The parent company of Inland Northwest Bank (INB), of Spokane, has reported net losses of $1.42 million for the fourth quarter and $275,000 for all of last year and has obtained $10.5 million in capital from the U.S. government that it says would enable INB to increase its lending.

Also, the bank-holding company, Northwest Bancorporation Inc., says INB will close its 2 1/2-year-old Walla Walla, Wash., branch in May because the branch has lost its lease. In addition, one of the bank's directors, Spokane real estate investor Harlan D. Douglass, reported to the U.S. Securities and Exchange Commission last month that during 2008 he acquired enough additional shares that he now owns 10.1 percent of the company.

Randall L. Fewel, president and CEO of both companies, says Northwest Bancorporation lost a fully-diluted 60 cents a share in the fourth quarter, compared with net income of 31 cents a share in the year-earlier quarter, and lost 12 cents a share for all of 2008, compared with net income of $1.10 a share in 2007.

"The disappointing earnings for the fourth quarter and for the year are due to the deteriorating economic conditions in the markets we serve, which created significant strain on the bank's loan portfolio," Fewel says. That strain resulted in net charge-offs of $1.9 million in loans during the year.

Northwest Bancorporation's total assets grew to $400.2 million as of year-end, up 16.4 percent from a year earlier. Also as of Dec. 31, INB reported net outstanding loans of $334.3 million, or 21.7 percent higher than a year earlier.

The $10.5 million in capital acquired from the U.S. Treasury Department's Capital Purchase Program for healthy banks could enable INB to loan as much as $25 million to $30 million more than it could have otherwise, Fewel projects, although he adds the bank will have to have sufficient demand from qualified borrowers to do that.

"We have increased loan originations by $120 million over the last two years to the point where our capital restricted our ability to grow loans anymore this year," he says. "With the $10.5 million capital injection, we will now strive to grow our loan portfolio."

Under the Capital Purchase Program, which is part of the Troubled Asset Relief Program (TARP), Northwest Bancorporation sold to the Treasury Department 10,500 shares of the company's Fixed-rate Cumulative Perpetual Preferred Stock, Series A, and a warrant to buy just over 525 shares of a second series of preferred stock.

"In my opinion, Inland Northwest Bank is exactly the kind of healthy bank the Capital Purchase Program was designed for," Fewel says. "Most jobs are created by small businesses, and the availability of credit is the fuel that feeds the small-business engine. As a result of us voluntarily agreeing to accept this capital injection from the Treasury, INB will be able to make more of that 'fuel' available to the small businesses in Spokane and Kootenai counties."

Northwest Bancorporation will pay the government a dividend of 5 percent a year on the Series A stock for the first five years after its issue, after which the dividend will increase to 9 percent. It will pay a dividend of 9 percent a year for the second issue. Yet, before the company decided to participate in the government program, Fewel says he met with three investment banking companies that said the government capital was cheaper than any capital fundraising they could conduct for the company.

In a filing with the SEC, the company said that as long as the government owns shares in Northwest Bancorporation acquired through the program, the company will ensure that its benefit plans for senior officers comply with federal law, which caps executive pay. Also, in a press release that was part of the filing, Fewel said that he had voluntarily given up his 2008 bonus, and he and the rest of the company's management team agreed to freeze their salaries in 2009. As well, no restricted stock awards were issued to any members of the company's executive team for 2008.

In response to the strain on its portfolio and in an effort to approach 2009 conservatively, INB added $3.95 million to its allowance for loan losses toward the end of 2008 and ended the year with a total of $5.4 million, or 1.4 percent of total loans, in that allowance, Fewel says.

The bank's nonperforming assets, or loans that are no longer accruing interest and real estate acquired through foreclosure or forfeiture, increased to 3.63 percent of total assets at year-end, up from 2.12 percent at the end of the third quarter and 0.16 percent at the end of 2007, Fewel says.

He says the cost of alternative sites for the bank's Walla Walla branch would have increased INB's overhead there dramatically, and because the branch "had been generating only a very small profit would have made it unprofitable to operate for the foreseeable future." He says the company had employed three people there.

Douglass, in a required 13-D filing with the SEC, reported that in the last year he had acquired 5,000 shares of Northwest Bancorporation stock at a cost of $6.15 a share, giving him 239,736 shares, or 10.1 percent of all of the company's shares. He reported in the filing that he bought the shares for investment purposes.