As filed with the Securities and Exchange Commission on August 11, 1997
Registration No. 333-30203
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
(Including Exhibits)
RIVERVIEW BANCORP, INC.
(Exact name of registrant in its charter)
Washington 6035 91-1838969
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(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
700 N.E. Fourth Avenue
Camas, Washington 98607
(360) 834-2231
(Address and telephone number of principal executive offices and
place of business)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
(202) 737-7900
(Name, address and telephone number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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Calculation of Registration Fee
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Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount Being Proposed Offering Aggregate Offering Amount of
Being Registered Registered(1) Price(1) Price(1) Registration Fee
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Common Stock,
$0.01 Par Value 6,127,938 $10.00 $61,279,380 $18,570(2)
Participation Interests 50,000 -- -- (3)
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(1) Estimated solely for purposes of calculating the registration fee. As
described in the Prospectus, the actual number of shares to be issued and sold
are subject to adjustment based upon the estimated pro forma market value of the
registrant and market and financial conditions.
(2) $16,507 previously paid.
(3) The securities of Riverview Bancorp, Inc. to be purchased by the Riverview
Savings Bank, FSB 401(k) Plan are included in the amount shown for Common Stock.
Accordingly, pursuant to Rule 457(h) of the Securities Act of 1933, as amended,
no separate fee is required for the participation interests. Pursuant to such
rule, the amount being registered has been calculated on the basis of the number
of shares of Common Stock that may be purchased with the current assets of such
Plan.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Cross Reference Sheet showing the location in the Prospectus
of the Items of Form S-1
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1. Front of Registration Front of Registration Statement;
Statement and Outside Front Outside Front Cover Page
Cover of Prospectus
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back
Cover Pages of Prospectus Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds; Capitalization
5. Determination of Offering Price Market for Common Stock; The Conversion and
Reorganization -- Stock Pricing, Exchange Ratio and
Number of Shares to be Issued
6. Dilution *
7. Selling Security-Holders *
8. Plan of Distribution The Conversion and Reorganization
9. Legal Proceedings Business of the Savings Bank -- Legal Proceedings
10. Directors, Executive Officers, Management of the Holding Company; Management of
Promoters and Control Persons the Savings Bank
11. Security Ownership of Certain Beneficial *
Owners and Management
12. Description of Securities Description of Capital Stock of the Holding Company
13. Interest of Named Experts and Legal and Tax Opinions; Experts
Counsel
14. Disclosure of Commission Position Part II -- Item 17
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Business of the Savings Bank
Five Years
16. Description of Business Business of the Holding Company;
Business of the Savings Bank
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business of the Savings Bank -- Properties
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19. Certain Relationships and Management of the Savings Bank -- Transactions
Related Transactions with the Savings Bank
20. Market Price for Common Equity Outside Front Cover Page; Market for
and Related Stockholder Matters Common Stock; Dividend Policy
21. Executive Compensation Management of the Savings Bank -- Executive
Compensation; and -- Benefits
22. Financial Statements Financial Statements; Pro Forma Data
23. Changes in and Disagreements *
with Accountants on Accounting
and Financial Disclosure
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*Item is omitted because answer is negative or item inapplicable.
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PROSPECTUS SUPPLEMENT
RIVERVIEW BANCORP, INC.
RIVERVIEW SAVINGS BANK, FSB
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Riverview Savings Bank, FSB Employees' Savings and
Profit Sharing Plan ("Plan" or "401(k) Plan") of participation interests and
shares of Riverview Bancorp, Inc. common stock, par value $.01 per share
("Common Stock"), as set forth herein.
In connection with the proposed reorganization of Riverview Savings Bank,
FSB ("Savings Bank" or "Employer") from the mutual holding company form of
organization to a wholly owned subsidiary of a stock savings and loan holding
company, Riverview Bancorp, Inc. (the "Holding Company") has been formed. The
reorganization of the Savings Bank as a wholly-owned subsidiary of the Holding
Company, the exchange of shares of Savings Bank common stock ("Savings Bank
Common Stock") by public stockholders of the Savings Bank (the "Public
Stockholders") for Common Stock and the sale of Common Stock to the public (the
"Conversion Offerings") are herein referred to as the "Conversion and
Reorganization." Applicable provisions of the 401(k) Plan permit the investment
of the Plan assets in Common Stock at the direction of a Plan Participant. This
Prospectus Supplement relates to the election of a Participant to direct the
purchase of Common Stock in connection with the Conversion and Reorganization.
The Prospectus dated ______, 1997 of the Holding Company ("Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion and Reorganization, the Conversion Offerings, the
Common Stock and the financial condition, results of operation and business of
the Savings Bank and the Holding Company. This Prospectus Supplement, which
provides detailed information with respect to the Plan, should be read only in
conjunction with the Prospectus. Terms not otherwise defined in this Prospectus
Supplement are defined in the Plan or the Prospectus.
A Participant's eligibility to purchase Common Stock in the Conversion and
Reorganization through the Plan is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion Offerings and
the maximum and minimum limitations set forth in the Plan of Conversion. See
"THE CONVERSION AND REORGANIZATION" and "-- Limitations on Purchases of Shares"
in the Prospectus.
For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus Supplement is ______, 1997.
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No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Savings Bank or the Plan. This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Savings Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof. This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached herein and should be
retained for future reference.
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TABLE OF CONTENTS
PAGE
The Offering
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Securities Offered..........................................................................................
Election to Purchase Common Stock in the Conversion.........................................................
Value of Participation Interests............................................................................
Method of Directing Transfer................................................................................
Time for Directing Transfer.................................................................................
Irrevocability of Transfer Direction........................................................................
Treatment of Savings Bank Common Stock Held in the Plan.....................................................
Direction to Purchase Common Stock After the Conversion.....................................................
Purchase Price of Common Stock..............................................................................
Nature of a Participant's Interest in the Holding Company Common Stock......................................
Voting and Tender Rights of Common Stock....................................................................
Description of the Plan
Introduction................................................................................................
Eligibility and Participation...............................................................................
Contributions Under the Plan................................................................................
Limitations on Contributions................................................................................
Investment of Contributions.................................................................................
The Employer Stock Fund.....................................................................................
Benefits Under the Plan.....................................................................................
Withdrawals and Distributions from the Plan.................................................................
Administration of the Plan..................................................................................
Reports to Plan Participants................................................................................
Plan Administrator..........................................................................................
Amendment and Termination...................................................................................
Merger, Consolidation or Transfer...........................................................................
Federal Income Tax Consequences.............................................................................
Restrictions on Resale......................................................................................
Legal Opinions.....................................................................................................
Investment Form....................................................................................................
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THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan and
up to ______ shares, at the actual purchase price of $10.00 per share, of Common
Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan. The Holding Company is the issuer of the Common
Stock. Only employees and former employees of the Savings Bank and their
beneficiaries may participate in the Plan. Information with regard to the Plan
is contained in this Prospectus Supplement and information with regard to the
Conversion and Reorganization and the financial condition, results of operation
and business of the Savings Bank and the Holding Company is contained in the
attached Prospectus. The address of the principal executive office of the
Savings Bank is 700 N.E. Fourth Avenue, Camas, Washington 98607. The Savings
Bank's telephone number is (360) 834-2231.
Election to Purchase Common Stock in the Conversion and Reorganization
In connection with the Savings Bank's Conversion and Reorganization, each
Participant in the 401(k) Plan may direct the trustees of the Plan
(collectively, the "Trustee") to transfer up to ___% of a Participant's
beneficial interest in the assets of the Plan to the Employer Stock Fund and to
use such funds to purchase Common Stock issued in connection with the Conversion
and Reorganization. Amounts transferred may include salary deferral, Employer
matching and profit sharing contributions. The Employer Stock Fund consists of
investments in the Common Stock. Funds not transferred to the Employer Stock
Fund will be invested at the Participant's discretion in the other investment
options available under the Plan. See "DESCRIPTION OF THE PLAN -- Investment of
Contributions" below. A Participant's ability to transfer funds to the Employer
Stock Fund in the Conversion Offerings is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion Offerings. For
general information as to the ability of the Participants to purchase shares in
the Conversion Offerings, see "THE CONVERSION AND REORGANIZATION-- The
Subscription, Direct Community and Syndicated Community Offerings" in the
attached Prospectus.
Value of Participation Interests
The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on a
_______ basis. This value represents the market value of past contributions to
the Plan by the Savings Bank and by the Participants and earnings thereon, less
previous withdrawals, and transfers from the Savings Fund.
Method of Directing Transfer
The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form"). If a Participant
wishes to transfer funds to the
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Employer Stock Fund to purchase Common Stock issued in connection with the
Conversion Offerings, the Participant should indicate that decision in Part 2 of
the Investment Form. If a Participant does not wish to make such an election, he
or she does not need to take any action.
Time for Directing Transfer
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion Offerings is _______, 1997. The Investment Form should be returned to
___________ at the Savings Bank no later than the close of business on such
date.
Irrevocability of Transfer Direction
A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion Offerings
shall be irrevocable. Participants, however, will be able to direct the sale of
Common Stock, as explained below.
Treatment of Savings Bank Common Stock Held in the Plan
Shares of Savings Bank Common Stock held in the Employer Stock Fund prior
to the consummation of the Conversion and Reorganization will treated in the
same manner as shares held by other Public Stockholders. Such shares will be
exchanged for shares of Common Stock pursuant to the Exchange Ratio. Application
of the Exchange Ratio will result in the holders of the outstanding Savings Bank
Common Stock owning, in the aggregate, approximately the same percentage of the
Common Stock to be outstanding upon the completion of the Conversion and
Reorganization as the percentage of Savings Bank Common Stock owned by them, in
the aggregate, immediately prior to the consummation of the Conversion. For
additional information regarding the treatment of Savings Bank Common Stock,
See, "THE CONVERSION AND REORGANIZATION" in the Prospectus.
Direction to Purchase Common Stock After the Conversion and Reorganization
After the Conversion and Reorganization, a Participant will be able to
direct that a certain percentage of such Participant's interests in the trust
assets ("Trust") be transferred to the Employer Stock Fund and invested in
Common Stock or to the other investment funds available under the Plan.
Alternatively, a Participant may direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred from the
Employer Stock Fund to other investment funds available under the Plan.
Participants will be permitted to direct that future contributions made to the
Plan by or on their behalf be invested in Common Stock. Following the initial
election, the allocation of a Participant's interest in the Employer Stock Fund
may be changed by the Participant on a monthly basis. Special restrictions may
apply to transfers directed by those Participants who are executive officers,
directors and principal
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stockholders of the Holding Company who are subject to the provisions of Section
16(b) of the Securities and Exchange Act of 1934, as amended ("Exchange Act").
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to purchase
shares of Common Stock. The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion Offerings.
Nature of a Participant's Interest in the Holding Company Stock
The Holding Company Stock purchased for an account of a Participant will be
held in the name in the Employer Stock Fund. Any earnings, losses or expenses
with respect to the Holding Company Stock, including dividends and appreciation
or depreciation in value, will be credited or debited to the account and will
not be credited to or borne by any other accounts.
Voting and Tender Rights of Common Stock
The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.
DESCRIPTION OF THE PLAN
Introduction
The Savings Bank adopted the Plan effective April 1, 1997 as an amendment
and restatement of the Savings Bank's prior retirement plan. The Plan is a cash
or deferred arrangement established in accordance with the requirement under
Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as
amended ("Code").
The Savings Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Savings
Bank will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury Regulations.
The Savings Bank has received a determination from the Internal Revenue Service
("IRS") that the Plan is qualified under Section 401(a) of the Code and that it
satisfies the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
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Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As such,
the Plan is subject to all of the provisions of Title I (Protection of Employee
Benefit Rights) and Title II (Amendments to the Internal Revenue Code Relating
to Retirement Plans) of ERISA, except the funding requirements contained in Part
3 of Title I of ERISA, which by their terms do not apply to an individual
account plan (other than a money purchase pension plan). The Plan is not subject
to Title IV (Plan Termination Insurance) of ERISA. Neither the funding
requirements contained in Title IV of ERISA nor the plan termination insurance
provisions contained in Title IV will be extended to Participants or
beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE SAVINGS BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON
WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A
PARTICIPANT RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A
WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
the material provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC. Copies of the Plan are available to
all employees by filing a request with the Plan Administrator. Each employee is
urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Savings Bank is eligible to participate and will become
a Participant in the Plan following completion of 1,000 hours of service with
the Savings Bank within a consecutive 12 month period of employment and the
attainment of age 21. The Plan fiscal year is the calendar year ("Plan Year").
Directors who are not employees of the Savings Bank are not eligible to
participate in the Plan.
During 1996, approximately _____ employees participated in the Plan.
Contributions Under the Plan
Participant Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's deferral
contributions account. For purposes of the Plan, "Compensation"
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means a Participant's total amount of earnings reportable W-2 wages for federal
income tax withholding purposes plus a Participant's elective deferrals pursuant
to a salary reduction agreement under the Plan or any elective deferrals to a
Section 125 plan. Due to recent statutory changes, the annual Compensation of
each Participant taken into account under the Plan is limited to $160,000 (as
adjusted under applicable Code provisions). A Participant may elect to modify
the amount contributed to the Plan under the participant's salary reduction
agreement during the Plan Year. Deferral contributions are generally transferred
by the Savings Bank to the Trustee of the Plan on a periodic basis.
Employer Contributions. The Savings Bank currently matches 50% of a
Participant's monthly deferral contributions to a maximum of 3% of Compensation.
In addition, the Savings Bank may make discretionary contributions in proportion
to each Participant's Compensation.
Limitations on Contributions
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted periodically under applicable Code provisions). A Participant's
"Section 415 Compensation" is a Participant's Compensation, excluding any amount
contributed to the Plan under a salary reduction agreement or any employer
contribution to the Plan or to any other plan or deferred compensation or any
distributions from a plan of deferred compensation. In addition, annual
additions are limited to the extent necessary to prevent the limitations for the
combined plans of the Savings Bank from being exceeded. To the extent that these
limitations would be exceeded by reason of excess annual additions to the Plan
with respect to a Participant, the excess must be reallocated to the remaining
Participants who are eligible for an allocation of Employer contributions for
the Plan Year.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $9,500 (as adjusted periodically
under applicable Code provisions). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross federal income
tax purposes in the year they are made. In addition, any such excess deferral
will again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan
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in any Plan Year on behalf of Highly Compensated Employees (defined below) in
relation to the amount of deferred compensation contributed by or on behalf of
all other employees eligible to participate in the Plan. Specifically, the
actual deferral percentage for a Plan Year (i.e., the average of the ratios,
calculated separately for each eligible employee in each group, by dividing the
amount of salary reduction contributions credited to the salary reduction
contribution account of such eligible employee by such employee's compensation
for the Plan Year) of the Highly Compensated Employees may not exceed the
greater of (a) 125% of the actual deferred percentage of all other eligible
employees, or (b) the lesser of (i) 200% of the actual deferred percentage of
all other eligible employees, or (ii) the actual deferral percentage of all
other eligible employees plus two percentage points. In addition, the actual
contribution percentage for a Plan Year (i.e., the average of the ratios
calculated separately for each eligible employee in each group, by dividing the
amount of employer contributions credited to the Matching contributions account
of such eligible employee by each eligible employee's compensation for the Plan
Year) of the Highly Compensated Employees may not exceed the greater of (a) 125%
of the actual contribution percentage of all other eligible employees, or (b)
the lesser of (i) 200% of the actual contributions percentage of all other
eligible employees, or (ii) the actual contribution percentage of all other
eligible employees plus two percentage points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combines voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted periodically under applicable
Code provisions) and, if elected by the Savings Bank, was in the top paid group
of employees for such Plan Year.
In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Savings Bank will be subject to a
10% excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate. In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year. However, the 10% excise tax will be imposed on the Savings
Bank with respect to any excess aggregate contributions, unless such amounts,
plus any income allocable thereto, are distributed within 2 1/2 months following
the close of the Plan Year in which they arose.
Top-Heavy Plan Requirements. If, for any Plan Year, the Plan is a
Top-Heavy Plan (as defined below), then (i) the Savings Bank may be required to
make certain minimum contributions to the Plan on behalf of non-key employees
(as defined below), and (ii) certain
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additional restrictions would apply with respect to the combination of annual
additions to the Plan and projected annual benefits under any defined plan
maintained by the Savings Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants. "Key Employees" generally
include any employee, who at any time during the Plan Year or any other the four
preceding Plan Years, if (1) an officer of the Savings Bank having annual
compensation in excess of $60,000 who is in administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the employer,
(3) a 5% owner of the employer (i.e., owns directly or indirectly more than 5%
of the stock of the employer, or stock possessing more than 5% of the total
combined voting power of all stock of the employer), or (4) a 1% of owner of the
employer having compensation in excess of $150,000.
Investment of Contributions
All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustee. The Trustee is appointed by the
Savings Bank's Board of Directors. The Plan provides that a Participant may
direct the Trustee to invest all or a portion of his or her Accounts in various
managed investment portfolios, as described below. A Participant may
periodically elect to change his or her investment directions with respect to
both past contributions and for more additions to the Participant's accounts
invested in these investment alternatives.
Under the Plan, the Accounts of Participant held in the Trust will be
invested by the Trustee at the direction of the Participant in the following
managed portfolios:
Investment Fund A - A passively managed, diversified equity portfolio with
the objective of simulating the performance of the
Standard & Poor's Composite Index of 500 stocks, managed
by Mellon Bank, N.A., as Trustee. An investment in Fund
A provides an opportunity for investment growth
generally consistent with that of widely traded common
stocks, but with a corresponding risk of decline in
value.
Investment Fund B - A portfolio of fixed income contracts primarily managed
by Mellon Bank, N.A., with the objective of maximizing
income at minimum risk of capital. Contributions are
invested in fixed income instruments including but not
limited to group annuity contracts issued by insurance
companies.
Investment Fund C - A passively managed, diversified portfolio of stock with
the objective of replicating the performance of the S &
P MidCap Index, managed by Mellon Bank, N.A. An
investment return generally consistent with that of
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smaller to medium sized company stocks, with an above
average potential for increase or decrease in value.
Investment Fund D - A government instrument fund with the objective of
maximizing income at minimum risk of capital with
underlying investments in obligations issued or
guaranteed by the United States government or agencies
or instrumentalities thereof, selected by Mellon Bank,
N.A., as Trustee.
Investment Fund E - A portfolio of high quality treasury, agency, corporate
and asset/mortgage- backed securities managed by Mellon
Bank, N.A. with the objective of replicating the total
performance of the Lehman Brothers Aggregate Bond index.
A Participant may also invest all or a portion of his or her Accounts in
the portfolios described above and in Fund F, described below:
Investment Fund F - The Employer Stock Fund which invests in common stock of
the Holding Company.
A Participant may elect, to have both past and future contributions and
additions to the Participant's Account invested either in the Employer Stock
Fund or in any of the other managed portfolios listed above. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in Investment Fund D.
The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined monthly on a quarterly basis. For
purposes of such allocation, all assets of the Trust are valued at their fair
market value.
The Employer Stock Fund
The Employer Stock Fund consists of investments in Common Stock. In
connection with the Conversion Offerings, pursuant to the attached Investment
Form, Participants will be able to change their investments at a time other than
the normal election intervals. Any cash dividends paid on Common Stock held in
the Employer Stock Fund will be credited to a cash dividend subaccount for each
Participant investing in the Employer Stock Fund. To the extent practicable, all
amounts held in the Employer Stock Fund (except the amounts credited to cash
dividend subaccounts) will be used to purchase shares of Common Stock. It is
expected that all purchases will be made at prevailing market prices. Pending
investment in Common Stock, assets held in the Employer Stock Fund will be
placed in bank deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are
charged or credited to the Accounts of Participants affected by the purchase or
sale. A Participant's Account
S-8
<PAGE>
will be adjusted to reflect changes in the value of shares of Common Stock
resulting from stock dividends, stock splits and similar changes.
To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation of the Common Stock subsequent to its
purchase.
Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company. For a
discussion of these risk factors, see "RISK FACTORS" on pages 1 through 7 in the
Prospectus.
Benefits Under the Plan
Vesting. A Participant, has at all times a fully vested, nonforfeitable
interest in all of his or her deferred contributions and the earnings thereon
under the Plan. A Participant is 100% vested in his or her matching
contributions account and employer discretionary contributions after the
completion of six years of service under the Plan's vesting schedule (20% per
year beginning with the completion of two years of service).
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2
UNLESS A PARTICIPANT RETIRES AS PERMITTED UNDER THE PLAN REGARDLESS OF WHETHER
SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT WITH THE SAVINGS BANK.
Distribution Upon Retirement, Disability or Termination of Employment.
Payment of benefits to a Participant who retires, incurs a disability, or
otherwise terminates employment generally shall be made in a lump sum cash
payment. At the request of the Participant, the distribution may include an
in-kind distribution of Common Stock of the Holding Company credited to the
Participant's Account. A Participant whose total vested account balance equals
or exceeds $3,500 at the time of termination, may elect, in lieu of a lump sum
payments, to be paid in annual installments over a period not exceeding the life
expectancy of the Participant or the joint life expectancies of the Participant
and his or her designated beneficiary. Benefits payments ordinarily shall be
made not later than 60 days following the end of the Plan Year in which occurs
later of the Participant's: (i) termination of employment; (ii) attainment of
age 65; or (iii) tenth anniversary of commencement of participation in the Plan;
but in no event later than April 1 following the calendar year in which the
Participant attains age 70 1/2 (if the Participant is retired). However, if the
vested portion of the Participant's Account balances exceeds $3,500, no
distribution shall be made from the Plan prior to the Participant's attaining
age 65 unless the Participant consents to an earlier distribution. Special rules
may apply to the distribution of
S-9
<PAGE>
Common Stock of the Holding Company to those Participants who are executive
officers, directors and principal shareholders of the Holding Company who are
subject to the provisions of Section 16(b) of the Exchange Act.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse, shall have his or her benefits paid to the surviving
spouse in a lump sum, or if the payment of his or her benefits had commenced
before his or her death, in accordance with the distribution method in effect at
his or her death. With respect to an unmarried Participant, and in the case of a
married Participant with spousal consent to the designation of another
beneficiary, payment of benefits to the beneficiary, payments of benefits to the
beneficiary of a deceased Participant shall be made in the form of a lump sum
payment in cash or in Common Stock, or if the payment of his or her benefit had
commenced before his or her death, in accordance with the distribution method if
effect at death.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
Administration of the Plan
Trustee. The Trustee with respect to Plan assets, other than the Employer
Stock Fund, is currently Mellon Bank, N.A. Mellon Bank also serves as custodian
of the Employer Stock Fund assets. Members of the Board of Directors of the
Savings Bank serve as trustees with respect to the Employer Stock Fund. Except
as otherwise indicated by the context, references in this Prospectus Supplement
to the Trustee refer to Mellon Bank.
Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom. The Trustee has
the authority to invest and reinvest the Trust and may sell or otherwise dispose
of Trust investments at any time and may hold trust funds uninvested. The
Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.
The Trustee has full power to vote any corporate securities in the Trust in
person or by proxy; provided, however, that the Participants will direct the
Trustee as to voting and tendering of all Common Stock held in the Employer
Stock Fund.
S-10
<PAGE>
The Trustee is entitled to reasonable compensation for its services and is
also entitled to reimbursement for expenses properly and actually incurred in
the administration of the Trust. The expenses of the Trustee and the
compensation of the persons so employed is paid out of the Trust except to the
extent such expenses and compensation are paid by the Savings Bank.
The Trustee must render at least annual reports to the Savings Bank and to
the Participants in such form and containing information that the Trustee deems
necessary.
Reports to Plan Participants
The administrator will furnish to each Participant a statement at least
semiannually showing (i) the balance in the Participant's Account as of the end
of that period, (ii) the amount of contributions allocated to such Participant's
Account for that period, and (iii) the adjustments to such Participant's Account
to reflect earnings or losses (if any).
Plan Administrator
The Savings Bank currently serves as the Plan Administrator. The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and the IRS, and for all disclosures required to be made to
Participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Amendment and Termination
The Savings Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee who ceases to be a Participant shall have a fully vested interest
in his or her Account. The Savings Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of the
Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of the Participants or their beneficiaries.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
S-11
<PAGE>
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan has received a determination from the IRS that it is qualified
under Section 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code. A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the Plan of each year; (2) Participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Savings Bank expects to timely
adopt any amendments to the Plan that may be necessary to maintain the qualified
status of the Plan under the Code. Following such an amendment, the Plan will be
submitted to the IRS for a determination that the Plan, as amended, continues to
qualify under Sections 401(a) and 501(a) of the Code and that it continues to
satisfy the requirements for a qualified cash or deferred arrangement under
Section 401(k) of the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's 401(k) account and the
investment earnings are actually distributed or withdrawn from the Plan.
Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualified as a "Lump Sum Distribution" (as
described below).
(b) Income earned on assets held by the Trust will not be taxable to
the Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it is
made: (i) within a single taxable year of the Participant or beneficiary; (ii)
on account of the Participant's death or separation from service, or after the
Participant attains age 59 1/2; and (iii) consists of the balance
S-12
<PAGE>
to the credits of the Participant under the Plan and all other profit sharing
plans, if any, maintained by the Savings Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes ("total taxable
amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any other
profit sharing plans maintained by the Savings Bank which is included in such
distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes. However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999. Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule. Such individuals also may elect to
have that portion of the Lump Sum Distribution attributable to the Participant's
pre-1974 participation in the Plan taxed at a flat 20% rate as gain from the
sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short- term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.
S-13
<PAGE>
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993, virtually
all distributions from the Plan may be rolled over to another qualified Plan or
to an individual retirement account ("IRA") without regard to whether the
distribution is a Lump Sum Distribution or Partial Distribution. Effective
January 1, 1993, Participants have the right to elect to have the Trustee
transfer all or any portion of an "eligible rollover distribution" directly to
another plan qualified under Section 401(a) of the Code or to an IRA. If the
Participant does not elect to have an "eligible rollover distribution"
transferred directly to another qualified plan of to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal to 20% of the
taxable distribution. An "eligible rollover distribution" means any amount
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life of the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law. The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
nonrecognition of net unrealized appreciation, discussed earlier.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of the Participant, (ii) attributable to the Participant's
being disabled within the meaning of Section 72(m)(7) of the Code, (iii) part of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Participant or the joint
lives (or joint life expectancies) of the Participant and his or her
beneficiary, (iv) made to the Participant after separation from service on
account of early retirement under the Plan after attainment of age 55, (v) made
to pay medical expenses to the extent deductible for federal income tax
purposes, (vi) pursuant to a qualified domestic relations order, or (vii) made
to effect the distribution of excess contributions or excess deferrals.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
S-14
<PAGE>
Restrictions on Resale
Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Savings Bank or the Holding Company as the term "affiliate"
is used in Rules 144 and 405 under the Securities Act of 1933, as amended
("Securities Act") (e.g., directors, officers and substantial shareholders of
the Savings Bank) may reoffer or resell such shares only pursuant to a
registration statement filed under the Securities Act (the Holding Company and
the Savings Bank having no obligation to file such registration statement) or,
assuming the availability thereof, pursuant to Rule 144 or some other exemption
from the registration requirements of the Securities Act. Any person who may be
an "affiliate" of the Savings Bank or the Holding Company may wish to consult
with counsel before transferring any Common Stock owned by him or her. In
addition, Participants are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Savings Bank's Conversion and
Reorganization from the mutual holding company of organization to a wholly-owned
subsidiary by the Holding Company.
S-15
<PAGE>
Investment Form
(Employer Stock Fund)
RIVERVIEW SAVINGS BANK, FSB
EMPLOYEES' SAVINGS AND PROFIT SHARING PLAN
Name of Participant:_________________________
Social Security Number:______________________
1. Instructions. In connection with the proposed reorganization of
Riverview Savings Bank, FSB ("Savings Bank") from the mutual holding form of
organization to a wholly-owned subsidiary of a savings and loan holding company
("Conversion and Reorganization"), participants in the Riverview Savings Bank,
FSB Employees' Savings and Profit Sharing Plan ("Plan") may elect to direct the
investment of up to ___% of their ___________, 1997 account balances into the
Employer Stock Fund ("Employer Stock Fund"). Amounts transferred at the
direction of Participants into the Employer Stock Fund will be used to purchase
shares of the common stock of Riverview Bancorp, Inc. ("Common Stock"), the
proposed holding company for the Savings Bank. A Participant's eligibility to
purchase shares of Common Stock is subject to the Participant's general
eligibility to purchase shares of Common Stock in the Conversion Offerings and
the maximum and minimum limitations set forth in the Plan of Conversion. See the
Prospectus for additional information.
You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion
Offerings. To direct such a transfer to the Employer Stock Fund, you should
complete this form and return it to ___________ at the Savings Bank, no later
than the close of business on _______, 1997. The Savings Bank will keep a copy
of this form and return a copy to you. (If you need assistance in completing
this form, please contact ___________.
2. Transfer Direction. I hereby direct the Plan Administrator to transfer
$__________ (in increments of $10) from my Plan account to the Employer Stock
Fund to be applied to the purchase of Common Stock in the Conversion Offerings.
Please transfer this amount from the following investments in the amounts
indicated:
3. Effectiveness of Direction. I understand that this Investment Form shall
be subject to all of the terms and conditions of the Plan and the terms and
conditions of the Conversion and Reorganization. I acknowledge that I have
received a copy of the Prospectus and the Prospectus Supplement.
- -------------------------------- ------------------------------
Signature Date
* * * * *
4. Acknowledgement of Receipt. This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.
- -------------------------------- ------------------------------
Plan Administrator Date
S-16
<PAGE>
PROSPECTUS
RIVERVIEW BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR RIVERVIEW SAVINGS BANK, FSB)
UP TO 5,328,642 SHARES OF COMMON STOCK
$10.00 PURCHASE PRICE PER SHARE
Riverview Bancorp, Inc. ("Holding Company"), a Washington corporation,
is offering up to 5,328,642 shares (which may be increased to 6,127,938 shares
under circumstances described in footnote 4 of the table below) of its common
stock, par value $.01 per share ("Common Stock"), in connection with (i) the
Exchange Offering, described below, to effect the reorganization of Riverview
Savings Bank, FSB ("Savings Bank") as a wholly-owned subsidiary of the Holding
Company and (ii) the Conversion Offerings, described below, to effect the
conversion of Riverview, M.H.C. ("MHC") from a mutual holding company to a stock
holding company. The Holding Company, Savings Bank and MHC are collectively
referred to herein as the "Primary Parties." The transactions contemplated by
the Exchange Offering and the Conversion Offerings, which are collectively
referred to herein as the "Conversion and Reorganization," are undertaken
pursuant to a Plan of Conversion and Agreement and Plan of Reorganization ("Plan
of Conversion") adopted by the Boards of Directors of the Primary Parties.
THE EXCHANGE OFFERING. Pursuant to the Plan of Conversion, each share
of common stock, par value $.01 per share, of the Savings Bank ("Savings Bank
Common Stock") held by the MHC (1,407,891 shares, or 58.21% of the outstanding
shares, as of the date of this Prospectus) will be canceled and each share of
Savings Bank Common Stock held by the Savings Bank's public stockholders
("Public Savings Bank Shares" and "Public Stockholders," respectively)
(1,010,610 shares, or 41.79% of the outstanding shares, as of the date of this
Prospectus) will be exchanged for shares of Common Stock ("Exchange Shares")
pursuant to a ratio ("Exchange Ratio") that will result in the Public
Stockholders' aggregate ownership of approximately 41.73% of the outstanding
shares of Common Stock before any (i) payment of cash in lieu of issuing
fractional Exchange Shares and (ii) Conversion Shares (as defined below)
purchased by the Public Stockholders and by the Savings Bank's employee stock
ownership plan ("ESOP") in the Conversion Offerings, described below. As
discussed under "Independent Valuation" below, the final Exchange
Ratio will be based on the Public Stockholders' ownership interest and not on
the market value of the Public Savings Bank Shares.
FOR INFORMATION ON HOW TO SUBSCRIBE FOR
SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (360) ____-_____.
FORA DISCUSSION OF CERTAIN RISKS THAT SHOULD
BE CONSIDERED BY EACH PROSPECTIVE INVESTOR,
SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVINGS
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE FDIC
OR ANY OTHER FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC,
THE OTS, THE FDIC OR ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
(COVER CONTINUED ON FOLLOWING PAGE)
CHARLES WEBB & COMPANY, PACIFIC CREST SECURITIES, INC.
A DIVISION OF KEEFE, BRUYETTE & WOODS, INC.
The date of this Prospectus is August___, 1997.
<PAGE>
<TABLE>
<CAPTION>
Estimated Underwriting
Purchase Commissions and Estimated Net
Price(1) Other Fees and Expenses(2) Proceeds(3)
<S> <C> <C> <C>
Minimum Price Per Share.................................. $10.00 $0.36 $9.64
- --------------------------------------------------------------------------------------------------------------------------
Midpoint Price Per Share................................. $10.00 $0.32 $9.68
- --------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share.................................. $10.00 $0.30 $9.70
- --------------------------------------------------------------------------------------------------------------------------
Maximum Price Per Share, as adjusted(4).................. $10.00 $0.28 $9.72
- --------------------------------------------------------------------------------------------------------------------------
Minimum Total(5)......................................... $22,950,000 $816,000 $22,134,000
- --------------------------------------------------------------------------------------------------------------------------
Midpoint Total(6)........................................ $27,000,000 $871,000 $26,129,000
- --------------------------------------------------------------------------------------------------------------------------
Maximum Total(7)......................................... $31,050,000 $927,000 $30,123,000
- --------------------------------------------------------------------------------------------------------------------------
Maximum Total, as adjusted(4)(8)......................... $35,707,500 $992,000 $34,715,500
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC., Arlington, Virginia ("RP Financial"). See "Independent
Valuation" on the cover page of this Prospectus and "THE CONVERSION AND
REORGANIZATION -- Stock Pricing, Exchange Ratio and Number of Shares to
be Issued."
(2) Includes estimated expenses to the Holding Company and the Savings Bank
arising from the Conversion and Reorganization, including fees to be
paid to Charles Webb & Company, a Division of Keefe, Bruyette & Woods,
Inc. ("Webb") in connection with the Conversion Offerings. Such amounts
exclude any fees to be paid to Pacific Crest Securities, Inc. ("Pacific
Crest") as compensation for its management of the Syndicated Community
Offering (as defined below), if any. Webb's fees amount to $309,000,
$365,000, $421,000 and $485,000 at the minimum, midpoint, maximum and
15% above the Estimated Valuation Range, respectively, which may be
deemed to be underwriting fees. Webb and Pacific Crest may be deemed to
be underwriters. Expenses, other than fees to be paid to Webb, are
estimated to total approximately $506,000 at each of the minimum,
midpoint, maximum and 15% above the Estimated Valuation Range. Actual
expenses may be more or less than estimated amounts. The Holding
Company and the Savings Bank have agreed to indemnify Webb against
certain liabilities, including liabilities that might arise under the
Securities Act of 1933, as amended ("Securities Act"). See "USE OF
PROCEEDS" and "THE CONVERSION AND REORGANIZATION -- Plan of
Distribution for the Subscription, Direct Community and Syndicated
Community Offerings."
(3) Actual net proceeds can vary substantially from the estimated amounts
depending upon actual expenses and the relative number of shares sold
in the Conversion Offerings. See "USE OF PROCEEDS" and "PRO FORMA
DATA."
(4) Gives effect to an increase in the number of shares that could be sold
in the Conversion Offerings resulting from an increase in the pro forma
market value of the MHC and the Savings Bank, as converted, up to 15%
above the maximum of the Estimated Valuation Range, without the
resolicitation of subscribers or any right of cancellation. The ESOP
shall have a first priority right to subscribe for such additional
shares up to an aggregate of 8% of the Common Stock issued in the
Conversion. The issuance of such additional shares will be conditioned
on a determination by RP Financial that such issuance is compatible
with its determination of the estimated pro forma market value of the
Holding Company and the Savings Bank, as converted. See "THE CONVERSION
AND REORGANIZATION -- Stock Pricing, Exchange Ratio and Number of
Shares to be Issued."
(5) Assumes the issuance of 2,295,000 Conversion Shares at $10.00 per
share.
(6) Assumes the issuance of 2,700,000 Conversion Shares at $10.00 per
share.
(7) Assumes the issuance of 3,105,000 Conversion Shares at $10.00 per
share.
(8) Assumes the issuance of 3,570,750 Conversion Shares at $10.00 per
share.
THE CONVERSION OFFERINGS. Pursuant to the Plan of Conversion,
nontransferable rights to subscribe ("Subscription Rights") for up to 3,105,000
shares (which may be increased to 3,570,750 shares under circumstances described
in footnote 4 of the table appearing on the cover page of this Prospectus) of
Common Stock ("Conversion Shares") have been granted, in order of priority, to
(i) depositors with $50.00 or more on deposit at the Savings Bank as of December
31, 1995 ("Eligible Account Holders"), (ii) the ESOP, a tax-qualified employee
benefit plan, (iii) depositors with $50.00 or more on deposit at the Savings
Bank as of June 30, 1997 ("Supplemental Eligible
<PAGE>
Account Holders"), and (iv) depositors of the Savings Bank (other than Eligible
Account Holders and Supplemental Eligible Account Holders) as of July 31, 1997
("Voting Record Date"), and borrowers of the Savings Bank with loans outstanding
as of October 22, 1993 which continue to be outstanding as of the Voting Record
Date ("Other Members"), subject to the priorities and purchase limitations set
forth in the Plan of Conversion ("Subscription Offering"). SUBSCRIPTION RIGHTS
ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE TRANSFERRING THEIR RIGHTS TO
SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION OFFERING OR SUBSCRIBING FOR
COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH
RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE OTS OR OTHER
AGENCY OF THE U.S. GOVERNMENT. Concurrently, but subject to the prior rights of
Subscription Rights holders, the Holding Company is offering the Conversion
Shares for sale to members of the general public through a direct community
offering ("Direct Community Offering") with preference given first to Public
Stockholders (who are not Eligible Account Holders, Supplemental Eligible
Account Holders or Other Members) and then to natural persons and trusts of
natural persons who are permanent residents of Clark, Cowlitz, Klickitat and
Skamania Counties of Washington ("Local Community"). It is anticipated that any
Conversion Shares not subscribed for in the Subscription Offering or purchased
in the Direct Community Offering will be offered to eligible members of the
general public on a best efforts basis by a selling group of broker-dealers
managed by Pacific Crest in a syndicated community offering ("Syndicated
Community Offering"). The Subscription Offering, Direct Community Offering and
the Syndicated Community Offering are referred to collectively as the
"Conversion Offerings." The Primary Parties reserve the right, in their absolute
discretion, to accept or reject, in whole or in part, any or all orders in the
Direct Community Offering or Syndicated Community Offering either at the time of
receipt of an order or as soon as practicable following the termination of the
Conversion Offerings. If an order is rejected in part, the purchaser does not
have the right to cancel the remainder of the order.
THE SUBSCRIPTION OFFERING WILL EXPIRE AT ____, PACIFIC TIME, ON
________, 1997 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE PRIMARY PARTIES FOR
UP TO ___ DAYS TO __________, 1997. SUCH EXTENSION MAY BE GRANTED WITHOUT
ADDITIONAL NOTICE TO SUBSCRIBERS. The Direct Community Offering is also expected
to terminate at ______, Pacific Time, on _______, 1997 or at a date thereafter,
however, in no event later than ________, 1997. The Holding Company must receive
at an office of the Savings Bank by the Expiration Date the accompanying
original Stock Order Form and a fully executed Certification Form (collectively,
the "Stock Order Form") (facsimile copies and photocopies will not be accepted),
along with full payment (or appropriate instructions authorizing a withdrawal
from a deposit account at the Savings Bank) of $10.00 per share ("Purchase
Price") for all Conversion Shares subscribed for or ordered. Payment by wire
transfer will not be accepted. Funds so received will be placed in segregated
accounts created for this purpose at the Savings Bank, and interest will be paid
at the Savings Bank's passbook rate from the date payment is received until the
Conversion and Reorganization is consummated or terminated. Payments authorized
by withdrawals from deposit accounts will continue to earn interest at their
contractual rate until the Conversion and Reorganization is consummated or
terminated, although such funds will be unavailable for withdrawal until the
Conversion and Reorganization is consummated or terminated. ORDERS SUBMITTED ARE
IRREVOCABLE UNTIL THE CONSUMMATION OR TERMINATION OF THE CONVERSION AND
REORGANIZATION. If the Conversion and Reorganization is not consummated within
45 days after the last day of the Subscription and Direct Community Offering
(which date will be no later than ________, 1997) and the OTS consents to an
extension of time to consummate the Conversion and Reorganization, subscribers
will be notified in writing of the time period within which the subscriber must
notify the Primary Parties of his or her intention to increase, decrease or
rescind his or her subscription. If an affirmative response to any such
resolicitation is not received by the Primary Parties from subscribers, such
orders will be rescinded and all funds will be returned promptly with interest.
If such period is not extended or, in any event, if the Conversion and
Reorganization is not consummated by ________, 1997, all subscription funds will
be promptly returned, together with accrued interest, and all withdrawal
authorizations terminated. Such extensions may not go beyond ________ __, 1999.
The Primary Parties have engaged Webb as their financial advisor and to
assist the Holding Company in the sale of the Conversion Shares in the
Conversion Offerings. Webb and Pacific Crest are registered broker-dealers and
members of the National Association of Securities Dealers, Inc. ("NASD").
Neither Webb nor Pacific Crest nor any other registered broker-dealer is
obligated to take or purchase any Conversion Shares in the Conversion Offerings.
See "THE CONVERSION AND REORGANIZATION -- Plan of Distribution for the
Subscription, Direct Community and Syndicated Community Offerings."
<PAGE>
INDEPENDENT VALUATION. OTS regulations require that the offering of
Conversion Shares in the Conversion Offerings be based on an independent
valuation of the pro forma market value of the Savings Bank and the MHC, as
converted. OTS policy requires that the independent valuation be multiplied by
58.27%, which represents the MHC's percentage ownership interest in the Savings
Bank. Accordingly, RP Financial's independent appraisal as of August 1, 1997
states that the aggregate pro forma market value of the Savings Bank and the
MHC, as converted, ranged from $23.0 million to $31.1 million, with a midpoint
of $27.0 million ("Estimated Valuation Range").
The Primary Parties' Boards of Directors determined that the Conversion
Shares would be sold at $10.00 per share ("Purchase Price"), resulting in a
range of 2,295,000 to 3,105,000 shares of Conversion Shares, with a midpoint of
2,700,000 Conversion Shares. Upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 58.27% and 41.73%, respectively, of the total outstanding shares
of Common Stock. Based upon the Estimated Valuation Range, the Exchange Ratio is
expected to range from 1.6299 to 2.2051, resulting in a range of 1,643,561
Exchange Shares to 2,223,642 Exchange Shares to be issued in the Exchange
Offering. The 5,328,642 shares of Common Stock offered hereby include up to
3,105,000 Conversion Shares (subject to adjustment up to 3,570,750 shares as
described herein) and up to 2,223,642 Exchange Shares (subject to adjustment up
to 2,557,188 shares as described herein). The Estimated Valuation Range may be
increased or decreased to reflect changes in market and economic conditions
prior to completion of the Conversion and Reorganization, and under certain
circumstances specified herein subscribers will be resolicited and given the
right to modify or cancel their orders. See "The CONVERSION AND REORGANIZATION
- -- Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
PURCHASE LIMITATIONS ON CONVERSION SHARES. Except for the ESOP, which
is expected to subscribe for 8% of the shares of Conversion Shares issued in the
Conversion Offerings, the Plan of Conversion provides for the following purchase
limitations: (i) no person may purchase in either the Subscription Offering,
Direct Community Offering or Syndicated Community Offering more than 1.6% of the
Conversion Shares issued in the Conversion Offerings, (ii) no person, together
with associates of or persons acting in concert with such person, may purchase
in either the Subscription Offering, Direct Community Offering or Syndicated
Community Offering more than 2% of the Conversion Shares issued in the
Conversion Offerings, (iii) the maximum number of Conversion Shares which may be
subscribed for or purchased in all categories in the Conversion Offerings by any
person, when combined with any Exchange Shares received, shall not exceed 1.6%
of the Common Stock to be issued in the Conversion and Reorganization, and (iv)
the maximum number of shares of Conversion Shares which may be subscribed for or
purchased in all categories in the Conversion Offerings by any person, together
with any associate or any group of persons acting in concert, when combined with
any Exchange Shares received, shall not exceed 2% of the Common Stock to be
issued in the Conversion and Reorganization. The minimum order is 25 Conversion
Shares. See "THE CONVERSION AND REORGANIZATION -- The Subscription, Direct
Community and Syndicated Community Offerings," "-- Procedure for Purchasing
Conversion Shares in the Subscription and Direct Community Offerings and "--
Limitations on Purchase of Conversion Shares."
MARKET FOR THE COMMON STOCK. The Holding Company has received
conditional approval to list the Common Stock on the Nasdaq National Market
under the symbol "RVSB." Prior to the Conversion and Reorganization, the Public
Savings Bank Shares have been listed on the Nasdaq SmallCap Market under the
same trading symbol. There can be no assurance that an active and liquid trading
market for the Common Stock will develop or, if developed, will be maintained.
See "RISK FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET
FOR COMMON STOCK."
<PAGE>
RIVERVIEW SAVINGS BANK, FSB
CAMAS, WASHINGTON
[Map of Washington with enlarged maps of Cowlitz, Clark, Skamania and Klickitat
Counties depicting main office and branch office locations for Riverview Savings
Bank, FSB, in the cities of Camas, Washougal, Stevenson, White Salmon, Battle
Ground, Goldendale, Vancouver and Longview, Washington.]
THE CONVERSION AND REORGANIZATION IS CONTINGENT UPON APPROVAL OF THE PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE MHC'S ELIGIBLE VOTING MEMBERS, BY THE
HOLDERS OF TWO-THIRDS OF THE OUTSTANDING SHARES OF SAVINGS BANK COMMON STOCK AND
BY THE HOLDERS OF A MAJORITY OF THE PUBLIC SAVINGS BANK SHARES, THE SALE OF AT
LEAST 2,295,000 CONVERSION SHARES PURSUANT TO THE PLAN OF CONVERSION, AND THE
RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
<PAGE>
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT
AGENCY.
PROSPECTUS SUMMARY
THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH AND
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) PRESENTED ELSEWHERE IN THIS
PROSPECTUS. THE PURCHASE OF COMMON STOCK IS SUBJECT TO CERTAIN RISKS. SEE "RISK
FACTORS."
RIVERVIEW BANCORP, INC.
The Holding Company was organized on June 23, 1997 under Washington law
at the direction of the Savings Bank to acquire the Savings Bank as a
wholly-owned subsidiary upon consummation of the Conversion and Reorganization.
The Holding Company has only engaged in organizational activities to date. The
Holding Company has received conditional OTS approval to become a savings and
loan holding company through the acquisition of 100% of the capital stock of the
Savings Bank. Immediately following the Conversion, the only significant assets
of the Holding Company will be the outstanding capital stock of the Savings
Bank, 50% of the net investable proceeds of the Conversion Offerings (see table
under "PRO FORMA DATA") as permitted by the OTS to be retained by it) and a note
receivable from the ESOP evidencing a loan to enable the ESOP to purchase 8% of
the Conversion Shares issued in the Conversion and Reorganization. Funds
retained by the Holding Company will be used for general business activities.
See "USE OF PROCEEDS." Upon consummation of the Conversion and Reorganization,
the Holding Company will be classified as a unitary savings and loan holding
company subject to OTS regulation. See "REGULATION -- Savings and Loan Holding
Company Regulations." The main office of the Holding Company is located at 700
N.E. Fourth Avenue, Camas, Washington 98607 and its telephone number is (360)
834-2231.
RIVERVIEW, M.H.C.
The MHC is the federally-chartered mutual holding company for the
Savings Bank. The MHC was formed in October 1993 as a result of the
reorganization of the Savings Bank into a federally chartered mutual holding
company ("MHC Reorganization"). The members of the MHC consist of depositors of
the Savings Bank and those current borrowers of the Savings Bank who had loans
outstanding as of the consummation date of the MHC Reorganization (October 22,
1993). Currently, the MHC's sole business activity is holding the 1,407,891
shares of Savings Bank Common Stock, which represents 58.21% of the outstanding
shares as of the date of this Prospectus. The MHC's main office is located at
700 N.E. Fourth Avenue, Camas, Washington 98067, and its telephone number is
(360) 834-2231. As part of the Conversion and Reorganization, the MHC will
convert to a federally-chartered interim stock savings bank and simultaneously
merge with and into the Savings Bank, with the Savings Bank as the surviving
entity.
RIVERVIEW SAVINGS BANK, FSB
The Savings Bank is a federally-chartered savings bank, founded in 1923
and headquartered in Camas, Washington. The Savings Bank's deposits are insured
by the FDIC up to applicable legal limits under the SAIF. The Savings Bank has
been a member of the Federal Home Loan Bank ("FHLB") system since 1937. The
Savings Bank is regulated by the OTS and the FDIC. At March 31, 1997, the
Savings Bank had total assets of $224.4 million, total deposit accounts of
$169.4 million, and total shareholders' equity of $25.0 million, on a
consolidated basis.
(i)
<PAGE>
On October 22, 1993, when the MHC Reorganization was consummated, the
Savings Bank completed its initial stock offering by issuing 1,725,000 shares of
Savings Bank Common Stock, of which 690,000 shares were purchased by the Public
Stockholders and 1,007,400 shares were issued to the MHC. Stock dividends issued
and stock options exercised subsequent to the initial public offering have
increased the total shares issued and outstanding to 2,418,501 as of the date of
this Prospectus, of which 1,010,610 shares are held by the Public Stockholders
and 1,407,891 shares are held by the MHC.
The Savings Bank is a community oriented financial institution offering
traditional financial services to the residents of its primary market area. The
Savings Bank considers Clark, Cowlitz, Klickitat and Skamania Counties of
Washington as its primary market area. The Savings Bank is engaged primarily in
the business of attracting deposits from the general public and using such funds
to originate fixed-rate mortgage loans and adjustable rate mortgage ("ARM")
loans secured by one- to- four family residential real estate located in its
primary market area. The Savings Bank is also an active originator of
residential construction loans and consumer loans. At March 31, 1997, one- to-
four family mortgage loans were $94.5 million, or 62.3% of total net loans
receivable and loans held for sale (collectively, "total net loans receivable"),
residential construction loans were $32.5 million, or 21.4% of total net loans
receivable, and consumer loans were $14.3 million, or 9.4% of total net loans
receivable. To a lesser extent, the Savings Bank originates land loans ($7.9
million or 5.2% of total net loans receivable at March 31, 1997) and commercial
real estate loans ($9.0 million or 5.9% of total net loans receivable at March
31, 1997). Substantially all of the Savings Bank's real estate loans are secured
by real estate located in its primary market area. Construction, consumer, land
and commercial real estate loans generally involve a greater risk of loss than
one- to- four family mortgage loans. See "RISK FACTORS -- Certain Lending
Risks."
In addition to originating one- to- four family loans for its
portfolio, the Savings Bank is an active mortgage broker for several third party
mortgage lenders. In recent periods, such mortgage brokerage activities have
reduced the volume of fixed-rate one- to- four family loans that are originated
and sold by the Savings Bank. See "-- Loan Originations, Sales and Purchases"
and "-- Mortgage Brokerage."
The Savings Bank also invests in short- to- intermediate term U.S.
Treasury securities and U.S. Government agency obligations, and mortgage-backed
securities issued by U.S. Government agencies. At March 31, 1997, the Savings
Bank's investment and mortgage-backed securities portfolio had a carrying value
of $53.7 million. See "BUSINESS OF THE SAVINGS BANK -- Investment Securities."
Deposits have been the primary source of funds for the Savings Bank's
investment and lending activities. The Savings Bank plans to continue to fund
its operations primarily with deposits, although advances from the FHLB-Seattle
have been used as a supplemental source of funds. The Savings Bank has also used
FHLB advances to purchase investment securities, with the goal of recognizing
income on the difference between the interest rate earned on the investment
securities and the interest rate paid on the FHLB advances. See "BUSINESS OF THE
SAVINGS BANK -- Deposits and Other Sources of Funds."
The Savings Bank conducts its operations from its main office and eight
branch offices located in Southwest Washington State. See "BUSINESS OF THE
SAVINGS BANK -- Properties." The Savings Bank's main office is located at 700
N.E. Fourth Avenue, Camas, Washington, and its telephone number is (360)
834-2231.
THE CONVERSION AND REORGANIZATION
PURPOSES OF THE CONVERSION AND REORGANIZATION. The Boards of Directors
of the Primary Parties believe that the Conversion and Reorganization is in the
best interests of the MHC and its members, the Savings Bank and its
stockholders, and the communities served by the MHC and the Savings Bank. In
their decision to pursue the Conversion and Reorganization, the Boards of
Directors considered the various regulatory uncertainties associated with the
mutual holding company structure, including the MHC's future ability to waive
any dividends from the Savings Bank and the uncertain future of the federal
thrift charter. See "RISK FACTORS -- Recent Legislation and the Future of the
Thrift Industry." In addition, the Boards of Directors considered the various
advantages of the stock
(ii)
<PAGE>
holding company form of organization, including: (i) the Holding Company's
ability to repurchase shares of its common stock without adverse tax
consequences, unlike the Savings Bank; (ii) the Holding Company's greater
flexibility under current law and regulations relative to the MHC to acquire
other financial institutions and diversify its operations; (iii) the larger
capital base of the Holding Company relative to the Savings Bank that will
result from the Conversion Offering; and (iv) the potential increased liquidity
in the Common Stock relative to the Public Savings Bank Shares because of the
larger number of shares of Common Stock to be outstanding upon consummation of
the Conversion and Reorganization. Currently, the Boards of Directors of the
Primary Parties have no specific plans, arrangements or understandings, written
or oral, regarding any stock repurchases, acquisitions or diversification of
operations. See "THE CONVERSION AND REORGANIZATION -- Purposes of Conversion and
Reorganization."
DESCRIPTION OF THE CONVERSION AND REORGANIZATION. The Conversion and
Reorganization are being undertaken pursuant to the Plan of Conversion that was
adopted by the Boards of Directors of the Savings Bank and the MHC on May 21,
1997 and subsequently amended on July 16 and July 25, 1997. Under the Plan of
Conversion, (i) the MHC will convert to an interim federal stock savings bank
("Interim A") and simultaneously merge with and into the Savings Bank, pursuant
to which the MHC will cease to exist and the outstanding shares of Savings Bank
Common Stock held by the MHC (1,407,891 shares or 58.21% of the outstanding
Savings Bank Common Stock as of the date of this Prospectus) will be canceled,
and (ii) an interim federal stock savings bank ("Interim B") will be formed as a
wholly-owned subsidiary of the Holding Company and will merge with and into the
Savings Bank, resulting in the Savings Bank becoming a wholly-owned subsidiary
of the Holding Company and the outstanding Public Savings Bank Shares (1,010,610
shares or 41.79% of the outstanding Savings Bank Common Stock as of the date of
this Prospectus) will be converted into the Exchange Shares pursuant to the
Exchange Ratio. The Exchange Ratio will result in the holders of the outstanding
Public Savings Bank Shares owning in the aggregate approximately the same
percentage of the Common Stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the Conversion Shares and the Exchange
Shares) as the percentage of Savings Bank Common Stock owned by them in the
aggregate immediately before the consummation of the Conversion and
Reorganization, before giving effect to any (i) payment of cash in lieu of
issuing fractional Exchange Shares and (ii) shares of Conversion Shares
purchased by the Savings Bank's stockholders in the Conversion Offerings.
The following diagram outlines the current organizational structure of
the Primary Parties' and their ownership interests:
--------------------- ---------------------
| MHC | | Public |
| | | Stockholders |
--------------------- ---------------------
| |
58.21%| |41.79%
| |
---------------------
| Savings Bank |
| |
---------------------
|
|100%
|
---------------------
| Holding Company |
| |
---------------------
|
|100%
|
---------------------
| Interim B |
| (in formation) |
---------------------
(iii)
<PAGE>
The following diagram reflects the post-Conversion and Reorganization
organizational structure of the Holding Company and the Savings Bank and their
ownership interests. The ownership interests presented assumes no fractional
Exchange Shares are issued, and does not give effect to purchases of any
Conversion Shares by the Public Stockholders or the exercise of outstanding
stock options.
--------------------- ---------------------
| Purchasers of | | Former Public |
| Conversion Shares | | Stockholders |
--------------------- ---------------------
| |
58.21%| |41.79%
| |
---------------------
| Holding Company |
| |
---------------------
|
|
|
---------------------
| Savings Bank |
| |
---------------------
REQUIRED APPROVALS. The OTS has approved the Plan of Conversion subject
to (i) the approval of the holders of at least a majority of the total number of
votes eligible to be cast by the members of the MHC as of the close of business
on the Voting Record Date (July 31, 1997) at a special meeting of members called
for the purpose of submitting the Plan of Conversion for approval ("Members'
Special Meeting"), (ii) the approval of the holders of at least two-thirds of
the outstanding shares of Savings Bank Common Stock (including those shares held
by the MHC) as of the close of business on the Voting Record Date at a meeting
of stockholders called for the purpose of considering the Plan ("Stockholders'
Meeting"), and (iii) the approval of the holders of at least a majority of the
Public Savings Bank Shares as of the close of business on the Voting Record Date
present in person or by proxy at the Stockholders' Meeting. The MHC intends to
vote its shares of Savings Bank Common Stock, which amount to 58.21% of the
outstanding shares, in favor of the Plan of Conversion at the Stockholders'
Meeting. In addition, as of March 31, 1997, directors and executive officers of
the Primary Parties as a group (10 persons) beneficially owned 264,768, or
10.64%, of the outstanding shares of Savings Bank Common Stock, which they
intend to vote in favor of the Plan of Conversion at the Stockholders' Meeting.
THE CONVERSION OFFERINGS
The Conversion Offerings, which consist of the Subscription Offering,
the Direct Community Offering and the Syndicated Community Offering (if any),
are being undertaken pursuant to the Plan of Conversion. The Holding Company is
offering up to 3,105,000 Conversion Shares in the Conversion Offerings.
Conversion Shares are first being offered in the Subscription Offering through
the exercise of Subscription Rights issued, in order of priority, to (i)
Eligible Account Holders; (ii) the ESOP; (iii) Supplemental Eligible Account
Holders; and (iv) Other Members. The Subscription Offering will expire at
________, Pacific Time, on _________ __, 1997, unless extended.
Subject to the prior rights of Subscription Rights holders, Conversion
Shares not subscribed for in the Subscription Offering are being offered in the
Direct Community Offering to members of the general public with preference given
first to Public Stockholders (who are not Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members) and then to natural persons and
trusts of natural persons who are permanent residents of the Local Community. It
is anticipated that shares not subscribed for in the Subscription Offering and
Direct Community Offering may be offered to certain members of the general
public in the Syndicated Community Offering. The Primary Parties reserve the
absolute right to reject or accept any orders in the Direct Community Offering
or the Syndicated Community Offering (if any), in whole or in part, either at
the time of receipt of an order
(iv)
<PAGE>
or as soon as practicable following the Expiration Date. The closing with
respect to all shares sold in the Conversion Offerings will occur
simultaneously, and all Conversion Shares will be sold at a uniform price of
$10.00 per share.
The Primary Parties have retained Webb as their consultant and advisor
in connection with the Conversion Offerings and to assist in soliciting
subscriptions in the Conversion Offerings on a best efforts basis. See "The
CONVERSION AND REORGANIZATION -- The Subscription, Direct Community and
Syndicated Offerings."
BENEFITS OF THE CONVERSION AND REORGANIZATION TO MANAGEMENT
ESOP. In connection with the MHC Reorganization, the Savings Bank
adopted the ESOP, a tax-qualified employee benefit plan for officers and
employees, which acquired 55,200 shares of the Savings Bank Common Stock. Upon
consummation of the Conversion and Reorganization, the Savings Bank Common Stock
held by the ESOP will be converted into Exchange Shares based upon the Exchange
Ratio. In connection with the Conversion and Reorganization, the ESOP will
purchase 8% of the Conversion Shares (248,400 shares of Common Stock based on
the issuance of the maximum of the Estimated Valuation Range). The ESOP's
purchase will be funded with the proceeds of a loan from the Holding Company.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership
Plan." As a result of the ESOP's acquisition of Common Stock, the Holding
Company will recognize compensation expense in an amount equal to the fair
market value of the ESOP shares when such shares are committed to be released to
participants' accounts. See "RISK FACTORS -- Expenses Associated With ESOP and
MRP" and "PRO FORMA DATA."
MRP. The Holding Company expects to seek stockholder approval of the
Riverview Bancorp, Inc. 1997 Management Recognition Plan ("1997 MRP"). The 1997
MRP will reserve a number of shares equal to 4% of the number of shares issued
in the Conversion Offerings. Under current OTS regulations, the approval of a
majority vote of the Holding Company's outstanding shares of Common Stock is
required prior to the implementation of the 1997 MRP within one year of the
consummation of the Conversion and Reorganization. If stockholder approval of
the 1997 MRP is obtained, it is expected that awards of up to 124,200 shares of
Common Stock (based on the issuance of the maximum of the Estimated Valuation
Range) will be made to key employees and directors of the Holding Company and
the Savings Bank at no cost to the recipient. Although no specific award
determinations have been made at this time, the Holding Company and the Savings
Bank anticipate that if stockholder approval is obtained it would provide awards
to its directors, officers and employees to the extent permitted by applicable
regulations. Under current OTS regulations, if the 1997 MRP is implemented
within one year of the consummation of the Conversion and Reorganization, (i) no
officer or employee could receive an award covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the 1997 MRP. In addition, all awards would
be subject to vesting at a minimum rate of 20% per year. The size of individual
awards will be determined prior to submitting the 1997 MRP for stockholder
approval, and disclosure of anticipated awards will be included in the proxy
materials for such meeting. See "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Management Recognition Plan."
STOCK OPTION PLAN. The Holding Company expects to seek stockholder
approval of the Riverview Bancorp, Inc. 1997 Stock Option Plan ("1997 Stock
Option Plan"). The 1997 Stock Option Plan will reserve a number of shares equal
to 10% of the number of shares issued in the Conversion and Reorganization.
Under current OTS regulations, the approval of a majority vote of the Holding
Company's outstanding shares of Common Stock is required prior to the
implementation of the 1997 Stock Option Plan within one year of the consummation
of the Conversion and Reorganization. If stockholder approval of the 1997 Stock
Option Plan is obtained, it is expected that options to acquire up to 310,500
shares of Common Stock of the Holding Company (based on the issuance of the
maximum of the Estimated Valuation Range) will be awarded to key
(v)
<PAGE>
employees and directors of the Holding Company and the Savings Bank. Such
options will be in addition to options outstanding under the Savings Bank's 1993
Stock Option and Incentive Plan ("1993 Stock Option Plan") that was adopted in
connection with MHC Reorganization. Options outstanding under the 1993 Stock
Option Plan will be assumed by the Holding Company with appropriate adjustments
made to the exercise price and the number of shares of Common Stock underlying
each option to reflect the applicable Exchange Ratio. The exercise price of such
options will be 100% of the fair market value of the Common Stock on the date
the option is granted. Although no specific award determinations have been made
at this time, the Holding Company and the Savings Bank anticipate that if
stockholder approval is obtained it would provide awards to its directors,
officers and employees to the extent permitted by applicable regulations. Under
current OTS regulations, if the 1997 Stock Option Plan is implemented within one
year of the consummation of the Conversion and Reorganization, (i) no officer
or employees could receive an award of options covering in excess of 25%, (ii)
no nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the 1997 Stock Option Plan. In addition, all
awards would be subject to vesting at a minimum rate of 20% per year. The size
of individual awards will be determined prior to submitting the 1997 Stock
Option Plan for stockholder approval, and disclosure of anticipated awards will
be included in the proxy materials for such meeting. Options are valuable only
to the extent that they are exercisable and the market price for the underlying
share of Common Stock is in excess of the exercise price. An option effectively
eliminates the market risk of holding the underlying securities since no
consideration is paid for the option until it is exercised. Therefore, the
recipient may, within the limits of the term of the option, wait to exercise the
option until the market price exceeds the exercise price. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- 1997 Stock Option Plan."
EMPLOYMENT AND SEVERANCE AGREEMENTS. The MHC and the Savings Bank
currently maintain employment agreements with Mr. Patrick Sheaffer (President
and Chief Executive Officer of the Savings Bank and the Holding Company) and Ron
Wysaske (Executive Vice President and Chief Financial Officer of the Savings
Bank and the Holding Company) that were entered into in connection with the MHC
Reorganization. In connection with the Conversion and Reorganization, the
Holding Company and the Savings Bank will enter into three-year employment
agreements with Messrs. Sheaffer and Wysaske, which have substantially the same
terms as and will replace the existing agreements. The agreements will provide
certain benefits in the event of the officers' termination of employment
following a change in control of the Holding Company or the Savings Bank. In the
event of a change in control of the Holding Company or the Savings Bank, as
defined in the agreement, each executive officer will be entitled to a package
of cash and/or benefits with a maximum value equal to 2.99 times their average
annual compensation during the five-year period preceding the change in control.
Assuming a change of control occurred as of March 31, 1997, the aggregate value
of the severance benefits payable to Messrs. Sheaffer and Wysaske under the
agreements would have been approximately $883,000. See "MANAGEMENT OF
THE SAVINGS BANK -- Executive Compensation -- Employment Agreements."
The MHC and the Savings Bank also currently maintains severance
agreements with certain senior officers that were entered into in connection
with the MHC Reorganization. In connection with the Conversion and
Reorganization, the Holding Company and the Savings Bank will enter into new
severance agreements with these officers, which have substantially the same
terms as and will replace the existing agreements. The severance agreements
provide certain benefits in the event of the officers' termination following a
change in control of the Holding Company or the Savings Bank. In the event of a
change in control of the Holding Company or the Savings Bank, as defined in the
agreement, each senior officer will be entitled to a package of cash and/or
benefits with a maximum value equal to 2.99 times their average annual
compensation during the five-year period preceding the change in control.
Assuming a change of control occurred as of March 31, 1997, the aggregate value
of the severance benefits payable to these senior officers under the agreements
would have been approximately $552,000. See "MANAGEMENT OF THE SAVINGS
BANK -- Executive Compensation -- Severance Agreements."
EMPLOYEE SEVERANCE COMPENSATION PLAN. In connection with the Conversion
and Reorganization, the Board of Directors of the Savings Bank intends to adopt
an Employee Severance Compensation Plan ("Severance
(vi)
<PAGE>
Plan") to provide benefits to eligible employees in the event of a change in
control of the Holding Company or the Savings Bank. Officers who enter into
separate employment or severance agreements with the Holding Company and the
Savings Bank will not be eligible to participate in the Severance Plan. The
Severance Plan will provide that, in the event of a change in control of the
Holding Company or the Savings Bank, eligible employees who are terminated or
who terminate employment (but only upon the occurrence of events specified in
the plan) within 12 months of the effective date of a change in control will be
entitled to a payment based on years of service with the Savings Bank, subject
to certain limits. Assuming that a change in control had occurred at March 31,
1997 and the termination of all eligible employees, the maximum aggregate
payment due under the Severance Plan would have been approximately $674,000.
See "MANAGEMENT OF THE SAVINGS BANK -- Executive Compensation -- Employee
Severance Compensation Plan."
For information concerning the possible voting control of officers,
directors and employees following the Conversion and Reorganization, see "RISK
FACTORS -- Anti-takeover Considerations -- Voting Control by Insiders."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING CONVERSION SHARES
To ensure that each prospective purchaser receives a Prospectus at
least 48 hours prior to the Expiration Date as required by Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will
be mailed later than five days or hand delivered later than two days prior to
the Expiration Date. Execution of the Stock Order Form will confirm receipt or
delivery of a Prospectus as required by Rule 15c2-8. Stock Order Forms will be
distributed only with a Prospectus.
To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Savings Bank, on the Stock
Order Form giving all names on each deposit account and/or loan and the account
and/or loan numbers at the applicable eligibility date.
Full payment by check, cash (only if delivered in person at an office
of the Savings Bank), money order, bank draft or withdrawal authorization
(payment by wire transfer will not be accepted) must accompany an original Stock
Order Form (facsimile copies and photocopies will not be accepted) and a fully
executed separate Certification Form. ORDERS CANNOT AND WILL NOT BE ACCEPTED
WITHOUT EXECUTION OF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE
STOCK ORDER FORM. See "THE CONVERSION AND REORGANIZATION -- Procedure for
Purchasing Conversion Shares in the Subscription and Direct Community Offering."
PURCHASE LIMITATIONS
Except for the ESOP, which is expected to subscribe for 8% of the
Conversion Shares issued in the Conversion and Reorganization, the Plan of
Conversion provides for the following purchase limitations: (i) no person may
purchase in either the Subscription Offering, Direct Community Offering or
Syndicated Community Offering more than 1.6% of the Conversion Shares issued in
the Conversion Offerings, (ii) no person, together with associates of or persons
acting in concert with such person, may purchase in either the Subscription
Offering, Direct Community Offering or Syndicated Community Offering more than
2% of the Conversion Shares issued in the Conversion Offerings, (iii) the
maximum number of Conversion Shares which may be subscribed for or purchased in
all categories in the Conversion Offerings by any person, when combined with any
Exchange Shares received, shall not exceed 1.6% of the Common Stock to be issued
in the Conversion and Reorganization, and (iv) the maximum number of Conversion
Shares which may be subscribed for or purchased in all categories in the
Conversion Offerings by any person, together with any associate or any group of
persons acting in concert, when combined with any Exchange Shares received,
shall not exceed 2% of the Common Stock to be issued in the Conversion and
Reorganization. The minimum order is 25 Conversion Shares. For purposes of these
purchase limitations, Exchange Shares will be valued at $10.00 per share which
is the same price at which the Conversion Shares will be issued in the
Conversion Offerings. At any time during the
(vii)
<PAGE>
Conversion Offerings, and without furtherapproval by the MHC members or the
Public Stockholders, the Primary Parties, in their sole discretion, may increase
any of the purchase limitations by up to 5% of the Conversion Shares issued in
the Conversion and Reorganization. Under certain circumstances, subscribers may
be resolicited in the event of such an increase and given the opportunity to
increase, decrease or rescind their orders. If there is an oversubscription in
the Conversion Offerings, Conversion Shares will be allocated as set forth in
the Plan of Conversion. See "THE CONVERSION AND REORGANIZATION -- The
Subscription, Direct Community and Syndicated Community Offerings," "--
Procedure for Purchasing Conversion Shares in the Subscription and Direct
Community Offerings" and "-- Limitations on Purchases of Conversion Shares."
Because the purchase limitations set forth in the Plan of Conversion take into
account the Exchange Shares to be issued to the Public Stockholders for their
Public Savings Bank Shares, the ability of certain Public Stockholders to
purchase Conversion Shares in the Conversion Offerings may be limited.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION AND
REORGANIZATION
OTS regulations require the aggregate purchase price of the Conversion
Shares be consistent with the independent appraisal of the estimated pro forma
market value of the MHC and the Savings Bank, as converted, which was estimated
by RP Financial to range from $23.0 million to $31.1 million as of August 1,
1997, or from 2,295,000 shares to 3,105,000 shares based on the Purchase Price.
Because the Public Stockholders will continue to hold the same aggregate
percentage ownership interest in the Holding Company as they held in the Savings
Bank before the Conversion and Reorganization, before giving effect to the
payment of cash in lieu of issuing fractional Exchange Shares and any Conversion
Shares purchased by the Public Stockholders in the Conversion Offerings or the
ESOP thereafter. The independent appraisal valuation was multiplied by 58.27%
(which represents the MHC's percentage interest in the Savings Bank to determine
the midpoint of the Estimated Valuation Range, which is $27.0 million, or
2,700,000 shares based on the Purchase Price). The full text of the independent
appraisal describes the procedures followed, the assumptions made, limitations
on the review undertaken and matters considered, which included but did not
depend on the trading market for the Savings Bank Common Stock (see "MARKET FOR
COMMON STOCK"). The appraisal will be updated or confirmed at the completion of
the Conversion Offerings. The maximum of the Estimated Valuation Range may be
increased by up to 15% and the number of Conversion Shares may be increased to
3,570,750 shares due to material changes in the financial condition or results
of operations of the Savings Bank or changes in market conditions or general
financial, economic or regulatory conditions. No resolicitation of subscribers
will be made and subscribers will not be permitted to modify or cancel their
subscriptions unless the gross proceeds from the sale of the Conversion Shares
are less than the minimum or more than 15% above the maximum of the current
Estimated Valuation Range. All Conversion Shares will be sold at the uniform
Purchase Price ($10.00 per share), which was established by the Boards of
Directors of the Primary Parties. Any increase or decrease in the number of
shares of Conversion Stock will result in a corresponding change in the number
of Exchange Shares, so that upon consummation of the Conversion and
Reorganization, the Conversion Shares and the Exchange Shares will represent
approximately 58.27% and 41.73%, respectively, of the total outstanding shares
of Common Stock. See "PRO FORMA DATA" and "THE CONVERSION AND REORGANIZATION --
Stock Pricing, Exchange Ratio and Number of Shares to be Issued." THE APPRAISAL
IS NOT INTENDED TO BE AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION OF ANY
KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK IN THE CONVERSION
OFFERINGS NOR CAN ASSURANCE BE GIVEN THAT PURCHASERS OF THE COMMON STOCK IN THE
CONVERSION OFFERINGS WILL BE ABLE TO SELL SUCH SHARES AFTER CONSUMMATION OF THE
CONVERSION AND REORGANIZATION AT A PRICE THAT IS EQUAL TO OR ABOVE THE PURCHASE
PRICE. Furthermore, the pro forma stockholders' equity is not intended to
represent the fair market value of the Common Stock and may be greater than
amounts that would be available for distribution to stockholders in the event of
liquidation. A complete copy of the appraisal is available in the manner set
forth under "ADDITIONAL INFORMATION."
(viii)
Based on the 1,010,610 Public Savings Bank Shares outstanding at the
date of this Prospectus, and assuming a minimum of 2,295,000 and a maximum of
3,105,000 Conversion Shares are issued in the Conversion Offerings, the Exchange
Ratio is expected to range from approximately 1.6299 Exchange Shares to 2.2051
Exchange Shares for each Public Savings Bank Share issued and outstanding
immediately prior to the consummation of the Conversion and Reorganization. The
Exchange Ratio will be affected if any stock options to purchase shares of
Savings Bank Common Stock are exercised after the date of this Prospectus and
before the consummation of the Conversion and Reorganization. If any stock
options are outstanding immediately before the consummation of the Conversion
and Reorganization, they will be converted into options to purchase shares of
Common Stock, with the number of shares subject to the option and the exercise
price per share to be adjusted based upon the Exchange Ratio so that the
aggregate exercise price remains unchanged. The duration of the options will
also be unchanged. As of the date of this Prospectus, there were outstanding
options to purchase 88,117 shares of Savings Bank Common Stock at a
weighted-average exercise price of $8.88 per share. The Savings Bank has no
plans to grant additional stock options before the consummation of the
Conversion and Reorganization.
<TABLE>
<CAPTION>
Shares
Conversion Shares to Exchange Stock to of Common
Be Issued(1) Be Issued(1) Stock to be Exchange
Amount Percent Amount Percent Outstanding(1) Ratio(1)
<S> <C> <C> <C> <C> <C> <C>
Minimum.............. 2,295,000 58.27% 1,643,561 41.73% 3,938,561 1.6299
Midpoint............. 2,700,000 58.27 1,933,602 41.73 4,633,602 1.9175
Maximum.............. 3,105,000 58.27 2,223,642 41.73 5,328,642 2.2051
15% above
Maximum............. 3,350,750 58.27 2,257,188 41.73 6,127,938 2.5359
</TABLE>
(1) Assumes that outstanding options to purchase 72,046 shares of Savings
Bank Common Stock at March 31, 1997 are not exercised before
consummation of the Conversion and Reorganization. However, assuming
exercise, the percentages represented by the Conversion Shares and the
Exchange Shares would be 56.58% and 43.42%, respectively, and the
Exchange Ratio would be 1.5828, 1.8621, 2.1414, and 2.4626, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively.
[/R]
DIFFERENCES IN STOCKHOLDER RIGHTS
The Holding Company is a Washington corporation subject to the
provisions of the Washington Business Corporation Act, as amended ("WBCA"), and
the Savings Bank is a federally chartered savings bank subject to federal laws
and regulations. Upon consummation of the Conversion and Reorganization, the
Public Stockholders will become stockholders of the Holding Company and their
rights will be governed by the Holding Company's Articles of Incorporation and
Bylaws and Washington law, rather than the Savings Bank's Federal Stock Charter
and Bylaws, federal law and OTS regulations. The rights of stockholders of the
Savings Bank are materially different in certain respects from the rights of
stockholders of the Holding Company. See "COMPARISON OF STOCKHOLDERS' RIGHTS"
and "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY."
USE OF PROCEEDS
The net proceeds from the sale of the Conversion Shares are estimated
to range from $22.1 million to $30.1 million, or to $34.7 million if the
Estimated Valuation Range is increased by 15%, depending upon the number of
shares sold and the expenses of the Conversion and Reorganization. The Holding
Company has received conditional OTS approval to purchase all of the capital
stock of the Savings Bank to be issued in the Conversion and Reorganization in
exchange for 50% of the net proceeds of the Conversion Offerings from which it
will fund the ESOP and the 1997 MRP. This will result in the Holding Company
retaining approximately $16.1 million to $15.1 million of the net proceeds, or
up to $17.4 million if the Estimated Valuation Range is increased
(ix)
<PAGE>
by 15%, from which it will fund the ESOP and the 1997 MRP, and the Savings Bank
receiving an equal amount. See "PRO FORMA DATA."
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the funds
contributed to it for general corporate purposes, including, initially, lending
and investment in short-term U.S. Government and agency obligations.
A portion of the net proceeds retained by the Holding Company will be
used for a loan by the Holding Company to the ESOP to enable it to refinance its
existing third party loan used to purchase shares of Savings Bank Common Stock
in the MHC Reorganization ($237,000 outstanding balance at March 31, 1997) and
to purchase 8% of the shares of Conversion Shares issued in the Conversion and
Reorganization. Such loan would fund the entire purchase price of the Conversion
Shares to be purchased by the ESOP in the Conversion Offerings ($2.5 million at
the maximum of the Estimated Valuation Range) and would be repaid principally
from the Savings Bank's contributions to the ESOP and from dividends payable on
the Common Stock held by the ESOP. The remaining proceeds retained by the
Holding Company initially will be invested primarily in short-term U.S.
Government and agency obligations. Such proceeds will be available for
additional contributions to the Savings Bank in the form of debt or equity, to
support future growth and diversification activities, as a source of dividends
to the stockholders of the Holding Company and for future repurchases of Common
Stock (including possible repurchases to fund the 1997 MRP), or to provide
shares to be issued upon exercise of stock options) to the extent permitted
under Washington law and OTS regulations. The Holding Company may consider
exploring opportunities to use such funds to expand operations through acquiring
or establishing additional branch offices and the acquisition of other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any such activities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market System under the symbol "RVSB" (the current symbol for
the Public Savings Bank Shares, which are listed on the Nasdaq SmallCap Market).
Keefe, Bruyette and Pacific Crest have agreed to act as a market makers for the
Holding Company's Common Stock following consummation of the Conversion and
Reorganization. No assurance can be given that an active and liquid trading
market for the Common Stock will develop or, if developed, will be maintained.
Further, no assurance can be given that purchasers will be able to sell their
shares at or above the Purchase Price after the Conversion and Reorganization.
See "RISK FACTORS -- Absence of Prior Market for the Common Stock" and "MARKET
FOR COMMON STOCK."
DIVIDEND POLICY
Following consummation of the Conversion and Reorganization, the
Holding Company's Board of Directors intends to declare cash dividends on the
Common Stock at an initial quarterly rate equal to $0.06 per share divided by
the final Exchange Ratio, commencing with the first full quarter following
consummation of the Conversion and Reorganization. Based upon the Estimated
Valuation Range, the Exchange Ratio is expected to be 1.6299, 1.9175, 2.2051 and
2.5359 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively, resulting in an initial quarterly
dividend rate of $0.0368, $0.0313, $0.0272 and $0.0237 per share, respectively,
following consummation of the Conversion and Reorganization. Declarations of
dividends by the Holding Company's Board of Directors will depend upon a number
of factors, including the amount of the net proceeds from the Conversion
Offerings retained by the Holding Company, investment opportunities available to
the Holding Company or the Savings Bank, capital requirements, regulatory
limitations, the Holding Company's and the Savings Bank's financial condition
and results of operations, tax considerations and general economic conditions.
Consequently, there can be no assurance that any dividends will be paid on the
Common Stock or that, if paid, such dividends will not be reduced or eliminated
in future periods. The Savings Bank intends to continue to pay regular
(x)
<PAGE>
quarterly dividends through either the date of consummation of the Conversion
and Reorganization (on a pro rata basis) or the end of the fiscal quarter during
which the Conversion and Reorganization is consummated. See "DIVIDEND POLICY."
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
At March 31, 1997, officers and directors of the Savings Bank (10
persons) beneficially owned 264,768 shares of Savings Bank Common Stock. See
"MANAGEMENT OF THE SAVINGS BANK -- Beneficial Ownership of Savings Bank Common
Stock by Directors and Executive Officers." In addition to an aggregate of
583,839 Exchange Shares to be received by officers and directors of the Savings
Bank in the Exchange Offering based on an Exchange Ratio of 2.2051, officers and
directors are expected to subscribe for an aggregate of approximately 10,200
Conversion Shares, or less than 1% of the shares based on both the minimum and
the maximum of the Estimated Valuation Range, respectively. See "CONVERSION
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS."
Furthermore, purchases by the ESOP, allocations under the 1997 MRP, and the
exercise of stock options issued under the Riverview Bancorp, Inc. 1997 Stock
Option Plan ("1997 Stock Option Plan"), will increase the number of shares
beneficially owned by directors, officers and employees. Assuming (i) the
Exchange Shares to be received and the Conversion Shares to be subscribed for by
officers and directors described above, (ii) implementation of the MRP and the
1997 Stock Option Plan and the exercise of remaining options under the 1993
Stock Option Plan, (iii) the open market purchase of shares on behalf of the
1997 MRP, (iv the purchase by the ESOP of 8% of the Conversion Shares sold in
the Conversion Offerings, and (v) the exercise of stock options equal to 10% of
the number of Conversion Shares issued in the Conversion and Reorganization,
directors, officers and employees of the Holding Company and the Savings Bank
would have voting control, on a fully diluted basis, of 24.31% and 23.84% of the
Common Stock, based on the issuance of the minimum and maximum of the Estimated
Valuation Range, respectively. See "RISK FACTORS -- Anti-takeover Considerations
- -- Voting Control by Insiders." The MRP and Stock Option Plan are subject to
approval by the stockholders of the Holding Company at a meeting to be held no
earlier than six months following consummation of the Conversion and
Reorganization.
RISK FACTORS
See "RISK FACTORS" beginning on page 1 for a discussion of certain
risks related to the Conversion and Reorganization that should be considered by
all prospective investors.
(xi)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF THE SAVINGS BANK
AND ITS SUBSIDIARIES AT THE DATES AND FOR THE PERIODS INDICATED. THIS
INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
PRESENTED ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C>
Total assets.................................. $224,385 $209,506 $190,609 $131,511 $117,023
Loans receivable, net(1)...................... 151,774 128,169 103,772 90,860 83,554
Mortgage-backed certificates held
to maturity, at amortized cost............... 26,402 28,375 31,922 17,196 11,097
Mortgage-backed certificates available
for sale, at fair value...................... 2,990 2,004 -- -- --
Cash and interest-bearing deposits............ 6,951 5,585 6,499 7,363 7,772
Investment securities held to
maturity, at amortized cost.................. 22,212 31,356 38,049 12,294 10,167
Investment securities available for
sale, at fair value.......................... 3,899 3,932 -- -- --
Deposit accounts.............................. 169,416 158,159 145,449 106,478 105,953
Federal Home Loan Bank advances............... 27,180 26,050 23,000 5,000 --
Shareholders' equity (retained
earnings before 1994)(2)..................... 25,022 23,086 20,533 18,359 9,803
Year Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Interest income............................... $17,476 $15,996 $13,232 $10,305 $10,230
Interest expense.............................. 8,923 8,416 5,927 3,840 4,625
------- ------- ------- ------- -------
Net interest income........................... 8,553 7,580 7,305 6,465 5,605
Provision for loan losses..................... 180 -- -- 200 187
------- --------- --------- ------- -------
Net interest income after provision
for loan losses.............................. 8,373 7,580 7,305 6,265 5,418
Gains from sale of loans,
securities and real estate owned............. 106 391 111 342 1,018
Noninterest income............................ 1,768 1,624 1,139 1,064 1,185
Noninterest expenses(3)....................... 7,204 5,607 4,889 3,936 3,890
------- ------- ------- ------- -------
Income before federal income tax
provision and extraordinary item
Provision for federal income taxes............ 1,035 1,375 1,220 1,335 1,350
----- ----- ----- ----- -----
Income before extraordinary items............. 2,008 2,613 2,446 2,380 2,381
Cumulative effect of accounting
changes...................................... -- -- -- 170 --
--------- --------- --------- ------- --------
Net income.................................... $ 2,008 $ 2,613 $ 2,446 $ 2,210 $ 2,381
======= ======= ======= ======= =======
(xii)
<PAGE>
Year Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
PER SHARE DATA (3):
Net income per share:
Before cumulative effect of
accounting changes.................. $0.85 $1.11 $1.04 $1.02 N/A
Cumulative effect of accounting
change.............................. -- -- -- 0.07 N/A
------------- ------------ ------------- ----- ---
Net income............................ $ 0.85 $ 1.11 $ 1.04 $1.09 N/A
=========== =========== =========== ===== ===
Dividends per share (4)................ $ 0.21 $ 0.17 $ 0.42 -- N/A
Weighted average shares
outstanding........................... 2,374,077 2,362,450 2,348,306 2,236,285 --
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED OTHER DATA:
Number of:
Real estate loans outstanding......... 3,260 2,939 2,894 2,722 2,723
Deposit accounts...................... 19,300 18,318 16,816 13,877 14,176
Full service offices.................. 9 9 9 6 6
At or For the Year Ended March 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED FINANCIAL RATIOS:
PERFORMANCE RATIOS:
Return on average assets................ 0.92% 1.31% 1.41% 2.06% 2.05%
Return on average equity................ 8.38 12.02 12.59 18.39 27.58
Dividend payout ratio(4)(5)............. 10.56 6.62 16.80 N/A N/A
Interest rate spread.................... 3.72 3.62 4.11 5.11 4.89
Net interest margin..................... 4.19 4.05 4.49 5.25 5.12
Noninterest expense to
average assets(6)...................... 3.30 2.80 2.82 3.17 3.35
Efficiency ratio (non-
interest expense divided by
the sum of net interest
income and noninterest
income)(7)............................. 69.09 58.44 57.15 50.00 49.82
ASSET QUALITY RATIOS:
Average interest-earning assets
to interest-bearing liabilities........ 110.80 109.63 110.39 112.66 105.32
Allowance for loan losses to
total loans at end of period........... 0.50 0.47 0.58 0.62 0.55
(xiii)
<PAGE>
Net charge-offs (recoveries) to
average outstanding loans during
the period............................. 0.00 0.00 (0.01) 0.07 0.38
Ratio of nonperforming assets
to total assets........................ 0.10 0.26 0.13 0.38 1.41
CAPITAL RATIOS:
Average equity to average assets........ 10.98 10.87 11.20 11.18 7.44
Equity to assets at end of fiscal year.. 11.15 11.02 10.77 13.96 8.38
(1) Includes loans held for sale.
(2 The Savings Bank was not a public company until the consummation of the
MHC Reorganization on October 22, 1993.
(3) Includes $947,000 special SAIF assessment in the year ended March 31, 1997.
(4) All cash dividends paid by the Savings Bank have been waived by the MHC.
(5) Excludes cash dividends waived by the MHC.
(6) Noninterest expense to average assets was 2.87% at March 31, 1997 without special SAIF assessment.
(7) Efficiency ratio was 60.00% at March 31, 1997 without special SAIF assessment.
</TABLE>
(xiv)
<PAGE>
RISK FACTORS
BEFORE INVESTING IN SHARES OF THE COMMON STOCK OFFERED HEREBY,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS PRESENTED BELOW, IN
ADDITION TO MATTERS DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
CERTAIN LENDING RISKS
CONSTRUCTION LENDING RISKS. Prompted by the high demand for residential
housing units in its primary market area, the Savings Bank has been an active
originator of residential construction loans, including speculative loans to
approximately 50 local residential builders. Residential construction loans have
increased from $19.6 million at March 31, 1993 to $32.5 million at March 31,
1997. At March 31, 1997, speculative residential construction loans amounted to
$16.8 million, or 49.9% of the residential construction loan portfolio. Subject
to market conditions, the Savings Bank intends to continue to be an active
originator of residential construction loans.
Construction lending generally involves greater credit risk than one-
to- four family mortgage lending. Construction loans generally have higher loan
balances than one- to- four family mortgage loans. In addition, the potential
for cost overruns because of the inherent difficulties in estimating
construction costs and, therefore, collateral values and the difficulties and
costs associated with monitoring construction progress, among other things, are
major contributing factors to this greater credit risk. Speculative construction
loans have the added risk that there is not an identified buyer for the
completed home when the loan is originated, with the risk that the builder will
have to service the construction loan debt and finance the other carrying costs
of the completed home for an extended time period until a buyer is identified.
Furthermore, the demand for construction loans and the ability of construction
loan borrowers to service their debt depends highly on the state of the general
economy, including market interest rate levels, and the state of the economy of
the Savings Bank's primary market area. A material downturn in economic
conditions would be expected to have a material adverse effect on the credit
quality of the construction loan portfolio, and may require management to
reassess the adequacy of the Savings Bank's allowance for loan losses and to
establish additional provisions for loan losses, which would have a material
adverse effect on net income. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Construction Lending" and "-- Allowance for Loan Losses."
CONSUMER LENDING RISKS. At March 31, 1997, the Savings Bank's consumer
loan portfolio amounted to $14.3 million, or 9.4% of total net loans receivable.
Consumer lending is also generally viewed to involve greater credit risk than
one- to- four family mortgage lending. Collateral such as automobiles, boats and
other personal property depreciate rapidly and are often an inadequate repayment
source if a borrower defaults. In addition, consumer loan repayments depend on
the borrower's continuing financial stability and are more likely to be
adversely affected by job loss, divorce, illness, personal bankruptcy and other
financial hardship. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Consumer Lending."
COMMERCIAL REAL ESTATE LENDING. At March 31, 1997, the Savings Bank's
commercial real estate loan portfolio amounted to $9.0 million, or 5.9% of total
net loans receivable. Commercial real estate lending generally involves greater
credit risk than one- to- four family mortgage lending. Because payments on
loans secured by commercial properties often depend upon the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy, among
other things. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Commercial Real Estate Lending."
COMMERCIAL BUSINESS LENDING. At March 31, 1997, the Savings Bank's
commercial business loan portfolio amounted to $794,000, or 0.5% of total net
loans receivable. Subject to market conditions and other factors, the Savings
Bank intends to expand its commercial business lending activities within its
primary market area. Commercial business lending generally involves greater
credit risk than one- to- four family mortgage lending. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation value of these assets in
the event of a borrower default is often an insufficient source
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of repayment because accounts receivable may be uncollectible and inventories
and equipment may be obsolete or of limited use, among other things. See
"BUSINESS OF THE SAVINGS BANK -- Lending Activities -- Commercial Business
Lending."
CONCENTRATION OF CREDIT RISK. The Savings Bank has no significant
concentration of credit risk other than that a substantial portion of its loan
portfolio is secured by real estate, either as primary or secondary collateral,
located in its primary market area. This concentration of credit risk could have
a material adverse effect on the Savings Bank's financial condition and results
of operations to the extent there is a material deterioration in that area's
economy and real estate values. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
INTEREST RATE RISK
GENERAL. Like all financial institutions, the Savings Bank's financial
condition and results of operations are influenced significantly by general
economic conditions, the related monetary and fiscal policies of the federal
government and government regulations. Deposit flows and the cost of funds are
influenced by interest rates of competing investments and general market
interest rates. Lending activities are affected by the demand for mortgage
financing and for consumer and other types of loans, which in turn is affected
by the interest rates at which such financing may be offered and by other
factors affecting the supply of housing and the availability of funds. The
Savings Bank's profitability, like that of most financial institutions, depends
largely on its net interest income, which is the difference between the interest
income received from its interest-earning assets and the interest expense
incurred in connection with its interest-bearing liabilities. To better control
the impact of changes in interest rates, the Savings Bank has sought to improve
the match between asset and liability maturities or repricing periods and rates
by emphasizing the origination and purchase of ARM loans and shorter term
construction, commercial real estate, and consumer loans.
POTENTIAL ADVERSE IMPACT ON RESULTS OF OPERATIONS. The Savings Bank's
results of operations would be adversely affected by a material prolonged
increase in market interest rates. At March 31, 1997, assuming, for example, an
instantaneous 200 basis point increase in market interest rates, the Savings
Bank's net portfolio value ("NPV") (the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts) would decrease by
approximately $5.6 million, or 17%. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management."
POTENTIAL ADVERSE IMPACT ON FINANCIAL CONDITION. Changes in the level
of interest rates also affect the volume of loans originated or purchased by the
Savings Bank and, thus, the amount of loan and commitment fees, as well as the
market value of the Savings Bank's investment securities and other
interest-earning assets. Changes in interest rates also can affect the average
life of loans. Decreases in interest rates may result in increased prepayments
of loans, as borrowers refinance to reduce borrowing costs. Under these
circumstances, the Savings Bank is subject to reinvestment risk to the extent
that it is not able to reinvest such prepayments at rates which are comparable
to the rates on the maturing loans or securities. Moreover, volatility in
interest rates also can result in disintermediation, or the flow of funds away
from savings institutions into direct investments, such as U.S. Government and
corporate securities and other investment vehicles which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher
rates of return than savings institutions.
At March 31, 1997, out of total gross loans of $165.5 million in the
Savings Bank's portfolio, $78.2 million were ARM loans, substantially all of
which reprice every year. Furthermore, the Savings Bank's ARM loans contain
periodic and lifetime interest rate adjustment limits which, in a rising
interest rate environment, may prevent such loans from repricing to market
interest rates. While management anticipates that ARM loans will better offset
the adverse effects of an increase in interest rates as compared to fixed-rate
mortgages, the increased mortgage payments required of ARM borrowers in a rising
interest rate environment could potentially cause an increase in delinquencies
and defaults. The Savings Bank has not historically had an increase in such
delinquencies and defaults on ARM loans, but no assurance can be given that such
delinquencies or defaults would not occur in the future. The marketability of
the underlying property also may be adversely affected in a high interest rate
environment.
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Moreover, the Savings Bank's ability to originate or purchase ARM loans may be
affected by changes in the level of interest rates and by market acceptance of
the terms of such loans. In a relatively low interest rate environment, as
currently exists, borrowers generally tend to favor fixed-rate loans over ARM
loans to hedge against future increases in interest rates.
COMPETITION
The Savings Bank has faced, and will continue to face, strong
competition both in making loans and attracting deposits. The Savings Bank's
primary market has a high concentration of financial institutions, many of which
are branches of large California and Pacific Northwest bank holding companies
which have greater financial resources than the Savings Bank and all of which
compete with the Savings Bank in varying degrees. Competition for loans
principally comes from commercial banks, thrift institutions, credit unions and
mortgage banking companies. Historically, commercial banks, thrift institutions
and credit unions have been the Savings Bank's most direct competition for
deposits. The Savings Bank also competes with short-term money market mutual
funds and with other financial institutions, such as brokerage firms and
insurance companies, for deposits. In competing for loans, the Savings Bank may
be forced to offer lower loan interest rates periodically. Conversely, in
competing for deposits, the Savings Bank may be forced to offer higher deposit
interest rates periodically. Either case or both cases could adversely affect
net interest income. See "BUSINESS OF THE SAVINGS BANK -- Competition."
RETURN ON EQUITY AFTER CONVERSION AND REORGANIZATION
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Savings
Bank's return on equity for the year ended March 31, 1997 was, and the Holding
Company's post-Conversion and Reorganization return on equity will be, less than
the average return on equity for publicly traded thrift institutions and their
holding companies. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for
numerical information regarding the Savings Bank's historical return on equity
and "CAPITALIZATION" for a discussion of the Holding Company's estimated pro
forma consolidated capitalization as a result of the Conversion and
Reorganization. In order for the Holding Company to achieve a return on equity
comparable to the historical levels of the Savings Bank, the Holding Company
either would have to increase net income or reduce stockholders' equity, or
both, commensurate with the increase in equity resulting from the Conversion and
Reorganization. Reductions in equity could be achieved by, among other things,
the payment of regular or special cash dividends (although no assurances can be
given as to their payment or, if paid, their amount and frequency), the
repurchase of shares of Common Stock subject to applicable regulatory
restrictions, or the acquisition of branch offices, other financial institutions
or related businesses (neither the Holding Company nor the Savings Bank has any
present plans, arrangements, or understandings, written or oral, regarding any
repurchase or acquisitions). See "DIVIDEND POLICY" and "USE OF PROCEEDS."
Achievement of increased net income levels will depend on several important
factors outside management's control, such as general economic conditions,
including the level of market interest rates, competition and related factors,
among others. In addition, the expenses associated with the ESOP and the MRP
(see "-- New Expenses Associated with ESOP and MRP"), along with other
post-Conversion and Reorganization expenses are expected to contribute initially
to reduced earnings levels. Subject to market conditions, initially the Savings
Bank intends to deploy the net proceeds of the Conversion Offerings to support
its core lending activities to increase earnings per share and book value per
share, with the goal of achieving a return on equity comparable to the average
for publicly traded thrift institutions and their holding companies. This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can be attained. Consequently, for the foreseeable future,
investors should not expect a return on equity which will meet or exceed the
average return on equity for publicly traded thrift institutions, many of which
are not newly converted institutions and have had time to deploy their
conversion capital.
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EXPENSES ASSOCIATED WITH ESOP AND MRP
The Savings Bank will recognize material employee compensation and
benefit expenses assuming the ESOP and the MRP are implemented. The actual
aggregate amount of these new expenses cannot be currently predicted because
applicable accounting practices require that they be based on the fair market
value of the shares of Common Stock when the expenses are recognized, which
would occur when shares are committed to be released in the case of the ESOP and
over the vesting period of awards made to recipients in the case of the MRP.
These expenses have been reflected in the pro forma financial information under
"PRO FORMA DATA" assuming the Purchase Price ($10.00 per share) as fair market
value. Actual expenses, however, will be based on the fair market value of the
Common Stock at the time of recognition, which may be higher or lower than the
Purchase Price. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements and Regulatory
Policies -- Accounting for Employee Stock Ownership Plans," "-- Accounting for
Stock-Based Compensation," "MANAGEMENT OF THE SAVINGS BANK - - Benefits --
Employee Stock Ownership Plan" and "-- Benefits -- Management Recognition Plan."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND
WASHINGTON AND FEDERAL LAW. Certain provisions included in the Holding Company's
Articles of Incorporation and in the WBCA might discourage potential proxy
contests and other potential takeover attempts, particularly those that have not
been negotiated with the Board of Directors. As a result, these provisions may
preclude takeover attempts that certain stockholders may deem to be in their
best interest and may tend to perpetuate existing management. These provisions
include, among other things, a provision limiting voting rights of beneficial
owners of more than 10% of the Common Stock and supermajority voting
requirements for certain business combinations. In addition, the Articles of
Incorporation provides for the election of directors to staggered terms of three
years, eliminates cumulative voting for directors, and permits the removal of
directors without cause only upon the vote of holders of 80% of the outstanding
voting shares. Certain provisions of the Articles of Incorporation of the
Holding Company cannot be amended by stockholders unless an 80% stockholder vote
is obtained. The Articles of Incorporation also contains provisions regarding
the timing and content of stockholder proposals and nominations and limiting the
calling of special meetings. The existence of these anti-takeover provisions
could result in the Holding Company being less attractive to a potential
acquiror and in stockholders receiving less for their shares than otherwise
might be available in the event of a takeover attempt. Furthermore, federal
regulations prohibit for three years after consummation of the Conversion and
Reorganization the ownership of more than 10% of the Savings Bank or the Holding
Company without prior OTS approval. Federal law also requires OTS approval prior
to the acquisition of "control" (as defined in OTS regulations) of an insured
institution. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY."
VOTING CONTROL BY INSIDERS. In addition to an aggregate of 583,839
Exchange Shares to be received by directors and officers of the Savings Bank and
the Holding Company in the Exchange Offering based on an Exchange Ratio of
2.2051, directors and officers expect to subscribe for 10,200 Conversion Shares,
or less than 1% of the shares issued in the Conversion Offerings at both the
minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting of
approximately 8% of the shares of Common Stock issued in the Conversion and
Reorganization through the ESOP (assuming shares have been allocated under the
ESOP). Under the terms of the ESOP, the unallocated shares will be voted by the
ESOP trustees in the same proportion as the votes cast by participants with
respect to the allocated shares. Patrick Sheaffer, President and Chief Executive
Officer of the Holding Company and the Savings Bank, and Ron Wysaske, Treasurer
of the Holding Company and Executive Vice President of the Savings Bank, serve
as the ESOP trustees.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion and Reorganization, the Holding
Company expects to seek approval of the 1997 MRP, which is a non- tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. The Holding Company expects to acquire
common stock of the Holding Company on behalf of the
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1997 MRP in an amount equal to 4% of the Common Stock issued in the Conversion
and Reorganization, or 91,800 and 124,200 shares at the minimum and the maximum
of the Estimated Valuation Range, respectively. These shares will be acquired
either through open market purchases through a trust established in conjunction
with the 1997 MRP or from authorized but unissued shares of Common Stock. A
committee of the Board of Directors of the Holding Company will administer the
1997 MRP, the members of which would also serve as trustees of the 1997 MRP
trust, if formed. Under the terms of the 1997 MRP, the 1997 MRP committee or the
MRP trustees, will have the power to vote unallocated and unvested shares. In
addition, the Holding Company intends to reserve for future issuance pursuant to
the Riverview Bancorp, Inc. 1997 Stock Option Plan ("1997 Stock Option Plan") a
number of authorized shares of Common Stock equal to 10% of the Conversion
Shares issued in the Conversion and Reorganization (229,500 and 310,500 shares
at the minimum and the maximum of the Estimated Valuation Range, respectively).
The Holding Company also intends to seek approval of the 1997 Stock Option Plan
at a meeting of stockholders to be held no earlier than six months following the
consummation of the Conversion and Reorganization.
Assuming (i) the receipt of Exchange Shares and the purchase of
Conversion Shares by the directors and officers described above, (ii) the
implementation of the 1997 MRP and the 1997 Stock Option Plan, (iii) the open
market purchase of shares on behalf of the 1997 MRP, (iv) the purchase by the
ESOP of 8% of the Conversion Shares sold in the Conversion Offerings, and (v)
the exercise of stock options equal to 10% of the number of shares of Conversion
Shares issued in the Conversion and Reorganization, directors, officers and
employees of the Holding Company and the Savings Bank would have voting control,
on a fully diluted basis, of 24.31% and 23.84% of the Common Stock, based on the
issuance of the minimum and maximum of the Estimated Valuation Range,
respectively. Management's potential voting control alone, as well as together
with additional stockholder support, might preclude or make more difficult
takeover attempts that certain stockholders may deem to be in their best
interest and might tend to perpetuate existing management.
PROVISIONS OF EMPLOYMENT AND SEVERANCE AGREEMENTS AND SEVERANCE PLAN.
The employment and severance agreements of Patrick Sheaffer, Chairman of the
Board, President and Chief Executive Officer of the Holding Company and the
Savings Bank, and Ron Wysaske, Treasurer and Chief Financial Officer of the
Holding Company and Executive Vice President and Chief Financial Officer of the
Savings Bank, and other senior officers of the Holding Company and the Savings
Bank provide for cash severance payments and/or the continuation of health, life
and disability benefits in the event of their termination of employment
following a change in control of the Holding Company or the Savings Bank.
Assuming a change of control occurred as of March 31, 1997, the aggregate value
of the severance benefits available to these executive officers under the
agreements would have been approximately $1.4 million. In addition, assuming
that a change in control had occurred at March 31, 1997 and the termination of
all eligible employees, the maximum aggregate payment due under the Savings
Bank's Severance Plan would have been approximately $674,000. These agreements
and plans may have the effect of increasing the costs of acquiring the Holding
Company, thereby discouraging future attempts to take over the Holding Company
or the Savings Bank.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits," "RESTRICTIONS ON
ACQUISITION OF THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE
HOLDING COMPANY."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
The 1997 MRP intends to acquire an amount of Common Stock of the
Holding Company equal to 4% of the Conversion Shares issued in the Conversion
and Reorganization. Such shares of Common Stock may be acquired by the Holding
Company in the open market or from authorized but unissued shares of Common
Stock of the Holding Company. If the 1997 MRP acquires authorized but unissued
shares of Common Stock from the Holding Company, the voting interests of
existing stockholders will be diluted and net income per share and stockholders'
equity per share will be decreased. See "PRO FORMA DATA" and "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- Management Recognition Plan." The 1997 MRP is
subject to approval by the Holding Company's stockholders.
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The 1997 Stock Option Plan will provide for options to acquire up to a
number of shares of Common Stock of the Holding Company equal to 10% of the
Conversion Shares issued in the Conversion and Reorganization. Such shares may
be authorized but unissued shares of Common Stock of the Holding Company and,
upon exercise of the options, will result in the dilution of the voting
interests of existing stockholders and may decrease net income per share and
stockholders' equity per share. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits
- -- 1997 Stock Option Plan." The 1997 Stock Option Plan is subject to approval by
the Holding Company's stockholders.
The Savings Bank maintains a 1993 Stock Option Plan ("1993 Stock Option
Plan") that was implemented in connection with the MHC Reorganization. As of the
date of this Prospectus, no shares of Savings Bank Common Stock remain reserved
for issuance under the 1993 Stock Option Plan and options for 88,117 shares have
been granted to optionees, which are exercisable but remain unexercised. Upon
consummation of the Conversion and Reorganization, the 1993 Stock Option Plan
will be assumed by the Holding Company and shares of Common Stock will be issued
in lieu of shares of Savings Bank Common Stock pursuant to the terms of the 1993
Stock Option Plan.
Assuming implementation of the 1997 MRP with authorized but unissued
shares acquired from the Holding Company, the implementation of the 1997 Stock
Option Plan, and the exercise of all outstanding stock options under the 1993
Stock Option Plan, the voting control of the shareholders of the Holding
Company would be diluted by 9.42%, 9.14%, 8.93% and 8.76% at the minimum,
midpoint, maximum, and maximum, as adjusted, of the Estimated Valuation Range,
respectively.
Pursuant to OTS requirements, the Plan of Conversion provides that the
limitations on the purchase of Conversion Shares in the Conversion Offerings
take into account the Exchange Shares issued to the Public Stockholders in
exchange for their Public Savings Bank Shares. As a result, the ability of
certain Public Stockholders to purchase Conversion Shares may be limited.
Consequently, such Public Stockholders may be prevented from purchasing
Conversion Shares so as to maintain their current ownership percentage in the
Savings Bank as a result of the Conversion and Reorganization. See "THE
CONVERSION AND REORGANIZATION -- Limitations on Purchases of Conversion Shares."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Prior to the Conversion and
Reorganization, the Public Savings Bank Shares have been listed on the Nasdaq
Smallcap Market under the symbol "RVSB." Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market also under the symbol "RVSB," there can be no assurance that an active
and liquid trading market for the Common Stock will develop or, if developed,
will continue. Furthermore, there can be no assurance that purchasers will be
able to sell their shares at or above the Purchase Price.
See "MARKET FOR COMMON STOCK."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the
Savings Bank or changes in market conditions or general financial, economic or
regulatory conditions following the commencement of the Conversion Offerings. If
the Estimated Valuation Range is increased, it is expected that the Holding
Company would increase the Estimated Price Range so that up to 3,570,750
Conversion Shares at the Purchase Price would be issued for an aggregate price
of up to $35,707,500. This increase in the number of shares would decrease a
subscriber's pro forma net income per share and stockholders' equity per share,
increase the Holding Company's pro forma consolidated stockholders' equity and
net
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earnings, and increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net income per share. See "PRO FORMA DATA."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income) to those Eligible Account
Holders, Supplemental Eligible Account Holders or Other Members who receive
and/or exercise the Subscription Rights in an amount equal to such value.
Additionally, the Savings Bank could be required to recognize a gain for tax
purposes on such distribution. Whether Subscription Rights are considered to
have ascertainable value is an inherently factual determination. The Savings
Bank has been advised by RP Financial that such rights have no value; however,
RP Financial's conclusion is not binding on the Internal Revenue Service
("IRS"). See "THE CONVERSION AND REORGANIZATION -- Effects of Conversion and
Reorganization on Depositors and Borrowers of the Savings Bank -- Tax Effects."
RIVERVIEW BANCORP, INC.
The Holding Company was organized on June 23, 1997 under Washington law
at the direction of the Savings Bank to become the holding company for the
Savings Bank upon consummation of the Conversion and Reorganization. The Holding
Company has received conditional OTS approval to become a savings and loan
holding company through the acquisition of 100% of the capital stock of the
Savings Bank. Prior to the Conversion and Reorganization, the Holding Company
will not engage in any material operations. After the Conversion and
Reorganization, the Holding Company will be classified as a unitary savings and
loan holding company subject to regulation by the OTS, and its principal
business will be the ownership of the Savings Bank. Immediately following the
Conversion and Reorganization, the only significant assets of the Holding
Company will be the capital stock of the Savings Bank, 50% of the net investable
proceeds of the Conversion Offerings as permitted by the OTS to be retained by
it, and a note receivable from the ESOP evidencing a loan to enable the ESOP to
purchase 8% of the
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Common Stock issued in the Conversion and Reorganization. See "PRO FORMA DATA"
and "BUSINESS OF THE HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Conversion Offerings will, should it decide to do so, facilitate
the expansion and diversification of its operations. The holding company
structure will also enable the Holding Company to repurchase its stock without
adverse tax consequences, subject to applicable regulatory restrictions,
including waiting periods. There are no present plans, arrangements, agreements,
or understandings, written or oral, regarding any such activities or
repurchases. See "REGULATION -- Savings and Loan Holding Company Regulations."
RIVERVIEW SAVINGS BANK, FSB
The Savings Bank is a federally-chartered savings bank, founded in 1923
and headquartered in Camas, Washington. The Savings Bank's deposits are insured
by the FDIC up to applicable legal limits under the SAIF. The Savings Bank has
been a member of the FHLB system since 1937. The Savings Bank is regulated by
the OTS and the FDIC. At March 31, 1997, the Savings Bank had total assets of
$224.4 million, total deposit accounts of $169.4 million, and total
shareholders' equity of $25.0 million, on a consolidated basis.
The Savings Bank is a community oriented financial institution offering
traditional financial services to the residents of its primary market area. The
Savings Bank considers the Local Community as its primary market area. The
Savings Bank is engaged primarily in the business of attracting deposits from
the general public and using such funds to originate fixed-rate mortgage loans
and ARM loans secured by one- to- four family residential real estate located in
its primary market area. The Savings Bank is also an active originator of
residential construction loans and consumer loans. At March 31, 1997, one- to-
four family mortgage loans were $94.5 million, or 62.3% of total net loans
receivable, residential construction loans were $32.5 million, or 21.4% of total
net loans receivable, and consumer loans were $14.3 million, or 9.4% of total
net loans receivable. To a lesser extent, the Savings Bank originates land loans
($7.9 million, or 5.2%, of total net loans receivable at March 31, 1997) and
commercial real estate loans ($9.0 million or 5.9% of total net loans receivable
at March 31, 1997). Substantially all of the Savings Bank's real estate loans
are secured by real estate located in its primary market area. Construction,
consumer, land and commercial real estate loans generally involve a greater risk
of loss than one- to- four family mortgage loans.
See "RISK FACTORS -- Certain Lending Risks."
The Savings Bank also invests in short- to- intermediate term U.S.
Treasury securities and U.S. Government agency obligations, and mortgage-backed
securities issued by U.S. Government agencies. At March 31, 1997, the Savings
Bank's investment and mortgage-backed securities portfolio had a carrying value
of $53.7 million. See "BUSINESS OF THE SAVINGS BANK -- Investment Securities."
Deposits have been the primary source of funds for the Savings Bank's
investment and lending activities. The Savings Bank plans to continue to fund
its operations primarily with deposits, although advances from the FHLB-Seattle
have been used as a supplemental source of funds. The Savings Bank has also used
FHLB advances to purchase investment securities, with the goal of recognizing
income on the difference between the interest rate earned on the investment
securities and the interest rate paid on the FHLB advances. See "BUSINESS OF THE
SAVINGS BANK -- Deposits and Other Sources of Funds."
The Savings Bank conducts its operations from its main office and eight
branch offices located in Southwest Washington State. See "BUSINESS OF THE
SAVINGS BANK -- Properties."
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USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $22.1 million to $30.1 million, or up to $34.7 million
if the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts. The Holding Company has received
conditional OTS approval to purchase all of the capital stock of the Savings
Bank to be issued in the Conversion and Reorganization in exchange for 50% of
the net proceeds of the Conversion Offerings, from which it will fund the ESOP
and the 1997 MRP. This will result in the Holding Company retaining
approximately $11.1 million to $15.1 million of net proceeds, or up to $17.4
million if the Estimated Valuation Range is increased by 15%, from which it will
fund the ESOP and the 1997 MRP, and the Savings Bank receiving an equal amount.
See "PRO FORMA DATA."
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the funds
contributed to it for general corporate purposes, including, initially, lending
and investment in short-term U.S. Government and agency obligations.
In connection with the Conversion and Reorganization and the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to refinance the
ESOP's existing third party loan used to purchase shares of Savings Bank Common
Stock in the MHC Reorganization ($237,000 outstanding balance at March 31, 1997)
and to purchase 8% of the shares of Common Stock sold in the Conversion
Offerings. The Holding Company's loan to fund the ESOP's purchase of shares of
Common Stock in the Conversion Offerings may range from $1.8 million to $2.5
million based on the sale of 183,600 shares to the ESOP (at the minimum of the
Estimated Valuation Range) and 248,400 shares (at the maximum of the Estimated
Valuation Range), respectively, at $10.00 per share. If 15% above the maximum of
the Estimated Valuation Range, or 3,570,750 Conversion Shares, are sold in the
Conversion and Reorganization, the Holding Company's loan to the ESOP would be
approximately $2.9 million (based on the sale of 285,660 shares to the ESOP). It
is anticipated that the ESOP loan will have a ten-year term with interest
payable at the prime rate as published in THE WALL STREET JOURNAL on the closing
date of the Conversion and Reorganization. The loan will be repaid principally
from the Savings Bank's contributions to the ESOP and from any dividends paid on
shares of Common Stock held by the ESOP.
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in short-term U.S. Government and agency obligations
or in a deposit account either at the Savings Bank or another financial
institution. Such proceeds will be available for additional contributions to the
Savings Bank in the form of debt or equity, to support future diversification or
acquisition activities, as a source of dividends to the stockholders of the
Holding Company and for future repurchases of Common Stock to the extent
permitted under Washington law and federal regulations. The Holding Company will
consider exploring opportunities to use such funds to expand operations through
acquiring or establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any diversification activities.
Following consummation of the Conversion and Reorganization, the
Holding Company's Board of Directors will have the authority to adopt plans for
repurchases of Common Stock, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there currently is
insufficient information upon which an intention to repurchase stock could be
based. The facts and circumstances upon which the Board of Directors may
determine to repurchase stock in the future would include but are not limited
to: (i) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve the Holding
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any
9
<PAGE>
other circumstances in which repurchases would be in the best interests of the
Holding Company and its stockholders. Any stock repurchases will be subject to a
determination by the Board of Directors that both the Holding Company and the
Savings Bank will be capitalized in excess of all applicable regulatory
requirements after any such repurchases and that capital will be adequate,
taking into account, among other things, the level of nonperforming and
classified assets, the Holding Company's and the Savings Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. For a discussion of the
regulatory limitations applicable to stock repurchases and current OTS policy
with respect thereto, see "THE CONVERSION AND REORGANIZATION -- Restrictions on
Repurchase of Stock."
DIVIDEND POLICY
GENERAL
Upon completion of the Conversion and Reorganization, the Holding
Company's Board of Directors will have the authority to declare dividends on the
Common Stock, subject to statutory and regulatory requirements. Following
consummation of the Conversion and Reorganization, the Board of Directors of the
Holding Company intends to pay cash dividends on the Common Stock at an initial
quarterly rate equal to $0.06 per share divided by the Exchange Ratio. Based
upon the Estimated Valuation Range, the Exchange Ratio is expected to be 1.6299,
1.8175, 2.2051 and 2.5359 at the minimum, midpoint, maximum and 15% above the
maximum of the Valuation Price Range, respectively, resulting in an initial
quarterly dividend rate of $0.0368, $0.0313, $0.0272 and $0.0237 per share,
respectively, commencing with the first full quarter following consummation of
the Conversion and Reorganization. In addition, the Board of Directors may
determine to pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. Declarations or payments of any dividends (regular and
special) will be subject to determination by the Board of Directors, which will
take into account the amount of the net proceeds retained by the Holding
Company, the Holding Company's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions that affect the payment
of dividends by the Savings Bank to the Holding Company discussed below. No
assurances can be given that any dividends, either regular or special, will be
declared or, if declared, what the amount of dividends will be or whether such
dividends, if commenced, will continue.
CURRENT RESTRICTIONS
Dividends from the Holding Company will depend, in part, upon receipt
of dividends from the Association because the Holding Company initially will
have no source of income other than dividends from the Association and earnings
from the investment of the net proceeds from the Conversion retained by the
Holding Company. OTS regulations require the Association to give the OTS 30 days
advance notice of any proposed declaration of dividends to the Holding Company,
and the OTS has the authority under its supervisory powers to prohibit the
payment of dividends to the Holding Company. In addition, the Association may
not declare or pay a cash dividend on its capital stock if the effect thereof
would be to reduce the regulatory capital of the Association below the amount
required for the liquidation account to be established pursuant to the
Association's Plan of Conversion. See "REGULATION -- Dividend Limitations," "THE
CONVERSION -- Effects of Conversion to Stock Form on Depositors and Borrowers of
the Association -- Liquidation Account" and Note 13 of Notes to the Consolidated
Financial Statements included elsewhere herein.
10
<PAGE>
Under Washington law, the Holding Company is prohibited from paying a
dividend if, as a result of its payment, the Holding Company would be unable to
pay its debts as they become due in the normal course of business, or if the
Holding Company's total liabilities would exceed its total assets.
The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
action in contemplation of any such distributions, within the first year
following the consummation of the Conversion and Reorganization.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 10 of Notes to the Consolidated
Financial Statements included elsewhere herein. The Holding Company does not
contemplate any distribution by the Savings Bank that would result in a
recapture of the Savings Bank's bad debt reserve or create the above-mentioned
federal tax liabilities.
11
<PAGE>
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there is no existing market for the Common Stock. Although the Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market System under the symbol "RVSB," there can be no assurance that
the Holding Company will meet Nasdaq National Market System listing
requirements, which include a minimum market capitalization, at least three
market makers and a minimum number of record holders. Keefe, Bruyette and
Pacific Crest have agreed to make a market for the Common Stock following
consummation of the Conversion and Reorganization and will assist the Holding
Company in seeking to encourage at least one additional market maker to
establish and maintain a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. Based on the level of market
making in the Public Savings Bank Shares, the Holding Company anticipates that
prior to the completion of the Conversion and Reorganization it will be able to
obtain the commitment from at least one additional broker-dealer to act as
market maker for the Common Stock. Additionally, the development of a liquid
public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the Savings
Bank or any market maker. There can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, it will
continue. The number of active buyers and sellers of the Common Stock at any
particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Common Stock as a short-term investment. Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market System as contemplated.
Since October 22, 1993, the Public Savings Bank Shares have been listed
on the Nasdaq SmallCap Market under the symbol "RVSB." The following table sets
forth the high and low trading prices, as reported by Nasdaq, and cash dividends
paid for each quarter during the 1996 and 1997 fiscal years. Stock dividends of
10% were also declared and paid in fiscal years 1996 and 1997. Trading prices
and cash dividends declared have been adjusted retroactively for all stock
dividends paid since the consummation of the MHC Reorganization. At March 31,
1997, there were four market makers in the Public Savings Bank Shares as
reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Cash Dividend
Fiscal Year Ended March 31, 1996 High Low Declared
- -------------------------------- ---- --- --------
<S> <C> <C> <C>
Quarter Ended June 30, 1995.....................$11.57 $ 9.50 $0.041
Quarter Ended Sept. 30, 1995....................$12.40 $11.15 $0.041
Quarter Ended Dec. 31, 1995.....................$14.46 $11.77 $0.041
Quarter Ended March 31, 1996....................$15.08 $13.43 $0.045
Cash Dividend
Fiscal Year Ended March 31, 1997 High Low Declared
- -------------------------------- ---- --- --------
Quarter Ended June 30, 1996.....................$15.45 $13.18 $0.05
Quarter Ended Sept. 30, 1996....................$14.55 $13.18 $0.05
Quarter Ended Dec. 31, 1996.....................$15.91 $14.09 $0.05
Quarter Ended March 31, 1997....................$23.00 $15.23 $0.055
</TABLE>
12
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Savings
Bank at March 31, 1997, and the pro forma consolidated capitalization of the
Holding Company after giving effect to the assumptions set forth under "PRO
FORMA DATA," based on the sale of the number of shares of Common Stock at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range. The shares that would be issued at the maximum, as adjusted, of the
Estimated Valuation Range would be subject to receipt of OTS approval of an
updated appraisal confirming such valuation. A CHANGE IN THE NUMBER OF SHARES TO
BE ISSUED IN THE CONVERSION AND REORGANIZATION WOULD MATERIALLY AFFECT PRO FORMA
CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company Pro Forma Consolidated Capitalization
Based Upon the Sale of
2,295,000 2,700,000 3,105,000 3,570,750
Capitalization Shares at Shares at Shares at Shares at
at $10.00 $10.00 $10.00 $10.00
March 31, 1997 Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3)............................. $169,416 $169,416 $169,416 $169,416 $169,416
FHLB advances........................... 27,180 27,180 27,180 27,180 27,180
ESOP debt(4)............................ 237 -- -- -- --
---------- ------------ ------------ ------------ ------------
Total deposits and
borrowed funds......................... $196,833 $196,596 $196,596 $196,596 $196,596
======== ======== ======== ======== ========
Stockholders' equity:
Preferred stock:
250,000 shares, $.01
par value per share,
authorized; none issued
or outstanding..................... $ -- $ -- $ -- $ -- $ --
Common Stock:
50,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5)..................... 2,416 39 46 53 61
Additional paid-in capital........... 16,043 40,554 44,542 45,529 53,113
Retained earnings(6)................. 7,033 7,127 7,127 7,127 7,127
Unrealized loss on securities
available-for-sale, net of tax...... (84) (84) (84) (84) (84)
Less:
Savings Bank Common Stock
acquired by ESOP in MHC
Reorganization.................... (386) -- -- -- --
Common Stock acquired
by ESOP(7)........................ -- (2,222) (2,546) (2,870) (3,242)
Common Stock to be acquired
by MRP(8)......................... -- (918) (1,080) (1,242) (1,428)
--------- -------- -------- -------- --------
Total stockholders' equity.............. $25,022 $44,496 $48,005 $51,513 $55,547
======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
- ---------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect material changes in the financial condition or results of
operations of the Savings Bank or changes in market conditions or general
financial, economic and regulatory conditions, or the issuance of
additional shares under the 1997 Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
if the aggregate number of Conversion Shares issued in the Conversion and
Reorganization is 15% above the maximum of the Estimated Valuation Range.
See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Conversion Shares
are not reflected. Such withdrawals will reduce pro forma deposits by the
amounts thereof.
(4) Represents outstanding balance on third party loan used by ESOP to acquire
shares of Savings Bank Common Stock in the MHC Reorganization.
(5) The Savings Bank's authorized capital will consist solely of 1,000 shares
of common stock, par value $1.00 per share, 1,000 shares of which will be
issued to the Holding Company, and 9,000 shares of preferred stock, no par
value per share, none of which will be issued in connection with the
Conversion and Reorganization.
(6) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below
the amount in the liquidation account, which will be established for the
benefit of Eligible Account Holders and Supplemental Eligible Account
Holders at the consummation of the Conversion and Reorganization and
adjusted downward thereafter as such account holders reduce their balances
or cease to be depositors. See "THE CONVERSION AND REORGANIZATION --
Effects of Conversion and Reorganization on Depositors and Borrowers of
the Savings Bank -- Liquidation Account."
(7) Assumes that 8% of the Conversion Shares sold in the Conversion and
Reorganization will be acquired by the ESOP with funds borrowed from the
Holding Company. Under generally accepted accounting principles ("GAAP"),
the amount of Conversion Shares to be purchased by the ESOP represents
unearned compensation and is, accordingly, reflected as a reduction of
capital. As shares are released to ESOP participants' accounts, a
corresponding reduction in the charge against capital will occur. Since
the funds are borrowed from the Holding Company, the borrowing will be
eliminated in consolidation and no liability will be reflected in the
consolidated financial statements of the Holding Company. See "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan."
(8) Assumes the purchase in the open market at the Purchase Price, pursuant to
the proposed 1997 MRP, of a number of shares equal to 4% of the shares of
Conversion Shares issued in the Conversion and Reorganization at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range. The issuance of such additional Conversion Shares of the
MRP from authorized but unissued shares of Holding Company Common Stock
would dilute the ownership interest of stockholders by 2.28%. The shares
are reflected as a reduction of stockholders' equity. See "RISK FACTORS --
Possible Dilutive Effect of Benefit Programs," "PRO FORMA DATA" and
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management Recognition
Plan." The 1997 MRP is subject to stockholder approval, which is expected
to be sought at a meeting to be held no earlier than six months following
consummation of the Conversion and Reorganization.
14
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro
forma capital position relative to its capital requirements at March 31, 1997.
The amount of capital infused into the Savings Bank for purposes of the
following table is 50% of the net proceeds of the Conversion Offerings. For
purpose of the table below, the amount expected to be borrowed by the ESOP and
the cost of the shares expected to be acquired by the 1997 MRP are deducted from
pro forma regulatory capital. For a discussion of the assumptions underlying the
pro forma capital calculations presented below, see "USE OF PROCEEDS,"
"CAPITALIZATION" and "PRO FORMA DATA." The definitions of the terms used in the
table are those provided in the OTS capital regulations as discussed under
"REGULATION -- Federal Regulation of the Savings Bank -- Capital Requirements."
PRO FORMA AT MARCH 31, 1997
<TABLE>
<CAPTION>
15% above
Minimum of Estimated Midpoint of Estimated Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range Valuation Range Valuation Range
2,295,000 Shares 2,700,000 Shares 3,105,000 Shares 3,570,750 Shares
March 31, 1997 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
------------------- --------------------- -------------------- ------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Adjusted Adjusted Adjusted Adjusted Adjusted
Total Total Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital(2)........$25,022 11.15% $33,429 14.25% $34,491 14.78% $36,452 15.30% $38,189 15.88%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible capital(2).... 22,777 10.25 31,184 13.43 32,696 13.97 34,207 14.50 35,944 15.10
Tangible capital 3,330 1.50 3,484 1.50 3,511 1.50 3,539 1.50 3,571 1.50
requirement ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................$19,447 8.75% $27,700 11.93% $29,185 12.47% $30,668 13.00% $32,373 13.60%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core capital(2)........ 22,777 10.25 31,184 13.43 32,696 13.97 34,207 14.50 35,944 15.10
Core capital 6,664 3.00 6,968 3.00 7,023 3.00 7,078 3.00 7,141 3.00
requirement (3) ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................$16,113 7.25% $24,216 10.43% $25,673 10.97% $27,129 11.50% $28,803 12.10%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total capital(4).......$22,986 20.89% $31,393 28.06% $32,905 29.31% $34,416 30.56% $36,153 31.98%
Risk-based
capital requirement... 8,804 8.00 8,951 8.00 8,980 8.00 9,010 8.00 9,043 8.00
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess.................$14,182 12.89% $22,442 20.06% $23,924 21.31% $25,406 22.56% $27,110 23.98%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- -------------------
(1) Based upon total tangible assets of $222.0 million at March 31, 1997 and
$231.1 million, $232.7 million, $234.4 million and $236.2 million at the
minimum, midpoint, maximum, and maximum, as adjusted, of the Estimated
Valuation Range, respectively, for purposes of the tangible capital
requirement, upon total adjusted assets of $222.1 million at March 31, 1997
and $231.1 million, $232.7 million, $234.4 million and $236.2 million at
the minimum, midpoint, maximum, and maximum, as adjusted, of the Estimated
Valuation Range, respectively, and upon risk-weighted assets of $110.0
million at March 31, 1997 and $111.7 million, $112.0 million, $112.3
million and $112.7 million at the minimum, midpoint, maximum, and maximum,
as adjusted, of the Estimated Valuation Range, respectively, for purposes
of the risk-based capital requirement.
(2) An unrealized loss on securities available-for-sale, net of taxes, of
$84,000 and a core deposit intangible asset of $2.3 million account for the
difference between GAAP capital and both tangible capital and core capital.
(3) The current OTS core capital requirement for savings associations is 3% of
total adjusted assets. The OTS has proposed core capital requirements which
would require a core capital ratio of 3% of total adjusted assets for
thrifts that receive the highest supervisory rating for safety and
soundness and a core capital ratio of 4% to 5% for all other thrifts. See
Note 13 of Notes to Consolidated Financial Statements.
(4) Percentage represents total core and supplementary capital divided by total
risk-weighted assets. Assumes net proceeds are invested in assets that
carry a 20% risk-weighting.
15
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Conversion Shares must be sold at a
price equal to the estimated pro forma market value of the MHC and the Savings
Bank, as converted, based upon an independent valuation. The Estimated Valuation
Range as of August 1, 1997 is from a minimum of $23.0 million to a maximum of
$31.1 million with a midpoint of $27.0 million or, at a price per share of
$10.00, a minimum number of shares of 2,295,000, a maximum number of shares of
3,105,000 and a midpoint number of shares of 2,700,000. The actual net proceeds
from the sale of the Conversion Shares cannot be determined until the Conversion
and Reorganization is completed. However, net proceeds set forth on the
following table are based upon the following assumptions: (i) Webb will receive
fees of $309,000, $365,000, $421,000 and $485,000 at the minimum, midpoint,
maximum and 15% above the Estimated Valuation Range, respectively (see "THE
CONVERSION AND REORGANIZATION -- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings); (ii) all of the Conversion
Shares will be sold in the Subscription and Direct Community Offerings; and
(iii) Conversion and Reorganization expenses, excluding the fees paid to Webb,
will total approximately $506,000 at each of the minimum, midpoint, maximum and
15% above the Estimated Valuation Range. Actual expenses may vary from this
estimate, and the fees paid will depend upon the percentages and total number of
shares sold in the Subscription, Direct Community and Syndicated Community
Offerings and other factors.
The pro forma consolidated net income of the Savings Bank for the year
ended March 31, 1997 has been calculated as if the Conversion and Reorganization
had been consummated at the beginning of the period and the estimated net
proceeds received by the Holding Company and the Savings Bank had been invested
at 6.00% at the beginning of the period, which represents the yield on the
one-year U.S. Treasury Bill at March 31, 1997. Although OTS regulations require
the use of the arithmetic average of the average yield on all interest-earning
assets and the average rate paid on all deposits in computing investment returns
on net proceeds, the yield on the one-year U.S. Treasury Bill is used because
management believes it more appropriately reflects a market rate of return.
As discussed under "USE OF PROCEEDS," the Holding Company expects to retain 50%
of the net proceeds of the Conversion Offerings from which it will fund the ESOP
loan. A pro forma after-tax return of 3.96% is used for both the Holding Company
and the Savings Bank for the period, after giving effect to an incremental
combined federal and state income tax rate of 34.0% for the year ended March 31,
1997. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the number of shares of Common
Stock indicated in the footnotes to the table. Per share amounts have been
computed as if the Common Stock had been outstanding at the beginning of the
period or at March 31, 1997, but without any adjustment of per share historical
or pro forma stockholders' equity to reflect the earnings on the estimated net
proceeds.
The following tables summarize the historical net income and retained
earnings of the Savings Bank and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the periods and at the date
indicated, based on the minimum, midpoint and maximum of the Estimated Valuation
Range and based on a 15% increase in the maximum of the Estimated Valuation
Range. No effect has been given to: (i) the shares to be reserved for issuance
under the 1997 Stock Option Plan, which is expected to be voted upon by
stockholders at a meeting to be held no earlier than six months following
consummation of the Conversion and Reorganization; (ii) withdrawals from deposit
accounts for the purpose of purchasing Conversion Shares in the Conversion
Offerings; (iii) the issuance of shares from authorized but unissued shares to
the 1997 MRP, which is expected to be voted upon by stockholders at a meeting to
be held no earlier than six months following consummation of the Conversion and
Reorganization; or (iv) the establishment of a liquidation account for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders.
See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option Plan" and
"THE CONVERSION AND REORGANIZATION -- Stock Pricing, Exchange Ratio and Number
of Shares Issued." Conversion Shares may be purchased with funds on deposit at
the Savings Bank, which will reduce deposits by the amounts of such purchases.
Accordingly, the net amount of funds available for investment will be reduced by
the amount of deposit withdrawals used to fund such purchases.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AND REORGANIZATION AT THE DATE ON WHICH THE
CONVERSION AND REORGANIZATION ACTUALLY OCCURS AND SHOULD NOT BE TAKEN AS
INDICATIVE OF FUTURE RESULTS OF OPERATIONS. STOCKHOLDERS' EQUITY REPRESENTS THE
DIFFERENCE BETWEEN THE STATED AMOUNTS OF CONSOLIDATED ASSETS AND LIABILITIES OF
THE HOLDING COMPANY COMPUTED ACCORDING TO GAAP. STOCKHOLDERS' EQUITY HAS NOT
BEEN INCREASED OR DECREASED TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE
OF LOANS AND OTHER ASSETS AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED
TO REPRESENT FAIR MARKET VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE
AVAILABLE FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
16
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended March 31, 1997
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------------
2,295,00 2,700,000 3,105,000 3,570,750
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds.............................. $22,950 $27,000 $31,050 $35,708
Less: estimated expenses.................... 816 871 927 992
------- ------- ------- -------
Estimated net proceeds...................... 22,134 26,129 30,123 34,716
Less: Common Stock acquired by ESOP ........ (1,836) (2,160) (2,484) (2,857)
Less: Common Stock to be acquired by
1997 MRP............................. (918) (1,080) (1,242) (1,428)
Add: Assets consolidated from MHC......... 94 94 94 94
------- ------- ------- -------
Net investable proceeds................ $19,474 $22,983 $26,491 $30,525
======= ======= ======= =======
Consolidated net income:
Historical................................. $2,008 $2,008 $2,008 $2,008
Pro forma income on net proceeds(2)........ 771 910 1,049 1,209
Pro forma ESOP adjustments(3).............. (121) (143) (164) (189)
Pro forma 1997 MRP adjustments(4).......... (121) (143) (164) (189)
------- ------- ------- -------
Pro forma net income..................... $2,537 $2,632 $2,729 $2,839
====== ====== ====== ======
Consolidated net income per share (5)(6):
Historical................................. $0.53 $0.45 $0.39 $0.34
Pro forma income on net proceeds........... 0.20 0.20 0.20 0.20
Pro forma ESOP adjustments(3).............. (0.03) (0.03) (0.03) (0.03)
Pro forma 1997 MRP adjustments(4).......... (0.03) (0.03) (0.03) (0.03)
------ ------ ------ ------
Pro forma net income per share........... $0.67 $0.59 $0.54 $0.48
===== ===== ===== =====
Consolidated stockholders' equity (book value):
Historical(10)............................. $25,116 $25,116 $25,116 $25,116
Estimated net proceeds..................... 22,134 26,129 30,123 34,716
Less: Common Stock acquired by ESOP........ (1,836) (2,160) (2,484) (2,857)
Less: Common Stock to be acquired by
1997 MRP(4)......................... (918) (1,080) (1,242) (1,428)
-------- -------- -------- --------
Pro forma stockholders' equity(7)........ $44,496 $48,005 $51,513 $55,547
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6)(10).......................... $6.38 $5.42 $4.71 $4.10
Estimated net proceeds..................... 5.62 5.64 5.66 5.66
Less: Common Stock acquired by ESOP........ (0.47) (0.47) (0.47) (0.47)
Less: Common Stock to be acquired by
1997 MRP(4)......................... (0.23) (0.23) (0.23) (0.23)
------- ------- ------- -------
Pro forma stockholders' equity per share(9)$11.30 $10.36 $ 9.67 $ 9.09
====== ====== ====== ======
Consolidated tangible stockholders' equity per share:
Historical(6)(10).......................... $6.38 $5.42 $4.71 $4.10
Estimated net proceeds..................... 5.62 5.64 5.65 5.67
Less: Common stock acquired by ESOP....... (0.47) (0.47) (0.47) (0.47)
Less: Common stock to be acquired by 1997 MRP(0.23) (0.23) (0.23) (0.23)
Less: Core deposit intangible (11)........ (0.59) (0.50) (0.44) (0.38)
------- ------- ------- -------
Pro forma tangible stockholders' equity per share$10.71 $ 9.86 $ 9.22 $ 8.69
====== ====== ====== ======
Purchase Price as a percentage of pro forma
stockholders' equity per share............. 85.50% 96.53% 103.41% 110.38%
===== ===== ===== ======
Purchase Price as a percentage of pro forma
tangible stockholders' equity per share.... 93.37% 101.42% 108.34% 115.21%
===== ===== ====== ======
Purchase Price as a multiple of pro forma
net income per share....................... 14.93x 16.95x 18.52x 20.83x
===== ===== ===== =====
</TABLE>
(FOOTNOTES ON SECOND FOLLOWING PAGE)
17
<PAGE>
- -------------------
(1) Gives effect to the sale of an additional 465,750 Conversion Shares in the
Conversion and Reorganization, which may be issued to cover an increase in
the pro forma market value of the MHC and the Savings Bank, as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination by RP Financial that such issuance is compatible with its
determination of the estimated pro forma market value of the MHC and the
Savings Bank, as converted. See "THE CONVERSION AND REORGANIZATION --
Stock Pricing, Exchange Ratio and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Conversion Shares. Since funds on deposit at the
Savings Bank may be withdrawn to purchase shares of Common Stock (which
will reduce deposits by the amount of such purchases), the net amount of
funds available to the Savings Bank for investment following receipt of
the net proceeds of the Conversion Offerings will be reduced by the amount
of such withdrawals.
(3) It is assumed that 8% of the Conversion Shares issued in the Conversion
and Reorganization will be purchased by the ESOP. The funds used to
acquire such shares will be borrowed by the ESOP (at an interest rate
equal to the prime rate as published in THE WALL STREET JOURNAL on the
closing date of the Conversion and Reorganization, which rate is currently
8.50%) from the net proceeds from the Conversion Offerings retained by the
Holding Company. The amount of this borrowing has been reflected as a
reduction from gross proceeds to determine estimated net investable
proceeds. The Savings Bank intends to make contributions to the ESOP at
least equal to the principal and interest requirement of the debt. As the
debt is repaid, stockholders' equity will be increased. The Savings Bank's
payment of the ESOP debt is based upon equal installments of principal
over a 10-year period, assuming a combined federal and state income tax
rate of 34.0%. Interest income earned by the Holding Company on the ESOP
debt offsets the interest paid by the Savings Bank on the ESOP loan. No
reinvestment is assumed on proceeds contributed to fund the ESOP. The ESOP
expense reflects adoption of Statement of Position ("SOP") 93-6, which
will require recognition of expense based upon shares committed to be
released and the exclusion of unallocated shares from earnings per share
computations. The valuation of shares committed to be released would be
based upon the average market value of the shares during the year, which,
for purposes of this calculation, was assumed to be equal to the $10.00
per share Purchase Price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits
-- Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the 1997 MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the 1997 MRP at the beginning of the period presented in open
market purchases at the Purchase Price, that 20% of the amount contributed
was an amortized expense during such period, and that the combined federal
and state income tax rate is 34.0%. The issuance of authorized but
unissued shares of the Common Stock instead of open market purchases would
dilute the voting interests of existing stockholders by approximately
2.28% and pro forma net income per share would be $0.67, $0.59, $0.53 and
$0.48 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the year ended March 31, 1997, respectively,
and pro forma stockholders' equity per share would be $11.27, $10.35,
$9.67 and $9.09 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range at March 31, 1997, respectively.
Shares issued under the 1997 MRP vest 20% per year and, for purposes of
this table, compensation expense is recognized on a straight-line basis
over each vesting period. In the event the fair market value per share is
greater than $10.00 per share on the date shares are awarded under the
1997 MRP, total 1997 MRP expense would increase. SEE "RISK FACTORS -- New
Expenses Associated with ESOP and MRP." The total estimated 1997 MRP
expense was multiplied by 20% (the total percent of shares for which
expense is recognized in the first year) resulting in pre-tax 1997 MRP
expense of $183,600, $216,000, $248,400 and $285,660 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range for the year ended March 31, 1997, respectively. No effect has been
given to the shares reserved for issuance under the proposed 1997 Stock
Option Plan. If stockholders approve the 1997 Stock Option Plan following
the Conversion and Reorganization, the Holding Company will have reserved
for issuance under the 1997 Stock Option Plan authorized but unissued
shares of Common Stock representing an amount of shares equal to 10% of
the Conversion Shares sold in the Conversion Offerings. If all of the
options were to be exercised utilizing these
18
<PAGE>
authorized but unissued shares rather than treasury shares which could be
acquired, the voting interests of existing stockholders would be diluted
by approximately 5.51%. Assuming stockholder approval of the 1997 Stock
Option Plan and that all options were exercised at the end of the year
ended March 31, 1997 at an exercise price of $10.00 per share, pro forma
net earnings per share would be $0.66, $0.58, $0.53 and $0.48,
respectively, for the year ended March 31, 1997, and pro forma
stockholders' equity per share would be $11.23, $10.34, $9.69 and $9.12,
respectively, for the year ended March 31, 1997 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1997 Stock Option Plan" and
"-- Benefits -- Management Recognition Plan" and "RISK FACTORS -- Possible
Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 3,764,141,
4,428,402, 5,092,662 and 5,856,561 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the year ended
March 31, 1997, respectively, which includes the Conversion Shares sold in
the Conversion and Reorganization, less the number of shares assumed to be
held by the ESOP not committed to be released within the first year
following the Conversion and Reorganization.
(6) Historical per share amounts have been computed as if the Conversion
Shares expected to be issued in the Conversion and Reorganization had been
outstanding at the beginning of the period or on the date shown, but
without any adjustment of historical net income or historical retained
earnings to reflect the investment of the estimated net proceeds of the
sale of shares in the Conversion and Reorganization, the additional ESOP
expense or the proposed 1997 MRP expense, as described above.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect
the liquidation account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in the
Conversion and Reorganization, or the federal income tax consequences of
the restoration to income of the Savings Bank's special bad debt reserves
for income tax purposes which would be required in the unlikely event of
liquidation. See "THE CONVERSION AND REORGANIZATION -- Effects of
Conversion and Reorganization to Stock Form on Depositors and Borrowers of
the Savings Bank" and "TAXATION." The amounts shown for book value do not
represent fair market values or amounts distributable to stockholders in
the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 3,938,561,
4,633,602, 5,328,642 and 6,127,938 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of
the Common Stock.
(10) Historical book value includes $94,000 of assets held by the MHC, which
will be consolidated with the Savings Bank's book value upon consummation
of the Conversion and Reorganization.
(11) At March 31, 1997, there was a core deposit intangible asset of $2.3
million related to the acquisition of certain branch offices in 1994. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Comparison of Operating Results for the Years Ended March
31, 1997 and 1996 -- Noninterest Expense" and "BUSINESS OF THE SAVINGS
BANK -- Properties."
19
<PAGE>
CONVERSION SHARES TO BE PURCHASED
BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
The following table sets forth, for each director and executive officer
and for all of the directors and executive officers as a group, (i) Exchange
Shares to be held upon consummation of the Conversion and Reorganization, based
upon their beneficial ownership of Savings Bank Common Stock as of March 31,
1997, (ii) proposed purchases of Conversion Shares, assuming shares available to
satisfy their subscriptions, and (iii) total shares of Common Stock to be held
upon consummation of the Conversion and Reorganization, in each case assuming
that 2,700,000 Conversion Shares are sold at the midpoint of the Estimated
Valuation Range. No individual has entered into a binding agreement with respect
to such intended purchases, and, therefore, actual purchases could be more or
less than indicated below. Directors and executive officers and their associates
may not purchase in excess of 31% of the shares sold in the Conversion and
Reorganization. Directors, officers and employees will pay the Purchase Price
($10.00 per share) for each share for which they subscribe.
<TABLE>
<CAPTION>
Number of
Exchange Proposed Purchase of Total Common Stock
Shares to Conversion Shares to be Held
be Held Number Number Percentage
(1)(2) Amount of Shares of Shares of Total
------------ ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Patrick Sheaffer 102,567 $-- -- 102,567 2.2%
President, Chief Executive
Officer and Chairman of the Board
Robert K. Leick 3,744 -- -- 3,744 *
Director
Roger Malfait 30,495 -- -- 30,495 *
Director
Gary R. Douglass 13,399 50,000 5,000 18,399 *
Director
Paul L. Runyan 75,553 -- -- 75,553 1.6
Director
Dale E. Scarbrough 30,495 -- -- 30,495 *
Director
Ronald Wysaske 66,550 -- -- 66,550 1.4
Executive Vice President and Director
Michael C. Yount 25,771 7,200 720 26,491 *
Senior Vice President of Operations
Karen Nelson 17,700 40,000 4,000 21,700 *
Vice President of Lending
Phyllis Kreibich 3,265 5,000 500 3,765 *
Corporate Secretary
All directors and executive 369,539 102,000 379,739 379,739 8.2
officers as a group (10 persons)
</TABLE>
(1) Excludes shares which may be received upon the exercise of outstanding
stock options granted under the 1993 Stock Option Plan. Based upon the
Exchange Ratio of 1.9175 Exchange Shares for each Public Savings Bank
Share at the midpoint of the Estimated Valuation Range, the persons
named in the table would have options to purchase Common Stock as
follows: Mr. Sheaffer, 39,755 shares; Mr. Leick, 7,395 shares; Mr.
Malfait, 7,395 shares; Mr. Douglass, 1,760 shares; Mr. Runyan, 3,071
shares; Mr. Scarbrough, 7,395 shares; Mr. Wysaske, 31,249 shares; Mr.
Yount, 24,037 shares; Ms. Nelson, 16,085 shares; Ms. Kreibich, none;
and all directors and executive officers as a group, 138,148 shares.
(2) Excludes stock options that may be granted under the 1997 Stock Option
Plan and awards that may be granted under 1997 MRP if such plans are
approved by stockholders at an annual or special meeting at least six
months following the Conversion and Reorganization. See "MANAGEMENT OF
THE SAVINGS BANK -- Benefits."
(*) Less than 1%.
20
<PAGE>
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THE FOLLOWING CONSOLIDATED STATEMENTS OF INCOME OF RIVERVIEW SAVINGS
BANK, FSB AND SUBSIDIARY FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND
1995 HAVE BEEN AUDITED BY DELOITTE & TOUCHE LLP, PORTLAND, OREGON, INDEPENDENT
AUDITORS, WHOSE REPORT THEREON APPEARS ELSEWHERE IN THIS PROSPECTUS. THESE
STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans receivable..................... $13,339,000 $11,252,000 $ 9,223,000
Interest on investment securities......................... 1,832,000 2,528,000 2,180,000
Interest on mortgage-backed securities.................... 2,135,000 2,020,000 1,586,000
Other interest and dividends.............................. 170,000 196,000 243,000
----------- ----------- -----------
Total interest income.................................... 17,476,000 15,996,000 13,232,000
----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposit accounts.............................. 7,034,000 6,583,000 5,121,000
Interest on borrowings.................................... 1,889,000 1,833,000 806,000
----------- ----------- -----------
Total interest expense................................... 8,923,000 8,416,000 5,927,000
----------- ----------- -----------
Net interest income...................................... 8,553,000 7,580,000 7,305,000
Less provision for loan losses............................. 180,000 -- --
----------- ------------- -------------
Net interest income after provision for loan losses...... 8,373,000 7,580,000 7,305,000
----------- ----------- -----------
NONINTEREST INCOME:
Fees and service charges.................................. 1,368,000 1,182,000 693,000
Loan servicing income..................................... 279,000 342,000 358,000
Gain on sale of mortgage-backed and
other securities available for sale...................... 37,000 216,000 --
Gain on sale of loans held for sale....................... 69,000 180,000 85,000
Trading activity gains (losses)........................... -- (5,000) 26,000
Other..................................................... 121,000 100,000 88,000
----------- ----------- -----------
Total noninterest income................................. 1,874,000 2,015,000 1,250,000
----------- ----------- -----------
NONINTEREST EXPENSES:
Salaries and employee benefits............................ 3,386,000 2,851,000 2,255,000
Occupancy and depreciation................................ 1,174,000 1,090,000 983,000
Special SAIF assessment................................... 947,000 -- --
Amortization of core deposit intangible................... 327,000 327,000 286,000
Marketing expense......................................... 257,000 263,000 312,000
FDIC insurance premium.................................... 275,000 336,000 290,000
Other..................................................... 838,000 740,000 763,000
----------- ----------- -----------
Total noninterest expenses............................... 7,204,000 5,607,000 4,889,000
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES......................... $ 3,043,000 $ 3,988,000 $ 3,666,000
PROVISION FOR FEDERAL INCOME TAXES......................... 1,035,000 1,375,000 1,220,000
----------- ----------- -----------
NET INCOME................................................. $ 2,008,000 $ 2,613,000 $ 2,446,000
=========== =========== ===========
PER COMMON SHARE:
Net income................................................ $ 0.85 $ 1.11 $ 1.04
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................................. 2,374,077 2,362,450 2,348,306
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
OPERATING STRATEGY
The Savings Bank's business consists principally of attracting retail
deposits from the general public and using these funds to originate mortgage
loans secured by one- to- four family residences located in its primary market
area. The Savings Bank also actively originates residential construction loans
secured by properties located in its primary market area. To a lesser extent,
the Savings Bank also originates consumer loans, commercial real estate loans
and land loans. In addition, the Savings Bank invests in U.S. Government and
federal agency obligations, and mortgage-backed securities. The Savings Bank
intends to continue to fund its assets primarily with retail deposits, although
FHLB- Seattle advances may be used as a supplemental source of funds.
The Savings Bank's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Savings Bank's profitability is
also affected by the level of other income and expenses. Other income, net,
includes income associated with the origination and sale of mortgage loans,
brokering loans, loan servicing fees, income from real estate owned and net
gains and losses on sales of interest-earning assets. Other expenses include
compensation and benefits, occupancy and equipment expenses, deposit insurance
premiums, data servicing expenses and other operating costs. The Savings Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.
The Savings Bank's business strategy is to operate as a
well-capitalized, profitable and independent community savings bank, dedicated
to home mortgage lending, consumer installment lending, small business lending
and providing quality financial services to local customers. Management believes
that it can best serve an important segment of the marketplace and enhance the
long-term value of the Savings Bank by operating independently and continuing
with and expanding its community-oriented approach, especially in light of
recent consolidations of financial institutions in the Savings Bank's primary
market area. The Savings Bank has sought to implement this strategy by: (i)
emphasizing the origination of residential mortgage loans, including one- to-
four family residential construction loans; (ii) providing high quality,
personalized financial services to customers and communities served by its
branch network; (iii) operating as a mortgage banker by selling fixed rate
mortgages to the secondary market on a servicing- retained basis, thereby
increasing the loan servicing portfolio and income; (iv) brokering customer
loans to third-party lenders, which generates fee income; (v) reducing interest
rate risk exposure by matching asset and liability durations and rates; (vi)
improving asset quality; (vii) containing operating expenses; and (viii)
maintaining capital in excess of regulatory requirements combined with prudent
growth.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 AND 1996
Total assets were $224.4 million at March 31, 1997 compared to $209.5
million at March 31, 1996. This increase resulted primarily from growth in the
loan portfolio, which was funded primarily by deposit growth and the proceeds of
maturing securities.
22
<PAGE>
Loans receivable, net, were $151.7 million at March 31, 1997 compared
to $126.2 million at March 31, 1996, a 20.2% increase. Increases primarily in
residential construction loans and consumer loans contributed to the increase in
loans receivable, net. Residential construction and consumer loans have greater
credit risk than one- to- four family mortgage loans. See "RISK FACTORS --
Certain Lending Risks" and "BUSINESS OF THE SAVINGS BANK -- Lending Activities."
Loans held-for-sale were $80,000 at March 31, 1997, compared to $1.9
million at March 31, 1996, as a result of timing differences on sales.
Investment securities held-to-maturity were $20.5 million at March 31,
1997, compared to $29.7 million at March 31, 1996, as a result of maturities,
the proceeds of which were used to fund loan growth.
Mortgage-backed securities held-to-maturity were $26.4 million at March
31, 1997, compared to $28.4 million at March 31, 1996, as a result of
prepayments, the proceeds of which funded loan growth.
Cash increased to $7.0 million at March 31, 1997 from $5.6 million at
March 31, 1996 as a result of increased deposits and the maturities of
investment securities.
Total deposits were $169.4 million at March 31, 1997, compared to
$158.2 million at March 31, 1996. Management attributes this increase primarily
to the growth in the Savings Bank's market area and to promotions of checking
accounts.
FHLB advances increased to $27.2 million at March 31, 1997 from $26.1
million at March 31, 1996. Approximately $20.0 million of the outstanding
advances at March 31, 1997 and $23.6 million at March 31, 1996 were used to
purchase mortgage-backed securities, classified as held-to-maturity, with the
goal of recognizing income on the difference between the rate paid on the
advances and the rate earned on the mortgage-backed securities. See "BUSINESS OF
THE SAVINGS BANK -- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Borrowings."
Shareholders' equity increased to $25.0 million at March 31, 1997 from
$23.1 million at March 31, 1996 primarily because of growth in retained
earnings, less cash dividends of $212,000 paid to the Public Stockholders.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
NET INCOME. Net income was $2.0 million, or $0.85 per share, for the
year ended March 31, 1997, compared to $2.6 million, or $1.11 per share, for the
year ended March 31, 1996. Earnings per share information has been retroactively
adjusted for stock dividends paid. The decrease in net income was primarily
attributable to the legislatively- mandated, one-time assessment levied by the
FDIC on all SAIF-insured institutions to recapitalize the SAIF. Without this
assessment, which amounted to $947,000 ($625,000 after tax), net income would
have been $2.6 million, or $1.11 per share, for the year ended March 31, 1997.
NET INTEREST INCOME. Net interest income increased $973,000 to $8.6
million for the year ended March 31, 1997 compared to $7.6 million for the year
ended March 31, 1996. The increased net interest income resulted primarily from
the increase in the average balance of net loans to $141.4 million in 1997
compared to $116.4 million in 1996. Net interest margin for the year ended March
31, 1997 rose to 4.19% from 4.05% for the 1996 fiscal year primarily because of
a lower average rate paid on FHLB advances as a result of the renewal of
maturing advances at lower interest rates.
INTEREST INCOME. Interest income totalled $17.5 million and $16.0
million for fiscal years 1997 and 1996, respectively. Average interest-earning
assets increased 9.1% to $204.0 million for the year ended March 31, 1997,
compared to $187.0 million for the year ended March 31, 1996, and the yield on
all interest-earning assets increased to 8.57% from 8.55% for the fiscal years
1997 and 1996, respectively. The increase in average yield was primarily
23
<PAGE>
a result of a higher proportion of loans in portfolio, which tend to have higher
yields than securities. The proportion of loans- to-assets at March 31, 1997 was
67.6% compared to 61.2% at March 31, 1996.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1997
totalled $8.9 million, a $507,000, or 6.0%, increase from $8.4 million the prior
year. The increase was primarily a result of an increase in the average balances
of certificates of deposit from $90.7 million to $99.7 million for the 1996 and
1997 fiscal years, respectively, as a result of deposit growth unaffected by any
special promotions. The average cost on other interest-bearing liabilities
(primarily FHLB advances) were 6.50% in fiscal 1997 compared 6.94% in fiscal
1996 as a result of the renewal of maturing FHLB advances at lower interest
rates, while average balances increased to $29.1 million in fiscal 1997 from
$26.4 million in fiscal 1996 to fund loan growth. The combined effect was to
produce interest expense of $1.9 million for other interest-bearing liabilities
for the year ended March 31, 1997, compared to $1.8 million for the year ended
March 31, 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended March 31, 1997 was $180,000 compared to no provision for loan losses for
the years ended March 31, 1996. The increase in the provision for loan losses
resulted primarily from the increased size of the loan portfolio, particularly
with respect to construction and consumer loans which inherently involve greater
risk than residential mortgage loans. The Savings Bank establishes a general
reserve for loan losses through a periodic provision for loan losses based on
management's evaluation of the loan portfolio and current economic conditions.
The provisions for loan losses are based on management's estimate of net
realizable value or fair value of the collateral, as applicable and the Savings
Bank's actual loss experience, and standards applied by the OTS and the FDIC.
The Savings Bank regularly reviews its loan portfolio, including non-performing
loans, to determine whether any loans require classification or the
establishment of appropriate reserves. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the
Savings Bank's allowance for loan losses. Such agencies may require the Savings
Bank to provide additions to the allowance for loan losses based upon judgments
different from management. The allowance for loan losses is provided based upon
management's continuing analysis of the pertinent factors underlying the quality
of the loan portfolio. These factors include changes in the size and composition
of the loan portfolio, actual loan loss experience, current and anticipated
economic conditions, and detailed analysis of individual loans for which full
collectibility may not be assured. The detailed analysis includes techniques to
estimate the fair value of the loan collateral and the existence of potential
alternative sources of repayment. Assessment of the adequacy of the allowance
for loan losses involves subjective judgments regarding future events, and thus
there can be no assurance that additional provisions for credit losses will not
be required in future periods. Although management uses the best information
available, future adjustments to the allowance may be necessary due to economic,
operating, regulatory and other conditions that may be beyond the Savings Bank's
control. Any increase or decrease in the provision for loan losses has a
corresponding negative or positive effect on net income. The allowance for loan
losses at March 31, 1997 was $831,000, or 0.50% of total loans receivable,
compared to $653,000, or 0.47%, at March 31, 1996. At March 31, 1997, management
deemed the allowance for loan losses adequate at that date. Non-performing
assets totalled $222,000, or 0.10%, of total assets, at March 31, 1997 as
compared to $548,000 or 0.26% at March 31, 1996.
NONINTEREST INCOME. The Savings Bank's principal sources of noninterest
income include loan fees, deposit service charges, and net gains on the sale of
loans and securities available-for-sale. Noninterest income including gains on
sales of assets for fiscal years 1997 and 1996 was $1.9 million and $2.0 million
respectively. Mortgage broker fees (included in fees and service charges)
totalled $394,000 for the year ended March 31, 1997 compared to $283,000 for the
previous year and related commission compensation expense was $335,000 for the
fiscal year ended March 31, 1997 compared to $243,000 for the fiscal year ended
March 31, 1996, both as a result of an increase in brokered loan production from
$40.7 million in 1996 to $60.9 million in 1997. For the fiscal year ended March
31, 1997, gains on sale of loans and investments totalled $106,000 compared to
$391,000 of gains recorded in 1996. The decrease in the gains on sale of loan
and investments resulted from the sale of one investment security in 1996 at a
gain of $216,000 and no comparable gain in 1997. The total loans-serviced-for-
others portfolio was $98.8 million at March 31, 1997 and generated $279,000
of servicing fees for fiscal 1997, versus $342,000 for fiscal 1996. The
purchased and
24
<PAGE>
originated mortgage servicing rights assets were $402,000 and $67,000,
respectively, at March 31, 1997, and were being amortized over the life of the
underlying loan servicing.
NONINTEREST EXPENSE. Noninterest expense increased by $1.6 million in
fiscal 1997 compared to fiscal 1996, as total noninterest expense was $7.2
million and $5.6 million for fiscal 1997 and 1996, respectively. The primary
cause for the $1.6 million increase was the FDIC insurance premium surcharge. On
September 30, 1996, President Clinton signed into law legislation requiring all
SAIF members (like the Savings Bank) to pay a special one-time premium of 65.7
basis points based on assessable deposits at March 31, 1995. The special premium
of $947,000, pre-tax, was accounted for as an expense and immediately reduced
the capital of the Savings Bank by the amount of the premium, net of taxes of
approximately $322,000, and reduced net income by approximately $625,000.
Effective January 1, 1997, the special assessment increased the SAIF reserve
level to the statutory requirement of 1.25%. The legislation also reduced the
Savings Bank's ongoing insurance premiums from an average of 23.0 basis points
to 6.5 basis points.
The other principal component of the Savings Bank's noninterest expense
has been and continues to be salaries and employee benefits of $3.4 million for
fiscal 1997 and $2.9 million for fiscal 1996, including the mortgage broker
commissions, as a result of full-time equivalent employees increasing to 82 at
March 31, 1997 from 73 at March 31, 1996. Other components of noninterest
expense include building, furniture, and equipment depreciation and expense,
deposit insurance premiums, data processing expense, and advertising expense.
The acquisition of the Hazel Dell and Longview branches from the
Resolution Trust Corporation ("RTC") in fiscal 1995 (see "BUSINESS OF THE
SAVINGS BANK -- Properties"), and the related acquisition of $42 million in
customer deposits, gave rise to a $3.2 million core deposit intangible asset
("CDI"), representing the excess of cost over fair value of deposits acquired.
The CDI ($2.3 million at March 31, 1997) is being amortized over the remaining
life of the underlying customer relationships, currently estimated at seven
years. The amortization cost of the CDI was $327,000 for both fiscal years 1997
and 1996.
PROVISION FOR INCOME TAXES. Provision for income taxes was $1.0 million
for the year ended March 31, 1997 compared to $1.4 million for the year March
31, 1996 as a result of lower income before income taxes. The effective tax rate
for fiscal year 1997 was 34.0% compared to 34.5% for fiscal 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
NET INCOME. Net income was $2.6 million, or $1.11 per share, for the
year ended March 31, 1996, compared to $2.4 million, or $1.04 per share, for the
year ended March 31, 1995. Earnings per share information has been retroactively
adjusted for stock dividends paid.
NET INTEREST INCOME. Net interest income increased $275,000 to $7.6
million for the year ended March 31, 1996 compared to $7.3 million for the year
ended March 31, 1995. The increased net interest income resulted primarily from
the increased assets, particularly loans receivable, for 1996 compared to 1995.
The net interest margin for the year ended March 31, 1996 decreased to 4.05%
from 4.49% for the 1995 fiscal year as a result of rising short-term market
interest rates. The Savings Bank also experienced a decline in the ratio of the
average balances of interest earning assets to interest-bearing liabilities to
109.6% for 1996 compared to 110.4% for 1995. This occurred as a result of the
construction of a branch facility in Battle Ground (see "BUSINESS OF THE SAVINGS
BANK -- Properties"), resulting in premises and equipment, net, increasing
$330,000 to $4.4 million at March 31, 1996.
INTEREST INCOME. Interest income totalled $16.0 million and $13.2
million, for fiscal years 1996 and 1995, respectively. Average interest-earning
assets increased 14.9% to $187.0 million for the year ended March 31, 1996,
compared to $162.7 million for the year ended March 31, 1995, and the yield on
all interest-earning assets increased to 8.55% from 8.13% for the fiscal years
1996 and 1995, respectively. The increase in the average balance of
interest-earning assets was primarily attributable to an increase in the average
balance of loans from $98.4 million
25
<PAGE>
in 1996 to $116.4 million in 1997 and an increase in the average balance of
mortgaged-backed securities and investment securities from $59.4 million in 1996
to $66.5 million in 1997, and were funded by increases in deposits and FHLB
advances. The increase in the average balance of loans resulted primarily
from loans originated through the mortgage brokerage operations that began in
April 1995. See "BUSINESS OF THE SAVINGS BANK--Lending Activities--Mortgage
Brokerage." The increase in average yield was primarily a result of rising
market interest rates and a higher proportion of loans in portfolio, which
tend to have higher yields than securities. The proportion of loans-to-assets
at March 31, 1996 was 61.2% compared to 54.4% at March 31, 1995.
INTEREST EXPENSE. Interest expense for the year ended March 31, 1996 totalled
$8.4 million, a 42.0% increase from $5.9 million the prior year. The increase
was a result of an increase in average cost of interest-bearing liabilities to
4.93% in 1996 from 4.02% in 1995, and the increase in total average
interest-bearing liabilities to $170.6 million for fiscal 1996 compared to
$147.4 million for fiscal 1995. The increase in the average balance of
interest-bearing liabilities was primarily attributable to an increase in the
average balance of deposits from $134.7 million in 1995 to $144.2 million in
1996, primarily as a result of increases in transaction accounts and
certificates of deposit at the newly opened Orchards Branch (see "BUSINESS OF
THE SAVINGS BANK -- Properties"), and the average balance of FHLB advances
increased from $12.6 million in 1995 to $26.4 million in 1996 as advances were
used to purchase mortgage-backed securities. Rising market interest rates
increased the rates paid on deposits and on FHLB advances.
PROVISION FOR LOAN LOSSES. There was no provision for loan losses for
the years ended March 31, 1996 and 1995. Based on management's evaluation of the
loan portfolio during these periods, particularly the low level of delinquent
loans and charge-offs, the allowance for loan losses was deemed adequate and no
provision for loan losses was required in management's judgment. Allowance for
loan losses at March 31, 1996 was $653,000, or 0.47% of total loans receivable,
compared to $657,000, or 0.58%, at March 31, 1995. Non-performing assets
totalled $548,000, or 0.26%, of total assets at March 31, 1996 as compared to
$240,000, or 0.13%, at March 31, 1995.
NONINTEREST INCOME. Noninterest income including gains on sales of
assets for fiscal years 1996 and 1995 was $2.0 million and $1.3 million
respectively. The increase of $765,000 was primarily a result of increased
account service charges, mortgage broker fees and gains on the sale of loans and
investments. Mortgage broker fees (included in fees and service charges)
totalled $283,000 for the year ended March 31, 1996 compared to zero for the
previous year as brokerage operations commenced in fiscal 1996. For the year
ended March 31, 1996, gains on sale of loans and investments totalled $391,000
compared to $111,000 of gains recorded in 1995. The total
loans-serviced-for-others portfolio was $106.2 million at March 31, 1996 and
generated $342,000 of servicing fees for fiscal 1996, versus $358,000 for fiscal
1995. The purchased mortgage servicing rights asset was $451,000 at March 31,
1996 and $484,000 at March 31, 1995.
NONINTEREST EXPENSE. Noninterest expense increased by $718,000 in
fiscal 1996 compared to fiscal 1995, as total noninterest expense was $5.6
million and $4.9 million for fiscal 1996 and 1995, respectively. Salaries and
employee benefits totalled $2.9 million for fiscal 1996 and $2.3 million for
fiscal 1995 as a result of additional personnel associated with the three new
branch offices. Other components of noninterest expense include building,
furniture, and equipment depreciation and expense, deposit insurance premiums,
data processing expense, and advertising expense. Occupancy costs rose $107,000
to $1,090,000 for the fiscal year 1996 compared to $983,000 for the fiscal year
1995, due to the addition of the new Battle Ground facility in July 1995. The
amortization of the CDI related to the acquisition from the RTC in May 1994 for
the fiscal year ended March 31, 1996 was $327,000 versus $286,000 for the year
ended March 31, 1995.
PROVISION FOR INCOME TAXES. The provision for income taxes was $1.4
million for the year ended March 31, 1996, compared to $1.2 million for the
year ended March 31, 1995 as a result of higher income before income taxes.
The effective tax rate for fiscal year 1996 was 34.5% compared to 33.3% for
fiscal 1995.
AVERAGE BALANCE SHEET
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
26
<PAGE>
expense on average interest-bearing liabilities, resultant yields, interest rate
spread, ratio of interest-earning assets to interest-bearing liabilities and net
interest margin. Average balances for a period have been calculated using the
monthly average balances during such period.
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996
--------------------------------- -----------------------------------
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans.........................$128,552 $12,087 9.40% $107,902 $10,413 9.65%
Non-mortgage loans..................... 12,835 1,252 9.75 8,474 839 9.90
------- ------ ------- ------
Total net loans...................... 141,387 13,339 9.43 116,376 11,252 9.67
Mortgage-backed securities.............. 30,212 2,135 7.07 29,779 2,020 6.78
Investment securities................... 29,048 1,832 6.31 36,729 2,528 6.88
Daily interest-bearing.................. 708 40 5.65 1,626 91 5.60
Other earning assets.................... 2,619 130 4.96 2,491 105 4.22
-------- -------- ----- -------- ------- -----
Total interest-earning assets.......... 203,974 17,476 8.57 187,001 15,996 8.55
Noninterest-earning assets:
Office properties and equipment........ 4,516 4,342
net
Real estate, net....................... 471 --
Other noninterest-earning assets....... 9,375 8,634
-------- --------
Total assets...........................$218,336 $199,977
======== ========
Interest-earning liabilities:
Regular savings accounts............... 21,408 588 2.75 22,259 617 2.77
NOW accounts........................... 15,915 234 1.47 15,322 247 1.61
Money market accounts.................. 18,046 617 3.42 15,879 599 3.77
Certificates of deposit................ 99,657 5,595 5.61 90,710 5,120 5.64
-------- -------- ----- -------- ------- -----
Total deposits........................ 155,026 7,034 4.54 144,170 6,583 4.57
Other interest-bearing................. 29,068 1,889 6.50 26,404 1,833 6.94
liabilities -------- -------- ----- -------- ------- -----
Total interest-bearing................ 184,094 8,923 4.85 170,574 8,416 4.93
liabilities
Noninterest-bearing
liabilities
Noninterest-bearing.................... 7,047 5,095
deposits
Other liabilities...................... 3,229 2,570
-------- --------
Total liabilities..................... 194,370 178,239
Stockholders' equity................... 23,966 21,738
-------- --------
Total liabilities and................... $218,336 $199,977
stockholders' equity ======== ========
Net interest income..................... $8,553 $7,580
====== ======
Interest rate spread.................... 3.72% 3.62%
==== ====
Net interest margin..................... 4.19% 4.05%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.80% 109.63%
====== ======
</TABLE>
1995
----------------------------------
Interest
Average and Yield/
Balance Dividends Cost
Interest-earning assets:
Mortgage loans......................... $ 93,627 $ 8,729 9.32%
Non-mortgage loans..................... 4,763 494 10.37
------ -----
Total net loans...................... 98,390 9,223 9.37
Mortgage-backed securities.............. 27,530 1,586 5.76
Investment securities................... 31,891 2,180 6.84
Daily interest-bearing.................. 3,450 166 4.81
Other earning assets.................... 1,438 77 5.35
-------- ------- -----
Total interest-earning assets.......... 162,699 13,232 8.13
Noninterest-earning assets:
Office properties and equipment........ 2,955
net
Real estate, net....................... --
Other noninterest-earning assets....... 7,865
--------
Total assets........................... $173,519
========
Interest-earning liabilities:
Regular savings accounts............... 28,559 919 3.22
NOW accounts........................... 13,733 264 1.92
Money market accounts.................. 10,694 331 3.10
Certificates of deposit................ 81,757 3,607 4.41
-------- ------ -----
Total deposits........................ 134,743 5,121 3.80
Other interest-bearing................. 12,638 806 6.38
liabilities -------- ------ -----
Total interest-bearing................ 147,381 5,927 4.02
liabilities
Noninterest-bearing
liabilities
Noninterest-bearing.................... 4,638
deposits
Other liabilities...................... 2,070
--------
Total liabilities..................... 154,089
Stockholders' equity................... 19,430
--------
Total liabilities and................... $173,519
stockholders' equity ========
Net interest income..................... $7,305
======
Interest rate spread.................... 4.11%
====
Net interest margin..................... 4.49%
====
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.39%
======
28
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth for the periods and at the date
indicated and the weighted average yields earned on the Savings Bank's assets,
the weighted average interest rates paid on the Savings Bank's liabilities,
together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
At March 31, Year Ended March 31,
1997 1997 1996 1995
Weighted average yield earned on:
<S> <C> <C> <C> <C>
Total net loans(1).............................. 8.50 9.43% 9.67% 9.37%
Mortgage-backed securities...................... 7.13 7.07 6.78 5.76
Investment securities........................... 6.34 6.31 6.88 6.84
All interest-earning assets..................... 8.06 8.57 8.55 8.13
Weighted average rate paid on:
Deposits........................................ 4.35 4.54 4.57 3.80
FHLB advances and other borrowings.............. 6.51 6.50 6.94 6.38
All interest-bearing liabilities................ 4.65 4.85 4.93 4.02
Interest rate spread (spread between weighted
average rate on all interest-earning
assets and all interest-bearing liabilities).... 3.41 3.72 3.62 4.11
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets)........................ N/A 4.19 4.05 4.49
</TABLE>
(1) Weighted average yield on total net loans at March 31, 1997 excludes
deferred loan fees.
29
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and
volumes on net interest income of the Savings Bank. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
<TABLE>
<CAPTION>
Year Ended March 31,
1997 vs. 1996 1996 vs. 1995
------------------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
(In Thousands)
Interest Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans............................. $1,993 $(268) $(51) $1,674 $1,330 $ 309 $ 45 $1,684
Non-mortgage loans......................... 432 (13) (6) 413 385 (22) (18) 345
Mortgage-backed securities................. 29 85 1 115 130 281 23 434
Investment securities...................... (528) (212) 44 (696) 331 13 4 348
Daily interest-bearing..................... (51) -- -- (51) (88) 27 (14) (75)
Other earning assets....................... 5 19 1 25 56 (16) (12) 28
------- ------ ----- ------- ------- --------- ------- --------
Total interest-earning assets............ 1,880 (389) (11) 1,480 2,144 592 28 2,764
------- ------- ------ ------- ------- -------- ------ --------
Interest Expense:
Regular savings accounts................... (24) (4) (1) (29) (203) (129) 30 (302)
NOW accounts............................... 10 (23) -- (13) 31 (42) (6) (17)
Money market accounts...................... 82 (56) (8) 18 161 72 35 268
Certificates of deposit.................... 505 (27) (3) 475 395 1,007 111 1,513
Other interest-bearing liabilities......... 185 (118) (11) 56 878 71 78 1,027
------- ------- ------ ------- ------- ------- ------ --------
Total interest-bearing liabilities...... 758 (228) (23) 507 1,262 979 248 2,489
------- ------- ------ ------- ------- ------- ------ --------
Net increase (decrease) in interest income.. $1,122 $(161) $ 12 $ 973 $ 882 $ (387) $(220) $ 275
====== ====== ==== ====== ====== ======= ====== =======
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Savings Bank's principal financial objective is to achieve
long-term profitability while reducing its exposure to fluctuating market
interest rates. The Savings Bank has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates. The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Savings Bank's interest-earning assets by retaining for its
portfolio loans with interest rates subject to periodic adjustment to market
conditions and selling fixed-rate one- to- four family mortgage loans with terms
of more than 15 years. The Savings Bank relies on retail deposits as its primary
source of funds. Management believes retail deposits, compared to brokered
deposits, reduce the effects of interest rate fluctuations because they
generally represent a more stable source of funds. As part of its interest rate
risk management strategy, the Savings Bank promotes transaction accounts and
certificates of deposit with terms up to ten years.
The Savings Bank has adopted a strategy that is designed to maintain or
improve the interest rate sensitivity of assets relative to its liabilities. The
primary elements of this strategy involve the origination of ARM loans or
purchase of adjustable rate mortgage-backed securities for its portfolio;
maintaining consumer and residential construction loans as a portion of total
net loans receivable because of their generally shorter terms and higher yields
than other one-to-four-family residential mortgage loans; matching asset and
liability maturities; investing in short
30
<PAGE>
term mortgage-backed and other securities; and the origination of fixed-rate
loans for sale in the secondary market and the retention of the related loan
servicing rights. This approach has remained consistent throughout the past year
as the Savings Bank has experienced growth in assets, deposits, and FHLB
advances.
Deposit accounts typically react more quickly to changes in market
interest rates than mortgage loans because of the shorter maturities of
deposits. As a result, sharp increases in interest rates may adversely affect
the Savings Bank's earnings while decreases in interest rates may beneficially
affect the Savings Bank's earnings. To reduce the potential volatility of the
Savings Bank's earnings, management has sought to improve the match between
asset and liability maturities and rates, while maintaining an acceptable
interest rate spread. Pursuant to this strategy, the Savings Bank actively
originates ARM loans for retention in its loan portfolio. Fixed-rate mortgage
loans with terms of more than 15 years generally are originated for the intended
purpose of resale in the secondary mortgage market. The Savings Bank has also
invested in adjustable rate mortgage-backed securities to increase the level of
short term adjustable assets. At March 31, 1997, ARM loans and adjustable rate
mortgage-backed securities constituted $77.1 million, or 45.6%, of the Savings
Bank's total combined mortgage loan and mortgage-backed securities portfolio.
Although the Savings Bank has sought to originate ARM loans, the ability to
originate and purchase such loans depends to a great extent on market interest
rates and borrowers' preferences. Particularly in lower interest rate
environments, borrowers often prefer to obtain fixed rate loans.
The Savings Bank's mortgage servicing activities provide additional
protection from interest rate risk. The Savings Bank retain servicing rights on
all mortgage loans sold. As market interest rates rise the fixed rate loans held
in portfolio diminish in value. However, the value of the servicing portfolio
tends to rise as market interest rates increase because borrowers tend not to
prepay the underlying mortgages, thus providing an interest rate risk hedge
versus the fixed rate loan portfolio. The loan servicing portfolio totalled
$98.8 million at March 31, 1997, including $38.0 million of purchased mortgage
servicing. The purchase of loan servicing replaced loan servicing balances
extinguished through prepayment of the underlying loans. The average balance of
the servicing portfolio was $102.4 million and produced service fees of $279,000
for the year ended March 31, 1997. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Mortgage Loan Servicing."
Consumer loans and construction loans typically have shorter terms and
higher yields than permanent residential mortgage loans, and accordingly reduce
the Savings Bank's exposure to fluctuations in interest rates. At March 31,
1997, the construction and consumer loan portfolios amounted to $33.7 million
and $14.3 million, or 22.2% and 9.4% of total net loans receivable,
respectively. See "BUSINESS OF THE SAVINGS BANK -- Lending Activities --
Construction Lending" and "-- Lending Activities -- Consumer Lending."
The Savings Bank also invests in short-term to medium-term U.S.
Government securities as well as mortgage-backed securities issued or guaranteed
by U.S. Government agencies. At March 31, 1997, the combined portfolio of $53.7
million had an average term to repricing or maturity of 1.7 years. See "BUSINESS
OF THE SAVINGS BANK -- Investment Activities."
In order to encourage institutions to reduce their interest rate risk,
the OTS adopted a rule incorporating an interest rate risk component into the
risk-based capital rules. Using data compiled by the FHLB-Seattle, the Savings
Bank receives a report which measures interest rate risk by modeling the change
in NPV over a variety of interest rate scenarios. This procedure for measuring
interest rate risk was developed by the OTS to replace the "gap" analysis (the
difference between interest-earning assets and interest-bearing liabilities that
mature or reprice within a specific time period). NPV is the present value of
expected cash flows from assets, liabilities and off- balance sheet contracts.
The calculation is intended to illustrate the change in NPV that will occur in
the event of an immediate change in interest rates of at least 200 basis points
with no effect given to any steps that management might take to counter the
effect of that interest rate movement. Under proposed OTS regulations, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction from total capital for purposes of calculating its
risk-based capital. An institution with a "normal" level of interest rate risk
is defined as one whose "measured interest rate risk" is less than 2.0%.
Institutions with assets of less than $300 million and a risk-based capital
ratio of more than 12.0% are exempt. The Savings Bank is exempt because its
assets are less than $300
31
<PAGE>
million. Based on the Savings Bank's regulatory capital levels at March 31,
1997, the Savings Bank believes that, if the proposed regulation was implemented
at that date, the regulation would not have had a material adverse effect on the
Savings Bank's regulatory capital compliance.
<TABLE>
<CAPTION>
At March 31, 1997
Net Portfolio Value Net Portfolio Value as a
Change Dollar Dollar Percent Percent of Present Value of Assets
In Rates Amount Change Change NPV Ratio Change
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400bp $20,523 $(11,830) (37)% 9.56% (445) bp
300bp 26,632 (8,721) (27) 10.80 (321) bp
200bp 26,766 (5,588) (17) 12.00 (201) bp
100bp 29,720 (2,633) (8) 13.09 (93) bp
--bp 32,353 -- -- 14.01 --
(100)bp34,487 2,134 7 14.72 71 bp
(200)bp35,635 3,282 10 15.06 105 bp
(300)bp36,779 4,425 14 15.39 138 bp
(400)bp38,401 6,048 19 15.87 186 bp
</TABLE>
The above table illustrates, for example, that an instantaneous 200
basis point increase in market interest rates at March 31, 1997 would reduce the
Savings Bank's NPV by approximately $5.6 million, or 17%, at that date.
Certain assumptions utilized by the FHLB-Seattle in assessing the
interest rate risk of savings associations within its region were utilized in
preparing the preceding table. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are customer deposits,
proceeds from principal and interest payments on and the sale of loans, maturing
securities and FHLB advances. While maturities and scheduled amortization of
loans are a predictable source of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Savings Bank must maintain an adequate level of liquidity to
ensure the availability of sufficient funds to fund loan originations and
deposit withdrawals, to satisfy other financial commitments and to take
advantage of investment opportunities. The Savings Bank generally maintains
sufficient cash and short-term investments to meet short-term liquidity needs.
At March 31, 1997, cash and cash equivalents totalled $7.0 million, or 3.1% of
total assets. At March 31, 1997, the Savings Bank also maintained an uncommitted
credit facility with the FHLB-Seattle that provided for immediately available
advances up to an aggregate amount of $78.5 million, under which $27.2 million
was outstanding.
32
<PAGE>
OTS regulations require savings institutions to maintain an average
daily balance of liquid assets (cash and eligible investments) equal to at least
5.0% of the average daily balance of its net withdrawable deposits and
short-term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus short-term
borrowings. The Savings Bank's actual short- and long-term liquidity ratios at
March 31, 1997 were 8.3% and 18.0%, respectively.
Liquidity management is both a short- and long-term responsibility of
the Savings Bank's management. The Savings Bank adjusts its investments in
liquid assets based upon management's assessment of (i) expected loan demand,
(ii) projected loan sales, (iii) expected deposit flows, (iv) yields available
on interest-bearing deposits, and (v) liquidity of its asset/liability
management program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations. If
the Savings Bank requires funds beyond its ability to generate them internally,
it has additional borrowing capacity with the FHLB and collateral for repurchase
agreements.
The Savings Bank's primary investing activity is the origination of
one- to- four family mortgage loans. During the years ended March 31, 1997, 1996
and 1995, the Savings Bank originated $67.9 million, $63.6 million and $49.7
million of such loans, respectively. At March 31, 1997, the Savings Bank had
mortgage loan commitments totalling $2.1 million, consumer loan commitments
totalling $4.4 million, and undisbursed loans in process totalling $11.1
million. The Savings Bank anticipates that it will have sufficient funds
available to meet current loan commitments. Certificates of deposit that are
scheduled to mature in less than one year from March 31, 1997 totalled $79.7
million. Historically, the Savings Bank has been able to retain a significant
amount of its deposits as they mature.
OTS regulations require the Savings Bank to maintain specific amounts
of regulatory capital. As of March 31, 1997, the Savings Bank complied with all
regulatory capital requirements as of that date with tangible, core and
risk-based capital ratios of 10.3%, 10.3% and 20.9%, respectively. For a
detailed discussion of regulatory capital requirements, see "REGULATION --
Federal Regulation of the Savings Bank -- Capital Requirements." See also
"HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE."
IMPACT OF ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. In November 1993 the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan and to exclude unallocated shares from earnings per share
computations. The effect of SOP 93-6 on net income and book value per share in
future periods cannot be predicted due to the uncertainty of the fair value of
the shares at the time they will be committed to be released. See "PRO FORMA
DATA."
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES. See Note 1 of Notes to the Consolidated Financial
Statements for a discussion of Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," and of SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127
defers the effective date of the application of certain portions of SFAS No. 125
until January 1, 1998. The adoption of the provisions of SFAS No. 125 did not
have a material impact on the Savings Bank's financial condition or results of
operations.
EARNINGS PER SHARE. SFAS No. 128, "Earnings Per Share," issued in
February 1997, establishes standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly-held common stock or
potential common stock. It replaces the presentation of primary EPS with a
presentation of basis EPS and requires the dual presentation of basic and
diluted EPS on the face of the income statement. SFAS No. 128 is effective for
the financial statements for the periods ending after December 15, 1997. SFAS
No. 128 requires restatement of all prior period EPS data presented. The impact
of its adoption is not expected to be material to the Savings Bank.
33
<PAGE>
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No. 129,
"Disclosure of Information About Capital Structure," establishes standards for
disclosing information about an entity's capital structure and applies to all
entities. SFAS No. 129 continues the previous requirements to disclose certain
information about an entity's capital structure found in APB Opinions No. 10,
"Omnibus Opinion - 1966," and No. 15, "Earnings Per Share," and SFAS No. 47,
"Disclosure of Long-Term Obligations," for entities that were subject to those
standards. SFAS No. 129 is effective for financial statements for periods ending
after December 15, 1997. SFAS No. 129 contains no change in disclosure
requirements for entities that were previously subject to the requirements of
APB Opinions Nos. 10 and 15 and SFAS No. 47. The adoption of the provisions of
SFAS No. 129 is not expected to have a material impact on the Savings Bank.
COMPREHENSIVE INCOME. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presenting of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. It 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
presented with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
DISCLOSURE ABOUT SEGMENTS. SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information," issued in June 1997, establishes
standards for disclosure about operating segments in annual financial statements
and selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 supersedes SFAS No. 14, "Financial reporting
for Segments of a Business Enterprise." SFAS No. 131 becomes effective for the
Savings Bank's fiscal year ending March 31, 1999, and requires that comparative
information from earlier years be restated to conform to its requirements. The
adoption of the provisions of SFAS No. 131 is not expected to have a material
impact on the Savings Bank.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The primary impact of inflation is reflected in the
increased cost of the Savings Bank's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
34
<PAGE>
RECENT DEVELOPMENTS
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF THE SAVINGS BANK AT
THE DATES AND FOR THE PERIODS INDICATED. INFORMATION AT JUNE 30, 1997 AND FOR
THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996 ARE UNAUDITED, BUT, IN THE OPINION
OF MANAGEMENT, CONTAIN ALL ADJUSTMENTS (NONE OF WHICH WERE OTHER THAN NORMAL
RECURRING ENTRIES) NECESSARY FOR A FAIR PRESENTATION OF THE RESULTS OF SUCH
PERIODS. THE SELECTED OPERATIONS DATA FOR THE THREE MONTHS ENDED JUNE 30, 1997
ARE NOT NECESSARILY INDICATIVE OF THE RESULTS OF OPERATION FOR THE ENTIRE FISCAL
YEAR. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO PRESENTED ELSEWHERE IN THIS PROSPECTUS.
At At
June 30, March 31,
1997 1997
-------------- --------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets............................. $229,652 $224,385
Loans receivable, net(1) ................ 154,327 151,774
Mortgage-backed certificates
held to maturity, at amortized cost..... 24,942 26,402
Mortgage-backed certificates
available for sale, at fair value....... 12,800 2,990
Cash and interest-bearing deposits....... 5,264 6,951
Investment securities held
to maturity, at amortized cost.......... 17,433 20,456
Investment securities
available for sale, at fair value....... 2,986 3,899
Deposit accounts......................... 168,622 169,416
FHLB advances............................ 32,550 27,180
Shareholders' equity..................... 25,811 25,022
Three Months
Ended June 30,
1997 1996
(In Thousands)
SELECTED OPERATING DATA:
Interest income.....................................$4,623 $4,212
Interest expense.................................... 2,250 2,166
----- -----
Net interest income................................. 2,373 2,046
Provision for loan losses........................... 45 45
----- -----
Net interest income after provision for loan losses. 2,328 2,001
Gains from sale of loans,
securities and real estate owned................... 23 14
Noninterest income.................................. 446 423
Noninterest expenses................................ 1,662 1,473
----- -----
Income before federal income tax provision.......... 1,135 965
Provision for federal income taxes.................. 390 330
----- -----
Net income.......................................... $ 745 $ 635
===== =====
34
<PAGE>
At or For the
Three Months
Ended June 30,
1997 1996
PER SHARE DATA:
Net income per share.......................... $0.31 $0.27
Dividends per share(2)........................ 0.06 0.055
Weighted average shares outstanding........... 2,383,698 2,370,889
SELECTED FINANCIAL RATIOS(3):
PERFORMANCE RATIOS:
Return on average assets...................... 1.31% 1.20%
Return on average equity...................... 11.72 10.89
Dividend payout ratio(2)(4)................... 8.19 8.35
Interest rate spread.......................... 3.46 3.13
Net interest margin........................... 4.38 4.06
Noninterest expenses to average assets........ 2.93 2.78
Efficiency ratio (non-interest expenses
divided by the sum of net interest
income and noninterest income)............... 58.48 59.32
Average interest-earning assets
to average interest-bearing liabilities...... 109.07 108.37
ASSET QUALITY RATIOS:
Allowance for loan losses to
total loans at end of period................. 0.51 0.47
Net charge-offs (recoveries) to average
outstanding loans during the period.......... 0.01 --
Ratio of nonperforming assets to total assets. 0.14 0.22
CAPITAL RATIOS:
Average equity to average assets.............. 11.20 11.02
Equity to assets at end of period............. 11.21 11.02
(1) Includes loans held for sale.
(2) All cash dividends paid by the Savings Bank have been waived by the
MHC.
(3) Annualized, where appropriate.
(4) Excludes cash dividends waived by the MHC.
36
<PAGE>
REGULATORY CAPITAL
The table below sets forth the Savings Bank's capital position relative
to its OTS capital requirements at the date indicated. The definitions of the
terms used in the table are those provided in the capital regulations issued by
the OTS. See "REGULATION -- Federal Regulation of the Savings Bank -- Capital
Requirements."
At June 30, 1997
Percent of Adjusted
Amount Total Assets(1)
(In Thousands)
Tangible capital...................... $23,576 10.6%
Tangible capital requirement.......... 3,330 1.5
------ ----
Excess................................ $20,246 9.1%
======= ===
Core capital.......................... $23,576 10.6%
Core capital requirement(2)........... 6,661 3.0
------ ----
Excess................................ $16,915 7.6%
======= ===
Risk-based capital(3)................. $23,821 21.3%
Risk-based capital requirement........ 8,949 8.0
------ ----
Excess................................ $14,872 13.3%
======= ====
- -----------------------
(1) Based on total tangible assets of $222.0 million for purposes of the
tangible capital requirement, total adjusted assets of $222.0 million
for purposes of the core capital requirements, and risk-weighted assets
of $111.9 million for purposes of the risk-based capital requirement.
(2) The current OTS core capital requirement for savings associations is 3%
of total adjusted assets. The OTS has proposed core capital
requirements that would require a core capital ratio of 3% of total
adjusted assets for thrifts that receive the highest supervisory rating
for safety and soundness and a core capital ratio of 4% to 5% for all
other thrifts.
(3) Percentage represents total core and supplementary capital divided by
total risk-weighted assets.
NONPERFORMING ASSETS AND DELINQUENCIES
At June 30, 1997, the Savings Bank had $311,000 of loans accounted for
on a non-accrual basis ($286,000 in residential real estate and $25,000 in
consumer loans) compared to $87,000 at March 31, 1997. At June 30, 1997, the
Savings Bank had no accruing loans which were contractually past due 90 days or
more, no restructured loans and no real estate owned. At March 31, 1997, there
were no accruing loans which were contractually past due 90 days or more and
$135,000 of real estate owned.
The allowance for loan losses was $866,000 at June 30, 1997.
Charge-offs for the three months ended June 30, 1997 were $11,000, compared to
$2,000 for the three months ended June 30, 1996. Recoveries for the three months
ended June 30, 1997 were $2,000, compared to $3,000 for the three months ended
June 30, 1996.
37
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by category at June 30, 1997.
Loan Cateogory
as a Percent of
Amount Total Loans
(in thousands)
Real estate -- mortgage:
Residential........................... $133 60.69%
Nonresidential........................ 224 9.65
Construction.......................... 103 20.01
Consumer............................... 146 8.94
Commercial............................. 50 0.71
Unallocated............................ 210 --
--- ------
Total allowance for loan losses...... $866 100.00%
==== ======
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1997 AND MARCH 31, 1997
Total assets were $229.7 million at June 30, 1997, compared to $224.4
million at March 31, 1997. This increase resulted primarily from growth in the
loan portfolio, which was funded primarily by proceeds of maturing securities,
FHLB advances and retained earnings.
Loans receivable, net, were $154.3 million at June 30, 1997, compared
to $151.7 million at March 31, 1997, a 1.7% increase. Increases primarily in
one- to- four family mortgage loans, commercial real estate loans, commercial
business loans, and consumer loans contributed to the increase in loans
receivable, net. Commercial real estate, commercial business and consumer loans
have greater credit risk than one- to- four family mortgage loans. See "RISK
FACTORS -- Certain Lending Risks" and "BUSINESS OF THE SAVINGS BANK -- Lending
Activities."
Investment securities held-to-maturity were $17.4 million at June 30,
1997, compared to $20.5 million at March 31, 1997, as a result of maturities,
the proceeds of which were used to fund loan growth.
Mortgage-backed securities held-to-maturity were $24.9 million at June
30, 1997, compared to $26.4 million at March 31, 1997, as a result of
prepayments, the proceeds of which funded loan growth.
Cash decreased to $5.3 million at June 30, 1997 from $7.0 million at
March 31, 1997 as a result of deposit outflows.
Total deposits were $168.6 million at June 30, 1997, compared to $169.4
million at March 31, 1997. Management attributes this decrease primarily to the
withdrawal of funds by a regular savings depositor for the purpose of paying
personal income taxes.
FHLB advances increased to $32.6 million at June 30, 1997 from $27.2
million at March 31, 1997. Approximately $30.0 million of the outstanding
advances at June 30, 1997 and $20.0 million at March 31, 1997 were used to
purchase mortgage-backed securities, with the goal of recognizing income on the
difference between the rate paid on the advances and the rate earned on the
mortgage-backed securities. At June 30, 1997, $10.0 million of such
mortgage-backed securities were classified as available-for-sale and the
remainder were classified as held-to-maturity. At March 31, 1997, all such
mortgage-backed securities were classified as held-to-maturity. See "BUSINESS OF
THE SAVINGS BANK -- Investment Activities" and "-- Deposit Activities and Other
Sources of Funds -- Borrowings."
38
<PAGE>
Shareholders' equity increased to $25.8 million at June 30, 1997 from
$25.0 million at March 31, 1997 primarily because of growth in retained
earnings, less cash dividends of $61,000 paid to the Public Stockholders.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1997
AND 1996
NET INCOME. Net income was $745,000, or $0.31 per share, for the three
months ended June 30, 1997, compared to $635,000, or $0.27 per share, for the
three months ended June 30, 1996. Earnings per share information has been
retroactively adjusted for stock dividends paid. The increase in net income was
primarily attributable to an increase in net interest income, offset by an
increase in noninterest expenses.
NET INTEREST INCOME. Net interest income increased $327,000 to $2.4
million for the three months ended June 30, 1997, compared to $2.0 million for
the three months ended June 30, 1996. The increased net interest income resulted
primarily from the increase in the average balance of net loans to $153.0
million for the three months ended June 30, 1997 compared to $132.0 million for
the three months ended June 30, 1996. Net interest margin for the three months
ended June 30, 1997 rose to 4.38% from 4.06% for the three months ended June 30,
1996.
INTEREST INCOME. Interest income totalled $4.6 million and $4.2 million
for the three months ended June 30, 1997 and 1996, respectively. Average
interest-earning assets increased 7.6% to $216.9 million for the three months
ended June 30, 1997, compared to $201.6 million for the three months ended June
30, 1996, and the yield on all interest-earning assets increased to 8.09% from
7.82% for the three months ended June 30, 1997 and 1996, respectively. The
increase in average yield was primarily a result of a higher proportion of loans
in portfolio, which tend to have higher yields than securities. The proportion
of loans-to-assets at June 30, 1997 was 67.2% compared to 63.5% at June 30,
1996.
INTEREST EXPENSE. Interest expense for the three months ended June 30,
1997 totalled $2.3 million, a $84,000, or 3.9%, increase from $2.2 million for
the three months ended June 30, 1996. The increase was primarily a result of an
increase in the average balance of deposits from $158.7 million for the three
months ended June 30, 1996 to $169.0 million for the three months ended June 30,
1997, as a result of growth (unaffected by any special promotions) in all
deposit categories other than passbook savings accounts. The average cost on
other interest-bearing liabilities (primarily FHLB advances) was 6.30% for the
three months ended June 30, 1997, compared 6.58% for the three months ended June
30, 1996, as a result of maturing of advances and new advances at lower interest
rates, while the average balance of FHLB advances increased to $29.9 million for
the three months ended June 30, 1997 from $27.4 million for the three months
ended June 30, 1996 to fund loan growth.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $45,000
for both the three months ended June 30, 1997 and 1996. The allowance for loan
losses at June 30, 1997 was $866,000, or 0.51% of total loans receivable,
compared to $699,000, or 0.47%, at June 30, 1996. At June 30, 1997, management
deemed the allowance for loan losses adequate at that date. See "BUSINESS OF THE
SAVINGS BANK -- Lending Activities -- Allowance for Loan Losses." Nonperforming
assets totalled $311,000, or 0.14%, of total assets, at June 30, 1997, compared
to $461,000, or 0.22%, at June 30, 1996. See "BUSINESS OF THE SAVINGS BANK --
Lending Activities -- Nonperforming Assets."
NONINTEREST INCOME. The Savings Bank's principal sources of noninterest
income include loan fees, deposit service charges, and net gains on the sale of
loans and securities available-for-sale. Noninterest income, excluding gains on
sales of assets, was $446,000 for the three months ended June 30, 1997, compared
to $423,000 for the three months ended June 30, 1996. This $23,000 increase was
primarily the result of increased deposit account service charges attributable
to increased numbers of accounts and increased loan origination fees
attributable to higher volume of brokered loans.
39
<PAGE>
NONINTEREST EXPENSE. Noninterest expense increased by $189,000 to $1.7
million for the three months ended June 30, 1997, compared to $1.5 million for
the three months ended June 30, 1996, primarily as a result of additional salary
and employee benefits expense attributable to the hiring of nine full-time
equivalent employees.
PROVISION FOR INCOME TAXES. Provision for income taxes was $390,000 for
the three months ended June 30, 1997, compared to $330,000 for the three months
June 30, 1996 as a result of higher income before income taxes. The effective
tax rate was approximately 34% for both periods.
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as a Washington business corporation
at the direction of the Savings Bank on June 23, 1997 for the purpose of
becoming a holding company for the Savings Bank upon completion of the
Conversion and Reorganization. As a result of the Conversion and Reorganization,
the Savings Bank will be a wholly-owned subsidiary of the Holding Company and
all of the issued and outstanding capital stock of the Savings Bank will be
owned by the Holding Company.
BUSINESS
Prior to the Conversion and Reorganization, the Holding Company has not
and will not engage in any significant activities other than of an
organizational nature. Upon completion of the Conversion and Reorganization, the
Holding Company's primary business activity will be the ownership of the
outstanding capital stock of the Savings Bank. In the future, the Holding
Company may acquire or organize other operating subsidiaries, although there are
no current plans, arrangements, agreements or understandings, written or oral,
to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Savings Bank
with the payment of appropriate rental fees, as required by applicable law and
regulations.
Since the Holding Company will only hold the outstanding capital stock
of the Savings Bank upon consummation of the Conversion and Reorganization, the
competitive conditions applicable to the Holding Company will be the same as
those confronting the Savings Bank. See "BUSINESS OF THE SAVINGS BANK --
Competition."
BUSINESS OF THE SAVINGS BANK
GENERAL
The Savings Bank operates, and intends to continue to operate, as a
community oriented financial institution and is devoted to serving the needs of
its customers. The Savings Bank's business consists primarily of attracting
retail deposits from the general public and using those funds to originate real
estate loans. See "-- Lending Activities."
MARKET AREA
The Savings Bank conducts operations from its home office in Camas and
eight branch offices in Washougal, Stevenson, White Salmon, Battle Ground,
Goldendale, Vancouver (2 branch offices) and Longview, Washington. The Savings
Bank's market area for lending and deposit taking activities encompasses Clark,
Cowlitz, Skamania and Klickitat Counties, throughout the Columbia River Gorge
area. Camas is located in Clark County which is approximately 15 miles east of
Portland, Oregon.
40
<PAGE>
Several businesses are located in the Camas area because of the
favorable tax structure and relatively lower energy costs as compared to Oregon.
Washington has no state income tax and Clark County operates a public electric
utility which provides relatively lower cost electricity than does Oregon.
Located in the Camas area are Sharp Electronics, Hewlett Packard, James River,
Underwriters Laboratory and Wafer Tech, as well as several support industries.
In addition to this industrial base, the Columbia River Gorge Scenic Area has
been a source of tourism which has transformed the area from its past dependence
on the timber industry. The primary tourist destination of the Gorge area is the
Skamania Lodge, a $25 million resort complex opened in 1993. In addition, the
Hood River, Oregon, area has become internationally renowned for windsurfing and
has attracted young professionals, many of whom have purchased second residences
in the area.
The Savings Bank faces strong competition from many financial
institutions for deposits and loan originations. See "-- Competition" and "RISK
FACTORS -- Competition."
LENDING ACTIVITIES
GENERAL. At March 31, 1997, the Savings Bank's total net loans
receivable amounted to $151.8 million, or 67.6% of total assets at that date.
The principal lending activity of the Savings Bank is the origination of
residential mortgage loans through its mortgage banking activities, including
residential construction loans, though the Savings Bank has originated loans
collateralized by commercial properties. The Savings Bank, to a lesser extent,
also makes consumer loans and has made commercial business loans. A substantial
portion of the Savings Bank's loan portfolio is secured by real estate, either
as primary or secondary collateral, located in its primary market area.
See "RISK FACTORS -- Certain Lending Risks -- Concentration of Credit Risk."
41
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995
------------------------- ------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
One-to-four family(1).................. $ 94,536 62.29% $ 88,140 68.77% $ 73,047 70.39%
Multi-family........................... 5,439 3.58 2,958 2.31 2,048 1.97
Construction one-to-four family........ 32,529 21.43 22,596 17.63 20,822 20.07
Construction multi-family.............. 547 0.36 361 0.28 -- --
Construction commercial................ 634 0.42 500 0.39 344 0.33
Land................................... 7,900 5.21 7,546 5.89 5,226 5.04
Commercial real estate ................ 8,997 5.93 6,518 5.08 5,335 5.14
-------- ------ -------- ------ -------- -------
Total real estate loans............. 150,582 99.21 128,619 100.35 106,822 102.94
Commercial business..................... 794 0.53 969 0.76 925 0.89
Consumer loans:
Automobile loans....................... 2,889 1.90 2,384 1.86 1,623 1.56
Savings account loans.................. 734 0.48 613 0.48 480 0.46
Home equity loans...................... 8,254 5.44 5,107 3.99 1,743 1.68
Other consumer loans................... 2,416 1.59 1,695 1.32 1,448 1.40
-------- ------ ------- ------ -------- -------
Total consumer loans................ 14,293 9.41 9,799 7.65 5,294 5.10
-------- ------ ------- ------ -------- -------
Total loans and loans held for sale..... 165,669 139,387 113,041
Less:
Undisbursed loans in process........... 11,087 7.30 8,876 6.93 7,098 6.84
Unamortized loan origination fees,
net of direct costs................... 1,967 1.30 1,678 1.31 1,502 1.45
Unearned discounts..................... 10 0.01 11 0.01 12 0.01
Allowance for possible loan losses..... 831 0.55 653 0.51 657 0.63
-------- ------ --------- ------- --------- -------
Total loans receivable, net(1).......... $151,774 100.00% $128,169 100.00% $103,772 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1994 1993
------------------------ ------------------
Amount Percent Amount Percent
Real estate loans:
<S> <C> <C> <C> <C>
One-to-four family(1).................. $64,068 70.51% $57,254 68.52%
Multi-family........................... 1,350 1.49 2,688 3.22
Construction one-to-four family........ 25,280 27.82 19,571 23.42
Construction multi-family.............. -- -- -- --
Construction commercial................ -- -- -- --
Land................................... 2,870 3.16 2,338 2.80
Commercial real estate ................ 6,238 6.87 7,187 8.60
-------- ------- -------- -------
Total real estate loans............. 99,806 109.85 89,038 106.56
Commercial business..................... 803 0.88 972 1.16
Consumer loans:
Automobile loans....................... 1,510 1.66 1,561 1.87
Savings account loans.................. 449 0.49 561 0.67
Home equity loans...................... -- -- -- --
Other consumer loans................... 1,358 1.50 1,385 1.66
------- ------- -------- -------
Total consumer loans................ 3,317 3.65 3,507 4.20
------- ------- -------- -------
Total loans and loans held for sale..... 103,926 93,517
Less:
Undisbursed loans in process........... 10,917 12.02 8,209 9.82
Unamortized loan origination fees,
net of direct costs................... 1,502 1.65 1,206 1.44
Unearned discounts..................... -- -- 33 0.04
Allowance for possible loan losses..... 647 0.71 515 0.62
-------- ------- -------- -------
Total loans receivable, net(1).......... $90,860 100.00% $83,554 100.00%
======= ====== ======= ======
</TABLE>
(1) Includes loans held for sale of $80,000, $1.9 million, $247,000, $4.5
million and $10.7 million at March 31, 1997, 1996, 1995, 1994 and 1993,
respectively.
42
<PAGE>
ONE- TO- FOUR FAMILY REAL ESTATE LENDING. Historically, the Savings
Bank's primary lending activity has been the origination of mortgage loans to
enable borrowers to purchase one- to- four family properties. At March 31, 1997,
approximately $94.5 million, or 62.3% of total net loans receivable, consisted
of loans secured by one- to four-family residential real estate. One- to- four
family mortgage loans accounted for $67.9 million, or 79.3% of total loan
originations, for the year ended March 31, 1997.
In addition to originating one- to- four family loans for its
portfolio, the Savings Bank is an active mortgage broker for several third party
mortgage lenders. In recent periods, such mortgage brokerage activities have
reduced the volume of fixed-rate one- to- four family loans that are originated
and sold by the Savings Bank. See "-- Loan Originations, Sales and Purchases"
and "-- Mortgage Brokerage."
The Savings Bank originates both fixed-rate mortgage loans and ARM
loans secured by one- to-four family properties. Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates,
the expectations of changes in the level of interest rates and the difference
between the interest rates and loan fees offered for fixed-rate mortgage loans
and the first year interest rates and loan fees for ARM loans. The relative
amount of fixed-rate mortgage loans and ARM loans that can be originated at any
time is largely determined by the demand for each in a competitive environment.
The Savings Bank originates fixed-rate mortgage loans for terms of 15
to 30 years as well as balloon mortgage loans with terms of either five or seven
years. The interest rates on the balloon mortgage loans are adjusted after the
expiration of the initial balloon term. Fixed rate mortgage loans are generally
originated to conform to standards that allow them to be sold in the secondary
mortgage market. The Savings Bank generally sells fixed-rate mortgage loans with
maturities of 15 years or more to the Federal Home Loan Mortgage Corporation
("FHLMC"), servicing retained. See "-- Lending Activities -- Loan Originations,
Sales and Purchases" and "-- Lending Activities -- Mortgage Loans Servicing."
The Savings Bank offers ARM loans at rates and terms competitive with
market conditions. At March 31, 1997, $59.6 million, or 46.9%, of the Savings
Bank's one- to- four family loan portfolio consisted of ARM loans. ARM loans are
originated with interest rates and payments that adjust annually based on a rate
equal to 2.75% to 3.75% above the prevailing rate on the one-year constant
maturity U.S. Treasury Bill Index.
At March 31, 1997, the Savings Bank charged an origination fee on ARM
loans ranging from 1% to 3% of the loan principal amount and an initial interest
rate that ranged from 6.25% to 7.25% per annum. The annual interest rate cap
(the maximum amount by which the interest rate may be increased per year) on ARM
loans is generally 2% and the lifetime interest rate cap is generally 5% to 6%
over the initial interest rate. The Savings Bank does not originate negative
amortization loans.
As a marketing incentive, the Savings Bank offers ARM loans with a
discounted or "teaser" rate of up to 2% below the normal rate offered. The
borrower, however, is qualified at the fully indexed rate. Annual and lifetime
interest rate caps are based on the initial discounted rate. "Teaser" rate loans
are subject to prepayment penalty during the first three years of the loan term
if the borrower repays more than 20% of the outstanding principal balance per
year. During the first year, the penalty is 3% of the outstanding principal
balance; during year two, it is 2% of the outstanding principal balance; and
during year three, it is 1% of the outstanding principal balance.
The retention of ARM loans in the portfolio helps reduce the Savings
Bank's exposure to changes in interest rates. There are, however, unquantifiable
credit risks resulting from the potential of increased costs arising from
changed rates to be paid by the customer. It is possible that during periods of
rising interest rates the risk of default on ARM loans may increase as a result
of repricing and the increased costs to the borrower. Furthermore, because
"teaser" rate loans originated by the Savings Bank generally provide for initial
rates of interest below the rates which would apply were the adjustment index
used for pricing initially (discounting), these loans are subject to increased
risks of default of delinquency. Another consideration is that although ARM
loans allow the Savings Bank to
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<PAGE>
increase the sensitivity of its asset base to changes in interest rates, the
extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limits. Because of these considerations, the Savings
Bank has no assurance that yields on ARM loans will be sufficient to offset
increases in its cost of funds.
While one- to- four family residential real estate loans typically are
originated with 30-year terms and the Savings Bank permits its ARM loans to be
assumed by qualified borrowers, such loans generally remain outstanding for
substantially shorter periods because borrowers often prepay their loans in full
upon sale of the property pledged as security or upon refinancing the original
loan. In addition, substantially all of the fixed interest rate loans in the
Savings Bank's loan portfolio contain due-on-sale clauses providing that the
Savings Bank may declare the unpaid amount due and payable upon the sale of the
property securing the loan. The Savings Bank enforces these due-on-sale clauses
to the extent permitted by law. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the real estate
market, prevailing interest rates and the interest rates payable on outstanding
loans.
The Savings Bank requires title insurance insuring the status of its
lien on all of the real estate secured loans and also requires that the fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance and the
replacement cost of the improvements. Where the value of the unimproved real
estate exceeds the amount of the loan on the real estate, the Savings Bank may
make exceptions to its property insurance requirements.
The Savings Bank generally does not make conventional loans with
loan-to-value ratios exceeding 80% and makes loans with a loan-to-value ratio in
excess of 80% only when secured by first liens on owner-occupied one-to-four
family residences. On loans with loan-to-value ratios in excess of 80%, the
Savings Bank requires private mortgage insurance ("PMI"), with coverage ranging
from 12% to 25% of the appraised value of the property or the amount required by
the FHLMC, depending on the loan-to-value ratio. Loans with loan-to-value ratios
in excess of 80% must have a mortgage escrow account from which disbursements
are made for real estate taxes, hazard and flood insurance and PMI.
CONSTRUCTION LENDING. Prompted by favorable economic conditions,
including a favorable long term interest rate environment, and increased
residential housing demand in its primary market area, the Savings Bank actively
originates three types of residential construction loans: (i) speculative
construction loans, (ii) custom construction loans and (iii)
construction/permanent loans. Annual originations of residential construction
loans have increased from $33.6 million during the year ended March 31, 1995 to
$43.9 million during the year ended March 31, 1997. Subject to market
conditions, the Savings Bank intends to increase its residential construction
lending activities. See "RISK FACTORS -- Certain Lending Risks." To a
substantially lesser extent, the Savings bank also originates construction loans
for the development of multi-family and commercial properties.
At March 31, 1997, the composition of the Savings Bank's construction
loan portfolio was as follows:
Outstanding Percent of
Balance(1) Total
(In thousands)
Speculative construction............ $16,814 49.9%
Custom construction................. 6,658 19.7
Construction/permanent.............. 10,238 30.4
-------- ------
Total............................. $33,710 100.0%
======= =====
- --------------------
(1) Includes loans in process.
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<PAGE>
Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Savings Bank or another lender for the
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to debt service
the speculative construction loan and finance real estate taxes and other
carrying costs of the completed home for a significant time after the completion
of construction until the home buyer is identified. The Savings Bank lends to
approximately 50 local builders, many of whom may have only one or two
speculative loans outstanding from the Savings Bank. The Savings Bank considers
approximately 20 builders as core borrowers with several speculative loans
outstanding at any one time. Rather than originating lines of credit to home
builders to construct several homes at once, the Savings Bank originates and
underwrites a separate loan for each home. Speculative construction loans are
originated for a term of 12 months, with interest rates ranging from 1.5% to
2.0% above the prime lending rate, and with a loan-to-value ratio of no more
than 80% of the appraised estimated value of the completed property. At March
31, 1997, the Savings Bank had four borrowers each with aggregate outstanding
speculative loan balances of more than $700,000, all of which were performing
according to their respective terms and the largest of which amounted to $1.2
million.
Unlike speculative construction loans, custom construction loans are
made to home builders who, at the time of construction, have a signed contract
with a home buyer who has a commitment for permanent financing for the finished
home with the Savings Bank or another lender. Custom construction loans are
generally originated for a term of 12 months, with fixed interest rates ranging
from 7.75% to 8.25%, and with loan-to-value ratios of 80% of the appraised
estimated value of the completed property or cost, whichever is less. At March
31, 1997, the largest outstanding custom construction loan had an outstanding
balance of $457,000 and was performing according to its terms.
Construction/permanent loans are originated to the home owner rather
than the home builder along with a commitment by the Savings Bank to originate a
permanent loan to the home owner to repay the construction loan at the
completion of construction. The construction phase of a construction/permanent
loan generally lasts six months and the interest rate charged is generally 6.25%
to 8.75%, fixed, and with loan-to-value ratios of 80% (or up to 95% with PMI) of
the appraised estimated value of the completed property or cost, whichever is
less. At the completion of construction, the Savings Bank may either originate a
fixed-rate mortgage loan or an ARM loan for retention in its portfolio or use
its mortgage brokerage capabilities to obtain permanent financing for the
customer with another lender. See "-- Mortgage Brokerage." When the Savings Bank
issues a commitment to provide permanent financing upon completion of
construction, the interest rate charged on the construction loan generally
includes an additional 0.375% to 0.625% as a protection against the risk of an
increase in interest rates before the permanent loan is funded. See "-- Lending
Activities -- Loan Originations and Sales" and "-- Lending Activities --
Mortgage Loan Servicing." At March 31, 1997, the largest outstanding
construction/permanent loan had an outstanding balance of $340,000 and was
performing according to its terms.
To a substantially lesser extent, the Savings Bank also provides
construction financing for non-residential properties (i.e., multi-family and
commercial properties). At March 31, 1997, such construction loans amounted to
$1.2 million.
All construction loans must be approved by the Savings Bank's Loan
Committee. See "-- Loan Solicitation and Processing." Prior to preliminary
approval of any construction loan application, an independent fee appraiser
inspects the site and the Savings Bank reviews the existing or proposed
improvements, identifies the market for the proposed project, analyzes the pro
forma data and assumptions on the project. In the case of a speculative or
custom construction loan, the Savings Bank reviews the experience and expertise
of the builder. After preliminary approval has been given, the application is
processed, which includes obtaining credit reports, financial statements and tax
returns on the borrowers and guarantors, an independent appraisal of the
project, and any other expert reports necessary to evaluate the proposed
project. In the event of cost overruns, the Savings Bank requires that the
borrower increase the loan amount by depositing its own funds into a loans in
process account and the Savings Bank disburses additional loan proceeds
consistent with the original loan-to-value ratio.
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<PAGE>
The construction loan documents require that construction loan proceeds
be disbursed in increments as construction progresses. Disbursements are based
on periodic on-site inspections by independent fee inspectors and Savings Bank
personnel. At inception, the Savings Bank also requires borrowers to deposit
funds to the loans-in-process account covering the difference between the actual
cost of construction and the loan amount. The Savings Bank regularly monitors
the construction loan portfolio and the economic conditions and housing
inventory. Property inspections are performed by the Savings Bank's property
inspector. The Savings Bank believes that the internal monitoring system helps
reduce many of the risks inherent in its construction lending.
Construction lending affords the Savings Bank the opportunity to
achieve higher interest rates and fees with shorter terms to maturity than does
its single-family permanent mortgage lending. Construction lending, however, is
generally considered to involve a higher degree of risk than single-family
permanent mortgage lending because of the inherent difficulty in estimating both
a property's value at completion of the project and the estimated cost of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor. If the estimate of construction cost proves
to be inaccurate, the Savings Bank may be required to advance funds beyond the
amount originally committed to permit completion of the project. If the estimate
of value upon completion proves to be inaccurate, the Savings Bank may be
confronted with a project whose value is insufficient to assure full repayment.
Projects may also be jeopardized by disagreements between borrowers and builders
and by the failure of builders to pay subcontractors. Loans to builders to
construct homes for which no purchaser has been identified carry more risk
because the payoff for the loan depends on the builder's ability to sell the
property prior to the time that the construction loan is due. The Savings Bank
has sought to address these risks by adhering to strict underwriting policies,
disbursement procedures, and monitoring practices. In addition, because the
Savings Bank's construction lending is in its primary market area, changes in
the local economy and real estate market could adversely affect the Savings
Bank's construction loan portfolio.
MULTI-FAMILY LENDING. At March 31, 1997, the Savings Bank had $5.4
million, or 3.6% of the Savings Bank's total net loans receivable, secured by
multi-family dwelling units (more than four units) located primarily in the
Savings Bank's primary market area. Subject to market conditions, the Savings
Bank intends to become a more active originator of multi-family loans within its
primary market area.
Multi-family loans are generally originated with variable rates of
interest equal to 3.75% over the one-year constant maturity U.S. Treasury Bill
Index, with principal and interest payments fully amortizing over terms of up to
25 years. Multi-family loans generally range in principal balance from $200,000
to $400,000. At March 31, 1997, the largest multi-family loan had an outstanding
principal balance of $1.3 million and was secured by an 18- unit adult assisted
living center located in the Savings Bank's primary market area. At March 31,
1997, this loan was performing according to its terms.
The maximum loan-to-value ratio for multi-family loans is generally
75%. The Savings Bank requires its multi-family loan borrowers to submit
financial statements and rent rolls on the subject property annually. The
Savings Bank also inspects the subject property annually.
Multi-family mortgage lending affords the Savings Bank an opportunity
to receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Savings Bank seeks to minimize these
risks by strictly scrutinizing the financial condition of the borrower, the
quality of the collateral and the management of the property securing the loan.
The Savings Bank also generally obtains personal guarantees from financially
capable parties based on a review of personal financial statements.
LAND LENDING. The Savings Bank originates loans to local real estate
developers with whom it has established relationships for the purpose of
developing residential subdivisions (i.e., installing roads, sewers, water
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<PAGE>
and other utilities), as well as loans to individuals to purchase building lots.
At March 31, 1997, subdivision development loans totalled $2.4 million, or 1.6%
of total net loans receivable, and building lot loans amounted to $5.5 million,
or 3.6% of the total net loans receivable. Land loans are secured by a lien on
the property and made for a period of five years with an interest rate that
adjusts with the prime rate, and are made with loan-to-value ratios not
exceeding 75%. Monthly interest payments are required during the term of the
loan. Subdivision loans are structured so that the Savings Bank is repaid in
full upon the sale by the borrower of approximately 90% of the subdivision lots.
All of the Savings Bank's land loans are secured by property located in its
primary market area. In addition, the Savings Bank also generally obtains
personal guarantees from financially capable parties based on a review of
personal financial statements. At March 31, 1997, the Savings Bank had no
nonaccruing land loans.
Loans secured by undeveloped land or improved lots involve greater
risks than one- to- four family residential mortgage loans because such loans
are advanced upon the predicted future value of the developed property. If the
estimate of such future value proves to be inaccurate, in the event of default
and foreclosure the Savings Bank may be confronted with a property the value of
which is insufficient to assure full repayment. The Savings Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on land loans to
60% of the estimated developed value of the secured property. Loans on raw land
may run the risk of adverse zoning changes, environmental or other restrictions
on future use.
COMMERCIAL REAL ESTATE LENDING. Commercial real estate loans totalled
$9.6 million, or 6.3% of total net loans receivable at March 31, 1997. The
Savings Bank originates commercial real estate loans generally at variable
interest rates and secured by properties, such as office buildings,
retail/wholesale facilities and industrial buildings, located in its primary
market area. The principal balance of an average commercial real estate loan
generally ranges between $300,000 and $500,000. At March 31, 1997, the largest
commercial real estate loan had an outstanding balance of $897,000 and is
secured by a mobile home park located in the Savings Bank's primary market area.
Such loan was performing according to its terms at March 31, 1997.
The Savings Bank requires appraisals of all properties securing
commercial real estate loans. Appraisals are performed by an independent
appraiser designated by the Savings Bank, all of which are reviewed by
management. The Savings Bank considers the quality and location of the real
estate, the credit of the borrower, the cash flow of the project and the quality
of management involved with the property. The Savings Bank generally imposes a
debt to income ratio of approximately 33% for originated loans secured by income
producing properties. Loan-to-value ratios on commercial real estate loans are
generally limited to 75%. The Savings Bank generally obtains loan guarantees
from financially capable parties based on a review of personal financial
statements.
Commercial real estate lending affords the Savings Bank an opportunity
to receive interest at rates higher than those generally available from one- to-
four family residential lending. However, loans secured by such properties
usually are greater in amount, more difficult to evaluate and monitor and,
therefore, involve a greater degree of risk than one- to- four family
residential mortgage loans. Because payments on loans secured by commercial
properties often depend upon the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy. The Savings Bank seeks to minimize these
risks by limiting the maximum loan-to-value ratio to 75% and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan.
COMMERCIAL BUSINESS LENDING. The Savings Bank engages in limited
amounts of commercial business lending. At March 31, 1997, commercial business
loans amounted to $794,000, or 0.5% of total net loans receivable. Commercial
business loans are generally made to customers who are well known to the Savings
Bank and are generally secured by business equipment and are made at variable
rates of interest equal to a negotiated margin above the prime rate. The Savings
Bank also generally obtains personal guarantees from financially capable parties
based on a review of personal financial statements.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending
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<PAGE>
is generally considered to be collateral based lending with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans are often collateralized
by equipment, inventory, accounts receivable or other business assets, the
liquidation of collateral in the event of a borrower default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other things. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment.
CONSUMER LENDING. The Savings Bank originates a variety of consumer
loans, including home equity lines of credit, home improvement loans, loans for
debt consolidation and other purposes, automobile and boat loans and savings
account loans. At March 31, 1997, consumer loans totalled $14.3 million, or 9.4%
of total net loans receivable.
Home equity lines of credit, which are secured by a second mortgage on
the borrower's primary residence, are a large and growing portion of the
consumer loan portfolio. The Savings Bank has actively marketed home equity
lines of credit with television advertising and intends to continue to do so
subject to market conditions. At March 31, 1997, approved home equity lines of
credit totalled $9.5 million, of which $6.9 million was outstanding. Home equity
lines of credit are made at loan-to-value ratios of 90% or less, taking into
consideration the outstanding balance on the first mortgage on the property.
Lines of credit with a loan to value ratio of 80% or less are made at variable
interest rates equal to 2% above the rate on the three-year U.S. Treasury Bill
with a maximum annual interest rate adjustment of 2% and a maximum lifetime
interest rate adjustment of 8%, with an interest rate not to exceed 16%.
Otherwise, the rate is 3% above the rate on the three-year U.S. Treasury Bill
with an annual interest rate adjustment of 3% and a maximum lifetime interest
rate adjustment of 9%, with an interest rate not to exceed 16%.
The Savings Bank also originates fully amortizing second mortgage loans
for terms up to ten years with generally fixed interest rates, and with
loan-to-value ratios of more than 80% (taking into account any outstanding first
mortgage loan balance). At March 31, 1997, such second mortgage loans amounted
to $1.4 million.
The Savings Bank's procedures for underwriting consumer loans include
an assessment of the applicant's payment history on other debts and ability to
meet existing obligations and payments on the proposed loans. Although the
applicant's creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, to the
proposed loan amount.
Consumer loans generally entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans that are unsecured or
secured by assets that depreciate rapidly, such as mobile homes, automobiles,
boats and recreational vehicles. In such cases, repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also give rise to
claims and defenses by the borrower against the Savings Bank as the holder of
the loan, and a borrower may be able to assert claims and defenses which it has
against the seller of the underlying collateral. The Savings Bank adds a general
provision to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
LOAN MATURITY AND REPRICING. The following table sets forth certain
information at March 31, 1997 regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity, but
does not include potential prepayments. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
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<PAGE>
Loan balances do not include unearned discounts, unearned income and allowance
for loan losses.
<TABLE>
<CAPTION>
After One After 3 After 5
Within Year to Years to Years to Beyond
One Year 3 Years 5 Years 10 Years 10 Years Total
-------- --------- -------- -------- -------- -----
(In thousands)
Residential one- to-four family:
<S> <C> <C> <C> <C> <C> <C>
Adjustable-rate................ $ 846 $ 2,954 $ 1,555 $ 8,023 $46,185 $ 59,563
Fixed-rate..................... 6,627 4,975 6,593 12,661 36,566 67,422
Other residential and
all non-residential:
Adjustable-rate................ 157 549 289 1,490 8,579 11,064
Fixed-rate..................... 1,259 1,242 1,605 3,452 4,895 12,453
Consumer and commercial:
Adjustable-rate................ 652 424 278 92 6,101 7,547
Fixed-rate..................... 3,317 2,257 1,414 442 110 7,540
------ ------ ----- ------ ------ -------
Total gross loans............. $84,831 $10,358 $9,612 $16,836 $43,952 $165,589
======= ======= ====== ======= ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due one
year after March 31, 1997 which have fixed interest rates and have floating or
adjustable interest rates.
Fixed- Floating- or
Rates Adjustable-Rates
(In thousands)
Real estate mortgage:
One- to-four family.......................$60,795 $4,297
Other mortgage loans...................... 11,194 249
Consumer and commercial.................... 4,223 --
------ -----
Total....................................$76,212 $4,546
======= ======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare loans
immediately due and payable in the event, among other things, that the borrower
sells the real property. The average life of mortgage loans tends to increase,
however, when current mortgage loan market rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
market rates. Furthermore, management believes that a significant number of the
Savings Bank's residential mortgage loans are outstanding for a period less than
their contractual terms because of the transitory nature of many of the
borrowers who reside in its primary market area.
LOAN SOLICITATION AND PROCESSING. The Savings Bank's lending activities
are subject to the written, non-discriminatory, underwriting standards and loan
origination procedures established by the Board of Directors and management. The
customary sources of loan originations are realtors, walk-in customers,
referrals and existing customers. The Savings Bank also uses commissioned loan
brokers and television and print advertising to market its products and
services.
Upon receipt of a loan application, a credit report is ordered to
verify specific information relating to the loan applicant's employment, income
and credit standing. A loan applicant's income is verified through the
applicant's employer or from the applicant's tax returns. In the case of a real
estate loan, an appraisal of the real
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<PAGE>
estate intended to secure the proposed loan is undertaken, generally by an
independent appraiser approved by the Savings Bank. The Savings Bank's mortgage
loan documents conform to FHLMC standards.
Consumer loans are generally approved by individual loan officers and
authorized branch managers. Residential mortgage loans within the FHLMC lending
limit (currently $214,600) may be approved by the Vice President of Lending.
Residential mortgage loans in excess of this limit but not more than $350,000
and all other loans of $350,000 or less require the approval of the Vice
President of Lending and one other designated senior officer. All loans in
excess of $350,000 must be approved by the Executive Loan Committee consisting
of President Sheaffer and two other members of the Board of Directors. All loans
are subsequently ratified by the full Board of Directors.
The Savings Bank's policy requires borrowers to obtain certain types of
insurance to protect the Savings Bank's interest in the collateral securing the
loan. The Savings Bank requires either a title insurance policy insuring that
the Savings Bank has a valid first lien on the mortgaged real estate or an
opinion by an attorney regarding the validity of title. Fire and casualty
insurance and, if applicable, flood insurance, is also required on collateral
for loans. The Savings Bank requires escrows for insurance on all loans with a
loan-to-value exceeding 80%.
LOAN COMMITMENTS. The Savings Bank issues commitments for residential
mortgage loans conditioned upon the occurrence of certain events. Such
commitments are made in writing on specified terms and conditions and are
honored for up to 10 days from approval, depending on the type of transaction.
The Savings Bank had outstanding mortgage loan commitments of approximately $2.1
million at March 31, 1997. See Note 5 of Notes to Consolidated Financial
Statements.
LOAN ORIGINATIONS, SALES AND PURCHASES. While the Savings Bank
originates both adjustable-rate and fixed-rate loans, its ability to generate
each type of loan depends upon relative customer demand for loans in its primary
market area. During the years ended March 31, 1997 and 1996, the Savings Bank's
total loan originations were $85.7 million and $78.0 million, respectively, of
which 53.8% and 51.4%, respectively, were subject to periodic interest rate
adjustment and 46.2% and 48.6% were fixed-rate loans, respectively.
The Savings Bank customarily sells the fixed-rate loans that it
originates with maturities of 15 years or more to the FHLMC as part of its asset
liability strategy. The sale of such loans allows the Savings Bank to continue
to make loans during periods when savings flows decline or funds are not
otherwise available for lending purposes; however, the Savings Bank assumes an
increased risk if such loans cannot be sold in a rising interest rate
environment. Changes in the level of interest rates and the condition of the
local and national economies affect the amount of loans originated by the
Savings Bank and demanded by investors to whom the loans are sold. Generally,
the Savings Bank's loan origination and sale activity and, therefore, its
results of operations, may be adversely affected by an increasing interest rate
environment to the extent such environment results in decreased loan demand by
borrowers and/or investors. Accordingly, the volume of loan originations and the
profitability of this activity can vary significantly from period to period.
Mortgage loans are sold to the FHLMC on a nonrecourse basis whereby foreclosure
losses are generally the responsibility of the FHLMC and not the Savings Bank.
Between the time that origination commitments are issued and the time
the loans are sold, the Savings Bank is exposed to movements in the price (due
to changes in interest rates) of such loans (or of securities into which such
loans are sometimes converted). Differences between the volume or timing of
actual loan originations and in management's estimates or in actual sales of the
loans can expose the Savings Bank to significant losses. This activity is
managed daily. There can be no assurance that the Savings Bank will be
successful in its efforts to reduce the risk of interest rate fluctuation
between the time of origination of a mortgage loan and the time of the ultimate
sale of the loan. To the extent that the Savings Bank does not adequately manage
its interest rate risk, the Savings Bank may incur significant mark-to-market
losses or losses relating to the sale of such loans, adversely affecting
financial condition and results of operations.
The Savings Bank is not an active purchaser of loans.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended March 31,
1997 1996 1995
(In thousands)
Total net loans receivable at beginning of period..... $128,169 $103,772 $ 90,860
------- ------- -------
Loans originated:
<S> <C> <C> <C>
Residential one- to-four family...................... 24,039 26,397 16,115
Multi-family......................................... 479 790 869
Construction one- to-four family..................... 43,887 37,165 33,591
Construction other................................... 1,646 861 344
Land and non-residential............................. 9,983 8,250 3,839
Other loans.......................................... 5,617 4,548 2,099
-------- -------- ---------
Total loans originated............................. 85,651 78,011 56,857
-------- -------- ---------
Loans purchased....................................... -- -- 53
---------- ---------- ----------
Residential one- to-four family loans sold............ 6,943 7,661 7,962
-------- --------- ---------
Repayment of principal................................ 52,426 44,004 39,833
-------- --------- ---------
Increase (decrease) in loans in process............... (2,677) (1,949) 3,797
--------- ---------- ----------
Net increase in loans................................. 23,605 24,397 12,912
-------- --------- ----------
Total net loans receivable at end of period........... $151,774 $128,169 $103,772
======== ======== ========
</TABLE>
MORTGAGE BROKERAGE. In addition to originating mortgage loans for
retention in its portfolio, the Savings Bank employs three commissioned brokers
who originate mortgage loans (including construction loans) for various mortgage
companies predominately in the Portland and Seattle metropolitan areas, as well
as for the Savings Bank. The loans brokered to such mortgage companies are
closed in the name of and funded by the purchasing mortgage company and they are
not originated as an asset of the Savings Bank. In return, the Savings Bank
receives a fee ranging from 1% to 1.25% of the loan amount that it shares
equally with the commissioned broker. For loans brokered to the Savings Bank,
they are closed on the Savings Bank's books as if the Savings Bank had
originated them and the commissioned broker receives a fee of approximately
0.50% of the loan amount. During the year ended March 31, 1997, brokered loans
totalled $60.9 million (including $25.6 million brokered to the Savings Bank).
Gross fees of $394,000 (excluding the portion of fees shared with the
commissioned brokers) were recognized for the year ended March 31, 1997.
MORTGAGE LOAN SERVICING. The Savings Bank is a qualified servicer for
the FHLMC. The Savings Bank's general policy is to close its residential loans
on the FHLMC modified loan documents to facilitate future sales to the FHLMC.
The Savings Bank continues to collect payments on the loans, to supervise
foreclosure proceedings, if necessary, and otherwise to service the loans prior
to selling the servicing rights. The Savings Bank retains a portion of the
interest paid by the borrower on the loans as consideration for its servicing
activities.
The Savings Bank generally retains the servicing rights on the
fixed-rate mortgage loans that it sells to the FHLMC. At March 31, 1997, total
loans serviced for others were $98.8 million.
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<PAGE>
In 1994, the Savings Bank purchased the servicing rights to an
underlying portfolio of residential mortgage loans secured by properties
predominately located in the Seattle Metropolitan Area. At March 31, 1997, the
value of these purchased servicing rights was $402,000 and was being amortized
over the life of the underlying loan servicing.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements and Regulatory
Policies" for a discussion of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities."
LOAN ORIGINATION AND OTHER FEES. The Savings Bank generally receives
loan origination fees and discount "points." Loan fees and points are a
percentage of the principal amount of the mortgage loan that are charged to the
borrower for funding the loan. The Savings Bank usually charges origination fees
of 2% to 3% on one- to four-family residential real estate loans, long-term
commercial real estate loans and residential construction loans. Current
accounting standards require fees received for originating loans to be deferred
and amortized into interest income over the contractual life of the loan.
Deferred fees associated with loans that are sold are recognized as income at
the time of sale. The Savings Bank had $2.0 million of net deferred loan fees at
March 31, 1997. The Savings Bank also receives loan servicing fees on the loans
it sells and on which it retains the servicing rights.
DELINQUENCIES. The Savings Bank's collection procedures for all loans
except consumer loans provide for a series of contacts with delinquent
borrowers. A late charge delinquency notice is first sent to the borrower when
the loan becomes 17 days past due. A follow-up telephone call, or letter if the
borrower cannot be contacted by telephone, is made when the loan becomes 22 days
past due. A delinquency notice is sent to the borrower when the loan becomes 30
days past due. When payment becomes 60 days past due, a notice of default letter
is sent to the borrower stating that foreclosure proceedings will be commenced
unless the delinquency is cured. If a loan continues in a delinquent status for
90 days or more, the Savings Bank generally initiates foreclosure proceedings.
In certain instances, however, the Savings Bank may decide to modify the loan or
grant a limited moratorium on loan payments to enable the borrower to reorganize
their financial affairs.
A delinquent consumer loan borrower is contacted on the fifteenth day
of delinquency. A letter of intent to repossess collateral is mailed to the
borrower after the loan becomes 45 days past due and repossession proceedings
are initiated after the loan becomes 90 days delinquent.
NONPERFORMING ASSETS. Loans are reviewed regularly and when a loan
become 90 days delinquent, it is placed on nonaccrual status at which time the
accrual of interest ceases and the reserve for any unrecoverable accrued
interest is established and charged against operations. Typically, payments
received on a nonaccrual loan are applied to the outstanding principal and
interest as determined at the time of collection of the loan.
52
<PAGE>
The following table sets forth information with respect to the Savings
Bank's nonperforming assets at the dates indicated. At the dates indicated, the
Savings Bank had no restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
<S> <C> <C> <C> <C> <C>
Residential real estate.................... $76 $541 $239 $499 $ 518
Consumer................................... 11 7 1 1 52
---- ------ ----- ------ --------
Total.................................... 87 548 240 500 570
---- ----- ---- ----- --------
Accruing loans which are contractually
past due 90 days or more................... -- -- -- -- --
------ ------ ------ ------ -------
Total of nonaccrual and
90 days past due loans.................... 87 548 240 500 570
---- ----- ----- ----- -------
Real estate owned (net)..................... 135 -- -- -- 1,085
---- ------ ------ ------ -------
Total nonperforming assets............. $222 $548 $240 $500 $1,655
==== ==== ==== ==== ======
Total loans delinquent 90 days
or more to net loans...................... 0.06% 0.43% 0.23% 0.55% 0.68%
Total loans delinquent 90 days or
more to total assets...................... 0.04 0.26 0.13 0.38 0.49
Total nonperforming assets to total assets.. 0.10 0.26 0.13 0.38 1.41
</TABLE>
The Savings Bank does not accrue interest on loans over 90 days past
due. However, if interest on nonaccrual loans had been accrued, interest income
of approximately $1,000 would have been recorded for the year ended March 31,
1997. Income of approximately $7,000 was received and recorded on nonaccrual
loans for the year ended March 31, 1997.
ASSET CLASSIFICATION. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Savings Bank.
53
<PAGE>
The aggregate amount of the Savings Bank's classified assets, general
loss allowances and charge-offs were as follows at the dates indicated:
At or For the Year
Ended March 31,
1997 1996
---- ----
(In thousands)
Substandard assets......................... $346 $722
Doubtful assets............................ -- --
Loss assets................................ 150 150
General loss allowances.................... 681 503
Specific loss allowances................... 150 150
Charge-offs................................ 11 23
REAL ESTATE OWNED. Real estate properties acquired through foreclosure
or by deed-in-lieu of foreclosure are recorded at the lower of cost or fair
value less estimated costs of disposal. Valuations are periodically performed by
management and an allowance for losses is established by a charge to operations
if the carrying value exceeds the estimated net realizable value. At March 31,
1997, the Savings Bank had $135,000 of real estate owned and in judgment,
consisting of a one- to- four family residence. The original loan on the
property was originated as a speculative construction loan. Upon foreclosure,
the Savings Bank completed the construction. The property is under contract for
sale and the Savings Bank does not expect to incur a material loss on its sale.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank's management evaluates the
need to establish reserves against losses on loans and other assets each year
based on estimated losses on specific loans and on any real estate held for sale
or investment when a finding is made that a significant and permanent decline in
value has occurred. Such evaluation includes a review of all loans for which
full collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio quality.
These provisions for losses are charged against earnings in the year they are
established. At March 31, 1997, the Savings Bank had an allowance for loan
losses of $831,000, or 0.50% of total outstanding loans at that date. Based on
past experience and future expectations, management believes that loan loss
reserves are adequate.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses, therefore negatively affecting the Savings Bank's financial condition
and results of operations.
54
<PAGE>
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $653 $657 $647 $515 $687
--- --- ---- ---- ----
Provision for loan losses.................. 180 -- -- 200 187
Recoveries:
Residential real estate................... 1 8 3 15 --
Consumer.................................. 8 11 26 41 20
----- ----- ----- ----- -------
Total recoveries........................ 9 19 29 56 20
----- ----- ----- ----- -------
Charge-offs:
Residential real estate................... -- -- -- 39 --
Commercial real estate.................... -- -- -- -- 300
Consumer.................................. 11 23 19 85 79
----- ------ ----- ------ -----
Total charge-offs....................... 11 23 19 124 379
----- ------ ----- ------ -----
Net charge-offs (recoveries).......... 2 4 (10) 68 359
----- ------ ------ ------ -----
Balance at end of period................... $831 $653 $657 $647 $515
==== ==== ==== ==== ====
Ratio of allowance to total loans
outstanding at end of period.............. 0.50% 0.47% 0.58% 0.62% 0.55%
Ratio of net charge-offs (recoveries) to
average loans outstanding during period... 0.00 0.00 (0.01) 0.07 0.38
Ratio of allowance to total of nonaccrual
and 90 days past due loans................ 955.17 119.16 273.75 129.40 90.35
</TABLE>
55
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
--------------------- ------------------- ------------------- --------------------- ---------------------
Loan Loan Loan Loan Loan
Category Category Category Category Category
as a Percent as a Percent as a Percent as a Percent as a Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage
Residential............. $124 60.34% $115 65.35% $ 97 66.44% $ 84 62.95% $ 87 64.09%
Nonresidential.......... 224 10.20 225 10.09 170 9.34 146 8.76 151 10.19
Construction............ 103 20.35 58 16.83 53 18.72 60 24.33 35 20.93
Consumer.................. 153 8.13 98 7.03 63 4.68 43 3.19 63 3.75
Commercial................ 40 0.48 46 0.70 46 0.82 40 0.77 71 1.04
Unallocated............... 187 -- 111 -- 228 -- 274 -- 108 --
---- -------- ----- -------- ----- -------- ----- -------- ----- --------
Total allowance......... $831 100.00% $653 100.00% $657 100.00% $647 100.00% $515 100.00%
for loan losses ==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
56
<PAGE>
INVESTMENT ACTIVITIES
Savings institutions have authority to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the
applicable FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
such savings institutions may also invest a portion of their assets in
commercial paper, corporate debt securities and mutual funds, the assets of
which conform to the investments that federally chartered savings institutions
are otherwise authorized to make directly. Savings institutions are also
required to maintain minimum levels of liquid assets which vary from time to
time. See "REGULATION -- Federal Regulation of the Savings Bank -- Federal Home
Loan Bank System." The Savings Bank may decide to increase its liquidity above
the required levels depending upon the availability of funds and comparative
yields on investments in relation to return on loans.
Federal regulations require the Savings Bank to maintain a minimum
amount of liquid assets and to make certain other securities investments. See
"REGULATION." The balance of the Savings Bank's investments in short-term
securities in excess of regulatory requirements reflects management's response
to the significantly increasing percentage of deposits with short maturities. At
March 31, 1997, the Savings Bank's short- and long-term regulatory liquidity
ratios were 8.3% and 18.0%, respectively, which exceeded regulatory
requirements. It is the intention of management to hold securities with short
maturities in the Savings Bank's investment portfolio in order to enable the
Savings Bank to match more closely the interest-rate sensitivities of its assets
and liabilities.
Investment decisions are made by the Investment Committee composed of
the Chief Executive Officer and Chief Financial Officer. The Savings Bank's
investment objectives are: (i) to provide and maintain liquidity within
regulatory guidelines; (ii) to maintain a balance of high quality, diversified
investments to minimize risk; (iii) to provide collateral for pledging
requirements; (iv) to serve as a balance to earnings; and (v) to optimize
returns. At March 31, 1997, the Savings Bank's investment and mortgage-backed
securities portfolio totalled approximately $53.7 million and consisted
primarily of obligations of the U.S. Government and agency obligations and
Federal National Mortgage Association ("FNMA") and FHLMC mortgage-backed
securities.
At March 31, 1997, the Savings Bank's investment securities portfolio
did not contain any tax-exempt securities or securities of any issuer with an
aggregate book value in excess of 10% of the Savings Bank's consolidated
shareholders' equity, excluding those securities issued by the U.S. Government
or its agencies.
The Board of Directors sets the investment policy of the Savings Bank
which dictates that investments be made based on the safety of the principal
amount, liquidity requirements of the Savings Bank and the return on the
investments. At March 31, 1997, no investment securities were held for trading.
The policy does not permit investment in non-investment grade bonds and permits
investment in various types of liquid assets permissible under OTS regulation,
which includes U.S. Treasury obligations, securities of various federal
agencies, "bank qualified" municipal bonds, certain certificates of deposits of
insured banks, repurchase agreements and federal funds.
The Savings Bank has adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which requires the classification of
securities at acquisition into one of three categories: held to maturity,
available for sale, or trading. See Note 1 of Notes to Consolidated Financial
Statements.
57
<PAGE>
The following table sets forth the investment securities portfolio and
carrying values at the dates indicated. The market value of the investment and
mortgage-backed securities portfolio was $53.8 million, $64.6 million, $67.9
million, $28.4 million and $20.1 million and at March 31, 1997, 1996, 1995, 1994
and 1993, respectively.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995
----------------------- ----------------------------- ------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY (AT AMORTIZED COST):
U. S. Government treasury obligations..... $7,989 14.86% $11,987 18.72% $11,987 17.45%
FNMA debentures........................... 2,000 3.72 4,005 6.25 6,004 8.74
FHLB debentures........................... 10,467 19.47 10,737 16.77 10,011 14.57
FHLMC debentures.......................... -- -- 3,000 4.68 7,765 18.31
Student Loan Marketing Association
("SLMA") debentures...................... -- -- -- -- 1,000 1.46
Real estate mortgage investment
conduits ("REMICs")...................... 6,641 12.36 5,108 7.98 -- --
FHLMC mortgage-backed securities.......... 6,800 12.65 9,030 14.10 14,919 21.72
FNMA mortgage-backed securities........... 12,961 24.12 14,237 22.23 17,003 24.75
------ ----- ------ ----- ------ ------
$46,858 87.18 $58,104 90.73 $68,689
------- ----- ------- ----- -------
AVAILABLE FOR SALE (AT MARKET VALUE):
U.S. Government treasury obligations...... 2,924 5.44 992 1.55 -- --
FHLB debentures........................... 975 1.82 2,940 4.59 -- --
REMICs.................................... 1,903 3.54 2,004 3.13 -- --
FHLMC mortgage-backed securities.......... 1,087 2.02 -- -- -- --
------- ---- ------- -- ------- --
Total investment securities.............. $53,747 100.00% $64,040 100.00% $68,689 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1994 1993
----------------------------- ------------------------
Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio
<S> <C> <C> <C> <C>
HELD TO MATURITY (AT AMORTIZED COST):
U. S. Government treasury obligations..... $ 8,088 72.94% $6,103 30.21%
FNMA debentures........................... 2,000 18.04 3,000 14.85
FHLB debentures........................... -- -- -- --
FHLMC debentures.......................... -- -- -- --
Student Loan Marketing Association
("SLMA") debentures...................... 1,000 3.54 -- --
Real estate mortgage investment
conduits ("REMICs")...................... -- -- -- --
FHLMC mortgage-backed securities.......... 9,060 32.03 10,676 52.85
FNMA mortgage-backed securities........... 8,136 28.76 421 2.09
------ ------ ------ ------
100.00 $28,284 100.00 $20,200
------ ------- ------ -------
AVAILABLE FOR SALE (AT MARKET VALUE):
U.S. Government treasury obligations...... -- -- -- --
FHLB debentures........................... -- -- -- --
REMICs.................................... -- -- -- --
FHLMC mortgage-backed securities.......... -- -- -- --
------- -- ------ --
Total investment securities.............. $28,284 100.00% $20,200 100.00%
======= ====== ======= ======
</TABLE>
58
<PAGE>
The following table sets forth the maturities and weighted average
yields of the debt securities in the investment securities portfolio at March
31, 1997.
<TABLE>
<CAPTION>
Less Than One to More than Five More than
One Year Five Years to Ten Years Ten Years
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ -------- ------ -------- ------ --------- ------ --------
(Dollars in thousands)
U.S. Government
<S> <C> <C> <C> <C> <C> <C> <C> <C>
treasury obligations........... $6,989 6.28% $ 1,987 5.42% $1,937 6.51% $ -- --%
FNMA debentures................. 1,000 4.33 -- -- 1,000 6.86 -- --
FHLB debentures................. 999 6.60 10,443 6.67 -- -- -- --
FHLMC debentures................ -- -- -- -- -- -- -- --
SLMA debentures................. -- -- -- -- -- -- -- --
REMICs.......................... -- -- -- -- 912 6.53 7,632 7.59
FHLMC mortgage-backed
securities..................... -- -- -- -- 4,551 6.90 3,336 7.37
FNMA mortgage-backed
securities..................... -- -- 490 5.66 7,351 6.78 5,120 7.20
------ ------- ------ -------
Total........................ $8,988 6.10 $12,920 6.44 $15,751 6.77 $16,088 7.42
====== ======= ======= =======
</TABLE>
(1) For available-for-sale securities carried at fair value, to weighted
average yield is computed using amortized cost.
59
<PAGE>
Aside from U.S. Government Treasury obligations, the Savings Bank
invests in mortgage-backed securities and REMICs. Mortgage-backed securities
(which are also known as mortgage participation certificates or pass-through
certificates) represent a participation interest in a pool of single-family or
multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (i.e., FNMA, FHLMC and the
Government National Mortgage Association ("GNMA") that pool and repackage the
participation interests in the form of securities, to investors such as the
Savings Bank. Mortgage-backed securities generally increase the quality of the
Savings Bank's assets by virtue of the guarantees that back them, are more
liquid than individual mortgage loans and may be used to collateralize
borrowings as other obligations of the Savings Bank. See Note 4 of Notes to
Consolidated Financial Statements for additional information.
REMICs are generally classified as derivative financial instruments
because they are created by redirecting the cash flows from the pool of
mortgages or mortgage-backed securities underlying these securities to create
two or more classes (or tranches) with different maturity or risk
characteristics designed to meet a variety of investor needs and preferences.
Management believes these securities may represent attractive alternatives
relative to other investments because of the wide variety of maturity, repayment
and interest rate options available. Current investment practices of the Savings
Bank prohibit the purchase of high risk REMICs. At March 31, 1997, the Savings
Bank held REMICs with a net carrying value of $8.5 million, of which $6.6
million were classified as held- to-maturity and $1.9 million of which were
available -for-sale. REMICs may be sponsored by private issuers, such as
mortgage bankers or money center banks, or by U.S. Government agencies and
government sponsored entities.
At March 31, 1997, the Savings Bank did not own any privately issued REMICs.
Investments in mortgage-backed securities, including REMICs, involve a
risk that actual prepayments will be greater than estimated prepayments over the
life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in interest rates.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and loan sales are the major sources
of the Savings Bank's funds for lending and other investment purposes. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They may also be used on a longer term basis for general business purposes.
DEPOSIT ACCOUNTS. Deposits are attracted from within the Savings Bank's
primary market area through the offering of a broad selection of deposit
instruments, including NOW accounts, money market accounts, regular savings
accounts, certificates of deposit and retirement savings plans. Deposit account
terms vary according to the minimum balance required, the time periods the funds
must remain on deposit and the interest rate, among other factors. In
determining the terms of its deposit accounts, the Savings Bank considers the
rates offered by its competition, profitability to the Savings Bank, matching
deposit and loan products and its customer preferences and concerns. The Savings
Bank generally reviews its deposit mix and pricing weekly.
60
<PAGE>
DEPOSIT BALANCES
The following table sets forth information concerning the Savings
Bank's time deposits and other interest-bearing deposits at March 31, 1997.
<TABLE>
<CAPTION>
Percent
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
(In thousands)
<C> <C> <C> <C> <C> <C>
1.500% None NOW Accounts $ 100 $ 18,474 10.90%
2.750 None Regular Savings 100 21,234 12.53
1.750 None Maxi Checking 2,500 1,606 0.95
3.750 None Money Market
Deposit Account 2,500 17,553 10.36
None None Noninterest Checking 100 7,085 4.18
Certificates of Deposit
4.403 28-92 Days Fixed-Term, Fixed-Rate 1,000 2,199 1.30
5.186 4-6 Months Fixed-Term, Fixed-Rate 1,000 8,233 4.86
5.549 12-17 Months Fixed-Term, Fixed-Rate 1,000 50,686 29.92
5.350 18 Months Fixed-Term, Variable
Rate Individual
Retirement Account
("IRA") 1,000 470 0.28
5.281 18-23 Months Fixed-Term, Fixed-Rate 1,000 2,795 1.65
5.837 24-35 Months Fixed-Term, Fixed-Rate 1,000 24,066 14.21
5.382 36-59 Months Fixed-Term, Fixed-Rate 1,000 2,824 1.67
6.055 60-83 Months Fixed-Term, Fixed-Rate 1,000 10,745 6.34
5.894 84-119 Months Fixed-Term, Fixed-Rate 1,000 1,446 0.85
--------- -------
Total $169,416 100.00%
======== ======
</TABLE>
At March 31, 1997, the Savings Bank's jumbo certificates of deposit
totalled $513,000, all of which were due within three months after March 31,
1997. Jumbo certificates of deposit require minimum deposits of $100,000 and
have negotiable interest rates.
61
<PAGE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Savings Bank at the dates
indicated.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- -------------------------------- ------------------------------
Balance Percent Increase Balance Percent Increase/ Balance Percent Increase/
------- ------- ------- ------- ------- -------
(Decrease) (Decrease) (Decrease)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand.......$ 7,085 4.18% $ 1,738 $ 5,347 3.38% $ 709 $ 4,638 3.19% $ (352)
NOW checking..................... 18,474 10.91 1,469 17,005 10.75 1,737 15,268 10.50 2,208
Regular savings accounts......... 21,234 12.53 (541) 21,775 13.77 (3,555) 25,330 17.42 (2,406)
Money market deposit accounts.... 19,159 11.31 1,388 17,771 11.24 4,752 13,019 8.95 4,121
Fixed-rate certificates which
mature(1):
Within 12 months............. 79,709 47.05 (12,197) 67,512 42.68 3,465 64,047 44.02 33,348
Within 12-36 months.......... 18,216 10.75 (4,230) 22,446 14.19 5,884 16,562 11.39 2,192
Beyond 36 months............. 5,539 3.27 (764) 6,303 3.99 (282) 6,585 4.53 (140)
-------- ------- -------- --------- ------- -------- --------- ------- ---------
Total.......................$169,416 100.00% $11,257 $158,159 100.00% $12,710 $145,449 100.00% $38,971(2)
======== ====== ======= ======== ====== ======= ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1994 1993
-----------------------------------------------------------
Balance Percent Increase/ Balance Percent Increase/
------- ------- ------- -------
(Decrease) (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand.......$ 4,990 4.69% $ 1,237 $ 3,753 3.54% $ 42
NOW checking..................... 13,060 12.26 1,050 12,010 11.34 1,431
Regular savings accounts......... 27,736 26.05 2,938 24,798 23.40 5,248
Money market deposit accounts.... 8,898 8.36 (643) 9,541 9.01 60
Fixed-rate certificates which
mature(1):
Within 12 months............. 30,699 28.83 (9,617) 40,316 38.05 (6,098)
Within 12-36 months.......... 14,370 13.50 2,789 11,581 10.93 (2,955)
Beyond 36 months............. 6,725 6.31 2,771 3,954 3.73 1,631
--------- ------- -------- --------- ------- ------
Total....................... $106,478 100.00% $ 525 $105,953 100.00% $(641)
======== ====== ======= ======== ====== =====
</TABLE>
(1) IRAs of $10.9 million, $11.0 million, $10.8 million, $8.8 million and
$9.1 million at March 31, 1997, 1996, 1995, 1994 and 1993,
respectively, are included in certificate balances. At March 31, 1997,
1996, 1995, 1994 and 1993 jumbo certificates amounted to $513,000,
$302,000, $706,000, $200,000 and $516,000, respectively.
(2) Increase primarily reflects assumption of deposits resulting from
acquisition of two branches from the RTC. See "-- Properties."
62
<PAGE>
TIME DEPOSITS BY RATES AND MATURITIES
The following table sets forth the time deposits in the Savings Bank
classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Below 4.00%...................................... $ 212 $ 483 $ 5,201 $22,166 $ 9,656
4.00 - 4.99%.................................... 4,063 7,084 32,471 15,662 25,074
5.00 - 5.99%.................................... 82,336 56,739 32,740 7,807 6,649
6.00 - 7.99%.................................... 16,786 31,776 16,079 5,046 11,490
8.00 - 9.99%.................................... 67 179 666 1,077 2,722
10.00 - 11.99%.................................... -- -- 37 36 261
----------- ---------- --------- --------- ---------
Total.......................................... $103,464 $96,261 $87,194 $51,794 $55,852
======== ======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at March 31, 1997.
<TABLE>
<CAPTION>
Amount Due
Less Than 1-2 After After
One Year Years 2-3 Years 3 Years Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Below 4.00%......................... $ 212 $ -- $ -- $ -- $ 212
4.00 - 4.99%...................... 3,752 304 7 -- 4,063
5.00 - 5.99%...................... 64,571 13,212 1,734 2,819 82,336
6.00 - 7.99%...................... 11,128 1,250 1,688 2,720 16,786
8.00 - 8.99%...................... 46 12 9 -- 67
9.00 - 11.99%...................... -- -- -- -- --
Over 11.99%........................ -- -- -- -- --
---------- ---------- -------- --------- ----------
Total............................. $79,709 $14,778 $3,438 $5,539 $103,464
======= ======= ====== ====== ========
</TABLE>
SAVINGS ACTIVITIES
The following table sets forth the savings activities of the Savings
Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance................. $158,159 $145,449 $106,478 $105,953 $106,594
-------- -------- -------- -------- -------
Net increase (decrease)
before interest
credited......................... 4,225 7,005 35,069 (2,599) (4,438)
Interest credited................ 7,032 5,705 3,902 3,124 3,797
-------- -------- -------- -------- ---------
Net increase (decrease) in
savings deposits................. 11,257 12,710 38,971 525 (641)
-------- --------- --------- --------- ---------
Ending balance.................... $169,416 $158,159 $145,449 $106,478 $105,953
======== ======== ======== ======== ========
</TABLE>
63
<PAGE>
In the unlikely event the Savings Bank is liquidated, depositors will
be entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Savings Bank. Substantially all of the Savings
Bank's depositors are residents of the States of Washington or Oregon.
BORROWINGS. Savings deposits are the primary source of funds for the
Savings Bank's lending and investment activities and for its general business
purposes. The Savings Bank has at times relied upon advances from the
FHLB-Seattle to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB-Seattle are typically secured by
the Savings Bank's first mortgage loans.
The FHLB functions as a central reserve bank providing credit for
savings and loan associations and certain other member financial institutions.
As a member, the Savings Bank is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Under its current
credit policies, the FHLB generally limits advances to 20% of a member's assets,
and short-term borrowings of less than one year may not exceed 10% of the
institution's assets. The FHLB determines specific lines of credit for each
member institution and the Savings Bank has a 35% line of credit with the FHLB
of Seattle and authority to borrow up to 5% of assets under a short-term line of
credit.
At March 31, 1997, the Savings Bank had $27.2 million of outstanding
advances from the FHLB-Seattle under a available credit facility of $78.5
million. Approximately $20.0 million of such outstanding advances were used to
purchase mortgage-backed securities, classified as held-to-maturity at March 31,
1997, with the goal of recognizing income on the difference between the rate
paid on the advances and the rate earned on the mortgage-backed securities. The
success of this activity depends on maintaining over time a positive
differential between the yields earned on the securities and the rates paid on
the advances. Since the yields earned on the securities are generally capped
while the rates paid on the advances generally are not capped, there is the risk
that this differential will narrow or be eliminated in a rising interest rate
environment. See Note 4 of Notes to Consolidated Financial Statements.
The Savings Bank may occasionally enter into sales of securities under
agreements to repurchase ("repurchase agreements") with nationally recognized
primary securities dealers. The Repurchase agreements are generally for terms up
to 30 days. Repurchase agreements are accounted for as borrowings and are
secured by designated investment securities. At March 31, 1997, the Savings Bank
had no reverse repurchase agreements outstanding.
The following tables set forth certain information concerning the
Savings Bank's borrowings at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Weighted average rate paid on
<S> <C> <C> <C> <C> <C>
FHLB advances.................. 6.49% 6.66% 7.03% 4.81% --%
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Maximum amounts of FHLB
advances outstanding
at any month end................ $32,750 $29,850 $23,000 $8,000 $410
Approximate average FHLB
advances outstanding............ 29,068 26,404 12,638 23,085 32
Approximate weighted
average rate paid on
FHLB advances................... 6.50% 6.94% 6.38% 4.81% 3.34%
</TABLE>
COMPETITION
There are several financial institutions in the Savings Bank's primary
market area from which the Savings Bank faces strong competition in the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits and loans
has historically come from other thrift institutions, credit unions and
commercial banks located in its market area. Particularly in times of high
interest rates, the Savings Bank has faced additional significant competition
for investors' funds from money market mutual funds and other short-term money
market securities and corporate and government securities. The Savings Bank's
competition for loans comes principally from other thrift institutions, credit
unions, commercial banks, mortgage banking companies and mortgage brokers.
SUBSIDIARY
Under OTS regulations, the Savings Bank is authorized to invest up to
3% of its assets in subsidiary corporations, with amounts in excess of 2% only
if primarily for community purposes. At March 31, 1997, the Savings Bank's
investment of $423,000 in Riverview Services, Inc. ("Riverview Services"), its
sole wholly-owned subsidiary, was within these limitations.
Riverview Services acts as trustee for deeds of trust on mortgage loans
granted by the Savings Bank, and receives a reconveyance fee of approximately
$35 for each deed of trust. Riverview Services also operates a courier service
for the benefit of the Savings Bank. Riverview Services had net income of
$53,000 for the fiscal year ended March 31, 1997 and total assets of $423,000 at
that date. Riverview Services' operations are included in the consolidated
financial statements of the Savings Bank appearing elsewhere herein.
PROPERTIES
The following table sets forth certain information relating to the
Savings Bank's offices as of March 31, 1997. All offices are owned by the
Savings Bank except as noted in the table.
Net
Approximate Book
Location Year Opened Square Footage Deposits Value
MAIN OFFICE:
700 N.E. Fourth Avenue 1975 25,000 $37,025 $1,335
Camas, Washington
65
<PAGE>
<TABLE>
<CAPTION>
Net
Approximate Book
Location Year Opened Square Footage Deposits Value
(In thousands)
BRANCH OFFICES:
<C> <C> <C> <C> <C>
1737 B Street 1982 2,200 $22,144 $106
Washougal, Washington
225 S.W. 2nd Street 1979 1,700 22,213 196
Stevenson, Washington
100 North Main 1977 1,800 16,111 141
White Salmon, Washington(1)
813 West Main 1979 2,000 15,109 775
Battle Ground, Washington
412 South Columbus 1983 2,500 8,193 70
Goldendale, Washington
11505-K Fourth Plain Boulevard 1994 3,500 7,656 1,079
Vancouver, Washington
"Orchards" Office
7735 N.E. Highway 99(2) 1994 4,800 27,395 560
Vancouver, Washington
"Hazell Dell" Office
1011 Washington Way(2) 1994 2,000 13,570 370
Longview, Washington
- ------------------
</TABLE>
(1) Leased.
(2) Former branches of Great American Federal Savings Association, San
Diego, California, that were acquired from the RTC on May 13, 1994. In
the acquisition, the Savings Bank assumed all insured deposit
liabilities of both branch offices totalling approximately $42.0
million.
The Savings Bank maintains two proprietary automatic teller machines in
Camas and Stevenson, Washington, which are part of a nationwide cash exchange
network.
The Savings Bank uses an outside data processing system to process
customer records and monetary transactions, post deposit and general ledger
entries and record activity in installment lending, loan servicing and loan
originations. At March 31, 1997, the net book value of the Savings Bank's office
properties, furniture, fixtures and equipment was $4.6 million.
PERSONNEL
As of March 31, 1997, the Savings Bank had 79 full-time employees and
12 part-time employees, none of whom are represented by a collective bargaining
unit. The Savings Bank believes its relationship with its employees is good.
66
<PAGE>
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
MANAGEMENT OF THE HOLDING COMPANY
Directors shall be elected by the stockholders of the Holding Company
for staggered three-year terms, or until their successors are elected and
qualified, at the first annual meeting of stockholders following the
consummation of the Conversion and Reorganization. The Holding Company's Board
of Directors consists of seven persons divided into three classes, each of which
contains approximately one third of the Board. One class, consisting of Messrs.
_________________ has a term of office expiring at the first annual meeting of
stockholders after their election; a second class, consisting of Messrs.
_____________________, has a term of office expiring at the second annual
meeting of stockholders after their election; and a third class, consisting of
Messrs. ______________, has a term of office expiring at the third annual
meeting of stockholders after their election.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are:
Name Position
Patrick Sheaffer Chairman of the Board, President and Chief Executive Officer
Ron Wysaske Treasurer and Chief Financial Officer
Phyllis Kreibich Corporate Secretary
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. For information concerning the principal occupations,
employment and compensation of the directors and executive officers of the
Holding Company during the past five years, see "MANAGEMENT OF THE SAVINGS BANK
- -- Biographical Information."
MANAGEMENT OF THE SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Savings Bank is presently composed of
seven members who are elected for terms of three years, approximately one third
of whom are elected annually in accordance with the Bylaws of the Savings Bank.
In addition to a Chairman of the Board, a Vice Chairman of the Board is elected
annually by the non-employee directors. The executive officers of the Savings
Bank are elected annually by the Board of Directors and serve at the Board's
discretion. The following table sets forth information with respect to the
Directors and executive officers of the Savings Bank.
67
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
- ---- ------- -------------------------- ------- -------
<S> <C> <C> <C> <C>
Patrick Sheaffer 57 Chairman of the Board, President
and Chief Executive Officer 1979 1997
Roger Malfait(2) 67 Director 1973 1997
Gary R. Douglass 55 Director 1984 1997
Dale E. Scarbrough 69 Director 1972 1998
Ron Wysaske 45 Executive Vice President, 1985 1998
Chief Financial Officer
and Director
Robert K. Leick(3) 61 Director 1972 1999
Paul L. Runyan 62 Director 1979 1999
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Name Age (1) Position with Savings Bank
Michael C. Yount 47 Senior Vice President
Karen Nelson 39 Vice President of Lending
Phyllis Kreibich 64 Corporate Secretary
</TABLE>
- -----------------------
(1) At March 31, 1997.
(2) Immediate past Vice-Chairman of the Board.
(3) Vice-Chairman of the Board.
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. There are no family relationships among or between the Directors or
executive officers.
PATRICK SHEAFFER joined the Savings Bank in 1965 and has served as
President and Chief Executive Officer since 1976. He became Chairman of the
Board in March 1993. He is responsible for the daily operations and the
management of the Savings Bank. Mr. Sheaffer is active in numerous professional
and civic organizations. Mr. Sheaffer is a founding director of Epitope Biotech
Company, a Nasdaq-listed company located in Portland, Oregon.
ROGER MALFAIT is a semi-retired real estate developer and cattle
rancher.
GARY R. DOUGLASS, a certified public accountant, is a principal with
Douglass & Paulson, P.C., Camas, Washington.
DALE E. SCARBROUGH is the retired Chief Financial Officer for the City
of Camas, Washington. He is a member of the American Legion and numerous
professional financial organizations.
RON WYSASKE joined the Savings Bank in 1976. Before joining the Savings
Bank, he was an audit and tax accountant at Price Waterhouse & Co. He became
Executive Vice President, Treasurer and Chief Financial Officer in 1981. He is
responsible for administering all finance, accounting and treasury functions at
the Savings Bank. He is a member of several professional organizations,
including the American Institute of Certified Public
68
<PAGE>
Accountants and the Financial Managers Society. Mr. Wysaske is a licensed
certified public accountant in the State of Washington.
ROBERT K. LEICK, an attorney in private practice, was a prosecuting
attorney with Skamania County, Washington, from 1967 to 1997. He is an active
member of numerous community and civic organizations, including the Skamania
County Historical Society, Skamania County Chamber of Commerce, Skamania County
Economic Development Council and the American Legion.
PAUL L. RUNYAN owns and operates Runyan's Jewelry Stores in Camas and
White Salmon, Washington. He is an active member of numerous civic and community
organizations, including the White Salmon Elks, Camas Moose Lodge, Camas Lions
Club and the Stevenson Eagles.
MICHAEL C. YOUNT joined the Savings Bank in 1979 and has served in
various capacities, such as appraiser, loan officer, loan collections and
supervisor of lending. He became Senior Vice President in 1989 and is
responsible for the daily operations and mortgage brokerage operations of the
Savings Bank and reports directly to the President.
Mr. Yount is a member of the Washougal City Council.
KAREN NELSON joined Savings Bank in 1979 and has served in various
capacities, such as loan servicing clerk, operations officer, checking
administrator, consumer loan officer, and loan originator, and became Vice
President of Lending in 1990. She is responsible for all lending and mortgage
servicing activities and of the Savings Bank reports directly to the President.
PHYLLIS KREIBICH joined the Savings Bank since 1987 and has served as
Corporate Secretary since 1989. She is responsible for maintaining the corporate
books and records of the Savings Bank and reports directly to the President.
BENEFICIAL OWNERSHIP OF SAVINGS BANK COMMON STOCK BY DIRECTORS AND EXECUTIVE
OFFICERS
The following table sets forth, as of March 31, 1997, certain
information as to the beneficial ownership of Savings Bank Common Stock by: (i)
persons known by the Savings Bank to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) the directors of the Savings Bank,
(iii) the executive officers of the Savings Bank, and (iv) by all officers and
directors as a group. For purposes of this table, an individual is considered to
beneficially own shares of Savings Bank Common Stock if he or she has or shares
voting power (which includes the power to vote or direct the voting of the
shares) or investment power (which includes the power to dispose of or direct
the disposition of the shares). Unless otherwise indicated, all shares are owned
directly by the officers and directors or by the officers and directors
indirectly through a trust, corporation or association, or by the officers and
directors or their spouses as custodians or trustees for the shares of minor
children. The officers and directors effectively exercise sole voting and
investment power over such shares. Shares which are subject to stock options
that are exercisable within 60 days of March 31, 1997 are deemed to be
beneficially owned. For information regarding proposed purchases of Conversion
Shares by the directors and officers and their anticipated ownership of Common
Stock upon consummation of the Conversion and Reorganization, see "CONVERSION
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS."
69
<PAGE>
Shares Beneficially
Owned at March
Name 31, 1997
- ---- -------------------------------------
Number Percent
------ -------
Riverview, M.H.C 1,407,891 58.27%
Patrick Sheaffer 74,223(1) 3.05
Roger Malfait 19,761(2) 0.82
Gary R. Douglass 7,906(3) 0.33
Dale E. Scarbrough 19,761(4) 0.82
Ron Wysaske 51,004(5) 2.10
Robert K. Leick 5,810(6) 0.24
Paul L. Runyan 41,004(7) 1.70
Michael C. Yount 25,976(8) 1.07
Karen Nelson 17,620(9) 0.73
Phyllis Kreibich 1,703 0.07
All officers and directors
as a group (10 persons) 264,768(10) 10.64
- -------------
(1) Includes 20,733 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days of
March 31, 1997.
(2) Includes 3,857 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days of
March 31, 1997.
(3) Includes 918 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(4) Includes 3,857 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(5) Includes 16,297 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(6) Includes 3,857 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(7) Includes 1,602 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days of
March 31, 1997.
(8) Includes 12,536 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(9) Includes 8,389 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
(10) Includes 72,046 shares of Savings Bank Common Stock which may be received
upon the exercise of stock options that are exercisable within 60 days
from March 31, 1997.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Savings Bank is conducted through meetings and
activities of its Board of Directors and its committees. During the fiscal year
ended March 31, 1997, the Board of Directors held 13 regular meetings. No
director attended fewer than 75% of the total meetings of the Board of Directors
of the Savings Bank and committees on which such director served.
The Savings Bank has standing Executive, Audit, Nominating and
Personnel/Compensation Committees, among others.
70
<PAGE>
The Executive Committee of the Board of Directors, which consists of
Directors Malfait, Leick and Sheaffer (Chairman), meets as necessary in between
meetings of the full Board of Directors. The Executive Committee met 12 times
during the fiscal year ended March 31, 1997.
The Audit Committee of the Savings Bank consists of Directors Scarbrough
(Chairman), Douglass and Runyan. It is responsible for developing and monitoring
the Savings Bank's audit program. The Committee meets with the Savings Bank's
independent auditors to discuss the results of the annual audit and any related
matters. The members of the committee also receive and review all the reports
and findings and other information presented to them by the Savings Bank's
officers regarding financial reporting policies and practices. The Audit
Committee met once during the fiscal year ended March 31, 1997.
The Nominating Committee consists of Directors Malfait (Chairman),
Douglass and Scarbrough. This Committee submits nominations for the annual
election of directors. The Nominating Committee met once during the fiscal year
ended March 31, 1997.
The Personnel/Compensation Committee consists of Director Runyan
(Chairman), Douglass and Leick. This Committee determines annual grade and
salary levels for employees and establishes personnel policies. The
Personnel/Compensation Committee met two times during the fiscal year ended
March 31, 1997.
DIRECTORS' COMPENSATION
Directors receive an annual retainer of $4,600 (except for the current and
immediate past Vice-Chairman of the Board who each receive an annual retainer of
$5,000) and a monthly fee of $320 provided that they attend all meetings held
during the month. Directors also receive $200 for each committee meeting
attended, except no fees are paid for service on the Executive Committee.
Director and committee fees totalled $104,000 for the year ended March 31, 1997.
Directors may elect to defer their monthly fees until retirement with no
income tax payable by the director until retirement benefits are received. This
alternative is available through a non-qualified deferred compensation plan
adopted by the Savings Bank in December 1986, and subsequently amended. If the
participant's employment is terminated on or after the date he attains age 65 or
five years of participation in the Plan ("Normal Retirement Date"), the Savings
Bank shall pay the participant or his designated beneficiaries in annual or
monthly installments over a period of 120 months, an amount equal to the balance
in the participant's account immediately before the date on which benefits
commence, plus interest on the unpaid balance. Participants may also choose two
optional forms of benefit payments: (i) a lump-sum payment within five years of
the Normal Retirement Date or (ii) an annuity over the life of the participant,
or a joint survivor annuity over the lives of the participant and the
participant's spouse. Benefits are also payable upon disability, early
retirement, termination of service or death. The Savings Bank pays annual
interest on assets under the plans based on a formula relating to gross
revenues, which amounted to 7.9% for the year ended March 31, 1997. The
estimated liability under the plan is accrued as earned by the participant. At
March 31, 1997, the Savings Bank's aggregate liability under the plans was
$663,000.
71
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for
Messrs. Sheaffer, Wysaske and Yount for the year ended March 31, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
<S> <C> <C> <C> <C> <C>
Patrick Sheaffer 1997 $128,902 $56,720 $-- $19,364
President and Chief 1996 124,246 27,772 -- 20,875
Executive Officer 1995 111,896 59,178 -- 18,220
Ron Wysaske 1997 91,615 36,677 16,446
Executive Vice 1996 88,818 23,328 -- 15,560
President 1995 86,028 49,816 -- 16,393
Michael C. Yount 1997 81,528 27,384 -- 13,934
Senior Vice 1996 77,259 19,332 -- 13,333
President 1995 75,712 42,108 -- 14,111
- ----------------
</TABLE>
(1) The aggregate amount of perquisites and other personal benefits was
less than 10% of the annual salary and bonus reported.
(2) Consists of contributions to profit sharing plan and ESOP. Such
contributions for 1997 amount to: Mr. Sheaffer, $4,500 and $14,864,
respectively; Mr. Wysaske, $3,833 and $12,613, respectively; and Mr.
Yount, $3,251 and $10,683, respectively.
EMPLOYMENT AGREEMENTS. The MHC and the Savings Bank currently maintain
employment agreements with Messrs. Sheaffer and Wysaske that were entered into
in connection with the MHC Reorganization. In connection with the Conversion and
Reorganization, the Holding Company and the Savings Bank (collectively, the
"Employers") will enter into three-year employment agreements ("Employment
Agreements") with Messrs. Sheaffer and Wysaske (individually, the "Executive"),
which have substantially the same terms as and will replace the existing
agreements.
Under the Employment Agreements, the initial salary levels for Messrs.
Sheaffer and Wysaske will be $129,000 and $92,000, respectively, which amounts
will be paid by the Savings Bank and may be increased at the discretion of the
Board of Directors of the Savings Bank or an authorized committee of the Board.
On each anniversary of the commencement date of the Employment Agreements, the
term of each agreement may be extended for an additional year at the discretion
of the Board. The agreement is terminable by the Employers at any time, by the
Executive if the Executive is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations. In the event that an Executive's
employment is terminated without cause or upon the Executive's voluntary
termination following the occurrence of an event described in the preceding
sentence, the Savings Bank would be required to honor the terms of the agreement
through the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.
The Employment Agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers. Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, an Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control. The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases
72
<PAGE>
shares of Common Stock pursuant to a tender or exchange offer for such shares,
(b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Holding Company representing 25% or more of the combined
voting power of the Holding Company's then outstanding securities, (c) the
membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
The maximum value of the severance benefits under the Employment
Agreements is 2.99 times the Executive's average annual compensation during the
five-year period preceding the effective date of the change in control (the
"base amount"). The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the Executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the Executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the Executive's
base amount. Assuming that a change in control had occurred at March 31, 1997
and that each Executive elected to receive a lump sum cash payment, Messrs.
Sheaffer and Wysaske would be entitled to payments of approximately $502,000 and
$381,000, respectively. Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), provides that severance payments that equal or exceed three
times the individual's base amount are deemed to be "excess parachute payments"
if they are contingent upon a change in control. Individuals receiving excess
parachute payments are subject to a 20% excise tax on the amount of such excess
payments, and the Employers would not be entitled to deduct the amount of such
excess payments.
The Employment Agreements restrict each Executive's right to compete
against the Employers for a period of one year from the date of termination of
the agreement if an Executive voluntarily terminates employment, except in the
event of a change in control.
SEVERANCE AGREEMENTS. The MHC and the Savings Bank currently maintain
employment agreements with Mr. Yount and Ms. Nelson that were entered into in
connection with the MHC Reorganization. In connection with the Conversion and
Reorganization, the Holding Company and the Savings Bank will enter into
severance agreements with Mr. Yount and Ms. Nelson, which have substantially the
same terms as and will replace the existing agreements.
It is anticipated that the new severance agreements will have an
initial term of three years. On each anniversary of the commencement date of the
severance agreements, the term of each agreement may be extended for an
additional year at the discretion of the Board of Directors of the Savings Bank.
The severance agreements will provide for severance payments and
continuation of other employee benefits in the event of involuntary termination
of employment in connection with any change in control of the Employers in the
same manner as provided for in the employment agreements. Severance payments and
benefits also will be provided on a similar basis in connection with a voluntary
termination of employment where, subsequent to a change in control, an officer
is assigned duties inconsistent with his position, duties, responsibilities and
status immediately prior to such change in control.
The term "change in control" is defined in the agreement as having
occurred when, among other things, (a) a person other than the Holding Company
purchases shares of Common Stock pursuant to a tender or exchange offer for such
shares, (b) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Holding Company representing 25% or more of the combined
voting power of the Holding Company's then outstanding securities, (c) the
membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.
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Assuming that a change in control had occurred at March 31, 1997, and
excluding any other benefits due under the severance agreements, the aggregate
value of the severance benefits payable to the two officers would be
approximately $552,000.
EMPLOYEE SEVERANCE COMPENSATION PLAN. In connection with the Conversion
and Reorganization, the Board of Directors of the Savings Bank intends to adopt
an Employee Severance Compensation Plan (the "Severance Plan") to provide
benefits to eligible employees in the event of a change in control of the
Holding Company or the Savings Bank (as defined in the Severance Plan). In
general, all employees with one or more years of service (except for
officers who enter into separate employment or severance agreements with the
Holding Company and the Savings Bank) will be eligible to participate in the
Severance Plan. Under the Severance Plan, in the event of a change in control of
the Holding Company or the Savings Bank, eligible employees who are terminated
or who terminate employment (but only upon the occurrence of events specified in
the Severance Plan) within 12 months of the effective date of a change in
control will be entitled to a payment based on years of service with the
Savings Bank. The maximum payment for any eligible employee would be equal to
two and 24 months, respectively, of their current compensation. Assuming that
a change in control had occurred at March 31, 1997 and the termination of all
eligible employees, the maximum aggregate payment due under the Severance Plan
would have been approximately $674,000.
401(K) PLAN. The Savings Bank maintains the Riverview Employees'
Savings & Profit Sharing Plan (the "401(k) Plan") for the benefit of eligible
employees of the Savings Bank. The 401(k) Plan is intended to be a tax-qualified
plan under Sections 401(a) and 401(k) of the Code. Employees of the Savings Bank
who have completed 1,000 hours of service during 12 consecutive months and who
have attained age 21 are eligible to participate in the 401(k) Plan.
Participants may contribute up to 15% of their annual compensation to the 401(k)
Plan through a salary reduction election. The Savings Bank matches 50% of
participant contributions to a maximum of 3% of the participant's salary. In
addition to employer matching contributions, the Savings Bank may contribute a
discretionary amount to the 401(k) Plan in any plan year which is allocated to
individual participants in the proportion that their annual compensation bears
to the total compensation of all participants during the plan year. To be
eligible to receive a discretionary employer contribution, the participant must
complete 1,000 hours of service during the plan year and remain employed by the
Savings Bank on the last day of the plan year. Participants are at all times
100% vested in their 401(k) Plan accounts. For the year ended March 31, 1997,
the Savings Bank incurred total contribution-related expenses of $52,000 in
connection with the 401(k) Plan.
Generally, the investment of 401(k) Plan assets is directed by plan
participants. In connection with the Conversion and Reorganization, the
participants will be able to direct the investment of their 401(k) Plan
account balance to purchase shares of Common Stock. A participant in the 401(k)
Plan who elects to purchase Common Stock in the Conversion and Reorganization
through the 401(k) Plan will receive the same subscription priority and will
be subject to the same individual purchase limitations as if the participant
had elected to make such purchase using other funds. See "THE CONVERSION AND
REORGANIZATION -- Limitations on Purchases of Conversion Shares."
BENEFITS
GENERAL. The Savings Bank currently pays 100% of the premiums for
medical, life and disability insurance benefits for full-time employees, subject
to certain deductibles.
EMPLOYEE STOCK OWNERSHIP PLAN. In connection with the MHC
Reorganization, the Savings Bank adopted the ESOP, which acquired 55,200 shares
of the Savings Bank Common Stock with the proceeds of a $552,000 loan from an
unaffiliated financial institution ("1993 Loan"). Upon consummation of the
Conversion and Reorganization, the Savings Bank Common Stock held by the ESOP
will be converted into Exchange Shares based upon the Exchange Ratio.
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In order to fund the purchase of up to 8% of the Conversion Shares to
be issued in the Conversion and Reorganization, it is anticipated that the ESOP
will borrow funds from the Holding Company equal to 100% of the aggregate
purchase price of the Conversion Shares. In addition, the Holding Company will
lend sufficient funds to the ESOP to enable the ESOP to repay the 1993 Loan
which had an outstanding principal balance of $237,000 at March 31, 1997. The
loan to the ESOP will be repaid principally from the Savings Bank's
contributions to the ESOP and dividends payable on Common Stock held by the ESOP
over the anticipated 10-year term of the loan. The interest rate for the ESOP
loan is expected to be the prime rate as published in THE WALL STREET JOURNAL on
the closing date of the Conversion and Reorganization. See "PRO FORMA DATA."
Shares purchased by the ESOP with the proceeds of the loan (including
shares originally acquired by the ESOP with the proceeds of the 1993 Loan) will
be held in a suspense account and released on a pro rata basis as the loan is
repaid. Discretionary contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the basis of each
participant's proportional share of total compensation. Forfeitures will be
reallocated among the remaining plan participants.
In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market or from individual stockholders or which
constitute authorized but unissued shares or shares held in treasury by Holding
Company. The timing, amount, and manner of such discretionary contributions will
be affected by several factors, including applicable regulatory policies, the
requirements of applicable laws and regulations, and market conditions.
Employees of the Savings Bank who have completed 1,000 hours of service
during 12 consecutive months and who have attained age 21 are eligible to
participate in the ESOP. Participants vest in their accrued benefits under the
ESOP at the rate of 20% per year, beginning upon the completion of two years of
service, with full vesting after six years of service. A participant is fully
vested at retirement, in the event of death or disability or upon termination of
the ESOP. Benefits are distributable upon a participant's retirement, early
retirement, death, disability, or termination of employment. The Savings Bank's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
Messrs. Sheaffer and Wysaske currently serve as trustees of the ESOP.
Under the ESOP, the trustees must vote all allocated shares held in the ESOP in
accordance with the instructions of plan participants and unallocated shares and
allocated shares for which no instructions are received must be voted in the
same ratio on any matter as those shares for which instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is
recorded at the fair market value of the ESOP shares when committed to be
released to participants' accounts. See "PRO FORMA DATA" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Comparison of Operating Results for the Years Ended March 31, 1997 and 1996."
The ESOP is be subject to the requirements of Employee Retirement
Income Security Act ("ERISA") and the regulations of the Internal Revenue
Service ("IRS") and the Department of Labor issued thereunder. The Savings Bank
has received a favorable determination letter from the IRS regarding the
tax-qualified status of the ESOP.
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1993 STOCK OPTION AND INCENTIVE PLAN. In connection with the Public MHC
Reorganization, the Savings Bank adopted the 1993 Stock Option Plan. The plan
was approved by the Public Stockholders at the Savings Bank's 1994 annual
meeting of stockholders. Options for all shares reserved for issuance under the
1993 Stock Option Plan have been granted to nonemployee directors, officers and
employees of the Savings Bank and are exercisable. In connection with the
Conversion and Reorganization, the 1993 Stock Option Plan will be assumed by the
Holding Company and appropriate adjustments will be made to the exercise price
and the number of shares underlying each option to reflect the applicable
Exchange Ratio.
No options were granted to Messrs. Sheaffer, Wysaske and Yount under
the 1993 Stock Option Plan during the fiscal year ended March 31, 1997.
Set forth below is certain information for Messrs. Sheaffer, Wysaske
and Yount concerning exercised and unexercisable options under the 1993 Stock
Option Plan at and for the fiscal year ended March 31, 1997.
<TABLE>
<CAPTION>
=======================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- ---------------------------------------------------------------------------------------
Number Value of
of Number of Unexercised
Shares Unexercised In-the-Money
Acquired Dollar Options at Options at
on Value Fiscal Year End Fiscal Year End
Name Exercise Realized (Exercisable) (Exercisable)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patrick Sheaffer -- $-- 20,733 $224,746
Ron Wysaske -- -- 16,297 176,659
Michael C. Yount -- -- 12,536 135,890
=======================================================================================
</TABLE>
1993 MANAGEMENT DEVELOPMENT AND RECOGNITION PLANS. In connection with
the MHC Reorganization, the Savings Bank adopted Management Development and
Recognition Plans (collectively, the "1993 MRPs") for officers, employees and
nonemployee directors of the Savings Bank. The 1993 MRPs were approved by the
Public Stockholders at the Savings Bank's 1994 annual meeting of stockholders.
All shares under the 1993 MRP have been awarded and are fully vested. For
purposes of the Conversion and Reorganization, the shares awarded under the 1993
MRP participants will be treated in the same manner as shares held by other
minority shareholders.
1997 STOCK OPTION PLAN. The Board of Directors of the Holding Company
intends to adopt the 1997 Stock Option Plan and to submit it to the stockholders
for approval at a meeting held no earlier than six months following consummation
of the Conversion and Reorganization. Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the 1997 Stock Option Plan within one
year of the consummation of the Conversion and Reorganization. The Stock Option
Plan will comply with all applicable regulatory requirements. However, the 1997
Stock Option Plan will not be approved or endorsed by the OTS.
The 1997 Stock Option Plan will be designed to attract and retain
qualified management personnel and nonemployee directors, to provide such
officers, key employees and nonemployee directors with a proprietary interest in
the Holding Company as an incentive to contribute to the success of the Holding
Company and the Savings Bank, and to reward officers and key employees for
outstanding performance. The 1997 Stock Option Plan will provide for the grant
of incentive stock options ("ISOs") intended to comply with the requirements of
Section 422 of the Code and for nonqualified stock options ("NQOs"). Upon
receipt of stockholder approval of the 1997 Stock Option
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Plan, stock options may be granted to key employees of the Holding Company and
its subsidiaries, including the Savings Bank. Unless sooner terminated, the 1997
Stock Option Plan will continue in effect for a period of ten years from the
date the 1997 Stock Option Plan is approved by stockholders.
A number of authorized shares of Common Stock equal to 10% of the
number of Conversion Shares of issued in connection with the Conversion and
Reorganization will be reserved for future issuance under the 1997 Stock Option
Plan (310,500 shares based on the issuance of 3,105,000 Conversion Shares at the
maximum of the Estimated Valuation Range). Shares acquired upon exercise of
options will be authorized but unissued shares or treasury shares. In the event
of a stock split, reverse stock split, stock dividend, or similar event, the
number of shares of Common Stock under the 1997 Stock Option Plan, the number of
shares to which any award relates and the exercise price per share under any
option may be adjusted by the Committee (as defined below) to reflect the
increase or decrease in the total number of shares of Common Stock outstanding.
The 1997 Stock Option Plan will be administered and interpreted by a
committee of the Board of Directors ("Committee"). Subject to applicable OTS
regulations, the Committee will determine which nonemployee directors, officers
and key employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options. All options granted to
nonemployee directors will be NQOs. The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.
Under current OTS regulations, if the 1997 Stock Option Plan is
implemented within one year of the consummation of the Conversion and
Reorganization, (i) no officer or employees could receive an award of options
covering in excess of 25%, (ii) no nonemployee director could receive in excess
of 5% and (iii) nonemployee directors, as a group, could not receive in excess
of 30% of the number of shares reserved for issuance under the 1997 Stock Option
Plan.
It is anticipated that all options granted under the 1997 Stock Option
Plan will be granted subject to a vesting schedule whereby the options become
exercisable over a specified period following the date of grant. Under OTS
regulations, if the 1997 Stock Option plan is implemented within the first year
following consummation of the Conversion and Reorganization the minimum vesting
period will be five years. All unvested options will be immediately exercisable
in the event of the recipient's death or disability. Unvested options also will
be exercisable following a change in control (as defined in the 1997 Stock
Option Plan) of the Holding Company or the Savings Bank to the extent authorized
or not prohibited by applicable law or regulations. OTS regulations currently
provide that if the 1997 Stock Option Plan is implemented prior to the first
anniversary of the Conversion and Reorganization, vesting may not be accelerated
upon a change in control of the Holding Company or the Savings Bank.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs
and NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable
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to the optionee at ordinary income tax rates. A federal income tax deduction
generally will not be available to the Holding Company as a result of the grant
or exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company. However, upon the exercise of an NQO, the difference
between the fair market value of the Common Stock on the date of exercise and
the option exercise price generally will be treated as compensation to the
optionee upon exercise, and the Holding Company will be entitled to a
compensation expense deduction in the amount of income realized by the optionee.
Although no specific award determinations have been made at this time,
the Holding Company and the Savings Bank anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
The size of individual awards will be determined prior to submitting the 1997
Stock Option Plan for stockholder approval, and disclosure of anticipated awards
will be included in the proxy materials for such meeting.
MANAGEMENT RECOGNITION PLAN. Following the Conversion and
Reorganization, the Board of Directors of the Holding Company intends to adopt
the 1997 MRP for officers, employees, and nonemployee directors of the Holding
Company and the Savings Bank, subject to shareholder approval. The 1997 MRP will
enable the Holding Company and the Savings Bank to provide participants with a
proprietary interest in the Holding Company as an incentive to contribute to the
success of the Holding Company and the Savings Bank. The 1997 MRP will comply
with all applicable regulatory requirements. However, the 1997 MRP will not be
approved or endorsed by the OTS. Under current OTS regulations, the approval of
a majority vote of the Holding Company's outstanding shares is required prior to
the implementation of the 1997 MRP within one year of the consummation of the
Conversion and Reorganization.
The MRP expects to acquire a number of shares of Common Stock equal to
4% of the Conversion Shares issued in connection with the Conversion and
Reorganization (124,200 shares based on the issuance of 3,105,000 Conversion
Shares at the maximum of the Estimated Valuation Range). Such shares will be
acquired on the open market, if available, with funds contributed by the Holding
Company or the Savings Bank to a trust which the Holding Company may establish
in conjunction with the 1997 MRP ("1997 MRP Trust") or from authorized but
unissued shares or treasury shares of the Holding Company.
A committee of the Board of Directors of the Holding Company will
administer the 1997 MRP, the members of which will also serve as trustees of the
1997 MRP Trust, if formed. The trustees will be responsible for the investment
of all funds contributed by the Holding Company or the Savings Bank to the 1997
MRP Trust. The Board of Directors of the Holding Company may terminate the 1997
MRP at any time and, upon termination, all unallocated shares of Common Stock
will revert to the Holding Company.
Shares of Common Stock granted pursuant to the 1997 MRP will be in the
form of restricted stock payable ratably over a specified vesting period
following the date of grant. During the period of restriction, all shares will
be held in escrow by the Holding Company or by the 1997 MRP Trust. Under OTS
regulations, if the 1997 MRP is implemented within the first year following
consummation of the Conversion and Reorganization, the minimum vesting period
will be five years. All unvested 1997 MRP awards will vest in the event of the
recipient's death or disability. Unvested 1997 MRP awards will also vest
following a change in control (as defined in the 1997 MRP) of the Holding
Company or the Savings Bank to the extent authorized or not prohibited by
applicable law or regulations. OTS regulations currently provide that, if the
1997 MRP is implemented prior to the first anniversary of the Conversion and
Reorganization, vesting may not be accelerated upon a change in control of the
Holding Company or the Savings Bank.
A recipient of an 1997 MRP award in the form of restricted stock
generally will not recognize income upon an award of shares of Common Stock, and
the Holding Company will not be entitled to a federal income tax deduction,
until the termination of the restrictions. Upon such termination, the recipient
will recognize ordinary income in an amount equal to the fair market value of
the Common Stock at the time and the Holding Company will
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be entitled to a deduction in the same amount after satisfying federal income
tax withholding requirements. However, the recipient may elect to recognize
ordinary income in the year the restricted stock is granted in an amount equal
to the fair market value of the shares at that time, determined without regard
to the restrictions. In that event, the Holding Company will be entitled to a
deduction in such year and in the same amount. Any gain or loss recognized by
the recipient upon subsequent disposition of the stock will be either a capital
gain or capital loss.
Although no specific award determinations have been made at this time,
the Holding Company and the Savings Bank anticipate that if stockholder approval
is obtained it would provide awards to its directors, officers and employees to
the extent and under terms and conditions permitted by applicable regulations.
Under current OTS regulations, if the 1997 MRP is implemented within one year of
the consummation of the Conversion and Reorganization, (i) no officer or
employees could receive an award covering in excess of 25%, (ii) no nonemployee
director could receive in excess of 5% and (iii) nonemployee directors, as a
group, could not receive in excess of 30% of the number of shares reserved for
issuance under the 1997 MRP. The size of individual awards will be determined
prior to submitting the 1997 MRP for stockholder approval, and disclosure of
anticipated awards will be included in the proxy materials for such meeting.
TRANSACTIONS WITH THE SAVINGS BANK
Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features. The Savings Bank's policy is not to make any new
loans or extensions of credit to the Savings Bank's executive officers and
directors at different rates or terms than those offered to the general public.
In addition, loans made to a director or executive officer in an amount that,
when aggregated with the amount of all other loans to such person and his
related interests, are in excess of the greater of $25,000 or 5% of the Savings
Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors.
See "REGULATION -- Federal Regulation of Savings Banks -- Transactions with
Affiliates." The aggregate amount of loans by the Savings Bank to its executive
officers and directors was $1.0 million at March 31, 1997, or approximately
1.9% of pro forma stockholders' equity (based on the issuance of the maximum of
the Estimated Valuation Range).
REGULATION
GENERAL
The Savings Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act, as amended ("HOLA") and, in certain respects, the Federal
Deposit Insurance Act ("FDIA") and the regulations issued by the OTS and the
FDIC to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal savings associations may
engage. Lending activities and other investments must comply with various
statutory and regulatory capital requirements. In addition, the Savings Bank's
relationship with its depositors and borrowers is also regulated to a great
extent, especially in such matters as the ownership of deposit accounts and the
form and content of the Savings Bank's mortgage documents. The Savings Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to review
the Savings Bank's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the
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OTS, the FDIC or Congress, could have a material adverse impact on the Holding
Company, the Savings Bank and their operations. The Holding Company, as a
savings and loan holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of, the OTS and the
Securities and Exchange Commission ("SEC").
FEDERAL REGULATION OF THE SAVINGS BANK
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs; ensure that the FHLBs
carry out their housing finance mission; ensure that the FHLBs remain adequately
capitalized and able to raise funds in the capital markets; and ensure that the
FHLBs operate in a safe and sound manner. The Savings Bank, as a member of the
FHLB-Seattle, is required to acquire and hold shares of capital stock in the
FHLB- Seattle in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or (ii) 1/20 of
its advances (borrowings) from the FHLB-Seattle. At March 31, 1997, the Savings
Bank complied with this requirement with an investment in FHLB-Seattle stock of
$1.8 million. Among other benefits, the FHLB-Seattle provides a central credit
facility primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB-Seattle.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the BIF and the SAIF. As insurer of the Savings Bank's deposits, the FDIC
has examination, supervisory and enforcement authority over all savings
associations.
The Savings Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. The Savings Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system under
the FDIA as discussed below. The matrix so created results in nine assessment
risk classifications, with rates that until September 30, 1996 ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken. The
Savings Bank's assessments expensed for the year ended March 31, 1997 equaled
$1.2 million, which includes the $947,000 special SAIF assessment.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the
FDIC imposed a special assessment on each depository institution with
SAIF-assessable deposits which resulted in the SAIF achieving its designated
reserve ratio. In connection therewith, the FDIC reduced the assessment schedule
for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with
most institutions, including the Savings Bank, paying 0%. This assessment
schedule is the same as that for the BIF, which reached its designated reserve
ratio in 1995. In addition, since January 1, 1997, SAIF members are charged an
assessment of 0.065% of SAIF-assessable deposits for the purpose of paying
interest on the obligations issued by the Financing Corporation ("FICO") in the
1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be
charged an assessment to help pay interest on the FICO
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bonds at a rate of approximately .013% until the earlier of December 31, 1999 or
the date upon which the last savings association ceases to exist, after which
time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Savings Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Savings Bank.
LIQUIDITY REQUIREMENTS. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
5.0%) of its net withdrawable accounts plus short-term borrowings. OTS
regulations also require each savings institution to maintain an average daily
balance of short-term liquid assets at a specified percentage (currently 1.0%)
of the total of its net withdrawable savings accounts and borrowings payable in
one year or less. Monetary penalties may be imposed for failure to meet
liquidity requirements. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
PROMPT CORRECTIVE ACTION. Each federal banking agency is required to
implement a system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, an institution shall be deemed to be (i) "well capitalized" if it
has a total risk-based capital ratio of 10.0% or more, has a Tier I risk-based
capital ratio of 6.0% or more, has a leverage ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a leverage ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized;" (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity. The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized,
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significantly undercapitalized or critically undercapitalized. Immediately upon
becoming undercapitalized, an institution shall become subject to various
mandatory and discretionary restrictions on its operations.
At March 31, 1997, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines"). The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. If the OTS
determines that the Savings Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Savings Bank to submit to the agency an
acceptable plan to achieve compliance with the standard. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
QUALIFIED THRIFT LENDER TEST. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations: (i) the association may not make any new investment or engage
in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
Currently, the QTL test requires that either an institution qualify as
a domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months. Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards. In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets: 50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by FHLMC or FNMA. Portfolio assets consist of
total assets minus the sum of (i) goodwill and other intangible assets, (ii)
property used by the savings institution to conduct its business, and (iii)
liquid assets up to 20% of the institution's total assets. At March 31, 1997,
the qualified thrift investments of the Savings Bank were approximately 93.6% of
its portfolio assets.
CAPITAL REQUIREMENTS. Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in order
to comply with the capital requirements. The Holding Company is not subject to
any minimum capital requirements.
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OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital is
defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries. An institution
that fails to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--
Federal Regulation of the Savings Bank -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will be permitted to operate at or near the regulatory minimum
leverage ratio of 3%. All other savings associations will be required to
maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can be given as to
the final form of any such regulation, the date of its effectiveness or the
requirement applicable to the Savings Bank.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Savings Bank's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal
to at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated debt,
intermediate-term preferred stock and mandatory convertible subordinated debt,
subject to an amortization schedule, and (iii) general valuation loan and lease
loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not included
for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due. Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential construction loans are
assigned a 100% risk weight, as are nonqualifying residential mortgage loans and
that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio. The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets.
Off-balance sheet items are included in risk- weighted assets by converting them
to an approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital
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for purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets. That dollar amount is deducted from an association's total
capital in calculating compliance with its risk- based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure. In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu
of the OTS-calculated amount. The OTS has postponed the date that the component
will first be deducted from an institution's total capital.
See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a
table that sets forth in terms of dollars and percentages the OTS tangible, core
and risk-based capital requirements, the Savings Bank's historical amounts and
percentages at March 31, 1997 and pro forma amounts and percentages based upon
the assumptions stated therein.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Savings Bank to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits various
levels of distributions based primarily upon a savings association's capital
level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital distributions
during a calendar year up to 100% of its net income to date during the calendar
year plus one-half its surplus capital ratio (i.e., the amount of capital in
excess of its fully phased-in requirement) at the beginning of the calendar year
or the amount authorized for a Tier 2 association. Capital distributions in
excess of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital requirement
but below its fully phased-in capital requirement (both before and after the
proposed capital distribution). Such an association may make (without
application) capital distributions up to an amount equal to 75% of its net
income during the previous four quarters depending on how close the association
is to meeting its fully phased-in capital requirement. Capital distributions
exceeding this amount require prior OTS approval. A Tier 3 savings association
has capital below the minimum capital requirement (either before or after the
proposed capital distribution). A Tier 3 savings association may not make any
capital distributions without prior approval from the OTS.
The Savings Bank currently meets the criteria to be designated a Tier 1
association and, consequently, could at its option (after prior notice to, and
no objection made by, the OTS) distribute up to 100% of its net income during
the calendar year plus 50% of its surplus capital ratio at the beginning of the
calendar year less any distributions previously paid during the year.
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LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Savings Bank's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such loan
is secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower in
additional amounts under circumstances limited essentially to loans to develop
or complete residential housing units. At March 31, 1997, the Savings Bank's
largest aggregate amount of loans to one borrower was $1.8 million, which
represented 7.4% of the Savings Bank's unimpaired capital and surplus at March
31, 1997.
ACTIVITIES OF SAVINGS BANKS AND THEIR SUBSIDIARIES. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
TRANSACTIONS WITH AFFILIATES. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions. Any loan or extension of credit by the Savings Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks. The Savings Bank has not been significantly affected by the
rules regarding transactions with affiliates.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such persons,
is governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations generally require
that such loans be made on terms and conditions substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. Generally, Regulation O also places individual and aggregate limits
on the amount of loans the Savings Bank may make to such persons based, in part,
on the Savings Bank's capital position, and requires
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certain board approval procedures to be followed. The OTS regulations, with
certain minor variances, apply Regulation O to savings institutions.
COMMUNITY REINVESTMENT ACT. Under the federal Community Reinvestment
Act ("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Savings Bank received an "outstanding" rating as a
result of its latest evaluation.
REGULATORY AND CRIMINAL ENFORCEMENT PROVISIONS. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof. They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions
under the HOLA. If the Holding Company acquires control of another savings
association as a separate subsidiary other than in a supervisory acquisition, it
would become a multiple savings and loan holding company. There generally are
more restrictions on the activities of a multiple savings and loan holding
company than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.
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QUALIFIED THRIFT LENDER TEST. The HOLA provides that any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of the Savings Bank - -
Qualified Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.
TAXATION
FEDERAL TAXATION
GENERAL. Upon consummation of the Conversion and Reorganization, the
Holding Company and the Savings Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Savings Bank's reserve for bad debts discussed below.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Savings Bank or the Holding Company.
BAD DEBT RESERVE. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Savings Bank's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Savings Bank's actual loss experience, or a percentage equal
to 8% of the Savings Bank's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Savings Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as such the new rules
will have no effect on the net income or federal income tax expense. For taxable
years beginning after December 31, 1995, the Savings Bank's bad debt deduction
will be determined under the experience method using a formula based on actual
bad debt experience over a period of years or, if the Savings Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year. The new rules allow an institution to suspend bad debt
reserve recapture for the 1996 and 1997 tax years if the institution's lending
activity for those years is equal to or greater than the institutions average
mortgage lending activity for the six taxable years preceding 1996 adjusted for
inflation. For this purpose, only home purchase or home improvement loans are
included and the institution can elect to have the tax years with the highest
and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Savings Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess Distributions
will be included in the Savings Bank's taxable income. Nondividend distributions
include distributions in excess of the Savings Bank's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividends paid out of the Savings
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Bank's current or accumulated earnings and profits, as calculated for federal
income tax purposes, will not be considered to result in a distribution from the
Savings Bank's bad debt reserve. The amount of additional taxable income created
from an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
if, after the Conversion, the Savings Bank makes a "nondividend distribution,"
then approximately one and one-half times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). See "REGULATION"
and "DIVIDEND POLICY" for limits on the payment of dividends by the Savings
Bank. The Savings Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporations, including the Savings Bank, whether or not an
Alternative Minimum Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Holding Company may exclude from its
income 100% of dividends received from the Savings Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Savings Bank will not file a consolidated
tax return, except that if the Holding Company or the Savings Bank owns more
than 20% of the stock of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
AUDITS. Neither the MHC's nor the Savings Bank's federal income tax
returns have been audited within the past five years.
STATE TAXATION
GENERAL. The Savings Bank is subject to a business and occupation tax
imposed under Washington law at the rate of 1.70% of gross receipts; however,
interest received on loans secured by mortgages or deeds of trust on residential
properties is exempt from such tax.
AUDITS. The Savings Bank's business and occupation tax returns were
audited for the period January 1, 1992 through December 31, 1995 resulting in an
additional tax liability of $48,000, which the Savings Bank has paid.
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THE CONVERSION AND REORGANIZATION
THE OTS HAS APPROVED THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY
THE MEMBERS OF THE SAVINGS BANK AND THE STOCKHOLDERS OF THE SAVINGS BANK
ENTITLED TO VOTE THEREON AND TO THE SATISFACTION OF CERTAIN OTHER CONDITIONS
IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION.
GENERAL
On May 21, 1997, the Boards of Directors of the MHC and the Savings
Bank unanimously adopted, and on July 16 and July 25, 1997, subsequently
amended, the Plan of Conversion, pursuant to which the MHC will convert from a
mutual holding company to a stock holding company and the Savings Bank
simultaneously reorganize as a wholly-owned subsidiary of the Holding Company,
a newly formed Washington corporation. THE FOLLOWING DISCUSSION OF ALL MATERIAL
ASPECTS OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A TO BOTH THE MHC'S PROXY
STATEMENT AND THE SAVINGS BANK'S PROXY STATEMENT, AND IS AVAILABLE TO BOTH
MEMBERS OF THE MHC AND STOCKHOLDERS OF THE SAVINGS BANK UPON REQUEST. The Plan
of Conversion is also filed as an exhibit to the Registration Statement. See
"ADDITIONAL INFORMATION." The OTS has approved the Plan of Conversion subject
to its approval by the members of the MHC entitled to vote on the matter at
the Special Meeting of Members called for that purpose to be held on September
24, 1997, its approval by the stockholders of the Savings Bank entitled to
vote on the matter at the Stockholders' Meeting called for that purpose to be
held on September 24, 1997, and its approval by the stockholders of the
Savings Bank (excluding the MHC) entitled to vote on the matter at the
Stockholders' Meeting, and subject to the satisfaction of certain other
conditions imposed by the OTS in its approval.
Pursuant to the Plan of Conversion, (i) the MHC will convert from a
federally-chartered mutual holding company to a federally-chartered interim
stock savings bank (i.e. Interim A) and simultaneously merge with and into the
Savings Bank, pursuant to which the MHC will cease to exist and the shares of
Savings Bank Common Stock held by the MHC will be canceled, and (ii) Interim A
will then merge with and into the Savings Bank. As a result of the merger of
Interim A with and into the Savings Bank, the Savings Bank will become a wholly
owned subsidiary of the Holding Company and the Public Savings Bank Shares will
be converted into the Exchange Shares pursuant to the Exchange Ratio, which will
result in the holders of such shares owning in the aggregate approximately the
same percentage of the Common Stock to be outstanding upon the completion of the
Conversion and Reorganization (i.e., the Conversion Shares and the Exchange
Shares) as the percentage of Savings Bank Common Stock owned by them in the
aggregate immediately prior to consummation of the Conversion and
Reorganization, but before giving effect to (a) the payment of cash in lieu of
issuing fractional Exchange Shares and (b) any shares of Conversion Stock
purchased by the Savings Bank's stockholders in the Conversion Offerings or the
ESOP thereafter.
As part of the Conversion and Reorganization, the Holding Company is
offering Conversion Shares in the Subscription Offering to holders of
Subscription Rights in the following order of priority: (i) Eligible Account
Holders (depositors of the Savings Bank with $50.00 or more on deposit as of
December 31, 1995); (ii) the ESOP; (iii) Supplemental Eligible Account Holders
(depositors of the Savings Bank with $50.00 or more on deposit as of June 30,
1997); and (iv) Other Members (depositors of the Savings Bank as of July 31,
1997 and borrowers of the Savings Bank with loans outstanding as of October 22,
1993, which continue to be outstanding as of July 31, 1997).
Concurrently with the Subscription Offering, any Conversion Shares not
subscribed for in the Subscription Offering may be offered for sale in the
Direct Community Offering to members of the general public, with priority being
given first to Public Stockholders (who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members) and then to natural
persons and trusts of natural persons residing in the Local Community.
Conversion Shares not sold in the Subscription and Direct Community Offerings
may be offered in the Syndicated Community Offering. Regulations require that
the Direct Community and Syndicated Community Offerings be completed within 45
days after completion of the fully extended Subscription Offering unless
extended
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by the Savings Bank or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Savings Bank will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed Conversion Shares. The Plan of Conversion provides that
the Conversion and Reorganization must be completed within 24 months after the
date of the approval of the Plan of Conversion by the members of the MHC.
No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless the
Plan of Conversion is approved by the members of the MHC and the stockholders of
the Savings Bank.
The completion of the Conversion Offerings, however, is subject to
market conditions and other factors beyond the Savings Bank's control. No
assurance can be given as to the length of time after approval of the Plan of
Conversion at the Special Members Meeting and the Stockholders Meeting that will
be required to complete the Direct Community or Syndicated Community Offerings
or other sale of the Conversion Shares. If delays are experienced, significant
changes may occur in the estimated pro forma market value of the MHC and the
Savings Bank, as converted, together with corresponding changes in the net
proceeds realized by the Holding Company from the sale of the Conversion Shares.
If the Conversion and Reorganization is terminated, the Savings Bank would be
required to charge all Conversion and Reorganization expenses against current
income.
Orders for Conversion Shares will not be filled until at least
2,295,000 Conversion Shares have been subscribed for or sold and the OTS
approves the final valuation and the Conversion and Reorganization closes. If
the Conversion and Reorganization is not completed within 45 days after the last
day of the fully extended Subscription Offering and the OTS consents to an
extension of time to complete the Conversion and Reorganization, subscribers
will be given the right to increase, decrease or rescind their subscriptions.
Unless an affirmative indication is received from subscribers that they wish to
continue to subscribe for shares, the funds will be returned promptly, together
with accrued interest at the Savings Bank's passbook rate from the date payment
is received until the funds are returned to the subscriber. If such period is
not extended, or, in any event, if the Conversion and Reorganization is not
completed, all withdrawal authorizations will be terminated and all funds held
will be promptly returned together with accrued interest at the Savings Bank's
passbook rate from the date payment is received until the Conversion and
Reorganization is terminated.
PURPOSES OF CONVERSION AND REORGANIZATION
The MHC, as a federally chartered mutual holding company, does not have
stockholders and has no authority to issue capital stock. As a result of the
Conversion and Reorganization, the Holding Company will be structured in the
form used by holding companies of commercial banks, most business entities and a
growing number of savings institutions. The holding company form of organization
will provide the Holding Company with the ability to diversify the Holding
Company's and the Savings Bank's business activities through acquisition of or
mergers with both stock savings institutions and commercial banks, as well as
other companies. Although there are no current arrangements, understandings or
agreements regarding any such opportunities, the Holding Company will be in a
position after the Conversion and Reorganization, subject to regulatory
limitations and the Holding Company's financial position, to take advantage of
any such opportunities that may arise.
In their decision to pursue the Conversion and Reorganization, the
Board of Directors of the MHC and the Savings Bank considered various regulatory
uncertainties associated with the mutual holding company structure including the
ability to waive dividends in the future as well as the general uncertainty
regarding a possible elimination of the federal savings association charter. See
"RISK FACTORS -- Recent Legislation and the Future of the Thrift Industry."
The Conversion and Reorganization will be important to the future
growth and performance of the holding company organization by providing a larger
capital base to support the operations of the Savings Bank and Holding Company
and by enhancing their future access to capital markets, their ability to
diversify into other financial
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services related activities, and their ability to provide services to the
public. Although the Savings Bank currently has the ability to raise additional
capital through the sale of additional shares of Savings Bank Common Stock, that
ability is limited by the mutual holding company structure which, among other
things, requires that the MHC hold a majority of the outstanding shares of
Savings Bank Common Stock.
The Conversion and Reorganization also will result in an increase in
the number of shares of Common Stock to be outstanding as compared to the number
of outstanding shares of Public Savings Bank Shares which will increase the
likelihood of the development of an active and liquid trading market for the
Common Stock. See "MARKET FOR COMMON STOCK." In addition, the Conversion and
Reorganization permit to the Holding Company to engage in stock repurchases
without adverse federal income tax consequences, unlike the Savings Bank.
Currently, the Holding Company has no plans or intentions to engage in any stock
repurchases.
An additional benefit of the Conversion and Reorganization will be an
increase in the accumulated earnings and profits of the Savings Bank for federal
income tax purposes. When the Savings Bank (as a mutual institution) transferred
substantially all of its assets and liabilities to its stock savings bank
successor in the MHC Reorganization, its accumulated earnings and profits tax
attribute was not able to be transferred to the Savings Bank because no tax-free
reorganization was involved. Accordingly, this tax attribute was retained by the
Savings Bank when it converted its charter to that of the MHC, even though the
underlying retained earnings were transferred to the Savings Bank. The
Conversion and Reorganization has been structured to re-unite the accumulated
earnings and profits tax attribute retained by the MHC in the MHC Reorganization
with the retained earnings of the Savings Bank by merging the MHC with and into
the Savings Bank in a tax-free reorganization. This transaction will increase
the Savings Bank's ability to pay dividends to the Holding Company in the
future. See "DIVIDEND POLICY."
If the Savings Bank had undertaken a standard conversion involving the
formation of a stock holding company in 1993, applicable OTS regulations would
have required a greater amount of common stock to be sold than the amount of net
proceeds raised in the MHC Reorganization. Management believed that it was
advisable to profitably invest the $6.5 million of net proceeds raised in the
MHC Reorganization prior to raising the larger amount of capital that would have
been raised in a standard conversion. A standard conversion in 1993 also would
have immediately eliminated all aspects of the mutual form of organization.
In light of the foregoing, the Boards of Directors of the Primary
Parties believe that the Conversion and Reorganization is in the best interests
of the MHC and the Savings Bank, their respective members and stockholders, and
the communities served by the Savings Bank.
EFFECTS OF CONVERSION AND REORGANIZATION ON DEPOSITORS AND BORROWERS OF THE
SAVINGS BANK
GENERAL. Prior to the Conversion and Reorganization, each depositor in
the Savings Bank has both a deposit account in the institution and a pro rata
ownership interest in the net worth of the MHC based upon the balance in his or
her account, which interest may only be realized in the event of a liquidation
of the MHC. However, this ownership interest is tied to the depositor's account
and has no tangible market value separate from such deposit account. A depositor
who reduces or closes his account receives a portion or all of the balance in
the account but nothing for his ownership interest in the net worth of the MHC,
which is lost to the extent that the balance in the account is reduced.
Consequently, the depositors of the Savings Bank normally have no way
to realize the value of their ownership interest in the MHC, which has
realizable value only in the unlikely event that the MHC is liquidated. In such
event, the depositors of record at that time, as owners, would share pro rata in
any residual surplus and reserves of the MHC after other claims are paid.
Upon consummation of the Conversion and Reorganization, permanent
nonwithdrawable capital stock will be created to represent the ownership of the
net worth of the Holding Company. The Common Stock is separate and apart from
deposit accounts and cannot be and is not insured by the FDIC or any other
governmental agency.
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Certificates are issued to evidence ownership of the permanent stock. The stock
certificates are transferable, and therefore the stock may be sold or traded if
a purchaser is available with no effect on any deposit and/or loan account(s)
the seller may hold in the Savings Bank.
CONTINUITY. The Conversion and Reorganization will not interrupt the
Savings Bank's normal business of accepting deposits and making loans. The
Savings Bank will continue to be subject to regulation by the OTS and the FDIC.
After the Conversion and Reorganization, the Savings Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The directors and officers of the Savings Bank at the time of the
Conversion and Reorganization will continue to serve as directors and officers
of the Savings Bank after the Conversion and Reorganization. The directors and
officers of the Holding Company consist of individuals currently serving as
directors and officers of the MHC and the Savings Bank, and they generally will
retain their positions in the Holding Company after the Conversion and
Reorganization.
EFFECT ON PUBLIC SAVINGS BANK SHARES. Under the Plan of Conversion,
upon consummation of the Conversion and Reorganization, the Public Savings Bank
Shares shall be converted into Exchange Shares based upon the Exchange Ratio
without any further action on the part of the holder thereof. Upon surrender of
the Public Savings Bank Shares, Common Stock will be issued in exchange for such
shares. See "-- Delivery and Exchange of Stock Certificates."
Upon consummation of the Conversion and Reorganization, the Public
Stockholders will become stockholders of the Holding Company. For a description
of certain changes in the rights of stockholders as a result of the Conversion
and Reorganization, see "COMPARISON OF STOCKHOLDERS" RIGHTS."
VOTING RIGHTS. Presently, depositors and borrowers of the Savings Bank
are members of, and have voting rights in, the MHC as to all matters requiring
membership action. Upon completion of the Conversion and Reorganization, the MHC
will cease to exist and all voting rights in the Savings Bank will be vested in
the Holding Company as the sole stockholder of the Savings Bank. Exclusive
voting rights with respect to the Holding Company will be vested in the holders
of Common Stock. Depositors and borrowers of the Savings Bank will not have
voting rights in the Holding Company after the Conversion and Reorganization,
except to the extent that they become stockholders of the Holding Company.
SAVINGS ACCOUNTS AND LOANS. The Savings Bank's savings accounts,
account balances and existing FDIC insurance coverage of savings accounts will
not be affected by the Conversion and Reorganization. Furthermore, the
Conversion and Reorganization will not affect the loan accounts, loan balances
or obligations of borrowers under their individual contractual arrangements with
the Savings Bank.
TAX EFFECTS. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion and Reorganization will
constitute a nontaxable reorganization under Section 368(a)(1)(A) of the Code.
Among other things, the opinion provides that: (i) the conversion of the MHC
from a mutual holding company to a federally-chartered interim stock savings
bank (i.e., Interim A) and its simultaneous merger with and into the Savings
Bank, with the Savings Bank as the surviving entity will qualify as a
reorganization within the meaning of Section 368(a)(1)(A) of the Code, (ii) no
gain or loss will be recognized by the Savings Bank upon the receipt of the
assets of the MHC in such merger, (iii) the merger of Interim B with and into
the Savings Bank, with the Savings Bank as the surviving entity, will qualify as
a reorganization within the meaning of Section 368(a)(1)(A) of the Code, (iv) no
gain or loss will be recognized by Interim B upon the transfer of its assets to
the Savings Bank, (v) no gain or loss will be recognized by the Savings Bank
upon the receipt of the assets of Interim B, (vi) no gain or loss will be
recognized by the Holding Company upon the receipt of Savings Bank Common Stock
solely in exchange for Common Stock, (vii) no gain or loss will be recognized by
the Public Stockholders upon the receipt of Exchange Shares in exchange for
their Public Savings Bank Shares, (viii) the basis of the Exchange Shares to be
received by the Public Stockholders will be the same as the basis of the Public
Savings Bank Shares surrendered in
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exchange therefor, before giving effect to any payment of cash in lieu of
fractional Exchange Shares, (ix) the holding period of the Exchange Shares to be
received by the Public Stockholders will include the holding period of the
Public Savings Bank Shares, provided that the Public Savings Bank Shares were
held as a capital asset on the date of the exchange, (x) no gain or loss will be
recognized by the Holding Company upon the sale of shares of Conversion Shares
in the Conversion Offerings, (xi) the Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members will recognize gain, if any, upon the
issuance to them of withdrawable savings accounts in the Savings Bank following
the Conversion and Reorganization, interests in the liquidation account and
nontransferable subscription rights to purchase Conversion Stock, but only to
the extent of the value, if any, of the subscription rights, and (xii) the tax
basis to the holders of Conversion Shares purchased in the Conversion Offerings
will be the amount paid therefor, and the holding period for the Conversion
Shares will begin on the date of consummation of the Conversion Offerings, if
purchased through the exercise of Subscription Rights, and on the day after the
date of purchase, if purchased in the Community Offering or the Syndicated
Community Offering. Unlike a private letter ruling issued by the IRS, an opinion
of counsel is not binding on the IRS and the IRS could disagree with the
conclusions reached therein. In the event of such disagreement, no assurance can
be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. RP Financial, a financial consulting firm retained by the
Savings Bank, whose findings are not binding on the IRS, has issued a letter
indicating that the Subscription Rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration and afford the recipients the right only
to purchase shares of the Common Stock at a price equal to its estimated fair
market value, which will be the same price paid by purchasers in the Direct
Community Offering for unsubscribed shares of Common Stock. If the Subscription
Rights are deemed to have a fair market value, the receipt of such rights may
only be taxable to those Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members who exercise their Subscription Rights. The Savings
Bank could also recognize a gain on the distribution of such Subscription
Rights. Eligible Account Holders, Supplemental Eligible Account Holders and
Other Members are encouraged to consult with their own tax advisors as to the
tax consequences in the event the Subscription Rights are deemed to have a fair
market value.
The Savings Bank has also received an opinion from Knapp, O'Dell &
Lewis, Camas, Washington, that, assuming the Conversion and Reorganization does
not result in any federal income tax liability to the Savings Bank, its account
holders, or the Holding Company, implementation of the Plan of Conversion will
not result in any Washington tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Knapp, O'Dell & Lewis and the
letter from RP Financial are filed as exhibits to the Registration Statement.
See "ADDITIONAL INFORMATION."
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION AND REORGANIZATION
PARTICULAR TO THEM.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the MHC, each depositor of the Savings Bank would receive his or her pro rata
share of any assets of the MHC remaining after payment of claims of all
creditors. Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his or her deposit account was to the total
value of all deposit accounts in the Savings Bank at the time of liquidation.
After the Conversion and Reorganization, each depositor, in the event of a
complete liquidation of the Savings Bank, would have a claim as a creditor of
the same general priority as the claims of all other general creditors of the
Savings Bank. However, except as described below, his or her claim would be
solely in the amount of the balance in his or her deposit account plus accrued
interest. Each stockholder would not have an interest in the value or assets of
the Savings Bank or the Holding Company above that amount.
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The Plan of Conversion provides for the establishment, upon the
completion of the Conversion and Reorganization, of a special "liquidation
account" for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the amount of any dividends waived by the
MHC plus the greater of (1) the Savings Bank's retained earnings of $9.8 million
at March 31, 1993, the date of the latest statement of financial condition
contained in the final offering circular utilized in the MHC Reorganization, or
(2) 58.21% of the Savings Bank's total stockholders' equity as reflected in its
latest statement of financial condition contained in the final Prospectus
utilized in the Conversion Offerings. As of the date of this Prospectus, the
initial balance of the liquidation account would be $14.6 million. Each Eligible
Account Holder and Supplemental Eligible Account Holder, if he or she were to
continue to maintain his deposit account at the Savings Bank, would be entitled,
upon a complete liquidation of the Savings Bank after the Conversion and
Reorganization to an interest in the liquidation account prior to any payment to
the Holding Company as the sole stockholder of the Savings Bank. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, transaction accounts such as checking accounts, money market
deposit accounts and certificates of deposit, held in the Savings Bank at the
close of business on December 31, 1995 or June 30, 1997, as the case may be.
Each Eligible Account Holder and Supplemental Eligible Account Holder will have
a pro rata interest in the total liquidation account for each of his or her
deposit accounts based on the proportion that the balance of each such deposit
account on the December 31, 1995 Eligibility Record Date or the June 30, 1997
Supplemental Eligibility Record Date, as the case may be, bore to the balance of
all deposit accounts in the Savings Bank on such date.
If, however, on any March 31 annual closing date of the Savings Bank,
commencing March 31, 1997, the amount in any deposit account is less than the
amount in such deposit account on December 31, 1995 or June 30, 1997, as the
case may be, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. In addition, no interest in the liquidation account
would ever be increased despite any subsequent increase in the related deposit
account. Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Holding Company as the sole stockholder of the Savings Bank.
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Conversion Shares have been
issued to persons and entities entitled to purchase the Conversion Shares in the
Subscription Offering. The amount of Conversion Shares which these parties may
purchase will be subject to the availability of the Conversion Shares for
purchase under the categories set forth in the Plan of Conversion. Subscription
priorities have been established for the allocation of stock to the extent that
the Conversion Shares are available. These priorities are as follows:
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with $50.00 or
more on deposit at the Savings Bank as of December 31, 1995 will receive
nontransferable Subscription Rights to subscribe for up to the greater of 1.6%
of the shares of Conversion Stock issued in the Conversion and Reorganization,
one-tenth of one percent of the total offering of Common Stock or 15 times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Common Stock to be issued by a fraction of which the
numerator is the amount of qualifying deposit of the Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all Eligible
Account Holders. If the exercise of Subscription Rights in this category results
in an oversubscription, shares of Common Stock will be allocated among
subscribing Eligible Account Holders so as to permit each Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make such person's total allocation equal 100 shares or the number of shares
actually subscribed for, whichever is less. Thereafter, unallocated shares will
be allocated among subscribing Eligible Account Holders proportionately, based
on the amount of their respective qualifying deposits as compared to total
qualifying deposits of all Eligible Account Holders. Subscription Rights
received by officers and directors in this category based on their increased
deposits
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in the Savings Bank in the one year period preceding December 31, 1995 are
subordinated to the Subscription Rights of other Eligible Account Holders.
CATEGORY 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Conversion and Reorganization. The ESOP intends to
purchase 8% of the shares of Common Stock issued in the Conversion and
Reorganization. In the event the number of shares offered in the Conversion and
Reorganization is increased above the maximum of the Estimated Valuation Range,
the ESOP shall have a priority right to purchase any such shares exceeding the
maximum of the Estimated Valuation Range up to an aggregate of 8% of the Common
Stock.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each depositor with
$50.00 or more on deposit as of June 30, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of 1.6% of the shares of
Conversion Stock issued in the Conversion and Reorganization, one-tenth of one
percent of the total offering of Common Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of qualifying deposits of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders. If the exercise of Subscription Rights in this
category results in an oversubscription, shares of Common Stock will be
allocated among subscribing Supplemental Eligible Account Holders so as to
permit each Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation equal 100
shares or the number of shares actually subscribed for, whichever is less.
Thereafter, unallocated shares will be allocated among subscribing Supplemental
Eligible Account Holders proportionately, based on the amount of their
respective qualifying deposits as compared to total qualifying deposits of all
Supplemental Eligible Account Holders.
CATEGORY 4: OTHER MEMBERS. Each depositor of the Savings Bank as of the
Voting Record Date (July 31, 1997) and each borrower with a loan outstanding on
October 22, 1993, which continues to be outstanding as of the Voting Record
Date, will receive nontransferable Subscription Rights to purchase up to 1.6% of
the shares of Conversion Stock issued in the Conversion and Reorganization to
the extent shares are available following subscriptions by Eligible Account
Holders, the Savings Bank's ESOP and Supplemental Eligible Account Holders. In
the event of an oversubscription in this category, the available shares will be
allocated proportionately based on the amount of the respective subscriptions.
SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR OTHERWISE
TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE SUBSCRIPTION
OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND
PENALTIES IMPOSED BY THE OTS OR ANOTHER AGENCY OF THE U.S. GOVERNMENT. EACH
PERSON EXERCISING SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE OR SHE
IS PURCHASING SUCH SHARES SOLELY FOR HIS OR HER OWN ACCOUNT AND THAT HE OR SHE
HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE OR TRANSFER
OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE
CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Holding Company and the Savings Bank will make reasonable attempts
to provide a Prospectus and related offering materials to holders of
Subscription Rights. However, the Subscription Offering and all Subscription
Rights under the Plan of Conversion will expire at ______, Pacific Time, on the
Expiration Date, whether or not the Savings Bank has been able to locate each
person entitled to such Subscription Rights. ORDERS FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING RECEIVED IN HAND BY THE SAVINGS BANK AFTER THE EXPIRATION
DATE WILL NOT BE ACCEPTED. The Subscription Offering may be extended by the
Holding Company and the Savings Bank up to _____, 1997 without the OTS's
approval. OTS regulations require that the Holding Company complete the sale of
Conversion Shares within 45 days after the close of the Subscription Offering.
If the Direct Community Offering and the Syndicated Community Offerings are not
completed by _____, 1997 (or _______, 1997, if the Subscription Offering is
fully extended), all funds received will be promptly returned with interest at
the Savings Bank's passbook
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rate and all withdrawal authorizations will be canceled or, if regulatory
approval of an extension of the time period has been granted, all subscribers
and purchasers will be given the right to increase, decrease or rescind their
orders. If an extension of time is obtained, all subscribers will be notified of
such extension and of the duration of any extension that has been granted, and
will be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Any shares of Common Stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given first to Public Stockholders (who are not eligible to
subscribe for Conversion Shares in the Subscription Offering) and then to
natural persons and trusts of natural persons residing in the Local Community.
Purchasers in the Direct Community Offering are eligible to purchase up to 1.6%
of the shares of Conversion Stock issued in the Conversion and Reorganization.
In the event an insufficient number of shares are available to fill orders in
the Direct Community Offering, the available shares will be allocated on a pro
rata basis determined by the amount of the respective orders. The Direct
Community Offering, if held, is expected to commence immediately subsequent to
the Expiration Date, but may begin at anytime during the Subscription Offering.
The Direct Community Offering may terminate on or at any time subsequent to the
Expiration Date, but no later than 45 days after the close of the Subscription
Offering, unless extended by the Holding Company and the Savings Bank, with
approval of the OTS. Any extensions beyond 45 days after the close of the fully
extended Subscription Offering would require a resolicitation of orders, wherein
subscribers for the maximum numbers of shares of Common Stock would be, and
certain other large Subscribers in the discretion of the Holding Company and the
Savings Bank may be, given the opportunity to continue their orders, in which
case they will need to reconfirm affirmatively their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest at the Savings Bank's passbook rate, or be
permitted to modify or cancel their orders. THE RIGHT OF ANY PERSON TO PURCHASE
SHARES IN THE DIRECT COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE
HOLDING COMPANY AND THE SAVINGS BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE
OR IN PART. IF AN ORDER IS REJECTED IN PART, THE PURCHASER DOES NOT HAVE THE
RIGHT TO CANCEL THE REMAINDER OF THE ORDER. THE HOLDING COMPANY PRESENTLY
INTENDS TO TERMINATE THE DIRECT COMMUNITY OFFERING AS SOON AS IT HAS RECEIVED
ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION AND
REORGANIZATION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.
SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be managed by Pacific Crest acting as
agent of the Holding Company. THE HOLDING COMPANY AND THE SAVINGS BANK HAVE THE
RIGHT TO REJECT ORDERS, IN WHOLE OR PART, IN THEIR SOLE DISCRETION IN THE
SYNDICATED COMMUNITY OFFERING. Neither Webb nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering; however, Webb has agreed to use its best
efforts in the sale of shares in the Syndicated Community Offering.
Conversion Shares sold in the Syndicated Community Offering also will
be sold at the $10.00 Purchase Price. See "-- Stock Pricing, Exchange Ratio and
Number of Shares to be Issued." No person will be permitted to subscribe in the
Syndicated Community Offering for Conversion Shares that exceeds 1.6% of the
Conversion Shares issued in the Conversion and reorganization. See "-- Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" for a description of the commission to be paid to the selected
dealers and to Webb.
Webb may enter into agreements with selected dealers to assist in the
sale of shares in the Syndicated Community Offering. During the Syndicated
Community Offering, selected dealers may only solicit indications of
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interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock. When
and if Webb and the Holding Company believe that enough indications of interest
and orders have been received in the Subscription Offering, the Direct Community
Offering and the Syndicated Community Offering to consummate the Conversion and
Reorganization, Webb will request, as of the Order Date, selected dealers to
submit orders to purchase shares for which they have received indications of
interest from their customers. Selected dealers will send confirmations to such
customers on the next business day after the Order Date. Selected dealers may
debit the accounts of their customers on a date which will be three business
days from the Order Date ("Settlement Date"). Customers who authorize selected
dealers to debit their brokerage accounts are required to have the funds for
payment in their account on but not before the Settlement Date. On the
Settlement Date, selected dealers will remit funds to the account that the
Holding Company established for each selected dealer. Each customer's funds so
forwarded to the Holding Company, along with all other accounts held in the same
title, will be insured by the FDIC up to the applicable $100,000 legal limit.
After payment has been received by the Holding Company from selected dealers,
funds will earn interest at the Savings Bank's passbook rate until the
completion of the Conversion Offerings. At the completion of the Conversion and
Reorganization, the funds received in the Conversion Offerings will be used to
purchase the shares of Common Stock ordered. The shares issued in the Conversion
and Reorganization cannot and will not be insured by the FDIC or any other
government agency. In the event the Conversion and Reorganization is not
consummated as described above, funds with interest will be returned promptly to
the selected dealers, who, in turn, will promptly credit their customers'
brokerage accounts.
The Syndicated Community Offering may terminate on or at any time
subsequent to the Expiration Date, but no later than 45 days after the close of
the Subscription Offering, unless extended by the Holding Company and the
Savings Bank, with approval of the OTS.
In the event the Savings Bank is unable to find purchasers from the
general public for all unsubscribed shares, other purchase arrangements will be
made by the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the OTS. The OTS may grant one
or more extensions of the offering period, provided that (i) no single extension
exceeds 90 days, (ii) subscribers are given the right to increase, decrease or
rescind their subscriptions during the extension period, and (iii) the
extensions do not go more than two years beyond the date on which the members
approved the Plan of Conversion. If the Conversion and Reorganization is not
completed within 45 days after the close of the Subscription Offering, either
all funds received will be returned with interest (and withdrawal authorizations
canceled) or, if the OTS has granted an extension of time, all subscribers will
be given the right to increase, decrease or rescind their subscriptions at any
time prior to 20 days before the end of the extension period. If an extension of
time is obtained, all subscribers will be notified of such extension and of
their rights to modify their orders. If an affirmative response to any
resolicitation is not received by the Holding Company from a subscriber, the
subscriber's order will be rescinded and all funds received will be promptly
returned with interest (or withdrawal authorizations will be canceled).
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Savings
Bank will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan of Conversion reside. However, the Holding Company and the
Savings Bank are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside in such state or (ii) the Holding
Company or the Savings Bank determines that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise, including
but not limited to a request or requirement that the Holding Company and the
Savings Bank or their officers, directors or trustees register as a broker,
dealer, salesman or selling agent, under the securities laws of such state, or a
request or requirement to register or otherwise qualify the Subscription Rights
or Common Stock for sale or submit any filing with respect thereto in such
state. Where the number of persons eligible to subscribe for shares in one state
is small, the Holding Company and the Savings Bank will base their decision as
to whether or not to offer the Common Stock in such state on a number of
factors, including the size of accounts held by account holders in the state,
the cost of reviewing the registration and qualification requirements of the
state (and of actually
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registering or qualifying the shares) or the need to register the Holding
Company, its officers, directors or employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Primary Parties have retained Webb to consult with and to advise
the Saving Bank and the Holding Company, and to assist the Holding Company on a
best efforts basis, in the distribution of the Conversion Shares in the
Subscription Offering and Direct Community Offering. The services that Webb will
provide include, but are not limited to (i) training the employees of the
Savings Bank who will perform certain ministerial functions in the Subscription
Offering and the Direct Community Offering regarding the mechanics and
regulatory requirements of the stock offering process, (ii) managing the Stock
Information Center by assisting interested stock subscribers and by keeping
records of all stock orders, (iii) preparing marketing materials, and (iv)
assisting in the solicitation of proxies from the MHC's members and the
stockholders of the Savings Bank for use at the Special Members' Meeting and the
Stockholders' Meeting, respectively. For its services, Webb will receive a
management fee of $25,000 and a success fee of 1.5% of the aggregate Purchase
Price of the Conversion Shares sold in the Subscription Offering and the Direct
Community Offering, excluding shares purchased by the ESOP and officers,
directors and employees of the Savings Bank, or members of their immediate
families. The management fee shall be applied to the success fee. If selected
broker-dealers are used to assist in the sale of the Conversion Shares in the
Syndicated Community Offering, Webb will be paid a fee of up to 5.5% of the
aggregate Purchase Price of the Conversion Shares sold by such broker-dealers
and Webb will pay to such broker-dealers an amount competitive with gross
underwriting commissions then charged for comparable amounts of stock sold at a
comparable price per share in a similar market environment. The Primary Parties
have agreed to reimburse Webb for its out-of-pocket expenses up to $15,000 and
its legal fees up to $30,000. The Primary Parties have also agreed to indemnify
Webb against certain claims and liabilities under the Securities Act, including
those in connection with material misstatements or omissions from this
Prospectus or otherwise arising from the use of this Prospectus (except for
claims and liabilities arising out of Webb's bad faith or gross negligence), and
will contribute to payments Webb may be required to make in connection with any
such claims or liabilities.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription Offering and
Direct Community Offering principally by the distribution of this Prospectus and
through activities conducted at the Savings Bank's Stock Information Center at
its main office facility. The Stock Information Center is expected to operate
during normal business hours throughout the Subscription Offering and Direct
Community Offering. It is expected that at any particular time one or more Webb
employees will be working at the Stock Information Center. Stock Information
Center personnel will be responsible for mailing materials relating to the
Conversion Offerings, responding to questions regarding the Conversion and
Reorganization and the Conversion Offerings and processing stock orders.
Sales of Common Stock will be made by registered representatives
affiliated with Webb or by the selected dealers managed by Pacific Crest. The
management and employees of the Savings Bank may participate in the Conversion
Offerings in clerical capacities, providing administrative support in effecting
sales transactions or, when permitted by state securities laws, answering
questions of a mechanical nature relating to the proper execution of the Order
Form. Management of the Savings Bank may answer questions regarding the business
of the Savings Bank when permitted by state securities laws. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. The management
and employees of the Holding Company and the Savings Bank have been instructed
not to solicit offers to purchase Common Stock or provide advice regarding the
purchase of Common Stock.
No officer, director or employee of the Savings Bank or the Holding
Company will be compensated, directly or indirectly, for any activities in
connection with the offer or sale of securities issued in the Conversion and
Reorganization.
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None of the Savings Bank's personnel participating in the Conversion
Offerings is registered or licensed as a broker or dealer or an agent of a
broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order Forms will only be distributed with a Prospectus. The Savings Bank will
accept for processing only orders submitted on original Order Forms. The Savings
Bank is not obligated to accept orders submitted on photocopied or telecopied
Order Forms. ORDERS CANNOT AND WILL NOT BE ACCEPTED WITHOUT THE EXECUTION OF THE
CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM.
To purchase shares in the Subscription Offering, an executed Order Form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Savings Bank (which may be given by completing the
appropriate blanks in the Order Form), must be received by the Savings Bank by
______, Pacific Time, on the Expiration Date. Order Forms which are not received
by such time or are executed defectively or are received without full payment
(or without appropriate withdrawal instructions) are not required to be
accepted. The Holding Company and the Savings Bank have the right to waive or
permit the correction of incomplete or improperly executed Order Forms, but do
not represent that they will do so. Pursuant to the Plan of Conversion, the
interpretation by the Holding Company and the Savings Bank of the terms and
conditions of the Plan of Conversion and of the Order Form will be final. In
order to purchase shares in the Direct Community Offering, the Order Form,
accompanied by the required payment for each share subscribed for, must be
received by the Savings Bank prior to the time the Direct Community Offering
terminates, which may be on or at any time subsequent to the Expiration Date.
Once received, an executed Order Form may not be modified, amended or rescinded
without the consent of the Savings Bank unless the Conversion and Reorganization
has not been completed within 45 days after the end of the Subscription
Offering, unless such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1995) and/or the Supplemental Eligibility Record Date (June 30, 1997) and/or the
Voting Record Date (July 31, 1997) must list all accounts on the Order Form
giving all names in each account, the account number and the approximate account
balance as of such date.
Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Savings Bank. Appropriate means by which such withdrawals may be
authorized are provided on the Order Form. No wire transfers will be accepted.
Interest will be paid on payments made by cash, check, bank draft or money order
at the Savings Bank's passbook rate from the date payment is received until the
completion or termination of the Conversion and Reorganization. If payment is
made by authorization of withdrawal from deposit accounts, the funds authorized
to be withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion and
Reorganization (unless the certificate
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matures after the date of receipt of the Order Form but prior to closing, in
which case funds will earn interest at the passbook rate from the date of
maturity until consummation of the Conversion and Reorganization), but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the Conversion and Reorganization. At the
completion of the Conversion and Reorganization, the funds received in the
Conversion Offerings will be used to purchase the shares of Common Stock
ordered. THE SHARES OF COMMON STOCK ISSUED IN THE CONVERSION AND REORGANIZATION
CANNOT AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. If
the Conversion and Reorganization is not consummated for any reason, all funds
submitted will be promptly refunded with interest as described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of
the aggregate Purchase Price from his or her deposit account, the Savings Bank
will do so as of the effective date of Conversion and Reorganization, though the
account must contain the full amount necessary for payment at the time the
subscription order is received. The Savings Bank not will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Savings
Bank's passbook rate.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but rather may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Conversion and
Reorganization, provided that there is in force from the time of its
subscription until such time, a loan commitment from an unrelated financial
institution or the Holding Company to lend to the ESOP, at such time, the
aggregate Purchase Price of the shares for which it subscribed.
IRAs maintained in the Savings Bank do not permit investment in the
Common Stock. A depositor interested in using his or her IRA funds to purchase
Common Stock must do so through a self-directed IRA. Since the Savings Bank does
not offer such accounts, it will allow such a depositor to make a
trustee-to-trustee transfer of the IRA funds to a trustee offering a
self-directed IRA program with the agreement that such funds will be used to
purchase the Holding Company's Common Stock in the Conversion Offerings. There
will be no early withdrawal or IRS interest penalties for such transfers. The
new trustee would hold the Common Stock in a self-directed account in the same
manner as the Savings Bank now holds the depositor's IRA funds. An annual
administrative fee may be payable to the new trustee. Depositors interested in
using funds in a Savings Bank IRA to purchase Common Stock should contact the
Stock Information Center so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Date. In addition, the provisions
of ERISA and IRS regulations require that officers, directors and 10%
shareholders who use self-directed IRA funds to purchase shares of Common Stock
in the Subscription Offering, make such purchases for the exclusive benefit of
IRAs.
STOCK PRICING, EXCHANGE RATIO AND NUMBER OF SHARES TO BE ISSUED
The Plan of Conversion requires that the purchase price of the
Conversion Shares must be based on the appraised pro forma market value of the
Conversion Shares, as determined on the basis of an independent valuation. The
Primary Parties have retained RP Financial to make such valuation. For its
services in making such appraisal and any expenses incurred in connection
therewith, RP Financial will receive a maximum fee of $25,000 plus out of pocket
expenses, together with a fee of no greater than $5,000 plus out of pocket
expenses for the preparation of a business plan and other services performed in
connection with the Holding Company's holding company application to the OTS.
The Primary Parties have agreed to indemnify RP Financial and its employees and
affiliates against certain losses (including any losses in connection with
claims under the federal securities laws) arising out of its services as
appraiser, except where RP Financial's liability results from its negligence or
bad faith.
The appraisal has been prepared by RP Financial in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the
Primary Parties and the economic and demographic conditions in the Savings
Bank's existing market area; certain historical, financial and
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other information relating to the Savings Bank; a comparative evaluation of the
operating and financial statistics of the Savings Bank with those of other
similarly situated publicly-traded companies located in Washington and other
regions of the United States; the aggregate size of the offering of the
Conversion Shares; the impact of the Conversion and Reorganization on the
Savings Bank's capital and earnings potential; the proposed dividend policy of
the Holding Company and the Savings Bank; and the trading market for the Savings
Bank Common Stock and securities of comparable companies and general conditions
in the market for such securities.
On the basis of the foregoing, RP Financial has advised the Primary
Parties in its opinion that the estimated pro forma market value of the MHC and
the Savings Bank, as converted, was $27.0 million as of August 1, 1997. Because
the holders of the Public Savings Bank Shares will continue to hold the same
aggregate percentage ownership interest in the Holding Company as they currently
hold in the Savings Bank (before giving effect to the payment of cash in lieu of
issuing fractional Exchange Shares and any Conversion Shares purchased by the
Savings Bank's stockholder in the Conversion Offerings), the appraisal was
multiplied by 58.27%, which represents the MHC's percentage interest in the
Savings Bank. The resulting amount represents the midpoint of the valuation
($27.0 million), and the minimum and maximum of the valuation were set at 15%
below and above the midpoint, respectively, resulting in a range of $23.0
million to $31.1 million. The Boards of Directors of the Primary Parties
determined that the Conversion Shares would be sold at $10.00 per share,
resulting in a range of 2,295,000 to 3,105,000 Conversion Shares being offered.
Upon consummation of the Conversion and Reorganization, the Conversion Shares
and the Exchange Shares will represent approximately 58.27% and 41.73,
respectively, of the Holding Company's total outstanding shares. The Boards of
Directors of the Primary Parties reviewed RP Financial's appraisal report,
including the methodology and the assumptions used by RP Financial, and
determined that the Estimated Valuation Range was reasonable and adequate. The
Boards of Directors of the Primary Parties also established the formula for
determining the Exchange Ratio. Based upon such formula and the Estimated
Valuation Range, the Exchange Ratio ranged from a minimum of 1.6299 to a maximum
of 2.2051 Exchange Shares for each Public Savings Bank Shares, with a midpoint
of 1.9175. Based upon these Exchange Ratios, the Holding Company
expects to issue between 1,643,561 and 2,223,642 shares of Exchange Shares to
the holders of Public Savings Bank Shares outstanding immediately prior to the
consummation of the Conversion and Reorganization. The Estimated Valuation Range
and the Exchange Ratio may be amended with the approval of the OTS, if required,
or if necessitated by subsequent developments in the financial condition of any
of the Primary Parties or market conditions generally. If the appraisal is
updated to below $23.0 million or above $31.1 million (the maximum of the
Estimated Valuation Range, as adjusted by 15%), such Appraisal will be filed
with the SEC by post-effective amendment.
Based upon current market and financial conditions and recent practices
and policies of the OTS, in the event the Holding Company receives orders for
Conversion Shares in excess of $31.1 million (the maximum of the Estimated
Valuation Range) and up to $35.7 million (the maximum of the Estimated Valuation
Range, as adjusted by 15%), the Holding Company may be required by the OTS to
accept all such orders. No assurances, however, can be made that the Holding
Company will receive orders for Conversion Shares in excess of the maximum of
the Estimated Valuation Range or that, if such orders are received, that all
such orders will be accepted because the Holding Company's final valuation and
number of shares to be issued are subject to the receipt of an updated appraisal
from RP Financial which reflects such an increase in the valuation and the
approval of such increase by the OTS. There is no obligation or understanding on
the part of management to take and/or pay for any shares of Conversion Shares to
complete the Conversion Offerings.
RP Financial's valuation is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing such shares.
RP Financial did not independently verify the Savings Bank's Consolidated
Financial Statements and other information provided by the Savings Bank and the
MHC, nor did RP Financial value independently the assets or liabilities of the
Savings Bank. The valuation considers the Savings Bank and the MHC as going
concerns and should not be considered as an indication of the liquidation value
of the Savings Bank and the MHC. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing Conversion Shares or receiving Exchange Shares in the Conversion and
Reorganization will thereafter
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be able to sell such shares at prices at or above the Purchase Price or in the
range of the foregoing valuation of the pro forma market value thereof.
No sale of Conversion Shares or issuance of Exchange Shares may be
consummated unless prior to such consummation RP Financial confirms that nothing
of a material nature has occurred which, taking into account all relevant
factors, would cause it to conclude that the Purchase Price is materially
incompatible with the estimate of the pro forma market value of a share of
Common Stock upon consummation of the Conversion and Reorganization. If such is
not the case, a new Estimated Valuation Range may be set, a new Exchange Ratio
may be determined based upon the new Estimated Valuation Range, a new
Subscription and Community Offering and/or Syndicated Community Offering or
Public Offering may be held or such other action may be taken as the Primary
Parties shall determine and the OTS may permit or require.
Depending upon market or financial conditions following the
commencement of the Subscription Offering, the total number of Conversion Shares
to be issued in the Conversion Offerings may be increased or decreased without a
resolicitation of subscribers, provided that the product of the total number of
shares times the Purchase Price is not below the minimum or more than 15% above
the maximum of the Estimated Valuation Range. In the event market or financial
conditions change so as to cause the aggregate Purchase Price of the shares to
be below the minimum of the Estimated Valuation Range or more than 15% above the
maximum of such range, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded with interest at the Savings
Bank's passbook rate of interest, or be permitted to modify or rescind their
subscriptions). Any increase or decrease in the number of Conversion Shares will
result in a corresponding change in the number of Exchange Shares, so that upon
consummation of the Conversion and Reorganization, the Conversion Shares and the
Exchange Shares will represent approximately 58.27% and 41.73%, respectively, of
the Holding Company's total outstanding shares of Common Stock (exclusive of the
effects of the exercise of outstanding stock options).
An increase in the number of Conversion Shares as a result of an
increase in the appraisal of the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Holding Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease in
the number of Conversion Shares would increase both a subscriber's ownership
interest and the Holding Company's pro forma net earnings and stockholders'
equity on a per share basis while decreasing pro forma net earnings and
stockholders' equity on an aggregate basis. See "RISK FACTORS -- Possible
Dilutive Effect of Benefit Plans" and "PRO FORMA DATA."
The appraisal report of RP Financial has been filed as an exhibit to
this Registration Statement and Application for Conversion of which this
Prospectus is a part and is available for inspection in the manner set forth
under "ADDITIONAL INFORMATION."
LIMITATIONS ON PURCHASES OF CONVERSION SHARES
The Plan of Conversion provides for certain limitations to be placed
upon the purchase of Common Shares by eligible subscribers and others in the
Conversion and Reorganization. Each subscriber must subscribe for a minimum of
25 Conversion Shares. Except for the ESOP, which is expected to subscribe for 8%
of the shares of Conversion Shares issued in the Conversion and Reorganization,
the Plan of Conversion provides for the following purchase limitations: (i) no
person may purchase in either the Subscription Offering, Direct Community
Offering or Syndicated Community Offering more than 1.6% of the shares of
Conversion Stock issued in the Conversion and Reorganization, (ii) no person,
together with associates of or persons acting in concert with such person, may
purchase in either the Subscription Offering, Direct Community Offering or
Syndicated Community Offering more than 2% of the shares of Conversion Stock
issued in the Conversion and Reorganization, (iii) the maximum number of shares
of Conversion Shares which may be subscribed for or purchased in all categories
in the Conversion and Reorganization by any person, when combined with any
Exchange Shares received, shall not exceed 1.4% of the
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Common Stock to be issued in the Conversion and Reorganization, and (iv) the
maximum number of shares of Conversion Shares which may be subscribed for or
purchased in all categories in the Conversion and Reorganization by any person,
together with any associate or any group of persons acting in concert, when
combined with any Exchange Shares received, shall not exceed 2% of the Common
Stock to be issued in the Conversion and Reorganization. For purposes of the
Plan of Conversion, the directors are not deemed to be acting in concert solely
by reason of their Board membership. Pro rata reductions within each
Subscription Rights category will be made in allocating shares to the extent
that the maximum purchase limitations are exceeded.
The Boards of Directors of the Primary Parties may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the Conversion Shares sold in the Conversion and Reorganization, provided
that orders for shares which exceed 5% of the Conversion Shares sold in the
Conversion and Reorganization may not exceed, in the aggregate, 10% of the
shares sold in the Conversion and Reorganization. The Savings Bank and the
Holding Company do not intend to increase the maximum purchase limitation unless
market conditions are such that an increase in the maximum purchase limitation
is necessary to sell a number of shares in excess of the minimum of the
Estimated Valuation Range. If the Boards of Directors decide to increase the
purchase limitation above, persons who subscribed for the maximum number of
Conversion Shares will be, and other large subscribers in the discretion of the
Holding Company and the Savings Bank may be, given the opportunity to increase
their subscriptions accordingly, subject to the rights and preferences of any
person who has priority Subscription Rights.
The term "acting in concert" is defined in the Plan of Conversion to
mean (i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.
The term "associate" of a person is defined in the Plan of Conversion
to mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank) 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 (excluding tax-qualified
employee plans); and (iii) any relative or spouse of such person, or any
relative of such spouse, who either has the same home as such person or who is a
director or officer of the Savings Bank or any of its parents or subsidiaries.
For example, a corporation of which a person serves as an officer would be an
associate of such person and, therefore, all shares purchased by such
corporation would be included with the number of shares which such person could
purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Savings Bank, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, Secretary and Treasurer.
Common Shares purchased pursuant to the Conversion and Reorganization
will be freely transferable, except for shares purchased by directors and
officers of the Savings Bank and the Holding Company and by NASD members. See
"-- Restrictions on Transferability by Directors and Officers and NASD Members."
DELIVERY AND EXCHANGE OF STOCK CERTIFICATES
CONVERSION STOCK. Certificates representing Conversion Shares will be
mailed by the Holding Company's transfer agent to the persons entitled thereto
at the addresses of such persons appearing on the Stock Order Form as soon as
practicable following the consummation of the Conversion and Reorganization. Any
undeliverable certificates will be held by the Holding Company until claimed by
persons legally entitled thereto or otherwise
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disposed according to applicable law. Purchasers of Conversion Shares may be
unable to sell such shares until certificates are available and delivered to
them.
EXCHANGE SHARES. After the consummation of the Conversion and
Reorganization, each holder of a certificate(s) theretofore evidencing issued
and outstanding shares of Savings Bank Common Stock (other than the MHC), upon
surrender of the same to an agent, duly appointed by the Holding Company, which
is anticipated to be the transfer agent for the Common Stock ("Exchange Agent"),
shall be entitled to receive in exchange therefor a certificate(s) representing
the number of full Exchange Shares based on the Exchange Ratio. The Exchange
Agent shall mail a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to such certificate shall
pass, only upon delivery of such certificate to the Exchange Agent) advising
such holder of the terms of the Exchange Offering and the procedure for
surrendering to the Exchange Agent such certificates in exchange for a
certificate(s) evidencing Common Stock. THE SAVINGS BANK STOCKHOLDERS SHOULD NOT
FORWARD SAVINGS BANK COMMON STOCK CERTIFICATES TO THE SAVINGS BANK OR THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE TRANSMITTAL LETTER.
No holder of a certificate theretofore representing shares of Savings
Bank Common Stock shall be entitled to receive any dividends on the Common Stock
until the certificate representing such shares is surrendered in exchange for
certificates representing shares of Common Stock. In the event that dividends
are declared and paid by the Holding Company in respect of Common Stock after
the consummation of the Conversion and Reorganization, but before surrender of
certificates representing shares of Savings Bank Common Stock, dividends payable
in respect of shares of Common Stock not then issued shall accrue (without
interest). Any such dividends shall be paid (without interest) upon surrender of
the certificates representing such shares of Savings Bank Common Stock. After
the consummation of the Conversion and Reorganization, the Holding Company shall
be entitled to treat certificates representing shares of Savings Bank Common
Stock as evidencing ownership of the number of full shares of Common Stock into
which the shares of Savings Bank Common Stock represented by such certificates
shall have been converted, notwithstanding the failure on the part of the holder
thereof to surrender such certificates.
The Holding Company shall not be obligated to deliver a certificate(s)
representing shares of Common Stock to which a holder of Savings Bank Common
Stock would otherwise be entitled as a result of the Conversion and
Reorganization until such holder surrenders the certificate(s) representing the
shares of Savings Bank Common Stock for exchange as provided above, or, in
default thereof, an appropriate affidavit of loss and indemnity agreement and/or
a bond as may be required in each case by the Holding Company. If any
certificate evidencing shares of Common Stock is to be issued in a name other
than that in which the certificate evidencing Savings Bank Common Stock
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the certificate so surrendered shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange pay to the Exchange Agent any transfer or other tax required by reason
of the issuance of a certificate for shares of Common Stock in any name other
than that of the registered holder of the certificate surrendered or otherwise
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
RESTRICTIONS ON REPURCHASE OF STOCK
Pursuant to OTS regulations, OTS-regulated savings associations (and
their holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan. Furthermore,
repurchases of any common stock are prohibited if the effect thereof would cause
the association's regulatory capital to be reduced below (a) the amount required
for the liquidation account or (b) the regulatory capital requirements imposed
by the OTS. Repurchases are generally prohibited during the first year following
conversion. Upon ten days' written notice to the OTS, and if the OTS does not
object, an institution may make open market repurchases of its outstanding
common stock during years two and three following the conversion, provided that
certain regulatory conditions are met and that the repurchase would
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not adversely affect the financial condition of the association. Any repurchases
of common stock by the Holding Company would be subject to these regulatory
restrictions unless the OTS would provide otherwise.
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of Common Stock purchased in the Conversion Offerings by
directors and officers of the Holding Company may not be sold for a period of
one year following consummation of the Conversion and Reorganization, except in
the event of the death of the stockholder or in any exchange of the Common Stock
in connection with a merger or acquisition of the Holding Company. Shares of
Common Stock received by directors or officers through the ESOP or the MRP or
upon exercise of options issued pursuant to the Stock Option Plan or purchased
subsequent to the Conversion and Reorganization are not subject to this
restriction. Accordingly, shares of Common Stock issued by the Holding Company
to directors and officers shall bear a legend giving appropriate notice of the
restriction and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted Common Stock shall be subject to the same restrictions.
Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion and
Reorganization) and their associates during the three-year period following
Conversion and Reorganization may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the OTS. This
restriction does not apply, however, to negotiated transactions involving more
than 1% of the Holding Company's outstanding Common Stock or to the purchase of
stock pursuant to the Stock Option Plan.
The Holding Company has filed with the SEC a registration statement
under the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion and Reorganization. The registration under the
Securities Act of shares of the Common Stock to be issued in the Conversion and
Reorganization does not cover the resale of such shares. Shares of Common Stock
purchased by persons who are not affiliates of the Holding Company may be resold
without registration. Shares purchased by an affiliate of the Holding Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Holding Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks. Provision may be made in
the future by the Holding Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances.
Under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with Subscription Rights and to certain reporting requirements upon
purchase of such securities.
COMPARISON OF STOCKHOLDERS' RIGHTS
GENERAL. As a result of the Conversion and Reorganization, holders of
the Savings Bank Common Stock will become stockholders of the Holding Company, a
Washington corporation. There are certain differences in stockholder rights
arising from distinctions between the Savings Bank's Federal Stock Charter and
Bylaws and the Holding Company's Articles of Incorporation and Bylaws and from
distinctions between laws with respect to federally chartered savings
institutions and Washington law.
The discussion herein is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. The
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discussion herein is qualified in its entirety by reference to the Articles of
Incorporation and Bylaws of the Holding Company and the WBCA. See "ADDITIONAL
INFORMATION" for procedures for obtaining a copy of the Holding Company's
Articles of Incorporation and Bylaws.
AUTHORIZED CAPITAL STOCK. The Holding Company's authorized capital
stock consists of 50,000,000 shares of Common Stock, par value $.01 per share
and 250,000 shares of preferred stock, par value $.01 per share ("Preferred
Stock"). The Savings Bank's authorized capital stock consists of 4,000,000
shares of Savings Bank Common Stock and 1,000,000 shares of serial preferred
stock, par value $1.00 per share. The shares of Common Stock and Preferred Stock
were authorized in an amount greater than that to be issued in the Conversion
and Reorganization to provide the Holding Company's Board of Directors with
flexibility to effect, among other transactions, financings, acquisitions, stock
dividends, stock splits and employee stock options. However, these additional
authorized shares may also be used by the Board of Directors consistent with its
fiduciary duty to deter future attempts to gain control of the Holding Company.
The Board of Directors also has sole authority to determine the terms of any one
or more series of Preferred Stock, including voting rights, conversion rates,
and liquidation preferences. As a result of the ability to fix voting rights for
a series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Holding Company's Board currently has no
plan for the issuance of additional shares, other than the issuance of
additional shares pursuant to stock benefit plans.
ISSUANCE OF CAPITAL STOCK. Pursuant to applicable laws and regulations,
the MHC is required to own not less than a majority of the outstanding Savings
Bank Common Stock. There will be no such restriction applicable to the Holding
Company following consummation of the Conversion and Reorganization.
The Holding Company's Articles of Incorporation do not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of the Holding Company, whereas the Savings Bank's
Federal Stock Charter restricts such issuance to general public offerings, or if
qualifying shares, to directors, unless the share issuance or the plan under
which they would be issued has been approved by a majority of the total votes
eligible to be cast at a legal stockholders meeting. Thus, stock-related
compensation plans such as stock option plans could be adopted by the Holding
Company without stockholder approval and shares of Holding Company capital stock
could be issued directly to directors or officers without stockholder approval.
The Bylaws of the NASD, however, generally require corporations with securities
which are quoted on the Nasdaq National Market System to obtain stockholder
approval of most stock compensation plans for directors, officers and key
employees of the corporation. Moreover, although generally not required,
stockholder approval of stock related compensation plans may be sought in
certain instances in order to qualify such plans for favorable federal income
tax and securities law treatment under current laws and regulations. The Holding
Company plans to submit the stock compensation plans discussed herein to its
stockholders for approval.
VOTING RIGHTS. Neither the Savings Bank's Federal Stock Charter or
Bylaws nor the Holding Company's Articles of Incorporation or Bylaws currently
provide for cumulative voting in elections of directors. For additional
information regarding voting rights, see "-- Limitations on Acquisitions of
Voting Stock and Voting Rights" below.
PAYMENT OF DIVIDENDS. The ability of the Savings Bank to pay dividends
on its capital stock is restricted by OTS regulations and by federal income tax
considerations related to savings institutions such as the Savings Bank. See
"REGULATION -- Federal Regulation of the Savings Bank -- Capital Requirements"
and "TAXATION." Although the Holding Company is not subject to these
restrictions as a Washington corporation, such restrictions will indirectly
affect the Holding Company because dividends from the Savings Bank will be a
primary source of funds of the Holding Company for the payment of dividends to
stockholders of the Holding Company.
Certain restrictions generally imposed on Washington corporations may
also have an impact on the Holding Company's ability to pay dividends. The WBCA
provides that dividends may be paid only if, after giving effect to the
dividend, the Holding Company will be able to pay its debts as they become due
in the ordinary course of
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business and the Holding Company's total assets will not be less than the sum of
its total liabilities plus the amount that would be needed, if the Holding
Company 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.
BOARD OF DIRECTORS. The Savings Bank's Federal Stock Charter and Bylaws
and the Holding Company's Articles of Incorporation and Bylaws each require the
Board of Directors of the Savings Bank and the Holding Company to be divided
into three classes as nearly equal in number as possible and that the members of
each class shall be elected for a term of three years and until their successors
are elected and qualified, with one class being elected annually.
Under the Savings Bank's Bylaws, any vacancies in the Board of
Directors of the Savings Bank may be filled by the affirmative vote of a
majority of the remaining directors although less than a quorum of the Board of
Directors. Persons elected by the directors of the Savings Bank to fill
vacancies may only serve until the next annual meeting of stockholders. Under
the Holding Company's Articles of Incorporation, any vacancy occurring in the
Board of Directors of the Holding Company, including any vacancy created by
reason of an increase in the number of directors, may be filled by the remaining
directors, and any director so chosen shall hold office for the remainder of the
term to which the director has been elected and until his or her successor is
elected and qualified.
Under the Savings Bank's Bylaws, any director may be removed for cause
by the holders of a majority of the outstanding voting shares. The Holding
Company's Articles of Incorporation provide that any director may be removed for
cause by a majority of the directors of the Holding Company or by the holders of
at least 80% of the outstanding voting shares of the Holding Company.
LIMITATIONS ON LIABILITY. The Holding Company's Articles of
Incorporation provides that the directors of the Holding Company shall not be
personally liable for monetary damages to the Holding Company for certain
breaches of their fiduciary duty as directors, except for liabilities that
involve intentional misconduct by the director, the authorization or illegal
distributions or receipt of an improper personal benefit from their actions as
directors. 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 the Holding Company.
Currently, federal law does not permit federally chartered savings
institutions such as the Savings Bank to limit the personal liability of
directors in the manner provided by the WBCA and the laws of many other states.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The
Savings Bank's Federal Stock Charter and Bylaws do not contain any provision
relating to indemnification of directors and officers of the Savings Bank. Under
current OTS regulations, however, the Savings Bank shall indemnify its
directors, officers and employees for any costs incurred in connection with any
litigation involving any such person's activities as a director, officer or
employee if such person obtains a final judgment on the merits in his or her
favor. In addition, indemnification is permitted in the case of a settlement, a
final judgment against such person or final judgment other than on the merits,
if a majority of disinterested directors determine that such person was acting
in good faith within the scope of his or her employment as he or she could
reasonably have perceived it under the circumstances and for a purpose he or she
could reasonably have believed under the circumstances was in the best interest
of the Savings Bank or its stockholders. The Savings Bank also is permitted to
pay ongoing expenses incurred by a director, officer or employee if a majority
of disinterested directors concludes that such person may ultimately be entitled
to indemnification. Before making any indemnification payment, the Savings Bank
is required to notify the OTS of its intention and such payment cannot be made
if the OTS objects thereto.
The officers, directors, agents and employees of the Holding Company
are indemnified with respect to certain actions pursuant to the Holding
Company's Articles of Incorporation, which complies with the WBCA regarding
indemnification. The WBCA allows the Holding Company to indemnify the
aforementioned persons for expenses, settlements, judgments and fines in suits
in which such person has made a party by reason of the fact that
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he or she is or was an agent of the Holding Company. No such indemnification may
be given if the acts or omissions of the person are adjudged to be in violation
of law, if such person is liable to the corporation for an unlawful
distribution, or if such person personally received a benefit to which he or she
was not entitled.
SPECIAL MEETINGS OF STOCKHOLDERS. The Holding Company's Articles of
Incorporation provides that special meetings of the stockholders of the Holding
Company may be called by the Chairman, President, a majority of the Board of
Directors or the holders of not less than a majority of the outstanding capital
stock of the Holding Company entitled to vote at the meeting. The Savings Bank's
Federal Stock Charter provides that, until October 22, 1998 (i.e., five years
after the consummation of the MHC Reorganization), special meeting of the
Savings Bank's stockholders may only be called by the Board of Directors.
Thereafter, special meetings may be called by the Chairman, President, a
majority of the Board of Directors or the holders of not less than a majority of
the outstanding capital stock of the Savings Bank entitled to vote at the
meeting.
STOCKHOLDER NOMINATIONS AND PROPOSALS. The Savings Bank's Bylaws
generally provide that stockholders may submit nominations for election as
director at an annual meeting of stockholders and any new business to be taken
up at such a meeting by filing such in writing with the Savings Bank at least
thirty days before the date of any such meeting.
The Holding Company's Bylaws generally provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Holding Company at least 30 days and not more than 60 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 the Holding Company and
its stockholders to provide sufficient time to enable management to disclose to
stockholders 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 stockholders
generally. Similarly, adequate advance notice of stockholder proposals will give
management time to study such proposals and to determine whether to recommend to
the stockholders that such proposals be adopted. In certain instances, such
provisions could make it more difficult to oppose management's nominees or
proposals, even if stockholders believe such nominees or proposals are in their
best interests.
STOCKHOLDER ACTION WITHOUT A MEETING. The Bylaws of the Holding Company
and the Savings Bank provide that any action to be taken or which may be taken
at any annual or special meeting of stockholders may be taken if a consent in
writing, setting forth the actions so taken, is given by the holders of all
outstanding shares entitled to vote.
STOCKHOLDER'S RIGHT TO EXAMINE BOOKS AND RECORDS. A federal regulation
which is applicable to the Savings Bank provides that stockholders may inspect
and copy specified books and records of a federally chartered savings
institution after proper written notice for a proper purpose. The WBCA similarly
provides that a stockholder may inspect books and records upon written demand
stating the purpose of the inspection, if such purpose is reasonably related to
such person's interest as a stockholder.
LIMITATIONS ON ACQUISITIONS OF VOTING STOCK AND VOTING RIGHTS. The
Holding Company's Articles of Incorporation provide that no person shall
directly or indirectly offer to acquire or acquire the beneficial ownership of
(i) more than 10% of the issued and outstanding shares of any class of an equity
security of the Holding Company, or (ii) any securities convertible into, or
exercisable for, any equity securities of the Holding Company if, assuming
conversion or exercise by such person of all securities of which such person is
the beneficial owner which are convertible into, or exercisable for, such equity
securities (but of no securities convertible into, or exercisable for, such
equity securities of which such person is not the beneficial owner), such person
would be the beneficial owner of more than 10% of any class of an equity
security of the Holding Company. The term "person" is broadly defined in the
Articles of Incorporation to prevent circumvention of this restriction.
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The foregoing restrictions do not apply to (i) any offer with a view
toward public resale made exclusively to the Holding Company by underwriters or
a selling group acting on its behalf, (ii) any employee benefit plan established
by the Holding Company or the Savings Bank, and (iii) any other offer or
acquisition approved in advance by the affirmative vote of two-thirds of the
Holding Company's Board of Directors. In the event that shares are acquired in
violation of this restriction, all shares beneficially owned by any person in
excess of 10% shall not be counted as shares entitled to vote and shall not be
voted by any person or counted as voting shares in connection with any matters
submitted to stockholders for a vote.
Neither the Charter nor the Bylaws of the Savings Bank contains a
provision which restricts voting rights of certain stockholders of the Savings
Bank in the manner set forth above.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS. A federal regulation
requires the approval of two-thirds the Board of Directors of the Savings Bank
and the holders of two-thirds of the outstanding stock of the Savings Bank
entitled to vote thereon for mergers, consolidations and sales of all or
substantially all of the Savings Bank's assets. Such regulation permits the
Savings Bank to merge with another corporation without obtaining the approval of
its stockholders if: (i) it does not involve an interim savings institution;
(ii) the Savings Bank's Federal Stock Charter is not changed; (iii) each share
of the Savings Bank's stock outstanding immediately prior to the effective date
of the transaction is to be an identical outstanding share or a treasury share
of the Savings Bank after such effective date; and (iv) either: (A) no shares of
voting stock of the Savings Bank and no securities convertible into such stock
are to be issued or delivered under the plan of combination or (B) the
authorized unissued shares or the treasury shares of voting stock of the Savings
Bank to be issued or delivered under the plan of combination, plus those
initially issuable upon conversion of any securities to be issued or delivered
under such plan, do not exceed 15% of the total shares of voting stock of the
Savings Bank outstanding immediately prior to the effective date of the
transaction.
The WBCA generally provides that the affirmative vote of the holders of
at least two-thirds of the outstanding shares entitled to vote thereon (and, if
any class or series of shares is entitled to vote thereon separately, the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of each such class or series) is required to authorize any merger, share
exchange or consolidation of the Holding Company in which the Holding Company is
not the surviving corporation, or any sale, lease, exchange, transfer or other
disposition of all, or substantially all, of the assets of the Holding Company.
The WBCA further restricts certain business combination between the Holding
Company and an interested shareholder (i.e., a person or group that beneficially
owns ten percent or more of the outstanding voting shares of the Holding
Company). The WBCA generally precludes the Holding Company from engaging in any
business combination with an interested shareholder within five years after the
acquisition pursuant to which the shareholder became an interested shareholder,
unless the business combination or the purchase of shares that caused the
shareholder to become an interested shareholder is approved by a majority of the
directors of the Holding Company prior to the person becoming an interested
shareholder.
The Holding Company's Articles of Incorporation requires the approval
of the holders of (i) at least 80% of the Holding Company's outstanding shares
of voting stock, and (ii) at least a majority of the Holding Company'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 Holding Company's Board of Directors 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 as described above 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 the Holding Company. The term "Business Combination"
is defined to include among other things: (i) any merger or consolidation of the
Holding Company or any of its affiliates with or into any Related Person; (ii)
any sale, lease, exchange, mortgage, transfer, or other disposition of all or a
substantial part of the assets of the Holding Company or any of its affiliates
to any Related Person (the term "substantial part" is defined to include more
than 25% of the Holding Company's total assets); (iii) any sale, lease,
exchange, or other transfer by
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any Related Person to the Holding Company of all or a substantial part of the
assets of Related Person; (iv) the acquisition by the Holding Company of any
securities of the Related Person; (v) any reclassification of the Holding
Company Common Stock; and (vi) any agreement, contract or other arrangement
providing for any of the transactions described above. 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.
The Holding Company's Articles of Incorporation requires the Holding
Company'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.
As holder of all of the outstanding Savings Bank Common Stock after
consummation of the Conversion and Reorganization, the Holding Company generally
will be able to authorize a merger, consolidation or other business combination
involving the Savings Bank without the approval of the stockholders of the
Holding Company.
DISSENTERS' RIGHTS OF APPRAISAL. An OTS regulation, which is applicable
to the Savings Bank, generally provides that a stockholder of a federally
chartered savings institution which engages in a merger, consolidation or sale
of all or substantially all of its assets shall have the right to demand from
such institution payment of the fair or appraised value of his or her stock in
the institution, subject to specified procedural requirements. This regulation
also provides, however, that the stockholders of a federally chartered savings
institution with stock which is listed on a national securities exchange or
quoted on the Nasdaq System are not entitled to dissenters' rights in connection
with a merger involving such savings institution if the stockholder is required
to accept only "qualified consideration" for his or her stock, which is defined
to include cash, shares of stock of any institution or corporation which at the
effective date of the merger will be listed on a national securities exchange or
quoted on the Nasdaq System or any combination of such shares of stock and cash.
Under the WBCA, shareholders of the Holding Company will generally have
dissenter's appraisal rights in connection with (i) a plan of merger to which
the Holding Company is a party; (ii) a plan of share exchange to which the
Holding Company is a party as the corporation whose shares will be acquired;
(iii) certain sales or exchanges of all, or substantially all, of the Holding
Company's property other than in the regular course of business; and (iv)
amendments to the Holding Company's Articles of Incorporation effecting a
material reverse stock split.
AMENDMENT OF GOVERNING INSTRUMENTS. No amendment of the Savings Bank's
Federal Stock Charter may be made unless it is first proposed by the Board of
Directors of the Savings Bank, then preliminarily approved by the OTS, and
thereafter approved by the holders of a majority of the total votes eligible to
be cast at a legal meeting. The Holding Company's Articles of Incorporation may
be amended by the vote of the holders of a majority of the outstanding shares of
Holding Company Common Stock, except that the provisions of the Articles of
Incorporation governing (i) the duration of the corporation, (ii) the purpose
and powers of the corporation, (iii) authorized capital stock, (iv) denial of
preemptive rights, (v) the number and staggered terms of directors, (vi) removal
of directors, (vii) approval of certain business combinations, (viii) the
evaluation of certain business combinations, (ix) elimination of directors'
liability, (x) indemnification of officers and directors, (xi) calling of
special meetings of shareholders, (xii) the authority to repurchase shares and
(xiii) the manner of amending the Articles of Incorporation may not be repealed,
altered, amended or rescinded except by the vote of the holders of at least 80%
of the outstanding shares of the Holding Company. This provision is intended to
prevent the holders of a lesser percentage of the outstanding stock of the
Holding Company from circumventing any of the foregoing provisions by amending
the Articles of Incorporation to delete or modify one of such provisions.
The Bylaws of the Savings Bank may be amended by a majority vote of the
full Board of Directors of the Savings Bank or by a majority vote of the votes
cast by the stockholders of the Savings Bank at any legal meeting.
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The Holding Company's Bylaws only be amended by a majority vote of the Board of
Directors of the Holding Company or by the holders of at least 80% of the
outstanding stock by the Holding Company.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S
ARTICLES OF INCORPORATION AND BYLAWS. The Board of Directors of the Savings Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions that have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Savings Bank in the orderly
deployment of the Conversion and Reorganization proceeds into productive assets
during the initial period after the Conversion and Reorganization. The Board of
Directors believes these provisions are in the best interest of the Savings Bank
and Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best position to determine
the true value of the Holding Company and to negotiate more effectively for what
may be in the best interests of its stockholders. Accordingly, the Board of
Directors believes that it is in the best interest of the Holding Company and
its stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts. It is also
the view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at a price reflective of
the true value of the Holding Company and that is in the best interest of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts that have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms that may be less favorable than
might otherwise be available. A transaction that is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value of the Holding
Company for its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners became less
than 300, thereby allowing for deregistration under the Exchange Act.
Despite the belief of the Savings Bank and the Holding Company as to
the benefits to stockholders of these provisions of the Holding Company's
Articles of Incorporation and Bylaws, these provisions may also have the effect
of discouraging a future takeover attempt that would not be approved by the
Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board of Directors of the Savings Bank and the Holding Company, however,
have concluded that the potential benefits outweigh the possible disadvantages.
Following the Conversion and Reorganization, pursuant to applicable law
and, if required, following the approval by stockholders, the Holding Company
may adopt additional anti-takeover charter provisions or other devices regarding
the acquisition of its equity securities that would be permitted for a
Washington business corporation.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws of the Holding
Company and in Federal and Washington law may be to discourage
111
<PAGE>
potential takeover attempts and perpetuate incumbent management, even though
certain stockholders of the Holding Company may deem a potential acquisition to
be in their best interests, or deem existing management not to be acting in
their best interests.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
The following discussion is a summary of certain provisions of federal
law and regulations and Washington corporate law relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations.
CONVERSION REGULATIONS
OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company). The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association (or its holding company) or an underwriter or
member of a selling group acting on the converting institution's (or its holding
company's) behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution (or its holding company) or who controls more than 10% of
the outstanding shares or voting rights of a converting or converted institution
(or its holding company).
As permitted by OTS regulations, the Savings Bank's Federal Stock
Charter contains a provision whereby the acquisition or offer to acquire
ownership of more than 10% of the issued and outstanding shares of any class of
equity securities of the Savings Bank by any person, either directly or through
an affiliate of such person, will be prohibited for a period of five years
following the date of consummation of the Conversion and Reorganization. Any
stock in excess of 10% acquired in violation of the Federal Stock Charter
provision will not be counted as outstanding for voting purposes. Furthermore,
for five years from the consummation date of the MHC Reorganization,
stockholders of the Savings Bank will not be permitted to call a special meeting
of stockholders relating to a change of control of the Savings Bank or a charter
amendment and will not be permitted to cumulate their votes in the election of
directors.
CHANGE OF CONTROL REGULATIONS
Under the Change in Bank Control Act, no person may acquire control of
an insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition. In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly
112
<PAGE>
or indirectly to exercise a controlling influence over, the management or
policies of the institution. Acquisition of more than 10% of any class of a
savings association's voting stock, if the acquiror also is subject to any one
of eight "control factors," constitutes a rebuttable determination of control
under the regulations. Such control factors include the acquiror being one of
the two largest stockholders. The determination of control may be rebutted by
submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock must file
with the OTS a certification form that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the OTS, as applicable. There
are also rebuttable presumptions in the regulations concerning whether a group
"acting in concert" exists, including presumed action in concert among members
of an "immediate family."
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
GENERAL
The Holding Company is authorized to issue 50,000,000 shares of Common
Stock having a par value of $.01 per share and 250,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 5,328,642 shares of Common Stock (subject to adjustment up to
6,127,938 shares) and no shares of preferred stock in the Conversion and
Reorganization. Each share of the Holding Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT NONWITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF ANY TYPE, AND WILL NOT BE INSURED BY THE FDIC
OR ANY OTHER GOVERNMENT AGENCY.
COMMON STOCK
DIVIDENDS. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of Common Stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues preferred stock, the holders
thereof may have a priority over the holders of the Common Stock with respect to
dividends.
STOCK REPURCHASES. The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION AND REORGANIZATION -- Restrictions on Repurchase of Stock"
and "USE OF PROCEEDS."
VOTING RIGHTS. Upon Conversion and Reorganization, the holders of
Common Stock of the Holding Company will possess exclusive voting rights in the
Holding Company. They will elect the Holding Company's Board of Directors and
act on such other matters as are required to be presented to them under
Washington law or
113
<PAGE>
as are otherwise presented to them by the Board of Directors. Except as
discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY," each holder
of Common Stock will be entitled to one vote per share and will not have any
right to cumulate votes in the election of directors. If the Holding Company
issues preferred stock, holders of the Holding Company preferred stock may also
possess voting rights. Certain matters require a vote of 80% of the outstanding
shares entitled to vote thereon. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."
As a federal stock savings bank, corporate powers and control of the
Savings Bank are vested in the Board of Directors, who elect the officers of the
Savings Bank and who fill any vacancies on the Board of Directors as it exists
upon Conversion and Reorganization. Subsequent to Conversion and Reorganization,
voting rights will be vested exclusively in the owners of the shares of capital
stock of the Savings Bank, all of which will be owned by the Holding Company,
and voted at the direction of the Holding Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Savings Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
of the Savings Bank, the Holding Company, as holder of the Savings Bank's
capital stock would be entitled to receive, after payment or provision for
payment of all debts and liabilities of the Savings Bank (including all deposit
accounts and accrued interest thereon) and after distribution of the balance in
the special liquidation account to Eligible Account Holders and Supplemental
Eligible Account Holders (see "THE CONVERSION AND REORGANIZATION"), all assets
of the Savings Bank available for distribution. In the event of liquidation,
dissolution or winding up of the Holding Company, the holders of its common
stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. If Holding Company preferred stock is issued, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
PREEMPTIVE RIGHTS. Holders of the Common Stock of the Holding Company
will not be entitled to preemptive rights with respect to any shares that may be
issued. The Common Stock is not subject to redemption.
PREFERRED STOCK
None of the shares of the authorized Holding Company preferred stock
will be issued in the Conversion and Reorganization and there are no plans to
issue the preferred stock. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
RESTRICTIONS ON ACQUISITION
Acquisitions of the Holding Company are restricted by provisions in its
Articles of Incorporation and Bylaws and by the rules and regulations of various
regulatory agencies. See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE
HOLDING COMPANY."
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC
pursuant to Section 12(g) of the Exchange Act upon the completion of the
Conversion and Reorganization and will not deregister its Common Stock for a
period of at least three years following the completion of the Conversion and
Reorganization. Upon such registration, the proxy and tender offer rules,
insider trading reporting and restrictions, annual and periodic reporting and
other requirements of the Exchange Act will be applicable.
114
<PAGE>
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Conversion and Reorganization have been opined upon by Breyer & Aguggia and
the Washington tax consequences of the Conversion and Reorganization have been
opined upon by Knapp, O'Dell & Lewis, Camas, Washington. Breyer & Aguggia and
Knapp, O'Dell & Lewis have consented to the references herein to their opinions.
Certain legal matters will be passed upon for Webb by Stevens & Lee, Reading,
Pennsylvania.
EXPERTS
The consolidated financial statements of the Savings Bank as of March
31, 1997 and 1996 and for the years ended March 31, 1997, 1996 and 1995 included
in this Prospectus have been audited by Deloitte & Touche LLP, Portland, Oregon,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of
its report to the Savings Bank setting forth its opinion as to the estimated pro
forma market value of the MHC and the Savings Bank, as converted, and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form S-1 (File No. 333-30203) under the Securities Act with respect to the
Common Stock offered in the Conversion and Reorganization. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
SEC. Such information may be inspected at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 and at its regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies may be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement also is available through the SEC's World Wide Web site
on the Internet (http://www.sec.gov).
The MHC has filed with the OTS an Application for Approval of
Conversion, which includes proxy materials for the Special Members' Meeting and
the Stockholders' Meeting and certain other information. This Prospectus omits
certain information contained in such Application. The Application, including
the proxy materials, exhibits and certain other information that are a part
thereof, may be inspected, without charge, at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and at the office of the Regional Director
of the OTS at the OTS West Regional Office, 1 Montgomery Street, Suite 400, San
Francisco, California 94104.
115
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
Page
Independent Auditors' Report .............................................. F-1
Consolidated Statements of Financial Condition
as of March 31, 1997 and 1996 ............................................ F-2
Consolidated Statements of Income for the
Years Ended March 31, 1997, 1996 and 1995 ................................ 20
Consolidated Statements of Shareholders' Equity
for the Years Ended March 31, 1997, 1996 and 1995 ........................ F-3
Consolidated Statements of Cash Flows for the
Years Ended March 31, 1997, 1996 and 1995 ................................ F-4
Notes to Consolidated Financial Statements................................. F-6
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements for the MHC have not been included herein
because the MHC has no material assets other than its shares of Savings Bank
Common Stock (which will be canceled as part of the Conversion and
Reorganization) and no significant liabilities (contingent or otherwise),
revenues or expenses, and has not engaged in any significant activities to date.
Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.
116
<PAGE>
[Letterhead of Deloitte & Touche]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Riverview Savings Bank, FSB
We have audited the accompanying consolidated statements of financial condition
of Riverview Savings Bank, FSB and Subsidiary (the "Bank") as of March 31, 1997
and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended March 31,
1997. These financial statements are the responsibility of the Bank'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, such consolidated financial statements present fairly, in all
material respects, the financial position of Riverview Savings Bank, FSB and
Subsidiary as of March 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
May 27, 1997
F-1
<PAGE>
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND 1996
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash (including interest-earning accounts of $1,450,000
and $1,793,000) $ 6,951,000 $ 5,585,000
Loans held for sale 80,000 1,941,000
Investment securities held to maturity, at amortized cost
(fair value of $20,438,000 and $29,956,000) 20,456,000 29,729,000
Investment securities available for sale, at fair value
(amortized cost of $3,993,000 and $3,994,000) 3,899,000 3,932,000
Mortgage-backed securities held to maturity, at amortized
cost (fair value of $26,488,000 and $28,716,000) 26,402,000 28,375,000
Mortgage-backed securities available for sale, at fair value
(amortized cost of $3,022,000 and $2,002,000) 2,990,000 2,004,000
Loans receivable (net of allowance of $831,000 and $653,000
for loan losses) 151,694,000 126,228,000
Real estate owned 135,000 -
Prepaid expenses and other assets 1,141,000 1,048,000
Accrued interest receivable 1,449,000 1,511,000
Federal Home Loan Bank stock 1,756,000 1,627,000
Premises and equipment 4,632,000 4,399,000
Land held for development 471,000 471,000
Core deposit intangible, net 2,329,000 2,656,000
----------- -----------
TOTAL ASSETS $ 224,385,000 $ 209,506,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposit accounts $ 169,416,000 $ 158,159,000
Accrued expenses and other liabilities 2,264,000 1,702,000
Advance payments by borrowers for taxes and
insurance 123,000 51,000
Deferred income taxes, net 143,000 143,000
Other borrowed funds 237,000 315,000
Federal Home Loan Bank advances 27,180,000 26,050,000
----------- -----------
Total liabilities 199,363,000 186,420,000
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 4,000,000 authorized,
1997 - 2,416,301 issued, 2,383,239 outstanding;
1996 - 2,195,281 issued, 2,155,206 outstanding 2,416,000 2,195,000
Additional paid-in capital 16,043,000 12,233,000
Unearned shares issued to employee stock ownership
trust (386,000) (439,000)
Retained earnings 7,033,000 9,137,000
Net unrealized loss on securities available for
sale, net of tax (84,000) (40,000)
--------- ---------
Total shareholders' equity 25,022,000 23,086,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 224,385,000 $209,506,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
- --------------------------------------------------------------------------------
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE YEARS ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNEARNED
SHARES
ISSUED TO UNREALIZED
COMMON STOCK EMPLOYEE LOSS ON
-------------------------- ADDITIONAL STOCK SECURITIES
PAID-IN OWNERSHIP RETAINED AVAILABLE
SHARES AMOUNT CAPITAL TRUST EARNINGS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1994 $ 1,761,523 $ 1,809,00 $ 6,884,000 $ (503,000) $ 10,169,000 $ - $ 18,359,000
Net income - - - - 2,446,000 - 2,446,000
Cash dividends - - - - (411,000) - (411,000)
Exercise of stock options 2,898 3,000 25,000 - - - 28,000
Earned ESOP shares 8,280 - 32,000 79,000 - - 111,000
10% stock dividend 177,136 183,000 2,214,000 (49,000) (2,348,000) - -
--------- --------- ----------- --------- ------------ ----------- ----------
BALANCE, MARCH 31, 1995 1,949,837 1,995,000 9,155,000 (473,000) 9,856,000 - 20,533,000
Net income - - - - 2,613,000 - 2,613,000
Cash dividends - - - - (173,000) - (173,000)
Exercise of stock options 500 1,000 4,000 - - - 5,000
Earned ESOP shares 9,108 - 55,000 93,000 - - 148,000
10% stock dividend 195,761 199,000 3,019,000 (59,000) (3,159,000) - -
Unrealized loss on securities
available for sale, net
of tax - - - - - (40,000) (40,000)
-------- -------- -------- -------- -------- --------- ----------
BALANCE, MARCH 31, 1996 2,155,206 2,195,000 12,233,000 (439,000) 9,137,000 (40,000) 23,086,000
Net income - - - - 2,008,000 - 2,008,000
Cash dividends - - - - (212,000) - (212,000)
Exercise of stock options 1,500 2,000 10,000 - - - 12,000
Earned ESOP shares 10,019 - 65,000 107,000 - - 172,000
10% stock dividend 216,514 219,000 3,735,000 (54,000) (3,900,000) - -
Increase in unrealized loss on
securities available for
sale, net of tax - - - - - (44,000) (44,000)
-------- -------- -------- -------- -------- --------- ----------
BALANCE, MARCH 31, 1997 2,383,239 $ 2,416,000 $ 16,043,000 $ (386,000) $ 7,033,000 $ (84,000) $ 25,022,000
=========== =========== ============ ========== =========== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,008,000 $2,613,000 $2,446,000
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 878,000 746,000 566,000
Provision for losses on loans and real estate owned 180,000 - -
Noncash compensation expense related to ESOP benefit 172,000 148,000 111,000
Increase in deferred loan origination fees, net of amortization 289,000 176,000 25,000
Federal Home Loan Bank stock dividend (130,000) (105,000) (76,000)
Accretion of discounts on investment securities, purchased
loans, and mortgage-backed securities (84,000) (167,000) (17,000)
Net (gain) loss on sale of real estate owned, mortgage-backed and investment
securities and premises and equipment (37,000) (301,000) 36,000
Changes in assets and liabilities:
Decrease (increase) in loans held for sale 1,861,000 (1,694,000) 4,227,000
Decrease (increase) in prepaid expenses and other assets (93,000) (98,000) 31,000
Decrease (increase) in accrued interest receivable 62,000 (113,000) (545,000)
Increase in accrued expenses and other liabilities 562,000 518,000 111,000
Decrease in net deferred taxes - 493,000 52,000
Other, net - (8,000) (111,000)
------------ ------------ ------------
Net cash provided by operating activities 5,668,000 2,208,000 6,856,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations (85,651,000) (74,568,000) (57,648,000)
Principal repayments on loans 59,369,000 51,733,000 40,479,000
Proceeds from call, maturity, or sale of securities available for sale 3,535,000 6,047,000 26,741,000
Purchase of investment securities available for sale (3,502,000) (4,996,000) (26,741,000)
Purchase of mortgage-backed securities available for sale (1,100,000) (2,002,000) -
Principal repayments on mortgage-backed securities held to maturity 5,104,000 5,656,000 4,818,000
Principal repayments on mortgage-backed securities available for sale 80,000 - -
Purchase of mortgage-backed securities held to maturity (3,035,000) (2,017,000) (19,544,000)
Purchase of investment securities held to maturity - (4,006,000) (25,651,000)
Proceeds from call or maturity of investment securities held to maturity 9,265,000 6,271,000 -
Purchase of premises and equipment (699,000) (749,000) (3,152,000)
Purchase of deposit relationships - - (3,269,000)
Purchase of Federal Home Loan Bank stock - (240,000) -
Purchase of mortgage servicing rights - - (252,000)
Proceeds from sale of real estate 140,000 225,000 -
------------ ------------ ------------
Net cash used in investing activities (16,494,000) (18,646,000) (64,219,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 11,257,000 12,710,000 38,971,000
Dividends paid (200,000) (164,000) (373,000)
Proceeds from Federal Home Loan Bank advances 68,880,000 40,050,000 31,050,000
Repayment of Federal Home Loan Bank advances (67,750,000) (37,000,000) (13,050,000)
Net increase (decrease) in advance payments by borrowers 72,000 2,000 (48,000)
Repayment of other borrowed funds (79,000) (79,000) (79,000)
Proceeds from exercise of stock options 12,000 5,000 28,000
------------ ------------ ------------
Net cash provided by financing activities 12,192,000 15,524,000 56,499,000
------------ ------------ ------------
NET DECREASE IN CASH $ 1,366,000 $ (914,000) $ (864,000)
(continued)
F-4
<PAGE>
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED MARCH 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
NET DECREASE IN CASH $ 1,366,000 $ (914,000) $ (864,000)
CASH, BEGINNING OF YEAR
5,585,000 6,499,000 7,363,000
----------- ----------- -----------
CASH, END OF YEAR $ 6,951,000 $ 5,585,000 $ 6,499,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 8,921,000 $ 8,405,000 $ 5,895,000
Income taxes 951,000 870,000 1,175,000
NONCASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned $ 269,000 $ - $ -
Loans arising from sale of real estate owned and land held
for investment - 225,000 -
Real estate transferred to land held for sale - - 471,000
Compensation expense recognized for shares released for
allocation to participants of the ESOP 172,000 148,000 111,000
December 29, 1995 transfer of securities from held to maturity to available
for sale at estimated fair value - 5,061,000 -
Fair value adjustment to securities available for sale (65,000) (62,000) -
Income tax effect related to fair value adjustment 21,000 22,000 -
See notes to consolidated financial statements. (Concluded)
</TABLE>
F-5
<PAGE>
RIVERVIEW SAVINGS BANK, FSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED MARCH 31, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Riverview Savings Bank, FSB and its wholly-owned
subsidiary, Riverview Services, Inc. (collectively, the "Bank"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NATURE OF OPERATIONS - The Bank is a nine branch community-oriented
financial institution operating in rural and suburban communities in
southwest Washington state. The Bank is engaged primarily in the business
of attracting deposits from the general public and using such funds,
together with other borrowings, to invest in various consumer-based real
estate loans, investment securities, and mortgage-backed securities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of related
revenue and expense during the reporting period. Actual results could
differ from those estimates.
STOCK OFFERING AND REORGANIZATION - On October 22, 1993, an initial public
stock offering of 690,000 shares of common stock was completed by
Riverview Savings Bank, FSB, a federally-chartered capital stock savings
bank. The Bank was formed from the reorganization of the former Riverview
Savings Bank, a mutual savings bank, into a mutual holding company known
as Riverview M.H.C. (the "MHC"). An additional 1,007,400 shares of common
stock were issued to the MHC in exchange for substantially all of the
assets and all of the liabilities of the former mutual savings bank. Upon
completion of these transactions, the MHC owned 58.4% of the Bank's
outstanding common stock (see also Note 16).
INTEREST INCOME - Interest on loans is credited to income as earned,
unless the collectibility of the interest is in doubt, at which time the
accrual of interest ceases and a reserve for any nonrecoverable accrued
interest is established and charged against operations and the loan
is placed on nonaccrual status. If ultimate collection of principal is
in doubt, all cash receipts on nonaccrual loans are applied to reduce
the principal balance.
Premiums or discounts on loans purchased and sold are amortized or
accreted using the level yield method over a period approximating the
average life of the loans.
LOAN FEES - Loan fee income, net of the direct origination costs, is
deferred and accreted to interest income by the level yield method over
the contractual life of the loan.
F-6
<PAGE>
SECURITIES - The Bank has adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. SFAS 115 requires the classification of securities at
acquisition into one of three categories: held to maturity, available for
sale, or trading.
In accordance with SFAS No. 115, investment securities are classified as
held to maturity where the Bank has the ability and positive intent to
hold them to maturity. Investment securities held to maturity are carried
at cost, adjusted for amortization of premiums and accretion of discounts
to maturity. Unrealized losses on securities held to maturity due to
fluctuations in fair value are recognized when it is determined that an
other than temporary decline in value has occurred. Investment securities
bought and held principally for the purpose of sale in the near term are
classified as trading securities. Investment securities not classified as
trading securities, or as held to maturity securities, are classified as
securities available for sale. For purposes of computing gains and losses,
cost of securities sold is determined using the specific identification
method. Unrealized holding gains and losses on securities available for
sale are excluded from earnings and reported net of tax as a separate
component of shareholders' equity until realized. At March 31, 1997 and
1996, the Bank had no trading securities.
On December 29, 1995, the Company reclassified $4.8 million of investment
securities held to maturity to investment securities available for sale at
fair value of $5.1 million. These investment securities were subsequently
sold for a gain of $216,000 before tax during the fiscal year 1996. The
reclassification was in accordance with the FASB issuing a special report,
A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, that permitted this one-time
reassessment without tainting the remaining securities held to maturity.
TRADING ACCOUNT SECURITIES ACTIVITY - Under the terms of the Bank's
investment policy, the Bank is authorized to purchase and sell U.S.
Treasury and government agency securities with maturity dates not to
exceed ten years. The policy limits such investments to 5% of total Bank
assets. Securities in the Bank's trading portfolio are carried at fair
value. There was no trading activity during the year ended March 31, 1997.
During the years ended March 31, 1996 and 1995, the Bank purchased and
sold $2.0 million and $21.9 million, respectively, of U.S. Treasury and
government agency securities and realized gross trading gains of $1,000
and $42,000 and gross trading losses of $6,000 and $16,000, respectively.
REAL ESTATE OWNED ("REO") - REO consists of properties acquired through
foreclosure. Specific charge-offs are taken based upon detailed analysis
of the fair value of collateral underlying loans on which the Bank is in
the process of foreclosing. Such collateral is transferred into REO at the
lower of recorded cost or fair value less estimated costs of disposal.
Subsequently, properties are evaluated and any additional declines in
value are provided for in the REO reserve for losses. The amounts the Bank
will ultimately recover from REO may differ from the amounts used in
arriving at the net carrying value of these assets because of future
market factors beyond the Bank's control or because of changes in the
Bank's strategy for the sale of the property. At March 31, 1996, there was
no REO.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at
a level sufficient to provide for estimated loan losses based on
evaluating known and inherent risks in the loan portfolio. The allowance
is provided based upon management's continuing analysis of the pertinent
factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual
loan loss experience, current and anticipated economic conditions, and
detailed analysis of individual loans for which full collectibility may
not be assured. The detailed analysis includes techniques to estimate the
fair value of loan collateral and the existence of potential alternative
sources of repayment. The appropriate allowance level is estimated based
upon factors and trends identified by management at the time the
consolidated financial statements are prepared.
F-7
<PAGE>
In accordance with SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN, and SFAS No. 118, an amendment of SFAS No. 114, a loan is
considered impaired when it is probable that a creditor will be unable
to collect all amounts (principal and interest) due according to the
contractual terms of the loan agreement. Large groups of smaller balance
homogenous loans such as consumer secured loans, residential mortgage
loans, and consumer unsecured loans are collectively evaluated for
potential loss. When a loan has been identified as being impaired, the
amount of the impairment is measured by using discounted cash flows,
except when, as a practical expedient, the current fair value of the
collateral, reduced by costs to sell, is used. When the measurement of
the impaired loan is less than the recorded investment in the loan
(including accrued interest, net deferred loan fees or costs, and
unamortized premium or discount), an impairment is recognized by creating
or adjusting an allocation of the allowance for credit losses. Uncollected
accrued interest is reversed against interest income. If ultimate
collection of principal is in doubt, all cash receipts on impaired loans
are aplied to reduce the principal balance. The Bank adopted SFAS No. 114
and No. 118 as of April 1, 1995.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is generally computed on the
straight-line method over the estimated useful lives as follows:
Buildings and improvements 3 to 60 years
Furniture and equipment 3 to 20 years
ASSET IMPAIRMENT - Effective April 1, 1996, the Company adopted SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. This statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 121 had no material impact on the financial
statements.
LOANS HELD FOR SALE - Under the terms of the Bank's investment policy, the
Bank is authorized to sell certain loans when such sales result in higher
net yields. Accordingly, such loans are classified as held for sale in the
accompanying consolidated financial statements and are carried at the
lower of aggregate cost or net realizable value.
MORTGAGE SERVICING - Fees earned for servicing loans for the FHLMC are
reported as income when the related mortgage loan payments are collected.
Loan servicing costs are charged to expense as incurred.
Effective January 1, 1997, the Bank records its mortgage servicing rights
at fair values in accordance with SFAS No. 125, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, which
amended SFAS Nos. 65 and 122. SFAS No. 125 requires the bank to allocate
the total cost of all mortgage loans, whether originated or purchased, to
the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values if it is practicable
to estimate those fair values. The Bank is amortizing the mortgage
servicing assets over the period of estimated net servicing income.
CORE DEPOSIT INTANGIBLE - On May 13, 1994, the Bank assumed $42 million of
deposits from the Resolution Trust Corporation for a deposit premium of
$3.2 million. In conjunction with the assumption of these deposits, the
Bank also acquired two branch facilities located in Vancouver and
Longview, Washington for $688,200. The deposit premium is reflected on the
consolidated statements of financial condition as core deposit intangible
and is being amortized to noninterest expense on a straight-line basis
over ten years.
F-8
<PAGE>
INCOME TAXES - The Bank accounts for income taxes in accordance with the
provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which requires
the use of the asset and liability method of accounting for income taxes
and eliminates, on a prospective basis, the exemption from deferred income
taxes of thrift bad debt reserves. These thrift bad debt reserves are
included in taxable income of later years only if the allowance for losses
is used subsequently for purposes other than to absorb bad debt losses.
Because the Bank does not intend to use the allowance for purposes other
than to absorb loan losses, no deferred taxes have been provided for the
thrift bad debt reserves. Bad debt deductions on which federal income
taxes have not been provided approximate $1,100,000 at March 31, 1997. The
Bank files a consolidated federal income tax return.
LAND HELD FOR DEVELOPMENT - Land held for development, which is carried at
the lower of cost or net realizable value, consists of a parcel of land
which the Bank intends to develop either for Bank operation or for
ultimate sale.
EMPLOYEE STOCK OWNERSHIP PLAN - The Bank sponsors a leveraged Employee
Stock Ownership Plan ("ESOP"). The ESOP is accounted for in accordance
with the American Institute of Certified Public Accountants (AICPA)
Statement of Position 93-6, EMPLOYER'S ACCOUNTING FOR EMPLOYEE STOCK
OWNERSHIP PLAN. Accordingly, the debt of the ESOP is recorded as other
borrowed funds of the Bank and the shares pledged as collateral are
reported as unearned shares issued to the employee stock ownership trust
in the statement of financial condition. As shares are released from
collateral, compensation expense is recorded equal to the then current
market price of the shares, and the shares become outstanding for
earnings-per-share calculations. Stock and cash dividends on allocated
shares are recorded as a reduction of retained earnings and paid directly
to plan participants or distributed directly to participants' accounts.
Cash dividends on unallocated shares are recorded as a reduction of debt
and accrued interest. Stock dividends on unallocated shares are recorded
as an increase to the unearned shares issued to the employee stock
ownership trust contra-equity account and distributed to participants over
the remaining debt service period.
EARNINGS PER SHARE - The weighted average number of shares of common stock
outstanding for all periods presented have been retroactively restated for
a 10% stock dividend declared on March 19, 1997 and payable on April 11,
1997. ESOP shares are not considered outstanding for earnings per share
purposes until they are allocated. Allocated ESOP shares for the year
ended March 31, 1997 were considered outstanding for three months. Shares
granted but not yet issued under the Bank's stock option plans are
considered common stock equivalents for earnings per share calculations;
however, these options had less than a 3% dilutive effect and, therefore,
are not reflected in the per share data.
SFAS No. 128, EARNINGS PER SHARE, issued in February 1997, establishes
standards for computing and presenting earnings per share ("EPS") and
applies to entities with publicly-held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of
basic EPS and requires the dual presentation of basic and diluted EPS on
the face of the income statement. This statement is effective for the
Bank's financial statements beginning with the quarter ending December 31,
1997. This statement requires restatement of all prior period EPS data
presented. The impact of the adoption of this statement is not expected to
be material to the Bank.
STATEMENT OF CASH FLOWS - Cash includes amounts on hand, due from banks,
and interest-earning deposits in other banks with maturities of 90 days or
less.
F-9
<PAGE>
STOCK-BASED COMPENSATION - The Company accounts for stock compensation
using the intrinsic value method as prescribed in Accounting Principles
Board APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. Under the intrinsic value based method,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the stock at grant date over the amount an
employee must pay to acquire the stock. Stock options granted have no
intrinsic value at the grant date and, under APB No. 25, there is no
compensation cost to be recognized.
Effective April 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which encourages, but does not require,
companies to record compensation costs for stock-based employee
compensation plans at fair value. The fair value approach measures
compensation costs based on factors such as the term of the option, the
market price at grant date, and the option exercise price, with expense
recognized over the vesting period. See Note 11 for pro forma effect on
net income and earnings per share as if the fair value method encouraged
by SFAS No. 123 was used.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During 1997, the Financial
Accounting Standards Board issued SFAS No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE.
SFAS No. 129 establishes standards for disclosing information about an
entity's capital structure. It applies to all entities. This Statement
continues the previous requirements to disclose certain information about
an entity's capital structure found in APB Opinions No. 10, OMNIBUS
OPINION - 1966, and No. 15, EARNINGS PER SHARE, and FASB Statement No. 47,
DISCLOSURE OF LONG-TERM OBLIGATIONS, for entities that were subject to the
requirements of those standards. This Statement is effective for financial
statements beginning with the quarter ending December 31, 1997. It
contains no change in disclosure requirements for entities that were
previously subject to the requirements of Opinions 10 and 15 and
Statement 47. The adoption of the provisions of SFAS No. 129 is not
expected to have a significant impact on the financial statements of the
Bank.
2. INTEREST RATE RISK MANAGEMENT
The Bank is engaged principally in gathering deposits and providing first
mortgage loans to individuals and commercial enterprises. At March 31,
1997 and 1996, the asset portfolio consisted of fixed and variable rate
interest-earning assets. Those assets were funded primarily with
short-term deposits that have market interest rates that vary over time.
The shorter maturity of the interest-sensitive liabilities indicates that
the Bank could be exposed to interest rate risk because, generally in an
increasing rate environment, interest-bearing liabilities will be
repricing faster at higher interest rates than interest-earning assets,
thereby reducing net interest income, as well as the market value of
long-term assets. Management is aware of this interest rate risk and in
its opinion actively monitors such risk and manages it to the extent
practicable.
3. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities
held to maturity consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Agency securities $ 12,467,000 $ 60,000 $ (79,000) $ 12,448,000
U.S. Treasury securities 7,989,000 12,000 (11,000) 7,990,000
------------ -------- ---------- ------------
$ 20,456,000 $ 72,000 $ (90,000) $ 20,438,000
============ ======== ========== ============
F-10
<PAGE>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1996 COST GAINS LOSSES VALUE
Agency securities $ 17,742,000 $ 225,000 $ (70,000) $ 17,897,000
U.S. Treasury securities 11,987,000 91,000 (19,000) 12,059,000
------------ -------- ---------- ------------
$ 29,729,000 $ 316,000 $ (89,000) $ 29,956,000
============ ======== ========== ============
</TABLE>
The contractual maturities of securities held to maturity are as follows:
MARCH 31, 1997
---------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
Due in one year or less $ 8,988,000 $ 8,995,000
Due after one year through five years 10,468,000 10,476,000
Due after five years through ten years 1,000,000 967,000
-------------- ------------
$ 20,456,000 $ 20,438,000
============== ============
There were no sales of securities held to maturity during the years ended
March 31, 1997 and 1996.
The amortized cost and approximate fair value of investment securities
available for sale consisted of the following:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1997 COST GAINS LOSSES VALUE
Agency securities $ 1,000,000 $ - $ (25,000) $ 975,000
U.S. Treasury securities 2,993,000 $ - $ (69,000) $ 2,924,000
----------- ---------- ----------- -----------
$ 3,993,000 $ - $ (94,000) $ 3,899,000
=========== ========== =========== ===========
MARCH 31, 1996
Agency securities $ 3,002,000 $ - $ (62,000) $ 2,940,000
U.S. Treasury securities 992,000 $ - $ - $ 992,000
----------- ---------- ----------- -----------
$ 3,994,000 $ - $ (62,000) $ 3,932,000
=========== ========== =========== ===========
The contractual maturities of securities available for sale are as
follows:
MARCH 31, 1997
--------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
Due after one year through five years $ 1,995,000 $ 1,961,000
Due after five years through ten years 1,998,000 1,938,000
--------------- ---------------
$ 3,993,000 $ 3,899,000
============== == ============
Securities with a book value of $1,000,000 and a fair value of $967,000
and $1,016,000 at March 31, 1997 and 1996, respectively, were pledged as
collateral for public funds held by the Bank.
F-11
<PAGE>
4. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Real estate mortgage investment conduits $ 6,641,000 $ 139,000 $ (4,000) $ 6,776,000
FHLMC mortgage-backed securities 6,800,000 89,000 (94,000) 6,795,000
FNMA mortgage-backed securities 12,961,000 125,000 (169,000) 12,917,000
------------ --------- ----------- ------------
$ 26,402,000 $ 353,000 $ (267,000) $ 26,488,000
============ ========= =========== ============
MARCH 31, 1996
Real estate mortgage investment conduits $ 5,108,000 $ 255,000 $ - $ 5,363,000
FHLMC mortgage-backed securities 9,030,000 82,000 (40,000) 9,072,000
FNMA mortgage-backed securities 14,237,000 108,000 (64,000) 14,281,000
------------ --------- ----------- ------------
$ 28,375,000 $ 445,000 $ (104,000) $ 28,716,000
============ ========= =========== ============
</TABLE>
The real estate mortgage investment conduits consist of FHLMC and FNMA
securities.
The contractual maturities of mortgage-backed securities held to maturity
are as follows:
MARCH 31, 1997
--------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
Due after one year through five years $ 490,000 $ 478,000
Due after five years through ten years 10,815,000 10,638,000
Due after ten years 15,097,000 15,372,000
------------- -------------
$ 26,402,000 $ 26,488,000
============= =============
There were no sales of mortgage-backed securities held to maturity during
the years ended March 31, 1997 and 1996.
Mortgage-backed securities available for sale consisted of the following:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
MARCH 31, 1997 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Real estate mortgage investment conduits $ 1,922,000 $ - $ (19,000) $ 1,903,000
FHLMC mortgage-backed securities
1,100,000 - (13,000) 1,087,000
----------- --------- ---------- -----------
$ 3,022,000 $ - $ (32,000) $ 2,990,000
=========== ========= ========== ===========
MARCH 31, 1996
Real estate mortgage investment conduits $ 2,002,000 $ 2,000 $ - $ 2,004,000
=========== ========= ========== ===========
</TABLE>
The real estate mortgage investment conduits consist of FHLMC and FNMA
securities.
Expected maturities of mortgage-backed securities held to maturity will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
F-12
<PAGE>
The contractual maturities of mortgage-backed securities available for
sale are as follows:
MARCH 31, 1997
--------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
Due after five years through ten years $ 2,019,000 $ 1,999,000
Due after ten years 1,003,000 991,000
------------- ------------
$ 3,022,000 $ 2,990,000
============= ============
Mortgage-backed securities held to maturity with a book value of $82,000
and $85,000 and a fair value of $82,000 and $84,000 at March 31, 1997 and
1996, respectively, were pledged as collateral for public funds held by
the Bank.
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain cash and certain marketable securities in an amount equal to 5%
of its deposits. The Bank met this requirement as of March 31, 1997 and
1996.
5. LOANS RECEIVABLE
Loans receivable consisted of the following:
MARCH 31,
---------------------------------------
1997 1996
Residential:
One to four family $ 94,456,000 $ 86,199,000
Multi-family 5,439,000 2,958,000
Construction:
One to four family 32,529,000 22,596,000
Multi-family 547,000 361,000
Commercial real estate 634,000 500,000
Commercial 794,000 969,000
Consumer:
Secured 12,797,000 8,545,000
Unsecured 1,496,000 1,254,000
Land 7,900,000 7,546,000
Non-residential 8,997,000 6,518,000
-------------- --------------
165,589,000 137,446,000
Less:
Undisbursed portion of loans 11,087,000 8,876,000
Deferred loan fees 1,967,000 1,678,000
Allowance for possible loan losses 831,000 653,000
Unearned discounts 10,000 11,000
-------------- --------------
Loans receivable, net $ 151,694,000 $ 126,228,000
============== ==============
F-13
<PAGE>
Loans, by maturity or repricing date, were as follows:
MARCH 31,
------------------------------------
1997 1996
Adjustable rate loans:
Within one year $ 73,628,000 $ 56,942,000
After one but within five years 1,884,000 6,864,000
After five but within ten years 281,000 -
After ten years 2,381,000 -
-------------- --------------
78,174,000 63,806,000
-------------- --------------
Fixed rate loans:
Within one year 11,203,000 3,443,000
After one but within five years 18,086,000 6,278,000
After five but within ten years 16,555,000 6,720,000
After ten years 41,571,000 57,199,000
-------------- --------------
87,415,000 73,640,000
-------------- --------------
$ 165,589,000 $ 137,446,000
================ ==============
Loans receivable with adjustable rates primarily reprice based on the one
year treasury index. The remaining adjustable rate loans adjust based on
the Federal Home Loan Bank ("FHLB") cost of funds index. Adjustable rate
loans may reprice a maximum of 2% per year and up to 6% over the life of
the loan.
At March 31, 1997, 99% of the loans in the portfolio were secured by
properties located in Washington and Oregon.
The Bank services loans for others totaling $98,751,000 and $106,167,000,
and $112,663,000 as of March 31, 1997 and 1996, and 1995, respectively.
These loan balances are not included in the consolidated statements of
financial condition as they are not assets of the Bank.
At March 31, 1997, the Bank had commitments to originate fixed rate
mortgage loans of $524,000 at interest rates ranging from 7.875% to
10.00%. At March 31, 1997, adjustable rate mortgage loan commitments were
$1,536,000 at interest rates ranging from 6.50% to 10.50%. The Bank has
the same credit policies in making commitments as it does for on-balance
sheet loans. Collateral is not required to support commitments.
Consumer loan commitments totaled $4,428,000 at March 31, 1997.
Aggregate loans to officers and directors, all of which are current,
consist of the following:
YEAR ENDED MARCH 31,
------------------------------------------------------
1997 1996 1995
Beginning balance $ 1,000,000 $ 1,107,000 $ 764,000
Originations 155,000 243,000 540,000
-17-
<PAGE>
Principal repayments (141,000) (350,000) (197,000)
------------- -------------- ---------------
Total $ 1,014,000 $ 1,000,000 $ 1,107,000
============= ============== ===============
F-14
<PAGE>
6. ALLOWANCE FOR LOSSES ON LOANS RECEIVABLE
Valuation allowances for loans receivable were as follows:
1997 1996 1995
BEGINNING BALANCE $ 653,000 $ 657,000 $ 647,000
Provision for losses 180,000 - -
Write-offs (11,000) (23,000) (19,000)
Recoveries 9,000 19,000 29,000
----------- ----------- -----------
ENDING BALANCE $ 831,000 $ 653,000 $ 657,000
=========== =========== ===========
At March 31, 1997 and 1996, the Bank's recorded investment in loans for
which an impairment has been recognized under the guidance of SFAS No. 114
and SFAS No. 118 was $87,000 and $548,000. The allowance for loan losses
in excess of specific reserves is available to absorb losses from all
loans, although allocations have been made for certain loans and loan
categories as part of management's analysis of the allowance. The average
investment in impaired loans was approximately $326,000 and $219,000
during the years ended March 31, 1997 and 1996.
7. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
MARCH 31,
------------------------------------
1997 1996
Land $ 1,399,000 $ 1,399,000
Buildings and improvements 3,679,000 3,552,000
Furniture and equipment 2,424,000 2,056,000
---------------- ----------------
Subtotal 7,502,000 7,007,000
Less accumulated depreciation (2,870,000) (2,608,000)
---------------- -----------------
Total $ 4,632,000 $ 4,399,000
=============== =============
Rent expense was $8,000, $12,000, and $35,000 for the years ended March
31, 1997, 1996, and 1995, respectively.
F-15
<PAGE>
8. DEPOSIT ACCOUNTS
Deposit accounts consisted of the following:
<TABLE>
<CAPTION>
AVERAGE AVERAGE
INTEREST MARCH 31, INTEREST MARCH 31,
ACCOUNT TYPE RATE 1997 RATE 1996
<S> <C> <C> <C> <C>
NOW Accounts:
Noninterest-bearing 0.00 % $ 7,085,00 0.00 % $ 5,347,000
Regular 1.50 18,474,000 1.50 17,005,000
Maxi 1.75 1,606,000 1.75 1,624,000
Insured money market 3.75 17,553,000 3.75 16,147,000
Savings accounts 2.75 21,234,000 2.75 21,775,000
Certificate accounts 5.62 103,464,000 5.72 96,261,000
------------- -------------
Total $ 169,416,000 $ 158,159,000
============= =============
Weighted average interest rate 4.35 % 4.42 %
====== ======
</TABLE>
Certificate accounts as of March 31, 1997, mature as follows:
AMOUNT
Less than one year $ 79,709,000
One year to two years 14,778,000
Two years to three years 3,438,000
Three years to four years 3,110,000
Four years to five years 1,782,000
After five years 647,000
--------------
Total $ 103,464,000
==============
Deposit accounts in excess of $100,000 are not insured by the Federal
Deposit Insurance Corporation.
Interest expense by deposit type was as follows:
YEAR ENDED MARCH 31,
--------------------------------------------------
1997 1996 1995
NOW Accounts:
Regular $ 234,000 $ 247,000 $ 264,000
Maxi 29,000 37,000 43,000
Insured money market accounts 588,000 562,000 288,000
Savings accounts 588,000 617,000 919,000
Certificate accounts 5,595,000 5,120,000 3,607,000
-------------- ------------- -------------
Total $ 7,034,000 $ 6,583,000 $ 5,121,000
============== ============= =============
F-16
<PAGE>
9. FEDERAL HOME LOAN BANK ADVANCES
At March 31, 1997, advances from the FHLB totaled $27,180,000, of which
$22,550,000 had fixed interest rates ranging from 5.54% to 8.15% with a
weighted average interest rate of 6.452%. The remaining $4,630,000
adjustable rate advance had an interest rate of 6.70%, which is the "Cash
Management Advance Rate" quoted by the FHLB from time to time, each change
in interest rate to take effect simultaneously with the corresponding
change in the Cash Management Rate.
At March 31, 1997, the Bank had additional borrowing commitments available
of $51,355,000 from the FHLB.
FHLB advances are collateralized as provided for in the Advance, Pledge
and Security Agreements with the FHLB by certain investment and
mortgage-backed securities, stock owned by the Bank, deposits with the
FHLB, and certain mortgages on deeds of trust securing such properties as
provided in the agreements with the FHLB.
Payments required to service the Bank's FHLB advances during the next five
years ended March 31 are as follows: 1998 - $12,630,000; 1999 -
$7,000,000; 2000 - $7,000,000; 2001 - $550,000; and 2002 - zero.
10. FEDERAL INCOME TAXES
Income tax expense attributable to operations for the three years ended
March 31 consisted of the following:
1997 1996 1995
Current $ 1,035,000 $ 882,000 $ 1,168,000
Deferred - 493,000 52,000
------------ ------------- ------------
Total $ 1,035,000 $ 1,375,000 $ 1,220,000
============ ============= ============
A reconciliation between the statutory federal income taxes computed at
the statutory rate and the effective tax rate for the year ended March 31
is as follows:
1997 1996 1995
Federal statutory rate 34.0 % 34.0 % 34.0 %
ESOP market value adjustment 0.7 0.5 0.3
Other, net (0.7) -- (1.0)
------------ ------------- ------------
Total 34.0 % 34.5 % 33.3 %
============ ============= ============
Taxes related to gains on sales of securities were $13,000, $72,000, and
$9,000 for the years ended March 31, 1997, 1996, and 1995, respectively.
F-17
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at March 31,
1997 and 1996 are as follows:
1997 1996
Deferred tax assets:
Deferred compensation $ 225,000 $ 186,000
Loan loss reserve 195,000 153,000
Core deposit intangible 106,000 69,000
Accrued expenses 72,000 36,000
Accumulated depreciation 56,000 24,000
Deferred loan fees 16,000 70,000
Unrealized loss on securities available for sale 43,000 20,000
---------- -----------
Total deferred tax asset 713,000 558,000
---------- -----------
Deferred tax liabilities:
FHLB stock dividend (350,000) (306,000)
Tax qualified loan loss reserve (282,000) (282,000)
Other (224,000) (113,000)
----------- -----------
Total deferred tax liability (856,000) (701,000)
----------- -----------
Deferred tax liability, net $ (143,000) $ (143,000)
=========== ===========
For the fiscal year ended March 31, 1996 and years prior, the Company
determined bad debt expense to be deducted from taxable income based on 8%
of taxable income before such deduction as provided by a provision in the
Internal Revenue Code ("IRC"). In August 1996, the provision in the IRC
allowing the 8% of taxable income deduction was repealed. Accordingly, the
Company is required to use the write-off method to record bad debt in the
current period and must recapture the excess reserve accumulated from
April 1, 1987 to March 31, 1996 from use of the 8% method ratably over a
six-taxable year period. The income tax provision from 1987 to 1996
included an amount of $282,000 for the tax effect on such excess reserves.
The IRC regulation allows the Bank the opportunity to defer the recapture
of the excess reserve for a period of up to two years if the Bank meets a
residential loan requirement. The Bank met the requirement to delay
recapture for the current taxable year.
No valuation allowance for deferred tax assets was deemed necessary at
March 31, 1997 or 1996, based on the Bank's anticipated future ability to
generate taxable income from operations.
11. EMPLOYEE BENEFITS PLANS
RETIREMENT PLAN - The Riverview Retirement and Savings Plan (the "Plan")
is a defined contribution profit-sharing plan incorporating the provisions
of Section 401(k) of the Internal Revenue Code. The retirement plan covers
all employees with at least one year of service who are over the age of
21. The Bank matches 50% of the employee's elective contribution up to 3%
of the employee's compensation. Bank expenses related to this plan for the
years ended March 31, 1997, 1996, and 1995 were $52,000, $66,000, and
$49,000, respectively.
F-18
<PAGE>
DIRECTOR DEFERRED COMPENSATION PLAN - Directors may elect to defer their
monthly directors' fees until retirement with no income tax payable by the
director until retirement benefits are received. This alternative is made
available to them through a nonqualified deferred compensation plan. The
Bank accrues annual interest on assets under the plan based upon a formula
relating to gross revenues, which amounted to 7.90%, 7.65%, and 7.32% for
the years ended March 31, 1997, 1996, and 1995, respectively. The
estimated liability under the plan is accrued as earned by the
participant. At March 31, 1997 and 1996, the Bank's aggregate liability
under the plan was $663,000 and $546,000, respectively.
BONUS PROGRAMS - The Bank maintains a bonus program for senior management.
The senior management bonus represents approximately 5% of fiscal year
profits, assuming profit goals are attained, and is divided among senior
management members in proportion to their salaries. Under these programs,
the Bank paid $140,000, $87,000, and $181,000 in bonuses during the years
ended March 31, 1997, 1996, and 1995, respectively. Accrued bonuses were
$201,000 and $140,000 at March 31, 1997 and 1996.
STOCK OPTION PLANS - The Board of Directors approved a Stock Option and
Incentive Plan for officers, directors, and key employees ("Stock Plan"),
which authorizes the grant of stock options. The maximum number of shares
of common stock of the Bank which may be issued under the Stock Plan is
96,431 shares. All options granted under the Stock Plan are immediately
exercisable and expire October 22, 2003.
Stock option activity, which includes the impact of stock dividends, is
summarized in the following table:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE
SHARES PER SHARE
OUTSTANDING AND EXERCISABLE APRIL 1, 1995 74,301 $ 7.20
Grants 6,050 11.36
Options exercised (605) 7.16
-------- --------
OUTSTANDING AND EXERCISABLE MARCH 31, 1996 79,746 7.51
Grants 5,500 15.27
Options exercised (1,650) 7.16
-------- --------
OUTSTANDING AND EXERCISABLE MARCH 31, 1997 83,596 $ 8.03
======== ========
Additional information regarding options outstanding as of March 31, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED AVG. WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$7.16 to 11.36 78,096 6.58 $ 7.52 78,096 $ 7.52
14.77 to 16.03 5,500 6.58 15.27 5,500 15.27
</TABLE>
F-19
<PAGE>
ADDITIONAL STOCK PLAN INFORMATION - As discussed in Note 1, the Bank
continues to account for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income and earnings per share had the Bank
adopted the fair value method as of the beginning of fiscal 1996. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Bank's stock option awards. These
models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Bank's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions:
RISK FREE
INTEREST EXPECTED EXPECTED EXPECTED
RATE LIFE VOLATILITY DIVIDENDS
Fiscal 1997 6.85 % 6.58 yrs 25.03 % 2.46 %
Fiscal 1996 6.33 % 7.58 yrs 28.78 % 3.16 %
The Bank's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. The weighted average fair
value of 1997 and 1996 awards was $5.20 and $4.24, respectively. If the
accounting provisions of the new pronouncement had been adopted as of the
beginning of fiscal 1996, the effect on 1997 and 1996 net income and
earnings per share in both years would not have been material.
12. EMPLOYEE STOCK OWNERSHIP PLAN
The Bank sponsors a leveraged ESOP that covers all employees with at least
one year of service who are over the age of 21. The Bank makes annual
contributions to the ESOP equal to the ESOP's debt service. All unreleased
ESOP shares are pledged as collateral for this debt. Shares are released
for allocation and allocated to participant accounts on the same date
annual debt payments are due, which is at December 31 of each year until
1999. Dividends on allocated ESOP shares may either be paid directly to
Plan participants or retained in the participant's accounts. Cash
dividends on unallocated shares are recorded as a reduction to ESOP debt
and accrued interest. ESOP compensation expense included in salaries and
benefits was $173,000, $148,000, and $111,000 for the years ended March
31, 1997, 1996, and 1995, respectively.
F-20
<PAGE>
ESOP share activity is summarized in the following table:
UNRELEASED ALLOCATED
ESOP AND RELEASED
SHARES SHARES TOTAL
BALANCE, APRIL 1, 1995 45,540 18,216 63,756
December 31, 1995 (9,108) 9,108 -
Adjusted for stock dividend 3,644 2,732 6,376
-------- ------ ------
BALANCE, MARCH 31, 1996 40,076 30,056 70,132
December 31, 1996 (10,019) 10,019 -
Adjusted for stock dividend 3,005 4,009 7,014
-------- ------ ------
BALANCE, MARCH 31, 1997 33,062 44,084 77,146
======== ====== ======
The fair value of unreleased shares was $661,000, $646,000, and $569,000
at March 31, 1997, 1996, and 1995, respectively.
Other borrowed funds consisted of a promissory note to fund the Bank's
ESOP. Interest is payable at the prime rate (8.25% at March 31, 1997),
adjusted each December 31. Annual principal payments of $78,860 plus
interest are due through December 31, 1999. All unreleased ESOP shares are
pledged as collateral for this promissory note.
The Employee Stock Ownership Trust Term Loan Agreement contains certain
negative and affirmative covenants regarding eligible acquisitions and
investments, restrictions on incurring debt and other liabilities, and
standards of recordkeeping. The Bank was in compliance with all covenants
as of March 31, 1997.
13. SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
The Board of Directors authorized 1,000,000 shares of serial preferred
stock as part of the stock offering and reorganization completed on
October 22, 1993. No preferred shares were issued or outstanding at March
31, 1997 or 1996.
Office of Thrift Supervision ("OTS") regulations permit the MHC to waive
receipt of dividends from the Bank with prior OTS approval. Under the
provisions of the notice of intent to waive dividends approved by the OTS,
the cumulative amount of such waived dividends, beginning March 7, 1995,
constitutes restricted retained earnings and is available for declaration
as a dividend solely to the MHC. Such dividends must be considered as
having been paid by the Bank in evaluating any proposed dividend under OTS
capital distribution regulations. As of March 31, 1997, the cumulative
amount of dividends waived by the MHC and restricted by the above
provisions was $579,000.
The Bank is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk, weightings, and other factors.
F-21
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
I capital to risk-weighted assets, of Tier 1 capital to total assets, and
tangible capital to tangible assets (set forth in the table below).
Management believes the Bank meets all capital adequacy requirements to
which it is subject as of March 31, 1997.
As of March 31, 1997, the most recent notification from the OTS
categorized the Bank 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 below. There are no conditions
or events since that notification that management believes have changed
the Bank's category.
The Bank's actual and required minimum capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
CATEGORIZED AS "WELL
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
------------------------- ------------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1997
Total Capital:
(To Risk Weighted Assets) $ 22,986,000 20.89 % $ 8,804,000 8.0 % $ 11,005,000 10.0 %
Tier I Capital:
(To Risk Weighted Assets) 22,777,000 20.70 % N/A N/A 6,603,000 6.0 %
Tier 1 Capital:
(To Total Assets) 22,777,000 10.25 % 6,664,000 3.0 % 11,107,000 5.0 %
Tangible Capital:
(To Tangible Assets) 22,777,000 10.26 % 3,330,000 1.5 % N/A N/A
AS OF MARCH 31, 1996
Total Capital:
(To Risk Weighted Assets) 20,502,000 21.13 % 7,763,000 8.0 % 9,704,000 10.0 %
Tier I Capital:
(To Risk Weighted Assets) 20,470,000 21.09 % N/A N/A 5,823,000 6.0 %
Tier 1 Capital:
(To Total Assets) 20,470,000 9.89 % 6,207,000 3.0 % 10,344,000 5.0 %
Tangible Capital:
(To Tangible Assets) 20,470,000 9.89 % 3,103,000 1.5 % N/A N/A
</TABLE>
The following table is a reconciliation of the Bank's capital, calculated
according to generally accepted accounting principles (GAAP), to
regulatory tangible and risk-based capital at March 31, 1997:
Equity $ 25,022,000
Unrealized securities loss, net 84,000
Core deposit intangible asset (2,329,000)
---------------
Tangible capital 22,777,000
Land held for development (471,000)
General valuation allowance 680,000
---------------
Total capital $ 22,986,000
===============
F-22
<PAGE>
On August 23, 1993, the OTS issued a regulation which would add an
interest rate risk component to the risk capital standards (the "final IRR
rule"). Institutions with a greater than normal interest rate risk
exposure will be required to take a deduction from the total capital
available to meet their risk based capital requirement. That deduction is
equal to one-half of the difference between the Bank's actual measured
exposure as defined by the regulation. Savings institutions, such as the
Bank, with less than $300,000,000 in assets and risk-based capital in
excess of 12% will not be subject to the final IRR rule.
At periodic intervals, the OTS and the Federal Deposit Insurance
Corporation ("FDIC") routinely examine the Bank's financial statements as
part of their legally prescribed oversight of the savings and loan
industry. Based on their examinations, these regulators can direct that
the Bank's financial statements be adjusted in accordance with their
findings. A future examination by the OTS or the FDIC could include a
review of certain transactions or other amounts reported in the Bank's
1997 financial statements. In view of the uncertain regulatory environment
in which the Bank operates, the extent, if any, to which a forthcoming
regulatory examination may ultimately result in adjustments to the 1997
financial statements cannot presently be determined.
On September 30, 1996, the United States Congress passed and the President
signed into law the omnibus appropriations package (C.R.), including the
Bank Insurance Fund/Savings Association Insurance Fund ("BIF/SAIF") and
Regulatory Burden Relief packages. Included in this legislation is a
requirement for SAIF-insured institutions to recapitalize the SAIF
insurance fund through a one-time special assessment to be paid within 60
days of the first of the month following the enactment. The FDIC is
charged with the ultimate responsibility of determining the specific
assessment, which was determined to be 65.7 basis points of the March 31,
1995 SAIF deposit assessment base. As the Bank is insured by the SAIF, the
assessment resulted in a pre-tax charge to other expenses of $947,000,
based on the SAIF assessment base of $144.2 million.
14. STOCK DIVIDEND
On March 19, 1997, the Bank declared a 10% stock dividend, payable April
11, 1997 to shareholders of record on March 31, 1997. Average shares
outstanding, and all per share amounts included in the financial
statements and notes, have been adjusted retroactively to reflect this
dividend.
15. 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.
F-23
<PAGE>
The estimated fair value of financial instruments is as follows at March
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Assets:
Cash $ 6,951,000 $ 6,951,000 $ 5,585,000 $ 5,585,000
Investment securities 20,456,000 20,438,000 29,729,000 29,956,000
Investment securities available 3,993,000 3,899,000 3,994,000 3,932,000
for sale
Mortgage-backed securities 26,402,000 26,488,000 28,375,000 28,716,000
Mortgage-backed securities 3,022,000 2,990,000 2,002,000 2,004,000
available for sale
Loans receivable, net 151,694,000 150,436,000 126,228,000 127,045,000
Loans held for sale, net 80,000 82,000 1,941,000 1,941,000
FHLB stock 1,756,000 1,756,000 1,627,000 1,627,000
Liabilities:
Demand deposits 65,952,000 65,952,000 61,898,000 61,898,000
Time deposits 103,464,000 103,401,000 96,261,000 96,628,000
FHLB advances - short-term 12,630,000 12,678,000 10,500,000 10,585,000
FHLB advances - long-term 14,550,000 14,401,000 15,550,000 15,643,000
Other borrowed funds 237,000 237,000 315,000 315,000
</TABLE>
Fair value estimates, methods, and assumptions are set forth below for the
Bank's financial instruments.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES - Fair values were based on
quoted market rates and dealer quotes.
LOANS RECEIVABLE - Loans were priced using a discounted cash flow method.
The discount rate used was the rate currently offered on similar products,
risk adjusted for credit concerns or dissimilar characteristics.
No adjustment was made to the entry-value interest rates for changes in
credit of performing loans for which there are no known credit concerns.
Management believes that the risk factor embedded in the entry-value
interest rates, along with the general reserves applicable to the loan
portfolio for which there are no known credit concerns, result in a fair
valuation of such loans on an entry-value basis.
DEPOSITS - The fair value of time deposits with no stated maturity such as
noninterest-bearing demand deposits, savings, NOW accounts, and money
market and checking accounts is equal to the amount payable on demand. The
fair value of time deposits was based on the discounted value of
contractual cash flows. The discount rate was estimated using rates
available in the local market.
FHLB ADVANCES - The fair value for FHLB advances is based on the
discounted cash flow method. The discount rate was estimated using rates
currently available from the FHLB.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - The estimated fair value of loan
commitments approximates fees recorded associated with such commitments
as of March 31, 1997 and 1996.
OTHER - The carrying value of other financial instruments was determined
to be a reasonable estimate of their fair value.
LIMITATIONS - The fair value estimates presented herein were based on
pertinent information available to management as of March 31, 1997 and
1996. Although management was not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial
statements on those dates and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein.
F-24
<PAGE>
Fair value estimates were based on existing financial instruments without
attempting to estimate the value of anticipated future business. The fair
value has not been estimated for assets and liabilities that were not
considered financial instruments. Significant assets and liabilities that
are not financial instruments include the mortgage banking operations,
deferred tax liabilities, premises and equipment.
16. PLAN OF CONVERSION AND STOCK ISSUANCE - SUBSEQUENT EVENT (UNAUDITED)
On May 21, 1997, the Board of Directors of Riverview, M.H.C., the mutual
holding company of the Bank, adopted a Plan of Conversion and Agreement
and Plan of Reorganization (the "Plan") to convert Riverview, M.H.C. to
stock form and to reorganize Riverview, M.H.C., and the Bank by forming a
new stock Washington stock corporation to become the parent company of the
Bank. The new Washington corporation will exchange certain shares of its
common stock for the outstanding common stock of the Bank and will
issue and offer for sale certain additional shares of its common
stock. The additional shares of common stock of the new Washington
corporation will be offered to eligible account holders of the Bank as
of December 31, 1995, who will receive nontransferable subscription
rights to purchase these shares, as well as certain other persons as
provided for in the Plan. The amount and pricing of the proposed stock
offering will be based on an independent appraisal of the Bank.
In connection with the proposed transaction, Riverview, M.H.C. will file
applications with the Office of Thrift Supervision and a registration
statement with the U.S. Securities and Exchange Commission with respect to
the reorganization and common stock offering. After receipt of the
required regulatory approvals, the Plan of Conversion will be submitted to
the members of Riverview, M.H.C. for approval by at least a majority of
the votes eligible to be cast at a special meeting and will also be
submitted to the Bank's stockholders for approval at a special meeting.
The transaction is expected to be completed during the third calendar
quarter of 1997.
The Plan provides that when the conversion is completed, a "Liquidation
Account" will be established in an amount equal to the amount of dividends
with respect to the common stock of the Bank waived by Riverview, M.H.C.
plus the greater of (1) the Bank's total retained earnings as of the date
of the latest statement of financial condition contained in the final
offering circular used in connection with the Bank's reorganization as a
majority-owned subsidiary of Riverview M.H.C., or (2) 58.3% of the Bank's
total shareholders' equity as of the date of the latest statement of
financial condition contained in the final Prospectus used in connection
with the conversion. The Liquidation Account is established to provide a
limited priority claim to the assets of the Bank to qualifying depositors
as of specified dates (as set forth in the Plan) who continue to maintain
deposits in the Bank after the conversion. In the unlikely event of a
complete liquidation of the Bank, and only in such an event, such
qualifying depositors would receive from the Liquidation Account a
liquidation distribution based on their proportionate share of the then
total remaining qualifying deposits.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause equity to be reduced below applicable regulatory
capital maintenance requirements or if such declaration and payment would
otherwise violate regulatory requirement.
Costs relating to the conversion will be deferred and, upon conversion,
such costs and any additional costs will be charged against the proceeds
from the sale of stock. As of March 31, 1997, deferred costs relating to
the conversion were not material. If the conversion is not completed,
these deferred costs will be expensed to operations.
* * * * * *
F-25
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Riverview Bancorp, Inc., Riverview, M.H.C. or Riverview Savings
Bank, FSB. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person or in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this Prospectus
nor any sale hereunder shall under any circumstances create any implication that
there has been no change in the affairs of Riverview Bancorp, Inc., Riverview,
M.H.C. or Riverview Savings Bank, FSB since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents Page
Prospectus Summary...................................
Selected Consolidated Financial Information..........
Risk Factors.........................................
Riverview Bancorp, Inc...............................
Riverview Savings Bank, FSB..........................
Use of Proceeds......................................
Dividend Policy......................................
Market for Common Stock..............................
Capitalization.......................................
Historical and Pro Forma Regulatory Capital Compliance
Pro Forma Data.......................................
Conversion Shares to be Purchased by Management
Pursuant to Subscription Rights.....................
Riverview Savings Bank, FSB and Subsidiary
Consolidated Statements of Income...................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................
Recent Developments..................................
Business of the Holding Company......................
Business of the Savings Bank.........................
Management of the Holding Company....................
Management of the Savings Bank.......................
Regulation...........................................
Taxation.............................................
The Conversion and Reorganization....................
Comparison of Stockholders' Rights...................
Restrictions on Acquisition of the Holding Company...
Description of Capital Stock of the Holding Company
Registration Requirements............................
Legal and Tax Opinions...............................
Experts..............................................
Additional Information...............................
Index to Consolidated Financial Statements...........
UNTIL THE LATER OF ______, 1997, OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
RIVERVIEW BANCORP, INC.
[Logo]
(Proposed Holding Company for
Riverview Savings Bank, FSB)
3,938,561 to 5,328,642 Shares of
Common Stock
PROSPECTUS
CHARLES WEBB & COMPANY, a Division
of Keefe, Bruyette & Woods, Inc.
PACIFIC CREST SECURITIES, INC.
August ___, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
In accordance with the Washington Business Corporation Law, RCW
ss.23B.08.570, Article XIII of the Registrant's Articles of Incorporation
provides as follows:
"ARTICLE XIII. Indemnification. The corporation shall indemnify and advance
expenses to its directors, officers, agents and employees as follows:
A. Directors and Officers. In all circumstances and to the full extent
permitted by the Washington Business Corporation Act now or hereafter in
force, the corporation shall indemnify any person who is or was a director,
officer or agent of the corporation and who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (including an action by or in
the right of the corporation), by reason of the fact that he is or was an
agent of the corporation, against expenses, judgments, fines, and amounts
paid in settlement and incurred by him in connection with such action, suit
or proceeding. However, such indemnity shall not apply on account of: (a)
acts or omissions of the director and officer finally adjudged to be in
violation of law; (b) conduct of the director and officer finally adjudged
to be in violation of RCW 23B.08.310, or (c) any transaction with respect
to which it was finally adjudged that such director and officer personally
received a benefit in money, property, or services to which the director
was not legally entitled. The corporation shall advance expenses incurred
in a proceeding for such persons pursuant to the terms set forth in a
separate directors' resolution or contract.
B. Implementation. The Board of Directors may take such action as is
necessary to carry out these indemnification and expense advancement
provisions. It is expressly empowered to adopt, approve and amend from time
to time such Bylaws, resolutions, contracts or further indemnification and
expense advancement arrangements as may be permitted by law, implementing
these provisions. Such Bylaws, resolutions, contracts, or further
arrangements shall include, but not be limited to, implementing the manner
in which determinations as to any indemnity or advancement of expenses
shall be made.
C. Survival of Indemnification Rights. No amendment or repeal of this
Article shall apply to or have any effect on any right to indemnification
provided hereunder with respect to acts or omissions occurring prior to
such amendment or repeal.
D. Service for Other Entities. The indemnification and advancement of
expenses provided under this Article shall apply to directors, officers,
employees, or agents of the corporation for both (a) service in such
capacities for the corporation, and (b) service at the corporations's
request as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise. A person is considered to be
serving an employee benefit plan at the corporation's request if such
person's duties to the corporation also impose duties on, or otherwise
involve services by, the director to the plan or to participants in or
beneficiaries of the plan.
E. Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise against liability
asserted against him and incurred by him in such capacity or arising out of
his status as such, whether or not the corporation would have had the power
to indemnify him against such liability under the provisions of this bylaw
and Washington law.
F. Other Rights. The indemnification provided by this section shall
not be deemed exclusive of any other right to which those indemnified may
be entitled under any other bylaw, agreement, vote of stockholders, or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such an office,
and shall continue as to a person who has ceased to be a director, trustee,
officer, employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person."
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution(1)
Legal fees and expenses................................ $150,000
Securities Marketing Firm legal fees................... 30,000
EDGAR, printing, copying, postage, mailing............. 150,000
Appraisal/business plan fees and expenses.............. 30,000
Accounting fees........................................ 90,000
Securities marketing fees (1).......................... 323,700
Data processing fees and expenses...................... 7,500
SEC filing fee......................................... 16,500
OTS filing fee......................................... 8,400
Blue sky legal fees and expenses....................... 7,500
Other.................................................. 16,400
--------
Total............................................ $830,000
========
- ----------
(1) Assumes a total offering of Conversion Shares of $24.0 million
(midpoint of the Estimated Valuation Range), a management fee payable to Webb
equal to $25,000 and a success fee of 1.5% of the aggregate Purchase Price of
the shares of Common Stock sold in the Subscription and Direct Community
Offering and the Syndicated Community Offering, excluding shares purchased by
the ESOP and officers and directors of the Savings Bank. See "THE CONVERSION AND
REORGANIZATION -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings."
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits
The exhibits filed as part of this Registration Statement are as
follows:
(a) List of Exhibits
1.1 -- Form of proposed Agency Agreement among Riverview Bancorp, Inc.,
Riverview Savings Bank, FSB, Riverview, M.H.C. and Charles Webb &
Company (a)
1.2 -- Engagement Letter with Riverview Savings Bank, FSB and Charles Webb &
Company (a)
2 -- Plan of Conversion and Agreement and Plan of Reorganization of
Riverview, M.H.C. and Riverview Savings Bank, FSB (a)
3.1 -- Articles of Incorporation of Riverview Bancorp, Inc. (a)
3.2 -- Bylaws of Riverview Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- State Tax Opinion of Deloitte & Touche LLP (a)
II-2
<PAGE>
8.3 -- Opinion of RP Financial, LC. as to the value of subscription
rights (a)
10.1 -- Proposed Form of Employment Agreement for Certain Executive
Officers (a)
10.2 -- Proposed Form of Severance Agreement for Key Employees (a)
10.3 -- Proposed Form of Employee Stock Ownership Plan (a)
10.4 -- Proposed Form of Employee Severance Compensation Plan (a)
10.5 -- Proposed Form of Employee Savings & Profit Sharing Plan and Trust (a)
11 -- Statement Regarding Computation of Earnings Per Share (a)
21 -- Subsidiaries of Riverview Bancorp, Inc. (a)
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Aguggia (a)
23.3 -- Consent of RP Financial, LC. (a)
24 -- Power of Attorney (a)
99.1 -- Order and Acknowledgement Form (contained in the marketing materials
included herein as Exhibit 99.2) (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with RP Financial, LC. (a)
99.4 -- Appraisal Report of RP Financial, LC. (b)
99.5 -- Proxy Statement for Special Meeting of Members of Riverview,
M.H.C. (a)
99.6 -- Proxy Statement for Annual Meeting of Stockholders of Riverview
Savings Bank, FSB (a)
- ----------
(a) Previously filed.
(b) To be filed by post-effective amendment.
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
II-3
<PAGE>
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) The undersigned registrant hereby undertakes to provide the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(5) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is therefore, unenforceable. In the event that a
claim for indemnification against liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amended Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Camas,
State of Washington, on this 11th day of August 1997.
RIVERVIEW BANCORP, INC.
By: /s/ Patrick Sheaffer
-------------------------------------
Patrick Sheaffer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Patrick Sheaffer President, Chief Executive August 11, 1997
- ------------------------- and Director
Patrick Sheaffer (Principal Executive Officer)
/s/ Ron Wysaske* Treasurer, Chief Financial August 11, 1997
- ------------------------- Officer and Director
Ron Wysaske (Principal Financial and
Accounting Officer)
/s/ Roger Malfait* Director August 11, 1997
- -------------------------
Roger Malfait
/s/ Gary R. Douglass* Director August 11, 1997
- -------------------------
Gary R. Douglass
/s/ Dale E. Scarbrough* Director August 11, 1997
- -------------------------
Dale E. Scarbrough
/s/ Paul L. Runyan* Director August 11, 1997
- -------------------------
Paul L. Runyan
/s/ Robert K. Leick* Director August 11, 1997
- -------------------------
Robert K. Leick
*By power of attorney dated June 25, 1997.
II-5
<PAGE>
As filed with the Securities and Exchange Commission on August 11, 1997
Registration No. 333-30203
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
RIVERVIEW BANCORP, INC.
(Exact name of registrant as specified in charter)
Washington 6035 91-1838969
(State or other jurisdiction of (Primary SICC No.) (I.R.S. Employer
incorporation or organization) Identification No.)
700 N.E. Fourth Avenue
Camas, Washington 98607
(360) 834-2231
(Address and telephone number of principal executive offices)
John F. Breyer, Jr., Esquire
Victor L. Cangelosi, Esquire
BREYER & AGUGGIA
Suite 470 East
1300 I Street, N.W.
Washington, D.C. 20005
(Name and address of agent for service)
<PAGE>
INDEX TO EXHIBITS
1.1 -- Form of proposed Agency Agreement among Riverview Bancorp, Inc.,
Riverview Savings Bank, FSB, Riverview, M.H.C. and Charles Webb &
Company
1.2 -- Engagement Letter between Riverview Savings Bank, FSB and Charles
Webb & Company (a)
2 -- Plan of Conversion and Reorganization of Riverview Savings Bank, FSB
and Riverview, M.H.C. (a)
3.1 -- Articles of Incorporation of Riverview Bancorp, Inc. (a)
3.2 -- Bylaws of Riverview Bancorp, Inc. (a)
4 -- Form of Certificate for Common Stock (a)
5 -- Opinion of Breyer & Aguggia regarding legality of securities
registered (a)
8.1 -- Federal Tax Opinion of Breyer & Aguggia (a)
8.2 -- State Tax Opinion of Deloitte & Touche LLP (a)
8.3 -- Opinion of RP Financial, LC. as to the value of subscription
rights (a)
10.1 -- Proposed Form of Employment Agreement For Senior Officers (a)
10.2 -- Proposed Form of Severance Agreement for Key Officers (a)
10.3 -- Proposed Form of Employee Stock Ownership Plan (a)
10.4 -- Proposed Form of Employee Severance Compensation Plan (a)
10.5 -- Proposed Form of Employee's Savings & Profit Sharing Plan and
Trust (a)
11 -- Statement Regarding Computation of Earnings Per Share (a)
21 -- Subsidiaries of Riverview Bancorp, Inc. (a)
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Breyer & Aguggia (a)
23.3 -- Consent of RP Financial, LC. (a)
24 -- Power of Attorney (a)
99.1 -- Order and Acknowledgement Form (contained in the marketing materials
included herein as Exhibit 99.2) (a)
99.2 -- Solicitation and Marketing Materials (a)
99.3 -- Appraisal Agreement with RP Financial, LC. (a)
99.4 -- Appraisal Report of RP Financial, LC. (b)
99.5 -- Proxy Statement for Special Meeting of Members of Riverview,
M.H.C. (a)
99.6 -- Proxy Statement for Annual Meeting of Stockholders of Riverview
Savings Bank, FSB (a)
- ---------------------
(a) Previously filed.
(b) To be filed by post-effective amendment.
Form of Proposed Agency Agreement Among Riverview Bancorp,
Inc., Riverview Savings Bank, FSB, Riverview, M.H.C. and
Charles Webb & Company
<PAGE>
RIVERVIEW BANCORP, INC.
(a Washington Corporation)
4,736,571 Shares
(Subject to Increase Up to 5,447,056 Shares)
COMMON STOCK ($.01 Par Value)
Subscription Price $10.00 Per Share
AGENCY AGREEMENT
_____ __, 1997
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
211 Bradenton Avenue
Dublin, Ohio 43017
Pacific Crest Securities, Inc.
U.S. Bancorp Tower, Suite 4250
111 S.W. Fifth Avenue
Portland, Oregon 97204
Ladies and Gentlemen:
Riverview Bancorp, Inc. (the "Holding Company"), Riverview, M.H.C. (the
"MHC") and Riverview Savings Bank, FSB (the "Bank") (collectively, the "Primary
Parties") hereby confirm, jointly and severally, their agreement with Charles
Webb & Company ("Webb" or the "Agent"), a Division of Keefe, Bruyette & Woods,
Inc. ("KBW"), and with Pacific Crest Securities, Inc. ("PCS"), as follows:
SECTION 1. THE OFFERING. The Holding Company is offering up to
4,736,571 shares of common stock, par value $.01 per share (the "Common Stock")
(subject to an increase up to 5,447,056 shares), in (i) an exchange offering
(the "Exchange Offering"), (ii) a subscription offering (the "Subscription
Offering"), (iii) a direct community offering (the "Direct Community Offering")
and, if necessary, (iv) a syndicated community offering (the "Syndicated
Community Offering"), in connection with the reorganization of the Bank from a
subsidiary of the MHC to a wholly-owned subsidiary of the Holding Company (the
"Reorganization"), all pursuant to the Plan of Conversion from Mutual Holding
Company to Stock Holding Company and Agreement and Plan of Reorganization, as
amended (the "Plan"). Pursuant to the Plan, the Reorganization will be effected
as follows: (i) the MHC will convert to an interim federal stock
1
<PAGE>
savings bank and merge simultaneously with and into the Bank, with the Bank as
the surviving entity and (ii) a newly-formed interim federal stock savings bank
("Interim FSB"), wholly owned by the Holding Company, will merge with and into
the Bank, resulting in the Bank becoming a wholly owned subsidiary of the
Holding Company.
In the Exchange Offering, each share of the common stock, par value
$1.00 per share, of the Bank (the "Bank Common Stock") held by the MHC will be
cancelled and each share of Bank Common Stock held by the Bank's other
stockholders (the "Public Stockholders") will be exchanged for shares of Common
Stock ("Exchange Shares") pursuant to an exchange ratio (the "Exchange Ratio")
that will result in the Public Stockholders owning in the aggregate the same
percentage of the outstanding shares of Common Stock, upon consummation of the
Reorganization, as the percentage of outstanding Bank Common Stock they owned
immediately prior to the Reorganization, excluding fractional shares for which
cash will be received and shares purchased by the Public Stockholders in the
Conversion Offerings (defined below), all as described in the Plan.
In the Subscription Offering, non-transferable rights to subscribe for
up to 2,760,000 shares (subject to an increase up to 3,174,000 shares) of the
Common Stock ("Subscription Rights") will be granted, in the following priority:
(1) the Bank's depositors with account balances of $50.00 or more as of December
31, 1995 ("Eligible Account Holders"); (2) the Bank's tax-qualified Employee
Stock Ownership Plan ("ESOP"); (3) the Bank's depositors with account balances
of $50.00 or more as of June 30, 1997 ("Supplemental Eligible Account Holders");
and (4) depositors of the Bank (other than Eligible Account Holders and
Supplemental Eligible Account Holders) as of July 31, 1997 (the "Voting Record
Date") and borrowers of the Bank with loans outstanding as of October 22, 1993
which continue to be outstanding as of the Voting Record Date (collectively,
"Other Members"), subject to the priorities and purchase limitations set forth
in the Plan. Concurrently with the Subscription Offering, the Holding Company
will offer all shares of Common Stock offered but not subscribed for in the
Subscription Offering, if any, in the Direct Community Offering to members of
the general public, with first preference given to Public Stockholders (who are
not Eligible Account Holders, Supplemental Eligible Account Holders or Other
Members) and then to natural persons and trusts of natural persons who are
permanent residents of Clark, Cowlitz, Klickitat and Skamania Counties of
Washington. Depending on market conditions, shares not subscribed for in the
Subscription Offering or purchased in the Direct Community Offering may be
offered in the Syndicated Community Offering to eligible members of the general
public on a best efforts basis by approved broker-dealer firms ("Assisting
Brokers") which are members of the National Association of Securities Dealers,
Inc. ("NASD").
2
<PAGE>
The Holding Company will issue shares of its Common Stock in the
Subscription Offering, Direct Community Offering, and Syndicated Community
Offering, (collectively, the "Conversion Offerings") (the "Conversion Shares")
at a purchase price of $10.00 per share (the "Purchase Price"). If the number of
Conversion Shares and Exchange Shares (collectively, the "Shares") is increased
or decreased in accordance with the Plan, the term "Shares" shall mean such
greater or lesser number, where applicable.
The Holding Company has filed with the U.S. Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (File No.
333-30203) containing a prospectus relating to the Exchange Offering and the
Conversion Offerings (collectively, the "Offerings") for the registration of the
Shares under the Securities Act of 1933, as amended (the "1933 Act"), and has
filed such amendments thereto as have been required to the date hereof (the
"Registration Statement"). The prospectus, as amended, included in the
Registration Statement at the time it initially became effective is hereinafter
called the "Prospectus," except that if any prospectus is filed by the Holding
Company pursuant to Rule 424(b) or (c) of the regulations of the Commission
under the 1933 Act differing from the prospectus included in the Registration
Statement at the time it initially becomes effective, the term "Prospectus"
shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and
after the time said prospectus is filed with the Commission and shall include
any supplements and amendments thereto from and after their dates of
effectiveness or use, respectively.
In connection with the Reorganization, the MHC filed with the Office of
Thrift Supervision, Department of the Treasury (the "OTS"), pursuant to Title
12, Part 563b of the Code of Federal Regulations (the "Conversion Regulations"),
an Application for Approval of Conversion, including exhibits and the
Prospectus, and has filed amendments thereto as required by the OTS (as so
amended, the "Application for Conversion"). The Holding Company filed with the
OTS its application on Form H-(e)1-S (the "Holding Company Application") to
acquire the Bank under the Home Owners Loan Act, as amended, and the regulations
promulgated thereunder ("HOLA"). The Bank's applications with the OTS for
approval of (i) the merger of MHC (after its conversion to an interim federal
stock savings bank) with and into the Bank and (ii) the merger of Interim FSB
with and into the Bank (collectively, the "Merger Applications"). The
Application for Conversion and Holding Company Application (including the Merger
Applications) shall collectively be hereinafter referred to as the "OTS
Applications."
SECTION 2. APPOINTMENT OF THE AGENT AND PCS. Subject to the terms and
conditions of this Agreement, the Primary Parties hereby appoint Webb as their
financial advisor and marketing agent to utilize its best efforts to solicit
subscriptions for the Conversion Shares and to advise and assist the Primary
3
<PAGE>
Parties with respect to the sale of the Conversion Shares in the Conversion
Offerings.
On the basis of the representations and warranties of the Primary
Parties contained in, and subject to the terms and conditions of, this
Agreement, the Agent accepts such appointment and agrees to consult with and
advise the Holding Company and the Bank as to the matters set forth in the
letter agreement ("Letter Agreement"), dated April 9, 1997, between the Bank and
Webb (a copy of which is attached hereto as Exhibit A). It is acknowledged by
the Primary Parties that the Agent shall not be obligated to purchase any Shares
and shall not be obligated to take any action which is inconsistent with any
applicable law, regulation, decision or order. Subscriptions for Conversion
Shares will be offered by means of order forms as described in the Prospectus.
Except as provided in the paragraph below, the appointment of the Agent
hereunder shall terminate upon consummation of the Offerings.
Webb agrees to act as financial advisor to the Bank and the Holding
Company for a period of one year following the consummation of the
Reorganization for no additional fee to render general advice on financial
matters, including dividend policy, and share repurchase programs, assistance
with shareholder reporting and shareholder relations matters, general advice on
mergers and acquisitions, and other related financial matters which are brought
to the attention of the Bank or the Holding Company. However, nothing in this
Agreement shall require the Holding Company or the Bank to obtain such financial
advisory services from Webb. After the completion of such one year period, if
the parties wish to continue the relationship, a fee will be negotiated and an
agreement with respect to specific advisory services will be entered into at
that time. Should discussions commence for a specific acquisition transaction
by, or a sale of, the Bank or the Holding Company during the period in which the
Agent is acting as financial advisor to the Bank and the Holding Company, the
general financial advisory relationship as set forth in this paragraph will
terminate with respect to the specific transaction. If the Bank or the Holding
Company and the Agent wish to have the Agent initiate, negotiate and/or process
such specific transaction, an appropriate fee will be negotiated at that time.
If selected broker-dealers are used to assist in the sale of Conversion
Shares in the Syndicated Community Offering, the Primary Parties hereby appoint,
subject to the terms and conditions of this Agreement, PCS to manage such
broker-dealers in the Syndicated Community Offering. On the basis of the
representations and warranties of the Primary Parties contained in, and subject
to the terms and conditions of, this Agreement, PCS accepts such appointment and
agrees to manage the selling group of broker-dealers in the Syndicated Community
Offering.
4
<PAGE>
SECTION 3. REFUND OF PURCHASE PRICE. In the event that the
Reorganization is not consummated for any reason, including but not limited to
the inability to sell the Conversion Shares during the Offerings (including any
permitted extension thereof), this Agreement shall terminate and any persons who
have subscribed for any of the Conversion Shares shall have refunded to them the
full amount which has been received from such person, together with interest at
the Bank's current passbook rate, from the date payment is received as provided
in the Prospectus. Upon termination of this Agreement, neither the Agent nor the
Primary Parties shall have any obligation to the other except that (i) the
Primary Parties shall remain liable for any amounts due pursuant to Sections
4(a), 8, 10 and 11 hereof, unless the transaction is not consummated due to the
breach by the Agent of a warranty, representation or covenant; and (ii) the
Agent shall remain liable for any amount due pursuant to Sections 10 and 11
hereof, unless the transaction is not consummated due to the breach by the
Primary Parties of a warranty, representation or covenant.
SECTION 4. FEES. In addition to the expenses specified in Section 8
hereof, as compensation for the Agent's services under this Agreement, the Agent
has received or will receive the following fees from the Primary Parties:
(a) A management fee in the amount of $25,000. Such fee has
been earned and paid in full.
(b) A fee of 1.5% of the aggregate Purchase Price of the
Conversion Shares sold in the Subscription Offering and the Direct Community
Offering, excluding those shares purchased by the Bank's officers, directors or
employees (or members of their immediate families), the ESOP, and any tax
qualified or stock based compensation plan (except Individual Retirement
Accounts) or similar plan created by the Bank for some or all of its directors
or employees. In the event, with respect to any stock purchases, fees are paid
pursuant to this subsection (b), such fees shall be paid in lieu of, and not in
addition to, payments to the Agent pursuant to subsection (a).
(c) A fee not to exceed 5.5% of the aggregate Purchase Price
of the Conversion Shares sold by Assisting Brokers in any Syndicated Community
Offering. The Agent will pay the Assisting Brokers which assisted in the
purchase of Conversion Shares in the Syndicated Community Offering a fee
competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar
market environment. The decision to utilize Assisting Brokers will be made
jointly by the Agent on the one hand, and the Primary Parties, on the other
hand, and it is agreed that PCS will manage the Assisting Brokers in the
Syndicated Offering.
5
<PAGE>
(d) PCS shall not be paid any fees for its services rendered
hereunder except for fees received as an Assisting Broker under subsection (c)
hereof.
SECTION 5. CLOSING. If the minimum number of Conversion Shares
permitted to be sold in the Reorganization on the basis of the most recently
updated Reorganization appraisal are subscribed for at or before the termination
of the Offerings, and the other conditions to the completion of the
Reorganization are satisfied, the Holding Company agrees to issue the Shares on
the Closing Date (as hereinafter defined) against payment therefor by the means
authorized by the Plan and to deliver certificates evidencing ownership of the
Conversion Shares in such authorized denominations and registered in such names
as may be indicated on the subscription order forms directly to the purchasers
thereof as promptly as practicable after the Closing Date. The Closing shall be
held at the offices of special counsel to the Primary Parties, or at such other
place as shall be agreed upon among the Primary Parties and the Agent, at 10:00
a.m. on a business day selected by the Holding Company which business day shall
be no less than two business days following the giving of prior notice by the
Holding Company to the Agent or at such other time as shall be agreed upon by
the Primary Parties and the Agent. At the Closing, the Primary Parties shall
deliver to the Agent in same-day funds the commissions, fees and expenses owing
to the Agent as set forth in Sections 4 and 8 hereof and the opinions required
hereby and other documents deemed reasonably necessary by the Agent shall be
executed and delivered to effect the sale of the Shares as contemplated hereby
and pursuant to the terms of the Prospectus. The Holding Company shall notify
the Agent when funds shall have been received for the minimum number of shares
of the Common Stock. The date upon which the Holding Company shall release the
Conversion Shares for delivery in accordance with the terms hereof is referred
to herein as the "Closing Date."
As soon as practicable after the Closing Date, the Holding Company and
the Bank shall cause a letter of transmittal to be mailed to each Public
Stockholder advising such Public Stockholder of the terms of the Exchange
offering and the procedure for surrendering to an agent, duly appointed by the
Holding Company (the "Exchange Agent"), the certificates evidencing shares of
Bank Common Stock issued and outstanding as of the Closing Date. Upon surrender
of each such certificate to the Exchange Agent, the Holding Company agrees to
issue to the holder thereof or his or her designee a certificate or certificates
representing the number of full Exchange Shares based on the Exchange Ratio.
SECTION 6.A. REPRESENTATIONS AND WARRANTIES OF THE PRIMARY
PARTIES. The Primary Parties jointly and severally represent and
warrant to the Agent and PCS that:
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(a) The Primary Parties have all such power, authority,
authorizations, approvals and orders as may be required to enter into this
Agreement, to carry out the provisions and conditions hereof and to issue and
sell the Shares as provided herein and as described in the Prospectus. The
consummation of the Reorganization, the execution, delivery and performance of
this Agreement and the consummation of the transactions herein contemplated have
been duly and validly authorized by all necessary corporate action on the part
of the Primary Parties and this Agreement has been validly executed and
delivered by the Primary Parties and, assuming valid execution and delivery by
the Agent and PCS, is the valid, legal and binding agreement of the Primary
Parties enforceable in accordance with its terms, except to the extent, if any,
that the provisions of Sections 10 and 11 hereof may be unenforceable as against
public policy, and except to the extent that such enforceability may be limited
by bankruptcy laws, insolvency laws, or other laws affecting the enforcement of
creditors' rights generally, or the rights of creditors of savings institutions
insured by the FDIC (including the laws relating to the rights of the
contracting parties to equitable remedies).
(b) The Plan has been approved by the OTS.
(c) The Registration Statement was declared effective by the
Commission on August __, 1997; and no stop order has been issued with respect
thereto and no proceedings therefor have been initiated or to the best knowledge
of the Primary Parties threatened by the Commission. At the time the
Registration Statement, including the Prospectus contained therein (including
any amendment or supplement thereto), became effective, the Registration
Statement complied as to form in all material respects with the requirements of
the 1933 Act and the regulations promulgated thereunder and the Registration
Statement, including the Prospectus contained therein (including any amendment
or supplement thereto), any Blue Sky Application or any Sales Information (as
such terms are defined in Section 10 hereof) authorized by the Primary Parties
for use in connection with the Offerings did not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and at the time any Rule 424(b) or (c)
Prospectus was filed with the Commission and at the Closing Date referred to in
Section 5, the Registration Statement, including the Prospectus contained
therein (including any amendment or supplement thereto), and any Blue Sky
Application or any Sales Information authorized by the Primary Parties for use
in connection with the Offerings will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the representations and warranties in
this Section 6A(c) shall not apply to statements or omissions made in reliance
upon and in
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conformity with written information furnished to the Primary Parties by the
Agent expressly regarding the Agent or KBW, or by PCS expressly regarding PCS,
for use under the captions ["Market for Common Stock,"] "The Conversion and
Reorganization -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings" and "--Description of Sales Activities" or
written statements or omissions from any sales information or information filed
pursuant to state securities or blue sky laws or regulations regarding the Agent
or PCS.
(d) The Application for Conversion, including the Prospectus,
was approved by the OTS on _________________, 1997; and the Proxy Statement of
the MHC relating to the special meeting of the members of the MHC at which the
Plan shall be considered for approval by the MHC's eligible voting members, and
the Proxy Statement of the Bank relating to the annual meeting of stockholders
at which the Plan shall be considered for approval by the Bank's eligible voting
stockholders (collectively, the "Proxy Statements"), have each been authorized
for use by the OTS. At the time of the approval of the Application for
Conversion, including the Prospectus, by the OTS (including any amendment or
supplement thereto) and at all times subsequent thereto until the Closing Date,
the Application for Conversion, including the Prospectus, did and will comply as
to form in all material respects with the Conversion Regulations and any other
applicable rules and regulations of the OTS (except as modified or waived in
writing by the OTS). At the time of the approval of the Application for
Conversion, and as of the date of this Agreement, the Application for
Conversion, including the Prospectus (including any amendment or supplement
thereto), did not and does not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that representations or warranties in
this subsection (d) shall not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the Primary Parties
by the Agent expressly regarding the Agent or KBW, or by PCS expressly regarding
PCS, for use in the Prospectus contained in the Application for Conversion under
the captions ["Market for Common Stock,"] "The Conversion -- Plan of
Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" and "--Description of Sales Activities" or written statements or
omissions from any sales information or information filed pursuant to state
securities or blue sky laws or regulations regarding the Agent or PCS.
(e) No order has been issued by the OTS, the Commission or the
FDIC (now and hereinafter references to the FDIC shall include the SAIF), or any
state regulatory authority, preventing or suspending the use of the Prospectus
and no action by or before any such government entity to revoke any approval,
authorization or order of effectiveness related to the
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Reorganization is pending or, to the best knowledge of the Primary Parties,
threatened.
(f) The Plan has been adopted by the Board of Directors of
both the MHC and the Bank, and has been acknowledged by the Board of Directors
of the Holding Company. To the best knowledge of the Primary Parties, no person
has, or at the Closing Date will have, sought to obtain review of the final
action of the OTS in approving the Plan, the Reorganization, or the OTS
Applications, pursuant to the HOLA or any other statute or regulation.
(g) The Holding Company has filed with the OTS the Holding
Company Application (including the Merger Applications) and the OTS has approved
of the Holding Company's acquisition of the Bank.
(h) R.P. Financial, LC., which prepared the appraisal of the
pro forma market value of the Bank and the MHC on which the Offerings were based
(the "Appraisal"), has advised the Primary Parties in writing that it is
independent with respect to each of the Primary Parties within the meaning of
the Conversion Regulations.
(i) Deloitte & Touche LLP, which certified the financial
statements filed as part of the Registration Statement and the Application for
Conversion, has advised the Primary Parties in writing that they are, with
respect to each of the Primary Parties, independent certified public accountants
within the meaning of 12 C.F.R. Sections 563c.3 and 571.2(c)(3) and under the
1933 Act and the regulations promulgated thereunder.
(j) The financial statements and the notes thereto which are
included in the Registration Statement and which are a part of the Prospectus
present fairly the financial condition and shareholders' equity of the Bank as
of the dates indicated and the results of operations and cash flows for the
periods specified. The financial statements comply in all material respects with
the applicable accounting requirements of Title 12 of the Code of Federal
Regulations, Regulation S-X of the Commission and generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods presented
except as otherwise noted therein, present fairly in all material respects the
information required to be stated therein, and are consistent with the most
recent financial statements and other reports filed by the Bank with the OTS and
the FDIC except that accounting principles employed in such filings conform to
requirements of such authorities and not necessarily to GAAP. The other
financial, statistical and pro forma information and related notes included in
the Prospectus present fairly the information shown therein on a basis
consistent with the audited and unaudited financial statements included in the
Prospectus, and as to the pro forma adjustments, the adjustments made therein
have been properly applied on the basis described therein.
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<PAGE>
(k) Since the respective dates as of which information is
given in the Registration Statement, including the Prospectus: (i) there has not
been any material adverse change in the financial condition or in the earnings,
capital, properties or business affairs of any of the Primary Parties or of the
Primary Parties considered as one enterprise, whether or not arising in the
ordinary course of business; (ii) there has not been any increase of more than
$_______ in the aggregate amount of loans past due ninety (90) days or more, any
real estate acquired by foreclosure or loans characterized as "in substance
foreclosure" or any change in total assets of the Bank in an amount greater than
$10.0 million; nor has the Bank issued any securities or incurred any liability
or obligation for borrowings other than in the ordinary course of business;
(iii) there have not been any material transactions entered into by any of the
Primary Parties, other than those in the ordinary course of business; and (iv)
the capitalization, liabilities, assets, properties and business of the Primary
Parties conform in all material respects to the descriptions thereof contained
in the Prospectus and, none of the Primary Parties has any material liabilities
of any kind, contingent or otherwise, except as disclosed in the Registration
Statement or the Prospectus.
(l) The Holding Company is a corporation organized and in good
standing under the laws of the State of Washington, with corporate power and
authority to own its properties and to conduct its business as described in the
Prospectus, and is duly qualified to transact business and is in good standing
in each jurisdiction in which the conduct of its business requires such
qualification unless the failure to qualify in one or more of such jurisdictions
would not have a material adverse effect on the financial condition, earnings,
capital, properties or business affairs of the Primary Parties. The Holding
Company has obtained all licenses, permits and other governmental authorizations
currently required for the conduct of its business, except those that
individually or in the aggregate would not materially adversely affect the
financial condition, earnings, capital, assets or properties of the Primary
Parties taken as a whole; and all such licenses, permits and governmental
authorizations are in full force and effect, and the Holding Company is
complying in all material respects therewith.
(m) The MHC is organized and is validly existing as a
federally chartered mutual holding company under the laws of the United States,
duly authorized to conduct its business and own its property as described in the
Registration Statement and the Prospectus; the MHC has obtained all licenses,
permits and other governmental authorizations required for the conduct of its
business except those that individually or in the aggregate would not materially
adversely affect the financial condition, earnings, capital, assets or
properties of the Primary Parties taken as a whole; all such licenses, permits
and governmental authorizations are in full force and effect and the MHC is
complying therewith in all material respects; the MHC is duly
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qualified as a foreign corporation to transact business in each jurisdiction in
which the failure to be so qualified in one or more of such jurisdictions would
have a material adverse effect on the financial condition, earnings, capital,
assets properties or business of the Primary Parties.
(n) The MHC does not own any equity securities or any equity
interest in any business enterprise except as described in the Prospectus.
(o) The Bank is organized and validly existing federally
chartered savings bank in stock form, duly authorized to conduct its business as
described in the Prospectus; the activities of the Bank are permitted by the
rules, regulations and practices of the OTS; the Bank has obtained all licenses,
permits and other governmental authorizations currently required for the conduct
of its business except those that individually or in the aggregate would not
materially adversely affect the financial condition of the Primary Parties taken
as a whole; all such licenses, permits and other governmental authorizations are
in full force and effect and the Bank is duly qualified as a foreign corporation
to transact business in each jurisdiction in which failure to so qualify would
have a material adverse effect upon the financial condition, earnings, capital,
properties or business affairs of the Bank; all of the issued and outstanding
capital stock of the Bank after the Reorganization will be duly and validly
issued and fully paid and nonassessable; and the Holding Company will directly
own all of such capital stock free and clear of any mortgage, pledge, lien,
encumbrance, claim or restriction. The Bank does not own equity securities or
any equity interest in any other business enterprise except for Riverview
Services, Inc. (the "Subsidiary") and as otherwise described in the Prospectus.
(p) The Bank is a member of the Federal Home Loan Bank of
Seattle ("FHLB of Seattle"); the deposit accounts of the Bank are insured by the
FDIC up to applicable limits.
(q) The Bank's authorized capital stock consists solely of
4,000,000 shares of the Bank Common Stock, of which ______________ shares are
issued and outstanding as of the date hereof and 1,000,000 shares of preferred
stock, $1.00 par value per share, none of which are issued and outstanding as of
the date hereof; and the MHC is not authorized to issue any shares of capital
stock.
(r) Subsidiary is the Bank's sole subsidiary; the Subsidiary
is organized, validly existing and in good standing under the laws of the State
of Washington, with full power and authority to own its property and conduct its
business and is not required to be qualified to do business as foreign
corporation in any jurisdiction where non-qualification has or would have a
material adverse effect on the financial condition, earnings, capital, assets or
properties of the Primary Parties, taken as a
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whole; the Subsidiary holds all licenses, certificates and permits from
governmental authorities necessary for the conduct of its business, except where
failure to hold such licenses, permits or authorizations would not have a
material adverse effect on the financial condition, earnings, capital, assets or
properties of the Primary Parties, taken as a whole; all of the outstanding
capital stock of the Subsidiary has been duly authorized and is fully paid and
non-assessable, and is owned directly by the Bank, free and clear of any liens
or encumbrances; the activities of the Subsidiary are permitted to be conducted
by subsidiaries of a federally-chartered savings bank pursuant to the OTS
regulations and the policies and practices of the OTS.
(s) Upon consummation of the Reorganization, the authorized,
issued and outstanding equity capital of the Holding Company will be within the
range set forth in the Prospectus under the caption "Capitalization," and,
except for the shares of Common Stock held by the Bank, which will be cancelled
as of the Closing Date, no shares of Common Stock have been or will be issued
and outstanding prior to the Closing Date; the shares of Common Stock to be
issued in the Exchange Offering and subscribed for in the Conversion Offering
have been duly and validly authorized for issuance, and when issued and
delivered by the Holding Company pursuant to the Plan against payment of the
consideration calculated as set forth in the Plan and the Prospectus, will be
duly and validly issued and fully paid and nonassessable; the issuance of the
shares of Common Stock is not subject to preemptive rights, except for the
Subscription Rights granted pursuant to the Plan; and the terms and provisions
of the shares of Common Stock will conform in all material respects to the
description thereof contained in the Prospectus. Upon issuance of the Shares,
good title to the Shares will be transferred from the Holding Company to the
Public Stockholders in the Exchange Offering and to the purchasers of Shares
against payment therefor in the Conversion Offering as set forth in the Plan and
the Prospectus, subject to such claims as may be asserted against the purchasers
thereof by third party claimants.
(t) None of the Primary Parties are in violation of their
respective Articles of Incorporation or charter or their respective bylaws, or
in material default in the performance or observance of any obligation,
agreement, covenant, or condition contained in any contract, lease, loan
agreement, indenture or other instrument to which they are a party or by which
they, or any of their respective property, may be bound which would result in a
material adverse change in the financial condition, earnings, capital,
properties or business affairs of the Primary Parties considered as one
enterprise or which would materially affect their properties or assets. The
consummation of the transactions herein contemplated will not (i) conflict with
or constitute a breach of, or default under, the articles of incorporation or
bylaws of the Holding Company, or the charter or
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bylaws of MHC or the Bank, or materially conflict with or constitute a material
breach of, or default under, any material contract, lease or other instrument to
which any of the Primary Parties has a beneficial interest, or any applicable
law, rule, regulation or order that is material to the financial condition of
the Primary Parties on a consolidated basis; (ii) violate any authorization,
approval, judgment, decree, order, statute, rule or regulation applicable to the
Primary Parties except for such violations which would not have a material
adverse effect on the financial condition and results of operations of the
Primary Parties on a consolidated basis; or (iii) with the exception of the
liquidation account established in the Reorganization, result in the creation of
any material lien, charge or encumbrance upon any property of the Primary
Parties.
(u) No material default exists, and no event has occurred
which with notice or lapse of time, or both, would constitute a material default
on the part of any of the Primary Parties, in the due performance and observance
of any term, covenant or condition of any indenture, mortgage, deed of trust,
note, bank loan or credit agreement or any other material instrument or
agreement to which any of the Primary Parties is a party or by which any of them
or any of their property is bound or affected in any respect which, in any such
case, is material to the Primary Parties considered as one enterprise, and such
agreements are in full force and effect; and no other party to any such
agreements has instituted or, to the best knowledge of the Primary Parties,
threatened any action or proceeding wherein any of the Primary Parties is
alleged to be in default thereunder under circumstances where such action or
proceeding, if determined adversely to any of the Primary Parties, would have a
material adverse effect upon the Primary Parties considered as one enterprise.
(v) The Primary Parties have good and marketable title to all
assets which are material to the businesses of the Primary Parties and to those
assets described in the Prospectus as owned by them free and clear of all
material liens, charges, encumbrances, restrictions or other claims, except such
as are described in the Prospectus or which do not have a material adverse
effect on the businesses of the Primary Parties taken as a whole; and all of the
leases and subleases which are material to the businesses of the Primary
Parties, as described in the Registration Statement or Prospectus, are in full
force and effect.
(w) Except as may be described in the Prospectus, the Primary
Parties are not in material violation of any directive from the OTS, the FDIC,
the Commission or any other agency to make any material change in the method of
conducting their respective businesses; the Primary Parties have conducted and
are conducting their respective businesses so as to comply in all respects with
all applicable statutes and regulations (including, without limitation,
regulations, decisions, directives and orders
13
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of the OTS, the Commission and the FDIC), except where the failure to so comply
would not reasonably be expected to result in any material adverse change in the
financial condition, results of operations, capital, properties or business
affairs of the Primary Parties considered as one enterprise and, except as set
forth in the Prospectus, there is no charge, investigation, action, suit or
proceeding before or by any court, regulatory authority or governmental agency
or body pending or, to the best knowledge any of the Primary Parties,
threatened, which would reasonably be expected to materially and adversely
affect the Reorganization, the performance of this Agreement, or the
consummation of the transactions contemplated in the Plan as described in the
Registration Statement, or which would reasonably be expected to result in any
material adverse change in the financial condition, results of operations,
capital, properties or business affairs of the Primary Parties considered as one
enterprise.
(x) The Primary Parties have received an opinion of its
special counsel, Breyer & Aguggia, with respect to the federal income tax
consequences of the Reorganization, as described in the Registration Statement
and the Prospectus, and an opinion from Knapp, O'Dell & Lewis with respect to
the tax consequences of the proposed transaction under the laws of the State of
Washington; and the facts and representations upon which such opinions are based
are truthful, accurate and complete, and none of the Primary Parties will take
any action inconsistent therewith.
(y) Since ______________, the Primary Parties have timely
filed all required federal and state tax returns, have paid all taxes that have
become due and payable in respect of such returns, except where permitted to be
extended, have made adequate reserves for similar future tax liabilities, and no
deficiency has been asserted with respect thereto by any taxing authority.
(z) No approval, authorization, consent or other order of any
regulatory or supervisory or other public authority is required for the
execution and delivery by the Primary Parties of this Agreement, or the issuance
of the Shares, except for the approval of the OTS and the Commission (which have
been received) and any necessary qualification, notification, or registration or
exemption under the securities or blue sky laws of the various states in which
the Shares are to be offered and except as may be required under the rules and
regulations of the NASD and/or Nasdaq.
(aa) None of the Primary Parties has: (i) issued any
securities within the last 18 months (except for (a) notes to evidence bank
loans or other liabilities in the ordinary course of business or as described in
the Prospectus, (b) shares of Common Stock issued to the Bank with respect to
the initial capitalization of the Holding Company, and (c) shares of Bank
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Common Stock issued pursuant to (1) the exercise of options under the Bank's
1993 Stock Option Plan, (2) a 10% stock dividend issued on April 12, 1996 or (3)
a 10% stock dividend issued on April 11, 1997); (ii) had any dealings with
respect to sales of securities within the 12 months prior to the date hereof
with any member of the NASD, or any person related to or associated with such
member, other than discussions and meetings relating to the Offerings and
purchases and sales of U.S. government and agency and other securities in the
ordinary course of business; (iii) entered into a financial or management
consulting agreement except for the Letter Agreement and as contemplated
hereunder; or (iv) engaged any intermediary between the Agent and the Primary
Parties in connection with the offering of Shares, and no person is being
compensated in any manner for such service.
(ab) Neither the Primary Parties nor, to the best knowledge of
the Primary Parties, any employees of the Primary Parties have made any payment
of funds of the Primary Parties as a loan to any person for the purchase of
Conversion Shares, except for the Holding Company's loan to the ESOP the
proceeds of which will be used to refinance certain indebtedness of the ESOP and
to purchase Conversion Shares, or has made any other payment of funds prohibited
by law, and no funds have been set aside to be used for any payment prohibited
by law.
(ac) The Bank complies in all material respects with the
applicable financial recordkeeping and reporting requirements of the Currency
and Foreign Transactions Reporting Act of 1970, as amended, and the regulations
and rules thereunder.
(ad) The Primary Parties have not relied upon Webb, PCS or
their counsel for any legal, tax or accounting advice in connection with the
Reorganization.
(ae) The records of Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are accurate and complete in all
material respects.
(af) To the best knowledge of the Primary Parties, the Primary
Parties comply with all laws, rules and regulations relating to environmental
protection, and none of them has been notified or is otherwise aware that any of
them is potentially liable, or is considered potentially liable, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or any other Federal, state or local environmental laws and
regulations; no action, suit, regulatory investigation or other proceeding is
pending, threatened against the Primary Parties relating to environmental
protection, nor do the Primary parties have any reason to believe any such
proceedings may be brought against any of them; and to the best knowledge of the
Primary Parties, no disposal, release or discharge of hazardous or toxic
substances, pollutants or contaminants, including petroleum and gas products, as
any of such terms may be defined under federal, state or local law, has
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occurred on, in, at or about any facilities or properties owned or leased by any
of the Primary Parties or, to the best knowledge of the Bank, in which the Bank
has a security interest.
Any certificates signed by an officer of any of the Primary Parties and
delivered to the Agent, PCS, or their counsel that refer to this Agreement shall
be deemed to be a representation and warranty by the Primary Parties to the
Agent and PCS as to the matters covered thereby with the same effect as if such
representation and warranty were set forth herein.
SECTION 6.B. REPRESENTATIONS AND WARRANTIES OF THE AGENT.
Agent represents and warrants to the Primary Parties that:
(a) KBW is a corporation and is validly existing in good
standing under the laws of the State of New York with full power and authority
to provide the services to be furnished to the Primary Parties hereunder.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of KBW, and this Agreement has
been duly and validly executed and delivered by KBW, and is the legal, valid and
binding agreement of Agent, enforceable in accordance with its terms except as
the enforceability thereof may be limited by (i) bankruptcy, insolvency,
moratorium, reorganization, conservatorship, receivership or other similar laws
relating to or affecting the enforcement of creditors' rights generally, (ii)
general equity principles regardless of whether such enforceability is
considered in a proceeding in equity or at law, and (iii) the extent, if any,
that the provisions of Sections 10 or 11 hereof may be unenforceable as against
public policy.
(c) Each of Agent and its employees, agents and
representatives who shall perform any of the services hereunder shall be duly
authorized and empowered, and shall have all licenses, approvals and permits
necessary to perform such services.
(d) The execution and delivery of this Agreement by Agent, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof will not conflict with, or result in a breach of,
any of the terms, provisions or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a default) under,
the articles of incorporation of KBW or any agreement, indenture or other
instrument to which KBW is a party or by which it or its property is bound.
(e) No action, suit, charge or proceeding is pending, or to
the knowledge of Agent threatened, against Agent which, if determined adversely
to Agent, would have a material adverse
16
<PAGE>
effect upon the ability of Agent to perform obligations under this Agreement.
(f) No approval, authorization, consent or other order of any
regulatory or supervisory or other public authority is required for the
execution and delivery by Agent of this Agreement, except as may have been
received.
SECTION 6.C. REPRESENTATIONS AND WARRANTIES OF PCS. PCS
represents and warrants to the Primary Parties that:
(a) PCS is a corporation and is validly existing in good
standing under the laws of the State of _________________ with full power and
authority to provide the services to be furnished to the Primary Parties
hereunder.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary action on the part of PCS, and this Agreement has
been duly and validly executed and delivered by PCS, and is the legal, valid and
binding agreement of PCS, enforceable in accordance with its terms except as the
enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium,
reorganization, conservatorship, receivership or other similar laws relating to
or affecting the enforcement of creditors' rights generally, (ii) general equity
principles regardless of whether such enforceability is considered in a
proceeding in equity or at law, and (iii) the extent, if any, that the
provisions of Sections 10 or 11 hereof may be unenforceable as against public
policy.
(c) Each of PCS and its employees, agents and representatives
who shall perform any of the services hereunder shall be duly authorized and
empowered, and shall have all licenses, approvals and permits necessary to
perform such services.
(d) The execution and delivery of this Agreement by PCS, the
consummation of the transactions contemplated hereby and compliance with the
terms and provisions hereof will not conflict with, or result in a breach of,
any of the terms, provisions or conditions of, or constitute a default (or event
which with notice or lapse of time or both would constitute a default) under,
the articles of incorporation of PCS or any agreement, indenture or other
instrument to which PCS is a party or by which it or its property is bound.
(e) No action, suit, charge or proceeding is pending, or to
the knowledge of PCS threatened, against PCS which, if determined adversely to
PCS, would have a material adverse effect upon the ability of PCS to perform
obligations under this Agreement.
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(f) No approval, authorization, consent or other order of any
regulatory or supervisory or other public authority is required for the
execution and delivery by PCS of this Agreement, except as may have been
received.
SECTION 7.A. COVENANTS OF THE PRIMARY PARTIES. The Primary
Parties hereby jointly and severally covenant with the Agent and
PCS as follows:
(a) The Holding Company will not, at any time after the date
the Registration Statement is declared effective, file any amendment or
supplement to the Registration Statement without providing the Agent and its
counsel an opportunity to review such amendment or file any amendment or
supplement to which amendment the Agent or its counsel shall reasonably object.
(b) The Primary Parties will not, at any time after the date
any OTS Application is approved, file any amendment or supplement to such OTS
Application without providing the Agent and its counsel an opportunity to review
such amendment or supplement or file any amendment or supplement to which
amendment or supplement the Agent or its counsel shall reasonably object.
(c) The Primary Parties will use their best efforts to cause
any post-effective amendment to the Registration Statement to be declared
effective by the Commission and any post-effective amendment to the OTS
Applications to be approved by the OTS, and will immediately upon receipt of any
information concerning the events listed below notify the Agent and PCS (i) when
the Registration Statement, as amended, has become effective; (ii) when the
Application for Conversion, as amended, has been approved by the OTS; (iii) when
the Holding Company Application, as amended, has been approved by the OTS; (iv)
when each of the Merger Applications, as amended, has been approved by the OTS;
(v) of the receipt of any comments from the Commission, the OTS, or any other
governmental entity with respect to the Reorganization or the transactions
contemplated by this Agreement; (vi) of any request by the Commission, the OTS,
any other governmental entity for any amendment or supplement to the
Registration Statement or the OTS Applications or for additional information;
(vii) of the issuance by the Commission, the OTS, or any other governmental
agency of any order or other action suspending the Offerings or the use of the
Registration Statement or the Prospectus or any other filing of the Primary
Parties under the Conversion Regulations or other applicable law, or the threat
of any such action; (viii) of the issuance by the Commission, the OTS, the FDIC
or any state authority of any stop order suspending the effectiveness of the
Registration Statement or of the initiation or threat of initiation or threat of
any proceedings for that purpose; or (ix) of the occurrence of any event
mentioned in paragraph (f) below. The Primary Parties will make every reasonable
effort to prevent the issuance by the Commission, the OTS, the FDIC or any state
authority of any order referred to in (vii) and (viii) above and, if any such
order
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shall at any time be issued, to obtain the lifting thereof at the earliest
possible time.
(d) The Primary Parties will deliver to the Agent, PCS and to
their counsel conformed copies of each of the following documents, with all
exhibits: each of the OTS Applications as originally filed and of each amendment
or supplement thereto, and the Registration Statement, as originally filed and
each amendment thereto. Further, the Primary Parties will deliver such
additional copies of the foregoing documents to counsel to the Agent and PCS as
may be required for any NASD filings. In addition, the Primary Parties will also
deliver to the Agent and PCS such number of copies of the Prospectus, as amended
or supplemented, as the Agent or PCS may reasonably request.
(e) The Primary Parties will comply in all material respects
with any and all terms, conditions, requirements and provisions with respect to
the Reorganization and the transactions contemplated thereby imposed by the
Commission, by applicable state law and regulations, and by the 1933 Act, the
Securities Exchange Act of 1934 (the "1934 Act") and the rules and regulations
of the Commission promulgated under such statutes, to be complied with prior to
or subsequent to the Closing Date; and when the Prospectus is required to be
delivered, the Primary Parties will comply in all material respects, at their
own expense, with all material requirements imposed upon them by the OTS, the
Conversion Regulations (except as modified or waived in writing by the OTS), the
FDIC, the Commission, by applicable state law and regulations and by the 1933
Act, the 1934 Act and the rules and regulations of the Commission promulgated
under such statutes, in each case as from time to time in force, so far as
necessary to permit the continuance of sales or dealing in shares of Common
Stock during such period in accordance with the provisions hereof and the
Prospectus.
(f) The Primary Parties will inform the Agent and PCS of any
event or circumstances of which it is aware as a result of which the
Registration Statement and/or Prospectus, as then supplemented or amended, would
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading. If it is
necessary, in the reasonable opinion of counsel for the Primary Parties or for
the Agent, to amend or supplement the Registration Statement or the Prospectus
in order to correct such untrue statement of a material fact or to make the
statements therein not misleading in light of the circumstances existing at the
time of their use, the Primary Parties will, at their expense, forthwith
prepare, file with the Commission and the OTS, and furnish to the Agent, a
reasonable number of copies of an amendment or amendments of, or a supplement or
supplements to, the Registration Statement and the Prospectus (in form and
substance reasonably satisfactory to counsel for the Agent after a reasonable
time for review) which will amend or supplement the
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Registration Statement and/or the Prospectus so that as amended or supplemented
it will not contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time, not misleading. For the purpose of this
subsection, each of the Primary Parties will furnish such information with
respect to itself as the Agent may from time to time reasonably request.
(g) Pursuant to the terms of the Plan, the Holding Company
will endeavor in good faith, in cooperation with the Agent, to register or to
qualify the Shares for offering and sale or to exempt such Shares from
registration and to exempt the Holding Company and its officers, directors and
employees from registration as broker-dealers, under the applicable securities
laws of the jurisdictions in which the Offerings will be conducted; provided,
however, that the Holding Company shall not be obligated to file any general
consent to service of process or to qualify to do business in any jurisdiction
in which it is not so qualified. In each jurisdiction where any of the Shares
shall have been registered or qualified as above provided, the Holding Company
will make and file such statements and reports in each year as are or may be
required by the laws of such jurisdictions.
(h) The liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders will be duly
established and maintained in accordance with the requirements of the OTS, and
such Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain their savings accounts in the Bank will have an inchoate
interest in their pro rata portion of the liquidation account which shall have a
priority superior to that of the holders of shares of Common Stock in the event
of a complete liquidation of the Bank.
(i) The Holding Company will not sell or issue, contract to
sell or otherwise dispose of, for a period of 90 days after the date hereof,
without the Agent's prior written consent, which consent shall not be
unreasonably withheld, any shares of Common Stock other than in connection with
any plan or arrangement described in the Prospectus.
(j) For the period of three years from the date of this
Agreement, the Holding Company will furnish to the Agent and PCS upon request
(i) a copy of each report of the Holding Company furnished to or filed with the
Commission under the 1934 Act or any national securities exchange or system on
which any class of securities of the Holding Company is listed or quoted, (ii) a
copy of each report of the Holding Company mailed to holders of Common Stock or
non-confidential report filed with the Commission or the OTS or any other
supervisory or regulatory authority or any national securities exchange or
system on which any class of the securities of the Holding Company is listed or
quoted, and (iii) from time to time, such other publicly available
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information concerning the Holding Company and the Bank as the Agent or PCS may
reasonably request.
(k) The Holding Company and the Bank will use the net proceeds
from the sale of the Common Stock in the manner set forth in the Prospectus
under the caption "Use of Proceeds."
(l) The Holding Company and the Bank will distribute the
Prospectus or other offering materials in connection with the offering and sale
of the Common Stock only in accordance with the Conversion Regulations, the 1933
Act and the 1934 Act and the rules and regulations promulgated under such
statutes, and the laws of any state in which the shares are qualified for sale.
(m) The Holding Company shall register its Common Stock under
Section 12(g) of the 1934 Act, concurrent with the effective date of the
Registration Statement. The Holding Company shall maintain the effectiveness of
such registration for not less than three years or such shorter period as
permitted by the OTS.
(n) For so long as the Common Stock is registered under the
1934 Act, the Holding Company will furnish to its stockholders as soon as
practicable after the end of each fiscal year such reports and other information
as are required to be furnished to its stockholders under the 1934 Act
(including consolidated financial statements of the Holding Company and its
subsidiaries, certified by independent public accountants).
(o) The Holding Company will comply with the provisions of
Rule 158 of the 1933 Act.
(p) The Holding Company will file with the Commission, within
the required time period, such reports on Form SR as may be required pursuant to
Rule 463 under the 1933 Act.
(q) The Holding Company will use its best efforts to obtain
approval for the listing of, and maintain the quotation of, the Common Stock on
the Nasdaq National Market System, effective on or prior to the Closing Date.
(r) The Primary Parties will maintain appropriate arrangements
for depositing all funds received from persons mailing subscriptions for or
orders to purchase Conversion Shares on an interest bearing basis at the rate
described in the Prospectus until the Closing Date and satisfaction of all
conditions precedent to the release of the Holding Company's obligation to
refund payments received from persons subscribing for or ordering Conversion
Shares in the Conversion Offering, in accordance with the Plan as described in
the Prospectus, or until refunds of such funds have been made to the persons
entitled thereto or withdrawal authorizations canceled in accordance with the
Plan and as described in the Prospectus. The Primary Parties will maintain such
records of all funds received to permit the
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funds of each subscriber to be separately insured by the FDIC (to the maximum
extent allowable) and to enable the Primary Parties to make the appropriate
refunds of such funds in the event that such refunds are required to be made in
accordance with the Plan and as described in the Prospectus.
(s) The Holding Company will promptly register as a savings
and loan holding company under the HOLA.
(t) The Holding Company and the Bank will take such actions
and furnish such information as are reasonably requested by the Agent in order
for the Agent to ensure compliance with the "Interpretation of the Board of
Governors of the NASD on Free Riding and Withholding."
(u) The Primary Parties will conduct their businesses in
compliance in all material respects with all applicable federal and state laws,
rules, regulations, decisions, directives and orders including, all decisions,
directives and orders of the Commission, the OTS and the FDIC.
(v) The Primary Parties will not amend the Plan of Conversion
without notifying the Agent prior thereto.
(w) The Holding Company shall provide the Agent with any
information necessary to carry out the allocation of the Conversion Shares in
the event of an oversubscription and such information shall be accurate and
reliable in all material respects.
(x) The Holding Company will not deliver the Shares until the
Primary Parties have satisfied or caused to be satisfied each condition set
forth in Section 9A hereof, unless such condition is waived in writing by the
Agent.
(y) Upon completion of the sale by the Holding Company of the
Shares contemplated by the Plan and the Prospectus, (i) the MHC shall have been
converted pursuant to the Plan to an interim federal stock savings bank and
merged with and into the Bank, (ii) all of the issued and outstanding capital
stock of the Bank shall be owned by the Holding Company, (iii) the Company shall
have no direct subsidiaries other than the Bank, and (iv) the Reorganization
shall have been effected in accordance with all applicable statutes,
regulations, decisions and orders; and all terms, conditions, requirements and
provisions with respect to the Reorganization (except those that are conditions
subsequent) imposed by the Commission, the OTS or any other governmental agency,
if any, shall have been complied with by the Primary Parties in all material
respects or appropriate waivers shall have been obtained and all notice and
waiting periods shall have been satisfied, waived or elapsed.
(z) Prior to the Closing Date, the Plan shall have been
approved by the eligible voting members of the MHC and the
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eligible voting stockholders of the Bank in accordance with the Conversion
Regulations and the provisions of MHC's and the Bank's respective charter and
bylaws.
(aa) As of the Closing Date, the Primary Parties shall have
completed all conditions precedent to the Reorganization in accordance with the
Plan and shall have complied in all material respects with applicable laws,
regulations (except as modified or waived in writing by the OTS), decisions and
orders, including all terms, conditions, requirements and provisions precedent
to the Reorganization imposed upon it by the OTS as set forth in correspondence
received from the OTS.
(ab) On or before the Closing Date, the MHC and the Bank will
have completed all conditions precedent to the Reorganization specified in the
Plan and the offer and sale of the Shares will have been conducted in all
material respects in accordance with the Plan, the Conversion Regulations
(except as modified or waived in writing by the OTS) and with all other
applicable laws, regulations, decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Reorganization imposed
upon any of the Primary Parties by the OTS, the Commission or any other
regulatory authority and in the manner described in the Prospectus.
SECTION 7.B. COVENANTS OF AGENT. Agent hereby covenants with the
Primary Parties as follows:
(a) During the period when the Prospectus is used, Agent will
comply, in all material respects and at its own expense, with all requirements
imposed upon it by the OTS and, to the extent applicable, by the 1933 Act, the
1934 Act and the rules and regulations promulgated under the 1933 Act and the
1934 Act.
(b) Agent will distribute any Prospectus or offering materials
in connection with the offering and sale of the Common Stock only in accordance
with the Conversion Regulations and the requirements of the 1933 Act and 1934
Act and the rules and regulations promulgated thereunder.
(c) KBU intends, together with PCS, to make a market in the
Common Stock after the completion of the Offerings.
(d) PCS intends, together with KBW, to make a market in the
Common Stock after the completion of the Offering.
SECTION 7.C. COVENANTS OF PCS. PCS hereby covenants with the Primary
Parties as follows:
(a) During the period when the Prospectus is used, PCS will
comply, in all material respects and at its own expense, with all requirements
imposed upon it by the OTS and, to the
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extent applicable, by the 1933 Act, the 1934 Act and the rules and regulations
promulgated under the 1933 Act and the 1934 Act.
(b) PCS will distribute any Prospectus or offering materials
in connection with the offering and sale of the Common Stock only in accordance
with the Conversion Regulations and the requirements of the 1933 Act and 1934
Act and the rules and regulations promulgated thereunder.
(c) PCS intends, together with KBW, to make a market in the
Common Stock after the completion of the Offerings.
SECTION 8. PAYMENT OF EXPENSES. Whether or not the Reorganization is
completed or the sale and exchange of the Shares by the Holding Company is
consummated, the Primary Parties will pay for all expenses incident to the
performance of this Agreement, including without limitation: (a) the preparation
and filing of the OTS Applications; (b) the preparation, printing, filing,
delivery and shipment of the Registration Statement, including the Prospectus,
and all amendments and supplements thereto; (c) all filing fees and expenses in
connection with the qualification or registration of the Shares for offer and
sale by the Holding Company or the Bank under the securities or "blue sky" laws,
including without limitation filing fees, reasonable legal fees and
disbursements of counsel in connection therewith, and in connection with the
preparation of a blue sky law survey; (d) the filing fees of the NASD; and (e)
the reasonable expenses of the Agent, including without limitation, accounting,
communications, legal and travel expenses. Any such expense incurred by the
Agent shall be reimbursed by the Primary Parties. If this Agreement is
terminated in accordance with the provisions of Sections 3, 9, or 13, the
Primary Parties shall pay the Agent the fees earned pursuant to Section 4 and
will reimburse the Agent for the reasonable expenses of the Agent, including
without limitation accounting, communication, legal and travel expenses. The
Agent's non-legal expenses shall not exceed $15,000 of the Expenses shall not be
incurred by Agent's counsel without the prior approval of the Holding Company or
the Bank. The Agent's legal fees shall not exceed $30,000.
SECTION 9.A. CONDITIONS TO THE AGENT'S AND PCS' OBLIGATIONS. The
obligations of the Agent and PCS hereunder and the occurrence of the Closing and
the Reorganization are subject to the condition that all representations and
warranties and other statements of the Primary Parties herein contained are, at
and as of the commencement of the Offerings and at and as of the Closing Date,
true and correct, the condition that the Primary Parties shall have performed
all of their obligations hereunder to be performed on or before such dates and
to the following further conditions:
(a) The Registration Statement shall have been declared
effective by the Commission and the OTS Applications approved by the OTS not
later than 5:30 p.m. on the date of this
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Agreement, and no stop order or other action suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or, to any of the Primary Parties' best knowledge, threatened
by the Commission or any state authority and no order or other action suspending
the authorization for use of the Prospectus or the consummation of the
Reorganization shall have been issued or proceedings therefor initiated or, to
any of the Primary Parties' best knowledge, threatened by the OTS, the
Commission, or any other governmental body.
(b) At the Closing Date, the Agent and PCS shall have each
received:
(1) The favorable opinion, dated as of the Closing
Date, of Breyer & Aguggia, special counsel for the Primary Parties, or Knapp,
O'Dell & Lewis, local counsel to the Primary Parties, in form and substance
satisfactory to counsel for the Agent to the effect that:
(i) The Holding Company is a corporation
duly organized and validly existing and in good standing under the laws of the
State of Washington, with corporate power and authority to own its properties
and to conduct its business as described in the Prospectus, and is duly
qualified to transact business and is in good standing in each jurisdiction in
which the conduct of its business requires such qualification and in which the
failure to qualify would have a material adverse effect on the financial
condition, earnings, capital, properties or business affairs of the Primary
Parties.
(ii) The Bank is a duly organized and
validly existing federally chartered capital stock savings bank with full power
and authority to own its properties and to conduct its business as described in
the Prospectus and to enter into this Agreement and perform its obligations
hereunder; the activities of the Bank as described in the Prospectus are
permitted by the rules, regulations and practices of the OTS; the issuance and
sale of the capital stock of the Bank to the Holding Company in the
Reorganization has been duly and validly authorized by all necessary corporate
action on the part of the Holding Company and the Bank and, upon payment
therefor in accordance with the terms of the Plan, will be validly issued, fully
paid and nonassessable; and will be owned of record and beneficially by the
Holding Company, free and clear of any mortgage, pledge, lien, encumbrance,
claim or restriction.
(iii) The Bank is a member of the FHLB of
Seattle and the Bank is an insured depository institution under the provisions
of the Federal Deposit Insurance Act, as amended, and to such counsel's
knowledge no proceedings for the termination or revocation of such insurance are
pending or threatened; and the description of the liquidation account as set
forth in the Prospectus under the caption "The Conversion and
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Reorganization -- Effects of Conversion and Reorganization on Depositors and
Borrowers of the Savings Bank -- Liquidation Account" has been reviewed by such
counsel and, to the extent that such information constitutes matters of law or
legal conclusions, is accurate in all material respects.
(iv) The MHC has been duly organized and is
validly existing as a federally chartered mutual holding company, duly
authorized to conduct its business and own its properties as described in the
Registration Statement and Prospectus.
(v) The Subsidiary has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Washington, and has been duly qualified to do business and
is in good standing as a foreign corporation in each jurisdiction where the
ownership or leasing of its properties or the conduct of its business requires
such qualification, unless the failure to be so qualified in one or more of such
jurisdictions would not have a material adverse effect on the financial
condition, earnings, capital, assets or properties of the Primary Parties, taken
as a whole; to such counsel's knowledge, the Subsidiary holds all licenses,
certificates and permits from governmental authorities necessary for the conduct
of its business, except where the failure to hold such licenses, certificates or
permits would not have a material adverse effect on the financial condition,
earnings, capital, assets or properties of the Primary Parties, taken as a
whole; the Subsidiary is not in violation of its articles of incorporation or
bylaws; all of the outstanding capital stock of the Subsidiary has been duly
authorized and is validly issued, fully paid and nonassessable, and owned
directly by the Bank, free and clear of any liens, charges, encumbrances or
restrictions except such as would not result in a material adverse effect on the
financial condition, earnings, capital, assets or properties of the Primary
Parties, taken as a whole; all of the leases and subleases material to the
business of the Subsidiary under which the Subsidiary holds properties are in
full force and effect; and the activities of the Subsidiary are permitted to
subsidiaries of a federally chartered savings bank by the regulations and the
policies and practices of the OTS.
(vi) Upon consummation of the
Reorganization, the authorized, issued and outstanding capital stock of the
Holding Company will be within the range set forth in the Prospectus under the
caption "Capitalization," and no shares of Common Stock have been or will be
issued and outstanding prior to the Closing Date (except for the shares issued
to the Bank upon incorporation of the Holding Company, which have been
cancelled); the shares of Common Stock of the Holding Company to be subscribed
for or exchanged in the Offerings have been duly and validly authorized for
issuance, and when issued and delivered by the Holding Company pursuant to the
Plan against payment of the consideration calculated as set forth in the Plan,
will be fully paid and nonassessable; and the
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issuance of the shares of Common Stock is not subject to preemptive rights under
the charter, articles of incorporation or bylaws of any of the Primary Parties,
or arising or outstanding by operation of law or, to the best knowledge of such
counsel, under any contract, indenture, agreement, instrument or other document,
except for the subscription rights under the Plan.
(vii) The authorized, issued and outstanding
capital stock of the Bank is as set forth in the Prospectus under the caption
"Capitalization," and all of the outstanding shares of such capital stock have
been duly authorized and validly issued and are fully paid and nonassessable.
(viii) The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all necessary corporation action on the part of the Primary
Parties; and this Agreement constitutes a valid, legal and binding obligation of
each of the Primary Parties, enforceable in accordance with its terms, except to
the extent that the provisions of Sections 10 and 11 hereof may be unenforceable
as against public policy, and except to the extent that such enforceability may
be limited by bankruptcy laws, insolvency laws, or other laws affecting the
enforcement of creditors' rights generally, or the rights of creditors of
savings institutions insured by the FDIC (including the laws relating to the
rights of the contracting parties to equitable remedies).
(ix) The Plan has been duly adopted by the
board of directors of both the MHC and the Bank, as required by the Conversion
Regulations, and approved by the members of the MHC and the eligible voting
stockholders of the Bank, as required by the Conversion Regulations and the
MHC's and the Bank's respective charter and bylaws.
(x) The OTS Applications have been approved
by the OTS and the Prospectus and the Proxy Statements have been authorized for
use by the OTS, and subject to the satisfaction of any conditions set forth in
such OTS approvals, no further approval, registration, authorization, consent or
other order of any federal regulatory agency, public board or body is required
in connection with the execution and delivery of this Agreement, the offer, sale
and issuance of the Shares and the consummation of the Reorganization.
(xi) The purchase by the Holding Company of
all of the issued and outstanding capital stock of the Bank has been authorized
by the OTS and no action has been taken, or, to such counsel's knowledge, is
pending or threatened, to revoke any such authorization or approval.
(xii) The Registration Statement has become
effective under the 1933 Act, no stop order suspending the effectiveness of the
Registration Statement has been issued, and,
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to the best of such counsel's knowledge, no proceedings for that purpose have
been instituted or threatened.
(xiii) The material tax consequences of the
Reorganization are set forth in the Prospectus under the caption "The Conversion
and Reorganization -- Effects of Conversion and Reorganization on Depositors and
Borrowers of the Savings Bank -- Tax Effects." The information in the Prospectus
under the caption "The Conversion and Reorganization -- Effects of Conversion
and Reorganization on Depositors and Borrowers of the Savings Bank -- Tax
Effects" has been reviewed by such counsel and fairly describes such opinions
rendered by Breyer & Aguggia and Knapp, O'Dell & Lewis to the Primary Parties
with respect to such matters.
(xiv) The terms and provisions of the shares
of Common Stock conform to the description thereof contained in the Registration
Statement and the Prospectus and such description describes in all material
respects the rights of the holders thereof; the information in the Prospectus
under the captions "Comparison of Stockholders' Rights," "Restrictions on
Acquisition of the Holding Company" and "Description of Capital Stock of the
Holding Company," to the extent that they constitute matters of law or legal
conclusions, has been prepared by such counsel and is accurate in all material
respects; and the forms of certificates proposed to be used to evidence the
shares of Common Stock are in due and proper form.
(xv) At the time the Application for
Conversion, including the Prospectus contained therein, was approved, the
Application for Conversion (as amended or supplemented) complied as to form in
all material respects with the requirements of the Conversion Regulation and all
applicable laws, rules and regulations and decisions and orders of the OTS,
except as modified or waived in writing by the OTS (other than the financial
statements, notes to financial statements, financial tables and other financial
and statistical data included therein and the appraisal valuation as to which
counsel need express no opinion). To such counsel's knowledge, no person has
sought to obtain regulatory or judicial review of the final action of the OTS
approving the OTS Applications.
(xvi) At the time that the Registration
Statement became effective the Registration Statement, including the Prospectus
contained therein, (as amended or supplemented) (other than the financial
statements, notes to financial statements, financial tables or other financial
and statistical data included therein and the appraisal valuation as to which
counsel need express no opinion), complied as to form in all material respects
with the requirements of the 1933 Act and the rules and regulations promulgated
thereunder; and except as modified or waived in writing by the OTS, the
Conversion Regulations and all other rules, regulations and decisions and orders
of the OTS.
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(xvii) To the best of such counsel's
knowledge, there are no legal or governmental proceedings pending, or threatened
(i) asserting the invalidity of this Agreement or (ii) seeking to prevent the
Reorganization or the offer, sale or issuance of the Shares.
(xviii) The information in the Prospectus
under the captions "Regulation," "The Conversion and Reorganization" and "Legal
and Tax Opinions," to the extent that it constitutes matters of law, summaries
of legal matters, documents or proceedings, or legal conclusions, has been
prepared by such counsel and is accurate in all material respects (except as to
the financial statements and other financial data included therein as to which
such counsel need express no opinion).
(xix) None of the Primary Parties is in
violation of its articles of incorporation or its charter, as the case may be,
or its bylaws or to the best of such counsel's knowledge, in violation of any
material obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
filed as on exhibit to, or incorporated by reference in, the Registration
Statement, which violation would have a material adverse effect on the financial
condition of the Primary Parties considered as one enterprise, or on the
earnings, capital, properties or business affairs of the Primary Parties
considered as one enterprise; the execution and delivery of this Agreement by
the Primary Parties, the incurrence of the obligations herein set forth and the
consummation of the transactions contemplated herein, will not materially
conflict with, constitute a material breach of, or default under, or result in
the creation or imposition of any material lien, charge or encumbrance upon any
property or assets of any of the Primary Parties which are material to their
business considered as one enterprise, pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which any of the
Primary Parties is a party or by which any of them may be bound, or to which any
of the property or assets of the Primary Parties are subject. In addition, such
action will not result in any material violation of the provisions of the
articles of incorporation or charter, as the case may be, or bylaws of any of
the Primary Parties or any material violation of any applicable law, act,
regulation or to such counsel's knowledge, order or court order, writ,
injunction or decree.
The opinion may be limited to matters governed by the laws of the
United States or the State of Washington. In rendering such opinion, such
counsel may rely (A) as to matters involving the application of laws of any
jurisdiction other than the United States, to the extent such counsel deems
proper and specified in such opinion, upon the opinion of other counsel of good
standing, as long as such other opinion indicates that the Agent and PCS may
rely on the opinion, and (B) as to matters of fact, to the extent such counsel
deems proper, on certificates of responsible
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officers of the Primary Parties and public officials; provided copies of any
such opinion(s) or certificates of public officials are delivered to Agent and
PCS together with the opinion to be rendered hereunder by special counsel to the
Primary Parties. The opinion of such counsel for the Primary Parties shall state
that it has no reason to believe that the Agent and PCS are not justified in
relying thereon.
(2) The letter of Breyer & Aguggia, special counsel
for the Primary Parties, in form and substance to the effect that during the
preparation of the Registration Statement and the Prospectus, Breyer & Aguggia
participated in conferences with certain officers of and other representatives
of the Primary Parties, counsel to the Agent and PCS, representatives of the
independent public accountants for the Primary Parties and representatives of
the Agent and PCS at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although Breyer & Aguggia is
not passing upon and does not assume the accuracy of the statements contained in
the Registration Statement and Prospectus, on the basis of the foregoing without
independent verification (relying as to materiality as to factual matters on
certificates of officers and other factual representations by the Primary
Parties), nothing has come to the attention of Breyer & Aguggia that caused
Breyer & Aguggia to believe that the Registration Statement at the time it was
declared effective by the SEC or the Prospectus as of its date, contained or
contains any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that counsel need express no comment or opinion
with respect to the financial statements, schedules and other financial and
statistical data included, or statistical or appraisal methodology employed, in
the Registration Statement or Prospectus).
(3) The favorable opinion, dated as of the Closing
Date, of Stevens & Lee, counsel for the Agent and PCS, with respect to such
matters as the Agent and PCS may reasonably require; such opinion may rely, as
to matters of fact, upon certificates of officers and directors of the Primary
Parties delivered pursuant hereto or as such counsel may reasonably request.
(c) Concurrently with the execution of this Agreement, the
Agent and PCS shall each receive a letter from Deloitte & Touche, LLP, dated the
date hereof and addressed to the Agent and PCS, (i) such letter confirming that
Deloitte & Touche, LLP is a firm of independent public accountants within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants, the 1933 Act and the regulations promulgated
thereunder and 12 C.F.R. Section 571.2(c)(3), and no information concerning its
relationship with or interests in the Primary Parties is required by the OTS
Applications or Item 10 of
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the Registration Statement, and stating in effect that in Deloitte & Touche's
opinion the financial statements of the Bank included in the Prospectus comply
as to form in all material respects with the applicable accounting requirements
of the 1933 Act, the 1934 act and the related published rules and regulations of
the Commission thereunder and the Conversion Regulations and generally accepted
accounting principles consistently applied; (ii) stating in effect that, on the
basis of certain agreed upon procedures (but not an audit examination in
accordance with generally accepted auditing standards) consisting of a reading
of the latest available unaudited interim financial statements of the Bank
prepared by the Bank, a reading of the minutes of the meetings of the Board of
Directors of each of the Primary Parties, the members of the MHC and the
stockholders of each of the Holding Company and the Bank, a review of interim
financial information in accordance with Statement on Auditing Standards No. 71,
and consultations with officers of the Bank responsible for financial and
accounting matters, nothing came to their attention which caused them to believe
that: (A) such unaudited financial statements, including Recent Developments, if
any, are not in conformity with generally accepted accounting principles applied
on a basis substantially consistent with that of the audited financial
statements included in the Prospectus; or (B) during the period from the date of
the latest unaudited consolidated financial statements included in the
Prospectus to a specified date not more than three business days prior to the
date hereof, there was any increase in borrowings (defined as advances from the
FHLB of Seattle, securities sold under agreements to repurchase and any other
form of debt other than deposits) of any of the Primary Parties or in
nonperforming loans of the Bank; or (C) there was any decrease in stockholders'
equity of the Bank at the date of such letter as compared with amounts shown in
the latest unaudited statement of condition included in the Prospectus or there
was any decrease in net income or net interest income of the Bank for the number
of full months commencing immediately after the period covered by the latest
unaudited income statement included in the Prospectus and ended on the latest
month end prior to the date of the Prospectus or in such letter as compared to
the corresponding period in the preceding year; and (iii) stating that, in
addition to the audit examination referred to in its opinion included in the
Prospectus and the performance of the procedures referred to in clause (ii) of
this subsection (c), they have compared with the general accounting records of
the Primary Parties, which are subject to the internal controls of the
accounting system of the Primary Parties and other data prepared by the Primary
Parties directly from such accounting records, to the extent specified in such
letter, such amounts and/or percentages set forth in the Prospectus as the Agent
and PCS may reasonably request, and they have found such amounts and percentages
to be in agreement therewith (subject to rounding).
(d) At the Closing Date, the Agent and PCS shall each receive
letters from Deloitte & Touche, LLP dated the Closing
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Date, addressed to the Agent and PCS, confirming the statements made by its
letter delivered by it pursuant to subsection (c) of this Section 9A, the
"specified date" referred to in clause (ii)(B) thereof to be a date specified in
such letter, which shall not be more than three business days prior to the
Closing Date.
(e) At the Closing Date, counsel to the Agent and PCS shall
have been furnished with such documents and opinions as counsel for the Agent
and PCS may require for the purpose of enabling them to advise the Agent and PCS
with respect to the issuance and sale of the Common Stock as herein contemplated
and related proceedings, or in order to evidence the accuracy of any of the
representations and warranties, or the fulfillment of any of the conditions
herein contained.
(f) At the Closing Date, the Agent and PCS shall each receive
a certificate of the Chief Executive Officer and Chief Financial Officer of each
of the Primary Parties, dated the Closing Date, to the effect that (i) they have
carefully examined the Prospectus and at the time the Prospectus became
authorized for final use, the Prospectus did not contain an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; (ii) there has not been, since the respective dates as of
which information is given in the Prospectus, any material adverse change in the
financial condition or in the earnings, capital, properties, business prospects
or business affairs of the Primary Parties, considered as one enterprise,
whether or not arising in the ordinary course of business; (iii) the
representations and warranties contained in Section 6A of this Agreement are
true and correct with the same force and effect as though made at and as of the
Closing Date; (iv) the Primary Parties have complied in all material respects
with all material agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Closing Date including the conditions
contained in this Section 9A; (v) no stop order has been issued or, to the best
of their knowledge, is threatened, by the Commission or any other governmental
body; (vi) no order suspending the Offerings, the Reorganization, the
acquisition of all of the shares of the Bank by the Holding Company or the
effectiveness of the Prospectus has been issued and to the best of their
knowledge, no proceedings for any such purpose have been initiated or threatened
by the OTS, the Commission, the FDIC, or any other federal or state authority;
(vii) to the best of their knowledge, no person has sought to obtain regulatory
or judicial review of the action of the OTS in approving the Plan or to enjoin
the Reorganization.
(g) At the Closing Date, the Agent and PCS shall each receive
a letter from R.P. Financial, LC., dated as of the Closing Date, (i) confirming
that said firm is independent of the Primary Parties and is experienced and
expert in the area of
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corporate appraisals within the meaning of the Conversion Regulations, (ii)
stating in effect that the Appraisal complies in all material respects with the
applicable requirements of the Conversion Regulations, and (iii) further stating
that its opinion of the aggregate pro forma market value of the Primary Parties,
as converted, expressed in the Appraisal as most recently updated, remains in
effect.
(h) None of the Primary Parties shall have sustained, since
the date of the latest audited financial statements included in the Registration
Statement and Prospectus, any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth in the Registration Statement and the
Prospectus, and since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall not have been any
material change, or any development involving a prospective material change in,
or affecting the general affairs of, management, financial position,
stockholders' equity or results of operations of any of the Primary Parties,
otherwise than as set forth or contemplated in the Registration Statement and
the Prospectus, the effect of which, in any such case described above, is in the
Agent's reasonable judgment sufficiently material and adverse as to make it
impracticable or inadvisable to proceed with the Offerings or the delivery of
the Shares on the terms and in the manner contemplated in the Prospectus.
(i) Prior to and at the Closing Date: (i) in the reasonable
opinion of the Agent, there shall have been no material adverse change in the
financial condition or in the earnings, capital, properties or business affairs
of any of the Primary Parties independently, or of the Primary Parties,
considered as one enterprise, from that as of the latest dates as of which such
condition is set forth in the Prospectus, except as referred to therein; (ii)
there shall have been no material transaction entered into by the Primary
Parties, considered as one enterprise, from the latest date as of which the
financial condition of the Primary Parties is set forth in the Prospectus, other
than transactions referred to or contemplated therein; (iii) none of the Primary
Parties shall have received from the OTS or the FDIC any direction (oral or
written) to make any material change in the method of conducting their business
with which it has not complied in all material respects (which direction, if
any, shall have been disclosed to the Agent and PCS) and which would reasonably
be expected to have a material and adverse effect on the condition (financial or
otherwise) or on the earnings, capital, properties or business affairs of the
Primary Parties considered as one enterprise; (iv) none of the Primary Parties
shall have been in default (nor shall an event have occurred which, with notice
or lapse of time or both, would constitute a default) under any provision of any
agreement or
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instrument relating to any material outstanding indebtedness; (v) no action,
suit or proceeding, at law or in equity or before or by any federal or state
commission, board or other administrative agency, shall be pending or, to the
knowledge of the Primary Parties, threatened against any of the Primary Parties
or affecting any of their properties wherein an unfavorable decision, ruling or
finding would reasonably be expected to have a material and adverse effect on
the financial condition or on the earnings, capital, properties or business
affairs of the Primary Parties, considered as one enterprise; and (vi) the
Shares have been qualified or registered for offering and sale under the
securities or blue sky laws of the jurisdictions as to which the Primary Parties
and the Agent shall have agreed.
(j) At or prior to the Closing Date, the Agent and PCS shall
each receive (i) a copy of the letter from the OTS authorizing the use of the
Prospectus and approving the Application for Conversion, (ii) a copy of the
order from the Commission declaring the Registration Statement effective, (iii)
a copy of certificate of existence for the Bank from the OTS, (iv) a certificate
of good standing from the State of Washington evidencing the good standing of
the Holding Company, (v) a copy of the letter from the OTS approving the Holding
Company Application, (vi) a certificate from the FDIC evidencing the Bank's
insurance of accounts, (vii) a certificate of the FHLB of Seattle evidencing the
Bank's membership therein, (viii) a certificate from the OTS evidencing the
existence of the MHC, (ix) a copy of the letters from the OTS approving the
Merger Applications and (x) any other documents that Agent or PCS shall
reasonably request.
(k) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) a suspension or limitation in trading in
securities generally on the New York Stock Exchange or American Stock Exchange
or in the over-the-counter market, or quotations halted generally on the Nasdaq
Stock Market, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required by either of such
exchanges or the NASD or by order of the Commission or any other governmental
authority; (ii) a general moratorium on the operations of commercial banks or
other federally-insured financial institutions or general moratorium on the
withdrawal of deposits from commercial banks or other federally-insured
financial institutions declared by either federal or state authorities; (iii)
the engagement by the United States in hostilities which have resulted in the
declaration, on or after the date hereof, of a national emergency or war; or
(iv) a material decline in the price of equity or debt securities if the effect
of any of (i) through (iv) herein, in the Agent's reasonable judgment, makes it
impracticable or inadvisable to proceed with the Offerings or the delivery of
the Shares on the terms and in the manner contemplated in the Registration
Statement and the Prospectus.
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SECTION 9.B. CONDITIONS TO THE PRIMARY PARTIES' OBLIGATIONS. The
obligations of the Primary Parties hereunder are subject to the representations
and warranties of the Agent and PCS being true and correct at and as of the
commencement of the Offerings and at and as of the Closing Date, to the
performance by the Agent and PCS of their respective obligations hereunder and
to the satisfaction of the conditions contained in Paragraph (a) of Section 9A
hereunder.
SECTION 10. INDEMNIFICATION.
(a) The Primary Parties jointly and severally agree to
indemnify and hold harmless the Agent and PCS, their respective officers,
directors, agents, servants and employees and each person, if any, who controls
the Agent or PCS within the meaning of Section 15 of the 1933 Act or Section
20(a) of the 1934 Act, against any and all loss, liability, claim, damage or
expense whatsoever (including but not limited to settlement expenses), joint or
several, that the Agent, PCS or any of such officers, directors, agents,
servants, employees and controlling Persons (collectively, the "Related
Persons") may suffer or to which the Agent, PCS or the Related Persons may
become subject under all applicable federal and state laws or otherwise, and to
promptly reimburse the Agent, PCS and any Related Persons upon written demand
for any reasonable expenses (including fees and disbursements of counsel)
incurred by the Agent, PCS or any Related Persons in connection with
investigating, preparing or defending any actions, proceedings or claims
(whether commenced or threatened) to the extent such losses, claims, damages,
liabilities or actions (i) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment or supplement thereto), preliminary or final
Prospectus (or any amendment or supplement thereto), the OTS Applications, or
any blue sky application or other instrument or document of the Primary Parties
or based upon written information supplied by any of the Primary Parties filed
in any state or jurisdiction to register or qualify any or all of the Shares
under the securities laws thereof (collectively, the "Blue Sky Applications"),
or any application or other document, advertisement, or communication ("Sales
Information") prepared, made or executed by or on behalf of any of the Primary
Parties with its consent or based upon written information furnished by or on
behalf of any of the Primary Parties, whether or not filed in any jurisdiction
in order to qualify or register the Shares under the securities laws thereof,
(ii) arise out of or based upon the omission or alleged omission to state in any
of the foregoing documents or information, a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; (iii) arise from any
theory of liability whatsoever relating to or arising from or based upon the
Registration Statement (or any amendment or supplement thereto), preliminary or
final Prospectus (or any amendment or supplement thereto), the OTS Applications,
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any Blue Sky Applications or Sales Information or other documentation
distributed in connection with the Reorganization; result from any claims made
with respect to the accuracy, reliability and completeness of the records of
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members or for any denial or reduction of a subscription or order to purchase
Common Stock, whether as a result of a properly calculated allocation pursuant
to the Plan or otherwise, based upon such records; provided, however, that no
indemnification is required under this paragraph (a) to the extent such losses,
claims, damages, liabilities or actions arise out of or are based upon any
untrue material statements or alleged untrue material statements in, or material
omission or alleged material omission from, the Registration Statement (or any
amendment or supplement thereto) or the preliminary or final Prospectus (or any
amendment or supplement thereto), the OTS Applications, the Blue Sky
Applications or Sales Information or other documentation distributed in
connection with the Reorganization made in reliance upon and in conformity with
written information furnished to the Primary Parties by the Agent with respect
to the Agent, or PCS with respect to PCS, expressly for use in the Registration
Statement (or any amendment or supplement thereto) or Prospectus (or any
amendment or supplement thereto) under the captions "Market for Common Stock,"
"The Conversion and Reorganization -- Plan of Distribution for the Subscription,
Direct Community and Syndicated Community Offerings" and "-- Description of
Sales Activities" or statistical information regarding the Holding Company
prepared by the Agent or PCS for use in the Sales Information, except for
information derived from the Prospectus. Provided further, that the Primary
Parties will not be responsible for any loss, liability, claim, damage or
expense to the extent they result primarily from actions taken or omitted to be
taken by the Agent or PCS in bad faith or from the Agent's or PCS' gross
negligence or willful misconduct, and the Agent and PCS each agree to repay to
the Primary Parties any amounts advanced to it by the Primary Parties in
connection with matters as to which it is found not to be entitled to
indemnification hereunder. Notwithstanding the foregoing, the indemnification
provided for in this paragraph (a) shall not apply to the Bank to the extent
that such indemnification by the Bank would constitute a covered transaction
under Section 23A of the Federal Reserve Act.
(b) The Agent agrees to indemnify and hold harmless the
Primary Parties, their directors and officers, agents, servants and employees
and each person, if any, who controls any of the Primary Parties within the
meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against
any and all loss, liability, claim, damage or expense whatsoever (including but
not limited to settlement expenses), joint or several which they, or any of
them, may suffer or to which they, or any of them, may become subject under all
applicable federal and state laws or otherwise, and to promptly reimburse the
Primary Parties and any such persons upon written demand for any reasonable
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expenses (including fees and disbursements of counsel) incurred by them in
connection with investigating, preparing or defending any actions, proceedings
or claims (whether commenced or threatened) to the extent such losses, claims,
damages, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment of supplement thereto), the OTS
Applications or any Blue Sky Applications or Sales Information or are based upon
the omission or alleged omission to state in any of the foregoing documents a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Agent's obligations under this Section
10(b) shall exist only if and only to the extent that such untrue statement or
alleged untrue statement was made in, or such material fact or alleged material
fact was omitted from, the Registration Statement (or any amendment or
supplement thereto) or the Prospectus (or any amendment or supplement thereto)
in reliance upon and in conformity with written information furnished to the
Primary Parties by the Agent expressly for use under the captions "Market for
Common Stock," "The Conversion and Reorganization -- Plan of Distribution for
the Subscription, Direct Community and Syndicated Community Offerings" and
"--Description of Sales Activities" or statistical information regarding the
Holding Company prepared by the Agent for use in the Sales information.
(c) PCS agrees to indemnify and hold harmless the Primary
Parties, their directors and officers, agents, servants and employees and each
person, if any, who controls any of the Primary Parties within the meaning of
Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all
loss, liability, claim, damage or expense whatsoever (including but not limited
to settlement expenses), joint or several which they, or any of them, may suffer
or to which they, or any of them, may become subject under all applicable
federal and state laws or otherwise, and to promptly reimburse the Primary
Parties and any such persons upon written demand for any reasonable expenses
(including fees and disbursements of counsel) incurred by them in connection
with investigating, preparing or defending any actions, proceedings or claims
(whether commenced or threatened) to the extent such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment of supplement thereto), the OTS Applications or any
Blue Sky Applications or Sales Information or are based upon the omission or
alleged omission to state in any of the foregoing documents a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that PCS' obligations under this Section 10(c) shall exist
only if and only to the extent that such untrue statement or alleged untrue
statement was made in, or such material fact or alleged material fact was
omitted from, the
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Registration Statement (or any amendment or supplement thereto) or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Primary Parties by PCS
expressly for use under the caption "The Conversion and Reorganization -- Plan
of Distribution for the Subscription, Direct Community and Syndicated Community
Offerings" and "--Description of Sales Activities" or statistical information
regarding the Holding Company prepared by PCS for use in the Sales information.
(d) Each indemnified party shall give prompt written notice to
each indemnifying party of any action, proceeding, claim (whether commenced or
threatened), or suit instituted against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have on account of this Section 10 or
otherwise. An indemnifying party may participate at its own expense in the
defense of such action. In addition, if it so elects within a reasonable time
after receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume defense of such action
with counsel chosen by it and approved by the indemnified parties that are
defendants in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
that are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action,
proceeding or claim, other than reasonable costs of investigation. In no event
shall the indemnifying parties be liable for the fees and expenses of more than
one separate firm of attorneys (and any special counsel that said firm may
retain) for all indemnified parties in connection with any one action,
proceeding or claim or separate but similar or related actions, proceedings or
claims in the same jurisdiction arising out of the same general allegations or
circumstances.
(e) The agreements contained in this Section 10 and in Section
11 hereof and the representations and warranties of the Primary Parties set
forth in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by or on behalf of the Agent, PCS or
their respective officers, directors, controlling persons, agents or employees
or by or on behalf of any of the Primary Parties or any officers, directors,
controlling persons, agents or employees of any of the Primary Parties; (ii)
delivery of and payment hereunder for the Shares; or (iii) any termination of
this Agreement.
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SECTION 11. CONTRIBUTION.
(a) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 10 is due in
accordance with its terms but is for any reason held by a court to be
unavailable from the Primary Parties, the Agent or PCS, as the case may be, the
Primary Parties, the Agent or PCS, as the case may be, shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses incurred in connection therewith and any amount paid in
settlement of any action, suit or proceeding of any claims asserted, but after
deducting any contribution received by the Primary Parties, the Agent or PCS, as
the case may be, from persons other than the other party thereto, who may also
be liable for contribution) in such proportion so that (i) the Agent is
responsible for that portion represented by the percentage that the fees paid to
the Agent pursuant to Section 4 of this Agreement (not including expenses), less
any portion of such fees paid by Agent to Assisting Brokers, bear to the gross
proceeds received by the Primary Parties from the sale of the Conversion Shares
in the Conversion Offerings, (ii) PCS is responsible for that portion
represented by the percentage that the fees paid to PCS by the Agent pursuant to
Section 4 of this Agreement bear to the gross proceeds received by the Primary
Parties from the sale of the Conversion Shares in the Conversion Offerings, and
(iii) the Primary Parties shall be responsible for the balance. If, however, the
allocation provided above is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section 10 above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative fault of the Primary Parties on the one hand and the Agent or PCS
on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions, proceedings or claims
in respect thereof), but also the relative benefits received by the Primary
Parties on the one hand and the Agent or PCS on the other from the offering, as
well as any other relevant equitable considerations. The relative benefits
received by the Primary Parties on the one hand and the Agent or PCS on the
other shall be deemed to be in the same proportion as the total gross proceeds
from the Conversion Offerings (before deducting expenses) received by the
Primary Parties bear, with respect to the Agent, to the total fees (not
including expenses) received by the Agent less the portion of such fees paid by
the Agent to Assisting Brokers, and with respect to PCS, to the total fees
received by PCS from the Agent under Section 4, if any. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Primary Parties on the
one hand or the Agent or PCS on the other and the parties relative intent, good
faith, knowledge, access to
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information and opportunity to correct or prevent such statement or omission.
The Primary Parties, the Agent and PCS agree that it would not be just and
equitable if contribution pursuant to this Section 11 were determined by
pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 11.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or action, proceedings or claims in respect
thereof) referred to above in this Section 11 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action, proceeding or claim.
It is expressly agreed that the Agent shall not be liable for any loss,
liability, claim, damage or expense or be required to contribute any amount
which in the aggregate exceeds the amount paid (excluding reimbursable expenses)
to the Agent under this Agreement less the portion of such fees paid by the
Agent to Assisting Brokers, and that PCS shall not be liable for any loss,
liability, claim, damage or expense or be required to contribute any amount
which in the aggregate exceeds the amount paid to PCS by the Agent under this
Agreement. It is understood that the above-stated limitation on the Agent's and
PCS' liability is essential to the Agent and PCS and that the Agent and PCS
would not have entered into this Agreement if such limitation had not been
agreed to by the parties to this Agreement. No person found guilty of any
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not found guilty
of such fraudulent misrepresentation. The duties, obligations and liabilities of
the Primary Parties, the Agent and PCS under this Section 11 and under Section
10 shall be in addition to any duties, obligations and liabilities which the
Primary Parties, the Agent and PCS may otherwise have. For purposes of this
Section 11, each of the Agent's, PCS' and the Primary Parties' officers and
directors and each person, if any, who controls the Agent, PCS or any of the
Primary Parties within the meaning of the 1933 Act and the 1934 Act shall have
the same rights to contribution as the Primary Parties, the Agent and PCS. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action, suit, claim or proceeding against such party in respect of which
a claim for contribution may be made against another party under this Section
11, will notify such party from whom contribution may be sought, but the
omission to so notify such party shall not relive the party from whom
contribution may be sought from any other obligation it may have hereunder or
otherwise than under this Section 11.
SECTION 12. REPRESENTATIONS, WARRANTIES AND INDEMNITIES TO SURVIVE
DELIVERY. All representations, warranties and indemnities and other statements
contained in this Agreement, or contained in certificates of officers of the
Primary Parties, the Agent or PCS submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on
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behalf of the Agent, PCS or their respective controlling persons, or by or on
behalf of the Primary Parties and shall survive the issuance of the Shares, and
any legal representative, successor or assign of the Agent, PCS, any of the
Primary Parties, and any indemnified person shall be entitled to the benefit of
the respective agreements, indemnities, warranties and representations.
SECTION 13. TERMINATION. Webb may terminate this Agreement
by giving the notice indicated below in this Section at any time
after this Agreement becomes effective as follows:
(a) In the event the Holding Company fails to sell the minimum
number of the Conversion Shares within the period specified in accordance with
the provisions of the Plan or as required by the Conversion Regulations and
applicable law, this Agreement shall terminate upon refund by the Primary
Parties to each person who has subscribed for or ordered any of the Conversion
Shares the full amount which it may have received from such person, together
with interest in accordance with Section 3, and no party to this Agreement shall
have any obligation to the other hereunder, except as set forth in Sections 3,
4, 8, 10 and 11 hereof.
(b) If any of the conditions specified in Section 9A shall not
have been fulfilled when and as required by this Agreement, or by the Closing
Date, or waived in writing by the Agent, this Agreement and all of the Agent's
and PCS' obligations hereunder may be canceled by the Agent by notifying the
Bank of such cancellation in writing at any time at or prior to the Closing
Date, and, any such cancellation shall be without liability of any party to any
other party except as otherwise provided in Sections 3, 4, 8, 10 and 11 hereof.
(c) If Webb elects to terminate this Agreement as provided in
this Section, the Primary Parties shall be notified by the Agent as provided in
Section 14 hereof.
SECTION 14. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to Webb shall be
directed to Charles Webb & Company at 211 Bradenton Avenue, Dublin, Ohio 43017,
Attention: Ms. Patricia A. McJoynt (with a copy to Edward C. Hogan, Esquire,
Stevens & Lee, One Glenhardie Corporate Center, 1275 Drummers Lane, P.O. Box
236, Wayne, Pennsylvania 19087- 0236); notices to the Primary Parties shall be
directed to 700 N.E. Fourth Avenue, Camas, Washington 98607, Attention: Patrick
Sheaffer, Chairman of the Board, President, and Chief Executive Officer (with a
copy to John F. Breyer, Jr., Breyer & Aguggia, 1300 I Street, N.W., Suite 470
East, Washington, D.C. 20005); and notices to PCS shall be directed to U.S.
Bancorp Tower, Suite 4250, 111 S.W. Fifth Avenue, Portland,
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Oregon 97204, Attention: Scott Sandbo (with a copy to Agent and Stevens & Lee in
accordance with the provisions set forth above).
SECTION 15. PARTIES. This Agreement shall inure to the benefit of and
be binding upon the Agent, PCS and the Primary Parties, and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
parties hereto and their respective successors and the controlling persons and
officers and directors referred to in Sections 10 and 11 and their heirs and
legal representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provisions herein contained. It is understood
and agreed that this Agreement is the exclusive agreement among the parties,
supersedes any prior Agreement among the parties and may not be varied except by
a writing signed by all parties.
SECTION 16. PARTIAL INVALIDITY. In the event that any term, provision
or covenant herein or the application thereof to any circumstances or situation
shall be invalid or unenforceable, in whole or in part, the remainder hereof and
the application of said term, provision or covenant to any other circumstance or
situation shall not be affected thereby, and each term, provision or covenant
herein shall be valid and enforceable to the full extent permitted by law.
SECTION 17. CONSTRUCTION. This Agreement shall be construed in
accordance with the laws of the State of Ohio.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become
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a binding agreement between you and us in accordance with its terms.
Very truly yours,
RIVERVIEW BANCORP, INC.
By:_____________________________
Patrick Sheaffer,
Chairman of the Board, President
and Chief Executive Officer
RIVERVIEW, M.H.C.
By:_____________________________
Patrick Sheaffer
Chairman of the Board, President
and Chief Executive Officer
RIVERVIEW SAVINGS BANK, FSB
By:________________________
Patrick Sheaffer,
Chairman of the Board, President
and Chief Executive Officer
The foregoing Agency Agreement is hereby confirmed and accepted as of the date
first set and above written.
CHARLES WEBB & COMPANY, A DIVISION
OF KEEFE, BRUYETTE & WOODS, INC.
By:_______________________________
Patricia A. McJoynt,
Executive Vice President and
Chief Operating Officer
PACIFIC CREST SECURITIES, INC.
By:_______________________________
Name:
Title:
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RIVERVIEW BANCORP, INC.
(A Washington Corporation)
Up to 2,760,000 Shares
(Par Value $.01 Per Share)
SELECTED DEALERS' AGREEMENT
_______________, 1997
Ladies and Gentlemen:
We have agreed to assist Riverview, M.H.C. (the "MHC"), a federally
chartered mutual holding company, and Riverview Savings Bank, FSB ("Riverview
Savings" or the "Bank"), a federally chartered stock savings bank, in connection
with the offer and sale of up to 2,760,000 shares of the common stock, $0.01 par
value per share (the "Common Stock"), of Riverview Bancorp, Inc. (the "Holding
Company"). Theses shares are to be issued in connection with the reorganization
of the Bank from a subsidiary of the MHC to a wholly owned subsidiary of the
Holding Company (the "Reorganization") in accordance with the Plan of Conversion
from Mutual Holding Company to Stock Holding Company and Agreement and Plan of
Reorganization (the "Plan"). The offering price per share of the Common Stock
has been fixed at $10.00. The Common Stock and certain of the terms on which it
is being offered are more fully described in the enclosed prospectus dated
______________, 1997 (the "Prospectus"). Capitalized terms not otherwise defined
herein shall have the meaning ascribed to them in the Prospectus.
In connection with the Reorganization, the Holding Company is offering
the Common Stock in a Subscription Offering to the Eligible Account Holders, the
ESOP, the Supplemental Eligible Account Holders and the Other Members, and
concurrently therewith, in a Direct Community Offering to members of the general
public, with preference given first to Public Stockholders (who are not Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members) and
then to natural persons and trusts of natural persons who are permanent
residents of Clark, Cowlitz, Klickitat and Skamania Counties of Washington. The
Common Stock is also being offered in accordance with the Plan by a selling
group of broker-dealers in the Syndicated Offering.
We are offering the selected dealers (of which you are one) the
opportunity to participate in the solicitation of offers to buy the Common Stock
and we will pay you a fee in the amount of _______ percent (______%) of the
dollar amount of the Common Stock sold on behalf of the Holding Company by you,
as evidenced
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by the authorized designation of your firm on the order form or forms for such
Common Stock accompanying the funds transmitted for payment therefor to the
special account established by the Bank for the purpose of holding such funds.
Any purchase of Common Stock made pursuant to this Agreement is subject to the
maximum purchase limitations provided for in the Plan and described in the
Prospectus. It is understood, of course, that payment of your fee will be made
to you directly by the Holding Company for the Common Stock sold on behalf of
the Holding Company by you, as evidenced in accordance with the preceding
sentence. As soon as practicable after the closing date of the Conversion
Offerings, the Holding Company will remit to you the fees to which you are
entitled hereunder.
Each order form for the purchase of Common Stock must set forth the
identity and address of each person to whom the certificates for such Common
Stock should be issued and delivered. Such order form should clearly identify
your firm. You shall instruct any subscriber who elects to send his order form
to you to make any accompanying check payable to the Bank.
This offer is made subject to the terms and conditions herein set forth
and contained in the Plan and is made only to selected dealers who are (i)
members in good standing of the National Association of Securities Dealers, Inc.
(the "NASD") who are to comply with all applicable rules of the NASD, including,
without limitation, the NASD's Interpretation With Respect to Free-Riding and
Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice,
or (ii) foreign dealers not eligible for membership in the NASD who agree (A)
not to sell any Common Stock within the United States, its territories or
possessions or to persons who are citizens thereof or resident therein and (B)
in making other sales to comply with the above-mentioned NASD Interpretation,
Sections 8, 24 and 36 of the above-mentioned Article III as if they were NASD
members and Section 25 of such Article III as it applies to non-member brokers
or dealers in a foreign country.
Orders for Common Stock will be strictly subject to confirmation and
we, acting on behalf of the Holding Company, reserve the right in our
uncontrolled discretion to reject any order in whole or in part, to accept or
reject orders in the order of their receipt or otherwise, and to allot. Neither
you nor any other person is authorized by the Holding Company or by us to give
any information or make any representations other than those contained in the
Prospectus in connection with the sale of any of the Common Stock. No selected
dealer is authorized to act as agent for us when soliciting offers to buy the
Common Stock from the public or otherwise. No selected dealer shall engage in
any stabilizing (as defined in Regulation M promulgated under the Securities
Exchange Act of 1934) with respect to the Common Stock during the offering.
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We and each selected dealer assisting in selling Common Stock pursuant
hereto agree to comply with the applicable requirements of the Securities
Exchange Act of 1934 and applicable state rules and regulations. In addition, we
and each selected dealer confirm that the Securities and Exchange Commission
interprets Rule 15c2-8 promulgated under the Securities Exchange Act of 1934 as
requiring that a Prospectus be supplied to each person who is expected to
receive a confirmation of sale 48 hours prior to delivery of such person's order
form.
We and each selected dealer within the meaning of Rule 15c3-1(a)(1)
further agree to the extent that our customers desire to pay for shares with
funds held by or to be deposited with us, in accordance with the interpretation
of the Securities and Exchange Commission of Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934, either (a) upon receipt of an executed order
form or direction to execute an order form on behalf of a customer to forward
the offering price for the Common Stock ordered on or before twelve noon of the
business day following receipt or execution of an order form by us to the
Holding Company for deposit in a segregated account or (b) to solicit
indications of interest in which event (i) we will subsequently contact any
customer indicating interest to confirm the interest and give instructions to
execute and return an order form or to receive authorization to execute the
order form on the customer's behalf, (ii) we will mail acknowledgements of
receipt of orders to each customer confirming interest on the business day
following such confirmation, (iii) we will debit accounts of such customers on
the third business day (the "Debit Date") following receipt of the confirmation
referred to in (i), and (iv) we will forward completed order forms together with
such funds to the Holding Company on or before twelve noon on the next business
day following the Debit Date for deposit in a segregated account. We and each
selected dealer acknowledge that if the procedure in (b) is adopted, our
customers' funds are not required to be in their accounts until the Debit Date.
Unless earlier terminated by us, this Agreement shall terminate upon
the closing date of this offering. We may terminate this Agreement or any
provisions hereof at any time by written or telegraphic notice to you. Of
course, our obligations hereunder are subject to the successful completion of
the offering.
You agree that at any time or times prior to the termination of this
Agreement you will, upon our request, report to us the number of shares of
Common Stock sold on behalf of the Holding Company by you under this Agreement.
We shall have full authority to take such actions as we may deem
advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack
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of good faith and for obligations expressly assumed by us in this Agreement.
Upon application to us, we will inform you as to the states in which we
believe the Common Stock has been qualified for sale under, or are exempt from
the requirements of, the respective blue sky laws of such states, but we assume
no responsibility or obligation as to your rights to sell Common Stock in any
state.
Additional copies of the Prospectus and any supplements thereto will be
supplied in reasonable quantities upon request.
Any notice from us to you shall be deemed to have been duly given if
mailed, telephoned, or telegraphed to you at the address to which this Agreement
is mailed.
This Agreement shall be construed in accordance with the laws of the
State of Ohio.
Please confirm your agreement hereto by signing and returning the
confirmation accompanying this letter at once to us at Charles Webb & Company,
211 Bradenton, Dublin, Ohio 43017-3514. The enclosed duplicate copy will
evidence the
agreement between us.
CHARLES WEBB & COMPANY
By:_______________________________
Patricia A. McJoynt
Executive Vice President
Agreed and accepted as of ________________, 1997
- ------------------------------
By:___________________________
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Exhibit 23.1
Consent of Deloitte & Touche LLP
Deloitte &
Touche LLP
- ----------- ---------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 S.W. Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Riverview, M.H.C.
Riverview Savings Bank, FSB
Camas, Washington
We consent to the use in this Pre-Effective Amendment No. 2 to the Registration
Statement of Riverview Bancorp, Inc. on Form S-1 of our report dated May 27,
1997 appearing in the Prospectus, which is part of this Registration Statement,
relating to the consolidated financial statements of Riverview Savings Bank,
FSB and Subsidiary, which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" contained in the
Prospectus, which is a part of such Registration Statement.
/s/ Deloitte & Touche
DELOITTE & TOUCHE LLP
Portland, Oregon
August 8, 1997
- ---------------
Deloitte Touche
Tohmatsu
International
_______________
