BELLINGHAM BANCORPORATION
Bellingham Bancorporation
211 East Holly Street
Bellingham, Washington 98225
April 16, 1999
Dear Shareholder:
You are cordially invited to attend the annual meeting of shareholders of
Bellingham Bancorporation, to be held at the Bank of Bellingham's Meridian
Branch, 2625 N. Meridian Street, Bellingham, Washington, on Thursday, May 20,
1999 at 7:00 p.m., local time.
On January 18, 1999, Bellingham Bancorporation agreed to merge with
Horizon Financial Corp. If the merger is completed, you will receive 2.74
shares of Horizon common stock in exchange for each share of Bellingham
Bancorporation common stock that you own. On March 12, 1999, as reported in
The Wall Street Journal, the closing price of Horizon common stock was
$13.625, making 2.74 shares of Horizon common stock worth $37.33. The value
of Horizon common stock, however, will fluctuate. All outstanding options to
purchase shares of Bellingham Bancorporation common stock will be assumed by
Horizon and converted into options to purchase Horizon common stock. Up to
1,129,264 shares of Horizon common stock will be issued to Bellingham
Bancorporation shareholders in the merger, representing approximately 13% of
the outstanding Horizon common stock after the merger.
At the annual meeting, you will be asked to approve and adopt the merger
agreement and to elect three directors of Bellingham Bancorporation to serve
until the closing of the merger or the 2002 annual meeting of shareholders.
Two thirds of the votes entitled to be cast at the annual meeting must vote
for approval and adoption of the merger agreement for the merger to be
completed. If the merger agreement is approved and all other conditions
described in the merger agreement have been met or waived, the merger is
expected to occur during the second quarter of 1999.
Your board of directors believes that the merger is in the best
interests of the Bellingham Bancorporation shareholders and unanimously
recommends that you vote FOR the merger agreement. Your board of directors
has received an opinion of Columbia Financial Advisors, Inc. that the
consideration to be received by Bellingham Bancorporation's shareholders in
the merger is fair.
This proxy statement/prospectus provides you with detailed information
about the proposed merger and includes, as Appendix A, a complete text of the
merger agreement. I urge you to read the enclosed materials carefully for a
complete description of the merger. Please complete, sign and return the
enclosed proxy card as promptly as possible. We look forward to seeing you at
the annual meeting.
Sincerely,
/s/ John M. Daughters
John M. Daughters
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE SHARES OF HORIZON COMMON STOCK TO BE ISSUED IN THE
MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE
SECURITIES ARE NOT SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF ANY
BANK OR NON-BANK SUBSIDIARY OF ANY OF THE PARTIES, AND THEY ARE NOT INSURED BY
ANY GOVERNMENTAL AGENCY.
Phone (360) 671-8888 * Fax (360) 671-6990
211 E. Holly Street, P.O. Box 608, Bellingham, WA 98227-0608
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BELLINGHAM BANCORPORATION
211 East Holly Street
Bellingham, Washington 98225
(360) 671-6990
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
An annual meeting of shareholders of Bellingham Bancorporation will be
held on Thursday, May 20, 1999, 7:00 p.m., local time, at the Bank of
Bellingham's Meridian Branch, 2625 N. Meridian Street, Bellingham,
Washington, for the following purposes:
1. To approve the Agreement and Plan of Mergers dated January 18, 1999
between Horizon Financial Corp., Horizon Bank, a savings bank,
Bellingham Bancorporation and Bank of Bellingham.
2. To elect three directors to serve until the closing of the merger or
the 2002 annual meeting of shareholders.
3. To transact such other business as may properly come before the
annual meeting or any adjournments or postponements.
NOTE: The board of directors is not aware of any other business to come
before the annual meeting.
Any action may be taken on these proposals at the annual meeting or on
any date or dates to which the annual meeting may be adjourned or postponed.
You can vote if you owned Bellingham Bancorporation common stock at the close
of business on April 13, 1999. A complete list of stockholders entitled to
vote at the annual meeting will be available at the main office of Bellingham
Bancorporation during the ten days prior to the annual meeting, and at the
annual meeting.
Bellingham Bancorporation shareholders have the right to dissent from the
merger and obtain payment of the fair value of their shares of Bellingham
Bancorporation common stock under Washington law. In order to perfect
dissenters' rights, Bellingham Bancorporation shareholders must send a notice
to Bellingham Bancorporation before the annual meeting on May 20, 1999 and
must not vote in favor of the merger by proxy or otherwise.
Your attention is directed to the proxy statement/prospectus accompanying
this notice for a more complete statement regarding the matters to be acted
upon at the annual meeting.
By order of the board of directors
/s/ Christine Hagen
Christine Hagen
Secretary
Bellingham, Washington
April 16, 1999
Important: the prompt return of proxies will save Bellingham Bancorporation
the expense of further requests for proxies to ensure a quorum at the annual
meeting. Please complete, sign and date the enclosed proxy and promptly mail
it in the enclosed envelope. You may revoke your proxy in the manner
described in the proxy statement/prospectus at any time before it is
exercised.
Please do not send in any stock certificates at this time.
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TABLE OF CONTENTS
Page
----
Questions and Answers About the Horizon/Bellingham
Bancorporation Merger . . . . . . . . . . . . . . . . . . . . . . . 1
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Historical and Pro Forma Comparative Per Share Data. . . . . . . . . 6
Market Price and Dividend Data . . . . . . . . . . . . . . . . . . . 8
Historical Consolidated Financial Data - Horizon Financial Corp. . . 9
Historical Consolidated Financial Data - Bellingham Bancorporation . 10
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . 12
The Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Record Date; Voting Rights; Vote Required . . . . . . . . . . . 13
Voting and Revocation of Proxies. . . . . . . . . . . . . . . . 13
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . 14
Principal Holders of Bellingham Bancorporation Common Stock. . . . . 14
Principal Holders of Horizon Common Stock. . . . . . . . . . . . . . 15
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Closing and Effective Time of Merger. . . . . . . . . . . . . . 15
Background of the Merger. . . . . . . . . . . . . . . . . . . . 16
Reasons for the Merger; Recommendation of Bellingham
Bancorporation's Board of Directors. . . . . . . . . . . . . . 16
Opinion of Bellingham Bancorporation's Financial Advisor. . . . 17
Merger Consideration. . . . . . . . . . . . . . . . . . . . . . 20
Bellingham Bancorporation Stock Options . . . . . . . . . . . . 20
Bellingham Bancorporation Warrants. . . . . . . . . . . . . . . 20
Dissenters' Rights. . . . . . . . . . . . . . . . . . . . . . . 21
Surrender of Certificates . . . . . . . . . . . . . . . . . . . 22
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . 23
Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . 24
Conduct of Business Pending the Merger. . . . . . . . . . . . . 25
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . 25
Termination of the Merger Agreement . . . . . . . . . . . . . . 25
Amendment of Merger Agreement . . . . . . . . . . . . . . . . . 26
Waiver of Performance of Obligations. . . . . . . . . . . . . . 26
Interests of Certain Persons in the Merger. . . . . . . . . . . 26
Federal Income Tax Consequences . . . . . . . . . . . . . . . . 27
Termination Fee . . . . . . . . . . . . . . . . . . . . . . . . 27
Resale of Horizon Common Stock. . . . . . . . . . . . . . . . . 28
Nasdaq Listing. . . . . . . . . . . . . . . . . . . . . . . . . 28
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . 28
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Impact of the Year 2000 Issue. . . . . . . . . . . . . . . . . . . . 29
Directors and Officers of Horizon Following the Merger . . . . . . . 33
Description of Horizon Capital Stock . . . . . . . . . . . . . . . . 33
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Horizon Common Stock. . . . . . . . . . . . . . . . . . . . . . 33
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 34
Comparative Rights of Holders of Horizon Common Stock and Holders of
Bellingham Bancorporation Common Stock. . . . . . . . . . . . . . . 34
Payment of Dividends . . . . . . . . . . . . . . . . . . . . . . 34
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Page
----
Size of Board of Directors. . . . . . . . . . . . . . . . . . . 34
Classified Board of Directors . . . . . . . . . . . . . . . . . 35
Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . 35
Removal of Directors. . . . . . . . . . . . . . . . . . . . . . 35
Vacancies on the Board of Directors . . . . . . . . . . . . . . 35
Special Meetings of Shareholders and Action Without a Meeting . 36
Advance Notice Requirements for Nominations of Directors and
Presentation of New Business at Meetings of Shareholders . . . 36
Approval of Mergers, Consolidations, Sale of Substantially All
Assets and Dissolution . . . . . . . . . . . . . . . . . . . . 36
Indemnification of Officers and Directors and Limitation of
Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Amendment of Articles of Incorporation and Bylaws . . . . . . . 38
Election of Directors. . . . . . . . . . . . . . . . . . . . . . . . 38
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Where You Can Find More Information. . . . . . . . . . . . . . . . . 40
Appendix A - Agreement and Plan of Mergers
Appendix B - Chapter 13 of the Washington Business Corporation Act
Appendix C - Fairness Opinion of Columbia Financial Advisors, Inc.
Appendix D - Financial Information for Bellingham Bancorporation
-ii-
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QUESTIONS AND ANSWERS
ABOUT THE HORIZON/BELLINGHAM BANCORPORATION MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: Horizon and Bellingham Bancorporation share a community-directed banking
philosophy and strategy which emphasizes responsiveness to local markets and
the delivery of personalized services through a community-oriented bank. The
companies believe that the merger will enable them to provide enhanced
services to customers and to compete more effectively in the present banking
environment, which is dominated by much larger institutions.
They would have a broader market area, more diverse asset base and a much
broader target market in the lending industry. The parties anticipate that
their complementary market areas and combined product mixes and areas of
expertise will provide substantial opportunities for growth, revenue
enhancement and increased quality of customer services to residents in the
region of northwestern Washington. The merger is expected to provide greater
efficiencies in management and information systems and substantial benefits to
the parties in that they will have a larger lending limit and will be able to
better serve larger customers.
Q: WHAT WILL BELLINGHAM BANCORPORATION SHAREHOLDERS RECEIVE FOR THEIR SHARES
OF BELLINGHAM BANCORPORATION COMMON STOCK?
A: Bellingham Bancorporation shareholders will receive 2.74 shares of Horizon
common stock for each of their shares of Bellingham Bancorporation common
stock. This exchange ratio will not change, even if the market price of
Horizon's common stock or Bellingham Bancorporation's common stock increases
or decreases between now and the date that the merger is completed.
Accordingly, the value of the 2.74 shares will fluctuate as the price of
Horizon common stock increases or decreases.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: Bellingham Bancorporation has not paid any dividends and does not expect
to. Future dividends declared by the board of directors of Horizon will be
paid on the shares issued to Bellingham Bancorporation shareholders in this
exchange.
Q: DO I HAVE DISSENTER'S RIGHTS?
A: In accordance with Chapter 13 of the Washington Business Corporation Act
(Chapter 23B.13 of the Revised Code of Washington), Bellingham
Bancorporation's shareholders have the right to dissent from the merger and to
receive payment in cash for the "fair value" of their Bellingham
Bancorporation common stock.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO BELLINGHAM BANCORPORATION'S
SHAREHOLDERS?
A: The exchange of shares of Bellingham Bancorporation common stock for
shares of Horizon common stock in the merger is designed to be tax-free to
Bellingham Bancorporation shareholders for federal income tax purposes, except
that Bellingham Bancorporation shareholders will recognize gain or loss in
connection with any cash received instead of fractional shares of Horizon
common stock. Your tax basis in the shares of Horizon common stock that you
will receive in the merger will equal your current tax basis in your
Bellingham Bancorporation common stock. To review the tax consequences to
Bellingham Bancorporation shareholders in greater detail, see page 27.
1
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THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR OWN
SITUATION. YOU SHOULD CONSULT WITH YOUR TAX ADVISORS FOR A FULL UNDERSTANDING
OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger in the second quarter of 1999.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares can be voted at the May 20, 1999 Bellingham
Bancorporation annual meeting.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have more questions about the merger, you should contact:
Bellingham Bancorporation
211 East Holly Street
Bellingham, Washington 98225
Attention: John M. Daughters
Tel: (360) 671-8888
2
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SUMMARY
This brief summary highlights selected information contained in this
proxy statement/prospectus. It does not contain all of the information that
is important to you. We urge you to carefully read the entire proxy
statement/prospectus and the other documents to which this document refers to
fully understand the merger. See "Where You Can Find More Information" (page
40). We have attached the merger agreement to this proxy statement/prospectus
as Appendix A. We encourage you to read the merger agreement. It is the
legal document that governs the merger of Horizon and Bellingham
Bancorporation.
The Companies
Horizon Financial Corp.
1500 Cornwall Avenue
Bellingham, Washington 98225
(360) 733-3050
Horizon is a Washington corporation and bank holding company
headquartered in Bellingham, Washington. At December 31, 1998, Horizon had
assets of $588 million, net loans of $466 million, deposits of $472 million
and shareholders' equity of $89 million. Horizon was incorporated in the
State of Washington in 1995 for the purpose of becoming a bank holding company
for Horizon Bank.
Horizon Bank is a Washington state-chartered savings bank. Originally
founded in 1922 as a savings and loan association, Horizon Bank converted to a
mutual savings bank in 1979, and then converted to stock form through an
initial public offering in August 1986. Horizon Bank has 12 full-service
offices located in Whatcom, Skagit and Snohomish counties. Horizon Bank is
regulated by the Washington Department of Financial Institutions, Division of
Banks, and the Federal Deposit Insurance Corporation, and its deposits are
insured by the Federal Deposit Insurance Corporation under the Bank Insurance
Fund.
Bellingham Bancorporation
211 East Holly Street
Bellingham, Washington 98225
(360) 671-6990
Bellingham Bancorporation is a Washington corporation and bank holding
company headquartered in Bellingham, Washington. Bellingham Bancorporation
was incorporated in 1998 for the purpose of becoming a bank holding company
for Bank of Bellingham.
Bank of Bellingham, a Washington state chartered commercial bank, is the
sole subsidiary of Bellingham Bancorporation. Bank of Bellingham was
organized in 1992. At December 31, 1998, Bank of Bellingham had assets of
$67.4 million, net loans of $48.4 million, deposits of $56.3 million and
shareholders' equity of $6.6 million. Bank of Bellingham has three full
service branches in Whatcom County. Bank of Bellingham is regulated by the
state of Washington, Division of Financial Institutions and the Federal
Deposit Insurance Corporation, and its deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Corporation.
The Annual Meeting (Pages 13 through 14)
An annual meeting will be held on May 20, 1999, at the Bank of
Bellingham's Meridian Branch, 2625 N. Meridian Street, Bellingham, Washington,
to vote on the proposal to approve the merger agreement and the election of
directors. You can vote at the annual meeting if you owned Bellingham common
stock on April 13, 1999.
3
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The Merger (Pages 15 Through 28)
If the merger agreement becomes effective, Bellingham Bancorporation will
be merged into Horizon, and Horizon will continue as the surviving
corporation. Simultaneously with the merger, Bank of Bellingham will be
merged into Horizon Bank, and Bank of Bellingham will operate as a division of
Horizon Bank until September 30, 1999.
Vote Required (Pages 13 and 14)
The merger agreement will be approved if the holders of at least
two-thirds of the outstanding shares of Bellingham Bancorporation common stock
vote for it. Directors and executive officers of Bellingham Bancorporation
and their affiliates beneficially owned an aggregate of 101,178, or
approximately 28%, of the shares of Bellingham Bancorporation common stock
outstanding on the record date. If the merger agreement is not approved,
Bellingham Bancorporation will continue as a separate entity. If the merger
agreement is approved, neither Bellingham Bancorporation nor the Bank of
Bellingham will continue to exist as independent entities. A failure to vote,
either by not returning the enclosed proxy or by checking the "Abstain" box,
will have the same effect as a vote against the merger agreement. All of the
directors of Bellingham Bancorporation have executed an agreement with Horizon
pursuant to which each director agreed to vote his shares for the merger
agreement.
Recommendation to Bellingham Bancorporation's Shareholders (Page 16)
The board of directors of Bellingham Bancorporation believes that the
merger is fair to you and in your best interests and unanimously recommends
that you vote "FOR" the merger agreement.
Opinion of Bellingham Bancorporation's Financial Advisor
Columbia Financial Advisors, Inc. has delivered its written opinion to
the Bellingham Bancorporation Bancorporation board, dated as of February 4,
1999 and updated as of the date of this proxy statement/prospectus that the
consideration to be received by the shareholders of Bellingham Bancorporation
in the merger is fair from a financial point of view. We have attached this
opinion as Appendix C to this proxy statement/prospectus. You should read it
carefully for a description of the procedures followed, matters considered and
limitations on the reviews undertaken by Columbia Financial in providing its
opinion.
Bellingham Bancorporation Stock Options and Warrants (Page 20)
The currently outstanding options and warrants to purchase an aggregate
of 41,200 shares and 12,000 shares, respectively, of Bellingham Bancorporation
common stock held by directors, certain employees and shareholders of
Bellingham Bancorporation will be converted into stock options and warrants to
purchase an aggregate of 145,768 shares of Horizon common stock, in each case,
at an exercise price per share equal to the current exercise price per share
divided by 2.74.
Interests of Certain Persons in the Merger (Pages 26 and 27)
In the merger, Bellingham Bancorporation's directors and executive
officers will receive the same consideration as that received by the other
Bellingham Bancorporation shareholders.
Horizon and Horizon Bank will enter into employment agreements with John
M. Daughters, President and Chief Executive Officer, and A.R. Ayala, Executive
Vice President, of Bellingham Bancorporation.
As soon as practicable after the merger, Horizon Bank will increase the
size of its board of directors by one member and elect John M. Daughters to
the board.
4
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Dissenters' Rights (Page 21)
Bellingham Bancorporation shareholders have the right to dissent from the
merger and obtain payment of the fair value of their shares of Bellingham
Bancorporation Common Stock under the provisions of Chapter 13 of the
Washington Business Corporation Act. If you wish to dissent you must deliver
to Bellingham Bancorporation, before the vote is taken by Bellingham
Bancorporation's shareholders, written notice of your intent to demand payment
for your shares if the merger is completed, and you must not vote your shares
in favor of the merger. If you elect to dissent, you must, with certain
limited exceptions, do so for all the shares that you have the power to vote.
Your failure to follow exactly the procedures specified in Chapter 13 will
result in the loss of your dissenters' rights. Accordingly, Bellingham
Bancorporation shareholders wishing to dissent from the Merger should read
carefully Chapter 13 set forth in Appendix B to this proxy statement/
prospectus, and consult with your legal advisors. If you dissent, the court
may determine that the fair value of your shares is less than the value of the
Horizon common stock you would receive if you don't dissent.
Accounting Treatment (Page 28)
We expect the merger to be accounted for as a "pooling-of-interests"
under generally accepted accounting principles.
Comparison of Rights of Holders of Horizon Common Stock and Bellingham
Bancorporation Common Stock (Pages 34 Through 38)
The rights of Bellingham Bancorporation shareholders are governed by
Washington law and Bellingham Bancorporation's Articles of Incorporation and
Bylaws. The rights of Horizon shareholders are also governed by Washington
law and Horizon's Articles of Incorporation and Bylaws.
Treatment of Bellingham Bancorporation's Subsidiary, Bank of Bellingham (Page
15)
Upon completing the merger, Bellingham Bancorporation shareholders will
become shareholders of Horizon, and their rights will be governed by
Washington law and Horizon's Articles and Bylaws. The Bank of Bellingham will
be merged into Horizon's subsidiary, Horizon Bank, a savings bank, in a
separate merger that will occur simultaneously with the merger of the two
parent companies. All Bank of Bellingham offices will become branch offices
of Horizon Bank and will have access to all services provided by Horizon Bank
to its customers. Until September 30, 1999, Bank of Bellingham will be
operated as a division of Horizon Bank.
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HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE DATA
The following tables show information about historical basic and diluted
earnings per common share, dividends per share and book value per share for
Horizon and Bellingham Bancorporation, and similar information reflecting the
merger, which we refer to as "pro forma" information. The pro forma and
equivalent pro forma data are provided for informational purposes. In
presenting the comparative pro forma information for certain time periods, we
assumed that Bellingham Bancorporation and Horizon had always been combined
for accounting and financial reporting purposes, a method known as "pooling-
of-interests" accounting. The pro forma annual information was obtained by
combining the consolidated financial statements of Horizon for the years ended
March 31, 1998, 1997 and 1996 and the consolidated financial statements of
Bellingham Bancorporation for the years ended September 30, 1998, 1997 and
1996. The pro forma interim information was obtained by combining the
consolidated financial statements of Horizon and Bellingham Bancorporation for
the nine months ended December 31, 1998 and 1997. The information listed as
"equivalent pro forma" was obtained by multiplying the pro forma amounts by
the exchange ratio of 2.74. We present this information to reflect the fact
that Bellingham Bancorporation stockholders will receive 2.74 shares of the
combined company's common stock for each share of Bellingham Bancorporation
common stock exchanged in the merger.
We expect that Bellingham Bancorporation and Horizon will incur merger
and integration charges as a result of combining our companies of
approximately $195,000. We also anticipate that the merger will provide the
combined company with financial benefits that include reduced operating
expenses and opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, does not reflect these expenses or
benefits and, accordingly, does not attempt to predict or suggest future
results. It also does not necessarily reflect what the historical results of
the combined company would have been had our companies been combined.
The information in the following tables is based on, and should be read
together with, the historical financial information that Bellingham
Bancorporation and Horizon have presented in prior Securities and Exchange
Commission filings, some of which, regarding Bellingham Bancorporation, have
been delivered to you with this proxy statement/prospectus. We have
incorporated this material into this document by reference. See "Where You
Can Find More Information" on pages 40 and 41.
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Horizon Financial Corp.
Per Common Share Data
Nine Months Ended
December 31, Year Ended March 31,
----------------- ----------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
Historical:
Basic earnings per share $ 0.86 $ .82 $ 1.11 $ 1.04 $ .96
Diluted earnings per share .85 .81 1.09 .03 .95
Cash dividends .33 .32 .83 .65 .28
Book value 11.86 11.38 11.22 10.61 10.46
Pro Forma:
Basic earnings per share(1) $ 0.83 $ 0.79 $ 1.06 $ 1.00 $ 0.90
Diluted earnings per share(1) 0.82 0.77 1.03 0.98 0.88
Cash dividends(2) 0.33 0.32 0.83 0.65 0.28
Book value(3) 11.26 10.71 10.67 10.03 10.15
Bellingham Bancorporation
Per Common Share Data
Three Months Ended
December 31, Year Ended March 31,
----------------- -------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
Historical:
Basic earnings per share $ 1.64 $ 1.57 $ 2.05 $ 1.82 $ 1.04
Diluted earnings per share 1.55 1.52 1.94 1.76 1.01
Book value 18.40 16.12 17.74 15.58 13.87
Equivalent Pro Forma:
Basic earnings per share(1) $ 2.27 $ 2.16 $ 2.90 $ 2.74 $ 2.47
Diluted earnings per share(1) 2.25 2.11 2.82 2.69 2.41
Cash dividends(2) 0.90 0.88 2.27 1.78 0.77
Book value(3) 30.85 29.35 29.24 27.48 27.81
- --------------------
(1) The pro forma combined basic earnings per share of Horizon is based upon
the combined pro forma net income for Horizon and Bellingham
Bancorporation divided by the weighted average pro forma common shares of
the combined entity using the conversion ratio to determine the pro forma
weighted average shares outstanding for Bellingham Bancorporation for each
period presented. The pro forma combined diluted earnings per share of
Horizon is based upon the combined pro forma net income of Horizon and
Bellingham Bancorporation divided by the weighted average pro forma common
shares of the combined entity increased by the dilutive effects of stock
options and warrants outstanding. The weighted average of all of
Bellingham Bancorporation's outstanding stock options and warrants,
converted using the exchange ratio of 2.74, are treated as dilutive for
purposes of this calculation. The pro forma equivalent earnings per share
of Bellingham Bancorporation represent the pro forma earnings per share of
Horizon multiplied by the exchange ratio of 2.74.
(2) Pro forma combined dividends assumes no changes in Horizon's cash
dividends per share. The pro forma equivalent cash dividends declared per
share of Bellingham Bancorporation common stock represent the pro forma
combined cash dividends declared per share of Horizon's common stock
multiplied by the 2.74 exchange ratio.
(3) The pro forma combined book value per share of Horizon's common stock is
based upon the historical total common stockholder's equity for Horizon
and the additional stockholder's equity resulting from the merger divided
by total pro forma common shares of the combined entities. The pro forma
equivalent book value per share of Bellingham Bancorporation common stock
represents the pro forma combined book value of Horizon's common stock
multiplied by the 2.74 exchange ratio.
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All amounts presented have been restated, as applicable, for stock
dividends and splits recognized by each company.
MARKET PRICE AND DIVIDEND DATA
Market Prices. The Horizon common stock trades on Nasdaq under the
symbol "HRZB".
There is no established trading market for the Bellingham Bancorporation
common stock.
The following table includes, for the periods indicated, the range of
high and low sale prices of the common stock of Horizon and dividends paid per
share on the common stock. No dividends have been paid on the Bellingham
Bancorporation's common stock. Share prices for the Horizon common stock have
been restated to adjust for the 15% stock dividend on April 22, 1997.
Horizon's fiscal year ends March 31.
Horizon
Common Stock
------------
High Low Dividend
---- --- --------
1997 Fiscal Year
First Quarter............. 11.52 10.22 .09
Second Quarter............ 12.17 10.87 .09
Third Quarter............. 12.17 10.65 .39
Fourth Quarter............ 14.57 11.52 .09
1998 Fiscal Year
First Quarter............. 16.63 11.74 .10
Second Quarter............ 16.75 14.50 .11
Third Quarter............. 18.50 15.75 .11
Fourth Quarter............ 19.36 16.25 .51
1999 Fiscal Year
First Quarter............. 18.875 15.25 .11
Second Quarter............ 16.50 12.375 .11
Third Quarter............. 14.25 12.00 .11
Fourth Quarter (through
March 18, 1999).......... 15.25 12.5625 --
On January 15, 1999, the last trading day prior to the joint announcement
by Horizon and Bellingham Bancorporation that they had entered into the merger
agreement, the closing per share sales price of Horizon common stock was
$14.375. The equivalent per share value of the Bellingham Bancorporation
common stock on January 15, 1999 was $39.39 per share. This equivalent per
share value is calculated by multiplying the quoted Horizon common stock price
by the merger exchange ratio of 2.74. On April 6, 1999 the last practicable
date prior to the mailing of this proxy statement/prospectus, the closing per
share sales price of Horizon common stock was $13.125, for an equivalent per
share value of Bellingham Bancorporation common stock of $35.96. You are
urged to obtain current market quotations for Horizon common stock. The
market value of the merger consideration at the time of the merger will depend
upon the market value of a share of Horizon common stock at such time. As of
February 28, 1999, Horizon had 7,505,941 outstanding shares and 1,500
shareholders of record, and Bellingham Bancorporation had 358,874 outstanding
shares and 300 stockholders of record.
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HISTORICAL CONSOLIDATED FINANCIAL DATA
HORIZON FINANCIAL CORP.
These tables show financial results actually achieved by Horizon. The
annual historical financial amounts are derived from Horizon's consolidated
financial statements audited by Moss Adams LLP, independent accountants.
Financial amounts as of and for the nine months ended December 31, 1998 and
1997 are unaudited, but Horizon believes such amounts reflect all normal
recurring adjustments necessary for a fair presentation of the results of
operations and financial position for those periods. You should not assume
the nine-month results indicate results for any future period. The
information below should also be read in conjunction with Horizon's Annual
Report on Form 10-K and Quarterly Report on Form 10-Q, as applicable, each of
which is incorporated by reference in this proxy statement/prospectus. See
"Where You Can Find More Information" on pages 40 and 41.
At or For the At or For the
Nine Months Ended Years Ended
December 31, March 31,
------------------ ------------------------------------------
1998 1997 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except for per share data)
Income Statement
Data:
Interest
income........ $32,250 $30,410 $40,901 $38,711 $37,082 $33,989 $33,619
Interest
expense........ 17,498 16,665 22,235 20,832 20,773 16,948 15,227
Net interest
income....... 14,752 13,745 18,666 17,878 16,309 17,041 18,392
Provision for
loan losses.... 395 180 355 201 110 132 368
Net interest
income after
provision for
loan losses.. 14,357 13,565 18,311 17,678 16,199 16,909 18,024
Noninterest
income......... 1,501 1,238 1,691 1,583 1,293 1,401 1,692
Noninterest
expense........ 6,075 5,556 7,565 7,461 6,685 7,149 7,445
Income before
income taxes. 9,783 9,247 12,437 11,800 10,807 11,161 12,271
Provision for
income taxes... 3,321 3,134 4,215 3,997 3,586 3,640 4,263
Change in
accounting
principle...... -- -- -- -- -- -- --
Net income before
preferred
dividend....... 6,462 6,113 8,222 7,803 7,221 7,521 8,008
Preferred
dividend....... -- -- -- -- -- -- --
Per Share Data:
Basic earnings
per share...... 0.86 0.82 1.11 1.04 0.96 1.01 1.08
Diluted earnings
per share (1).. 0.85 0.81 1.09 1.03 0.95 0.99 1.06
Book value...... 11.86 11.38 11.22 10.61 10.46 9.70 8.91
Average common
shares
outstanding(2). 7,488 7,426 7,436 7,479 7,536 7,461 7,401
Average common
share
equivalents.... 89 106 108 72 66 102 152
Performance Ratios:
Return on
average assets. 1.52 1.56 1.55 1.55 1.53 1.71 1.96
Return on average
equity......... 9.97 9.98 10.12 9.90 9.51 10.85 12.80
Net interest
margin......... 3.66 3.63 3.68 3.72 3.61 4.06 4.71
Efficiency
ratio.......... 38.31 37.53 37.20 38.30 38.00 39.20 37.10
(table continued on next page)
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At or For the At or For the
Nine Months Ended Years Ended
December 31, March 31,
------------------ ------------------------------------------
1998 1997 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except for per share data)
Balance Sheet
Data (4):
Total assets... 587,631 553,063 547,146 515,341 488,968 457,478 424,636
Cash and
securities.... 105,564 95,784 101,499 104,356 87,662 83,782 71,795
Loans.......... 466,393 442,051 433,697 399,078 389,651 360,120 340,421
Allowance for
loan losses... 3,956 3,586 3,611 3,406 3,236 3,126 2,994
Total deposits. 471,869 451,573 450,125 424,811 402,676 377,703 351,506
Total
shareholders'
equity........ 88,886 85,382 83,895 78,509 79,147 72,685 65,995
Asset Quality
Ratios (4):
Nonperforming
assets to
loans and
other real
estate........ 0.70% -- 0.01% 0.01% --% --% --%
Net charge-offs
(recoveries) to
average loans. -- -- -- -- -- -- --
Allowance for
loan losses to
total loans... 0.85 0.81 0.83 0.85 0.83 0.87 0.88
Allowance for
loan losses to
nonperforming
loans (5)..... 1223.00 -- 7222.00 8752.00 -- -- --
- -----------------
(1) Diluted earnings per share is based upon the weighted average number of
common shares outstanding and common share equivalents during the period.
(2) Adjusted for the 15% stock dividend effected on April 22, 1997.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end except net charge-offs (recoveries) to average loans.
(5) Nonperforming loans consist of nonaccrual loans and loans contractually
past due 90 days or more.
HISTORICAL CONSOLIDATED FINANCIAL DATA
BELLINGHAM BANCORPORATION
These tables show financial results actually achieved by Bellingham
Bancorporation. The annual historical financial amounts are derived from
Bellingham Bancorporation's consolidated financial statements audited by Moss
Adams LLP, independent accountants. Financial amounts as of and for the three
months ended December 31, 1998 and 1997 are unaudited, but Bellingham
Bancorporation believes such amounts reflect all normal recurring adjustments
necessary for a fair presentation of the results of operations and financial
position for those periods. You should not assume the three-month results
indicate results for any future period. The information below should also be
read in conjunction with Bellingham Bancorporation's financial information
contained in Appendix D.
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At or For the At or For the
Three Months Ended Years Ended
December 31, September 30,
------------------ ------------------------------------------
1998 1997 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except for per share data)
Income Statement
Data:
Interest
income......... $1,372 $1,146 $5,099 $4,603 $3,333 $2,250 $1,504
Interest
expense........ 529 438 1,875 1,665 1,319 908 538
Net interest ------ ------ ------ ------ ------ ------ ------
income....... 843 708 3,224 2,938 2,014 1,342 966
Provision for
loan losses.... 32 24 111 164 91 58 66
Net interest ------ ------ ------ ------ ------ ------ ------
income after
provision for
loan losses.. 811 684 3,113 2,774 1,923 1,284 900
Noninterest
income ........ 276 178 630 379 255 120 89
Noninterest
expense........ 740 575 2,630 2,189 1,707 1,030 838
Income before ------ ------ ------ ------ ------ ------ ------
income taxes. 347 287 1,113 964 471 374 151
Provision for
income taxes... 116 97 379 323 136 14 --
------ ------ ------ ------ ------ ------ ------
Net income...... $ 231 $ 190 $ 734 $ 641 $ 335 $ 360 $ 151
====== ====== ====== ====== ====== ====== ======
Per Share Data:
Basic earnings
per share...... $ 0.64 $ 0.53 $ 2.05 $ 1.82 $ 1.04 $ 1.20 $ 0.50
Diluted earnings
per share (1).. 0.62 0.51 1.94 1.76 1.01 1.18 0.50
Book value...... 18.40 16.12 17.74 15.58 13.87 12.49 11.24
Weighted average
shares
outstanding....358,874 358,874 358,874 352,874 323,437 300,000 300,000
Weighted average
shares outstanding
including dilutive
effect of stock
options and
warrants.......378,772 364,701 378,772 364,701 333,038 305,654 302,264
Performance Ratios:
Return on
average
assets......... 1.39% 1.35% 1.24% 1.23% 0.80% 1.30% 0.73%
Return on
average equity. 14.15 13.17 12.36 12.28 7.80 10.10 4.60
Net interest
margin......... 5.60 5.71 6.03 6.18 5.50 5.25 5.05
Efficiency ratio 66.10 64.95 68.24 66.01 75.23 70.47 79.45
Balance Sheet
Data:
Total
assets.........$67,327 $56,818 $64,307 $54,584 $49,519 $31,811 $23,443
Securities...... 4,813 5,089 5,102 5,208 6,826 4,232 4,125
Loans........... 48,390 46,022 51,954 42,603 36,697 23,295 15,884
Allowance for
loan losses.... 522 457 502 439 345 206 160
Total deposits.. 56,294 49,689 53,001 47,961 43,846 27,302 19,369
Total share-
holders' equity 6,603 5,783 6,368 5,589 4,811 3,746 3,372
Asset Quality Ratios:
Nonperforming
assets to loans
receivable...... --% 0.03% 0.26% 0.03% 0.04% --% --%
Net charge-offs
(recoveries) to
average loans... 0.02 0.01 0.10 0.18 0.20 0.06 (0.05)
Allowance for loan
losses to total
loans
receivable...... 1.08 0.99 0.97 1.03 0.94 0.88 1.01
Allowance for loan
losses to non-
performing loans -- 31.90 3.74 30.69 22.38 -- --
- -------------------
(1) Diluted earnings per share is based upon the weighted average number of
common shares outstanding plus the dilutive share outstanding resulting
from stock options and warrants calculated using the treasury stock
method.
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FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus, including information incorporated by
reference, contains certain forward- looking statements with respect to the
financial condition, results of operations, plan, objectives, future
performance and business of each of Horizon and Bellingham Bancorporation, as
well as certain information relating to the merger, including, without
limitation
(1) statements relating to the cost savings and accretion to reported
earnings estimated to result from the merger,
(2) statements relating to revenues estimated to result from the merger,
(3) statements relating to the merger and integration costs estimated to
be incurred in connection with the merger and
(4) statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "estimates" or similar
expressions. These forward-looking statements involve certain risks
and uncertainties. Actual results may differ materially from those
expected by such forward-looking statements due to, among others,
the following factors:
(a) expected cost savings from the merger are not fully realized or
are not realized within the expected time frame or additional or
unexpected costs are incurred;
(b) revenues following the merger are lower than expected;
(c) competitive pressures among financial services companies
increase;
(d) costs or difficulties related to the integration of the
businesses are greater than expected;
(e) changes in the interest rate environment may reduce interest
margins, cause prepayment of loans being serviced and reduce the
demand for loans;
(f) general economic conditions, either internationally or
nationally or in the states in which Horizon or Bellingham
Bancorporation is doing business are less favorable than
expected;
(g) legislative or regulatory changes adversely affect the
businesses in which Horizon or Bellingham Bancorporation are
engaged;
(h) personal or commercial customers' bankruptcies increase;
(i) technological changes, including "Year 2000" data systems
compliance issues, are more difficult or expensive than
anticipated; and
(j) changes occur in the securities markets. See "Where You Can
Find More Information" on pages 40 to 41 for a list of a the
documents incorporated by reference in this proxy statement/
prospectus.
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THE ANNUAL MEETING
General
This proxy statement/prospectus is being furnished to shareholders of
Bellingham Bancorporation in connection with the solicitation of proxies by
Bellingham Bancorporation's board of directors for use at an annual meeting to
be held on May 20, 1999, and at any adjournments or postponements thereof. At
the annual meeting, stockholders of Bellingham Bancorporation will vote upon a
proposal to approve the Agreement and Plan of Mergers dated January 18, 1999
between Bellingham Bancorporation, Bank of Bellingham, Horizon and Horizon
Bank. The merger agreement provides that Bellingham Bancorporation will merge
with and into Horizon and stockholders of Bellingham Bancorporation will
receive 2.74 shares of the common stock of Horizon in exchange for each of
their shares of Bellingham Bancorporation common stock. The Bellingham
Bancorporation board is not aware as of the date of this proxy statement/
prospectus of any business to be acted upon at the annual meeting other than
the proposal to approve the merger agreement and the election of directors.
If other matters are properly brought before the annual meeting or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act on such matters according to their best
judgment.
Record Date; Voting Rights; Vote Required
The Bellingham Bancorporation board has fixed the close of business on
April 13, 1999 as the record date for the determination of stockholders of
Bellingham Bancorporation entitled to receive notice of and to vote at the
annual meeting. On the record date, there were 358,874 shares of Bellingham
Bancorporation common stock outstanding. Each holder of Bellingham
Bancorporation common stock is entitled to one vote per share held of record
on the record date.
The presence in person or by proxy at the annual meeting of the holders
of a majority of the outstanding shares of Bellingham Bancorporation common
stock will constitute a quorum. Under the Washington Business Corporation
Act, approval of the merger agreement will require the affirmative vote of the
holders of two thirds of the outstanding shares of Bellingham Bancorporation
common stock. Directors and executive officers of Bellingham Bancorporation
and their affiliates beneficially owned on the record date an aggregate of
101,178, or approximately 28%, of the outstanding shares of Bellingham
Bancorporation Common Stock. MEMBERS OF BELLINGHAM BANCORPORATION'S DIRECTORS
AND EXECUTIVE OFFICERS HAVE ENTERED INTO AGREEMENTS TO VOTE ALL SHARES OF
BELLINGHAM BANCORPORATION COMMON STOCK HELD BY THEM IN FAVOR OF APPROVAL OF
THE MERGER AGREEMENT.
Voting and Revocation of Proxies
Shares of Bellingham Bancorporation common stock represented by a proxy
properly signed and received at or prior to the annual meeting, unless
subsequently revoked, will be voted at the annual meeting in accordance with
the instructions on the proxy. If a proxy is signed and returned without
indicating any voting instructions, shares of Bellingham Bancorporation common
stock represented by such proxy will be voted "FOR" approval of the merger
agreement. If your shares of Bellingham Bancorporation common stock are held
in street name by your broker, your broker will not be able to vote your
shares without instructions from you. You should instruct your broker to vote
your shares following the procedure provided by your broker.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before the proxy is voted by filing either an
instrument revoking it or a duly executed proxy bearing a later date with the
Secretary of Bellingham Bancorporation prior to or at the annual meeting or by
voting the shares subject to the proxy in person at the annual meeting.
Attendance at the annual meeting will not in and of itself constitute a
revocation of a proxy.
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A proxy may indicate that all or a portion of the shares represented
thereby are not being voted with respect to a specific proposal. This could
occur, for example, when a broker is not permitted to vote shares held in
street name on certain proposals in the absence of instructions from the
beneficial owner. Shares that are not voted with respect to a specific
proposal will be considered as not present for such proposal, even though such
shares will be considered present for purposes of determining a quorum and
voting on other proposals. Abstentions on a specific proposal will be
considered as present but will not be counted as voting in favor of such
proposal. The proposal to approve the merger agreement must be approved by
the holders of two thirds of the shares of Bellingham Bancorporation common
stock outstanding on the record date. Accordingly, any nonvoted shares and
abstentions with regard to this proposal will have the same effect as votes
against the proposal.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees
and agents of Bellingham Bancorporation may solicit proxies from Bellingham
Bancorporation's stockholders, either personally or by telephone or other form
of communication. None of the foregoing persons who solicit proxies will be
specifically compensated for such services. Nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners. Bellingham Bancorporation will reimburse such nominees, fiduciaries
and other custodians for the reasonable out-of-pocket expenses incurred by
them in connection therewith. In addition, Bellingham Bancorporation will
bear its own expenses in connection with the solicitation of its proxies for
the annual meeting.
PRINCIPAL HOLDERS OF BELLINGHAM BANCORPORATION COMMON STOCK
Information regarding ownership of Bellingham Bancorporation common stock
as of March 18, 1999, by (1) beneficial owners of more than 5% of the
outstanding shares of Bellingham Bancorporation common stock, (2) each
director and each executive officer whose salary and bonus for the fiscal year
ended September 30, 1998 exceeded $100,000 and (3) all directors and executive
officers of Bellingham Bancorporation and Bank of Bellingham as a group, is
listed in the following table:
Number
of Shares Percent
Beneficially of Shares
Name Owned(1) Outstanding
- ---- -------- -----------
Beneficial Owners of More Than 5%
Eleanor Jansen
Residuary Trust 18,602 5.2%
Directors and Executive Officers
Leib Alexander 33,802 9.3
John K. Cavers 6,018 1.7
John M. Daughters* 11,502 3.2
Martin L. Haines 9,232 2.6
Ann Jones 8,348 2.3
Cal Leenstra 11,584 3.2
Charles Self 13,760 3.8
Rick S. Wilson 7,534 2.1
All directors and executive
officers as a group (8 persons) 101,178 28.2
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- ------------------
* Mr. Daughters is also President and Chief Executive Officer of Bellingham
Bancorporation.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any share of
Bellingham Bancorporation common stock if he or she has or shares voting
and/or investment power with respect to such security. The table includes
shares owned by spouses, other immediate family members in trust, shares
held in retirement accounts or funds for the benefit of the named
individuals, and other forms or ownership, over which shares the persons
named in the table possess voting and/or investment power. The amounts
shown also include the following shares of Bellingham Bancorporation
common stock which the indicated individuals have the right to acquire
within 60 days of the Bellingham Bancorporation record date through the
exercise of stock options and warrants: Leib Alexander, 2,000 shares; John
K. Cavers, 2,000 shares; John M. Daughters, 17,500 shares; Ann Jones,
2,000 shares; Cal Leenstra, 2,000 shares; Rick S. Wilson, 2,000 shares;
and all directors and executive officers as a group, 27,000 shares.
PRINCIPAL HOLDERS OF HORIZON COMMON STOCK
Information regarding ownership of Horizon Common Stock by (1) each
director and each of the five most highly compensated executive officers and
(2) all directors and executive officers of Horizon as a group, is contained
in Horizon's proxy statement dated June 26, 1998, for its annual meeting of
shareholders held on July 28, 1998, which is incorporated by reference in
Horizon's Annual Report on Form 10-K for the year ended March 31, 1998,
incorporated by reference in this proxy statement/prospectus. No person is
known by Horizon to own beneficially 5% or more of the outstanding shares of
Horizon common stock.
In December 1998, Maurice (Dennis) Fox retired as a Director of Horizon
and Horizon Bank.
PROPOSAL I - THE MERGER
This section of the proxy statement/prospectus describes certain aspects
of the merger. The following description does not purport to be complete and
is qualified in its entirety by reference to the merger agreement, a copy of
which is attached as Appendix A to this proxy statement/prospectus and
incorporated herein by reference. You are urged to read the merger agreement
carefully in its entirety.
Closing and Effective Time of the Merger
The closing of the merger will take place when all conditions to the
merger are satisfied. The merger will become effective at the time that
Horizon and Bellingham Bancorporation agree to be the effective time. At the
effective time, Bellingham Bancorporation will be merged with and into
Horizon. Following the merger, Horizon will continue as the surviving
corporation, and Bellingham Bancorporation will no longer exist as an
independent entity. The merger of Bank of Bellingham with and into Horizon
Bank will be effectuated simultaneously with the merger at the effective time.
Except with respect to fractional shares as discussed below, if the merger
agreement is approved and the merger becomes effective, stockholders of
Bellingham Bancorporation will receive 2.74 shares of Horizon common stock for
each of their shares of Bellingham Bancorporation common stock. See "--
Merger Consideration." Shares of Horizon common stock issued and outstanding
immediately before the effective time will remain issued and outstanding
immediately after the effective time.
The market price for Horizon common stock will fluctuate between the date
of this proxy statement/prospectus and the effective time. The market value
of the shares of Horizon common stock that stockholders of Bellingham
Bancorporation receive at the effective time may be more or less than the
market value of such shares on the date of this proxy statement/prospectus.
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Background of the Merger
Background. Horizon Bank is a savings bank headquartered in Bellingham,
Washington located near the USA/Canada border. Horizon operates 12 branches
located in communities along the I-5 corridor from Everett, Washington to
Blaine, Washington located at the Canadian border. This geographic region has
enjoyed moderate to strong economic growth during the past decade and Horizon
has been expanding its number of branches to take advantage of the growth.
Additional branches are under construction or are planned for the near future.
Horizon has maintained a well capitalized status in order to finance this
expansion of new branches as well as make investments in new technology
including a new computer system and wide area network that will link all
Horizon branches on a real time basis. In addition, Horizon has elected to
expand into commercial banking services through acquisitions as set out in
this merger transaction with Bellingham Bancorporation.
Since its inception in 1992, Bellingham Bancorporation, through its
wholly owned subsidiary, Bank of Bellingham, has realized consistent growth in
assets and profitability. The Bank of Bellingham currently operates three
full service branches, with the most recent branch opening in October 1998.
The Bank of Bellingham's business plan targeted many of the markets served by
Horizon. The plan of the Board of Directors and management was to remain
independent and to continue a long term strategy of steady internal growth.
However, in October 1998, Horizon approached management of the Bank of
Bellingham with a proposal to merge the respective operations and to introduce
commercial banking services throughout Horizon's substantially larger branch
network. After several meetings with Horizon management and extensive
analysis and discussion of the proposal over a period of several months, the
board of directors concluded that a combined bank could more effectively
accomplish the business objectives, and benefit shareholders, while retaining
the benefits for customers of a locally-owned and operated bank headquartered
in the City of Bellingham.
Reasons for the Merger; Recommendation of Bellingham Bancorporation's Board of
Directors
Bellingham Bancorporation and Horizon Financial, and their respective
subsidiaries Bank of Bellingham and Horizon Bank, share a community-directed
banking philosophy and strategy which emphasizes responsiveness to local
markets and the delivery of personalized services through a community-oriented
bank. The companies believe that the merger will enable the combined bank to
provide enhanced services to customers and to compete more effectively in the
present banking environment, which is dominated by much larger institutions.
The geographic markets of the banks are complementary. The Bank of
Bellingham's primary market area is the City of Bellingham and surrounding
Whatcom County. Horizon Bank serves a broader geographic area within the
State of Washington of which the City of Bellingham and surrounding Whatcom
County are a significant part.
Historically, the two banks have targeted different areas of the lending
market. Bellingham Bancorporation is a commercial bank that provides a full
range of commercial banking services and has emphasized commercial business
loans to local corporations and small businesses, with a relatively small
portfolio of residential loans secured by first deeds of trust. In contrast,
Horizon Bank's portfolio is dominated by residential loans with a modest
portfolio of commercial business loans. The combined bank would therefore
have a broader market area, more diverse asset base and a much broader target
market in the lending industry. Thus, the parties anticipate that their
complementary market areas and combined product mixes and areas of expertise
will provide substantial opportunities for growth, revenue enhancement and
increased quality of customer services to residents in the region of
northwestern Washington. Generally, the merger is expected to provide greater
efficiencies in management and information systems and substantial benefits to
the parties in that the combined bank will have a larger lending limit and
will be able to better serve larger customers.
Reasons for the Merger - Bellingham Bancorporation. The board of
Bellingham Bancorporation was initially approached regarding the proposed
merger in October 1998. The terms of the merger agreement, including the
merger
16
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consideration to be paid to Bellingham Bancorporation's stockholders, were the
result of arm's length negotiations between the representatives of Horizon and
Bellingham Bancorporation. The material factors considered by the Bellingham
Bancorporation board in deciding to approve and recommend the terms of the
merger were:
1. the merger consideration to be paid to Bellingham Bancorporation's
stockholders in relation to the market value, tangible book value and
earnings per share of Bellingham Bancorporation common stock.
Because the consideration consists of common stock of Horizon, this
included a review of information concerning the financial condition,
results of operations, capital levels, asset quality and prospects
for Horizon;
2. the impact of the merger on the depositors, employees, customers and
communities served by Bellingham Bancorporation, including the
expansion of the Bank of Bellingham's deposit and lending base into a
broader geographic area;
3. information concerning the financial condition, results of
operations, capital levels, asset quality and prospects for
Bellingham Bancorporation;
4. increased lending opportunities arising from a larger lending limit
and capital base as a result of the merger;
5. industry and economic conditions;
6. the general structure of the transaction and the compatibility of
management and business philosophy;
7. the likelihood of receiving the required approvals in a timely
manner; and
8. the ability of the combined enterprise to compete in relevant banking
and non-banking markets.
In making its determination, the Bellingham Bancorporation board did not
assign any relative or specific weights to the factors which it considered,
and individual directors may have given different weights to different
factors.
Generally, the board concluded that the combined bank would be an even
sounder financial institution with a complementary business strategy and
community orientation with greater size, capital strength, efficiency and
greater profitability. The board believes that the combined bank will be able
to compete more effectively in a rapidly changing marketplace that is
increasingly becoming dominated by larger and larger financial institutions.
The Bellingham Bancorporation board believes that the merger is fair to and in
the best interests of Bellingham Bancorporation and its stockholders.
Opinion of Bellingham Bancorporation's Financial Advisor
On January 27, 1999, Bellingham Bancorporation hired Columbia Financial
Advisors, Inc. ("Columbia") to provide an opinion as to the fairness, from a
financial point of view, of the merger consideration to the stockholders of
Bellingham Bancorporation. Columbia is a regionally recognized investment
banking firm that is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions. The Bellingham
Bancorporation Board selected Columbia on the basis of Columbia's experience,
reputation, and expertise in transactions similar to the Merger.
Columbia delivered its opinion to the Bellingham Bancorporation Board
that, as of February 4, 1999, the merger consideration is fair, from a
financial point of view, to the shareholders of Bellingham Bancorporation. No
limitations were imposed by the Bellingham Bancorporation with respect to the
investigations made or procedures
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followed by it in rendering its opinion. Columbia has consented to the
inclusion herein of the summary of its opinion to the Bellingham
Bancorporation Board and to the references to the entire opinion attached
hereto as Appendix C.
THE FULL TEXT OF THIS OPINION OF COLUMBIA, WHICH IS ATTACHED AS APPENDIX
C TO THIS PROXY STATEMENT/PROSPECTUS, SETS FORTH CERTAIN ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY COLUMBIA, AND
SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE OPINION OF COLUMBIA SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE OPINION.
In rendering its opinion, Columbia:
- reviewed Bellingham Bancorporation's Annual Reports for the prior
three fiscal years of 1998, 1997, and 1996 and Horizon Financial's
Annual Reports, Proxy Statements and Form 10-K's for the prior three
fiscal years of 1998, 1997, and 1996 and certain other information
considered relevant, including internal reports, such as board
reports, asset-liability reports, asset-quality reports and loan
files;
- discussed with senior management of Bellingham Bancorporation and with
the wholly-owned subsidiary, Bank of Bellingham, the current position
and prospective outlook;
- discussed with senior management of Horizon Financial their
operations, financial performances and future plans and prospects;
- considered historical quotations, levels of activity and prices of
recorded transactions in Bellingham Bancorporation's and Horizon
Financial's common stock;
- reviewed financial and stock market data of other community banks in a
comparable asset range to Bellingham Bancorporation;
- reviewed financial and stock market data of other community banks in a
comparable asset range to Horizon Financial;
- reviewed certain recent business combinations with community banks as
the acquired company, which Columbia deemed comparable in whole or in
part; and
- performed other analyses that Columbia considered appropriate.
In rendering its opinion, Columbia Financial assumed and relied upon the
accuracy and completeness of financial information provided to it by
Bellingham Bancorporation and Horizon Financial. In its review, Columbia did
not undertake any independent verification of the information provided to it,
nor did it make any independent appraisal or evaluation of the assets or
liabilities nor of potential exposure resulting from year 2000 issues, of
Bellingham Bancorporation or Horizon Financial, and potential or contingent
liabilities of Bellingham Bancorporation or Horizon Financial.
Comparable Sales Multiples. Columbia Financial calculated a "Merger
Consideration-Adjusted Book Value" for Bellingham Bancorporation's December
31, 1998 stockholders equity and the estimated May 31, 1999 stockholders'
equity adjusted for the price to stockholders equity ratios for a sample of
Northwest banking institutions with assets of below $150 million which sold
between January 1, 1993 through December 31, 1998 and a sample of Northwest
banking institutions with total assets of below $150 million which sold
between January 1, 1996 and December 31, 1998. The calculations are $34.39
and $39.19 per share, respectively, for the May 31, 1999 stockholders' equity
for
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the two samples. For the estimated December 31, 1998 stockholders' equity,
the calculations are $31.40 and $35.78, respectively. For Bellingham
Bancorporation's 1998 net income 12 months prior to December 31, 1998, the
calculations are $32.44 and $35.11, respectively.
Transaction Value as a Percentage of Total Assets. Columbia Financial
calculated the percentage of total assets which the transaction represents as
a price level indicator. The transaction value as a percentage of total
assets facilitates a truer price level comparison with comparable banking
organizations, regardless of the differing levels of stockholders equity and
earnings. In this instance, a transaction value of $35.97 per Bellingham
Bancorporation share results in a transaction value as a percentage of total
assets of 22.02%. The median price as a percentage of total assets for a
sample of Northwest banking institutions with assets of below $150 million
which sold between January 1, 1993 through December 31, 1998 and a sample of
Northwest banking institutions with total assets of below $150 million which
sold between January 1, 1996 and December 31, 1998 was 18.93% and 21.29%,
respectively.
The information in the following table summarizes the comparable group
results analyzed by Columbia with respect to the Merger. The summary does not
purport to be a complete description of the analysis performed by Columbia and
should not be construed independently of the other information considered by
Columbia in rendering its opinion. Selecting portions of Columbia's analysis
or isolating certain aspects of the comparable transactions without
considering all analysis and factors could create an incomplete or potentially
misleading view of the evaluation process.
Proposed Median Value for Samples
Transaction 1993-1998 1996-1998
----------- --------- ---------
Price to December 31, 1998 2.56x 2.15x 2.45x
Tangible Stockholder's Equity
Price to trailing Twelve
Months Net Income 19.77x 17.50x 18.94x
Price to December 31, 1998
Total Assets 22.03% 18.93% 21.29%
Investment Value is sometimes referred to as the income or earnings
value. One investment value method frequented used estimates the present
value of an institution's future earnings or cash flow which is discussed
below.
Net Present Value Analysis. The investment or earnings value of any
banking organization's stock is an estimate of the present value of future
benefits, usually earnings, dividends, or cash flow, which will accrue to the
stock. An earnings value is calculated using an annual future earning stream
over a period of time of not less than five years and the residual or terminal
value of the earnings stream after five years, using Bellingham
Bancorporation's estimates of future growth and an appropriate capitalization
or discount rate. Columbia Financial's calculations were based on an analysis
of the banking industry, Bellingham Bancorporation's earnings estimates for
1999-2003, historical levels of growth and earnings, and the competitive
situation in Bellingham Bancorporation's market area. Using discount rates of
16% and 18%, acceptable discount rates considering the risk-return
relationship most investors would demand for an investment of this type as of
the valuation date, the "Net Present Value of Future Earnings" provided a
range of $31.39 to $36.82 per share.
When the net asset value, market value and investment value approaches
are subjectively weighed, using the appraiser's experience and judgment, it is
Columbia Financial's opinion that the proposed transaction is fair, from a
financial point of view to the Bellingham Bancorporation shareholders.
Pursuant to the terms of the engagement letter, Bellingham Bancorporation
has agreed to pay Columbia Financial a fee of $20,000 for this fairness
opinion. In addition, Bellingham Bancorporation has agreed to indemnify
Columbia Financial against certain liabilities.
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Merger Consideration
Shares of Horizon Common Stock. Except with respect to fractional shares
as described below, if the merger agreement is approved and the merger becomes
effective, each share of Bellingham Bancorporation common stock outstanding
immediately prior to the effective time will be automatically converted into
the right to receive 2.74 shares of Horizon common stock. At the effective
time, the 358,819 outstanding shares of Bellingham Bancorporation common stock
will be converted into a total of 983,164 shares of Horizon common stock.
Cash in Lieu of Fractional Shares. Horizon will not issue any fractional
shares of Horizon common stock in the merger. Horizon will pay cash to each
holder of Bellingham Bancorporation common stock who would otherwise be
entitled to receive a fractional share of Horizon common stock. The cash
payment will be equal to the product of the fractional part of the share of
Horizon common stock and $13.75.
Bellingham Bancorporation Stock Options
At the effective time, each outstanding Bellingham Bancorporation stock
option will be automatically converted into an option, having the same terms,
including vesting, as such Bellingham Bancorporation stock option, to purchase
a number of shares of Horizon common stock equal to the total number of shares
subject to such Bellingham Bancorporation stock option multiplied by 2.74, at
an exercise price per share equal to the exercise price per share of such
Bellingham Bancorporation stock option divided by 2.74. As of the date of
this proxy statement/prospectus, a total of 41,200 shares of Bellingham
Bancorporation common stock were subject to outstanding Bellingham
Bancorporation stock options. At the effective time, such options will be
converted into options to purchase a total of 112,888 shares of Horizon common
stock, assuming none are exercised prior to that time. Options become fully
vested upon change of control. The following table includes information
regarding options held by each director and executive officer of Bellingham
Bancorporation that would become fully exercisable:
Bellingham Equivalent
Bancorporation Horizon Stock
Stock Options Options to
Name of Director Position To Vest Vest
- ---------------- -------- ------- ----
John M. Daughters President and Chief 15,500 42,470
Executive Officer
Bellingham Bancorporation Warrants
A total of 12,000 warrants of Bellingham Bancorporation have been issued
as a form of compensation to certain organizers in connection with the
formation of Bellingham Bank. The warrants will be converted into the right
to receive a number of shares of Horizon common stock equal to the number of
shares subject to warrants multiplied by 2.74. Each such warrant will be
converted into the right to receive Horizon common stock at an exercise price
per share of $4.56.
The following table includes information regarding warrants held by each
director and executive officer of Bellingham Bancorporation who holds warrants
and the number of warrants to be held by such person following the merger:
Bellingham
Name of Director Bancorporation Equivalent
or Executive Officer Position Warrants Horizon Stock
- -------------------- -------- -------- -------------
John M. Daughters President and Chief 2,000 5,480
Executive Officer
Leib Alexander Director 2,000 5,480
John K. Cavers Director 2,000 5,480
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Dissenters' Rights
In accordance with Chapter 13 of the Washington Business Corporation Act
(Chapter 23B.13 of the Revised Code of Washington), Bellingham
Bancorporation's shareholders have the right to dissent from the merger and to
receive payment in cash for the "fair value" of their Bellingham
Bancorporation common stock.
If Bellingham Bancorporation shareholders perfect dissenters' rights with
respect to more than 5% of the outstanding shares of Bellingham Bancorporation
Common Stock, Horizon may elect not to consummate the merger. Bellingham
Bancorporation shareholders electing to exercise dissenters' rights must
comply with the provisions of Chapter 13 in order to perfect their rights.
Bellingham Bancorporation and Horizon will require strict compliance with the
statutory procedures. The following is intended as a brief summary of the
material provisions of the Washington statutory procedures required to be
followed by a Bellingham Bancorporation shareholder in order to dissent from
the Merger and perfect the shareholder's dissenters' rights. This summary,
however, is not a complete statement of all applicable requirements and is
qualified in its entirety by reference to Chapter 13 of the Washington
Business Corporation Act, the full text of which is set forth in Appendix B
hereto.
A shareholder who wishes to assert dissenters' rights must (a) deliver to
Bellingham Bancorporation before the vote is taken by Bellingham
Bancorporation shareholders written notice of the shareholder's intent to
demand payment for the shareholder's shares if the Merger is effected, and (b)
not vote such shares in favor of the merger. A shareholder wishing to deliver
such notice should hand deliver or mail such notice to Bellingham
Bancorporation at the following address:
Bellingham Bancorporation
211 East Holly Street
Bellingham, Washington 98225
Attn: Corporate Secretary
A shareholder who wishes to exercise dissenters' rights generally must
dissent with respect to all the shares the shareholder owns or over which the
shareholder has power to direct the vote. However, if a record shareholder is
a nominee for several beneficial shareholders some of whom wish to dissent and
some of whom do not, then the record holder may dissent with respect to all
the shares beneficially owned by any one person by notifying Bellingham
Bancorporation in writing of the name and address of each person on whose
behalf the record shareholder asserts dissenters' rights. A beneficial
shareholder may assert dissenters' rights directly by submitting to Bellingham
Bancorporation the record shareholder's written consent and by dissenting with
respect to all the shares of which such shareholder is the beneficial
shareholder or over which such shareholder has power to direct the vote.
A shareholder who does not deliver to Bellingham Bancorporation prior to
the vote being taken by Bellingham Bancorporation shareholders a written
notice of the shareholder's intent to demand payment for the "fair value" of
the shares will lose the right to exercise dissenters' rights. In addition,
any shareholder electing to exercise dissenters' rights must either vote
against the merger or abstain from voting.
If the merger is effected, Horizon as the surviving corporation shall,
within ten days after the effective date of the merger, deliver a written
notice to all shareholders who properly perfected their dissenters' rights.
Such notice will, among other things, (a) state where the payment demand must
be sent and where and when certificates for certificated shares must be
deposited; (b) inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received; (c)
supply a form for demanding payment; and (d) set a date by which Horizon must
receive the payment demand, which date will be between 30 and 60 days after
notice is delivered.
A shareholder wishing to exercise dissenters' rights must at that time
file the payment demand and deliver share certificates as required in the
notice. Failure to do so will cause such person to lose his or her
dissenters' rights.
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Within 30 days after the merger occurs or receipt of the payment demand,
whichever is later, Horizon shall pay each dissenter with properly perfected
dissenters' rights Horizon's estimate of the "fair value" of the shareholder's
interest, plus accrued interest from the effective date of the merger. With
respect to a dissenter who did not beneficially own Bellingham Bancorporation
shares prior to the public announcement of the merger, Horizon is required to
make the payment only after the dissenter has agreed to accept the payment in
full satisfaction of the dissenter's demands. "Fair value" means the value of
the shares immediately before the effective date of the merger, excluding any
appreciation or depreciation in anticipation of the merger. The rate of
interest is generally required to be the rate at which Horizon can borrow
money from other banks. It is the current intention of Horizon to estimate
the fair value of Bellingham Bancorporation common stock to be $19.25 per
share, which represents the price paid for Bellingham Bancorporation common
stock in the last transaction for which a price is known to Bellingham
Bancorporation management prior to the date on which the merger agreement was
signed.
A dissenter who is dissatisfied with Horizon's estimate of the fair value
or believes that interest due is incorrectly calculated may notify Horizon of
the dissenter's estimate of the fair value and amount of interest due. If
Horizon does not accept the dissenter's estimate and the parties do not
otherwise settle on a fair value then Horizon must within 60 days petition a
court to determine the fair value.
In view of the complexity of Chapter 13 of the Washington Business
Corporation Act, shareholders of Bellingham Bancorporation who may wish to
dissent from the merger and pursue appraisal rights should consult their legal
advisors.
Surrender of Certificates
As soon as practicable after the effective time, Horizon's transfer
agent, American Stock Transfer & Trust Company, acting in the capacity of
exchange agent for Horizon, will mail to each holder of record of shares of
Bellingham Bancorporation common stock a form letter of transmittal, together
with instructions for the exchange of such holder's stock certificates for a
certificate representing the shares of Horizon common stock and the cash in
lieu of fractional shares of Horizon common stock to which he or she is
entitled.
STOCKHOLDERS OF BELLINGHAM BANCORPORATION SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS.
After surrendering to the exchange agent one or more certificates for
Bellingham Bancorporation common stock, together with a properly completed
letter of transmittal, the exchange agent will issue and mail to the holder a
certificate representing the number of whole shares of Horizon common stock to
which the holder is entitled and, if applicable, a check for the amount
representing any fractional share, without interest. The exchange agent will
issue a certificate for Horizon common stock in a name other than the name in
which the surrendered certificate is registered only if (a) the certificate
surrendered is properly endorsed and is in proper form for transfer and (b)
the person requesting the issuance of the certificate either pays to the
exchange agent any transfer or other taxes required by the issuance of a
certificate for shares in a name other than the registered holder of the
certificate surrendered or establishes to the satisfaction of the exchange
agent that the taxes have been paid or are not due.
All Horizon common stock issued pursuant to the merger will be deemed
issued as of the effective time. No dividends in respect of the Horizon
common stock with a record date after the effective time will be paid to the
former stockholders of Bellingham Bancorporation entitled to receive
certificates for shares of Horizon common stock until such shareholders
surrender their certificates representing shares of Bellingham Bancorporation
common stock. After the certificates are surrendered, Horizon will pay the
shareholder in whose name the certificates representing such shares of Horizon
common stock are issued any dividends the record and payment dates of which
are after the effective time and before the date of such surrender. After the
certificates are surrendered, Horizon will pay to the person in whose name the
certificate representing the shares of Horizon common stock is issued, on the
dividend payment date, any dividend on the shares of Horizon common stock that
have a record date after the effective time and before the date of
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surrender, but a payment date after the surrender. In no event will the
persons entitled to receive such dividends be entitled to receive interest on
amounts payable as dividends.
Conditions to the Merger
The effectiveness of the merger is subject to the satisfaction as of the
closing date of a number of conditions or, if permissible under the merger
agreement, waiver of such conditions.
Conditions to the Obligations of Both Parties. Following are the
material conditions to the obligations of both parties to effect the merger:
1. approval of the merger agreement by the holders of not less than two
thirds of the outstanding shares of Bellingham Bancorporation common
stock;
2. receipt of all applicable regulatory approvals without any condition
that, in the opinion of Horizon, would deprive Horizon of the
material economic or business benefits of the merger;
3. no court or government or regulatory authority having taken any
action which enjoins or prohibits the merger; and
4. receipt by Horizon and Bellingham Bancorporation of the opinion of
Breyer & Associates PC, dated as of the effective date, as to
certain federal income tax consequences of the merger.
Conditions to the Obligations of Horizon. Following are the material
conditions to the obligations of Horizon to effect the merger:
1. the delivery by Bellingham Bancorporation of opinions of its legal
counsel and certificates executed by certain of its executive
officers as to compliance with the merger agreement;
2. the accuracy of the representations and warranties, and compliance
in all material respects with the agreements and covenants of
Bellingham Bancorporation;
3. John M. Daughters and A.R. Ayala having entered into employment
agreements with Horizon Bank;
4. each member of the Bellingham Bancorporation board having entered
into an agreement with Horizon providing that such individual shall
not:
a. for a period of three years participate in the formation of a
new financial institution in any county in Washington where
Horizon or any subsidiary has an office or branch;
b. for a period of 18 months be an officer, director, employee
stockholder in a financial institution with assets under $400
million located in any county in Washington where Horizon or
any subsidiary has an office or branch;
c. for a period of two years disclose any confidential
information.
5. the absence of any material adverse change in the financial position
or results of operations of Bellingham Bancorporation;
6. the number of dissenting shares not exceeding 5% of the outstanding
shares of Bellingham Bancorporation common stock;
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7. receipt by Horizon of an agreement from each "affiliate" of
Bellingham Bancorporation restricting the sale of Horizon common
stock received by such affiliate in the merger; and
8. that the Merger will qualify for pooling-of-interests accounting
treatment.
Conditions to the Obligation of Bellingham Bancorporation. Following are
the material conditions to the obligations of Bellingham Bancorporation to
effect the merger:
1. the delivery by Horizon of opinions of its legal counsel and
certificates executed by certain of its executive officers as to
compliance with the merger agreement; and
2. the accuracy of the representations and warranties, and compliance
in all material respects with the agreements and covenants of
Horizon.
For a complete description of all of the conditions to the obligations of
the parties to effect the merger, see Article VI of the merger agreement.
Regulatory Approvals
The merger is subject to prior approval by the Federal Reserve and the
Department of Financial Institutions. An application for approval of the
merger was filed with the Federal Reserve and the Department of Financial
Institutions on March 9, 1999. The merger of Horizon Bank and Bank of
Bellingham is subject to the receipt of certain prior approvals from the
Federal Deposit Insurance Corporation and the Department of Financial
Institutions. An application for such merger was filed with the Federal
Deposit Insurance Corporation and the Department of Financial Institutions on
March 9, 1999.
The approval of any application merely implies satisfaction of regulatory
criteria for approval, which do not include review of the transaction from the
standpoint of the adequacy of the consideration to be received by, or fairness
to, shareholders. Regulatory approvals do not constitute an endorsement or
recommendation of the proposed transaction.
Horizon and Bellingham Bancorporation are not aware of any governmental
approvals or compliance with banking laws and regulations that are required
for consummation of the transactions contemplated by the merger agreement
other than as described above. Should any other approval or action be
required, it is presently contemplated that such approval or action would be
sought. There can be no assurance that any such approval or action, if
needed, could be obtained and, if such approvals or actions are obtained,
there can be no assurance as to the timing thereof. The merger cannot proceed
in the absence of all requisite regulatory approvals. See "-- Effective Date
of the Merger," "-- Conditions to Consummation of the Merger," and "--
Amendment; Waiver; Termination."
The merger agreement provides that if the merger has not been consummated
by September 30, 1999, the merger agreement may be terminated by Horizon or
Bellingham Bancorporation. Since there is the possibility that regulatory
approval may not be obtained for a substantial period of time after approval
of the merger agreement by Bellingham Bancorporation's shareholders, there can
be no assurance that the merger will be consummated by September 30, 1999. In
addition, should regulatory approval require any material change, a
resolicitation of shareholders may be required if regulatory approval is
obtained after shareholder approval of the merger agreement.<PAGE>
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Conduct of Business Pending the Merger
The merger agreement requires Bellingham Bancorporation to maintain the
general character of its business and conduct its business in the ordinary and
usual manner at all times prior to the effective time. In addition, without
the prior written consent of Horizon, Bellingham Bancorporation and its
subsidiaries may not:
1. issue or sell any Bellingham Bancorporation common stock;
2. pay any dividends;
3. incur any indebtedness for borrowed money or becoming liable for the
obligations of any other entity other than in the ordinary course of
business;
4. change its lending, investment, liability management or other
material banking policies in any respect;
5. impose any lien on any share of stock held by Bellingham
Bancorporation;
6. enter into or amend any employment agreements or any employee
benefit plans or granting any salary increases (other than in the
ordinary course of business);
7. dispose of any material portion of its assets or acquiring any
material portion of the business or property of any other entity;
8. amend its articles of incorporation or bylaws;
9. settle any claims involving any liability for money damages in
excess of $25,000;
10. enter into, terminate or change any material agreements, except for
those agreements that may be terminated by Bellingham Bancorporation
without penalty upon not more than 60 days' prior written notice;
11. extend credit other than in accordance with existing lending
policies; and
12. change the pricing structure of its deposit liabilities, other than
in the ordinary course of business. Moreover, Bellingham
Bancorporation and the Bank of Bellingham are required, among other
things, to operate their businesses in the usual, regular and
ordinary course and to use their best efforts to preserve their
business relationships and to retain key employees.
See Article III and V of the merger agreement for additional restrictions
on the conduct of business of Bellingham Bancorporation pending the merger.
No Solicitation
Bellingham Bancorporation has agreed under the merger agreement that
neither it nor any of its directors, officers, employees or agents, will,
directly or indirectly solicit, initiate or encourage or facilitate any
proposal for a merger or other business combination involving Bellingham
Bancorporation or for the acquisition of a substantial equity interest in, or
a substantial portion of the assets of Bellingham Bancorporation.
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the effective
time:
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1. by mutual written consent of the parties;
2. by either party if the other party has committed a material breach
that cannot be or has not been cured within 30 days after the giving
of written notice of such breach;
3. by either party if the merger has not become effective by September
30, 1999, unless the party seeking to terminate is in default under
the merger agreement; and
4. by either party if the shareholders of Bellingham Bancorporation
fail to approve the merger agreement or a required regulatory
approval has not been approved or has been denied.
Amendment of Merger Agreement
The merger agreement may be amended by the respective boards of directors
of the parties at any time before or after approval of the merger agreement by
Bellingham Bancorporation's stockholders. Unless required by law, no
amendment of the merger agreement effected after the merger agreement is
approved by Bellingham Bancorporation's stockholders shall require any further
stockholder approval.
Waiver of Performance of Obligations
Either of the parties to the merger agreement may, by a signed writing,
give any consent, take any action with respect to the termination of the
merger agreement or otherwise, or waive any of the inaccuracies in the
representations and warranties of the other party or compliance by the other
party with any of the covenants or conditions contained in the merger
agreement.
Interests of Certain Persons in the Merger
The directors and executive officers of Bellingham Bancorporation,
together with their affiliates, beneficially owned a total of 101,178 shares
of Bellingham Bancorporation common stock (representing 28.2% of all
outstanding shares of Bellingham Bancorporation common stock) as of the record
date. The directors and executive officers will receive the same
consideration in the merger for their shares as the other shareholders of
Bellingham Bancorporation. Certain members of Bellingham Bancorporation's
management and the Bellingham Bancorporation board have certain interests in
the merger as described below that are in addition to their interests as
shareholders of Bellingham Bancorporation generally. The Bellingham
Bancorporation board was aware of these interests and considered them, among
other matters, in approving the merger agreement.
Employment Agreements. Following the effective time, John M. Daughters,
the President and Chief Operating Officer of Bellingham Bancorporation, and
A.R. Ayala, the Chief Financial Officer of Bellingham Bancorporation, will
enter into three-year employment agreements with Horizon and Horizon Bank.
Mr. Daughters will become an Executive Vice President of Horizon Bank and head
the commercial banking division. Mr. Ayala will become a Vice President with
Horizon Bank. The salaries for Mr. Daughters and Mr. Ayala will be $100,000
and $65,015, respectively.
Appointment on the Horizon Bank Board. As soon as practicable following
the effective time of merger, Horizon Bank intends to increase the size of its
board of directors by one member and elect John M. Daughters to the board.
Conversion of Stock Options and Warrants. At the effective time of the
merger, Horizon will assume each outstanding option and warrant to purchase
shares of Bellingham Bancorporation stock in such manner that it is converted
into an option to purchase shares of Horizon stock, except that each such
option will be exercisable for the number of shares of Horizon stock equal to
the number of shares of Bellingham Bancorporation stock for which such option
is exercisable multiplied by 2.74 and the exercise price of such Bellingham
Bancorporation option will be equal
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to the exercise price of such option divided by 2.74. As of the date of this
proxy statement/prospectus, the officers and directors of Bellingham
Bancorporation held options and warrants to acquire an aggregate of 53,200
shares of Bellingham Bancorporation stock.
Indemnification. For a period of three years after the closing of the
merger, Horizon has agreed to pay up to 150% of the current annual premium to
maintain Bellingham Bancorporation's existing director and officer liability
for acts and omissions by the officers and directors of Bellingham
Bancorporation that occurred prior to the merger.
Federal Income Tax Consequences
The receipt of the following opinion from Breyer & Associates PC,
Horizon's counsel, as to the federal income tax consequences of the merger, in
form and substance satisfactory to Bellingham Bancorporation, is a condition
to the consummation of the merger:
1. the proposed merger qualifies as a tax-free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code, as
amended, and
2. no gain or loss will be recognized by shareholders of Bellingham
Bancorporation on the receipt by them of shares of Horizon common
stock in exchange for their shares of Bellingham Bancorporation
common stock, except to the extent they receive cash for fractional
shares.
The above opinion of counsel, which will be delivered on the effective
date, is filed as an exhibit to the registration statement. The foregoing
discussion is a summary of all of the material tax consequences of the merger.
An opinion of counsel only represents counsel's best legal judgment, and has
no binding effect or official status of any kind, and no assurance can be
given that contrary positions may not be taken by the Internal Revenue Service
or a court considering the issues. Neither Horizon nor Bellingham
Bancorporation has requested or will request a ruling from the Internal
Revenue Service with regard to the federal income tax consequences of the
merger.
The above summary of the material federal income tax consequences of the
merger is not intended as a substitute for careful tax planning on an
individual basis. In addition to the federal income tax consequences
discussed above, consummation of the merger may have significant state and
local income tax consequences that are not discussed in this proxy statement/
prospectus. Accordingly, persons considering the merger are urged to consult
their tax advisors with specific reference to the effect of their own
particular facts and circumstances on the matters discussed in this proxy
statement/prospectus.
Termination Fee
Bellingham Bancorporation has agreed to pay to Horizon a termination fee
under certain circumstances. A fee of $800,000 may be demanded by Horizon if
the merger is not completed by January 18, 2001 and any of the following
occurs:
1. a third party acquires beneficial ownership of 25% or more of the
then outstanding Bellingham Bancorporation common stock;
2. Bellingham Bancorporation, without the written consent of Horizon,
enters into or recommends to Bellingham Bancorporation stockholders
an agreement with a third party providing for certain actions (each
an "Acquisition Transaction"), including a merger or similar
transaction involving Bellingham Bancorporation, the purchase,
acquisition or lease of substantially all of the assets of
Bellingham Bancorporation or the purchase or other acquisition of
securities representing 10% or more of the voting power of
Bellingham Bancorporation; or
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3. a bona fide proposal to engage in an Acquisition Transaction is made
to Bellingham Bancorporation by a third party, and after such
proposal is made either Bellingham Bancorporation willfully breaches
the merger agreement entitling Horizon to terminate the merger
agreement, Bellingham Bancorporation shareholders fail to approve
the merger agreement at the Bellingham Bancorporation annual
meeting, the Bellingham Bancorporation annual meeting is canceled
without the fault of Horizon, or the Bellingham Bancorporation Board
withdraws or modifies in a manner adverse to Horizon its
recommendation to stockholders to approve the merger agreement.
This termination fee is intended to increase the likelihood that the merger
will be consummated according to the terms set forth in the merger agreement
and may be expected to discourage competing offers to acquire Bellingham
Bancorporation from potential third party acquirors because the termination
fee could increase the cost of such acquisition. To the best of Bellingham
Bancorporation's knowledge, no event that would permit Horizon to demand
payment of the termination fee has occurred as of the date of this proxy
statement/prospectus. This fee will not be payable because Bellingham
Bancorporation shareholders fail to approve the merger agreement unless prior
to the Bellingham Bancorporation annual meeting a bona fide proposal to engage
in an Acquisition Transaction is made to Bellingham Bancorporation by a third
party.
Resale of Horizon Common Stock
The shares of Horizon common stock issuable to shareholders of Bellingham
Bancorporation upon the merger becoming effective have been registered under
the Securities Act of 1933, as amended. Such shares may be traded freely and
without restriction by those shareholders not deemed to be "affiliates" of
Bellingham Bancorporation or Horizon as that term is defined in the rules
under the Securities Act of 1933. Persons who may be deemed to be affiliates
of Bellingham Bancorporation generally include individuals or entities that
control, are controlled by or are under common control with, Bellingham
Bancorporation, and may include the executive officers and directors of
Bellingham Bancorporation, as well as certain principal shareholders of
Bellingham Bancorporation.
Nasdaq Listing
The merger agreement provides that Horizon will, prior to the effective
time, notify Nasdaq of the listing of the shares of Horizon common stock to be
issued in connection with the merger and will obtain any approval required by
Nasdaq necessary in connection with the issuance of the Horizon common stock.
Accounting Treatment
Management of Horizon anticipates that the merger will be accounted for
as a "pooling-of-interests" under generally accepted accounting principles.
This means that, Horizon will carry forward to Horizon's consolidated balance
sheet the net assets of Bellingham Bancorporation at their historical cost.
Expenses
Except as otherwise provided in the merger agreement, Horizon and
Bellingham Bancorporation will each pay their own expenses in connection with
the merger and the bank merger. In addition, if the merger agreement is
terminated because the board of directors of Bellingham Bancorporation has
either failed to recommend approval of the merger to Bellingham
Bancorporation's stockholders or has recommended against approval of the
merger because of the receipt by Bellingham Bancorporation of an acquisition
proposal from a third party, Bellingham Bancorporation shall pay Horizon,
concurrently with such termination, a termination fee of $800,000.
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IMPACT OF THE YEAR 2000 ISSUE
General
With the new millennium approaching, organizations are examining their
computer systems to ensure they are Year 2000 compliant. The Year 2000 issue
is that many existing computer systems use only two numbers to identify a year
in the date field with the assumptions that the first two digits are always
19. As the century is implied in the date, on January 1, 2000, computers that
are not Year 2000 compliant will assume the year is 1900. Systems that
calculate, compare, or sort using the incorrect date will cause erroneous
results, ranging from system malfunctions to incorrect or incomplete
transaction processing. If not remedied, potential risks include business
interruption or shut down, financial loss, reputation loss and/or legal
liability.
In May 1997, the Federal Financial Institutions Examination Council
issued an interagency statement to the chief executive officers of all
federally supervised financial institutions, including Horizon and Bellingham
Bancorporation, regarding Year 2000 project management awareness. The Federal
Financial Institutions Examination Council statement provides guidance to
financial institutions, providers of data services and all examining personnel
of the federal banking agencies regarding the Year 2000 issue. The federal
banking agencies have been conducting Year 2000 compliance examinations, and
the failure to implement an adequate Year 2000 program can be identified as an
unsafe and unsound banking practice. The Office of the Comptroller of
Currency and the Office of Thrift Supervision have established examination
procedures that contain three categories of ratings: "Satisfactory," "Needs
Improvement," and "Unsatisfactory." Institutions that receive a Year 2000
rating of Unsatisfactory may be subject to formal enforcement action,
supervisory agreements, cease and desist orders, civil money penalties, or the
appointment of a conservator. In addition, federal banking agencies will be
taking into account Year 2000 compliance programs when reviewing applications
and may deny an application based on Year 2000 related issues.
Bellingham Bancorporation
Bank of Bellingham is a user of computers, computer software and
equipment utilizing embedded microprocessors, all of which may be affected by
the Year 2000 issue. The Year 2000 issue exists because many computer systems
and applications use two-digit date fields to designate a year. When the
century date change occurs, date-sensitive systems may recognize the Year 2000
as 1900, or not at all. This inability to recognize or properly treat the
Year 2000 may cause erroneous results, ranging from system malfunctions to
incorrect or incomplete processing.
Bank of Bellingham's Year 2000 task force is made up of the chief
executive officer and chief financial officer of the bank, the credit
administrator, and the cashier. Regular progress reports are made to the
board of directors. The Year 2000 task force is implementing a comprehensive
program to make all information and non-information technology assets Year
2000 compliant. Included in this program are the following phases:
1. Awareness - educational initiatives on Year 2000 issues and concerns.
This phase is complete.
2. Assessment - identify and evaluate all vital systems of Bank of
Bellingham. This phase is complete.
3. Renovation - upgrade or replace any critical system that is non-Year
2000 compliant. This phase was substantially complete as of
December 31, 1998.
4. Validation - testing all critical systems and third-party vendors
for Year 2000 compliance. As a result of a planned change of
service bureau, this phase will need to be re-visited. Bank of
Bellingham will rely on the results of proxy testing done by the
third-party service bureau for certain date-sensitive testing. This
proxy testing, involving the use of live client data, will test the
results of transactions on various test dates before and after the
Year 2000 date change and cover all of the service bureau
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applications used by Bank of Bellingham. Proxy testing results are
expected to be in our hands by June 30, 1999.
Other parties whose Year 2000 compliance may affect Bank of
Bellingham include the Federal Reserve Bank, the Federal Home Loan
Bank, Bank of Bellingham's automated teller machine network, and
credit card and merchandise bankcard service bureaus. These third
parties have indicated their compliance or intended compliance.
Regulatory examination results have been received on some of these
vendors. Where it is possible to do so, Bank of Bellingham has and
will schedule testing with these third parties. Where testing is not
possible, Bank of Bellingham will rely on certifications from vendors
and service providers.
5. Implementation - placement of renovated systems in use. As Bank of
Bellingham completes the validation phase, Bank of Bellingham expects
To determine any necessary remaining remedial actions and provide for
Their implementation. Internal computer hardware has been replaced
and verified to be Year 2000 compliant.
Bank of Bellingham's cost incurred as of February 28, 1999 to identify,
fix and replace computer equipment, software programs, or other equipment that
were not Year 2000 compliant was $111,811. Ongoing system maintenance or
modification costs are charged to expense as incurred, while the cost of new
hardware, software or other equipment is capitalized and amortized over their
estimated useful lives. Bank of Bellingham does not separately track the
internal costs and time that its employees spend on Year 2000 issues, which
are principally payroll costs. Funds have been budgeted in Bank of
Bellingham's 1998-1999 fiscal year for use in Year 2000 compliance efforts
where appropriate.
Because Bank of Bellingham depends substantially on its computer systems
and those of third parties, the failure of these systems to be Year 2000
compliant could cause substantial disruption of Bank of Bellingham's business
and could have a material adverse financial impact. Failure to resolve Year
2000 issues presents the following risks to Bank of Bellingham:
1. If Bank of Bellingham's third party service bureau is unable to
properly process customer transactions, Bank of Bellingham could lose
customers to other financial institutions, resulting in a loss of
revenue.
2. Governmental agencies, such as the Federal Home Loan Bank of Seattle,
and correspondent institutions could fail to provide funds to Bank of
Bellingham, which could materially impair Bank of Bellingham's
liquidity, thus affecting Bank of Bellingham's ability to fund loans
and deposit withdrawals.
3. Commercial borrowers could fail to repay their credit commitments
because of loss of income due to the failure of their own computer
systems, or those of their vendors.
4. Concern on the part of depositors that Year 2000 issues could
restrict access to their deposit account balances could result in
Bank of Bellingham experiencing deposit outflows prior to December
31, 1999.
5. Bank of Bellingham could incur increased personnel costs if
additional staff is required to perform functions that inoperative
systems would have otherwise performed.
In the event that one or more of these failure scenarios materializes,
Bank of Bellingham will implement the appropriate measures to mitigate
disruption of service and risk of loss to the extent possible. Credit risk
mitigation efforts are currently being implemented. Management believes that
it is not possible to estimate the potential lost revenue due to the Year 2000
issue, as the extent and longevity of any potential problem cannot be
predicted.
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There can be no assurances that Bank of Bellingham's Year 2000 plan will
effectively address the Year 2000 issue, that Bank of Bellingham's estimates
of the timing and costs of completing the plan will ultimately be accurate or
that the impact of any failure of Bank of Bellingham or its third party
vendors and service providers to be Year 2000 compliant will not have a
material adverse effect on Bank of Bellingham's business, financial condition
or results of operations. However, management of Bank of Bellingham is
confident of its ability to complete the transition into the next century with
minimal disruption of normal service levels.
Bank of Bellingham's most recent on-site Year 2000 examination was
conducted by the Federal Deposit Insurance Corporation on February 1, 1999.
Horizon
Regulation. Financial institution regulators have increased their focus
upon Year 2000 issues and have issued guidance concerning the responsibilities
of senior management and directors. The sole subsidiary of Horizon, Horizon
Bank, has been examined by the Federal Deposit Insurance Corporation and the
State of Washington's Department of Financial Institutions on several
occasions, including both on-site and off-site exams. Horizon Bank's most
recent exam was conducted by the State of Washington in February 1999.
Regulations do not allow Horizon Bank to make public the results of the State
or Federal Deposit Insurance Corporation examinations. However, each report
is reviewed by Horizon Bank's board of directors, and the board is currently
satisfied with management's progress to date regarding Year 2000 issues.
The Federal Financial Institution Examination Council has issued several
interagency statements on Year 2000 issues. These statements require
financial institutions to proceed through five phases of Year 2000
preparedness. The following sections summarize these phases, and Horizon
Bank's progress to date in each phase:
Awareness Phase. Horizon Bank has established a formal Year 2000 plan
and created an internal Year 2000 committee, which has been meeting on this
issue since 1997. This phase focused on identifying those systems and
programs that had the potential of being affected by Year 2000 risks. This
phase also included educating Horizon Bank's employees about Year 2000 issues
and resulted in a bank wide effort to identify potential problems related to
the Year 2000. This phase was substantially completed early in 1998.
Assessment Phase. This phase focused on completing assessments of
hardware, software and other computer applications in order to identify risks
and monitor Year 2000 progress. Further, this phase included a prioritization
of Year 2000 risks, to identify which systems were mission critical systems
for Horizon Bank's business, and which were considered less important in terms
of potential adverse impact to Horizon Bank. This assessment was
substantially completed in mid 1998.
Renovation Phase. Following the assessment phase, Horizon Bank moved
into the renovation phase, which focused on identifying solutions to potential
Year 2000 problems with its systems and programs. During the fourth quarter
of 1998, Horizon Bank completed a major personal computer renovation, which
included new machines at all teller stations, and numerous other network
upgrades. While the primary purpose for this renovation was not related to
the Year 2000 issue, compliance efforts were enhanced by this project, since
computers with older BIOS chips are more likely to be susceptible to Year 2000
problems than newer computers. Horizon Bank decided, however, that even these
new machines would be tested for Year 2000 readiness. The renovation phase is
substantially completed at this time.
Validation Phase. This phase was designed to test the ability of
hardware and software to accurately process date sensitive data. Horizon Bank
is working with its data processor, Fiserv, as well as other vendors, to make
sure that their computers and software programs have been tested for Year 2000
readiness. As an example, Horizon Bank conducted extensive testing of the
Fiserv system in December 1998, and will have the opportunity for additional
testing in April 1999. Based on an analysis of the December 1998 test
results, along with the extensive amount of data received
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on the Year 2000 issue from Fiserv over the past two years, Horizon Bank is
satisfied with the progress made by its service provider in its Year 2000
efforts. In addition, Horizon Bank is satisfied with the results of the
testing of Horizon Bank's other vendors and internal computer systems, along
with the renovations that have been completed to date. Year 2000 testing
expenses are anticipated to total less than $50,000, the majority of which
have already been paid by Horizon Bank through the year ended December 31,
1998. Future expenses relating to Year 2000 issues are not anticipated to
have a material impact on Horizon Bank's financial statements. With the
exception of the April 1999 additional test date, the validation phase is
substantially complete at this time.
Implementation Phase. Horizon Bank has completed the implementation
phase for all systems currently being utilized. Any new systems deployed
prior to year-end will also be reviewed for Year 2000 compliance. In light of
the pending merger with the Bank of Bellingham, Horizon Bank's management will
be working closely with Bank of Bellingham's management to ensure that the
programs utilized by the Bank of Bellingham will not create any additional
Year 2000 concerns.
Early in 1999, Horizon Bank's Year 2000 focus shifted from the five
phases presented above, to the development of business resumption and
contingency plans. Guidelines provided by the Federal Financial Institution
Examination Council set forth four phases in this contingency planning
process, and the paragraphs below set forth Horizon Bank's progress to date in
these phases.
Organizational Planning Guidelines. This phase focused on establishing
organizational planning guidelines that define the business continuity
planning strategy for Horizon Bank, and the Federal Deposit Insurance
Corporation expects institutions to complete this phase prior to March 31,
1999. Horizon Bank has substantially completed this phase of the contingency
planning process.
Business Impact Analysis. Irrespective of best efforts towards Year 2000
compliance, the possibility exists that there may be an interruption of
business around the turn of the century. Therefore, Horizon Bank is working
on its business impact analysis, to assess the effects of potential system
failures in each core business process, such as deposit taking, check cashing,
cash withdrawals and lending services. This analysis will set forth Year 2000
event scenarios and consider the risks of both internal and external
infrastructure failures on each core business process and determine the
minimum acceptable level of outputs and services for each process. This
analysis will be conducted as a joint effort with the Bank of Bellingham, with
members from each institution's management team working on Year 2000 issues
from this point forward. While this analysis will be an ongoing process
during the remainder of 1999, the business impact analysis is expected to be
substantially completed by March 31, 1999.
Business Resumption Contingency Plan. Upon completion of the business
impact analysis, Horizon Bank will proceed in developing a business resumption
contingency plan. Said plan shall provide the framework to operate Horizon
Bank in the event that any of Horizon Bank's core business processes
experience Year 2000 related problems. Specifically, the plan shall set forth
logistical guidelines and time frames to assist Horizon Bank's personnel in
its business resumption contingency planning efforts. This plan shall be
considered a supplement to Horizon Bank's disaster recovery plan, already in
place. The business resumption contingency plan shall be substantially
completed prior to June 30, 1999.
Validation of Business Resumption Contingency Plan. Finally, Horizon
Bank will design methods to validate its business resumption contingency plan
to ensure that the plan will be effective, if needed. Said validation methods
shall be substantially completed by June 30, 1999.
While there can be no guarantee of total Year 2000 compliance, Horizon
Bank is working diligently to minimize potential impacts to its customers and
shareholders as a result of the turn of the century.
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DIRECTORS AND OFFICERS OF HORIZON
FOLLOWING THE MERGER
Following completion of the merger John M. Daughters will be added to the
board of directors of Horizon Bank. Mr. Daughters has been President and
Chief Executive Officer of Bank of Bellingham since its inception in 1992.
Prior to his employment with Bank of Bellingham, Mr. Daughters was Regional
Vice President with Security Pacific Bank. For information regarding the
directors and executive officer of Horizon, see Horizon's proxy statement
dated June 26, 1998 for its annual meeting of shareholders held on July 28,
1998, which is incorporated by reference in Horizon's Annual Report on Form
10-K for the year ended March 31, 1998, incorporated by reference in this
proxy statement/prospectus. See "Where You Can Find More Information."
DESCRIPTION OF HORIZON CAPITAL STOCK
General
Horizon has authorized two classes of stock: (1) 30,000,000 authorized
shares of Horizon common stock, par value $1.00 per share, 7,768,931of which
are issued and outstanding as of March 9, 1999; and (2) 10,000,000 authorized
shares of preferred stock, par value $1.00 per share, none of which have been
issued.
The following summary is qualified in its entirety by reference to the
Articles of Incorporation and Bylaws of Horizon, copies of which have been
filed as exhibits to the registration statement of which this proxy statement/
prospectus is a part.
Horizon Common Stock
The holders of Horizon common stock are entitled to one vote for each
share of Horizon common stock owned. Except as expressly provided by law and
except for any voting rights which may be conferred on any shares of preferred
stock issued by the Horizon board, all voting power is in Horizon common
stock. Holders of Horizon common stock may not cumulate their votes for the
election of directors.
Holders of Horizon common stock do not have preemptive rights to acquire
any additional, unissued or treasury shares of Horizon, or securities of
Horizon convertible into or carrying a right to subscribe to or acquire shares
of Horizon.
Holders of Horizon common stock will be entitled to receive dividends out
of funds legally available therefor, if and when properly declared by the
Horizon board.
However, the Horizon board may not declare or pay cash dividends on
Horizon common stock, and no Horizon common stock may be purchased by Horizon,
unless full dividends on outstanding preferred stock for all past dividend
periods and for the current dividend period, if any, have been declared and
paid.
On liquidation of Horizon, the holders of Horizon common stock are
entitled to share pro rata in any distribution of the assets of Horizon, after
the holders of shares of preferred stock have received liquidation preference
of their shares plus any cumulated but unpaid dividends, whether or not earned
or declared, if any, and after all other indebtedness of Horizon has been
retired.
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Preferred Stock
Horizon is authorized to issued 10,000,000 shares of preferred stock.
The preferred stock is available for issuance from time to time for various
purposes as determined by the Horizon board, including making future
acquisitions, raising additional equity capital and financing. Subject to
certain limits set by the Horizon articles, the preferred stock may be issued
on such terms and condition, and at such times and in such situations, as the
Horizon board in its sole discretion determines to be appropriate, without any
further approval or action by the shareholders, unless otherwise required by
laws, rules, regulations or agreements applicable to Horizon.
Moreover, except as otherwise limited by the Horizon articles or
applicable laws, rules or regulations, the Horizon board has the sole
authority to determine the relative rights and preferences of the preferred
stock and any series thereof without shareholder approval.
COMPARATIVE RIGHTS OF HOLDERS OF HORIZON COMMON STOCK
AND HOLDERS OF BELLINGHAM BANCORPORATION COMMON STOCK
Horizon is incorporated under the laws of the State of Washington and,
accordingly, the rights of Horizon's shareholders are governed by Horizon's
articles of incorporation, bylaws and the Washington Business Corporation Act.
Bellingham Bancorporation is also incorporated under the laws of the State of
Washington and, accordingly, the rights of Bellingham Bancorporation's
shareholders are governed by Bellingham Bancorporation's articles of
incorporation, bylaws, and the Washington Business Corporation Act.
Upon consummation of the merger, shareholders of Bellingham
Bancorporation will become shareholders of Horizon and, as such, their rights
will be governed by Horizon's articles of incorporation, bylaws and will
continue to be subject to the Washington Business Corporation Act. The
following is a summary of material differences between the rights of a Horizon
shareholder under Horizon's articles of incorporation and bylaws, on the one
hand, and the rights of a Bellingham Bancorporation shareholder under
Bellingham Bancorporation's articles of incorporation and bylaws, on the other
hand. This discussion is not intended to be a complete statement of the
differences affecting the rights of shareholders and is qualified in its
entirety by reference to the governing law and the articles of incorporation
and bylaws of each corporation.
Payment of Dividends
Horizon. Under Washington law, dividends may be paid only if, after
giving effect to the dividend, Horizon will be able to pay its debts as they
become due in the ordinary course of business and Horizon's total assets will
not be less than the sum of its total liabilities plus the amount that would
be needed, if Horizon were to be dissolved at the time of the dividend, to
satisfy the preferential rights of persons whose right to payment is superior
to those receiving the dividend.
Bellingham Bancorporation. Bellingham Bancorporation is subject to the
same requirements.
Size of Board of Directors
Horizon. Horizon's articles of incorporation provide that its board of
directors shall consist of not less than five nor more than 30 members. The
bylaws of Horizon provide that the board of directors may change the
authorized number of directors within the stated range. Changes in the size
of the range may be made by an amendment to Horizon's articles of
incorporation, which must be approved by at least a majority of the
outstanding shares entitled to vote. The current number of directors is set
at eight.
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Bellingham Bancorporation. Bellingham Bancorporation s articles of
incorporation provide that its board of directors shall consist of not less
than seven nor more than 17 members. The bylaws of Bellingham Bancorporation
provide that the board of directors may change the authorized number of
directors within the stated range. Changes in the size of the range may be
made by amendment to Bellingham Bancorporation's articles of incorporation.
The current number of directors is set at eight.
Classified Board of Directors
Horizon. Horizon's articles of incorporation provide for a board of
directors divided into three classes, with members of each class of directors
being elected for a term of three years. A classified board is one in which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes a change in the
composition of the board of directors, and a potential change in control of a
corporation, a lengthier and more difficult process. Since the terms of only
one-third of the incumbent directors expire each year, it requires at least
two annual elections for the shareholders to change a majority of the
directors. In the absence of the provisions of the articles of incorporation
classifying the board, all of the directors would be elected each year.
Bellingham Bancorporation. Bellingham Bancorporation's articles of
incorporation provide for a board of directors divided into three classes,
with members of each class of directors being elected for a term of three
years.
Cumulative Voting
Horizon. Horizon's articles of incorporation eliminate cumulative
voting. Cumulative voting entitles each shareholder to cast a number of votes
in the election of directors equal to the number of such shareholder's shares
of common stock multiplied by the number of directors to be elected and to
distribute such votes among one or more of the nominees to be elected. The
absence of cumulative voting rights limits the ability of minority
shareholders to obtain representation on the Horizon board.
Bellingham Bancorporation. Bellingham Bancorporation's articles of
incorporation also eliminate cumulative voting.
Removal of Directors
Horizon. Horizon's articles of incorporation provide that at a meeting
of shareholders called expressly for that purpose, any director or the entire
board of directors may be removed only for cause and only by a vote of the
holders of a majority of the shares then entitled to vote at such meeting.
The requirement that directors may be removed only for cause makes it
difficult for a person or entity immediately to acquire control of the Horizon
board through the removal of existing directors and the election of such
person's or entity's nominees to fill the newly created vacancies.
Bellingham Bancorporation. Bellingham Bancorporation's articles of
incorporation provide that directors may be removed from office for cause by
the affirmative vote of the majority of the shares represented at the meeting
or without cause by the affirmative vote of the holders of 66% or more of the
shares entitled to vote at a annual meeting called for that purpose.
Vacancies on the Board of Directors
Horizon. The bylaws of Horizon provide that any vacancy on the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors, and any director so appointed is to served for the unexpired term
of his or her predecessor.
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Bellingham Bancorporation. Bellingham Bancorporation's bylaws provide
that any vacancy on the board of directors may be filled by the affirmative
vote of a majority of the remaining directors and any directors so appointed
may only serve until the next meeting of shareholders.
Special Meetings of Shareholders and Action Without a Meeting
Horizon. The articles of incorporation of Horizon provide that special
meetings of shareholders may be called only by the president, board of
directors or by the written request of not less than a majority of the
outstanding shares of common stock. This restriction on the calling of
special shareholders' meetings may deter hostile takeovers of Horizon by
making it more difficult for a person or entity to obtain immediate control of
Horizon between one annual meeting and the next.
Bellingham Bancorporation. The bylaws of Bellingham Bancorporation
provide that special meetings of shareholders may be called by the President,
the board of directors or shareholders holding not less than 25% of the shares
entitled to vote at the meeting.
Advance Notice Requirements for Nominations of Directors and Presentation of
New Business at Meetings of Shareholders
Horizon. The bylaws of Horizon generally provide that any shareholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of shareholders must submit written notice to
Horizon at least 20 days in advance of the meeting, together with certain
information relating to the nomination or new business. Failure to comply
with these advance notice requirements will preclude such nominations or new
business from being considered at the meeting. Management believes that it is
in the best interests of Horizon and its shareholders to provide sufficient
time to enable management to disclose to shareholders information about a
dissident slate of nominations for directors. This advance notice requirement
may also give management time to solicit its own proxies in an attempt to
defeat any dissident slate of nominations, should management determine that
doing so is in the best interest of shareholders generally. Similarly,
adequate advance notice of shareholder proposals will give management time to
study such proposals and to determine whether to recommend to the shareholders
that such proposals be adopted. In certain instances, such provisions could
make it more difficult to oppose management's nominees or proposals, even if
shareholders believe such nominees or proposals are in their best interests.
Bellingham Bancorporation. Bellingham Bancorporation's bylaws provide
that nominations for the election of directors made by a shareholder must be
made not less than 30 days prior to the annual meeting.
Approval of Mergers, Consolidations, Sale of Substantially All Assets and
Dissolution
Horizon. Horizon's articles of incorporation require the approval of the
holders of (i) at least 80% of Horizon's outstanding shares of voting stock,
and (ii) at least a majority of Horizon's outstanding shares of voting stock,
not including shares held by a "related person," to approve certain "business
combinations," except in cases where the proposed transaction has been
approved in advance by a majority of those members of the Horizon board who
were directors prior to the time when the related person became a related
person. In the event the requisite approval of the board were given, the
normal vote requirement of applicable Washington law or the articles of
incorporation would apply, or, for certain transactions, no shareholder vote
would be necessary. The term "related person" is defined to include any
individual, corporation, partnership or other entity which owns beneficially
or controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of Horizon. These provisions apply to any "business combination"
which is defined to include among other things:
1. any merger or consolidation of Horizon with or into any related
person;
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2. any sale, lease, exchange, transfer, or other disposition of all or
a substantial part of the assets of Horizon or any of its
subsidiaries to any related person (the term "substantial part" is
defined to include more than 25% of Horizon's total assets);
3. any merger or consolidation of a related person into Horizon or any
subsidiary of Horizon;
4. any sale, lease, or other disposition of assets by the related person
to Horizon;
5. the issuance of any securities of Horizon or a subsidiary of Horizon
to a related person;
6. any reclassification of Horizon common stock;
7. any agreement or other arrangement providing for any of the
transactions described above; and
8. the adoption of a plan or proposal for liquidation or dissolution of
Horizon that was proposed by the related person.
The increased shareholder vote required to approve a business combination
may have the effect of foreclosing mergers and other business combinations
which a majority of shareholders deem desirable and place the power to prevent
such a merger or combination in the hands of a minority of shareholders.
Pursuant to Horizon's articles of incorporation, mergers, consolidations
and sales of substantially all of the assets of Horizon must, subject to
certain exceptions, be approved by the vote of the holders of a majority of
the outstanding shares of common stock of Horizon and any other affected class
of stock.
Horizon's articles of incorporation require Horizon's board of directors
to consider certain factors in addition to the amount of consideration to be
paid when evaluating certain business combinations or a tender or exchange
offer. These additional factors include: (i) the social and economic effects
of the transaction; (ii) the business and financial condition and earnings
prospects of the acquiring person or entity; and (iii) the competence,
experience, and integrity of the acquiring person or entity and its
management.
Bellingham Bancorporation. Pursuant to the Washington Business
Corporation Act, a plan of merger or share exchange must be recommended for
approval by the board of directors and approved by each voting group entitled
to vote separately on the plan by two-thirds of all the votes entitled to be
cast on the plan by that voting group. Action by the shareholders of the
surviving corporation on a plan of merger is not required if certain
conditions are met.
Bellingham Bancorporation's articles of incorporation allow, but do not
require, the Bellingham Bancorporation board to consider all relevant factors
in addition to the amount of consideration to be paid when evaluating certain
business combinations or a tender or exchange offer, including the social and
economic effects on the employees and customers of Bellingham Bancorporation
and the communities in which its offices are located and other factors deemed
relevant by the board of directors. The Bellingham Bancorporation's board did
consider these additional factors when evaluating the terms of the merger
transaction.
Indemnification of Officers and Directors and Limitation of Liability
Horizon. Pursuant to Horizon's articles of incorporation, Horizon will,
to the fullest extent permitted by the Washington Business Corporation Act,
indemnify the directors, officers and agents of Horizon for expenses,
judgments, fines and amounts paid in settlement incurred by such person in
connection with any action, suit or proceeding by reason of the fact that such
person is or was an agent of Horizon. In addition, Horizon's articles of
incorporation provide that the directors of Horizon shall not be personally
liable for monetary damages to Horizon for conduct as directors, except for
liabilities that involve intentional misconduct by the director, a knowing
violation of law by the director, conduct
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violating provisions of the Washington Business Corporation Act relating to
unlawful distributions by Horizon, or any transaction from which the director
will personally receive a benefit in money, property or services to which the
director is not legally entitled. This provision might, in certain instances,
discourage or deter shareholders or management from bringing a lawsuit against
directors for a breach of their duties even though such an action, if
successful, might have benefitted Horizon.
Bellingham Bancorporation. The articles of incorporation and bylaws of
Bellingham Bancorporation provide that it will indemnify its officers and
directors if any such person has been successful on the merits, or otherwise
in the defense of any action, suit or proceeding to which he or she is a party
by the reason of the fact that he or she was or is a director or officer of
Bellingham Bancorporation or any subsidiary thereof.
Additionally, the articles of incorporation and bylaws provide that each
person shall be indemnified for expenses and other costs even though not
successful in his or her defense if he or she acted in good faith and in a
manner he or she reasonably believed to be in and not opposed to the best
interests of Bellingham Bancorporation, and, with respect to a criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The provisions also provide that expenses incurred by such person
can be paid by Bellingham Bancorporation in advance of the final disposition
upon receipt of an agreement to repay such amounts if indemnification is not
ultimately warranted.
Amendment of Articles of Incorporation and Bylaws
Horizon. Horizon's articles of incorporation may be amended by the vote
of the holders of a majority of the outstanding shares of Horizon common
stock. The bylaws of Horizon may be amended by a majority vote of the board
of directors.
Bellingham Bancorporation. Bellingham Bancorporation's articles of
incorporation may be amended by a two-thirds vote of the outstanding shares of
Bellingham Bancorporation common stock. Bellingham Bancorporation's bylaws
may be amended, altered or repealed by only a two-thirds of the majority of
the Bellingham Bancorporation board or by the affirmative vote of two-thirds
of shareholders.
PROPOSAL II - ELECTION OF DIRECTORS
Bellingham Bancorporation's board of directors consist of eight members
as required by the bylaws. The Articles of Incorporation require the Board to
be divided into three classes as nearly equal in number as possible. The term
of office of only one class of directors expires in each year, and they are
elected for terms of three years, or until their successors are elected and
qualified. The board of directors has nominated for election as directors Cal
Leenstra, Charles Self and Rick S. Wilson for election at the meeting to serve
until the earlier of the closing of the merger or until his or her successors
are elected and appointed. The nominees are current members of the boards of
directors of Bellingham Bancorporation and the Bank of Bellingham. Each
director of Bellingham Bancorporation is also a director of the Bank of
Bellingham.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL NOMINEES FOR DIRECTORS
OF BELLINGHAM BANCORPORATION.
Unless otherwise specified on the proxy, it is intended that the persons
named in the proxies solicited by the board will vote for the election of the
nominees named below. Bellingham Bancorporation's Articles of Incorporation
prohibit stockholders from cumulating their votes for election of directors.
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If any nominee is unable to serve, the shares represented by all valid
proxies will be voted for the election of such substitute director as the
board of directors may recommend. At this time, the board knows of no reason
why any nominee might be unable to serve.
The Bellingham Bancorporation board recommends a vote "FOR" each of the
nominees named in the following table as directors of Bellingham
Bancorporation.
The following table sets forth certain information for each nominee and
for each director continuing in office after the meeting.
Year First
Elected Term to
Name Age Position Director (1) Expire
---- --- -------- ------------ ------
BOARD NOMINEES
Cal Leenstra 61 Past President and Chief 1992 2002(2)
Executive Officer, Kelstrup,
Inc.; Director, Washington
State Association of Realtors.
Charles Self 64 Retired Vice President of 1992 2002(2)
Finance, Wal-Mart Stores,
Inc.; independent investor.
Rick S. Wilson 55 President, Wilson Motors and 1992 2002(2)
Wilson Toyota.
DIRECTORS CONTINUING IN OFFICE AFTER MEETING
John M.
Daughters 57 President and Chief Executive 1992 2000
Officer of Bank of Bellingham;
formerly with Security Pacific
Bank; director Whatcom Medical
Bureau.
Leib Alexander 62 Retired dentist in Bellingham; 1992 2000
President Alexander & Associates;
owner of Hampton Inn, Bellingham,
Washington.
John K. Cavers 70 Retired President and Chief 1992 2001
Executive Officer, Comptec, Inc.
Martin L. Haines 60 Retired insurance broker and 1992 2001
major stockholder in Unity
Insurance Group, Inc.
Ann Jones 62 Former owner and operator of 1992 2001
KGMI-AM and KISM-FM radio.
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- -----------------
(1) Includes prior service on board of directors of Bank of Bellingham.
(2) Assumes election at the meeting.
LEGAL MATTERS
The validity of the Horizon common stock to be issued in the merger is
being passed upon for Horizon by Breyer & Associates PC, Washington, D.C.
Breyer & Associates PC will deliver an opinion concerning certain federal
income tax consequences of the merger.
EXPERTS
The consolidated financial statements incorporated in this proxy
statement/prospectus by reference from Horizon's Annual Report on Form 10-K
for the year ended March 31, 1998 have been audited by Moss Adams LLP,
independent auditors, as stated in their report, which is incorporated herein
by reference, and have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Bellingham Bancorporation at and
for the year ended September 30, 1998, have been included in this proxy
statement/prospectus in reliance upon the report of Moss Adams LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
The Bellingham Bancorporation board is not aware of any business to come
before the Bellingham Bancorporation annual meeting other than those matters
described above in this proxy statement/prospectus. However, if any other
matters should properly come before the Bellingham Bancorporation annual
meeting, it is intended that proxies in the accompanying form will be voted in
respect thereof in accordance with the judgment of the person or persons
voting the proxies.
WHERE YOU CAN FIND MORE INFORMATION
Horizon files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read
and copy such reports, statements and information at the Securities and
Exchange Commission's public reference room in Washington, D.C. You can
request copies of these documents, upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Reports, proxy statements and
other information filed by Horizon are also available on the Internet at the
Commission's World Wide Web site at http://www.sec.gov.
Horizon has filed a Registration Statement on Form S-4 (File No. 333-
74721) to register with the Commission the shares of Horizon to be issued to
Bellingham Bancorporation shareholders in the merger. This proxy statement/
prospectus is part of the registration statement and constitutes a prospectus
of Horizon and a proxy statement for Bellingham Bancorporation for the annual
meeting. As allowed by the Commission, this proxy statement/prospectus does
not contain all the information that shareholders can find in the registration
statement or the exhibits to the registration statement.
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The Commission allows Horizon to "incorporate by reference" information
into this proxy statement/prospectus, which means that Horizon can disclose
important information to you by referring you to another document filed
separately with the Commission. The information incorporated by reference is
deemed to be a part of this proxy statement/prospectus, except for any
information superseded by information contained directly in the proxy
statement/prospectus. This Prospectus incorporates by reference the following
documents that Horizon has filed with the Commission:
1. Horizon's annual report on Form 10-K for the year ended March 31,
1998;
2. Horizon's quarterly reports on Form 10-Q for the quarters ended June
30, 1998, September 30, 1998 and December 31, 1998; and
3. Horizon's current report on Form 8-K dated January 18, 1999.
Horizon incorporates by reference additional documents that it may file
with the Commission between the date of this proxy statement/prospectus and
the date of the annual meeting. These include periodic reports, such as
annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, as well as proxy statements.
Documents incorporated by reference are available from Horizon without
charge, excluding all exhibits unless specifically incorporated by reference
as an exhibit to this proxy statement/prospectus. Shareholders of Bellingham
Bancorporation may obtain documents incorporated by reference in this proxy
statement/prospectus by requesting them in writing or by telephone from
Richard P. Jacobson, Corporate Secretary, Horizon Financial Corp., 1500
Cornwall Avenue, Bellingham, Washington 98225 (telephone number: (360) 733-
3050). In order to ensure timely delivery of the documents, any request
should be made by May 12, 1999.
Horizon has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Horizon and
Bellingham Bancorporation has supplied all information contained in this proxy
statement/prospectus relating to Bellingham Bancorporation.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote your shares at the annual
meeting. We have not authorized anyone to provide you with information that
differs from that contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated April 16, 1999. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than that date, and neither the mailing of this proxy statement/
prospectus to stockholders not the issuance of shares of Horizon common stock
in the merger shall create any implication to the contrary. This proxy
statement/prospectus does not constitute an offer to sell, or a solicitation
of an offer to purchase, the Horizon common stock offered by this proxy
statement/prospectus, or does it constitute the solicitation of a proxy, in
any jurisdiction to or from any person to whom or from whom it is unlawful to
make such offer or solicitation.
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APPENDIX A
AGREEMENT AND PLAN OF MERGERS
AGREEMENT AND PLAN OF MERGERS, dated as of the 18th day of January 1999
(this "Agreement"), by and among HORIZON FINANCIAL CORP. (the "Company"),
HORIZON BANK, A SAVINGS BANK ("Horizon"), BELLINGHAM BANCORPORATION
("Bancorp") and BANK OF BELLINGHAM (the "Bank").
RECITALS:
(A) THE COMPANY. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Washington, with its
principal executive offices located in Bellingham, Washington. The Company is
a registered bank holding company with the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") under the Bank Holding Company Act of
1956, as amended. As of the date hereof, the Company has 30,000,000
authorized shares of common stock of $1.00 par value per share ("Company
Common Stock") and 10,000,000 shares of preferred stock of $1.00 par value per
share ("Company Preferred Stock") (no other class of capital stock being
authorized), of which 7,496,294 shares of Company Common Stock and no shares
of Company Preferred Stock are issued and outstanding.
(B) HORIZON. Horizon is a state stock savings bank duly organized and
existing under the laws of the United States, with its principal executive
offices located in Bellingham, Washington. As of the date hereof, Horizon has
30,000,000 authorized shares of common stock, par value $1.00 per share
("Horizon Common Stock") and 10,000,000 authorized shares of serial preferred
stock (no other class of capital stock being authorized), of which 1,000
shares of Horizon Common Stock and no shares of serial preferred stock are
outstanding. All of the issued and outstanding shares of Horizon Common Stock
are owned by the Company.
(C) BANCORP. Bancorp is a corporation duly organized and existing in
good standing under the laws of the State of Washington, with its principal
executive offices located in Bellingham, Washington. Bancorp is a registered
bank holding company with the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended. As of the date hereof, Bancorp has 600,000
authorized shares of common stock of $1.00 par value per share ("Bancorp
Common Stock"), (no other class of capital stock being authorized), of which
358,874 shares of Bancorp Common Stock and no shares of Bancorp Preferred
Stock, are issued and outstanding.
(D) THE BANK. The Bank is a state chartered bank duly organized and
existing under the laws of the State of Washington, with its principal
executive offices located in Bellingham, Washington. As of the date hereof,
the Bank has 600,000 authorized shares of common stock of $1.00 par value per
share (the "Bank Common Stock") and no authorized shares of preferred stock
(the "Bank Preferred Stock") (no class of capital stock being authorized), of
which 179,437 shares of the Bank Common Stock and no shares of the Bank
Preferred Stock are issued and outstanding. All of the issued and outstanding
shares of Bank Common Stock are owned by Bancorp.
(E) VOTING AGREEMENT. As a condition and an inducement to the Company's
willingness to enter into this Agreement, the directors and executive officers
of Bancorp and all shareholders owning in excess of 10% of the outstanding
shares of Bancorp have entered into agreements with the Company pursuant to
which, among other things, they have agreed to vote in favor of approval of
the transactions contemplated by this Agreement at the Bancorp Meeting (as
hereinafter defined).
(F) RIGHTS, ETC. Except as Previously Disclosed (as hereinafter
defined) in Schedule 4.01(C), there are no shares of capital stock of Bancorp
or the Bank authorized and reserved for issuance, neither Bancorp nor the Bank
has any Rights (as defined below) issued or outstanding and neither Bancorp
nor the Bank has any commitment to
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authorize, issue or sell any such shares or any Rights, except pursuant to
this Agreement. The term "Rights" means securities or obligations convertible
into or exchangeable for, or giving any person any right to subscribe for or
acquire, or any options, calls or commitments relating to, shares of capital
stock. There are no preemptive rights in respect of Bancorp Common Stock or
Bank Common Stock.
(G) APPROVALS. The Board of Directors of each of Bancorp, the Bank, the
Company and Horizon has approved, at meetings of each of such Boards of
Directors, this Agreement and has authorized the execution hereof in
counterparts.
In consideration of their mutual promises and obligations, the parties
hereto adopt and make this Agreement and prescribe the terms and conditions
thereof and the manner and basis of carrying it into effect, which shall be as
follows:
DEFINITIONS
(A) DEFINITIONS. Capitalized terms used in this Agreement have the
following meanings:
"Acquisition Transaction" means: (a) a merger or consolidation, or any
similar transaction, involving Bancorp or the Bank, (b) a purchase, lease or
other acquisition of all or substantially all of the assets of Bancorp or the
Bank, or (c) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of securities representing 10% or
more of the voting power of Bancorp or the Bank; or a bona fide proposal is
made by a third party to Bancorp or the Bank to engage in an Acquisition
Transaction and after such proposal is made any of the following events
occurs: Bancorp willfully breaches this Agreement and such breach entitles
the Company to terminate this Agreement; the holders of Bancorp Common Stock
do not approve this Agreement at the Bancorp Meeting; the Bancorp Meeting is
not held or is canceled prior to termination of this Agreement for reasons
other than the fault of the Company; or Bancorp's Board of Directors modifies
in a manner adverse to the Company the recommendation of Bancorp's Board of
Directors with respect to this Agreement.
"Agreement" means this Agreement and Plan of Mergers.
"Asset Classification" has the meaning assigned to such term in Section
4.01(T).
"Bancorp" means Bellingham Bancorporation.
"Bancorp Common Stock" has the meaning assigned to such term in Recital
(C).
"Bancorp Financial Reports" has the meaning assigned to such term in
Section 4.01(H).
"Bancorp Meeting" has the meaning assigned to such term in Section 5.03.
"Bancorp Option" has the meaning assigned to such term in Section 2.08.
"Bancorp Subsidiary(ies)" means any business entity five percent or more
of the equity interests of which are owned directly or indirectly by Bancorp.
"Bancorp Tax Returns" has the meaning assigned to such term in Section
4.01(Z).
"Bancorp Warrant" has the meaning assigned to such term in Section 2.08.
"Bank" means Bank of Bellingham.
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"Bank Common Stock" has the meaning assigned to such term in Recital (D).
"Bank Merger" has the meaning assigned to such term in Section 1.02(A).
"Bank Preferred Stock" has the meaning assigned to such term in Recital
(D).
"BIF" means the Bank Insurance Fund of the FDIC.
"Break-up Fee" has the meaning assigned to such term in Section 8.08.
"Business Day" means any day other than a Saturday, Sunday, or a legal
holiday in the State of Washington.
"Code" has the meaning assigned to such term in Section 4.01(Q)(2).
"Company" means Horizon Financial Corp.
"Company Common Stock"has the meaning assigned to such term in Recital
(A).
"Company Financial Reports" has the meaning assigned to such term in
Section 4.02(D).
"Company Option" has the meaning assigned to such term in Section 2.08.
"Company Preferred Stock"has the meaning assigned to such term in Recital
(A).
"Company Warrant" has the meaning assigned to such term in Section 2.08.
"Compensation and Benefit Plans" has the meaning assigned to such term in
Section 4.01(Q)(1).
"Continuing Bank" has the meaning assigned to such term in Section
1.02(A).
"Continuing Corporation" has the meaning assigned to such term in Section
1.01(A).
"Corporate Merger" has the meaning assigned to such term in Section
1.01(A).
"Derivatives Contract" has the meaning assigned to such term in Section
4.01(BB).
"Director" means the Director of the Washington Department of Financial
Institutions.
"Dissenters Shares" means the shares of Company Common stock held by
those shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.03.
"Effective Time" has the meaning assigned to such term in Section 1.03.
"Employment Agreement" shall mean any of Exhibits F-1 and F-2 attached
hereto.
"Environmental Law" means (1) any federal, state and local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, legal doctrine, order, judgment, decree, injunction, requirement or
agreement with any governmental entity, relating to (a) the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, groundwater, drinking water supply, surface land, subsurface
land, plant and
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animal life or any other natural resource) or to human health or safety, or
(b) the exposure to, or the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of Hazardous Material, in each case as amended and as now in effect,
including the Federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the
Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the
Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of
1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, and the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational
Safety and Health Act of 1970, each as amended and as now in effect, and (2)
any common law or equitable doctrine (including injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that
may impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of or exposure to any Hazardous
Material.
"ERISA" has the meaning assigned to such term in Section 4.01(Q)(2).
"ERISA Affiliate" has the meaning assigned to such term in Section 4.01
(Q)(3).
"ERISA Plans" has the meaning assigned to such term in Section 4.01(Q)
(2).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Exchange Agent" has the meaning assigned to such term in Section 2.04.
"Excluded Shares" has the meaning assigned to such term in Section 2.01
(B).
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"FHLB" means the Federal Home Loan Bank of Seattle, which is one of the
12 FHLBs that makes up the Federal Home Loan Bank System.
"GAAP" means generally accepted accounting principles consistently
applied.
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
including any oil or other petroleum product, toxic waste, pollutant,
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste or petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos, asbestos containing material, urea formaldehyde foam
insulation, lead and polychiorinated biphenyl.
"Horizon" means Horizon Bank, a savings bank.
"Horizon Common Stock" has the meaning assigned to such term in Recital
(B).
"Joint Proxy Statement/Prospectus" has the meaning assigned to such term
in Section 5.02.
"Loan/Fiduciary Property" means any property owned or controlled by the
Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries holds a security or other interest, and, where required by the
context, includes any such property where the Company or any of its
Subsidiaries constitutes the owner or operator of such property, but only with
respect to such property.
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"Material Adverse Effect" means with respect to any Party an event,
occurrence or circumstance (including (i) the making of any provisions for
possible loan and lease losses, write-downs of other real estate and taxes and
(ii) any breach of a representation or warranty contained herein by such
Party) that (a) has or is reasonably likely to have a material adverse effect
on the financial condition, results of operations, business or prospects of
such Party and its subsidiaries, taken as a whole, or (b) would materially
impair such Party's ability to perform its obligations under this Plan or the
Stock Option Agreement or the consummation of any of the transactions
contemplated hereby or thereby.
"Mergers" has the meaning assigned to such term in Section 1.02(A).
"Multiemployer Plans" has the meaning assigned to such term in Section
4.01(Q)(2).
"Nasdaq" means the National Association of Securities Dealers Automated
Quotations system.
"Option" has the meaning assigned to such term in the Stock Option
Agreement.
"Option Shares" has the meaning assigned to such term in the Stock Option
Agreement.
"Participation Facility" means any facility in which the Company or any
of its Subsidiaries participates in the management and, where required by the
context, includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section 4.01(Q)
(2).
"Previously Disclosed" means information provided by a Party in a
Schedule that is delivered by that Party to the other Party contemporaneously
with the execution of this Plan and specifically designated as information
"Previously Disclosed" pursuant to this Plan.
"Registration Statement" has the meaning assigned to such term in Section
5.02.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of the State of Washington.
"Rights" has the meaning assigned to such term in Recital (F).
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated thereunder.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" with respect to any entity means each partnership or
corporation, the majority of the outstanding partnership interests, capital
stock or voting power of which is (or upon the exercise of all outstanding
warrants, options and other rights would be) owned, directly or indirectly, at
the time in question by such entity.
"Taxes" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license,
excise, franchise, employment, withholding or similar taxes imposed on the
income, properties or operations of the respective Party or its Subsidiaries,
together with any interest, additions, or penalties with respect thereto and
any interest in respect of such additions or penalties.
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"Third Party" means a person within the meaning of Section 3(a)(9) and
13(d)(3) of the Exchange Act, excluding (1) Bancorp or any Bancorp Subsidiary
and (2) the Company or any subsidiary of the Company.
"Washington Department" has the meaning assigned to such term in Section
4.01(H).
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in
this Agreement or unless the context clearly requires otherwise, the terms
defined in this Plan include the plural as well as the singular; the words
"hereof," "herein," "hereunder," "in this Plan" and other words of similar
import refer to this Plan as a whole and not to any particular Article,
Section or other subdivision; and references in this Plan to Articles,
Sections, Schedules, and Exhibits refer to Articles and Sections of and
Schedules and Exhibits to this Plan. Whenever the words "include,"
"includes," or "including" are used in this Plan, they shall be deemed to be
followed by the words "without limitation." Unless otherwise stated,
references to Subsections refer to the Subsections of the Section in which the
reference appears. All pronouns used in this Plan include the masculine,
feminine and neuter gender, as the context requires. All accounting terms
used in this Plan that are not expressly defined in this Plan have the
respective meanings given to them in accordance with GAAP.
I. THE MERGERS
1.01. THE CORPORATE MERGER. Subject to the provisions of this
Agreement, at the Effective Time (as hereinafter defined):
(A) THE CONTINUING CORPORATION. Bancorp shall be merged with and into
Company pursuant to the terms and conditions set forth herein and pursuant to
the Plan of Merger attached hereto as Exhibit A (the "Corporate Merger").
Upon consummation of the Corporate Merger, the separate existence of Bancorp
shall cease and the Company (the "Continuing Corporation") shall survive.
(B) RIGHTS, ETC. The Continuing Corporation shall thereupon and
thereafter possess all of the rights, privileges, immunities and franchises,
of a public as well as of a private nature, of each of the merging
corporations; and all property, real, personal and mixed, and all debts due on
whatever account, and all and every other interest, of or belonging to or due
to each of the corporations so merged, shall be deemed to be vested in the
Continuing Corporation without further act or deed; and the title to any real
estate or any interest therein, vested in each of such corporations, shall not
revert or be in any way impaired by reason of the Corporate Merger.
(C) LIABILITIES. The Continuing Corporation shall thenceforth be
responsible and liable for all the liabilities, obligations and penalties of
each of the corporations so merged, in accordance with applicable law.
(D) CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS; OFFICERS. The
Certificate of Incorporation and Bylaws of the Continuing Corporation shall be
those of the Company, as in effect immediately prior to the Corporate Merger
becoming effective. The directors and officers of the Company in office
immediately prior to the Corporate Merger becoming effective shall be the
directors and officers of the Continuing Corporation, together with such
additional directors and officers as may thereafter be elected, who shall hold
office until such time as their successors are elected and qualified.
1.02. THE BANK MERGER. As soon as practicable following the
Effective Time:
(A) THE CONTINUING BANK. The Bank shall be merged into Horizon pursuant
to the terms and conditions set forth herein and pursuant to the Plan of
Merger attached hereto as Exhibit B (the "Bank Merger" and, together with the
Corporate Merger, the "Mergers"). Upon consummation of the Bank Merger, the
separate existence of the Bank shall cease and Horizon (the "Continuing Bank")
shall survive.
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(B) RIGHTS, ETC. The Continuing Bank shall thereupon and thereafter
possess all of the rights, privileges, immunities and franchises, of a public
as well as of a private nature, of each of the institutions so merged; and all
property, real, personal and mixed, and all debts due on whatever account, and
all and every other interest, of or belonging to or due to each of the
institutions so merged, shall be deemed to be vested in the Continuing Bank
without further act or deed; and the title to any real estate or any interest
therein, vested in each of such institutions, shall not revert or be in any
way impaired by reason of the Bank Merger.
(C) LIABILITIES. The Continuing Bank shall thenceforth be responsible
and liable for all the liabilities, obligations and penalties of each of the
institutions so merged, in accordance with applicable law.
(D) CHARTER; BYLAWS; DIRECTORS; OFFICERS. The Charter and Bylaws of the
Continuing Corporation shall be those of Horizon, as in effect immediately
prior to the Bank Merger becoming effective. The directors and officers of
Horizon in office immediately prior to the Bank Merger becoming effective
shall be the directors and officers of the Continuing Bank, together with such
additional directors and officers as may thereafter be elected, who shall hold
office until such time as their successors are elected and qualified.
(E) NAME. Subsequent to the Bank Merger and until September 30, 1999,
the former offices of the Bank will be operated as the Bank of Bellingham, a
division of Horizon Bank, a savings bank.
1.03. EFFECTIVE DATE. Subject to the conditions to the obligations
of the parties to effect the Mergers as set forth in Article VI, the effective
date (the "Effective Date") of the Corporate Merger shall be such date as the
Company shall notify Bancorp in writing not less than five days prior thereto,
which date shall be not later than the date set forth in Section 7.03 herein.
Prior to the Effective Date, the Company and Bancorp shall execute and deliver
to the Secretary of State of the State of Washington, Articles of Merger in
accordance with applicable law. The time on the Effective Date at which the
Corporate Merger becomes effective is referred to as the "Effective Time."
II. CONSIDERATION
2.01. CORPORATE MERGER CONSIDERATION. Subject to the provisions of
this Agreement, at the Effective Time:
(A) OUTSTANDING COMPANY COMMON STOCK. The shares of common stock of the
Company issued and outstanding immediately prior to the Effective Time shall,
on and after the Effective Time, remain as issued and outstanding shares of
Company Common Stock.
(B) OUTSTANDING BANCORP COMMON STOCK. Each share (excluding (i) shares
("Dissenters' Shares") that have not been voted in favor of approval of this
Agreement and with respect to which dissenters' rights have been perfected in
accordance with Section 23B.13 of the RCW or (ii) shares held by Bancorp or
any of its subsidiaries or by the Company or any of its subsidiaries, in each
case other than in a fiduciary capacity or as a result of debts previously
contracted ("Excluded Shares")) of Bancorp Common Stock issued and outstanding
immediately prior to the Effective Time shall become and be converted into, by
virtue of the Corporate Merger, automatically and without any action on the
part of the holder thereof, the right to receive 2.74 shares of Company Common
Stock.
2.02. STOCKHOLDER RIGHTS; STOCK TRANSFERS. At the Effective Time,
holders of Bancorp Common Stock shall cease to be, and shall have no rights
as, stockholders of Bancorp, other than to receive the consideration provided
under this Article II, without interest. After the Effective Time, there
shall be no transfers on the stock transfer books of Bancorp or the Continuing
Corporation of the shares of Bancorp Common Stock which were issued and
outstanding immediately prior to the Effective Time.
2.03. FRACTIONAL SHARES. Notwithstanding any other provision hereof,
no fractional shares of Company Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued
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in the Corporate Merger; instead, the Company shall pay to each holder of
Bancorp Common Stock who would otherwise be entitled to a fractional share an
amount in cash determined by multiplying such fraction by $13.75.
2.04 EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, the Company shall send or cause to be sent to each former stockholder of
Bancorp of record immediately prior to the Effective Date transmittal
materials for use in exchanging such stockholder's certificates for Company
Common Stock for the consideration set forth in this Article II. The
certificates representing the shares of Company Common Stock into which shares
of such shareholder's Bancorp Common Stock are converted on the Effective
Date, any fractional share checks which such stockholder shall be entitled to
receive, and any dividends paid on such shares of Company Common Stock for
which the record date for determination of stockholders entitled to such
dividends is on or after the Effective Date, will be delivered to such
stockholder only upon delivery to an independent exchange agent selected by
the Company (the "Exchange Agent") of the certificates representing all of
such shares of Bancorp Common Stock (or indemnity satisfactory to the Company
and the Exchange Agent, in their judgement, if any of such certificates are
lost, stolen or destroyed). No interest will be paid on any such fractional
share checks or dividends to which the holder of such shares shall be entitled
to receive upon such delivery. Certificates surrendered for exchange by any
person constituting an "affiliate" of Bancorp for purposes of Rule 145 of the
Securities Act , shall not be exchanged for certificates representing Company
Common Stock until the Company has received a written agreement from such
person as specified in Section 5.17.
2.05 ANTI-DILUTION PROVISIONS. In the event the Company changes the
number of shares of Company Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization
or similar transaction with respect to the outstanding Company Common Stock
and the record date therefor shall be prior to the Effective Date, the
Exchange Ratio shall be proportionately adjusted.
2.06 EXCLUDED SHARES; DISSENTERS SHARES. Each of the Excluded Shares
shall be canceled and retired at the Effective Time, and no consideration
shall be issued in exchange therefor. Dissenters' Shares shall be purchased
and paid for in accordance with Section 23B.13 of the RCW.
2.07 RESERVATION OF RIGHT TO REVISE TRANSACTION. The Company may at any
time change the method of effecting the acquisition of Bancorp and the Bank
(including without limitation the provisions of this Article II) if and to the
extent it deems such change to be desirable; PROVIDED, HOWEVER, that no such
change shall (i) alter or change the amount or kind of consideration to be
issued to holders of Bancorp Common Stock as provided for in this Agreement or
(ii) adversely affect the tax treatment to Bancorp stockholders, individually
or collectively, as a result of receiving such consideration.
2.08 OPTIONS AND WARRANTS. At the Effective Time, by virtue of the
Corporate Merger, and without any action on the part of any holder of an
option, each option granted by Bancorp to purchase shares of Bancorp Common
Stock ("Bancorp Option") that is then outstanding and unexercised shall be
converted into and become an option to purchase Company Common Stock ("Company
Option") on the same terms and conditions as are in effect with respect to the
Bancorp Option immediately prior to the Effective Time and each warrant to
purchase Bancorp Common Stock ("Bancorp Warrant") shall be converted into and
become a warrant to purchase Company Common Stock ("Company Warrant"), except
that (i) each such Company Option and Company Warrant may be exercised solely
for shares of Company Common Stock, (ii) the number of shares of Company
Common Stock subject to such Company Option and Company Warrant shall be equal
to the number of shares of Bancorp Common Stock subject to such Option and
Warrant immediately prior to the Effective Time multiplied by 2.74, the
product being rounded, if necessary, up or down to the nearest whole share,
and (iii) the per share exercise price under each such Company Option and
Company Warrant shall be adjusted by dividing the per share exercise price of
the Bancorp Option and the Bancorp Warrant by 2.74 and rounding up to the
nearest cent. The number of shares of Bancorp Common Stock which are issuable
upon exercise of Options and Warrants as of the date hereof are Previously
Disclosed in Schedule 2.08.
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III. ACTIONS PENDING CONSUMMATION
Without the prior written consent of the Company, each of Bancorp and the
Bank shall conduct its and each of the Bancorp Subsidiaries' (as hereinafter
defined) business in the ordinary and usual course consistent with past
practice and shall use its best efforts to maintain and preserve its and each
of the Bancorp Subsidiaries' business organization, employees and advantageous
business relationships and retain the services of its and each of the Bancorp
Subsidiaries' officers and key employees, and each of Bancorp and the Bank
will not, and will cause each of the Bancorp Subsidiaries not to, agree to:
3.01. CAPITAL STOCK. Except for or as otherwise permitted in or
expressly contemplated by this Agreement or as Previously Disclosed in
Schedule 4.01(C), issue, sell or otherwise permit to become outstanding any
additional shares of capital stock of Bancorp, the Bank or any Bancorp
Subsidiary, or any Rights with respect thereto, or enter into any agreement
with respect to the foregoing, or permit any additional shares of Bancorp
Common Stock to become subject to grants of employee stock options, stock
appreciation rights or similar stock based employee compensation rights.
3.02. DIVIDENDS, ETC. Make, declare or pay any dividend on or in
respect of, or declare or make any distribution on, or directly or indirectly
combine, redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock or, other than as permitted in or contemplated by this
Agreement, authorize the creation or issuance of, or issue, any additional
shares of its capital stock or any Rights with respect thereto.
3.03. INDEBTEDNESS; LIABILITIES; ETC. Other than in the ordinary
course of business consistent with past practice, incur any indebtedness for
borrowed money, assume, guarantee, endorse or otherwise as an accommodation
become responsible or liable for the obligations of any other individual,
corporation or other entity.
3.04. LINE OF BUSINESS; OPERATING PROCEDURES; ETC. Except as may be
directed by any regulatory agency, (i) change its lending, investment,
liability management or other material banking policies in any material
respect, except such changes as are in accordance and in an effort to comply
with Section 5.10, or (ii) commit to incur any further capital expenditures
beyond those Previously Disclosed in Schedule 3.04 other than in the ordinary
course of business and not exceeding $5,000 individually or $10,000 in the
aggregate.
3.05. LIENS AND ENCUMBRANCES. Other than in the ordinary course of
business consistent with prior business activities, impose, or suffer the
imposition, on any shares of capital stock of any of the Bancorp Subsidiaries,
or on any of its or the Bancorp Subsidiaries' other assets, any lien, charge
or encumbrance, or permit any such lien, charge or encumbrance to exist.
3.06. COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously
Disclosed in Schedule 3.06, enter into or amend any employment, severance or
similar agreement or arrangement with any of its directors, officers or
employees, or grant any salary or wage increase, amend the terms of any stock
option or increase any employee benefit (including incentive or bonus
payments), except normal individual increases in regular compensation to
employees in the ordinary course of business consistent with past practice.
3.07. BENEFIT PLANS. Except as Previously Disclosed in Schedule
3.07, enter into or modify (except as may be required by applicable law) any
pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare contract, plan or arrangement, or any trust
agreement related thereto, in respect of any of its directors, officers or
other employees, including without limitation taking any action that
accelerates the vesting or exercise of any benefits payable thereunder.
3.08. CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion
of its assets, business or properties, which is material to Bancorp and the
Bancorp Subsidiaries taken as a whole, or merge or consolidate with, or
acquire all or any portion of, the business or property of any other entity
which is material to Bancorp and the
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Bancorp Subsidiaries taken as a whole (except foreclosures or acquisitions by
the Bank in a fiduciary capacity, in each case in the ordinary course of
business consistent with past practice).
3.09. AMENDMENTS. Amend its Articles of Incorporation, Charter or
Bylaws.
3.10. CLAIMS. Settle any claim, litigation, action or proceeding
involving any liability for money damages in excess of $25,000 or restrictions
upon the operations of Bancorp or any Bancorp Subsidiary.
3.11 CONTRACTS. Except as previously disclosed on Schedule 3.11,
enter into, renew, terminate or make any change in any material contract,
agreement or lease, except in the ordinary course of business consistent with
past practice with respect to contracts, agreements and leases that are
terminable by it without penalty on more than 60 days prior written notice.
3.12. LOANS. Extend credit other than in the ordinary course of
business consistent with prior lending practices.
3.13 DEPOSIT RATES. Change the pricing structure of its deposit
liabilities, except in the ordinary course of business consistent with past
practice.
IV. REPRESENTATIONS AND WARRANTIES
4.01. REPRESENTATIONS AND WARRANTIES OF BANCORP AND THE BANK. Each
of Bancorp and the Bank hereby represents and warrants to the Company and
Horizon as follows:
(A) RECITALS. The facts set forth in the Recitals of this Agreement
with respect to it are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. It is duly qualified to do
business and is in good standing in the States of the United States and
foreign jurisdictions where the failure to be duly qualified, individually or
in the aggregate, is reasonably likely to have a Material Adverse Effect (as
hereinafter defined) on it. Each of Bancorp and the Bancorp Subsidiaries has
in effect all federal, state, local, and foreign governmental authorizations
necessary for it to own or lease its properties and assets and to carry on its
business as it is now conducted, the absence of which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(C) SHARES. The outstanding shares of it are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive
rights. Except as Previously Disclosed in Schedule 4.01(C), there are no
shares of capital stock or other equity securities of Bancorp or the Bank
outstanding and no outstanding Rights with respect thereto.
(D) BANCORP SUBSIDIARIES. Bancorp has Previously Disclosed in Schedule
4.01(D) a list of all the Bancorp Subsidiaries. Each of the Bancorp
Subsidiaries that is a banking association is an "insured depository
institution" as defined in the Federal Deposit Insurance Act and applicable
regulations thereunder. No equity securities of any of the Bancorp
Subsidiaries are or may become required to be issued (other than to Bancorp or
a wholly-owned Bancorp Subsidiary) by reason of any Rights with respect
thereto. There are no contracts, commitments, understandings or arrangements
by which any of the Bancorp Subsidiaries is or may be bound to sell or
otherwise issue any shares of its capital stock, and there are no contracts,
commitments, understandings or arrangements relating to the rights of Bancorp
or the Bank, as applicable, to vote or to dispose of such shares. All of the
shares of capital stock of each Bancorp Subsidiary held by Bancorp or a
Bancorp Subsidiary are fully paid and nonassessable and are owned by Bancorp
or a Bancorp Subsidiary free and clear of any charge, mortgage, pledge,
security interest, restriction, claim, lien or encumbrance. Each Bancorp
Subsidiary is in good standing under the laws of the jurisdiction in which it
is
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incorporated or organized, and is duly qualified to do business and in good
standing in the jurisdictions where the failure to be duly qualified is
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on it. Except as Previously Disclosed in Schedule 4.01(D),
Bancorp does not own beneficially, directly or indirectly, any shares of any
equity securities or similar interests of any corporation, bank, partnership,
joint venture, business trust, association or other organization. The
deposits of the Bank are insured by the BIF of the FDIC. The Bank is a member
in good standing with the FHLB of Seattle.
(E) CORPORATE POWER. It and each of the Bancorp Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to any necessary receipt of approval
by its stockholders referred to in Section 6.01, this Agreement has been
authorized by all necessary corporate action of it and is a valid and binding
agreement of it enforceable against it in accordance with its terms, subject
as to enforcement as to bankruptcy, insolvency and other similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(G) NO DEFAULTS. Subject to the approval by its stockholders referred
to in Section 6.01, the required regulatory approvals referred to in Section
6.02, and the required filings under federal and state securities laws, and
except as Previously Disclosed in Schedule 4.01(G), the execution, delivery
and performance of this Agreement and the consummation by it of the
transactions contemplated hereby, does not and will not (i) constitute a
breach or violation of, or a default under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement,
indenture or instrument of it or of any of the Bancorp Subsidiaries or to
which it or any of the Bancorp Subsidiaries or its or their properties is
subject or bound, which breach, violation or default is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it,
(ii) constitute a breach or violation of, or a default under, its Articles of
Incorporation, Charter or Bylaws, or (iii) require any consent or approval
under any such law, rule, regulation, judgment, decree, order, governmental
permit or license or the consent or approval of any other party to any such
agreement, indenture or instrument, other than any such consent or approval,
which if not obtained, would not be reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on Bancorp.
(H) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule
4.01(H), (i) as to Bancorp, its audited consolidated balance sheet as of
September 30, 1998 and 1997 and related consolidated statements of income and
changes in stockholders' equity and cash flows for the years ended September
30, 1998, 1997 and 1996, and (ii) as to the Bank, its call report for the
fiscal year ended September 30, 1998, and all other financial reports filed or
to be filed subsequent to September 30, 1998, in the form filed with the FDIC
and the Washington Department of Banking ("Washington Department") (together,
the "Bancorp Financial Reports") did not and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Bancorp Financial
Reports (including the related notes and schedules thereto) fairly presents
and will fairly present the financial position of the entity or entities to
which it relates as of its date and each of the statements of income and
changes in stockholders' equity and cash flows or equivalent statements in the
Bancorp Financial Reports (including any related notes and schedules thereto)
fairly presents and will fairly present the results of operations, changes in
stockholders' equity and cash flows, as the case may be, of the entity or
entities to which it relates for the periods set forth therein, in each case
in accordance with generally accepted accounting principles consistently
applied during the periods involved, except in each case as may be noted
therein, subject to normal and recurring year-end audit adjustments in the
case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. None of Bancorp or the Bancorp
Subsidiaries has any obligation or liability (contingent or otherwise) that,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it, except (i) as reflected in Bancorp Financial Reports
prior to the date of this Agreement, and (ii) for commitments and obligations
made, or liabilities incurred, in the ordinary course of its business
consistent with past practice since September 30, 1998. Since September 30,
1998, none of Bancorp or the Bancorp Subsidiaries
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has incurred or paid any obligation or liability (including any obligation or
liability incurred in connection with any acquisitions in which any form of
direct financial assistance of the federal government or any agency thereof
has been provided to any Bancorp Subsidiary) which, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.01(J),
since September 30, 1998, no events have occurred which, individually or in
the aggregate, have had or are reasonably likely to have a Material Adverse
Effect on it.
(K) PROPERTIES. Except as reserved against in the Bancorp Financial
Reports, Bancorp and the Bancorp Subsidiaries have good and marketable title,
free and clear of all liens, encumbrances, charges, defaults, or equities of
any character, to all of the properties and assets, tangible and intangible,
reflected in the Bancorp Financial Reports as being owned by Bancorp or the
Bancorp Subsidiaries as of the dates thereof other than those that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on it, except those properties or assets sold or otherwise
disposed of in the ordinary course of business. All buildings and all material
fixtures, equipment, and other property and assets which are held under leases
or subleases by any of Bancorp or Bancorp Subsidiaries are held under valid
leases or subleases enforceable in accordance with their respective terms,
other than any such exceptions to validity or enforceability that,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect on Bancorp.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.01(L), no litigation, proceeding or controversy before any court or
governmental agency is pending which, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on Bancorp or which
alleges claims under any fair lending law or other law relating to
discrimination, including, without limitation, the Equal Credit Opportunity
Act, the Fair Housing Act, the Community Reinvestment Act and the Home
Mortgage Disclosure Act, and, to the best of its knowledge, no such
litigation, proceeding or controversy has been threatened; and except as
Previously Disclosed in Schedule 4.01(L), neither it nor any of the Bancorp
Subsidiaries or any of its or their material properties or their officers,
directors or controlling persons is a party to or is subject to any order,
decree, agreement, memorandum of understanding or similar arrangement with, or
a commitment letter or similar submission to, any federal or state
governmental agency or authority charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits (together with
any and all agencies or departments of federal, state or local government
(including, without limitation, the Washington Department, the FHLB, the
Federal Reserve Board, the FDIC, the Internal Revenue Service, the Department
of Revenue of the State of Washington, the Securities Exchange Commission
("SEC") and any other federal or state bank, or other financial institution,
insurance and securities regulatory authorities, the "Regulatory
Authorities")) and neither it nor any of the Bancorp Subsidiaries has been
advised by any of such Regulatory Authorities that such authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum or
understanding, commitment letter or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in Schedule
4.01(M), each of Bancorp and the Bancorp Subsidiaries:
(1) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with,
all Regulatory Authorities that are required in order to permit it to own its
businesses presently conducted and that are material to the business of
Bancorp and the Bancorp Subsidiaries taken as a whole; all such permits,
licenses, certificates of authority, orders and approvals are in full force
and effect and, to the best of its knowledge, no suspension or cancellation of
any of them is threatened; and all such filings, applications and
registrations are current;
(2) has received no notification or communication from
any Regulatory Authority or the staff thereof (i) asserting that any of
Bancorp or the Bancorp Subsidiaries is not in compliance with any
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of the statutes, regulations or ordinances which such Regulatory Authority
enforces, which, as a result of such noncompliance in any such instance,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on Bancorp, (ii) threatening to revoke any license, franchise,
permit or governmental authorization, which revocation, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Bancorp
or the Bancorp Subsidiaries, or (iii) requiring any of Bancorp or the Bancorp
Subsidiaries (or any of its officers, directors or controlling persons) to
enter into a cease and desist order, agreement or memorandum of understanding
(or requiring the board of directors thereof to adopt any resolution or
policy);
(3) is not required to give prior notice to any federal
banking or thrift agency of the proposed addition of an individual to its
board of directors or the employment of an individual as a senior executive;
and
(4) is in compliance in all material respects with all
fair lending laws or other laws relating to discrimination, including, without
limitation, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Community Reinvestment Act and the Home Mortgage
Disclosure Act.
(N) MATERIAL CONTRACTS.
(1) Except as Previously Disclosed in Schedule 4.01(N),
(and with a true and correct copy of the document or other item in question
attached to such Schedule), neither Bancorp nor any Bancorp Subsidiary is a
party or subject to any of the following (whether written or oral, express or
implied):
(i) any agreement, arrangement or commitment (a) not
made in the ordinary course of business or (b) pursuant to which Bancorp or
any Bancorp Subsidiary is or may become obligated to invest in or contribute
capital to any Bancorp Subsidiary or any other entity;
(ii) any agreement, indenture or other instrument not
disclosed in the Bancorp Financial Reports relating to the borrowing of money
by Bancorp or any Bancorp Subsidiary or the guarantee by Bancorp or any
Bancorp Subsidiary of any such obligation (other than trade payables or
instruments related to transactions entered into in the ordinary course of
business by any Bancorp Subsidiary, such as deposits, Fed Funds borrowings and
repurchase agreements);
(iii) any contract containing covenants that limit
the ability of Bancorp or any Bancorp Subsidiary to compete in any line of
business or with any person or containing any restriction of the geographical
area in which, or method by which, Bancorp or any Bancorp Subsidiary may carry
on its business (other than as may be required by law or any applicable
Regulatory Authority);
(iv) any contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K promulgated
by the SEC;
(v) any lease with annual rental payments
aggregating $10,000 or more;
(vi) consulting agreement (other than data
processing, software programming and licensing contracts entered into in the
ordinary course of business) involving the payment of more than $10,000 per
annum;
(vii) any agreement with any executive officer or
other key employee of Bancorp or any Bancorp Subsidiary the benefits of which
are contingent, or the terms of which are materially altered or any payments
or rights are accelerated, upon the occurrence of a transaction involving
Bancorp or any of Bancorp Subsidiaries of the nature contemplated by this
Agreement;
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(viii) any agreement with respect any executive
officer of Bancorp or any Bancorp Subsidiary providing any term of employment
or compensation guarantee extending for a period longer than one year and for
the payment of in excess of $50,000 per annum; or
(ix) agreement or plan, including any stock option
plan, stock appreciation rights plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
(2) Except as Previously Disclosed on Schedule 4.01(N),
no officer or director of Bancorp or any "associate" (as such term is defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of any such officer or director, has any material interest in
any material contract or property (real or personal), tangible or intangible,
used in or pertaining to the business of Bancorp or any Bancorp Subsidiary.
(3) None of Bancorp or the Bancorp Subsidiaries is in
default under any contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which it is a party, by which its
respective assets, business or operations may be bound or affected, or under
which it or any of its respective assets, business or operations receives
benefits, which default, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect on Bancorp, and there has not
occurred any event that, with the lapse of time or the giving of notice or
both, would constitute such a default. Except as Previously Disclosed in
Schedule 4.01(N), neither Bancorp nor any Bancorp Subsidiary is subject to or
bound by any contract containing covenants which limit the ability of Bancorp
or any Bancorp Subsidiary to compete in any line of business or with any
person or which involve any restriction of geographical area in which, or
method by which, Bancorp or any Bancorp Subsidiary may carry on its business
(other than as may be required by law or any applicable Authority).
(O) REPORTS. Since January 1, 1996, each of Bancorp and the Bancorp
Subsidiaries has filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with (i) the FDIC, (ii) the Washington Department, (iii) the FHLB and the
FHLB System, (iv) the Federal Reserve Board and (v) any other applicable
Regulatory Authorities. As of their respective dates (and without giving
effect to any amendments or modifications filed after the date of this
Agreement with respect to reports and documents filed before the date of this
Agreement), each of such reports and documents, including the financial
statements, exhibits and schedules thereto, complied in all material respects
with all of the statutes, rules and regulations enforced or promulgated by the
Regulatory Authority with which they were filed and did not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(P) NO BROKERS. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried on by it directly with the
other parties hereto and no action has been taken by it that would give rise
to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment.
(Q) EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.01(Q)(1) contains a complete list of all
bonus, deferred compensation, pension, retirement, profit-sharing, thrift
savings, employee stock ownership, stock bonus, stock purchase restricted
stock and stock option plans, all employment or severance contracts, all
personnel codes, practices, procedures, policies, manuals, affirmative action
materials, all medical, dental, health and life insurance plans, all other
employee benefit plans, contracts or arrangements and any applicable
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"change of control" or similar provisions in any plan, contract or
arrangement maintained or contributed to by it or any of the Bancorp
Subsidiaries for the benefit of employees, former employees, directors, former
directors or their beneficiaries (the "Compensation and Benefit Plans"). True
and complete copies of all Compensation and Benefit Plans, including, but not
limited to, any trust instruments and/or insurance contracts, if any, forming
a part thereof, and all amendments thereto have been supplied to the Company.
(2) All "employee benefit plans" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), other than "multiemployer plans" within the meaning of
Section 3(37) of ERISA ("Multiemployer Plans"), covering employees or former
employees of it and the Bancorp Subsidiaries (the "ERISA Plans"), to the
extent subject to ERISA, are in substantial compliance with ERISA. Except as
Previously Disclosed in Schedule 4.01(Q)(2) each ERISA Plan which is an
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA
("Pension Plan") and which is intended to be qualified under Section 401(a) of
the Internal Revenue Code of 1986 (as amended, the "Code") has received a
favorable determination letter from the Internal Revenue Service, and it is
not aware of any circumstances reasonably likely to result in the revocation
or denial of any such favorable determination letter or the inability to
receive such a favorable determination letter. There is no material pending
or, to its knowledge, threatened litigation relating to the ERISA Plans.
Neither it nor any of the Bancorp Subsidiaries has engaged in a transaction
with respect to any ERISA Plan that could subject it or any of the Bancorp
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or
Section 502(i) of ERISA in an amount which would be material.
(3) No liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by it or any of the Bancorp
Subsidiaries with respect to any ongoing, frozen or terminated "single-
employer plan," within the meaning of Section 4001(a)(15) of ERISA, currently
or formerly maintained by any of them, or the single-employer plan of any
entity which is considered one employer with it under Section 4001(a)(15) of
ERISA or Section 414 of the Code (an "ERISA Affiliate"). Neither it nor any
of the Bancorp Subsidiaries presently contributes to a Multiemployer Plan, nor
have they contributed to such a plan within the past five calendar years. No
notice of a "reportable event," within the meaning of Section 4043 of ERISA
for which the 30-day reporting requirement has not been waived, has been
required to be filed for any Pension Plan or by any ERISA Affiliate within the
past 12-month period.
(4) All contributions required to be made under the terms
of any ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. Neither it nor any of the Bancorp Subsidiaries
has provided, or is required to provide, security to any Pension Plan or to
any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29)
of the Code.
(5) Under each Pension Plan which is a single-employer
plan, as of the last day of the most recent plan year, the actuarially
determined present value of all "benefit liabilities," within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan's most recent actuarial valuation) did not
exceed the then current value of the assets of such plan, and there has been
no material change in the financial condition of such plan since the last day
of the most recent plan year.
(6) Neither it nor any of the Bancorp Subsidiaries has
any obligations for retiree health and life benefits under any plan, except as
set forth in Schedule 4.01(Q)(6). There are no restrictions on the
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rights of it or any of the Bancorp Subsidiaries to amend or terminate any
such plan without incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule
4.01(Q)(7), neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment compensation,
golden parachute or otherwise) becoming due to any director or any employee of
it or any of the Bancorp Subsidiaries under any Compensation and Benefit Plan
or otherwise from it or any of the Bancorp Subsidiaries, (ii) increase any
benefits otherwise payable under any Compensation and Benefit Plan, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefit.
(R) NO KNOWLEDGE. It knows of no reason why the regulatory approvals
referred to in Section 6.02 should not be obtained.
(S) LABOR AGREEMENTS. Neither it nor any Bancorp Subsidiary is a party
to, or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
or any Bancorp Subsidiary the subject of a proceeding asserting that it or any
such subsidiary has committed an unfair labor practice (within the meaning of
the National Labor Relations Act) or seeking to compel it or such subsidiary
to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it or any
Bancorp Subsidiary, pending or, to the best of its knowledge, threatened, nor
is it aware of any activity involving its or any Bancorp Subsidiary's
employees seeking to certify a collective bargaining unit or engaging in any
other organization activity.
(T) ASSET CLASSIFICATION. It has Previously Disclosed in Schedule
4.01(T) a list, accurate and complete in all material respects, of the
aggregate amounts of loans, extensions of credit or other assets of Bancorp
and the Bancorp Subsidiaries that have been classified by it as of September
30, 1998 (the "Asset Classification"); and no amounts of loans, extensions of
credit or other assets that have been classified as of September 30, 1998 by
any regulatory examiner as "Other Loans Specially Mentioned," "Substandard,"
"Doubtful," "Loss," or words of similar import are excluded from the amounts
disclosed in the Asset Classification, other than amounts of loans, extensions
of credit or other assets that were charged off by Bancorp or any Bancorp
Subsidiary prior to September 30, 1998.
(U) ALLOWANCE FOR LOAN AND LEASE LOSSES. The allowance for loan and
lease losses shown on the consolidated balance sheets of Bancorp included in
the September 30, 1998 Bancorp Financial Reports was, and the allowance for
possible loan losses to be shown on subsequent Bancorp Financial Reports, will
be, adequate in the opinion of the Board of Directors and management of
Bancorp, to provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding (including accrued interest
receivable) as of the date thereof.
(V) INSURANCE. Each of Bancorp and the Bancorp Subsidiaries has taken
all requisite action (including without limitation the making of claims and
the giving of notices) pursuant to its directors' and officers' liability
insurance policy or policies in order to preserve all rights thereunder with
respect to all matters that are known to Bancorp, except for such matters
which, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on it. Previously Disclosed in Schedule 4.01(V) is a
list of all insurance policies maintained by or for the benefit of Bancorp or
the Bancorp Subsidiaries or their directors, officers, employees or agents.
(W) STATE TAKEOVER LAWS; ARTICLES OF INCORPORATION. It has taken all
necessary action to exempt this Agreement and the transactions contemplated
hereby and thereby from, and this Agreement and the transactions contemplated
hereby are exempt from, (i) any applicable state takeover laws, and (ii) any
supermajority provisions or other provisions imposing special conditions on
business combinations contained in Bancorp's Articles of Incorporation.
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(X) NO FURTHER ACTION. It has taken all action so that the entering
into of this Agreement and the consummation of the transactions contemplated
hereby (including without limitation the Merger), or any other action or
combination of actions, or any other transactions, contemplated hereby or
thereby do not and will not (i) require a vote of stockholders (other than as
set forth in Section 6.01), or (ii) result in the grant of any rights to any
person under the Articles of Incorporation, Charter or Bylaws of Bancorp or
any Bancorp Subsidiary or under any agreement to which Bancorp or any Bancorp
Subsidiary is a party, or (iii) restrict or impair in any way the ability of
the Company to exercise the rights granted hereunder.
(Y) ENVIRONMENTAL MATTERS.
(1) To its knowledge, it and each of the Bancorp
Subsidiaries, the Participation Facilities and the Loan/Fiduciary Properties
(each as defined below) are, and have been, in compliance with all
Environmental Laws (as defined below), except for instances of noncompliance
which are not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on Bancorp.
(2) There is no proceeding pending or, to its knowledge,
threatened before any court, governmental agency or board or other forum in
which it or any of the Bancorp Subsidiaries or any Participation Facility has
been, or with respect to threatened proceedings, reasonably would be expected
to be, named as a defendant or potentially responsible party (i) for alleged
noncompliance (including by any predecessor) with any Environmental Law, or
(ii) relating to the release or threatened release into the environment of any
Hazardous Material (as defined below), whether or not occurring at or on a
site owned, leased or operated by it or any of the Bancorp Subsidiaries or any
Participation Facility, except for such proceedings pending or threatened that
are not reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect on it or have been Previously Disclosed in Schedule
4.01(Y)(2).
(3) There is no proceeding pending or, to its knowledge,
threatened before any court, governmental agency or board or other forum in
which any Loan/Fiduciary Property (or it or any of the Bancorp Subsidiaries in
respect of any Loan/Fiduciary Property) has been, or with respect to
threatened proceedings, reasonably would be expected to be, named as a
defendant or potentially responsible party (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (ii) relating to
the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property, except
for such proceedings pending or threatened that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it or
have been Previously Disclosed in Schedule 4.01(Y)(3).
(4) To its knowledge, there is no reasonable basis for
any proceeding of a type described in subparagraphs (2) or (3) above, except
as has been Previously Disclosed in Schedule 4.01(Y)(4).
(5) To its knowledge, during the period of (i) its or any
of the Bancorp Subsidiaries' ownership or operation of any of their respective
current properties, (ii) its or any of the Bancorp Subsidiaries' participation
in the management of any Participation Facility, or (iii) its or any of
Bancorp Subsidiaries' holding of a security or other interest in a Loan/
Fiduciary Property, there have been no releases of Hazardous Material in, on,
under or affecting any such property, Participation Facility or Loan/Fiduciary
Property, except for such releases that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it or
have been Previously Disclosed in Schedule 4.01(Y)(5).
(6) To its knowledge, prior to the period of (i) its or
any of the Bancorp Subsidiaries' ownership or operation of any of their
respective current properties, (ii) its or any of the Bancorp Subsidiaries'
participation in the management of any Participation Facility, or (iii) its or
any of the Bancorp
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Subsidiaries' holding of a security or other interest in a Loan/Fiduciary
Property, there were no releases of Hazardous Material in, on, under or
affecting any such property, Participation Facility or Loan/Fiduciary
Property, except for such releases that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it or
have been Previously Disclosed in Schedule 4.01(Y)(6).
(Z) TAX REPORTS. Except as Previously Disclosed in Schedule 4.01(Z),
(i) all reports and returns with respect to Taxes (as defined below) that are
required to be filed by or with respect to it or the Bancorp Subsidiaries,
including without limitation consolidated federal income tax returns of it and
the Bancorp Subsidiaries (collectively, the "Bancorp Tax Returns"), have been
duly filed, or requests for extensions have been timely filed and have not
expired, except to the extent all such failures to file, taken together, are
not reasonably likely to have a Material Adverse Effect on it, and such
Bancorp Tax Returns were true, complete and accurate in all material respects,
(ii) all taxes (which shall mean federal, state, local or foreign income,
gross receipts, windfall profits, severance, property, production, sales, use,
license, excise, franchise, employment, withholding or similar taxes imposed
on the income, properties or operations of it or the Bancorp Subsidiaries,
together with any interest, additions, or penalties with respect thereto and
any interest in respect of such additions or penalties, collectively the
"Taxes") shown to be due on Bancorp Tax Returns have been paid in full, (iii)
the Bancorp Tax Returns have been examined by the Internal Revenue Service or
the appropriate state, local or foreign taxing authority or the period for
assessment of the Taxes in respect of which such Bancorp Tax Returns were
required to be filed has expired, (iv) all Taxes due with respect to completed
and settled examinations have been paid in full, (v) no issues have been
raised by the relevant taxing authority in connection with the examination of
any of the Bancorp Tax Returns which are reasonably likely, individually or in
the aggregate, to result in a determination that would have a Material Adverse
Effect on it, except as reserved against in the Bancorp Financial Reports, and
(vi) no waivers of statutes of limitations (excluding such statutes that
relate to years under examination by the Internal Revenue Service) have been
given by or requested with respect to any Taxes of it or the Bancorp
Subsidiaries.
(AA) ACCURACY OF INFORMATION. The statements with respect to Bancorp and
the Bancorp Subsidiaries contained in this Agreement, the Schedules and any
other written documents executed and delivered by or on behalf of Company or
the Bank pursuant to the terms of this Agreement are true and correct in all
material respects, and such statements and documents do not omit any material
fact necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
(BB) DERIVATIVES CONTRACTS. None of Bancorp or the Bancorp Subsidiaries
is a party to or has agreed to enter into an exchange-traded or over-the-
counter swap, forward, future, option, cap, floor or collar financial contract
or any other contract not included on the balance sheet which is a derivative
contract (including various combinations thereof) (each a "Derivatives
Contract") or owns securities that are referred to as "structured notes"
except for those Derivatives Contracts and structured notes Previously
Disclosed in Schedule 4.01(BB), including a list, as applicable, of any
Bancorp or Bancorp Subsidiary assets pledged as security for each such
Derivatives Contract.
(CC) ACCOUNTING CONTROLS. Each of Bancorp and the Bancorp Subsidiaries
has devised and maintained systems of internal accounting controls sufficient
to provide reasonable assurances that (i) all material transactions are
executed in accordance with management's general or specific authorization;
(ii) all material transactions are recorded as necessary to permit the
preparation of financial statements in conformity with generally accepted
accounting principles consistently applied with respect to banks or any other
criteria applicable to such statements, and to maintain proper accountability
for items; (iii) access to the material property and assets of Bancorp and the
Bancorp Subsidiaries is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
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(DD) DEPOSITS. Except as set forth in Schedule 4.01 (DD), none of the
Bank's deposits is a brokered deposit as defined in 12 CFR Section 337.6 or
subject to any encumbrance, legal testament or other legal process, and no
portion of the deposits represents a deposit by any affiliate of the Bank.
(EE) MINUTE BOOKS. The minute books of Bancorp and the Bank contain
complete and accurate records of all meetings held and other corporate action
taken since January 1, 1992 by their respective stockholders, Boards of
Directors and committees thereof.
(FF) AFFILIATE TRANSACTIONS. Except as Previously Disclosed on Schedule
4.01(FF), no officer or director of Bancorp or the Bank or any "associate" of
such person has any material interest in any contract with Bancorp or any
Bancorp subsidiary or in any real or personal property used in the business of
Bancorp or any Bancorp Subsidiary. For the purposes of this section,
"associate" of a person means (i) any corporation or organization (other than
Bancorp or any Bancorp Subsidiary) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities, (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity, and (iii) any relative or
spouse of such person, or any relative of such spouse, who has the same home
as such person.
(GG) LOAN PORTFOLIO. To the knowledge of Bancorp and the Bank:
(1) All evidences of indebtedness ("Loans") reflected as assets on
the books and records of Bancorp or the Bank are in all respects legal, valid
and binding obligations of the respective obligor named therein and no such
indebtedness is subject to any defenses which have been or may be asserted,
except for defenses arising from applicable bankruptcy, insolvency, moratorium
or other similar laws relating to creditors' rights generally and general
principles of equity.
(2) The Bank has good title to and is the sole owner of record of
each Loan or any participation interest shown as an asset on the books and
records of the Bank, free of any lien, encumbrance or claim by any other
person, except for Loans securing borrowings from the FHLB of Seattle or Loans
subject to repurchase obligations as Previously Disclosed in Schedule 4.01(GG)
(2).
(3) Except as Previously Disclosed in Schedule 4.01(GG)(3) all
Loans reflected as assets on the books and records of the Bank that are
primarily secured by an interest in real property are secured by a valid and
perfected lien, as stated in the loan documentation.
(4) Except as Previously Disclosed in Schedule 4.01(GG) (4), no
Loan, all or any part of which is an asset of the Bank was, as of September
30, 1998, more than 30 days past due.
(5) Except as Previously Disclosed in Schedule 4.01(GG)(5), none of
the agreements pursuant to which the Bank has sold Loans or pools of Loans or
participation in Loans or pools of participations of Loans, if any, contains
any obligation to repurchase such Loans or interests therein solely on account
of a payment default by the obligor on any such Loan.
(6) Previously Disclosed on Schedule 4.01(GG)(6) are all Loans by
Bancorp or the Bank to employees of Bancorp or the Bank. There are no Loans
to any employee, officer, director or other affiliate of Bancorp or the Bank
on which the borrower is paying a rate other than that reflected in the note
or the relevant credit agreement or on which the borrower is paying a rate
which was below market at the time the Loan was made; and, except as
Previously Disclosed in Schedule 4.01(GG)(6), all such Loans are and were made
in compliance with all applicable federal laws and regulations.
(HH) Year 2000 Issues. Expenses associated with resolving Year 2000
technology issues are not expected to have a material adverse effect on the
financial condition or results of operations of the Bancorp or the Bank,
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nor are Year 2000 technology issues expected to have a material adverse effect
on the operations of the Bancorp or the Bank. Neither the Bancorp or any of
the Bank Subsidiaries has received, or reasonably expects to receive, a "Year
2000 Deficiency Notification Letter" (as such term is employed in the Federal
Reserve's Supervision and Regulation Letter No. SR-98-3 (SUP), dated March 4,
1998). The Bank has made available to the Company and Horizon a complete and
accurate copy of its plans, including an estimate of the anticipated
associated costs, for addressing the issues ("Year 2000 Issues") set forth in
the statements of the Federal Financial Institutions Examinations Council,
dated May 5, 1997, entitled "Year 2000 Project Management Awareness" and
December 1997, entitled "Safety and Soundness Guidelines Concerning the Year
2000 Business Risk" as such issues affect the Bancorp and the Bancorp
Subsidiaries. Between the date hereof and the Effective Time, the Bancorp
shall use its commercially practicable efforts to implement its plans.
4.02. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND HORIZON.
Each of the Company and Horizon hereby represents and warrants to Bancorp
and the Bank, as follows:
(A) RECITALS. The facts set forth in the Recitals of this Agreement
with respect to it are true and correct.
(B) CORPORATE AUTHORITY. Subject to the required regulatory approvals
referred to in Section 6.02, this Agreement has been authorized by all
necessary corporate action of it and is a valid and binding agreement of it
enforceable against it in accordance with its terms, subject as to enforcement
as to bankruptcy, insolvency and other similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
(C) NO DEFAULTS. Subject to the required regulatory approvals referred
to in Section 6.02 and the required filings under federal and state
securities' laws, the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby and thereby by
it, do not and will not (i) constitute a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of it or
of any of its subsidiaries or to which it or any of its subsidiaries or
properties is subject or bound, which breach, violation or default is
reasonably likely to have a Material Adverse Effect on it, (ii) constitute a
breach or violation of, or a default under, its Certificate of Incorporation,
Charter or Bylaws, or (iii) require any consent or approval under any such
law, rule, regulation, judgment, decree, order, governmental permit or
license, or the consent or approval of any other party to any such agreement,
indenture or instrument.
(D) FINANCIAL REPORTS. In the case of the Company, its Annual Report on
Form 10-K for the fiscal year ended March 31, 1998 and all documents filed or
to be filed under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, in
the form filed with the SEC (in each such case, the "Company Financial
Reports"), did not and will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading; and each of the balance sheets in
or incorporated by reference into the Company Financial Reports (including the
related notes and schedules thereto) fairly presents and will fairly present
the financial position of the entity or entities to which it relates as of its
date and each of the statements of income and changes in stockholders' equity
and cash flows or equivalent statements in the Company Financial Reports
(including any related notes and schedules thereto) fairly presents and will
fairly present the results of operations, changes in stockholders' equity and
changes in cash flows, as the case may be, of the entity or entities to which
it relates for the periods set forth therein, in each case in accordance with
generally accepted accounting principles consistently applied to savings banks
and bank holding companies during the periods involved, except as may be noted
therein, subject to normal and recurring year-end audit adjustments in the
case of unaudited statements.
(E) NO EVENTS. Since March 31, 1998, no events have occurred which,
individually or in the aggregate, have had or are reasonably likely to have a
Material Adverse Effect on it.
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(F) SHARES AUTHORIZED. In the case of the Company, the shares of
Company Common Stock to be issued in exchange for shares of Bancorp Common
Stock upon consummation of the Corporate Merger in accordance with Article II
of this Agreement have been duly authorized and, when issued in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights.
(G) CORPORATE POWER. The Company and Horizon each has the corporate
power and authority to carry on its business as it is now being conducted and
to own all its material properties and assets.
(H) ACCURACY OF INFORMATION. The statements with respect to the Company
and Horizon contained in this Agreement, the Schedules and any other written
documents executed and delivered by or on behalf of the Company pursuant to
the terms of this Agreement are true and correct in all material respects, and
such statements and documents do not omit any material fact necessary to make
the statements contained therein, in light of the circumstances under which
they were made, not misleading.
V. COVENANTS
Each of Bancorp and the Bank hereby covenants to the Company and Horizon
and each of the Company and Horizon hereby covenants to Bancorp and the Bank,
that:
5.01. BEST EFFORTS. Subject to the terms and conditions of this
Agreement and to the exercise by its Board of Directors of such Board's
fiduciary duties, it shall use its best efforts in good faith to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or desirable, or advisable under applicable laws, so as to
permit consummation of the Mergers on the Effective Date and to otherwise
enable consummation of the transactions contemplated hereby and shall
cooperate fully with the other parties hereto to that end.
5.02. REGISTRATION STATEMENT. The Company, in cooperation with
Bancorp, shall prepare and file with the SEC a Registration Statement with
respect to the shares of Company Common Stock to be issued in the Corporate
Merger. Such Registration Statement shall contain a Joint Proxy
Statement/Prospectus which shall serve as the proxy statement of Bancorp for
the Bancorp Meeting (as defined below), and as the prospectus of the Company
for the shares of Company Common Stock to be issued in the Corporate Merger.
The Company shall use its best efforts to cause the Registration Statement to
become effective.
5.03 BANCORP MEETING. With respect to Bancorp, it shall call a
special meeting (the "Bancorp Meeting") of the holders of Bancorp Common Stock
to be held as soon as practicable for purposes of voting upon the transactions
contemplated hereby and Bancorp shall use its best efforts to solicit and
obtain the votes of the holders of Bancorp Common Stock in favor of the
transactions contemplated hereby and, subject to the exercise of its fiduciary
duties, the Board of Directors of Bancorp shall recommend approval of such
transactions by such holders. In connection with the Bancorp Meeting, the
Company and Bancorp shall cooperate in the preparation of the Joint Proxy
Statement/Prospectus and, with the approval of each of the Company and
Bancorp, which approvals will not be unreasonably withheld, the Joint Proxy
Statement/Prospectus will be mailed to the shareholders of Bancorp.
5.04. REGISTRATION STATEMENT EFFECTIVENESS. The Company will advise
Bancorp, promptly after the Company receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order or the suspension of the
qualification of the Company Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
5.05. REGISTRATION STATEMENT COMPLIANCE WITH SECURITIES LAWS. When
the Registration Statement or any post-effective amendment or supplement
thereto shall become effective, and at all times subsequent to such
effectiveness, up to and including the date of the Meeting, such Registration
Statement and all
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amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by or on behalf of Bancorp relating to
Bancorp or the Bancorp Subsidiaries and by or on behalf of the Company
relating to the Company or its subsidiaries, (i) will comply in all material
respects with the provisions of the Securities Act and any other applicable
statutory or regulatory requirements, and (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; PROVIDED, HOWEVER, in no event shall any party hereto be liable
for any untrue statement of a material fact or omission to state a material
fact in the Registration Statement made in reliance upon, and in conformity
with, written information concerning another party furnished by or on behalf
of such other party specifically for use in the Registration Statement.
5.06. PRESS RELEASES. Bancorp and the Bank will not, without the
prior approval of the Company, and the Company and Horizon will not, without
the prior approval of Bancorp, issue any press release or written statement
for general circulation relating to the transactions contemplated hereby,
except as otherwise required by law.
5.07. ACCESS; INFORMATION.
(1) Upon reasonable notice, Bancorp and the Bank shall afford the
Company and its officers, employees, counsel, accountants and other authorized
representatives, access, during normal business hours throughout the period up
to the Effective Date, to all of its and the Bancorp Subsidiaries' properties,
books, contracts, commitments and records and, during such period, Bancorp and
the Bank shall furnish promptly to the Company (i) a copy of each material
report, schedule and other document filed by Bancorp and the Bancorp
Subsidiaries with any Regulatory Authority, and (ii) all other information
concerning the business, properties and personnel of Bancorp and the Bancorp
Subsidiaries as the Company may reasonably request, provided that no
investigation pursuant to this Section 5.07 shall affect or be deemed to
modify or waive any representation or warranty made by Bancorp or the Bank or
the conditions to the obligations of Bancorp and the Bank to consummate the
transactions contemplated by this Agreement; and
(2) The Company will not use any information obtained pursuant to
this Section 5.07 for any purpose unrelated to the consummation of the
transactions contemplated by this Agreement and, if this Agreement is
terminated, will hold all information and documents obtained pursuant to this
paragraph in confidence (as provided in Section 8.06) unless and until such
time as such information or documents become publicly available other than by
reason of any action or failure to act by the Company or as it is advised by
counsel that any such information or document is required by law or applicable
stock exchange rule to be disclosed, and in the event of the termination of
this Agreement, the Company will, upon request by Bancorp, deliver to Bancorp
all documents so obtained by the Company or destroy such documents and, in the
case of destruction, will certify such fact to Bancorp.
5.08. ACQUISITION PROPOSALS. In the case of Bancorp, without the
prior written consent of the Company, it shall not, and it shall cause the
Bancorp Subsidiaries not to, solicit, initiate or encourage inquiries or
proposals with respect to, or furnish any nonpublic information relating to or
participate in any negotiations or discussions concerning, any acquisition or
purchase of all or a substantial portion of the assets of, or a substantial
equity interest in, Bancorp or any of the Bancorp Subsidiaries or any merger
or other business combination with Bancorp or any of the Bancorp Subsidiaries
other than as contemplated by this Agreement; it shall instruct its and the
Bancorp Subsidiaries' officers, directors, agents, advisors and affiliates to
refrain from doing any of the foregoing; and it shall notify the Company
immediately if any such inquiries or proposals are received by, or any such
negotiations or discussions are sought to be initiated with, Company or any of
the Bancorp Subsidiaries.
5.09. BLUE-SKY FILINGS. In the case of the Company, it shall use its
best efforts to obtain all necessary state securities laws or "blue sky"
permits and approvals, provided that the Company shall not be required by
virtue thereof to submit to general jurisdiction in any state.
5.10. CERTAIN POLICIES OF BANCORP AND THE BANK. In the case of each
of Bancorp and the Bank, it shall, at the Company's request: (i) modify and
change its loan, litigation and other reserve and real estate
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valuation policies and practices (including loan classifications and levels of
reserves), and (ii) generally conform its operating, lending and compliance
policies and procedures, prior to the Effective Date so as to be consistent on
a mutually satisfactory basis with those of the Company and generally accepted
accounting principles; PROVIDED, HOWEVER, Bancorp and the Bank shall not be
required to take any such action set forth in (i) above until all regulatory
approvals set forth in Section 6.02 shall have been obtained. Bancorp's and
the Bank's representations, warranties and covenants contained in this
Agreement shall not be deemed to be untrue or breached in any respect for any
purpose as a consequence of any modifications or changes undertaken solely on
account of this Section 5.10.
5.11. STATE TAKEOVER LAW. In the case of Bancorp, Bancorp shall not
take any action that would cause the transactions contemplated by this
Agreement to be subject to any applicable state takeover statute and Bancorp
shall take all necessary steps to exempt (or ensure the continued exemption
of) the transactions contemplated by this Agreement from, or, if necessary,
challenge the validity or applicability of, any applicable state takeover law,
as now or hereafter in effect.
5.12. NO RIGHTS TRIGGERED. Except as Previously Disclosed], in the
case of Bancorp, Bancorp shall take all necessary steps to ensure that the
entering into of this Agreement and the consummation of the transactions
contemplated hereby and thereby (including without limitation the Merger) and
any other action or combination of actions, or any other transactions
contemplated hereby or thereby do not and will not (i) result in the grant of
any rights to any person under the Articles of Incorporation or Bylaws of
Bancorp or under any agreement to which Bancorp or any Bancorp Subsidiary is a
party, or (ii) restrict or impair in any way the ability of the Company and
Horizon to exercise the rights granted hereunder.
5.13. SHARES LISTED. In the case of the Company, it shall file with
the Nasdaq Stock Market a Notification Form for Listing of Additional Shares.
5.14. REGULATORY APPLICATIONS. In the case of the Company and
Horizon, (i) it shall promptly prepare and submit applications to the
appropriate Regulatory Authorities for approval of the Mergers, and (ii)
promptly make all other appropriate filings to secure all other approvals,
consents and rulings which are necessary for the consummation of the Mergers
by the Company and Horizon.
5.15 REGULATORY DIVESTITURES. In the case of Bancorp, effective on
or before the Effective Date, Bancorp and the Bancorp Subsidiaries shall cease
engaging in such activities as the Company shall advise Bancorp in writing are
not permitted to be engaged in by the Company under applicable law following
the Effective Date and, to the extent required by any Regulatory Authority as
a conditional approval of the transactions contemplated by this Agreement,
Bancorp shall divest any subsidiary engaged in activities or holding assets
that are impermissible for the Company on terms and conditions agreed to by
the Company.
5.16 CURRENT INFORMATION.
(a) During the period from the date of this Agreement to the Effective
Date, each of Bancorp, the Bank, the Company and Horizon shall, and shall
cause its representatives to, confer on a regular and frequent basis with
representatives of the other.
(b) Bancorp and the Bank shall promptly notify the Company of (i) any
material change in the business or operations of Bancorp, the Bank or any
Bancorp Subsidiary, (ii) any material complaints, investigations or hearings
(or communications indicating that the same may be contemplated) of any
Regulatory Authority relating to Bancorp, the Bank, or any Bancorp Subsidiary,
(iii) the initiation or threat of material litigation involving or relating to
Bancorp, the Bank or any Bancorp Subsidiary, or (iv) any event or condition
that might reasonably be expected to cause any of Bancorp's or the Bank's
representation or warranties set forth herein not to be true and correct in
all material respects as of the Effective Date or prevent Bancorp or the Bank
from fulfilling its or their obligations hereunder; and in each case shall
keep the Company informed with respect thereto.
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(c) The Company shall (i) promptly notify Bancorp of any event or
condition that might reasonably be expected to cause any of the Company's and
Horizon's representations or warranties set forth herein not to be true and
correct in all material respects as of the Effective Date, and (ii) notify
Bancorp immediately of any denial of any application filed by the Company or
Horizon with any Regulatory Authority with respect to this Agreement, and in
each case shall keep Bancorp and the Bank informed with respect thereto.
5.17 AFFILIATE AGREEMENTS. In the case of Bancorp, it will cause
each person who is an "affiliate" of Bancorp for purposes of Rule 145 under
the Securities Act (each an "Affiliate") to execute and deliver to the Company
on or before the mailing of the Joint Proxy Statement/Prospectus for the
Bancorp Meeting an agreement in the form attached hereto as Exhibit C
restricting the disposition of the shares of Company Common Stock to be
received by such person in exchange for such person's shares of Bancorp Common
Stock. Previously Disclosed on Schedule 5.17 is a list of Affiliates as of
the date hereof.
5.18 COMPANY BOARD OF DIRECTORS. In the case of Horizon, it shall
take such action as may be necessary to cause the appointment of John M.
Daughters to its Boards of Directors effective as of the Effective Time.
5.19 POOLING OF INTERESTS. In the case of Bancorp and the Bank,
neither Bancorp nor the Bank shall take any action which would disqualify the
Corporate Merger as a "pooling of interest" for accounting purposes.
5.20 CONSENTS AND APPROVALS. In the case of Bancorp and the Bank,
they shall take such action as may be necessary, but without the incurrence of
substantial expense, to obtain any required consents from the lessor or
sublessor on each lease pursuant to which Bancorp or the Bank leases as lessee
real or personal property for the assumption of such lease by the Company or
Horizon.
5.21 BENEFITS. Bancorp's qualified and non-qualified plans, as well
as the incentive plans of the Bank, will be terminated immediately prior to
the Effective Time, except for the Bank's commercial lending incentive
program, which will continue through September 30, 1999. All Bank employees
will be offered continued employment in similar positions, with no reduction
in compensation subsequent to the Effective Time until September 30, 1999.
Attached hereto is a list of all employees of Bancorp and the titles that will
be in effect as of the Effective Date subject to Horizon's employment
practices and such changes as may be agreed upon prior to such date. All such
continued employees will be deemed employees at will. The foregoing is
subject to the satisfactory compliance by the employee with Horizon's
personnel policies. Staff reductions that occur after September 30, 1999 will
be paid severance in accordance with Horizon's severance policy with credit
given for prior service at the Bank. In addition, as soon as
administratively practicable following the Effective Date, employees of the
Bank who are retained by Horizon shall be entitled to participate in the same
benefit plans as are generally available to Horizon employees of similar rank
and service. Employees of the Bank who continue as Horizon employees
following the Effective Date shall be credited with prior years of service
with the Bank for purposes of eligibility and vesting (but not for the accrual
of benefits) under the Horizon benefit plans, and accrued sick leave of Bank
employees will be transferred to Horizon subject to the limitations of
Horizon's sick leave policy.
Subject to the limitations of applicable law, rules and regulations and
Horizon's lending policy, individuals will be eligible to receive loans from
Horizon for the purchase of stock upon the exercise of stock options and
warrants. Such loans shall be made at prime plus 1%, and for fully amortized
five-year terms with principle and interest. In the alternative, Horizon will
make arrangements for such loans to be made through a correspondent bank.
5.22 SEVERANCE AGREEMENTS. To the extent that the employment of any
employee who is employed by the Bank as of the Effective Date, is terminated
by Horizon or any of its subsidiaries within one (1) year following the
Effective Date, such employee shall be entitled to a severance payment as
follows:
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Service Severance
------- ---------
Non-Officers
------------
Over six months to two years Two weeks
Over two years to four years Three weeks
Over five years Four weeks
Officers
--------
Over six months to one year Two weeks
Over one year to two years Three weeks
Over two years to three years Four weeks
Over three years to four years Six weeks
Over four year to six years Seven weeks
Over six years Eight weeks
5.23 INSURANCE. The Company shall use its best efforts to cause the
persons serving as officers and directors of Bancorp and the Bank immediately
prior to the Effective Date to be covered for a period of three years after
he Closing Date by the Company's present carrier with respect to acts or
omissions occurring prior to the Effective Date which were committed by such
officers and directors in their capacity as such; provided, however, that the
Company shall not be obligated to incur additional costs for such insurance to
the extent such premiums exceed 150% of the annual premiums paid as of the
date hereof by Bancorp and the Bank for such insurance.
VI. CONDITIONS TO CONSUMMATION OF THE MERGERS
Consummation of the Mergers is conditioned upon:
6.01. SHAREHOLDER VOTE. Approval of the transactions contemplated
hereby by the requisite vote of the stockholders of Bancorp.
6.02. REGULATORY APPROVALS. Procurement by the Company of all
required regulatory consents and approvals by the appropriate Regulatory
Authorities and the expiration of the statutory waiting period relating
thereto; PROVIDED, HOWEVER, that no such approval or consent shall have
imposed any condition or requirement which, in the opinion of the Company,
would so materially adversely impact the economic or business benefits to the
Company of the transactions contemplated by this Agreement so as to render
inadvisable the consummation of the Mergers.
6.03. NO INJUNCTION. There shall not be in effect any order, decree
or injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated hereby.
6.04. LEGAL OPINION. Bancorp and the Bank shall have received an
opinion, dated the Effective Date, of Breyer & Associates PC, special counsel
for the Company and Horizon, in form reasonably satisfactory to Bancorp, which
shall cover the matters contained in Exhibit D hereto.
6.05. LEGAL OPINION. The Company shall have received an opinion,
dated the Effective Date, of Sloan Bobrick & Oldfield, Inc. P.S., counsel for
Bancorp and the Bank, in form reasonably satisfactory to the Company, which
shall cover the matters contained in Exhibit E hereto.
6.06. OFFICER'S CERTIFICATE. (i) Each of the representations and
warranties contained herein of the Company and Horizon shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
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same effect as though all such representations and warranties had been made on
the Effective Date, except for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, and (ii)
each and all of the agreements and covenants of the Company and Horizon to be
performed and complied with pursuant to this Agreement on or prior to the
Effective Date shall have been duly performed and complied with in all
material respects, and Bancorp and the Bank shall have received a certificate
signed by the Chief Executive Officers and the Chief Financial Officers of the
Company and Horizon dated the Effective Date, to such effect.
6.07. OFFICERS' CERTIFICATE. (i) Each of the representations and
warranties contained herein of Bancorp and the Bank shall be true and correct
as of the date of this Agreement and upon the Effective Date with the same
effect as though all such representations and warranties had been made on the
Effective Date, except for any such representations and warranties made as of
a specified date, which shall be true and correct as of such date and except
as otherwise provided in Section 5.10, and (ii) each and all of the agreements
and covenants of Bancorp and the Bank to be performed and complied with
pursuant to this Agreement on or prior to the Effective Date shall have been
duly performed and complied with in all material respects, and the Company and
Horizon shall have received a certificate signed by the Chief Executive
Officers and the Chief Financial Officers of Bancorp and the Bank dated the
Effective Date, to such effect.
6.08. EFFECTIVE REGISTRATION STATEMENT. The Registration Statement
shall have become effective and no stop order or other order suspending the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
6.09. BLUE-SKY PERMITS. The Company shall have received all state
securities laws and "blue sky" permits necessary to consummate the Corporate
Merger.
6.10. TAX OPINION. The Company and Bancorp shall have received an
opinion from Breyer & Associates PC to the effect that (i) the Corporate
Merger constitutes a reorganization under Section 368 of the Code, and (ii) no
gain or loss will be recognized by stockholders of Bancorp who receive shares
of the Company Common Stock in exchange for their shares of Bancorp Common
Stock, and, in rendering their opinion, Breyer & Associates PC may require and
rely upon representations contained in certificates of officers of the
Company, Bancorp and others.
6.11. EMPLOYMENT AGREEMENTS. The Employment Agreements between the
Company, Horizon and John M. Daughters and A.R. Ayala substantially in the
form attached hereto as Exhibits F-1 and F-2, respectively, shall have been
duly executed and delivered by all parties to such agreements.
6.12. NON-COMPETE AGREEMENTS. Each member of the Board of Directors
of the Bancorp and the Bank shall have entered into a non-compete agreement
with the Company substantially in the form attached hereto as Exhibit G.
6.13. ADVERSE CHANGE. During the period from September 30, 1998 to
the Effective Date, there shall not have been any material adverse change in
the financial position or results of operations of Bancorp or the Bank, nor
shall Bancorp or the Bank have sustained any loss or damage to its properties,
whether or not insured, that materially affects its ability to conduct its
business; and the Company shall have received a certificate dated the
Effective Date signed by the Chief Executive Officers of Bancorp and the Bank
to such effect.
6.14. DISSENTERS' RIGHTS. The number of Dissenters' Shares shall not
exceed in the aggregate five percent of the outstanding shares of Bancorp
Common Stock.
6.15. RECEIPT OF AFFILIATE AGREEMENTS. The Company shall have
received from each Affiliate of Bancorp the agreements referred to in Section
5.17.
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6.16 POOLING LETTERS. The Company and the Bancorp shall have
received a letter dated as of the Effective Date, in form and substance
acceptable to the Company and the Bancorp from Moss Adams LLP to the effect
that the Mergers will qualify for pooling of interests accounting treatment.
PROVIDED, HOWEVER, that a failure to satisfy any of the conditions set
forth in the proviso following Section 6.02 or in Sections 6.05, 6.07, 6.11,
6.12, 6.13, 6.14, 6.15, or 6.16 shall only constitute conditions if asserted
by the Company, and a failure to satisfy any of the conditions set forth in
Section 6.04 or 6.07 shall only constitute conditions if asserted by Bancorp.
VII. TERMINATION
This Agreement may be terminated prior to the Effective Date, either
before or after receipt of required stockholder approvals:
7.01. MUTUAL CONSENT. By the mutual consent of the Company and
Bancorp, if the Board of Directors of each so determines by vote of a majority
of the members of its entire Board.
7.02. BREACH. By the Company or Bancorp, if its Board of Directors
so determines by vote of a majority of the members of its entire Board, in the
event of (i) a material breach by the other party of any representation or
warranty contained herein, which breach cannot be or has not been cured within
thirty (30) days after the giving of written notice to the breaching party of
such breach, or (ii) a breach by the other party of any of the material
covenants or agreements contained herein, which breach cannot be or has not
been cured within thirty (30) days after the giving of written notice to the
breaching party of such breach.
7.03. DELAY. By the Company or Bancorp, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event that the Corporate Merger is not consummated by September 30, 1999.
7.04. NO STOCKHOLDER OR REGULATORY APPROVAL. By the Company or
Bancorp, if its Board of Directors so determines by a vote of a majority of
the members of its entire Board, (i) in the event that any stockholder
approval contemplated by Section 6.01 is not obtained at the Bancorp Meeting ,
including any adjournment or adjournments thereof, or (ii) in the event that
written notice is received which states that any required regulatory approval
contemplated by Section 6.02 has not been approved or has been denied.
VIII. OTHER MATTERS
8.01. SURVIVAL. If the Effective Date occurs, all representations,
warranties, agreements and covenants contained in this Agreement shall not
survive the Effective Date. If this Agreement is terminated prior to the
Effective Date, the agreements and representations of the parties in Section
4.01(P), Sections 5.05, 5.07(2), 5.11 and 5.12, and Sections 8.01, 8.03, 8.04,
8.05, 8.06, 8.07, 8.08 and 8.10 shall survive such termination.
8.02. WAIVER; AMENDMENT. Prior to the Effective Date, any provision
of this Agreement may be (i) waived in writing by the party benefitted by the
provision, or (ii) amended or modified at any time (including the structure of
the transactions contemplated hereby) by an agreement in writing among the
parties hereto approved by their respective Boards of Directors and executed
in the same manner as this Agreement, except that, after the vote by the
stockholders of Bancorp, the consideration to be received by the stockholders
of Bancorp for each share of Bancorp Common Stock shall not thereby be
decreased.
8.03. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original. This
Agreement shall become effective when one counterpart has been signed by each
party hereto.
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8.04. GOVERNING LAW. This Agreement shall be governed by, and
interpreted in accordance with, the laws of the State of Washington, except as
federal law may be applicable.
8.05. EXPENSES. Each party hereto will bear all expenses incurred by
it in connection with this Agreement and the transactions contemplated hereby.
8.06. CONFIDENTIALITY. Except as otherwise provided in Section
5.06(2), each of the parties hereto and their respective agents, attorneys and
accountants will maintain the confidentiality of all information provided in
connection herewith which has not been publicly disclosed.
8.07. NOTICES. All notices, requests and other communications
hereunder to a party shall be in writing and shall be deemed to have been duly
given when delivered by hand, telegram or telecopied (with confirmation) or
mailed by registered or certified mail (return receipt requested) to such
party at its address set forth below or such other address as such party may
specify by notice to the parties hereto.
If to the Company or Horizon to: Horizon Financial Corporation
1500 Cornwall Avenue
Bellingham, Washington 98225
Telecopy Number: (360)733-7019
Attn: V. Lawrence Evans, President & CEO
Copies to: Breyer & Associates PC
1100 New York Avenue, N.W.
Suite 700 East
Washington, D.C. 20005
Telecopy Number: (202) 737-7979
Attn: John F. Breyer, Jr., Esq.
If to Bancorp or the Bank to: Bellingham Bancorporation
211 East Holly Street
Bellingham, Washington 98225
Telecopy Number: (360) 671-6990
Attn: John M. Daughters, President & CEO
Copies to: Sloan Bobrick & Oldfield, Inc. P.S.
2601 North Alder Street
Tacoma, Washington 94807
Telecopy Number: (206)752-5324
Attn: Thomas H. Oldfield, Esq.
8.08. BREAK-UP FEE. The parties hereby acknowledge that, in
negotiating and executing this Agreement and in taking the steps necessary or
appropriate to effect the transaction contemplated hereby, the Company has
incurred and will incur direct and indirect monetary and other costs
(including, without limitation, attorney's fees and costs and costs of the
Company employee and management time) and will forego discussion with respect
to other potential acquisitions. To compensate the Company for such cost and
to induce it to forego initiating discussions regarding other acquisitions,
Bancorp and the Bank shall be obligated to pay the Company on demand (and in
no event more than three days after such demand) in immediately available
funds $800,000 ("Break-up Fee") if:
(A) within 24 months after the date hereof, the Corporate Merger has not
been completed and there occurs any of the events set forth in subparagraphs
(i), (ii) or (iii) below.
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(i) Any person other than the Company or an affiliate of the
Company acquires beneficial ownership of 25% or more of the then-outstanding
Bancorp Common Stock;
(ii) Bancorp or any of its affiliates, without having received the
Company's prior written consent, enters into an agreement to engage in an
Acquisition Transaction (as previously defined) with any Third Party, or
Bancorp's Board of Directors recommends that the shareholders of Bancorp
approve or accept any Acquisition Transaction with any person other than the
Company or any of its subsidiaries.
(iii) A bona fide proposal is made by a third party to Bancorp or
the Bank to engage in an Acquisition Transaction and after such proposal is
made any of the following events occurs: Bancorp willfully breaches this
Agreement and such breach entitles the Company to terminate this Agreement;
the holders of Bancorp Common Stock do not approve this Agreement at the
Meeting; the Meeting is not held or is canceled prior to termination of this
Agreement for reasons other than the fault of the Company; or Bancorp's Board
of Directors modifies in a manner adverse to the Company the recommendation of
Bancorp's Board of Directors with respect to this Agreement.
Notwithstanding the foregoing, Bancorp and the Bank shall not be
obligated to pay to the Company the Break-up Fee if, prior to the occurrence
of any of the events specified in 8.08(A)(i), (ii) or (iii), Bancorp validly
terminates this Agreement pursuant to Section 7.01 or clause (ii) of Section
7.04. The parties further agree that this Section 8.08 is without prejudice
to any other rights that the parties hereto may have for any failure to
perform this Agreement.
8.09. ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This
Agreement together represent the entire understanding of the parties hereto
with reference to the transactions contemplated hereby and thereby and
supersede any and all other oral or written agreements heretofore made.
Nothing in this Agreement expressed or implied, is intended to confer upon any
person, other than the parties hereto or their respective successors, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
8.10. HEADINGS. The headings contained in this Agreement are for
reference purposes only and are not part of this Agreement.
8.11 ATTORNEY FEES. If any Party hereto shall bring an action at
law or in equity to enforce its rights under this Agreement (including an
action based upon a misrepresentation or the breach of any warranty, covenant,
agreement or obligation contained herein), the prevailing Party in such action
shall be entitled to recover from the other Party its reasonable costs and
expenses necessarily incurred in connection with such action (including fees,
disbursements and expenses of attorneys and costs of investigation).
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
HORIZON FINANCIAL CORP.
By: /s/ V. Lawrence Evans
----------------------------------------
NAME: V. Lawrence Evans
TITLE: President and Chief Executive Officer
HORIZON BANK, A SAVINGS BANK
By: /s/ V. Lawrence Evans
----------------------------------------
NAME: V. Lawrence Evans
TITLE: President and Chief Executive Officer
BELLINGHAM BANCORPORATION
By: /s/ John M. Daughters
----------------------------------------
NAME: John M. Daughters
TITLE: President and Chief Executive Officer
BANK OF BELLINGHAM
By: /s/ John M. Daughters
----------------------------------------
NAME: John M. Daughters
TITLE: President and Chief Executive Officer
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APPENDIX B
Chapter 13 of the Washington Business Corporation Act
23B.13.010 Definitions. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
23B.13.020 Right to dissent. (1) A shareholder is entitled to dissent from,
and obtain payment of the fair value of the shareholder's shares in the event
of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party (i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the shareholder
is entitled to vote on the merger, or (ii) if the corporation is a subsidiary
that is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that
materially reduces the number of shares owned by the shareholder to a fraction
of a share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
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(e) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955 the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the
fair value of the shareholder's shares shall terminate upon the occurrence of
any one of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets
aside the corporate action; or
(c) The shareholder's demand for payment is withdrawn with the
written consent of the corporation.
23B.13.030 Dissent by nominees and beneficial owners. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the shareholder's name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf
the shareholder asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which the
dissenter dissents and the dissenter's other shares were registered in the
names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all
shares of which such shareholder is the beneficial shareholder or over which
such shareholder has power to direct the vote.
23B.13.200 Notice of dissenters' rights. (1) If proposed corporate action
creating dissenters' rights under RCW 23B.13.020 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(2) If corporate action creating dissenters' rights under RCW
23B.13.020 is taken without a vote of shareholders, the corporation, within
ten days after the effective date of such corporate action, shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210 Notice of intent to demand payment. (1) If proposed corporate
action creating dissenters' rights under RCW 23B.13.020 is submitted to a vote
at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights must (a) deliver to the corporation before the vote is taken written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effected, and (b) not vote such shares in
favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection
(1) of this section is not entitled to payment for the shareholder's shares
under this chapter.
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23B.13.220 Dissenters' notice. (1) If proposed corporate action creating
dissenters' rights under RCW 23B.13.020 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of RCW 23B.13.210.
(2) The dissenters' notice must be sent within ten days after the
effective date of the corporate action, and must:
(a) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(c) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230 Duty to demand payment. (1) A shareholder sent a dissenters'
notice described in RCW 23B.13.220 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to RCW
23B.13.220(2)(c), and deposit the shareholder's certificates in accordance
with the terms of the notice.
(2) The shareholder who demands payment and deposits the
shareholder's share certificates under subsection (1) of this section retains
all other rights of a shareholder until the proposed corporate action is
effected.
(3) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
23B.13.240 Share restrictions. (1) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effected or the restriction is
released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until the
effective date of the proposed corporate action.
23B.13.250 Payment. (1) Except as provided in RCW 23B.13.270, within thirty
days of the later of the effective date of the proposed corporate action, or
the date the payment demand is received, the corporation shall pay each
dissenter who complied with RCW 23B.13.230 the amount the corporation
estimates to be the fair value of the shareholder's shares, plus accrued
interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair
value of the shares;
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(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
RCW 23B.13.280; and
(e) A copy of this chapter.
23B.13.260 Failure to take action. (1) If the corporation does not effect
the proposed action within sixty days after the date set for demanding payment
and depositing share certificates, the corporation shall return the deposited
certificates and release any transfer restrictions imposed on uncertificated
shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment
demand procedure.
23B.13.270 After-acquired shares. (1) A corporation may elect to withhold
payment required by RCW 23B.13.250 from a dissenter unless the dissenter was
the beneficial owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation
of how the interest was calculated, and a statement of the dissenter's right
to demand payment under RCW 23B.13.280.
23B.13.280 Procedure if shareholder dissatisfied with payment or offer. (1)
A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under
RCW 23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and
demand payment of the dissenter's estimate of the fair value of the
dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under RCW
23B.13.250 or offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250
within sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
23B.13.300 Court action. (1) If a demand for payment under RCW 23B.13.280
remains unsettled, the corporation shall commence a proceeding within sixty
days after receiving the payment demand and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does
not commence the proceeding within the sixty-day period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
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(2) The corporation shall commence the proceeding in the superior
court of the county where a corporation's principal office, or, if none in
this state, its registered office, is located. If the corporation is a
foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the registered
office of the domestic corporation merged with or whose shares were acquired
by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not
residents of this state, whose demands remain unsettled, parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of
the corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
(6) Each dissenter made a party to the proceeding is entitled to
judgment (a) for the amount, if any, by which the court finds the fair value
of the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to
withhold payment under RCW 23B.13.270.
23B.13.310 Court costs and counsel fees. (1) The court in a proceeding
commenced under RCW 23B.13.300 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court. The court shall assess the costs against the corporation, except
that the court may assess the costs against all or some of the dissenters, in
amounts the court finds equitable, to the extent the court finds the
dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially comply
with the requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the corporation,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefitted.
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APPENDIX C
[LOGO]
COLUMBIA
FINANCIAL
ADVISORS, INC.
1000 Second Avenue
Suite 3650
Seattle, WA 98104-1045 April 16, 1999
(206) 682-5677
FAX (206) 682-7747
Board of Directors
Bellingham Bancorporation
211 East Holly Street
Bellingham, WA 98225
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Bellingham Bancorporation ("BB") of the
consideration to be received by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated January 18, 1999, (the "Agreement")
between BB and Horizon Financial Corp. ("HRZB").
In connection with the proposed merger transaction (the "Merger") whereby
BB will merge into HRZB, each issued and outstanding share of BB common stock
(along with its associated rights) at the effective time of the Merger (other
than (i) shares of holders of which are exercising appraisal rights pursuant
to applicable law and (ii) shares held directly by or indirectly by the Bank,
its parent company or any subsidiary thereof other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall
be exchanged in a 100% stock transaction (the Merger "Consideration"). The
estimated value of the HRZB merger is $37.68 per share of BB common stock and
preferred stock. With the April 9, 1999 closing stock price for HRZB of
$13.125, the estimated value is $35.97 per share.
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and
advises the directors, officers and shareholders of both public and private
banks and thrift institutions with respect to the fairness, from a financial
point of view, of the consideration to be received in transactions such as
that proposed by the Agreement. With particular regard to our qualifications
for rendering an opinion as to the fairness, from a financial point of view,
of the Consideration to be received by holders of the shares from HRZB
pursuant to the Merger, CFAI has advised Washington community banks regarding
fairness of capital transactions. BB has agreed to pay CFAI a fee for this
opinion letter.
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Offices in Seattle, Washington and Portland, Oregon
(503) 222-0562
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Board of Directors
Bellingham Bancorporation
April 16, 1999
In connection with rendering this opinion, we have, among other things:
(i) reviewed the Agreement; (ii) reviewed BB's financial information for the
twelve months ended September 30, 1998 and the three months ended December 31,
1998; (iii) reviewed certain internal financial analyses and certain other
forecasts for BB prepared by and reviewed with the management of BB; (iv)
conducted interviews with senior management of BB regarding the past and
current business operations, results thereof, financial condition and future
prospects of BB; (v) reviewed the current market environment generally and the
banking environment in particular; (vi) reviewed the prices paid in certain
recent mergers and acquisitions in the banking industry on a regional basis;
(vii) reviewed HRZB's audited financial information for the fiscal year ended
March 31, 1998 and quarter ended September 30, 1998 and December 31, 1998,
including the Form 10-KSB filed with the U.S. Securities and Exchange
Commission; (viii) reviewed the price ranges and dividend history for HRZB
common stock; (ix) and reviewed such other information, studies and analyses
and performed such other investigations and took into account such other
matters as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied on
the accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of
the BB or HRZB. With respect to the financial forecasts referred to above, we
have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgment of the senior management of
BB. This opinion is necessarily based upon circumstances and conditions as
they exist and can be evaluated as of the date of this letter. We have not
been authorized to solicit and did not solicit other entities for purposes of
a business combination with BB.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof.
We are not expressing any opinion herein as to the prices at which shares of
HRZB Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the merger.
In reliance upon and subject to the foregoing, it is our opinion that, as
of the date hereof, the Merger Consideration to be received by the
shareholders of BB pursuant to the Agreement is fair, from a financial point
of view, to the shareholders of BB.
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Board of Directors
Bellingham Bancorporation
April 16, 1999
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the
merger transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: /s/ Robert J. Rogowski
------------------------------------------
Robert J. Rogowski
Principal
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APPENDIX D
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF BELLINGHAM
BANCORPORATION
The following discussion and analysis highlights the significant factors
affecting the financial statements of Bellingham Bancorporation and its
wholly-owned subsidiary, Bank of Bellingham. For a more complete
understanding of the following discussions, reference should be made to the
consolidated financial statements and related notes thereto, presented
elsewhere in this Proxy Statement.
In February 1998, Bank of Bellingham's shareholders approved a plan of
reorganization whereby Bellingham Bancorporation was formed and, effective
March 31, 1998, became the sole shareholder of Bank of Bellingham.
Concurrently, the shareholders of the Bank of Bellingham became the
shareholders of Bellingham Bancorporation.
Balance Sheet Analysis
Financial Condition. The total assets of Bellingham Bancorporation
increased by $3,019,505 or 4.70% between December 31, 1998 and September 30,
1998. The increase was due primarily to an increase in deposits of $3,292,644
or 6.21%. Bellingham Bancorporation receives a major portion of its income
from earning assets, which consists of interest-bearing deposits with other
banks, federal funds sold, investment securities and loans. See Tables 1 and
2 for an analysis of the average balances of interest-bearing assets and
interest-bearing liabilities for the quarter ended December 31, 1998, and the
year ended September 30, 1998.
Bellingham Bancorporation's loan portfolio represents the largest
component of the earning assets base and has the largest impact on income from
earning assets. The market in which Bellingham Bancorporation operates is
dependent upon small to medium size commercial business and real estate loans.
While the economy of this market has averaged 2% annual growth during Bank of
Bellingham's six years of existence, the experience and customer base of its
commercial lending officers has contributed to the annual growth in the loan
portfolio.
Inherent in Bank of Bellingham's loan portfolio is credit risk.
Bellingham Bancorporation maintains an allowance for loan losses, which is
evaluated for adequacy by management. Management's methodology to determine
the adequacy of the allowance considers reviews of individual loans, recent
loan loss experience, current economic conditions and the risk characteristics
of the various categories of loans. See Tables 5 through 9 for detailed
information concerning the loan portfolio and the allowance for loan losses.
Investment securities are the second largest component of the earning
assets base. See Tables 3 and 4 for details concerning the position and
maturity ranges of the investment portfolio.
Deposits, the primary source of funding earning assets, increased by
$3,292,644 or 6.21% between December 31, 1998 and September 30, 1998. The
majority of this increase was insured money market accounts, which increased
$2,201,254 or 13.77%. See Table 10 for a maturity analysis of certificates of
deposit of $100,000 and more at December 31, 1998.
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During the period between September 30, 1998 and September 30, 1997,
Bellingham Bancorporation increased the level of borrowings from the Federal
Home Loan Bank in order to provide funds for increased loan growth and to
stabilize interest rate risk. With the opening of the Meridian branch in
November 1998 and the resulting increase in deposits, Bellingham
Bancorporation repaid $1.5 million of borrowed funds in January 1999 to reduce
interest expense.
Liquidity and Interest Rate Sensitivity Management. Liquidity is the
ability of an institution to fund the needs of its borrowers, depositors and
creditors. Based on the maturity structure and the anticipated loan and
deposit funding requirements, Bellingham Bancorporation anticipates its
liquidity requirements will be met in the foreseeable future. Bellingham
Bancorporation's management is of the opinion that the traditional funding
sources of maturing loans and investment securities, federal funds, the base
of core deposits, the borrowing lines of credit with the Federal Home Loan
Bank of Seattle and various other Seattle-based banks, will be adequate to
provide liquidity needs. See Tables 4, 6, and 10 for additional information
on certain investment, loan and deposit maturities.
Capital. The Federal Reserve Board requires bank holding companies to
maintain capital on "risk adjusted" assets so that categories of assets with
potentially higher risk will require more capital backing than assets with
lower risk. In addition, bank holding companies are required to maintain
capital to support, on a risk-adjusted basis, certain off-balance sheet
activities such as loan commitments.
At December 31, 1998, Bellingham Bancorporations' Tier 1 capital and
total capital as a percentage of total risk-adjusted assets exceeded the
required minimum levels. See Table 12 for additional information concerning
Bank of Bellingham's capital ratios.
Earnings Analysis
Net income for the first three months of 1999 was $231,172, an increase
of $41,852, or 22.11% over the same period in 1998. The increase was due
primarily to an increase in net interest income of $127,190 or 18.60%, and fee
income of $83,727 or 65.02%. The annualized return on average assets and
return on average equity for the first three months of 1999 was 1.39% and
14.15%, respectively, compared to 1.35% and 13.17% for the first three months
of 1998. For the years ended September 30 1998 and 1997, the return on
average assets was 1.24% and 1.23%, respectively, while the return on average
equity was 12.36% and 12.28%, respectively.
The primary components of total income and expense which affect net
income are net interest income, provision for loan losses, noninterest income,
noninterest expense and the provision for income taxes. Significant factors
affecting these categories are presented below.
Net Interest Income. Net interest income for the first three months of
fiscal 1999 was $810,896, an 18.60% increase over the same period in 1998.
The primary reason for the increase was an increase in net loans outstanding
of $2,302,285, Federal funds sold of $3,940,000 and interest-bearing deposits
of $4,539,902. Interest on loans, Federal funds sold and interest-bearing
deposits for the three months ended December 31, 1998 increased $193,338 and
$36,120, respectively, as compared to the same period in 1997. Interest
expense for the three months ended December 31, 1998 increased $91,020 or
20.80% as compared to the same period in 1997.
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For the years ended September 30, 1998 and 1997, net interest income was
$3,113,151 and $2,773,780, respectively. The increase in 1998 compared to
1997 was due primarily to an increase in net loans outstanding of $9,288,724
or 22%. Interest on loans increased $567,314 or 13.88% for the year ended
September 30, 1998. See Tables 1 and 2 for more detailed information
regarding rate and volume factors which affected net income during the two
year period ended September 30, 1998.
Provision for Loan Losses. For the first three months of 1999,
Bellingham Bancorporation provided $32,000 for loan losses compared to $24,000
for the comparable period in 1998. The provision for loan losses was $111,000
and $164,000 for the years ended September 30, 1998 and 1997, respectively.
Net charge-offs on loans were $48,618 in 1998 and $69,623 in 1997. For
the three months ended December 31, 1998, net charge-offs totaled $11,780.
The allowance for loan losses was $522,044 or 1.08% of loans at December 31,
1998, compared to $501,824 or 1.00% at September 30, 1998 and $439,442 or
1.03% at September 30, 1997. See Tables 7, 8 and 9 for more information
regarding loan quality and the allowance for loan losses.
Noninterest Income. Total noninterest income for the three months ended
December 31, 1998 and 1997 was $276,166 and $177,868, respectively. The
increase was due primarily to an increase of $140,141 in sold mortgage loan
fees. The decline in interest rates has generated a substantial increase in
mortgage refinancing and purchase loans. Bellingham Bancorporation sells its
mortgage loans into the secondary market, including servicing rights, in
exchange for which it receives service release fee premiums. Total
noninterest income for the year ended September 30, 1998 was $629,961 as
compared to $378,911 for 1997. Mortgage loan fees contributed $240,649 to
this increase.
Noninterest Expense. Total noninterest expense for the three months ended
December 31, 1998 and 1997 was $739,690 and $575,204, respectively. Increases
in salary, occupancy and other expenses, principally associated with the
opening of the Meridian branch, all contributed to the increase. Total
noninterest expense for the year ended September 30, 1998 was $2,629,908 as
compared to $2,189,331 for 1997.
Provision for Income Taxes. Income tax expense for the three months
ended December 31, 1998 and 1997 was $116,200 and $97,050, respectively, for
an effective tax rate of approximately 34%. Income tax expense for the years
ended September 30, 1998 and 1997 was $378,550 and $323,000, respectively.
The effective tax rate was approximately 34%. Note 8 of Notes to the
Financial Statements provides further details of the applicable income tax
expense for 1998 and 1997.
Year 2000
Bellingham Bancorporation's mission-critical functions are out-sourced to
a third-party vendor that implemented new software in 1997. This software is
substantially in compliance with Y2K issues, and is currently undergoing final
testing. To prepare for conversion to the new software, Bellingham
Bancorporation replaced all hardware and software that was not then Y2K
compliant, or sufficiently technologically advanced to operate the new system.
Bellingham Bancorporation has substantially completed the testing of its
proprietary hardware and software. The cost to replace and upgrade the
hardware and software was approximately $112,000, and is being depreciated
over an average life of 36 months. Expenditures since 1997 have been treated
as normal personnel and equipment expense.
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The merger with Horizon Financial Corporation will require Bellingham
Bancorporation to convert to Horizon Financial Corporation's software system.
Horizon Financial Corporation also out-sources its mission-critical functions
to a third-party, which is one of the largest systems providers to the
financial industry, processing over 7,000 financial institutions.
In the unlikely event that the merger does not receive the necessary
regulatory and shareholder approvals, Bellingham Bancorporation will remain
with its current service provider.
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement of Financial Accounting
Standards No. 133 establishes accounting and reporting standards for
derivative instruments. Statement of Financial Accounting Standards No. 133
becomes effective for fiscal years beginning after June 15, 1999.
In October 0f 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 134, Accounting for
Mortgage-Backed Securities Retained After Securitization of Mortgage Loans
Held for Sale by a Mortgage banking Enterprise. Statement of Financial
Accounting Standards No. 134 establishes accounting and reporting standards
for certain activities of mortgage banking enterprises. Statement of
Financial Accounting Standards No. 134 becomes effective for fiscal quarters
beginning after December 15, 1998.
Management believes that adoption of these standards will not have a
material impact on its reported financial condition or results of operations.
Competition
Bellingham Bancorporation competes principally within the limits of the
city of Bellingham, and generally in Whatcom County, Washington markets with
other banks and financial institutions, many or all of which may have greater
financial resources than Bellingham Bancorporation. Bellingham Bancorporation
faces substantial competition from other commercial banks, savings banks,
credit unions, mortgage companies and other non-traditional financial
entities. Regional interstate banking laws and other recent federal and state
laws have resulted in increased competition from both conventional banking
institutions and other businesses offering financial services and products.
Bellingham Bancorporation also competes for interest-bearing funds with a
number of other financial intermediaries and investment alternatives,
including brokerage firms, money market mutual funds, government bonds,
corporate bonds and other securities.
Litigation
There is no material pending litigation of which Bellingham
Bancorporation or the Bank of Bellingham is a party.
D-4
<PAGE>
<PAGE>
Offices
Bellingham Bancorporation's executive offices are located at 211 East
Holly Street, Bellingham, Washington 98225. This address also serves as the
main office of the Bank of Bellingham. The Bank of Bellingham has full
service branch facilities at 801 Alabama Street, Bellingham, Washington 98225
and 2625 Meridian Street, Bellingham, Washington 98225. The Bank of
Bellingham owns the building housing the main office, and the land and
building housing the Alabama office. The remaining premises are operated
pursuant to long-term leases with third parties at prevailing market rental
rates.
Employees
As of December 31, 1998, Bellingham Bancorporation and the Bank of
Bellingham had 35 employees.
D-5
<PAGE>
<PAGE>
<TABLE>
BELLINGHAM BANCORPORATION
Table 1 - Comparative Average Balances - Yields and Rates
The table below shows the average balances and liabilities of Bellingham, the interest income or expense
associated with those assets and liabilities, and the computed yield or rate based upon the interest income
or expense from the quarter ended December 31, 1998, and the fiscal years ended September 30, 1998 and 1997,
respectively.
Quarter Ended December 31, Year Ended September 30, Year Ended September 30,
1998 1998 1997
------------------------------- ------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-
earning
assets:
Loans $49,925,500 $1,230,121 9.88% $46,417,246 $4,653,751 10.03% $40,173,614 $4,086,437 10.17%
Investment
securities:
Taxable 4,839,860 71,609 5.93% 5,357,388 351,426 6.56% 6,045,218 443,857 7.34%
Tax-exempt 400,351 4,524 4.53% 279,533 13,048 4.67% 40,609 2,830 6.97%
Interest-
bearing
deposits 1,278,131 16,393 5.14% 44,641 3,111 6.97% - - -
Federal
funds
sold 3,935,785 48,815 4.97% 1,405,256 77,811 5.54% 1,242,478 69,671 5.61%
----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
Total
interest-
earning
assets 60,379,627 1,371,462 9.11% 53,504,064 5,099,147 9.53% 47,501,919 4,602,795 9.69%
Noninterest-
earning
assets:
Other
assets 5,477,663 5,616,359 5,695,495
Allowance
for loan
losses (511,397) (470,107) (370,886)
----------- ----------- -----------
Total $65,345,893 $58,650,316 $52,826,528
=========== =========== ===========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-
bearing
liabilities:
Demand
deposits $ 5,401,853 $ 22,600 1.68% $ 4,804,125 $ 112,678 2.35% $ 4,686,050 $ 94,143 2.01%
Savings
deposits 20,831,721 196,427 3.78% 19,321,098 749,680 3.88% 18,949,768 764,138 4.03%
Time
deposits 17,500,714 241,011 5.52% 15,925,654 891,022 5.59% 13,621,880 765,848 5.62%
Borrowed
funds 4,789,508 68,528 5.74% 2,100,842 121,616 5.79% 705,229 40,886 5.80%
Total ----------- ---------- ---- ----------- ---------- ---- ----------- ---------- ----
interest-
bearing
liabili-
ties 48,523,796 528,566 4.37% 42,151,719 1,874,996 4.45% 37,962,927 1,665,015 4.39%
Noninterest-
bearing
liabilities:
Demand
deposits 10,215,599 10,283,498 9,449,783
Other 240,312 236,875 267,573
----------- ----------- -----------
58,979,707 52,672,092 47,680,283
Shareholders'
equity 6,366,186 5,978,224 5,146,245
----------- ----------- -----------
Total $65,345,893 $58,650,316 $52,826,528
=========== =========== ===========
Net
interest
earnings $ 842,896 $3,224,151 $2,937,780
Net yield ========== ========== ==========
on
interest-
earning
assets 5.60% 6.03% 6.18%
==== ==== ====
Loan fees included in interest income were approximately $131,906, $441,254 and $269,309 for the quarter
ended December 31, 1998 and the years ended September 30, 1998, and 1997, respectively. Tax-exempt
investments have not been reported on a tax equivalent basis. Nonaccrual loans were not included in the
average balances.
D-6
</TABLE>
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
Table 2 - Volume and Yield/Rate Analysis
The following table shows the change from quarter to year for each component
of the net interest margin separated into the amount generated by volume
changes and the amount generated by changes in the yield or rate.
1998 Compared to 1997
Change Due To:
--------------------------------------
Volume Rate Net
------ ---- ---
Interest Earned on:
Loans $ 635,099 $ (67,785) $ 567,314
Investment securities:
Taxable (50,502) (41,929) (92,431)
Tax-exempt 16,650 (6,432) 10,218
Interest-bearing deposits - 3,111 3,111
Federal funds sold 9,128 (988) 8,140
Total interest-earning ---------- ---------- -----------
assets $ 610,375 $ (114,023) $ 496,352
========== ========== ===========
Interest Paid on:
Demand deposits 2,372 16,163 18,535
Savings deposits 14,974 (29,432) (14,458)
Time deposits 129,523 (4,349) 125,174
Borrowed funds 80,911 (181) 80,730
Total interest-bearing ---------- ---------- -----------
liabilities $ 227,780 $ (17,799) $ 209,981
========== ========== ===========
The change in interest due to both volume and yield/rate has been allocated to
change due to volume and change due to yield/rate in proportion to the
absolute value of the change of each. The balances of nonaccrual loans were
not included for purposes of these computations.
Table 3 - Investment Portfolio
The table below indicates the book value of investment securities by type at
the end of 1Q99, and for the fiscal year ended September 30, 1998.
December 31, September 30,
1998 1998
---- ----
Held-to-Maturity
U.S. Treasury and U.S. Government Agencies $ - -
Obligations of states and political
subdivisions 397,646 400,706
Total held-to-maturity investment ---------- ----------
securities $ 397,646 $ 400,706
========== ==========
Available-for-Sale
U.S. Treasury and U.S. Government Agencies $4,369,266 4,675,711
Obligations of states and political
subdivisions - -
Total debt securities 4,369,266 4,675,711
---------- ----------
Equity Securities 292,600 287,000
Total available-for-sale investment ---------- ----------
securities $4,661,866 $4,962,711
========== ==========
D-7
<PAGE>
<PAGE>
<TABLE>
BELLINGHAM BANCORPORATION
Table 4 - Maturity Distribution and Yields of Investment Portfolio
The following table details the maturities of investment securities at December 31, 1998 and weighted
average yield for each range of maturities.
Maturing
---------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Yield Five Years Yield Ten Years Yield Ten Years Yield Total
-------- ----- ---------- ----- --------- ----- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
U.S. Treasury and
U.S. Government
Agencies $ - $ - $ - $ - $ -
Obligations of states
and political
subdivisions - 28,998 6.97% 368,648 4.30% - 397,646
-------- ---------- ---------- -------- ----------
Total held-to-
maturity
investment
securities $ - $ 28,998 $ 368,648 $ - $ 397,646
======== ========== ========== ======== ==========
Available-for-sale
U.S. Treasury and
U.S. Government
Agencies - 1,811,682 6.06% 1,657,027 6.00% 900,557 6.08% 4,369,266
Obligations of states
and political
subdivisions - - - - -
-------- ---------- ---------- -------- ----------
Total debt
securities - 1,811,682 1,657,027 900,557 4,369,266
Equity securities 292,600 7.26% - - - 292,600
Total available- -------- ---------- ---------- -------- ----------
for-sale invest-
ment securities $292,600 $1,811,682 $1,657,027 $900,557 $4,661,866
======== ========== ========== ======== ==========
D-8
</TABLE>
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
Table 5 - Composition of the Loan Portfolio
December 31, September 31,
1998 1998
---- ----
Commercial $ 16,747,355 $ 12,773,611
Real estate - commercial and mortgages 18,471,099 25,053,302
Real estate - construction 3,028,475 517,619
Consumer 4,012,250 7,980,672
Loans held-for-sale 6,212,325 5,677,391
------------ ------------
$ 48,471,504 $ 52,002,595
============ ============
Table 6 - Loan Maturity and Sensitivity to Changes in Interest Rates
The following table sets forth certain information at September 30, 1998
regarding the dollar amount of loans in Bellingham Bancorporation's loan
Portfolio.
Maturing
-----------------------------------------------------
Maturing
One Year
Within Through After
One Year Five Years Five Years Total
Fixed Rate Loans -------- ---------- ---------- -----
Commercial $ 1,582,226 $ 4,914,796 $ 3,120,746 $ 9,617,768
Real estate -
commercial and
mortgages 2,218,254 11,235,771 5,068,647 18,522,672
Real estate -
construction 3,435,164 91,484 96,613 3,623,261
Consumer 693,787 903,376 1,516,505 3,113,668
Loans held-for-sale 2,739,977 2,128,281 809,133 5,677,391
----------- ----------- ----------- -----------
$10,669,408 $19,273,708 $10,611,644 $40,554,760
=========== =========== =========== ===========
Variable Rate Loans
Commercial $ 4,744,222 $ 1,511,294 $ 503,603 $ 6,759,119
Real estate -
commercial and
mortgages 2,352,305 759,528 213,810 3,325,643
Real estate -
construction - - - -
Consumer 1,360,578 2,495 - 1,363,073
Loans held-for-sale - - - -
----------- ----------- ----------- -----------
$ 8,457,105 $ 2,273,317 $ 717,413 $11,447,835
=========== =========== =========== ===========
Repricing for Variable Rate Loans
-----------------------------------------------------
Variable rate loans(1) $11,447,835 $ - $ - $11,447,835
- -------------------
(1) The repricing information by loan type was not available.
D-9
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
Table 7 - Nonperforming Loans and Past Due Loans
At December 31, 1998 and 1997, Bellingham Bancorporation had loans amounting
to $0 and $14,320, respectively that were considered impaired, all of which
were nonaccruing. The allowance for loan losses relating to impaired loans
was $0 and $14,320, respectively. During the quarters ended December 31, 1998
and 1997 the average balance of impaired loans was approximately $0 and
$14,320, respectively. No interest income on impaired loans was recognized or
collected during the period that the loans were impaired. There were no
commitments to lend additional funds to borrower's whose loans were classified
as impaired.
As of September 30, 1998, loans considered impaired totaled approximately
$134,304, all of which were nonaccruing. There was no allowance for loan
losses relating to impaired loans. During 1998, the average balance of
impaired loans was approximately $ 23,623, No interest income on impaired
loans was recognized or collected during the period that the loans were
impaired. There were no commitments to lend additional funds to borrowers
whose loans were classified as impaired. A summary of past due and
nonaccruing loans follows:
30 to 89 Days 90 Days or More
Past Due and Past Due and
Still Accruing Still Accruing Nonaccruing
-------------- -------------- -----------
September 30, 1998 $ 205,661 $ - $ 134,304
============== ============== ===========
Table 8 - Analysis of the Allowance for Loan Losses
The table below summarizes Bellingham Bancorporation's loan loss experience
for the following periods.
Quarter
Ended Year Ended
December 31, September 30,
1998 1998
---- ----
Amount of loan loss reserve at
beginning of period $ 501,824 $ 439,442
Loans charged off:
Commercial - (34,592)
Consumer (12,020) (15,449)
---------- ----------
Total charge-offs (12,020) (50,041)
Recoveries on loans previously
charged off:
Consumer 240 1,423
---------- ----------
Total recoveries 240 1,423
---------- ----------
Net charge offs (11,780) (48,618)
Additions to allowance charged
to operating expense (2) 32,000 111,000
---------- ----------
Amount of loan loss reserve at
end of period $ 522,044 $ 501,824
========== ==========
Percentage of net charge-offs
during period to average
loans outstanding during the
period 0.02% 0.11%
========== ==========
- -------------------
(2) The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio
by management. These evaluations consider several factors including, but
not limited to general economic conditions, loan portfolio composition,
prior loan losses experience and management's review of individual loans.
D-10
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
Table 9 - Allocation of the Allowance for Loan Losses
The following table is a summary by allocation category of Bellingham
Bancorporation's allowance for loan losses:
Quarter Percentage Percentage
Ended Loans Year Ended Loans
December 31, in each September 30, in each
1998 Category 1998 Category
---- -------- ---- --------
Commercial $ 89,534 34.55% $ 93,463 24.56%
Real estate -
construction 18,777 6.25 22,464 1.00
Real estate - mortgage 134,987 38.11 142,031 48.18
Consumer 85,338 8.28 96,015 15.35
Unallocated 193,408 147,851
-------- --------
$522,044 $501,824
======== ========
Table 10 - Time Deposits of $100,000 or More
The table below shows maturities on outstanding time deposits of $100,000 or
more at December 31, 1998:
Three months or less $3,306,861
Over six months through twelve months 3,223,738
Over twelve months 1,063,445
----------
$7,594,044
==========
Table 11 - Return on Equity and Assets
Quarter Year
Ended Ended
December 31, September 30,
1998 1998
---- ----
Return on average assets 1.39% 1.24%
Return on average equity 14.15% 12.29%
Equity to assets ratio 9.79% 9.90%
Table 12 - Comparison of Capitol Ratios with Regulatory Requirements
Regulatory
Requirements
For Capital
Bellingham Adequacy
Bancorporation Purposes
-------------- --------
As of December 31, 1998
Total capital/risk-weighted assets 11.14% 8.00%
Tier 1 capital/risk-weighted assets 10.23% 4.00%
Tier 1 capital/average assets 9.97% 4.00%
- --------------------
(3) Excludes unrealized gains and losses on securities available for sale.
D-11
<PAGE>
<PAGE>
MOSS-ADAMS LLP
- ------------------------------------------------------------------------------
Certified Public Accountants
Independent Auditor's Report
To the Board of Directors and Stockholders
Bellingham Bancorporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Bellingham
Bancorporation and Subsidiary as of September 30, 1998, and the related
consolidated statements of income, stockholders' equity and comprehensive
income, and cash flows for each of the two years in the period ended September
30, 1998. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bellingham Bancorporation and
Subsidiary as of September 30, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
1998, in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Bellingham, Washington
November 13, 1998
D-12
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 1998
ASSETS
1998
Cash and Cash Equivalents ----
Cash and due from banks $ 2,886,189
Federal funds sold 1,500,000
------------
Total cash and cash equivalents 4,386,189
Investments
Interest-bearing deposits in banks 282,689
Securities available-for-sale 4,701,054
Securities to be held-to-maturity 400,706
Federal Home Loan Bank stock 287,000
------------
Total investments 5,671,449
------------
Loans Held-For-Sale 5,677,391
------------
Loans 46,276,577
Less allowance for loan losses (501,824)
------------
Total loans, net 45,774,753
Other Assets
Bank premises and equipment, net 1,519,706
Goodwill, net 717,548
Accrued interest receivable 378,634
Other 181,761
------------
Total other assets 2,797,649
------------
Total Assets $ 64,307,431
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 10,628,233
Interest-bearing 42,372,696
------------
Total deposits 53,000,929
Other Liabilities
Other borrowed funds 4,681,728
Accrued interest payable 110,164
Other 146,769
------------
Total other liabilities 4,938,661
------------
Total liabilities 57,939,590
------------
Stockholders' Equity
Common stock, $1 par value; 600,000 shares authorized 358,874
Additional paid-in-capital 4,291,110
Retained earnings 1,692,514
Accumulated other comprehensive income, net of tax 25,343
------------
Total stockholders' equity 6,367,841
------------
Total Liabilities and Stockholders' Equity $ 64,307,431
============
See accompanying notes to these financial statements.
D-13
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 1998 and 1997
1998 1997
Interest Income ---- ----
Loans, including fees $ 4,653,751 $ 4,086,437
Investments 365,334 446,687
Federal funds sold 80,062 69,671
------------ ------------
Total interest income 5,099,147 4,602,795
Interest Expense ------------ ------------
Deposits 1,753,380 1,624,129
Other borrowed funds 121,616 40,886
------------ ------------
Total interest expense 1,874,996 1,665,015
------------ ------------
Net Interest Income 3,224,151 2,937,780
Provision for Loan Losses 111,000 164,000
Net Interest Income After Provision for Loan ------------ ------------
Losses 3,113,151 2,773,780
Noninterest Income ------------ ------------
Income from sales of loans to secondary
markets 310,033 79,109
Service fees 298,619 267,441
Net gain on sales of investments 1,901 10,182
Other income 19,408 22,179
------------ ------------
Total noninterest income 629,961 378,911
Noninterest Expenses ------------ ------------
Salaries and employee benefits 1,212,428 1,009,053
Occupancy and equipment 312,959 305,601
Data processing services 254,436 252,184
State business taxes 105,899 63,518
Goodwill amortization 95,673 93,420
Advertising 77,093 81,628
Operational losses 67,294 20,683
Other expenses 504,126 363,244
------------ ------------
Total noninterest expenses 2,629,908 2,189,331
------------ ------------
Income Before Provision for Income Taxes 1,113,204 963,360
Provision for Income Taxes ------------ ------------
Currently payable 411,550 340,000
Deferred benefit (33,000) (17,000)
------------ ------------
Total provision for income taxes 378,550 323,000
------------ ------------
Net Income $ 734,654 $ 640,360
============ ============
Basic Earnings Per Share $2.05 $1.82
===== =====
Diluted Earnings Per Share $1.94 $1.76
===== =====
See accompanying notes to these financial statements.
D-14
<PAGE>
<PAGE>
<TABLE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Years Ended September 30, 1998 and 1997
Accumu-
lated
Other Total
Common Stock Additional Compre- Stock- Compre-
-------------------- Paid-in hensive Retained holders' hensive
Shares Amount Capital Income(Loss) Earnings Equity Income
------ ------ ------- ------------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1996 173,437 $173,437 $4,326,547 $(6,107) $317,500 $4,811,377
Comprehensive income
Net income - - - - 640,360 640,360 $640,360
Other comprehensive
income
Unrealized gains
(losses) on
available-for-
sale securities,
net of taxes of
$(6,341) - - - (12,309) - (12,309) (12,309)
Total other ---------
comprehensive
income - - - - - - (12,309)
---------
Comprehensive income - - - - - - $628,051
========
Common stock issued 6,000 6,000 144,000 - - 150,000
------- -------- ---------- -------- --------- ----------
Balance, September
30, 1997 179,437 179,437 4,470,547 (18,416) 957,860 5,589,428
Comprehensive income
Net income - - - - 734,654 734,654 $734,654
Other comprehensive
income
Unrealized gains
(losses) on
available-for-
sale securities,
net of taxes of
$22,543 - - - 43,759 - 43,759 43,759
Total other --------
comprehensive
income - - - - - - 43,759
---------
Comprehensive income - - - - - - $778,413
Common stock split ========
(two for one) 179,437 179,437 (179,437) - - -
------- -------- ---------- -------- ---------- ----------
Balance, September
30, 1998 358,874 $358,874 $4,291,110 $25,343 $1,692,514 $6,367,841
======= ======== ========== ======= ========== ==========
See accompanying notes to these financial statements.
D-15
</TABLE>
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
1998 1997
Cash Flows From Operating Activities ---- ----
Net income $ 734,654 $ 640,360
Adjustments to reconcile net income to
net cash flows from operating activities
Provision for loan losses 111,000 164,000
Depreciation and amortization 256,138 249,513
Net amortization (accretion) of investment
security premiums and discounts (25,154) 2,607
Net gain on sales of investments (1,901) (10,182)
Proceeds from sales of mortgage loans held-
for-sale 28,524,635 8,942,383
Origination of mortgage loans held-for-sale (32,142,215) (10,309,778)
Gain on sales of SBA guaranteed loans - (137,725)
Interest receivable (91,754) 37,254
Other assets (50,497) 32,315
Interest payable 46,695 8,913
Other liabilities (222,518) 162,505
------------ ------------
Net cash flows from operating activities (2,860,917) (217,835)
Cash Flows From Investing Activities ------------ ------------
Proceeds from sale of other real estate owned - 163,593
Investment in interest-bearing deposits
in banks (271,343) 29,313
Purchases of held-to-maturity investment
securities (368,509) (4,632,041)
Purchases of available-for-sale investment
securities (3,060,491) -
Proceeds from sale and maturities of
securities available-for-sale 3,600,706 6,244,785
Proceeds from maturities of securities
held-to-maturity 5,885 -
Investment in Federal Home Loan Bank stock (115,700) (13,000)
Net change in loans made to customers (5,782,474) (4,470,350)
Additions to premises and equipment (137,453) (91,374)
------------ ------------
Net cash flows from investing activities (6,129,379) (2,769,074)
Cash Flows From Financing Activities ------------ ------------
Proceeds from sale of common stock - 150,000
Increase (decrease) in demand deposits 3,517,639 704,219
Increase in time deposits, net 1,521,968 3,410,729
Proceeds from other borrowings 4,081,728 -
------------ ------------
Net cash flows from financing activities 9,121,335 4,264,948
------------ ------------
Net Change in Cash and Cash Equivalents 131,039 1,278,039
Cash and Cash Equivalents, beginning of year 4,255,150 2,977,111
------------ ------------
Cash and Cash Equivalents, end of year $ 4,386,189 $ 4,255,150
============ ============
Supplemental Disclosure of Cash Flow
Information
Cash paid during the year for interest $ 1,828,301 $ 1,656,102
============ ============
Cash paid during the year for federal
income taxes $ 389,000 $ 111,500
============ ============
See accompanying notes to these financial statements.
D-16
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 1 - Organization And Summary Of Significant Accounting Policies
(a) Basis of Presentation - The Consolidated financial statements include the
accounts of Bellingham Bancorporation (the Corporation), a bank holding
company, and its wholly-owned subsidiary, Bank of Bellingham (the Bank).
Significant intercompany account balances and transactions have been
eliminated.
During 1998, the stockholders of the Bank approved the formation of the
Corporation for the benefit of stockholders. The stockholders of the Bank
exchanged shares of the Bank for shares of the Corporation, and the Bank
became a wholly-owned subsidiary of the Corporation.
(b) Nature of Operations - The Bank provides a full range of banking services
to individual and corporate customers through its branches in Whatcom County,
Washington. The Bank is subject to significant competition from other
financial institutions. The Bank is also subject to the regulations of certain
federal and state of Washington agencies and undergoes periodic examinations
by those regulatory authorities.
(c) Financial Statement Presentation and Use of Estimates - The financial
statements have been prepared in accordance with generally accepted accounting
principles and reporting practices applicable to the banking industry. In
preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
of the date of the balance sheet, and revenues and expenses for the period.
Actual results could differ from estimated amounts. Material estimates that
are particularly susceptible to significant change relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in
connection with foreclosure or in satisfaction of loans.
(d) Cash and Cash Equivalents - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks and federal
funds sold. Generally, federal funds are purchased and sold for one-day
periods. Investments in federal funds sold are made with major banks as
approved by the Board of Directors.
(e) Investment Securities - The Bank classifies its securities into one of
three categories: (1) held-to-maturity, (2) available-for-sale, or (3)
trading. Investment securities are categorized as held-to-maturity when the
Bank has the positive intent and ability to hold those securities to maturity.
Securities which are held-to-maturity are stated at cost and adjusted for
amortization of premiums and accretion of discounts which are recognized as
adjustments to interest income.
Investment securities categorized as available-for-sale are generally held for
investment purposes (to maturity), although unanticipated future events may
result in the sale of some securities. Available-for-sale securities are
recorded at estimated fair value, with the net unrealized gain or loss
included as other comprehensive income in the statement of stockholders'
equity, net of the related tax effect. Realized gains or losses on
dispositions are based on the net proceeds and the adjusted carrying amount of
securities sold, using the specific identification method.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their cost that are other than temporary are recognized
by write-downs of the individual securities to their fair value. Such write-
downs would be included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
The Bank had no trading securities at either year end.
D-17
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 1 - Organization And Summary Of Significant Accounting Policies
(Continued)
(f) Loans Held for Sale - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains or losses on the sale of such
loans are based on the specific identification method.
(g) Loans Receivable - Loans receivable, that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off, are
reported at their outstanding principal adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated loans
and unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The Bank considers loans impaired when it is probable the Bank will not be
able to collect all amounts due under a loan agreement. Impaired loans are to
be measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Changes in these values will
be reflected in income and as adjustments to the allowance for possible credit
losses.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received, or payment is considered certain.
The allowance for loan losses is maintained at a level management believes is
adequate to provide for potential loan, loan commitment and standby letter of
credit losses. The allowance is based on a continuing review of loans, loan
commitments and standby letters of credit which includes consideration of
actual loss experience, changes in the size and character of the portfolio,
identification of individual problem situations which may affect the
borrower's ability to repay, and evaluations of the prevailing and anticipated
economic conditions.
Management believes the allowance for loan losses and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revision of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination processes, periodically review the Bank's allowance for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Bank to recognize additional losses based on their judgment using
information available to them at the time of their examination.
(h) Premises and Equipment - Premises and equipment are stated at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets, which range from 5 to 32 years.
(i) Goodwill - Goodwill recognized in connection with the purchase of branch
assets and related liabilities is amortized using the straight-line method
over ten years. Accumulated amortization was $236,000 at September 30, 1998.
D-18
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 1 - Organization And Summary Of Significant Accounting Policies
(Continued)
(j) Income Taxes - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. Deferred taxes result
from temporary differences in the recognition of certain income and expense
amounts between the Bank's financial statements and its tax returns. The
principal items giving rise to these differences include depreciation,
investment income and loan loss reserves.
(k) Financial Instruments - In the ordinary course of business, the Bank has
entered into off-balance-sheet financial instruments consisting of commitments
to extend credit, commitments under credit-card arrangements, commercial
letters of credit, and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.
(l) Advertising Costs - The Bank expenses advertising costs as they are
incurred. Total advertising expenses were $77,000 in 1998 and $82,000 in 1997.
(m) Stock Options - The Bank recognizes the financial effects of stock
options in accordance with Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees (APB 25). Generally, stock options
are issued at a price equal to the fair value of the Bank's stock as of the
grant date. Under APB 25, options issued in this manner do not result in the
recognition of employee compensation in the Bank's financial statements.
Disclosures required by Statement of Financial Accounting Standard No. 123
Accounting for Stock-Based Compensation are provided in Note 9.
(n) Premiums From Sale Of SBA Guaranteed Loan Participations - From time to
time, the Bank sells the guaranteed portion of government guaranteed loans to
third parties. The Bank realizes a premium from the sale of such
participations, plus a negotiated annual servicing fee.
(o) Earnings Per Share - Basic earnings per share amounts are computed based
on the weighted average number of shares outstanding during the period after
giving retroactive effect to stock dividends and stock splits. Diluted
earnings per share amounts are computed by determining the number of
additional shares that are deemed outstanding due to stock options and
warrants under the treasury stock method.
(p) Comprehensive Income - During fiscal 1998, the Bank adopted SFAS No. 130,
Reporting Comprehensive Income. This Statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. All prior
years have been restated to conform with the new requirements.
(q) Reclassifications - Certain reclassifications have been made to the prior
year financial statements to conform with the current year presentation.
D-19
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 2 - Investment Securities
Carrying amounts and approximate fair values of investment securities at
September 30, 1998 are summarized as follows:
Gross Unrealized Estimated
Amortized ----------------- Fair
Cost Gains Losses Value
Available-for-Sale Securities ---- ----- ------ -----
U.S. Treasury and obligations
of U.S. government agencies $4,675,711 $30,683 $5,340 $4,701,054
Held-To-Maturity Securities
State and political
subdivisions 400,706 4,994 - 405,700
---------- ------- ------ ----------
Total Investment Securities $5,076,417 $35,677 $5,340 $5,106,754
========== ======= ====== ==========
The amortized cost and estimated fair value of investment securities at
September 30, 1998 by contractual or expected maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Available-For-Sale Held-To-Maturity
---------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
U.S. Treasury and Obligations
of U.S. Government Agencies
1-2 years $ - $ - $ - $ -
2-5 years 3,051,892 3,084,606 - -
5-10 years 250,076 257,670 - -
Over 10 years 1,373,743 1,358,778 - -
State and Political
Subdivisions
2-5 years - - 32,096 35,071
5-10 years - - 368,610 370,629
---------- ---------- -------- --------
$4,675,711 $4,701,054 $400,706 $405,700
========== ========== ======== ========
Gross realized gains and losses on investment sales were as follows for the
years ended September 30:
1998 1997
---- ----
Proceeds from sales of securities
available-for-sale $ 822,422 $ 4,705,618
Gross gains realized on securities ========== ============
available-for-sale $ 1,901 $ 18,160
Gross losses realized on securities ========== ============
available-for-sale $ - $ 7,978
========== ============
Investment securities with a book value of $2,951,840 were pledged to secure
U.S. government and public deposits as required by law, as of September 30,
1998.
D-20
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 3 - Federal Home Loan Bank ("FHLB") Stock
FHLB stock represents an investment by the Bank in the capital stock of the
Federal Home Loan Bank and is carried at par value ($100 per share), which
approximates its fair value. As an investor, the Bank is entitled to certain
benefits including a variety of funding options at various interest rates and
terms, and correspondent banking services. In addition, quarterly stock
dividends are paid by the FHLB.
Note 4 - Loans
The major classifications of loans as of September 30, 1998 are summarized as
follows:
Commercial real estate and mortgages $ 25,053,302
Commercial 12,773,611
Consumer 7,980,672
Real estate construction 517,619
Deferred loan fees (48,627)
--------------
Total loans $ 46,276,577
==============
The allowance for loan losses at September 30, 1998 and changes during the
year are as follows:
Balance at beginning of year $ 439,442
Provision charged to operating expenses
for loan losses 111,000
Loans charged off (48,618)
--------------
Balance at end of year $ 501,824
==============
As of September 30, 1998, loans considered impaired totaled approximately
$134,304, all of which were nonaccruing. There was no allowance for loan
losses relating to impaired loans. During 1998, the average balance of
impaired loans was approximately $23,623. No interest income on impaired loans
was recognized or collected during the period that the loans were impaired.
There were no commitments to lend additional funds to borrowers whose loans
were classified as impaired. A summary of past due and nonaccruing loans
follows:
30 to 89 Days 90 Days or More
Past Due and Past Due and
Still Accruing Still Accruing Nonaccruing
-------------- -------------- -----------
September 30, 1998 $ 205,661 $ - $ 134,304
============= ============= ===========
Note 5 - Bank Premises And Equipment
Bank premises and equipment as of September 30, 1998 are classified as
follows:
Land $ 237,500
Building and site work 1,150,853
Computer equipment 281,909
Other equipment 231,657
Furniture and fixtures 166,394
Construction-in-progress 37,563
------------
2,105,876
Less accumulated depreciation and
amortization (586,170)
------------
$ 1,519,706
============
D-21
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 6 - Deposits
Deposits as of September 30, 1998 consisted of the following:
Savings accounts $ 3,871,186
Certificates of deposit under $100,000 9,601,709
Certificates of deposit over $100,000 7,188,519
Demand accounts
Noninterest-bearing 9,900,214
Interest-bearing 5,721,882
Money market accounts 15,989,400
Other deposits 728,019
-------------
$ 53,000,929
=============
Note 7 - Other Borrowed Funds
The Bank has a promissory note with the Federal Home Loan Bank of Seattle in
the amount of $600,000 at September 30, 1998. Interest only payments are due
and payable each month, and are calculated based on the 11th District Cost of
Funds rate in effect at the beginning of the month plus ninety basis points
(5.811% at September 30, 1998). The interest rate on the note reprices at the
end of each month. The note is secured by the assets of the Bank generally,
and specifically, a commercial loan with a principal balance of $264,435 at
September 30, 1998, and is due in full on May 28, 1999.
The Bank has fixed rate advances from the Federal Home Loan Bank of Seattle
totaling $3,500,000 at September 30, 1998. Interest only payments are due and
payable each month. Interest rates range from 5.59% to 5.96%. The note is
secured by the assets of the Bank generally, and specifically, cash and
interest bearing deposits at the FHLB of $282,504. The advances are due in
full on their respective maturity dates ranging from August 5, 1999 through
May 28, 2003.
The Bank has a treasury, tax and loan note option with the Federal Reserve
Bank in the amount of $581,728 at September 30, 1998 payable on demand.
Interest is payable monthly at a rate .25% below the federal funds rate
(4.75%). The note is secured by a pledge of certain qualifying investment
securities.
Note 8 - Income Taxes
Total deferred tax assets and liabilities are as follows:
1998
----
Deferred tax assets
Loan loss reserve in excess of amount
allowed for tax reporting $ 150,000
Other items, net 7,000
----------
Total deferred tax asset 157,000
----------
Deferred tax liabilities
Income deferred for tax purposes (20,000)
Other items, net (17,000)
----------
Total deferred tax asset (37,000)
----------
Net deferred tax assets $ 120,000
==========
Management believes the net deferred tax asset will be realized in the normal
course of operations and, accordingly, has not reduced net deferred tax assets
by a valuation allowance.
D-22
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 9 - Stockholders' Equity
(a) The Corporation and Bank are 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 Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The capital amounts and classifications are 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 Corporation and Bank to maintain minimum amounts and ratios (set
forth in the table below and as defined in the regulations) of total and Tier
I capital to risk-weighted assets, and of Tier I capital to average assets.
Management believes, as of September 30, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of January 1998, the most recent notification from the Federal Deposit
Insurance Corporation, 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 total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The Corporation and Bank's actual capital amounts and ratios are also
presented in the table (in thousands).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Annual Adequacy Purposes Action Provisions
-------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September
30, 1998
Total Capital
(to Risk Weighted
Assets) Greater Greater
or Less or Less
Consolidated $ 6,073 11% $ 4,537 Than 8.0% $ 5,672 Than 10%
Greater Greater
Bank of or Less or Less
Bellingham $ 5,982 11% $ 4,537 Than 8.0% $ 5,671 Than 10%
Tier I Capital
(to Risk Weighted Greater Greater
Assets) or Less or Less
Consolidated $ 5,571 10% $ 2,269 Than 4.0% $ 3,403 Than 6%
Greater Greater
Bank of or Less or Less
Bellingham $ 5,480 10% $ 2,268 Than 4.0% $ 3,403 Than 6%
Tier I Capital Greater Greater
(to Average Assets) or Less or Less
Consolidated $ 5,571 9% $ 2,376 Than 4.0% $ 2,971 Than 5%
Bank of
Bellingham $ 5,480 9% $ 2,375 Than 4.0% $ 2,969 Than 5%
(b) Stock Option and Incentive Plans - The Bank has authorized options on
30,000 shares of stock under the 1993 Stock Option Plan and 20,000 shares of
stock under the 1998 Stock Option Plan, (the maximum amount, as adjusted by
two-for-one stock split) to certain officers and key employees. Options are
granted at the then fair market value and vest at 20 percent per year. Options
are exercisable from one to five years from date of grant, subject to certain
limitations, and expire after 10 years.
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123 Accounting for Stock-
Based Compensation. The pro forma information recognizes, as compensation, the
value of stock options granted using an option valuation model known as the
Black Scholes model. The fair value of options issued in 1998 and 1997 is
estimated at $21,010 and $28,066, respectively. The following assumptions were
used to estimate the fair value of the options:
D-23
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 9 - Stockholders' Equity (Continued)
1998 1997
---- ----
Risk-free interest rate 4.72% 6.11%
Dividend yield rate 0.00% 0.00%
Price volatility 0.00% 0.00%
Weighted average expected life of options 5 yrs 5 yrs
Management believes that the assumptions used in the option pricing model are
highly subjective and represent only one estimate of possible value, as there
is no active market for the options granted. The fair value of the options
granted are allocated to pro forma earnings over the vesting period of the
options. The pro forma effect on the Bank's earnings as a result of option
issuances for the years ended September 30, 1998 and 1997 is as follows:
1998 1997
---- ----
Net income as reported $734,654 $640,360
Additional compensation for fair
value of stock options 6,475 4,872
-------- --------
Pro forma net income $728,179 $635,488
======== ========
Pro forma earnings per share
Basic $2.03 $1.81
===== =====
Diluted $1.92 $1.74
===== =====
Stock option transactions were:
Shares of Common Stock
----------------------
Available
for Under Exercise Price of
Option Plan Shares Under Plan
------ ---- -----------------
Balance, September 30, 1996 6,000 24,000
Granted (6,000) 6,000 $16.50 to $18.00
-------- --------
Balance, September 30, 1997 - 30,000
Granted 20,000 -
Authorized (4,200) 4,200 $19.25
-------- --------
Balance September 30, 1998 15,800 34,200
======== ========
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------ -------------------
Weighted
Average Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
$12.50 - 15.00 24,000 4.80 years $13.15 16,200 $13.15
$16.50 - 18.00 6,000 7.15 years 16.70 1,200 16.70
$ 19.25 4,200 9.55 years 19.25 - -
D-24
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 10 - Employee Benefit Plans
The Bank has a 401(k) savings plan covering substantially all of its full-time
employees. Eligible employees may contribute through payroll deductions.
Effective January 1996, the plan was amended to allow the Bank to make annual
matching contributions, to actual employee contributions, based on certain
formulas established in the plan, up to a maximum of 4% of the employee's
salary. Contributions for the plan are funded currently and were $8,500 in
1998 and $4,500 in 1997.
Note 11 - Commitments and Contingency (Also see Note 19)
Operating Lease Commitments - The Bank leases certain parcels of land for its
operations. The leases expire at various times, the earliest being 2002 and
the latest 2016. The leases may be extended at the Bank's option ranging from
five years to forty-five years. The leases terms call for rent increases at
five year increments based upon predetermined indices (and possible appraisal
adjustments). The leases require the Bank to pay all taxes, maintenance and
utility costs as well as maintain certain types of insurance. The annual lease
commitment for land, without regard to indexed increases, for the next five
years and thereafter is as follows:
Year Ending
September 30,
-------------
1999 $ 103,000
2000 103,000
2001 103,000
2002 103,000
2003 74,000
Thereafter 228,000
------------
$ 714,000
============
Rental expense charged to operations was $47,000 and $45,000 for the years
ended September 30, 1998, respectively.
Contingent Gain - The Bank has filed a claim with its insurance company for
the recovery of an operational loss incurred during fiscal 1998. The maximum
expected recovery is $59,750. The Bank believes its claim has merit and will
record the recovery, if any, once the claim has been settled with the
insurance company.
Note 12 - Related Party Transactions
Certain directors, executive officers and principal stockholders are customers
of, and have had banking transactions with the Bank, and the Bank expects to
have such transactions in the future. All loans and commitments included in
such transactions were made in compliance with applicable laws on
substantially the same terms (including interest rates and collateral) as
those prevailing at the time for comparable transactions with other persons
and do not involve more than the normal risk of collectibility or present any
other unfavorable features. The amount of loans outstanding to directors,
executive officers, principal stockholders and companies with which they are
associated was approximately $1,385,022 at September 30, 1998. Interest earned
on loans to these parties amounted to approximately $117,937 in 1998 and
$145,000 in 1997.
D-25
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 13 - Stock Warrants
In 1992, certain key organizers of the Bank received warrants for 24,000
shares of stock at an exercise price of $12.50 per share. As of September 30,
1998, warrants for 12,000 shares of stock were still outstanding, which expire
September 30, 2002.
Note 14 - Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is with customers located within Whatcom
County. Investments in state and municipal securities involve governmental
entities within the state of Washington. The Bank originates commercial, real
estate and consumer loans. Generally, loans are secured by accounts
receivable, inventory, deposit accounts, personal property or real estate.
Rights to collateral vary and are legally documented to the extent
practicable. Although the Bank has a diversified loan portfolio, local
economic conditions may affect borrowers' ability to meet the stated repayment
terms.
The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of policy, does not
extend credit in excess of $1.1 million to any single borrower or group of
related borrowers.
Note 15 - Financial Instruments
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit, standby letters of credit
and financial guarantees. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized
in the balance sheet. The contract or notional amounts of those instruments
reflect the extent of the Bank's involvement in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, standby
letters of credit, and financial guarantees written is represented by the
contractual notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Commitments to Extend Credit and Financial Guarantees - Commitments to extend
credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank's experience has been that approximately fifty percent
of loan commitments are drawn upon by customers, while no commercial letters
of credit have been utilized. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment,
and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing,
and similar transactions. All guarantees are short-term. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Collateral supporting those
commitments, for which collateral is deemed necessary, generally amounts to
one hundred percent of the commitment amount at September 30, 1998.
The Bank has not been required to perform on any financial guarantees and has
not incurred any losses on its commitments during the past two years.
D-26
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 15 - Financial Instruments (Continued)
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at September 30, 1998 follows:
Notional
Amount
------
Commitments to extend credit $ 7,290,000
Credit card arrangements 5,400,000
Standby letters of credit 40,000
Note 16 - Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments. The estimated fair value amounts have
been determined by the Bank using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Bank could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts. The fair value of
commitments to customers is not considered material since they are for
relatively short periods of time and subject to customary credit terms. The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
(a) Cash, due from banks, federal funds sold and interest-bearing deposits in
banks - For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
(b) Investment securities and loans held-for-sale - For securities and loans
held-for-sale, fair values are based on quoted market prices or dealer quotes,
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
(c) Federal Home Loan Bank Stock - FHLB stock is carried at par value which
approximates its fair value.
(d) Loans - The fair value of loans generally is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities. For certain homogeneous categories of loans, such as Small
Business Administration guaranteed loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics.
(e) Deposits - The fair value of demand deposits, savings accounts, and
certain money market deposits, is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
(f) Temporary borrowed funds - These borrowings are short-term in nature, and
their recorded values approximate their fair values.
(g) Term debt - These instruments represent borrowings with the Federal Home
Loan Bank, and their fair values are estimated by discounting future cash
flows using current interest rates offered for these types of borrowings.
D-27
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 16 - Fair Value of Financial Instruments (Continued)
September 30, 1998
-----------------------------
Carrying Estimated
Amount Fair Value
------ ----------
Assets
Cash, due from banks and interest bearing
deposits in other banks $ 4,668,878 $ 4,668,878
Investment securities
Available-for-sale 4,701,054 4,701,054
Held-to-maturity 400,706 405,700
FHLB stock 287,000 287,000
Loans held-for-sale 5,677,391 5,677,391
Fixed rate loans 34,878,274 37,825,238
Variable rate loans 11,723,574 11,723,547
Liabilities
Demand and savings deposits 36,210,710 36,969,499
Time deposits 16,790,228 16,031,430
Temporary borrowed funds 581,728 581,728
Term debt 4,100,000 3,866,676
(h) Limitations - The fair value estimates presented herein are based on
pertinent information available to management as of the applicable date.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Bank to have
disposed of such items at September 30, 1998, the estimated fair values would
necessarily have been achieved at that date, since market values may differ
depending on various circumstances. The estimated fair value at September 30,
1998 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Bank that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not
recognized in the financial statements, nevertheless may have value but are
not included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the trained work force,
customer goodwill, and similar items.
Note 17 - Earnings Per Share
The numerators and denominators of basic and diluted earnings per share are as
follows:
1998 1997
---- ----
Net income (numerator) $ 734,654 $ 640,360
============ ============
Shares used in the calculation (denominator)
Weighted average shares outstanding 358,874 352,874
Effect of dilutive stock options and
warrants 19,898 11,727
------------ ------------
Diluted shares 378,772 364,601
============ ============
Basic Earnings per share $ 2.05 $ 1.82
====== ======
Diluted Earnings per share $ 1.94 $ 1.76
====== ======
D-28
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 18 - Parent Company (Only) Financial Information
Condensed balance sheet at September 30, 1998:
1998
ASSETS ----
Cash and due from bank $ 89,790
Investment in Bank 6,269,278
Other assets 8,773
------------
Total assets $ 6,367,841
============
TOTAL STOCKHOLDERS' EQUITY $ 6,367,841
============
Condensed statement of income for the year ended
September 30, 1998:
1998
INCOME ----
Dividend from Bank $ 100,000
Interest income 1,670
------------
Total income 101,670
------------
EXPENSES
Legal fees 1,889
Amortization of prepaids 932
Other expenses 286
------------
Total expenses 3,107
------------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF BANK 98,563
EQUITY IN UNDISTRIBUTED INCOME OF BANK 636,091
------------
NET INCOME $ 734,654
============
Condensed statement of cash flows for the year ended:
1998
CASH FLOWS FROM OPERATING ACTIVITIES ----
Net income $ 734,654
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed income of Bank (636,091)
Other operating activities (9,705)
Amortization 932
------------
Net cash from operating activities 89,790
------------
NET INCREASE IN CASH 89,790
CASH, beginning of year -
------------
CASH, end of year $ 89,790
============
D-29
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1998 and 1997
Note 19 - Subsequent Event
Subsequent to year end, the Bank completed leasehold improvements to its third
branch and began operations. The lease calls for the Bank to pay base rent,
taxes, maintenance and utility costs as well as certain types of insurance.
The Bank's total future minimum lease commitment for this new branch is
included in Note 11.
Note 20 - New Accounting Pronouncements
The Financial Accounting Standards Board also issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities in June 1998. The Statement
establishes accounting and reporting standards for derivative instruments.
SFAS No. 133 becomes effective for fiscal years beginning after June 15, 1999.
The Financial Accounting Standards Board also issued SFAS No. 134 Accounting
for Mortgage-Backed Securities Retained After Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise in October of 1998. The
statement establishes accounting and reporting standards for certain
activities of mortgage banking enterprises. SFAS No. 134 becomes effective for
fiscal quarters beginning after December 15, 1998.
Management believes that adoption of these standards will not have a material
impact on its reported financial condition or results of operations.
D-30
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1998
Unaudited
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 2,804,895
Federal funds sold 3,940,000
------------
Total cash and cash equivalents 6,744,895
Investments
Interest-bearing deposits in other banks 4,572,811
Securities available-for-sale 4,414,923
Securities to be held-to-maturity 397,646
Federal Home Loan Bank stock 292,600
------------
Total investments 9,677,980
Loans 48,389,872
Less allowance for loan losses (522,044)
------------
Total loans, net 47,867,828
Other Assets
Bank premises and equipment, net 1,768,913
Goodwill, net 703,197
Accrued interest receivable 354,151
Other 209,972
------------
Total other assets 3,036,233
------------
Total Assets $ 67,326,936
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 10,591,300
Interest-bearing 45,702,272
------------
Total deposits 56,293,572
Other Liabilities
Other borrowed funds 4,141,222
Accrued interest payable 110,496
Other 178,654
------------
Total other liabilities 4,430,372
------------
Total liabilities 60,723,944
Stockholders' Equity
Common stock, $1 par value; 600,000 shares authorized 358,874
Additional paid-in capital 4,291,110
Retained earnings 1,923,687
Accumulated other comprehensive income, net of tax 29,321
------------
Total stockholders' equity 6,602,992
------------
Total Liabilities and Stockholders' Equity $ 67,326,936
============
See accompanying notes to these financial statements.
D-31
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
CONSOLIDATED BALANCE SHEET
December 31, 1998
Unaudited
1998 1997
---- ----
Interest Income
Loans, including fees $ 1,230,121 $ 1,036,779
Investments 92,526 95,774
Federal funds sold 48,815 12,695
------------ ------------
Total interest income 1,371,462 1,145,248
Interest Expense ------------ ------------
Deposits 460,038 428,059
Other borrowed funds 68,528 9,487
------------ ------------
Total interest expense 528,566 437,546
------------ ------------
Net Interest Income 842,896 707,702
Provision for Loan Losses 32,000 24,000
Net Interest Income After Provision for Loan ------------ ------------
Losses 810,896 683,702
Noninterest Income ------------ ------------
Service fees 212,501 140,688
Other income 63,665 37,180
------------ ------------
Total noninterest income 276,166 177,868
------------ ------------
Noninterest Expenses
Salaries and employee benefits 360,149 273,877
Occupancy and equipment 89,530 83,400
Other expenses 290,010 217,927
------------ ------------
Total noninterest expenses 739,689 575,204
------------ ------------
Income Before Provision for Income Taxes 347,373 286,366
Provision for Income Taxes 116,200 97,050
------------ ------------
Net Income $ 231,173 $ 189,316
============ ============
Basic Earnings Per Share $ .64 $ .53
===== =====
Diluted Earnings Per Share $ .62 $ .51
===== =====
See accompanying notes to these financial statements.
D-32
<PAGE>
<PAGE>
<TABLE>
BELLINGHAM BANCORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the Three Months Ended December 31, 1998
Unaudited
Accumu-
lated
Addi- Other Total
Common Stock tional Compre- Stock- Compre-
-------------------- Paid-in hensive- Retained holders' hensive
Shares Amount Capital Income Earnings Equity Income
------ ------ ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1998 358,874 $ 358,874 $ 4,291,110 $ 25,343 $ 1,692,514 $ 6,367,841
Comprehensive income
Net income - - - - 231,173 231,173 $ 231,173
Other comprehensive
income
Unrealized gains
(losses) 3,978 3,978 3,878
Total other
comprehensive ----------
income 3,878
----------
Comprehensive income - - - - - - $ 235,051
------- --------- ----------- -------- ----------- ----------- ==========
Balance, December
31, 1998 358,874 $ 358,874 $ 4,291,110 $ 29,321 $ 1,923,687 $ 6,602,992
======= ========= =========== ======== ========== ===========
See accompanying notes to these financial statements.
D-33
</TABLE>
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended December 31, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
December 31, December 31,
1998 1997
Cash Flows From Operating Activities ---- ----
Net income $ 231,173 $ 186,635
Adjustments to reconcile net income to
net cash flows from operating activities
Provision for loan losses 32,000 24,000
Depreciation and amortization 45,808 48,322
Net amortization (accretion) of investment
security premiums and discounts - 9,843
Interest receivable 24,483 (82,274)
Other assets (28,211) 30,364
Interest payable (110,164) 15,426
Other liabilities 142,381 (202,008)
----------- -----------
Net cash flows from operating activities 337,470 30,308
Cash Flows From Investing Activities ----------- -----------
Investment in interest-bearing deposits in
banks (4,290,122) 11,346
Net proceeds from maturities of securities
held-to-maturity 3,060 2,892
Net proceeds from sale and maturities of
securities available-for-sale 290,109 113,149
Investment in Federal Home Loan Bank stock (5,600) (6,900)
Net change in loans made to customers 3,552,316 (3,426,123)
Additions to premises and equipment (280,664) (54,328)
----------- -----------
Net cash flows from investing activities (730,901) (3,359,964)
Cash Flows From Financing Activities ----------- -----------
Proceeds from sale of common stock
Proceeds from long-term-debt - 500,000
Payments on long-term-debt (540,506) -
Increase in interest-bearing deposits, net 3,329,576 1,197,191
Increase (Decrease) in non-interest
deposits, net (36,933) 530,349
----------- -----------
Net cash flows from financing activities 2,752,137 2,227,540
----------- -----------
Net Change in Cash and Cash Equivalents 2,358,706 (1,102,116)
Cash and Cash Equivalents, beginning of
period 4,386,189 4,255,150
----------- -----------
Cash and Cash Equivalents, end of year $ 6,744,895 $ 3,153,034
=========== ===========
See accompanying notes to these financial statements.
D-34
<PAGE>
<PAGE>
BELLINGHAM BANCORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended December 31, 1998 and 1997
Note 1 - Financial Statement Presentation
The balance sheet as of December 31, 1998, the statements of income and cash
flows for the three months ended December 31, 1998 and 1997 and the statement
of stockholders' equity for the three months ended December 31, 1998, have
been prepared by Bellingham Bancorporation, without audit. In the opinion of
management, all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position, results of operations and
cash flows at December 31, 1998 and for all periods presented have been made.
Operating results for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending September 30, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted in accordance with Article 3 of Regulation S-B.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended September 30, 1998 included
elsewhere herein.
Note 2 - Net Income Per Share
Basic earnings per share of common stock, after giving effect to the stock
split, is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding plus the additional shares deemed
outstanding for stock options and warrants calculated using the treasury stock
method.
Note 3 - The Merger
On January 18, 1999, Horizon Financial Corporation and Bellingham
Bancorporation entered into a merger agreement pursuant to which Horizon
Financial Corporation proposes to acquire all of the issued and outstanding
stock of Bellingham Bancorporation. Under the Merger Agreement, each share of
Bellingham Bancorporation common stock outstanding will be converted into the
right to receive 2.74 shares of Horizon Financial Corporation common stock.
There will be no fractional shares of Horizon Financial Corporation common
stock issued in the merger. Each holder of Bellingham Bancorporation common
stock who would otherwise be entitled to receive a fractional share of Horizon
Financial Corporation common stock will receive a cash payment equal to the
fraction multiplied by $13.74.
D-35
<PAGE>
