, 2014 and 2013. 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, 2014 and 2013.

Bank Officers

ADMINISTRATION

LOAN DEPARTMENT

CREDIT ADMINISTRATION

Stanly V. Anderson Vice President Information Technology Manager

T.J. Brill Senior Vice President Commercial Team Leader

Valaurie E. Caprez Vice President Loan Servicing Manager

Duane L. Henderson Consumer Loan Officer

Marcia A. Dorwin Senior Credit Analyst CRA Officer

Kyle J. Hendricks Senior Vice President Commercial Loan Officer

Denise L. Leonard Small Business Loan Administrator

Deborah A. Banning Training Specialist Cindy M. Bocook Vice President Deposit Operations Manager Jeffrey N. Featherstone Assistant Vice President Assistant Controller Robin L. Harrison Vice President Compliance Officer Douglas J. Jaworski Business Development Officer Leilani T. McKernan Vice President Controller Jason W. Miller Vice President Vice President of Marketing Jennifer L. Nelson Vice President Human Resources Manager Harold A. Perier Assistant Vice President Network Administrator Regina M. Runyan Vice President Data Processing Manager Denise L. Satterfield Executive Assistant

Ronald G. Jacobson Senior Vice President Director of Private Banking Ryan D. Lee Vice President Commercial Loan Officer Shelley M. Menne Senior Vice President Commercial Loan Officer

MORTGAGE DEPARTMENT Douglas J. Beaudoin Senior Vice President Mortgage Department Manager Margaret C. Bowen Mortgage Underwriter David T. Cloe Home Loan Consultant

Keith J. Mires Vice President Commercial Loan Officer

Ruth E. Johnson Assistant Vice President Mortgage Loan Ops Supervisor

Mike F. Wilson Vice President Commercial Loan Officer

Geoffrey J. Lee Vice President Mortgage Loan Officer Candace S. Lugviel Mortgage Loan Officer Kent W. Nelson Mortgage Loan Officer Cory J. Oberst Assistant Vice President Mortgage Loan Officer Patricia A. Ricketts Mortgage Underwriter

CONTINUED ON PAGE 60

Bank Officers

BRANCH MANAGEMENT & OPERATIONS Bradley D. Alcock Assistant Vice President Retail Business Development Officer

Heidi M. Horobiowski Branch Manager Spokane Valley Branch

JoAnn R. Baker Assistant Branch Manager Airway Heights Branch

Venessa L. Hunt Assistant Branch Manager Ruby Branch

Michael L. Bowsher Assistant Branch Manager Hayden Branch

Brandon P. Kerr Vice President Branch Manager Ruby Branch & South Hill Branch

Spencer B. Brower Vice President Branch Manager Coeur dâ&#x20AC;&#x2122;Alene Branch Christina R. Cornell Assistant Branch Manager Northpointe Branch Janet K. Dibler Vice President Branch Manager Airway Heights Branch

Nicole R. Melcher Branch Manager Main Branch Abigail M. Nuszkiewicz Assistant Branch Manager Coeur Dâ&#x20AC;&#x2122;Alene Branch

Holly K. Finney Branch Manager Post Falls Branch

Heidi L. Riddell Assistant Branch Manager Francis Branch

Kelly A. Hagen Branch Manager Spirit Lake Branch

Valerie J. Summers Assistant Branch Manager Spokane Valley Branch

Deanna L. Hanley Assistant Vice President Branch Manager Francis Branch & Northpointe Branch

Jennifer L. Loucks Assistant Branch Manager South Hill Branch

Bank Branches Airway Heights 11917 W. Sunset Highway Airway Heights, Washington 99001 509.244.4840 Coeur d’Alene 955 Ironwood Drive Coeur d’Alene, Idaho 83814 208.664.8747 Downtown 421 W. Riverside Avenue Spokane, Washington 99201 509.456.8888 Francis 518 W. Francis Avenue Spokane, Washington 99205 509.323.1144 Hayden 30 W. Prairie Avenue Coeur d’Alene, Idaho 83815 208.762.1155

Corporate Information Corporate Headquarters Northwest Bancorporation, Inc. 421 W. Riverside Avenue, Suite 113 Spokane, Washington 99201 Phone: 509.456.8888 Toll Free: 888.509.7922 Fax: 509.742.6669 Email: inb@inb.com Annual Meeting The Annual Meeting of shareholders will be held on Monday, May 18, 2015, at 5:30 p.m. at the Airway Heights Branch of Inland Northwest Bank located at 11917 W. Sunset Highway, 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:

Northpointe 1021 E. Hawthorne Road Spokane, Washington 99218 509.466.1111

Computershare 211 Quality Circle, Suite 210 P.O. Box 30170 College Station, TX 77842 Toll Free: 800.368.5948 www.computershare.com

Post Falls 1729 E. Seltice Way Post Falls, Idaho 83854 208.777.0887

Internet Site: www.inb.com

Ruby 2110 N. Ruby Street Spokane, Washington 99207 509.232.4666 South Hill 2905 E. 57th Avenue Spokane, Washington 99223 509.448.7770 Spirit Lake 31845 N. 5th Avenue Spirit Lake, Idaho 83869 208.623.5700 Spokane Valley 15015 E. Sprague Avenue Spokane Valley, Washington 99216 509.924.1033

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 letter that are not historical facts and pertain to the Company’s future operating results. When used in this letter, 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; changes in accounting policies; changes in the monetary and fiscal policies of the federal government; and changes in laws, regulations and the competitive environment. Unless legally required, the Company disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

P. 61

421 W. Riverside Avenue, Suite 113 Spokane, Washington 99201 509.456.8888 888.509.7922