<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
AMENDMENT NO. 1 TO FORM 8-K FILED JUNE 22, 1998
/ / CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Amended Report: August 7, 1998
HERITAGE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Washington
(State or other jurisdiction of incorporation organization)
91-1857900 Commission File No.
(IRS Employer or 000-29480
Identification No.)
201 Fifth Avenue SW, Olympia, WA 98501
(Address of principal executive office) (ZIP code)
(360) 943-1500
(Registrant's telephone number, including area code)
<PAGE>
AMENDMENT NO. 1 TO FORM 8-K
FORM 8-K/A
HERITAGE FINANCIAL CORPORATION
Olympia, Washington
The Company hereby amends ITEM 7 of the Company's FORM 8-K dated June 22, 1998
reporting the Company's acquisition of all of the outstanding common stock of
North Pacific Bancorporation to include the requisite financial statements of
North Pacific Bancorporation and pro forma financial statements.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 12, 1998, Heritage Financial Corporation (the "Company") acquired all of
the outstanding common stock of North Pacific Bancorporation whose wholly owned
subsidiary is North Pacific Bank. North Pacific Bank operates two banking
offices in Tacoma, Washington with assets of $81.3 million at May 31, 1998.
Based on a formula which includes the earnings of North Pacific Bank from
January 1, 1998 through June 12, 1998 less certain adjustments, the Company paid
approximately $17.5 million in cash (and approximately $0.1 million in
transaction costs) to acquire all of the outstanding common stock of North
Pacific Bancorporation from its sole stockholder. The funds that the Company
utilized in this transaction were held in short term investments and were part
of the net proceeds from the Company's January 1998 stock offering. Subsequent
to the consummation of the acquisition, the holding company, called North
Pacific Bancorporation, was merged into Heritage Financial Corporation. At a
future date, the Company intends to merge the operations of North Pacific Bank
with and into Heritage Bank. This transaction will be accounted for using the
purchase method of accounting. Effective June 18, 1998, Mr. Peter Wallerich,
former Chairman and Chief Executive Officer of North Pacific Bancorporation,
became a director of the Company.
The Plan of Stock Purchase and Agreement to Merge was previously filed by the
Company on May 12, 1998 with its March 31, 1998 10Q filing.
ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statement of Business Acquired
The audited financial statements of North Pacific Bancorporation as of
December 31, 1997 and 1996 and the years then ended are attached hereto as
Appendix A. North Pacific Bancorporation's Condensed Statements of Condition as
of March 31, 1998 (unaudited) and December 31, 1997, and unaudited Condensed
Statements of Income for the three months ended March 31, 1998 and 1997 are
attached hereto as Appendix B.
2
<PAGE>
(b) Pro Forma Financial Information
Unaudited pro forma condensed combined financial statements reflecting
consummation of the acquisition are attached hereto as Appendix C. The
unaudited pro forma condensed combined statement of financial condition as of
March 31, 1998 combines the historical consolidated statements of financial
condition of Heritage Financial Corporation ("HFC")and North Pacific Bank
("NP")as if the acquisition had occurred on such date after giving effect to
certain pro forma adjustments described in the accompanying notes. North
Pacific Bank's financial statements are included in the pro forma condensed
combined financial statements because the use of NP and its operations are more
indicative of the impact of this acquisition on HFC. The unaudited pro forma
condensed combined statements of income are presented as if the acquisition had
been consummated at the beginning of each period presented. Financial
information for North Pacific Bank, which has a December 31 fiscal year end, has
been adjusted to reflect a June 30 fiscal year end in order to present nine
month periods ended March 31, 1998 and 1997.
The unaudited pro forma condensed combined financial statements and notes
thereto reflect the application of the purchase method of accounting. The
unaudited pro forma condensed combined financial statements included herein are
not necessarily indicative of the future results of operations or the future
financial position of the combined entities or the results of operations and
financial position of the combined entities that would have actually occurred
had the transactions been in effect as of the dates or for the periods
presented.
c. EXHIBITS
(1) Exhibit 2 - The Plan of Stock Purchase and Agreement to Merge between the
Company and North Pacific Bancorporation (incorporated by reference to
EXHIBIT 2 to the Company's Form 10Q filed for the quarter ended March 31,
1998, file number 000-29480).
(2) EXHIBIT 23 - Consent of Knight, Vale & Gregory, Inc. P.S.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
HERITAGE FINANCIAL CORPORATION
Registrant
Date: August 7, 1998 /s/ Donald V. Rhodes
-----------------------------------------
Donald V. Rhodes, Chairman, President and
Chief Executive Officer
Date: August 7, 1998 /s/ James Hastings
-----------------------------------------
James Hastings, Vice President and
Treasurer
3
<PAGE>
ITEM 7(a). FINANCIAL STATEMENTS OF NORTH PACIFIC BANCORPORATION
Appendix A
North Pacific Bancorporation
and Subsidiary
CONSOLIDATED FINANCIAL REPORT
December 31, 1997
4
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT................................. 6
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................. 8
Consolidated Statements of Income............................ 9
Consolidated Statements of Changes in Shareholder's Equity... 10
Consolidated Statements of Cash Flows........................ 11-12
Notes to Consolidated Financial Statements................... 13-26
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
NORTH PACIFIC BANCORPORATION
Tacoma, Washington
We have audited the accompanying consolidated balance sheets of NORTH PACIFIC
BANCORPORATION AND SUBSIDIARY as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NORTH PACIFIC
BANCORPORATION AND SUBSIDIARY as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KNIGHT, VALE & GREGORY, INC., P.S.
/s/ Knight, Vale & Gregory, Inc., P.S.
January 7, 1998
Tacoma, Washington
6
<PAGE>
CONSOLIDATED
FINANCIAL
STATEMENTS
7
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
ASSETS
<S> <C> <C>
Cash and due from banks $ 4,258 $ 4,204
Interest bearing deposits in banks 2,615 2,262
Federal funds sold 4,500 4,000
Securities available for sale 14,628 14,329
Securities held to maturity (market value $2,976 and $3,281) 2,944 3,254
Loans 42,781 38,199
Allowance for credit losses 614 541
NET LOANS 42,167 37,658
Premises and equipment 1,983 1,994
Accrued interest receivable 488 470
Cash value of officers' life insurance 713 685
Other assets 160 162
TOTAL ASSETS $74,456 $69,018
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Deposits:
Demand $14,447 $13,343
Savings and interest-bearing demand 35,549 32,127
Time 14,292 13,100
TOTAL DEPOSITS 64,288 58,570
Accrued interest payable 95 120
Federal funds purchased and securities sold under agreements to repurchase 574 732
Subordinated capital debentures 500 500
Long-term debt 736 766
Other liabilities 264 368
TOTAL LIABILITIES 66,457 61,056
COMMITMENTS AND CONTINGENCIES - - - -
SHAREHOLDER'S EQUITY
Common stock, par value $1 per share;
50,000 shares authorized; 5,154 shares issued 5 5
Surplus 1,367 1,367
Retained earnings 6,598 6,582
Net unrealized gain on securities available for sale,
net of tax of $16 and $4, respectively 29 8
TOTAL SHAREHOLDER'S EQUITY 7,999 7,962
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $74,456 $69,018
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
North Pacific Bancorporation and Subsidiary
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
INTEREST INCOME
Loans $4,474 $4,399
Federal funds sold and deposits in banks 312 288
Securities available for sale - taxable 875 1,019
Securities held to maturity - tax-exempt 139 160
TOTAL INTEREST INCOME 5,800 5,866
INTEREST EXPENSE
Deposits 1,732 1,944
Federal funds purchased and securities sold under agreements to repurchase 25 17
Subordinated debentures 38 38
Long-term debt 44 48
TOTAL INTEREST EXPENSE 1,839 2,047
NET INTEREST INCOME 3,961 3,819
PROVISION FOR CREDIT LOSSES 90 - -
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 3,871 3,819
NON-INTEREST INCOME
Service charges on deposit accounts 261 289
Loan servicing fees 118 92
Gains on sales of loans 232 253
License department income 221 203
Other operating income 317 320
TOTAL NON-INTEREST INCOME 1,149 1,157
NON-INTEREST EXPENSE
Salaries 2,220 2,155
Employee benefits 451 550
Occupancy 230 229
Equipment 309 286
State B&O taxes 125 120
Other 979 820
TOTAL NON-INTEREST EXPENSE 4,314 4,160
INCOME BEFORE INCOME TAXES 706 816
INCOME TAXES 190 226
NET INCOME $ 516 $ 590
EARNINGS PER SHARE DATA
Basic earnings per share $100.11 $114.47
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,154 5,154
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
- --------------------------------------------------------------------------------
(Dollars in Thousands)
North Pacific Bancorporation and Subsidiary
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN ON
COMMON RETAINED SECURITIES
STOCK SURPLUS EARNINGS AVAILABLE FOR SALE TOTAL
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $5 $1,367 $5,992 $ 69 $7,433
Net income -- -- 590 -- 590
Valuation adjustments, net of tax -- -- -- (61) (61)
BALANCE AT DECEMBER 31, 1996 5 1,367 6,582 8 7,962
Net income -- -- 516 -- 516
Valuation adjustments, net of tax -- -- -- 21 21
Cash dividends paid -- -- (500) -- (500)
BALANCE AT DECEMBER 31, 1997 $5 $1,367 $6,598 $ 29 $7,999
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollars in Thousands)
North Pacific Bancorporation and Subsidiary
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 516 $ 590
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for credit losses 90 --
Depreciation and amortization 297 294
Deferred income taxes (benefit) (8) 31
Gain on sales of premises and equipment (10) --
Gains on sales of loans (232) (253)
Increase in cash value of officers' life insurance (28) (26)
(Increase) decrease in accrued interest receivable (18) 101
Increase in interest payable (25) (42)
Other, net (135) 519
NET CASH PROVIDED BY OPERATING ACTIVITIES 447 1,214
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities held to maturity
and available for sale 11,156 8,059
Purchases of securities available for sale (10,233) (5,988)
Purchases of securities held to maturity (850) (790)
Net increase in interest bearing deposits in banks (353) (1,237)
Net (increase) decrease in federal funds sold (500) 2,000
Purchases of premises and equipment (295) (100)
Proceeds from sales of premises and equipment 19 --
Proceeds from sales of loans 3,588 3,730
Net increase in loans (7,955) (2,249)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,423) 3,425
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings and
interest-bearing demand deposits 4,526 (2,454)
Net increase (decrease) in time deposits 1,192 (1,943)
Net increase (decrease) in federal funds purchased and securities sold (158) 458
Net repayment of long-term debt (30) (124)
Cash dividends paid (500) --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,030 (4,063)
NET INCREASE IN CASH AND DUE FROM BANKS 54 576
CASH AND DUE FROM BANKS
Beginning of year 4,204 3,628
END OF YEAR $ 4,258 $ 4,204
</TABLE>
(continued)
See notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(concluded) (Dollars in Thousands)
North Pacific Bancorporation and Subsidiary
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $1,864 $2,087
Income taxes 210 135
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES
Fair value adjustment of assets available for sale $ 33 $ (93)
Income tax effect of fair value adjustment (12) 32
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of North Pacific
Bancorporation (the Company) and its wholly owned subsidiary, North Pacific Bank
(the Bank). All significant intercompany transactions and balances have been
eliminated.
NATURE OF OPERATIONS
North Pacific Bancorporation is a one-bank holding company, with lending and
other activities concentrated in and around Tacoma and Pierce County,
Washington. The Bank has two branches; its primary source of revenue is
providing loans to customers, who are predominately small and middle-market
businesses.
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the date
of the balance sheet, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ significantly from those
estimates.
Certain prior year amounts have been reclassified to conform to 1997
presentation. All dollar amounts are stated in thousands, except per share
information.
SECURITIES HELD TO MATURITY
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income over the period
to maturity.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of debt and certain equity securities not
classified as securities held to maturity. Securities available for sale are
reported at fair value. Unrealized gains and losses, net of the related deferred
tax effect, are reported as a net amount in a separate component of
shareholder's equity. Realized gains and losses on securities available for
sale, determined using the specific identification method, are included in
earnings. Amortization of premiums and accretion of discounts are recognized in
interest income over the period to maturity.
Declines in the fair value of individual securities held to maturity and
available for sale below their cost that are other than temporary result in
write-downs of the individual securities to their fair value. Such write-downs
are included in earnings as realized losses.
(continued)
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOANS
Loans are stated at the amount of unpaid principal, reduced by an allowance for
credit losses. Interest on loans is accrued daily based on the principal amount
outstanding.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. Interest income is subsequently recognized only to the
extent cash payments are received.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries. The allowance is based on management's periodic evaluation of
potential losses in the loan portfolio after consideration of historical loss
experience, adverse situations that may affect the borrowers' ability to repay,
the estimated value of any underlying collateral, economic conditions, the
results of examination of individual loans, the evaluation of the overall
portfolio by senior credit personnel and federal and state regulatory agencies,
and other risks inherent in the portfolio. This evaluation requires the use of
current estimates, which may vary from the ultimate collectibility experienced
in the future. The estimates used are reviewed periodically and, as adjustments
become necessary, they are charged to operations in the period in which they
become known.
When management determines it is possible that a borrower will be unable to
repay all amounts due according to the terms of the loan agreement, including
scheduled interest payments, the loan is considered impaired. The amount of
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or when the primary source of
repayment is provided by real estate collateral, at the fair value of the
collateral less estimated selling costs. The amount of impairment and any
subsequent charges are recorded through the provision for credit losses as an
adjustment to the allowance for credit losses.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation, which
is computed on a straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is less.
Gains or losses on dispositions are reflected in earnings.
(continued)
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
CASH AND CASH EQUIVALENTS
The Company considers all amounts due from depository institutions to be cash
equivalents.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which
the Company adopted in the fourth quarter of 1997. SFAS No. 128 requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
exclude dilution and are computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share reflect the
potential dilution that could occur if common shares were issued pursuant to the
exercise of options under the Company's stock option plans. There was no change
in previously reported earnings per share as a result of adopting this
pronouncement.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements of
Accounting Standards Nos. 130, Reporting Comprehensive Income, and 131,
Disclosures about Segment of an Enterprise and Related Information, both of
which are effective for years beginning after December 31, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items that
are required to be recognized under accounting standards as components of
comprehensive income will have to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Also, the
accumulated balance of other comprehensive income will have to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS No. 131 requires that public enterprises
report financial and descriptive information about their reportable operating
segments. Both of these pronouncements will require additional disclosures about
the Company's operations, but are not anticipated to have any effect on
financial position or results of operations.
NOTE 2 - RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum
reserve balances on deposit with the Federal Reserve Bank. The amounts of such
balances for the years ended December 31, 1997 and 1996 were approximately $472
and $255, respectively.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 3 - DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and their approximate fair values at
December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
U.S. Government and agency securities $12,739 $41 $ 2 $12,778
Corporate securities 1,505 6 -- 1,511
Equity securities 339 -- -- 339
TOTAL $14,583 $47 $ 2 $14,628
DECEMBER 31, 1996
U.S. Government and agency securities $12,991 $26 $10 $13,007
Corporate securities 1,011 -- 4 1,007
Equity securities 315 -- -- 315
TOTAL $14,317 $26 $14 $14,329
SECURITIES HELD TO MATURITY
DECEMBER 31, 1997
State and municipal securities $ 2,944 $33 $ 1 $ 2,976
DECEMBER 31, 1996
State and municipal securities $ 3,254 $33 $ 6 $ 3,281
</TABLE>
(continued)
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 3 - DEBT AND EQUITY SECURITIES (concluded)
The scheduled maturities of debt securities held to maturity and available for
sale at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 651 $ 657 $ 2,997 $ 2,999
Due from one year to five years 1,443 1,459 10,747 10,790
Due after ten years 850 860 500 500
TOTAL $2,944 $2,976 $14,244 $14,289
</TABLE>
Securities carried at approximately $2,687 (market value of $2,705) at December
31, 1997 and $2,865 (market value of $2,866) at December 31, 1996 were pledged
to secure public deposits and for other purposes required or permitted by law.
NOTE 4 - LOANS
Loans at December 31 consist of the following:
1997 1996
Commercial $ 8,308 $ 9,502
Real estate construction 3,027 2,948
Real estate mortgage:
Residential 8,557 8,422
Non-residential 22,068 16,881
Consumer 1,075 753
43,035 38,506
Less unearned income 254 307
TOTAL LOANS $42,781 $38,199
(continued)
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 4 - LOANS (concluded)
Changes in the allowance for credit losses for the years ended December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Balance at beginning of year $541 $559
Provision for credit losses 90 --
Charge-offs (17) (29)
Recoveries -- 11
NET CHARGE-OFFS (17) (18)
BALANCE AT END OF YEAR $614 $541
</TABLE>
The recorded investment in impaired loans was $175 and $117 at December 31, 1997
and 1996, respectively. No allocation of the allowance for credit losses was
considered necessary for these impaired loans. The average recorded investment
in impaired loans during the years ended December 31, 1997 and 1996 was $119 and
$360, respectively. Income recognized on impaired loans totaled $12 in 1997 and
$153 in 1996.
At December 31, 1997, there were no commitments to lend additional funds to
borrowers whose loans have been modified. Loans 90 days and over past due still
accruing interest totaled $182 and $128 at December 31, 1997 and 1996,
respectively.
Certain related parties of the Company, principally directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1997 and 1996. Total loans outstanding at December 31, 1997 and 1996 to
key officers and directors were $145 and $90, respectively. Gross principal
payments totaled $90 and $71 during the years ended December 31, 1997 and 1996,
respectively. New advances of $145 were made during 1997; none were made in
1996.
Government guaranteed loans serviced for others are not included in the
accompanying balance sheets. The unpaid principal balances of guaranteed loans
serviced for others were $8,617 and $6,516 at December 31, 1997 and 1996,
respectively.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 310 $ 310
Buildings 2,517 2,364
Equipment, furniture and fixtures 2,196 2,073
5,023 4,747
Less accumulated depreciation and amortization 3,040 2,753
TOTAL PREMISES AND EQUIPMENT $1,983 $1,994
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of certificates of deposit, each with a balance in excess
of one hundred thousand dollars, was $2,978 and $3,100 at December 31, 1997 and
1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit are as
follows:
0 - 90 days $4,663
91 - 365 days 7,682
Over 1 year 1,947
$14,292
NOTE 7 - LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
1997 1996
Note payable to Federal Home Loan Bank, payable in
monthly installments of $2, plus interest at
5.95%, collateralized by U.S. Government
securities, maturing on January 2, 2009 $381 $401
Note payable to Federal Home Loan Bank, interest
payable monthly at 6.48%, collateralized by
U.S. Government securities, maturing on
September 6, 2005 328 328
Note payable to Tacoma City Light, payable in
monthly installments of principal and
interest of $1, interest imputed at 6.25%,
maturing on October 1, 2000 27 37
TOTAL LONG-TERM DEBT $736 $766
(continued)
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 7 - LONG-TERM DEBT (concluded)
Minimum annual principal payments are as follows for future years ending
December 31:
1998 $ 30
1999 30
2000 27
2001 20
2002 20
Thereafter 609
$736
NOTE 8 - SUBORDINATED CAPITAL DEBENTURES
In 1991, the Bank issued uncollateralized, subordinated debentures totaling
$500. The debentures bear interest at 8.5%, adjustable annually at two
percentage points above the average October yields for 52-week Treasury Bills.
Interest is payable quarterly, and the obligations mature December 31, 1998. At
December 31, 1997, the interest rate was 7.64%.
NOTE 9 - EMPLOYEE BENEFITS
The Company has a 401(k) defined contribution plan for those employees who meet
the eligibility requirements set forth in the plan. Contributions to the plan,
adopted in January 1986, are at the discretion of the Bank's Board of Directors
and are limited to 4% of employee compensation. Eligible employees can
contribute up to 15% of compensation. The Bank's contribution to the plan was
$58 in 1996; no contribution was made in 1997.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN
In December 1996, the Company adopted an Employee Stock Ownership Plan (ESOP)
for those employees who meet the eligibility requirements set forth in the plan.
The ESOP is a combination of a money purchase plan and a stock bonus plan.
Eligible employees can contribute up to 15% of compensation. Employer
contributions to the plan are paid in an amount equal to 10% of the compensation
of all participants entitled to share in the allocation for the plan year.
Additional employer contributions to the ESOP are at the discretion of the Board
of Directors. Employer contributions to the ESOP were $170 in 1997 and $200 in
1996.
The Company is in the process of securing outside financing for a possible
initial purchase of stock for the ESOP. Any such debt incurred would be
guaranteed by the Company.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 11 - INCOME TAXES
Income taxes are comprised of the following for the years ended December 31:
1997 1996
Current $198 $195
Deferred (benefit) (8) 31
TOTAL INCOME TAXES $190 $226
The following is a reconciliation between the statutory and the effective
federal income tax rates for the years ended December 31:
<TABLE>
<CAPTION>
1997 PERCENT 1996 PERCENT
OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C>
Income tax at statutory rates $240 34.0% $278 34.0%
Decrease resulting from:
Tax-exempt income (43) (6.1) (48) (5.9)
Other (7) (1.0) (4) (.5)
TOTAL INCOME TAX EXPENSE $190 26.9% $226 27.6%
</TABLE>
The effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at December 31, 1997 and 1996 are presented
below:
1997 1996
DEFERRED TAX ASSETS
Allowance for credit losses $113 $ 94
DEFERRED TAX LIABILITIES
Accumulated depreciation 53 56
Unrealized gain on securities available for sale 16 4
Deferred income 88 74
TOTAL DEFERRED TAX LIABILITIES 157 134
NET DEFERRED TAX LIABILITIES ($ 44) ($ 40)
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the
Bank's commitments is as follows:
Commitments to extend credit $9,117
Standby letters of credit 375
Commercial letters of credit 968
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. The total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 60% to 70% of loan commitments are
drawn upon by customers. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the party. Collateral held varies, but may include accounts receivable,
inventory, property and equipment, residential real estate, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems necessary.
The Bank has agreements with other commercial banks and the Federal Home Loan
Bank for lines of credit totaling $10,448. At December 31, 1997, these lines
were unused.
Because of the nature of its activities, the Company is subject to various
pending and threatened legal actions which arise in the ordinary course of
business. In the opinion of management, liabilities arising from these claims,
if any, will not have a material effect on the financial position of the
Company.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 13 - CONCENTRATION OF CREDIT RISK
The Bank has credit risk exposure, including off-balance-sheet credit risk
exposure, related to commercial loans as disclosed in Notes 4 and 12. The
ultimate collectibility of a substantial portion of the loan portfolio is
susceptible to changes in economic and market conditions in the region. The
Bank does have a concentration of loans to gas stations and convenience stores.
These loans account for approximately 14% of the loan portfolio at December 31,
1997. The Bank generally requires collateral on its loan exposures, and
typically maintains loan-to-value ratios of no greater than 75%.
Investments in state and municipal securities involve governmental entities
within the State of Washington. The distribution of commitments to extend
credit approximates the distribution of loans outstanding. Standby letters of
credit were granted primarily to commercial borrowers. The Bank, as a matter of
practice, generally does not extend credit to any single borrower or group of
related borrowers in excess of $1,000.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit, credit card arrangements, and letters of credit
represent the amounts of potential accounting loss should the contract be fully
drawn upon, the customer default, and the value of any existing collateral
become worthless.
NOTE 14 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS - DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash $ 50 $ 171
Investment in subsidiary 7,736 7,563
Receivable from subsidiary 213 240
TOTAL ASSETS $7,999 $7,974
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities $ -- $ 12
Shareholder's equity 7,999 7,962
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,999 $7,974
</TABLE>
(continued)
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 14 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (concluded)
CONDENSED STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
OPERATING INCOME
Dividends received from subsidiary $800 $600
OPERATING EXPENSES
Interest expense - - 2
Salaries and employee benefits 504 502
Other 157 24
TOTAL OPERATING EXPENSES 661 528
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 139 72
INCOME TAX BENEFIT 225 180
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 364 252
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 152 338
NET INCOME $516 $590
CONDENSED STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $516 $590
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of undistributed subsidiary (152) (338)
(Increase) decrease in receivable from subsidiary 27 (152)
Increase (decrease) in other assets and liabilities (12) 99
NET CASH PROVIDED BY OPERATING ACTIVITIES 379 199
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt - - (96)
Decrease in notes receivable - - 41
Cash dividends paid (500) - -
NET CASH USED IN FINANCING ACTIVITIES (500) (55)
NET CHANGE IN CASH (121) 144
CASH
Beginning of year 171 27
END OF YEAR $ 50 $171
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 15 - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional discretionary --
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines in the
regulatory framework for prompt corrective action, the Bank must meet specific
capital adequacy guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Tier 1 capital (as defined in the regulations) to total average
assets (as defined), and minimum ratios of Tier 1 and total capital (as defined)
to risk-weighted assets (as defined). Under the regulatory framework for prompt
corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-
based, and total risk-based ratios as set forth in the table.
As of December 31, 1997, the most recent notification from the Bank's regulator
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, and Tier 1 risk-based, Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
Management believes, as of December 31, 1997, that the Bank meets all capital
requirements to which it is subject.
The Company's and the Bank's actual capital amounts and ratios at December 31
are presented in the following table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Tier 1 capital (to average assets):
Consolidated $7,970 10.99% $2,901 4.00% N/A N/A
North Pacific Bank 7,707 10.63 2,901 4.00 $3,627 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 7,970 16.36 1,949 4.00 N/A N/A
North Pacific Bank 7,707 15.82 1,949 4.00 2,923 6.00
Total capital (to risk-weighted assets):
Consolidated 8,679 17.81 3,898 8.00 N/A N/A
North Pacific Bank 8,416 17.27 3,898 8.00 4,872 10.00
</TABLE>
(continued)
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
North Pacific Bancorporation and Subsidiary
December 31, 1997 and 1996
NOTE 15 - REGULATORY MATTERS (concluded)
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Tier 1 capital (to average assets):
Consolidated $7,954 11.58% $2,747 4.00% N/A N/A
North Pacific Bank 7,555 11.01 2,744 4.00 $3,430 5.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 7,954 19.03 1,672 4.00 N/A N/A
North Pacific Bank 7,555 18.10 1,670 4.00 3,340 6.00
Total capital (to risk-weighted assets):
Consolidated 8,676 20.76 3,344 8.00 N/A N/A
North Pacific Bank 8,277 19.83 3,340 8.00 4,175 10.00
</TABLE>
RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. At December 31, 1997, all of the
Bank's retained earnings were available for dividend declaration without prior
regulatory approval.
26
<PAGE>
Appendix B
NORTH PACIFIC BANCORPORATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
As of December 31, 1997 and March 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
ASSETS December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
Cash on hand and in banks $ 4,258 3,681
Interest earning deposits 2,615 2,900
Federal funds sold 4,500 5,500
Securities available for sale 14,628 11,622
Securities held to maturity 2,944 3,193
Loans 42,781 45,715
Less: Allowance for loan losses (614) (644)
------- -------
Net loans 42,167 45,071
Premises and equipment 1,983 1,997
Other assets 1,361 740
------- -------
Total assets $74,456 74,704
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits $64,288 63,822
Federal Home Loan Bank advances 709 704
Securities sold under agreements to
repurchase 574 509
Other borrowed funds 527 525
Other liabilities 359 1,022
Stockholder's equity 7,999 8,122
------- -------
Total liabilities and stockholder's
equity $74,456 74,704
======= =======
</TABLE>
27
<PAGE>
NORTH PACIFIC BANCORPORATION
CONDENSED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1997 and 1998
(Unaudited; in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1998
------ -----
<S> <C> <C>
Interest income $1,457 1,561
Interest expense 442 491
------ -----
Net interest income 1,015 1,070
Provision for loan losses 20 30
------ -----
Net interest income after provision
for loan losses 995 1,040
Other income 214 265
Other expense 1,090 1,177
------ -----
Income before Federal income tax 119 128
Federal income tax 12 17
------ -----
Net income $ 107 111
====== =====
Net income per share
Basic $20.76 21.54
Diluted 20.76 21.54
Weighted average number of common shares:
Basic 5,154 5,154
Diluted 5,154 5,154
</TABLE>
28
<PAGE>
Appendix C
Item 7(b). PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED COMBINED STATEMENTS OF FINANCIAL CONDITION
As of March 31, 1998
(Unaudited; Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ASSETS HFC NP Adjustments Combined
-------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Cash on hand and in banks $ 6,893 3,681 10,574
Federal funds sold - 2,900 2,900
Interest earning deposits 59,046 5,500 (17,609)(1) 46,937
Securities available for sale 1,602 11,622 13,224
Securities held to maturity 22,886 3,193 26,079
Loans held for sale 8,150 - 8,150
Loans 213,224 45,715 258,939
Less: Allowance for loan
losses (2,842) (644) (3,486)
-------- ------ ------ -------
Net loans 210,382 45,071 255,453
Premises and equipment 11,659 1,997 2,397 (2) 16,053
Other assets 2,188 740 8,026 (3) 10,954
-------- ------ ------ -------
Total assets $322,806 74,704 (7,186) 390,324
======== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $225,619 63,932 289,551
Federal Home Loan Bank
advances - 704 704
Securities sold under
agreements to repurchase - 509 509
Other borrowed funds - 525 525
Other liabilities 4,230 1,125 723 (4) 6,078
Stockholders' equity 92,957 7,909 (7,909) 92,957
-------- ------ ------ -------
Total liabilities and
stockholder's equity $322,806 74,704 (7,186) 390,324
======== ====== ====== =======
</TABLE>
(1) Represents acquisition purchase price plus transaction costs.
(2) Represents the fair value of premises in excess of book value. Fair value
of premises is based on appraised value at June 12, 1998.
(3) Represents estimated goodwill.
(4) Represents the deferred tax effects of the purchase accounting adjustments.
See accompanying Notes to Pro Forma Condensed Combined Financial Statements
29
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF INCOME
For the Year Ended June 30, 1997
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HFC NP Adjustments Combined
------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Interest income $18,512 5,936 (935) 23,513
Interest expense 9,000 1,848 - 10,848
------- ----- ------ ------
Net interest income 9,512 4,088 (935) 12,665
Provision for loan losses (270) 50 - (220)
------- ----- ------ ------
Net interest income after
provision for loan losses 9,782 4,038 (935) 12,885
Other income 3,347 1,082 - 4,429
Other expense 11,105 3,663 645 (1) 15,413
------- ----- ------ ------
Income before Federal
income tax (benefit) 2,024 1,457 (1,580) 1,901
Federal income tax (benefit) (245) 486 (342) (101)
------- ----- ------ ------
Net income $ 2,269 971 (1,238) 2,002
======= ===== ====== ======
Earnings per share:
Basic $0.24 0.10 (0.13) 0.21
Diluted 0.24 0.10 (0.13) 0.21
Weighted average number of
common shares:
Basic 9,309
Diluted 9,392
</TABLE>
(1) Includes amortization of estimated goodwill over a 15 year period.
30
<PAGE>
PRO FORMA CONDENSED STATEMENTS OF INCOME
For the Nine Months Ended March 31, 1998
(Unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
HFC NP Adjustments Combined
------- ----- ----------- ---------
<S> <C> <C> <C> <C>
Interest income $16,552 4,594 (726) 20,420
Interest expense 7,486 1,443 - 8,929
------- ----- ------ ------
Net interest income 9,066 3,151 (726) 11,491
Provision for loan losses 90 70 - 160
------- ----- ------ ------
Net interest income after
provision for loan losses 8,976 3,081 (726) 11,331
Other income 2,820 654 - 3,474
Other expense 8,069 2,822 484 11,375
------- ----- ------ ------
Income before Federal
income tax 3,727 913 (1,211) 3,429
Federal income tax 1,312 267 (247) 1,332
------- ----- ------ ------
Net income 2,415 646 (964) 2,097
======= ===== ====== ======
Earnings per share:
Basic $0.25 0.07 (0.10) 0.22
Diluted 0.25 0.07 (0.10) 0.22
Weighted average number of
common shares:
Basic 9,410
Diluted 9,615
</TABLE>
31
<PAGE>
NOTES TO PROFORMA CONDENSED COMBINED
STATEMENT OF FINANCIAL CONDITION AND STATEMENTS OF INCOME
NOTE 1. Basis of Presentation
The unaudited pro forma condensed combined statement of financial condition
as of March 31, 1998 combines the historical consolidated statements of
financial condition of Heritage Financial Corporation ("HFC") and North Pacific
Bank ("NP") as if the acquisition had occurred on March 31, 1998 after giving
effect to certain pro forma adjustments described in the accompanying notes.
North Pacific Bank's financial statements are included in the pro forma
condensed combined financial statements because the use of NP and its operations
are more indicative of the impact of this acquisition on HFC. The unaudited pro
forma condensed combined statements of income are presented as if the
acquisition had been consummated at the beginning of each period presented.
Financial information for North Pacific Bank, which has a December 31 fiscal
year end, has been adjusted to reflect a June 30 fiscal year end in order to
present the nine month period ended March 31, 1998 and the twelve months ended
June 30, 1997.
The unaudited pro forma condensed combined financial statements and notes
thereto reflect the application of the purchase method of accounting. The
unaudited pro forma condensed combined financial statements included herein are
not necessarily indicative of the future results of operations or the future
financial position of the combined entities or the results of operations and
financial position of the combined entities that would have actually occurred
had the transactions been in effect as of the dates or for the periods
presented.
NOTE 2. Pro Forma Adjustments
The pro forma adjustments to the pro forma condensed combined statements of
financial condition as of March 31, 1998 represent the purchase accounting
adjustments recorded at June 12, 1998 for the $17.5 million purchase price plus
transaction costs, and for the fair value of assets acquired and liabilities
assumed. However, because the stockholders' equity of the acquired entity is
shown at March 31, 1998 rather than June 12, 1998, this results in an estimated
goodwill of $8.0 million which differs from that recorded at June 12, 1998. For
purposes of the pro forma condensed statements of income, the amortization of
goodwill and the depreciation of the fair value of premises in excess of book
value are based on the June 12, 1998 figures and are based on terms of 15 years
and 25 years, respectively. The pro forma adjustment for the loss of interest
income related to the decrease in interest earning deposits of $17,609 (purchase
price plus transaction costs) is based on the average yield on interest earning
deposits during the nine months ended March 31, 1998 and the twelve months ended
June 30, 1997.
NOTE 3. Earnings Per Share
Earnings per share (basic and diluted) for the nine months ended March 31,
1997 and 1998 were computed based on Heritage Financial Corporation's weighted
average shares outstanding during each period. Earnings per share information
for periods prior to the Company's January 8, 1998 stock offering and conversion
is based on the historical
32
<PAGE>
weighted average common shares outstanding for Heritage Bank during the
applicable period multiplied by the exchange ratio utilized in the stock
conversion (5.1492).
33
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Form 8-K of our report, dated January 7,
1998, relating to the consolidated financial statements of North Pacific
Bancorporation and Subsidiary.
/s/ Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington
August 7, 1998
