<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-29480
HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-1857900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 6, 1998 there were outstanding 9,763,290 common shares, with no par
value, of the registrant.
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HERITAGE FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page
- --------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Statements of Income for the Three and 3
Nine Months Ended March 31, 1997 and 1998
Consolidated Statements of Financial Condition 4
As of June 30, 1997 and March 31, 1998
Consolidated Statement of Stockholders' Equity 5
for the Nine Months Ended March 31, 1998
Consolidated Statements of Cash Flows for the 6
Nine Months Ended March 31, 1997 and 1998
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 17
Risk
PART II. Other Information
Item 2. Change in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
</TABLE>
Page 2
<PAGE>
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------------------------------------
1997 1998 1997 1998
------ ----- ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $4,225 4,925 12,180 14,525
Mortgage backed securities 115 100 355 308
Investment securities and FHLB dividends 151 209 596 505
Interest bearing deposits 101 888 511 1,214
------ ----- ------ ------
Total interest income 4,592 6,122 13,642 16,552
INTEREST EXPENSE:
Deposits 2,199 2,510 6,715 7,478
Borrowed funds - - - 8
------ ----- ------ ------
Total interest expense 2,199 2,510 6,715 7,486
------ ----- ------ ------
Net interest income 2,393 3,612 6,927 9,066
PROVISION FOR LOAN LOSSES - 30 - 90
------ ----- ------ ------
Net interest income after provision for loan 2,393 3,582 6,927 8,976
loss
NONINTEREST INCOME:
Gains on sales of loans 385 717 1,498 1,819
Commissions on sales of annuities
and securities 77 32 168 106
Service charges on deposits 113 143 343 397
Rental income 50 52 159 156
Gains on sale of premises - - - 36
Other income 101 103 271 306
------ ----- ------ ------
Total noninterest income 726 1,047 2,439 2,820
NONINTEREST EXPENSE:
Salaries and employee benefits 1,361 1,507 4,034 4,470
Building occupancy 432 440 1,206 1,297
FDIC premiums and special assessment - 34 1,229 98
Data processing 143 170 401 494
Marketing 57 93 155 275
Office supplies and printing 56 60 180 188
Other 351 545 999 1,247
------ ----- ------ ------
Total noninterest expense 2,400 2,849 8,204 8,069
------ ----- ------ ------
Income before federal income tax (benefit) 719 1,780 1,162 3,727
Federal income tax (benefit) 245 621 (540) 1,312
------ ----- ------ ------
Net income $ 474 1,159 1,702 2,415
====== ===== ====== ======
Earnings per share:
Basic $ 0.05 0.12 0.18 0.26
Diluted $ 0.05 0.11 0.18 0.25
</TABLE>
See Notes to Condensed Financial Statements
Page 3
<PAGE>
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
-----------------------------------
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 7,412 6,893
Interest earning deposits 175 59,046
Investment securities held to maturity 8,506 18,542
Mortgage backed securities held to maturity 5,159 4,344
Loans held for sale 6,323 8,150
Loans receivable 201,870 213,224
Less: Allowance for loan losses (2,752) (2,842)
-----------------------------------
Loans, net 199,118 210,382
Real Estate Owned - 79
Premises and equipment, net 12,202 11,659
Federal Home Loan Bank stock 1,511 1,602
Accrued interest receivable 1,380 1,773
Prepaid expenses and other assets 378 336
-----------------------------------
$242,164 322,806
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 209,781 225,619
Advances from Federal Home Loan Bank 890 -
Advance payments by borrowers for taxes and insurance 473 752
Accrued expenses and other liabilities 2,605 2,777
Deferred Federal income taxes 701 701
-----------------------------------
214,450 229,849
Stockholders' equity:
Preferred stock, $1 par value per share, 5,000,000 shares authorized;
none outstanding - -
Common stock, $1 par value per share,10,000,000 shares authorized;
1,809,616 shares outstanding 1,810 -
Preferred stock, no par value per share, 2,500,000 shares authorized;
none outstanding - -
Common stock, no par value per share,15,000,000 shares authorized;
9,755,067 shares outstanding - 70,398
Additional paid-in capital 4,103 -
Unallocated common stock held by ESOP - (1,315)
Retained earnings, substantially restricted 21,801 23,874
-----------------------------------
Total stockholders' equity 27,714 92,957
Commitments and contingencies
-----------------------------------
$242,164 322,806
===================================
</TABLE>
See Notes to Condensed Financial Statements
Page 4
<PAGE>
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended March 31, 1998
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
UNALLOCATED
ADDITIONAL COMMON TOTAL
COMMON PAID IN STOCK HELD BY RETAINED STOCKHOLDERS'
STOCK CAPITAL ESOP EARNINGS EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 1,810 4,103 - 21,801 27,714
Offering proceeds 64,352 - (1,322) - 63,030
ESOP loan repayments - - 7 - 7
Conversion transaction 4,223 (4,103) - - 120
Exercise of stock options 13 - - - 13
Net income - - - 2,415 2,415
Cash dividend declared - - - (342) (342)
------------------------------------------------------------------------------------------
Balance at March 31, 1998 $70,398 - (1,315) 23,874 92,957
==========================================================================================
</TABLE>
See Notes to Condensed Financial Statements
Page 5
<PAGE>
HERITAGE FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,702 2,415
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization 704 756
Deferred loan fees, net of amortization 5 (124)
Provision for loan losses (2) 90
Net increase(decrease) in loans held for sale 1,847 (1,827)
Deferred Federal income tax expense (benefit) (960) -
Federal Home Loan Bank stock dividends (83) (91)
Net change in accrued interest receivable, prepaid expenses and
other assets, and accrued expenses and other liabilities 1,356 (514)
--------------------
Net cash provided by operating activities 4,569 705
--------------------
Cash flows from investing activities:
Loans originated, net of principal payments and loan sales (29,099) (11,309)
Principal payments of mortgage backed securities 611 822
Proceeds from maturities of investment securities held to maturity 9,160 5,170
Purchase of investment securities held to maturity (2,360) (15,194)
Purchase of premises and equipment (1,539) (231)
--------------------
Net cash used in investing activities (23,227) (20,742)
--------------------
Cash flows from financing activities:
Net increase in deposits 8,926 15,957
Net decrease in FHLB advances - (890)
Net increase in advance payment by borrowers for taxes
and insurance 298 279
Cash dividends paid (228) -
Proceeds from exercise of stock options 28 13
Proceeds received for stock conversion - 63,030
--------------------
Net cash provided by financing activities 9,024 78,389
--------------------
Net increase(decrease) in cash and cash equivalents (9,634) 58,352
Cash and cash equivalents at beginning of period 18,082 7,587
--------------------
Cash and cash equivalents at end of period $ 8,448 65,939
====================
Supplemental disclosures of cash flow information:
Cash payments for:
Interest expense $ 6,702 7,513
Federal income taxes 420 1,220
</TABLE>
See Notes to Condensed Financial Statements
Page 6
<PAGE>
HERITAGE FINANCIAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Nine Months Ended March 31, 1998 and 1997
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
(a.) Description of Business
Heritage Financial Corporation (the "Company") was recently organized as the
holding company for the Heritage Savings Bank (the "Bank"). Effective January 8,
1998, the Company closed its second step conversion and stock offering which
resulted in $66.1 million in gross proceeds. Effective January 9, 1998, the
Company's common stock began to trade on the Nasdaq National Market under the
symbol "HFWA". Prior to January 8, 1998 the Bank was majority-owned by Heritage
Financial Corporation, M.H.C. (MHC), a Washington state mutual holding company,
whose securities were not registered pursuant to the Securities Exchange Act of
1934, nor publicly traded. Effective January 8, 1998, the MHC was merged into
the Bank.
(b.) Basis of Presentation
The financial statements shown herein are for the Bank only through December 31,
1997 and for the consolidated Company thereafter. The accompanying consolidated
financial statements have been prepared, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These consolidated
financial statements should be read in conjunction with the Bank's June 30, 1997
audited consolidated financial statements and notes thereto included in the
Company's recent Registration Statement on Form S-1 filed with the Securities
and Exchange Commission under file number 333-35573. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ended June 30, 1998. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets, contingent assets and
liabilities and revenues and expenses for the periods presented.
NOTE 2. STOCKHOLDERS' EQUITY
(a.) Stock Offering and Conversion
Effective January 8, 1998, the Company sold 6.6 million shares of its common
stock at a subscription price of $10 per share to the Bank's customers, its
existing stockholders and the general public.
Of the 1.8 million shares of Heritage Savings Bank common stock outstanding at
December 31, 1997, 1.2 million shares owned by Heritage Financial Corporation,
M.H.C. (the "Mutual Holding Company") were canceled on January 8, 1998 and the
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Mutual Holding Company was merged into the Bank. The remaining 0.6 million
shares of the Bank's common stock owned by its stockholders were converted into
3.1 million shares of the Company's common stock outstanding.
(b.) Earnings per Share
The Company adopted the Financial Accounting Standards Board ("FASB") Statement
No. 128, "Earnings Per Share" for the period ending December 31, 1997. This
statement establishes standards for computing and presenting earnings per share
("EPS"). It replaced the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted average number of common shares
outstanding (the denominator) during the period. Shares issued during the
period and shares reacquired during the period are weighted for the portion of
the period that they were outstanding. Diluted earnings per share is similar
to the computation of basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive options outstanding had been exercised. The
following tables illustrate the reconciliation of weighted average shares used
for earnings per share for the applicable periods.
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1998
------------------------
<S> <C> <C>
Basic:
Weighted average shares 1,808,299 9,719,506
Effect of stock conversion 7,502,994 -
------------------------
Weighted average shares outstanding 9,311,293 9,719,506
========================
Diluted:
Basic weighted average share outstanding 9,311,293 9,719,506
Incremental shares from stock options 79,262 424,839
------------------------
Weighted average shares outstanding 9,390,555 10,144,345
========================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
March 31,
1997 1998
------------------------
<S> <C> <C>
Basic:
Weighted average shares 1,807,543 9,449,932
Effect of stock conversion 7,499,859 -
------------------------
Weighted average shares outstanding 9,307,403 9,449,932
========================
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Diluted:
Basic weighted average share outstanding 9,307,403 9,449,932
Incremental shares from stock options 82,058 204,636
------------------------
Weighted average shares outstanding 9,389,461 9,654,568
========================
</TABLE>
Earnings per share information for periods prior to January 8, 1998 is based on
the historical weighted average common shares outstanding for the Bank during
the applicable period multiplied by the exchange ratio utilized in the stock
conversion (5.1492). On January 8, 1998, the former stockholders of the Bank
received 5.1492 shares of the Company's common stock for each share of the
Bank's common stock exchanged.
c. Cash Dividend Declared
On March 24, 1998, the Company announced a quarterly cash dividend of 3.5 cents
per share payable on April 15, 1998 to shareholders of record on April 6, 1998.
NOTE 3. FEDERAL INCOME TAXES
The Bank recorded a Federal income tax benefit of $540,000 for the nine months
period ended March 31, 1997 as a result of the reversal of $938,000 deferred tax
liability related to the potential recapture of the pre-1988 additions to the
tax bad debt reserve which could have been triggered by the Mutual Holding
Company reorganization in January 1994. Based on subsequent legislation in
August 1996, the Bank reversed the $938,000 deferred tax liability as a
reduction of Federal income tax expense during the quarter ended September 30,
1996.
NOTE 4. SUBSEQUENT EVENT - ACQUISITION
On April 6, 1998, the Company announced an agreement to acquire all of the
outstanding stock of North Pacific Bancorporation whose wholly owned subsidiary
is North Pacific Bank. Based on a formula which includes the earnings of North
Pacific Bank from January 1, 1998 through the consummation date less certain
adjustments, the Company expects to pay approximately $18 million in cash to
acquire all of the stock of North Pacific Bancorporation from its sole
stockholder. At a future date, the Company intends to merge the operations of
North Pacific Bank with Heritage Bank. This transaction will be accounted for
using the purchase accounting method. North Pacific Bank operates two banking
offices in Tacoma with assets of $74.7 million at March 31, 1998. The
agreement, which was approved by the respective Boards of Directors of the
parties and the sole stockholder of North Pacific Bancorporation, is subject to
a number of conditions, including the approval of various regulatory agencies.
The parties anticipate closing the stock purchase transaction by June 30, 1998.
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the financial
condition and results of operations of the Company. The information contained
in this section should be read in conjunction with the Condensed Financial
Statements and the accompanying Notes thereto and the June 30, 1997 audited
consolidated financial statements and notes thereto included in the Company's
recent Registration Statement on Form S-1 filed with the Securities and Exchange
Commission under file number 333-35573
STATEMENTS CONCERNING FUTURE PERFORMANCE, DEVELOPMENTS OR EVENTS, CONCERNING
EXPECTATIONS FOR GROWTH AND MARKET FORECASTS, AND ANY OTHER GUIDANCE ON FUTURE
PERIODS, CONSTITUTE FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES WHICH MIGHT CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM STATED EXPECTATIONS. SPECIFIC FACTORS INCLUDE, BUT ARE NOT LIMITED TO THE
EFFECT OF INTEREST RATE CHANGES, RISKS ASSOCIATED WITH ACQUISITION OF OTHER
BANKS AND OPENING NEW BRANCHES, THE ABILITY TO CONTROL COSTS AND EXPENSES, AND
GENERAL ECONOMIC CONDITIONS. ADDITIONAL INFORMATION ON THESE AND OTHER FACTORS
WHICH COULD AFFECT THE COMPANY'S FINANCIAL RESULTS ARE INCLUDED IN FILINGS BY
THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Beginning in 1994, the Company began to implement a growth strategy which is
intended to broaden its products and services from traditional thrift products
and services to those more closely related to commercial banking. That strategy
entails (1) geographic and product expansion, (2) loan portfolio
diversification, (3) development of relationship banking, and (4) maintenance of
asset quality. Effective January 8, 1998, the Company closed its second step
conversion and stock offering which resulted in $66.1 million in gross proceeds.
Thereafter, the Company's common stock began to trade on the Nasdaq National
Market under the symbol "HFWA". The Company intends to continue to fund its
assets primarily with retail deposits, although FHLB advances may be used as a
supplemental source of funds, and it believes that the capital raised in the
recent stock offering will enhance its ability to continue implementing its
growth strategy.
FINANCIAL CONDITION DATA
The Company's total assets at March 31, 1998 were $322.8 million, a 33% increase
from June 30, 1997. Of the $80.6 million increase in total assets from June 30,
1997, $63.0 million were funds related to the recent stock offering which closed
January 8,
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1998. Net loans outstanding and loans held for sale totaled $218.5 million at
March 31, 1998, an increase of 12% from March 31, 1997 and a 6% increase from
June 30, 1997. The Company experienced substantial growth in commercial loans
during the nine months ended March 31, 1998. Commercial loans increased to $51.8
million at March 31, 1998, compared with $39.4 million at June 30, 1997, an
increase of 31%. Deposits were $225.6 million at March 31, 1998, an increase of
13% from March 31, 1997 and a 8% increase from June 30, 1997.
The Company's allowance for loan losses at March 31, 1998 was $2.8 million, or
1.28% of outstanding loans. Nonperforming assets at March 31, 1998 amounted to
$373,000, or 0.12% of total assets. There were no loan charge-offs or
recoveries during the nine months ended March 31, 1998.
EARNINGS SUMMARY
Net income for the third quarter ended March 31, 1998 was $1,159,000, or $0.11
per diluted share, compared to $474,000, or $0.05 per diluted share, for the
same period in 1997, an increase of 145%. Earnings per share for the nine
months ended March 31, 1997 were computed as set forth in Note 2(b) in the Notes
to Condensed Financial Statements. The increase in net income was primarily due
to an $88 million increase in the average balance of earning assets, a widening
of the net interest margin and a substantial increase in mortgage banking
activity and related income. The majority of the increase in earning assets
($63 million) and the widening of the net interest margin was attributable to
the large influx of equity capital resulting from the Company's recently
completed stock offering.
Net income for the nine months ended March 31, 1998 was $2.4 million, or $0.25
per diluted share, compared with $1.7 million, or $0.18 per diluted share, for
the same period in 1997. This represents a 42% increase period to period.
During the quarter ended September 30, 1996, based on federal legislation, the
Company accrued $1.1 million for a one-time assessment by the FDIC to
recapitalize the SAIF deposit insurance fund. The Company also reversed a
$938,000 deferred tax liability related to the potential recapture of the pre-
1988 additions to the tax bad debt reserve. Excluding the impact of these two
nonrecurring items, net income for the nine months ended March 31, 1997 would
have been $1.5 million, or $0.16 per diluted share. On a comparable fully taxed
basis, net income for the nine months ended March 31, 1998, increased by $0.9
million, or 60%, compared with the first nine months of fiscal 1997. The
increase in net income on such a comparable basis was primarily attributable to
increases in net interest income and mortgage banking income partially offset by
an increase in noninterest expense.
On April 6, 1998, the Company announced an agreement to acquire all of the
outstanding stock of North Pacific Bancorporation whose wholly owned subsidiary
is North Pacific Bank. Based on a formula which includes the earnings of North
Pacific Bank from January 1, 1998 through the consummation date less certain
adjustments, the Company expects to pay approximately $18 million in cash to
acquire all of the stock of North Pacific Bancorporation from its sole
stockholder. At a future date, the
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Company intends to merge the operations of North Pacific Bank with Heritage
Bank. This transaction will be accounted for using the purchase accounting
method. North Pacific Bank operates two banking offices in Tacoma with assets of
$74.7 million at March 31, 1998. The agreement, which was approved by the
respective Boards of Directors of the parties and the sole stockholder of North
Pacific Bancorporation, is subject to a number of conditions, including the
approval of various regulatory agencies. The parties anticipate closing the
stock purchase transaction by June 30, 1998.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1998 increased 49% to
$3.6 million from $2.4 million for the comparable 1997 quarter. For the nine
months ended March 31, 1998, net interest income increased to $9.1 million, a
31% increase from $6.9 million for the same period in 1997. The increase in net
interest income during the nine months ended March 31, 1998 was largely due to
average interest earning assets increasing more rapidly than average interest
bearing liabilities coupled with the substantial increase in stockholders'
equity resulting from the recent stock offering. For the nine month period
ended March 31, 1998 compared to the same period in 1997, average balance of
interest earning assets increased $47 million, while the average balance of
interest bearing liabilities increased $24 million.
Net interest margin (net interest income divided by average interest earning
assets) increased to 4.82% in the third quarter of fiscal 1998 from 4.53% in the
third quarter of fiscal 1997. The increase in net interest margin was primarily
the result of increased capital from the stock offering. While net interest
margin widened, net interest spread declined to 3.57% from 4.10%. The average
yield of earning assets declined to 8.17% for third quarter 1998 from 8.70% for
third quarter fiscal 1997 due to investment of the stock offering net proceeds
in lower yielding assets as management seeks to deploy the funds in higher
yielding loans.
For the nine months ended March 31, 1998, net interest margin increased to 4.72%
from 4.42% for the same period in 1997. The average yield of interest earning
assets decreased to 8.63% for the 1998 fiscal period from 8.71% for the 1997
fiscal period due to the shift in the mix of earning assets resulting from the
investment of the stock offering net proceeds. In comparison, the average cost
of interest bearing liabilities decreased to 4.68% for the 1998 fiscal period
from 4.73% for the 1997 fiscal period.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1998 increased $320,000,
or 44%, compared with the 1997 comparable period. Gains on sales of loans
increased $331,000, or 86%, for the three months ended March 31, 1998, as a
result of the volume of mortgage loans sold increasing 72% ($31.8 million in the
1998 quarter compared to $18.5 million for the 1997 comparable quarter) while
the average gain (expressed as a percentage of the volume of mortgage loans
sold) increased to 2.26%
Page 12
<PAGE>
in the quarter ended March 31, 1998 compared to 2.09% in the comparable 1997
quarter. Service charges on deposits for the third quarter of fiscal 1998
increased $30,000 or 27%, which was offset by a $45,000 decline in commissions
on sales of annuities and securities. For the nine months ended March 31, 1998,
noninterest income increased $381,000, or 16%, compared to the same period in
1997. Gains on sales of loans increased $321,000, or 21%, for the nine months
ended March 31, 1998 due to increased volume of mortgage loans sold ($77.0
million for the nine months ended March 31, 1998 compared to $64.1 million for
the same period in 1997). Service charges on deposits increased $54,000, or 16%,
for the nine months ended March 31, 1998 due to growth in business and personal
checking accounts.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1998 increased
$447,000, or 19%, compared with the same period in 1997. Excluding the impact
of the $1.1 million one-time assessment by the FDIC to recapitalize the SAIF
deposit insurance fund during the nine months ended March 31, 1997, noninterest
expense for the nine months ended March 31, 1998 increased $954,000, or 13%,
compared with the same period in 1997. The increases are primarily due to the
expenses associated with the expansion of Heritage Bank into Pierce County and
an increase in mortgage commissions due to increased volume of mortgage loan
originations. Total noninterest expense was 61.15% and 67.89% of total revenues
(the sum of net interest income plus noninterest income) for the third quarter
and the nine months ended March 31, 1998, respectively, and 76.98% and 75.97%
for the same periods in 1997, respectively. Increases in noninterest expenses
are centered in compensation, occupancy, data processing, marketing and other
expenses.
INCOME TAXES
Provision for federal income taxes was $1.3 million for the nine months ended
March 31, 1998, compared to a federal income tax benefit of $540,000 for the
same period in 1997. The federal income tax benefit for the 1997 period
reflects the reversal of the $938,000 deferred tax liability mentioned in Note 3
of the Notes to Condensed Financial Statements.
LENDING ACTIVITIES
Since initiating its expansion activities in 1994, the Company has supplemented
its traditional mortgage loan products with an increased emphasis on variable
interest rate commercial loans. As indicated in the table below, total loans
increased to $221.4 million at March 31, 1998 from $208.2 million at June 30,
1997. At March 31, 1998, commercial loans increased to $51.8 million, or 23.38%
of total loans, from $39.4 million, or 18.95% of total loans, at June 30, 1997.
<TABLE>
<CAPTION>
(in thousands)
AT JUNE 30, % OF AT MARCH 31, % OF
1997 TOTAL 1998 TOTAL
---------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
Page 13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Commercial $ 39,445 18.95% $ 51,762 23.38%
Real estate mortgages
One-to-four family residential 103,439 49.68 101,254 45.74
Five or more family and commercial
properties 51,209 24.60 52,404 23.67
-----------------------------------------------
Total real estate mortgages 154,648 74.28 153,658 69.41
Real estate construction
One-to-four family residential 12,683 6.09 13,777 6.22
Five or more family and commercial
properties 1,029 0.50 1,565 0.71
-----------------------------------------------
Total real estate construction 13,712 6.59 15,342 6.93
Consumer 1,467 0.70 1,816 0.82
-----------------------------------------------
Gross loans 209,272 100.52% 222,578 100.54%
Less: deferred loan fees (1,079) (0.52) (1,204) (0.54)
-----------------------------------------------
Total loans $208,193 100.00% $221,374 100.00%
===============================================
</TABLE>
NONPERFORMING ASSETS
The following table sets forth the amount of the Bank's nonperforming assets at
the dates indicated
<TABLE>
<CAPTION>
At June 30, At March 31,
1997 1998
-----------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 133 294
Restructured loans - -
-----------------------
Total nonperforming loans 133 294
Real estate owned - 79
-----------------------
Total nonperforming assets $ 133 373
=======================
Accruing loans past due 90 days or more $ - -
Potential problem loans 68 47
Allowance for loan losses 2,752 2,842
Nonperforming loans to loans 0.06% 0.17%
Allowance for loan losses to loans 1.32% 1.28%
Allowance for loan losses to nonperforming loans 2,069.17% 966.67%
Nonperforming assets to total assets 0.05% 0.12%
</TABLE>
Nonperforming loans increased to $294,000, or 0.17% of total loans, at March 31,
1998 from $133,000, or 0.06% of total loans, at June 30, 1997. At both dates
shown in the table above, the nonaccrual loans were comprised of single family
mortgages.
During the nine months ended March 31, 1998, the Company foreclosed on a $79,000
residential mortgage loan which was transferred to real estate owned in the
third quarter 1998.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Page 14
<PAGE>
The allowance for loan losses is maintained at a level considered adequate by
management to provide for reasonably foreseeable loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions and loss experience and
an overall evaluation of the quality of the underlying collateral, holding and
disposal costs and costs of capital. The allowance is increased by provisions
for loan losses charged to operations and reduced by loans charged off, net of
recoveries.
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.
The following table sets forth for the periods indicated information regarding
changes in the Bank's allowance for loan losses:
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------
1997 1998
------------------------
<S> <C> <C>
Total loans outstanding at end of period (1) $196,150 221,375
Average loans outstanding during period 178,875 210,260
Allowance balance at beginning of period 1,873 2,752
Provision for loan losses - 90
Charge-offs
Real estate - -
Commercial (3) -
Consumer - -
------------------------
Total charge-offs (3) -
------------------------
Recoveries
Real estate - -
Commercial - -
Consumer - -
------------------------
Total recoveries - -
------------------------
Net (charge-offs) recoveries (3) -
------------------------
Allowance balance at end of period $ 1,870 2,842
========================
Ratio of net (charge-offs) recoveries during
period to average loans outstanding (0.002%) -%
========================
__________
(1) Includes loans held for sale
</TABLE>
While pursuing its growth strategy, the Company will continue to employ prudent
underwriting and sound loan monitoring procedures in order to maintain asset
quality. During the nine months ended March 31, 1998, the Company had no
charge-offs or recoveries. The allowance for loan losses at March 31, 1998
increased $90,000 to $2.84 million, or 1.28% of total loans. This ratio of
allowance for loan losses to total
Page 15
<PAGE>
loans has declined to 1.28% at March 31, 1998 from 1.32% at June 30, 1997 due to
the growth of the loan portfolio.
LIQUIDITY AND SOURCE OF FUNDS
The Company's primary sources of funds are customer deposits, loan repayments,
loan sales, maturing investment securities and advances from the FHLB of
Seattle. These funds, together with retained earnings, equity and other
borrowed funds, are used to make loans, acquire investment securities and other
assets and to fund continuing operations. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by the level of interest rates,
economic conditions and competition.
The Company 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 fund operations. The
Company generally maintains sufficient cash and short term investments to meet
short term liquidity needs. At March 31, 1998, cash and cash equivalents
totaled $65.9 million, or 20% of total assets, and investment securities
classified as held to maturity with maturities of one year or less amounted to
$5.7 million, or 1.8% of total assets. At March 31, 1998, the Company
maintained an unused credit facility with the FHLB of Seattle for up to 20% of
assets or $64.6 million.
To fund the growth of the Company, management's strategy has been to build core
deposits (which includes all deposits except public funds) through the
development of its branch office network and commercial banking relationships.
Historically, the Company has been able to retain a significant amount of its
deposits as they mature. Management anticipates that the Company will continue
to rely on the same sources of funds in the future and will use those funds
primarily to make loans and purchase investment securities.
CAPITAL
Stockholders' equity at March 31, 1998 was $93.0 million compared with $27.7
million at June 30, 1997. Effective January 8, 1998, the Company closed its
second step conversion and stock offering which resulted in $63 million in net
proceeds.
Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. At March 31, 1998, the Company's leverage ratio was
27.74%, compared with 11.68% at June 30, 1997. In addition, banking regulators
have adopted risk-based capital guidelines, under which risk percentages are
assigned to various categories of assets and off-balance sheet items to
calculate a risk-adjusted capital ratio. Tier I capital generally consists of
common shareholders' equity, while Tier II capital includes the allowance for
loan losses, subject to certain limitations. Regulatory minimum risk-based
capital guidelines require Tier I capital of 4% of risk-adjusted assets and
total capital (combined Tier I and Tier II) of 8%. The Company's Tier I and
total capital ratios
Page 16
<PAGE>
were 45.66% and 46.91%, respectively, at March 31, 1998 compared with 15.65% and
16.90%, respectively, at June 30, 1997.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC") published
the qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates beginning in 1993. To
qualify as "well-capitalized", banks must have a Tier I risk-adjusted capital
ratio of at least 6%, a total risk-adjusted capital ratio of at least 10%, and a
leverage ratio of at least 5%. Heritage Bank qualified as "well-capitalized" at
March 31, 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's results of operations are largely dependent upon its ability to
manage interest rate risk. Management considers interest rate risk to be a
significant market risk that could have a material effect on the Company's
financial condition and results of operations. The Company does not currently
use derivatives to manage market and interest rate risk.
Subsequent to the end of the Company's most recent year end (June 30, 1997),
management deployed the net proceeds from the stock offering in short term
investments until these funds can be utilized in the Company's lending
operations. In management's opinion, the nature of the deployment does not
represent a material change in the reported market risks of the Company.
YEAR 2000 ISSUES
The Company utilizes various computer software programs to provide banking
products and services to its customers. Many existing computer programs use
only two digits to identify a year in the date field and were not designed to
consider the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations.
The Company has identified all computer software programs used in its business
and has determined the extent to which these programs are Year 2000 compliant.
The Company utilizes a service bureau to perform data processing services
related to the Company's loans, deposits, general ledger and other financial
applications. The Company's service bureau advised the Company that it has
committed resources to perform and test necessary modifications by December 31,
1998.
The Company utilizes other computer software in its daily operations from
automated heating, air conditioning and ventilating systems to its telephone and
voice mail systems. The modification and testing of these software programs
will not have a material impact on the Company's financial condition.
Page 17
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
None to report.
USE OF PROCEEDS
As discussed in Note 1(a) of the Notes to Condensed Financial Statements, the
Company closed its second step conversion and stock offering on January 8, 1998
which resulted in $66.1 million in gross proceeds. In connection therewith,
(1) The effective date of the Securities Act registration statement was
November 12, 1997 and the commission file number assigned to the
registration statement was 333-35573.
(2) The Company completed its stock offering effective January 8, 1998
with all securities sold pursuant to the registration statement. Ryan
Beck acted as the marketing agent for the Company's stock offering.
The class of securities in the offering was no par value common stock
of which 9.75 million shares were registered. In the offering, 9.75
million shares were offered; 6.61 million shares were sold for $66.1
million in cash and the remaining 3.14 million shares were exchanged
for shares of Heritage Bank common stock.
(3) Total expenses incurred in the Company's second step conversion and
offering expenses were $1.77 million. None of these expenses were paid
directly or indirectly to any of the Company's directors, officers or
affiliates or any person owning ten (10) percent or more of the
Company's equity securities.
(4) The net offering proceeds of $64.3 million were used as follows:
. $1.3 million was used to fund the Company's loan to the Bank's
ESOP; and
. $63 million has been invested in U.S. Government and agency
securities with maturities of three years or less and in
interest earning deposits.
This actual use of proceeds does not represent a material change from
the suggested use of proceeds as disclosed in the registration
statement.
Page 18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
a. EXHIBIT 2 - Plan of acquisition of North Pacific Bancorporation.
b. See EXHIBIT 27-Financial Data Schedule.
c. No reports on Form 8K were filed during the quarter ended March 31,
1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERITAGE FINANCIAL CORPORATION
______________________________
(Registrant)
Date: May 15, 1998 by /s/ Donald V. Rhodes
-------------------------------------
Donald V. Rhodes, Chairman, President
and Chief Executive Officer
(Duly Authorized Officer)
Date: May 15, 1998 by /s/ James Hastings
-------------------------------------
James Hastings, Vice President and
Treasurer
(Principal Financial and Accounting
Officer)
Page 19
<PAGE>
PLAN OF STOCK PURCHASE AND AGREEMENT TO MERGE
AMONG
HERITAGE FINANCIAL CORPORATION AND HERITAGE SAVINGS
BANK AND NORTH PACIFIC BANCORPORATION AND
NORTH PACIFIC BANK
DATED AS OF APRIL 3, 1998
<PAGE>
CONTENTS
Page
----
DEFINITIONS........................................................ 1
SECTION 1. TERMS OF TRANSACTION................................... 5
1.1 Transaction...................................... 5
1.2 Consideration.................................... 5
SECTION 2. CLOSING OF TRANSACTION................................. 5
2.1 Closing.......................................... 5
2.2 Events of Closing................................ 5
2.3 Place of Closing................................. 5
SECTION 3. MERGERS................................................ 6
SECTION 4. REPRESENTATIONS AND WARRANTIES......................... 6
4.1 Representations and Warranties of NP and NPB..... 6
4.2 Representations and Warranties of HFC............ 13
SECTION 5. CONDUCT AND TRANSACTIONS PRIOR TO CLOSING.............. 13
5.1 Conduct of NP's and NPB's Business Prior to
Closing.......................................... 13
5.2 Submission to Regulatory Authorities............. 17
5.3 Public Announcements............................. 17
5.4 Consents......................................... 18
5.5 Further Actions.................................. 18
5.6 Notice........................................... 18
5.7 Confidentiality.................................. 19
SECTION 6. APPROVALS AND CONDITIONS............................... 19
6.1 Required Approvals............................... 19
6.2 Conditions to Obligations of HFC and Bank........ 19
6.3 Conditions to Obligations of Selling Shareholder,
NP and NPB....................................... 21
SECTION 7. SELLING SHAREHOLDER, OFFICERS AND EMPLOYEES............ 21
7.1 Selling Shareholder.............................. 21
7.2 Employees........................................ 21
7.3 Officers' Employment Contracts................... 21
7.4 Initial Payments to Senior Management............ 21
7.5 Employee Benefit Issues.......................... 22
7.6 Office and Secretary Support for Mr. P.K.
Wallerich........................................ 22
-i-
<PAGE>
SECTION 8. TERMINATION OF AGREEMENT AND ABANDONMENT OF TRANSACTION 23
8.1 Termination...................................... 23
8.2 Cost Allocation Upon Termination................. 23
SECTION 9. MISCELLANEOUS.......................................... 24
9.1 Notices.......................................... 24
9.2 Waivers and Extensions........................... 24
9.3 Construction and Execution in Counterparts....... 25
9.4 Indemnification of Directors and Executive
Officers......................................... 25
9.5 Survival of Representations, Warranties, and
Covenants........................................ 25
9.6 Attorneys' Fees and Costs........................ 25
9.7 Governing Law.................................... 26
SECTION 10. AMENDMENTS............................................ 26
-ii-
<PAGE>
List of Annexes and Exhibits
ANNEXES:
ANNEX 1 Offices of each Bank
ANNEX 2 NP Options (Section 4.1.3)
ANNEX 3 NP Subsidiaries (Section 4.1.4)
ANNEX 4 Properties
ANNEX 5 Environmental Matters
ANNEX 6 Material Contracts
ANNEX 7 Asset Classification of NPB (Section 4.1.17)
ANNEX 8 Insurance Policies (Section 4.1.20)
ANNEX 9 NP Benefit Plans (Section 4.1.22(ii))
EXHIBITS:
EXHIBIT A Merger Agreement I (pursuant to Section 3)
EXHIBIT B Merger Agreement II (pursuant to Section 3)
EXHIBIT C Selling Shareholder's Agreement (pursuant to Section 6.1)
-iii-
<PAGE>
PLAN OF STOCK PURCHASE AND AGREEMENT TO MERGE
AMONG
HERITAGE FINANCIAL CORPORATION AND
HERITAGE SAVINGS BANK AND NORTH PACIFIC
BANCORPORATION AND NORTH PACIFIC BANK
THIS PLAN OF STOCK PURCHASE AND AGREEMENT TO MERGE (the "Agreement") is
made and entered into as of April 3, 1998, among HERITAGE FINANCIAL CORPORATION
("HFC"), HERITAGE SAVINGS BANK ("Bank"), NORTH PACIFIC BANCORPORATION ("NP"),
NORTH PACIFIC BANK ("NPB"), and PETER K. WALLERICH and MARYLU WALLERICH
("Selling Shareholder").
PREAMBLE
The management of HFC, Bank, NP and NPB believe that the transactions
contemplated by this Agreement are in the best interest of the respective
corporations and their shareholders.
It is contemplated that the transactions will be accomplished as follows:
(i) Selling Shareholder, who owns all outstandings shares of NP Common Stock,
will sell to HFC, and HFC will purchase from Selling Shareholder, for cash, all
issued and outstanding shares of NP Common Stock; (ii) subsequent to
consummation of this Stock Purchase transaction, NP, which will then be wholly
owned by HFC, will be merged with and into HFC ("Merger I") and will cease to
exist; and (iii) subsequent to consummation of the Merger I NPB and Bank, both
of which will then be wholly owned by HFC, will be merged together, with Bank
being the bank surviving the merger ("Merger II").
AGREEMENT
In consideration of the mutual agreements set forth in this Agreement,
Selling Shareholder, HFC, Bank, NP and NPB agree as follows:
DEFINITIONS
Terms used in this Agreement will have the following meanings:
"Acquisition Proposal" has the meaning assigned to such term in Section
5.1.9 of this Agreement.
"Agreement" means this Plan of Stock Purchase and Agreement to Merge,
including all Annexes and Exhibits thereto.
"Asset Classification" has the meaning assigned to such term in Section
4.1.17 of this Agreement.
<PAGE>
"BHC Act" means the federal Bank Holding Company Act of 1956, as amended.
"Bank" is Heritage Savings Bank, a Washington state chartered banking
association, which has its head office in Olympia, Washington, and which is
wholly owned by HFC.
"Banking Act" means Title 30 of the RCW.
"Business Day" means any day other than a Saturday, Sunday, legal holiday
or a day on which banking institutions located in the State of Washington are
authorized or required by law to remain closed.
"Capital" means capital stock, surplus and retained earnings determined in
accordance with GAAP, applied on a consistent basis.
"Closing" means the closing of the Transaction contemplated by this
Agreement, which will occur on the Effective Date, as more fully specified in
Section 2.1 of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Compensation Plans" has the meaning assigned to such term in Section
4.1.22 of this Agreement.
"Control" with respect to any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting interests, by
contract, or otherwise.
"Core Deposits" means all deposits other than (i) brokered deposits, (ii)
public funds and (iii) certificates of deposit (or equivalents) equal to or in
excess of $100,000.
"Corporate Code" means the Washington Business Corporation Act, as amended,
as set forth in Title 23B of the RCW.
"Director" means the Director of the Department of Financial Institutions
for the State of Washington.
"Effective Date" means the date on which all conditions to Closing have
occurred and on which the Stock Purchase takes place, as more fully specified in
Section 2.1 of this Agreement.
"Employees" has the meaning assigned to such term in Section 4.1.22(ii) of
this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
-2-
<PAGE>
"ERISA Affiliate" has the meaning assigned to such term in Section
4.1.22(iv) of this Agreement.
"ESI Plan" has the meaning assigned to such term in Section 4.1.22(ix) of
this Agreement.
"Executive Officers" with respect to any party to this Agreement means the
chief executive officer, chief financial officer, and chief lending officer of
such party.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve" means the Board of Governors of the Federal Reserve
System, acting directly or by delegated authority through the Federal Reserve
Bank of San Francisco.
"Financial Statements" means the NP Financial Statements.
"GAAP" means generally accepted accounting principles.
"Hazardous Material" means any material so described in Section 4.1.8 of
this Agreement.
"HFC" is Heritage Financial Corporation, a Washington corporation which has
its principal place of business in Olympia, Washington, and which is a bank
holding company registered pursuant to the BHC Act.
"Loan Property" means any property in which the applicable party (or a
Subsidiary of it) holds a security interest for an amount greater than $100,000
and, where required by the context, includes the owner or operator of such
property, but only with respect to such property.
"Material Adverse Effect" with respect to a Person means any condition,
event, change or occurrence that is reasonably likely to have a material adverse
effect upon (a) the condition, financial or otherwise, properties, business or
results of operations of such Person and its Subsidiaries, taken as a whole, and
(b) the ability of such Person to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement.
"Merger I" means the merger of NP with and into HFC.
"Merger II" means the merger of NPB with Bank.
"Merger Agreement I" means the Plan and Agreement of Merger used to effect
Merger I, in the form attached as Exhibit A.
"Merger Agreement II" means the Plan and Agreement of Merger used to effect
Merger II, in the form attached as Exhibit B.
"Mergers" means Merger I and Merger II.
-3-
<PAGE>
"NP" is North Pacific Bancorporation, Inc., a Washington corporation which
has its principal place of business in Tacoma, Washington and which is a bank
holding company registered pursuant to the BHC Act.
"NP Common Stock" means the issued and outstanding shares of North Pacific
common stock, $1 par value per share.
"NP Financial Statements" means NP's audited consolidated statements of
financial condition at December 31, 1997, 1996 and 1995, and the related
statements of income, cash flows and shareholders' equity for each of the years
ended December 31, 1997, 1996 and 1995, all as more fully described in Section
4.1.5, of this Agreement.
"NPB" is North Pacific Bank, a Washington state chartered banking
association, which has its head office in Tacoma, Washington, and which is
wholly owned by NP.
"OREO" means real property acquired by NPB through foreclosure or deed in
lieu of foreclosure or other realization proceedings.
"Pension Plan" has the meaning assigned to such term in Section 4.1.22(iii)
of this Agreement.
"Person" includes an individual, corporation, partnership, association,
limited liability company, trust or unincorporated organization.
"Plan" has the meaning assigned to such term in Section 4.1.22(i) of this
Agreement.
"Properties" with respect to any party to this Agreement means (i)
properties or other assets owned or leased by such party or any of its
Subsidiaries, and (ii) Loan Properties.
"RCW" means the Revised Code of Washington, as amended.
"Stock Purchase" means the purchase of all NP Common Stock by HFC.
"Subsequent NP Financial Statements" means a consolidated balance sheet and
related consolidated statements of income, cash flows and shareholders' equity
at and for each fiscal quarter ending after December 31, 1997 and prior to
Closing, all as more fully described in Section 5.1.8 of this Agreement.
"Subsidiary" with respect to any party to this Agreement means any Person
directly or indirectly controlled by such party.
"Transaction" means consummation of the Stock Purchase in accordance with
Section 1.1 of this Agreement.
-4-
<PAGE>
SECTION 1.
TERMS OF TRANSACTION
1.1 TRANSACTION.
Subject to the terms and conditions of this Agreement and for the
consideration set forth in Section 1.2, Selling Shareholder hereby agrees to
sell to HFC, and HFC hereby agrees to purchase from Selling Shareholder, all of
the NP Common Stock that is issued and outstanding immediately prior to Closing.
1.2 CONSIDERATION.
As consideration for the purchase of all issued and outstanding shares of
NP Common Stock, HFC shall pay, in cash, a price of $18,000,000, plus net income
of NPB, determined in accordance with GAAP consistently applied, from January 1,
1998 through Closing, reduced by expenses incurred by NP or NPB to accomplish
the Transaction and by the amount to be paid as provided in Section 7.4 of this
Agreement.
SECTION 2.
CLOSING OF TRANSACTION
2.1 CLOSING.
The Closing will occur on the Effective Date. Unless HFC and Selling
Shareholder agree upon another date, the Effective Date will be the date five
(5) Business Days after the fulfillment of the regulatory approval condition
precedent to closing of the Transaction set forth in Section 6.1 of this
Agreement. If Closing does not occur on or prior to September 30, 1998, either
party may terminate this Agreement in accordance with Section 8 of this
Agreement. The parties will use their best efforts to cause the Transaction to
close by June 30, 1998.
2.2 EVENTS OF CLOSING.
On the Effective Date, certificates representing all of the NP Common
Stock, endorsed in blank or with duly executed stock powers annexed thereto and
in form and substance satisfactory to counsel for HFC, will be delivered by
Selling Shareholder to HFC. If Selling Shareholder fails to deliver the required
certificates on the Effective Date or otherwise defaults under this Agreement on
or prior to the Effective Date, then no Transaction will occur unless the
adversely affected party (i) waives the default or (ii) elects to proceed while
reserving rights arising due to the default.
2.3 PLACE OF CLOSING.
Unless HFC and Selling Shareholder agree otherwise, the Closing will occur
at the law offices of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim,
-5-
<PAGE>
P.L.L.C. at such time during normal business hours as HFC and Selling
Shareholder may fix.
SECTION 3.
MERGERS
Subsequent to and conditioned upon the prior closing of the Transaction,
and subject to the terms and conditions set forth in this Agreement and in the
Annexes and Exhibits, HFC, in its sole discretion, intends to merge NP with and
into HFC in Merger I and within a reasonable time following completion of Merger
I (as determined by HFC), intends to merge NPB and Bank, with Bank being the
surviving bank, in Merger II. Closing of the Transaction is not conditioned upon
consummation of the Mergers.
Merger I will be effected in accordance with the provisions of Chapter
23B.11 of the Corporate Code, and pursuant to Merger Agreement I attached as
Exhibit A to this Agreement. In Merger I, NP will be merged into HFC, and HFC
will be the surviving corporation and will be liable for all of the liabilities
of NP. It is the intention that Merger I will qualify as a tax-free liquidation
for Federal Income Tax purposes within the meaning of Section 332 of the Code.
Merger II will be effected in accordance with Chapter 30.49 of the Banking
Act and 12 United States Code (USC) 1828(c) and any related rules and
regulations, and pursuant to Merger Agreement II attached as Exhibit B to this
Agreement. In Merger II, NPB will be merged with Bank, and Bank will be the
resulting bank and will be liable for all of the liabilities of the combined
corporations. It is the intention of the parties to this Agreement that Merger
II will qualify as a "reorganization" for federal income tax purposes within the
meaning of Section 368 of the Code.
SECTION 4.
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS AND WARRANTIES OF NP AND NPB.
NP and NPB represent and warrant to HFC that, except as disclosed in an
Annex to this Agreement or otherwise disclosed in writing by them and accepted
by HFC within 20 days following the execution of this Agreement:
4.1.1 ORGANIZATION AND GOOD STANDING. NP is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington, is a registered bank holding company pursuant to the BHC Act, and
has all requisite power and authority to own and operate its properties and to
carry on its businesses as now conducted. Each of its Subsidiaries is either a
commercial bank or a corporation duly organized, validly existing and in good
standing under the laws of the State of Washington (and if a bank, its deposits
are issued by the Federal Deposit Insurance Corporation), and has all requisite
power and authority to own and operate
-6-
<PAGE>
its Properties and to carry on its businesses as now conducted. The locations of
all offices, including approved and unopened offices of its bank Subsidiaries,
are listed in Annex 1.
4.1.2 CORPORATE AUTHORITY. Subject to receipt of any required
shareholder approvals of this Agreement and subject to the required approvals,
consents and waivers of governmental authorities referred to in Section 6.1 of
this Agreement, each of NP and its Subsidiaries has all requisite corporate
power and authority to enter into and carry out its obligations pursuant to this
Agreement. The execution, delivery and performance of this Agreement will not
violate any judgment, order, decree, statute, rule or governmental regulation to
which it or any of its Subsidiaries may be subject, or constitute a breach or
violation of or a default under any agreement or instrument to which it or any
of its Subsidiaries is a party or by which it or any of its Subsidiaries may be
bound, which breach or violation or default would have a Material Adverse
Effect. Neither it nor any of its Subsidiaries is in violation of any provision
of its Articles of Incorporation or Bylaws or any agreement or instrument to
which it or any of such Subsidiaries is a party or by which it or any of such
Subsidiaries is bound, which violation would have a Material Adverse Effect.
4.1.3 CAPITAL STOCK. The authorized capital stock of NP consists of
50,000 shares of NP Common Stock, a total of 5,154 shares of which are issued
and outstanding as of the date of this Agreement. All shares of NP Common Stock
were validly issued and are fully paid and nonassessable. NPB's authorized
capital stock consists of 8,000 shares of common stock, par value $100.00 per
share, of which 8,000 shares currently are issued and outstanding, all of which
are validly issued to NP, fully paid and nonassessable. No unissued shares of
common stock or any other securities of NP or NPB, or any of their Subsidiaries,
are subject to any warrants, options, conversion privileges, rights or
commitments of any character, kind or nature, except as set forth in Annex 2,
and neither NP nor NPB has issued or is obligated to issue any additional shares
of common stock or any other security to any other person, except as so
disclosed.
4.1.4 SUBSIDIARIES. Except as listed in Annex 3, NP does not have
any Subsidiaries. The shares of capital stock of each of its Significant
Subsidiaries (as defined in Rule 1-02 of Regulation S-X) are owned by it free
and clear of all liens, claims, encumbrances and restrictions on transfer.
4.1.5 OWNERSHIP OF NP COMMON STOCK. The Selling Shareholder owns all
of the NP Common Stock free and clear of all claims, security interests,
mortgages, pledges, liens and other encumbrances of every nature whatsoever
(collectively, "liens").
4.1.6 FINANCIAL STATEMENTS. NP's Financial Statements (i) have been
prepared from the books and records of the entity or entities to which they
relate, (ii) present fairly the financial condition and operating results of
such entity or entities at the times indicated and for the periods covered,
(iii) have been prepared in accordance with GAAP consistently applied through
the periods covered, except as stated therein,
-7-
<PAGE>
and (iv) reflect all material liabilities, contingent or otherwise, of NP and
NPB on the respective dates covered, except as stated therein.
4.1.7 PROPERTIES.
(i) NP and each of its Subsidiaries have unencumbered legal title or
contract vendee's interest to their respective owned properties and other assets
reflected in its Financial Statements, except for: (a) those encumbrances
related to real property taxes, local improvement district assessments (if any),
easements, covenants, restrictions and other matters of record which do not
individually or in the aggregate materially adversely affect the use and
enjoyment of the relevant real property; (b) prior mortgage liens on other real
estate owned (to the extent consistent with the terms of the original loan in
connection with which such real estate was acquired); (c) any property and other
assets, not material in aggregate amount, disposed of since December 31, 1997 in
the ordinary course of business; and (d) such defects in title which would not,
individually or in the aggregate, have a Material Adverse Effect. All leases of
real or personal property in which NP or NPB has an interest as lessee are
assignable without the consent of any other party.
(ii) All buildings and other facilities used in NP's business (or that
of any of its Subsidiaries) are adequately maintained and are free from defects
which could materially interfere with the current or future use of such
facilities.
4.1.8 ENVIRONMENTAL MATTERS.
(i) To the knowledge of the Executive Officers of NP and NPB and each
of their Subsidiaries, the Loan Properties are, and have been, in compliance
with all applicable laws, rules, regulations, standards and requirements of the
United States Environmental Protection Agency and of state and local agencies
with jurisdiction over pollution or protection of the environment, except for
violations which, individually or in the aggregate, do not or would not result
in a Material Adverse Effect on it.
(ii) To the knowledge of NP's and NPB's Executive Officers, neither
they nor any of their Subsidiaries, nor any other Person having an interest in
any of their Properties, has engaged in the unlawful generation, use,
manufacture, treatment, transportation, storage (in tanks or otherwise), or
disposal of Hazardous Material on or from such Properties. With respect to their
Properties, there has not been (a) any unlawful presence, use, generation,
handling, treatment, storage, release, threatened release, migration or disposal
of Hazardous Material, (b) any condition that could result in any use, ownership
or transfer restriction, or (c) any condition of nuisance, any of which,
individually or collectively, would have a Material Adverse Effect on them.
Neither they nor any of their Subsidiaries has received notice of, or has reason
to know of, a condition that could give rise to any private or governmental
suit, claim, action, proceeding or investigation against it or its Properties or
against any other Person as a result of any of the events described in clauses
(a), (b), and (c) of this paragraph. "Hazardous Material" means any chemical,
substance, material, object, condition, waste or combination of the foregoing
which is or may be hazardous or
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harmful to human health or safety or to the environment due to its
radioactivity, ignitability, corrosivity, reactivity, explosivity, toxicity,
carcinogenicity, infectiousness or other harmful or potentially harmful
properties or effects, including, without limitation, petroleum or petroleum
products, and all of those chemicals, substances, materials, objects,
conditions, wastes or combinations of them which are now or become listed,
defined or regulated in any manner by any federal, state or local law based,
directly or indirectly.
4.1.9 TAXES. All tax returns and reports required by law to be filed
by NP and its Subsidiaries have been duly filed, and all taxes, assessments,
fees and other government charges upon it or any of its Subsidiaries or upon any
of their respective properties, assets, income or franchises that are due and
payable have been paid. The federal income portion of such taxes have been paid
in full as indicated in its tax returns for the past five years or adequate
provision has been made for any such taxes on its balance sheet in accordance
with GAAP. No material objections to returns or claims for additional taxes are
being asserted with respect to its federal or state taxes for any prior years,
except for such audits, objections or claims which are being contested in good
faith, by appropriate proceedings and with establishment of appropriate
reserves, and which have been disclosed in writing to the other parties to this
Agreement. There has been no past audit, objection to returns, or claim for
additional taxes except as specified in the foregoing sentence.
4.1.10 ABSENCE OF REGULATORY ACTION. To the knowledge of the
Executive Officers of NP and NPB, neither they nor any of their Subsidiaries is
in violation of any statute, rule or governmental regulation applicable to them
(including, without limitation, the Community Reinvestment Act, Bank Secrecy
Act, Truth in Lending Act, Equal Credit Opportunity Act, and statutes, rules and
regulations governing the reporting of taxpayer identification numbers of its
customers). Neither they nor any of their Subsidiaries is a party to any cease
and desist order, written agreement or memorandum of understanding with, or a
party to any commitment letter or similar undertaking to, or is subject to any
order or directive by, or is a recipient of any extraordinary supervisory letter
from, or has adopted any board resolutions at the request of, federal or state
regulatory authorities, nor have they been advised by such authorities that they
are contemplating issuing or requesting any such order, agreement, memorandum or
similar document or undertaking.
4.1.11 ALLOWANCE FOR LOAN AND LEASE LOSSES. In the opinion of the
management of NP and NPB, the allowance for loan losses shown in the NP
Financial Statements is, and that which will be stated in its Subsequent NP
Financial Statements prior to Closing will be, adequate to absorb anticipated
loan and lease losses. In any event, the allowance for loan losses at the
Effective Date will be at least 1.36% of its then-outstanding loans and leases.
4.1.12 AGREEMENTS. Except for arrangements made in the ordinary
course of business, NP and its Subsidiaries are not bound by any material
contract (as defined in Item 601(b)(10) of SEC Regulation S-K) to be performed
after the date hereof that has not been delivered to HFC. Specifically, except
as so disclosed prior to
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the date of this Agreement, as of the date of this Agreement, neither it nor any
of its Subsidiaries is a party to an oral or written (i) agreement not
terminable on 30 days or less notice involving the payment of more than $25,000
per annum, in the case of any such agreement with an individual, or $100,000 per
annum, in the case of any other such agreement, (ii) agreement with any
executive officer or other key employee of it or any of its Subsidiaries the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving it or any of its Subsidiaries of
the nature contemplated by Agreement and which provides for the payment of in
excess of $25,000, (iii) agreement with respect to any executive officer of it
or any of its Subsidiaries providing any term of employment or compensation
guarantee extending for a period longer than one year and for the payment of an
amount in excess of $25,000 per annum, or (iv) agreement or plan, including any
stock option plan, stock appreciation rights plan, restricted stock plan or
stock purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of any
of the transactions contemplated by this Agreement or the value of any of the
benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement.
4.1.13 COMPLIANCE WITH LAWS. NP and each of its Subsidiaries has all
permits, licenses, certificates of authority, orders, and approvals of, and has
made all filings, applications, and registrations with, federal, state, local,
and foreign governmental or regulatory bodies that are required in order to
permit it or its Subsidiaries to carry on their respective businesses as they
are presently conducted and the absence of which, individually or in the
aggregate, can reasonably be expected to have a Material Adverse Effect on it.
All such permits, licenses, certificates of authority, orders and approvals are
in full force and effect, and, to the best knowledge of its Executive Officers,
no suspension or cancellation of any of them is threatened.
4.1.14 KNOWLEDGE AS TO CONDITIONS. NP knows of no reason why the
approvals, consents and waivers of governmental authorities referred to in
Section 6.1 of this Agreement should not be obtained.
4.1.15 NO MATERIAL ADVERSE EFFECT. Since December 31, 1997, neither
NP nor any of its Subsidiaries has incurred any material liability, except in
the ordinary course of their business consistent with past practice, nor has
there been any change in the financial condition (which includes, without
limitation, the condition of assets, franchises, results of operations and
prospects) that has had or may reasonably be expected to have a Material Adverse
Effect on it.
4.1.16 COMPLETENESS OF REPRESENTATIONS. No representation or
warranty made by NP or NPB with respect to it or its Subsidiaries, nor any
representation made by Selling Shareholder in this Agreement (or in the Annexes
to this Agreement) contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained in this
Agreement (or in such Annexes) or in such representation or warranty not
misleading.
4.1.17 ASSET CLASSIFICATION.
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(i) Annex 7 sets forth a list, separated by category of
classification or criticism ("Asset Classification"), of the aggregate amounts
of loans, extensions of credit and other assets of it and its Subsidiaries that
have been criticized or classified, and such list is accurate and complete in
all material respects, as of December 31, 1997, except as otherwise expressly
noted in such Annex.
(ii) No amount of its loans, extensions of credit or other assets that
have been classified or criticized by any representative of any governmental
entity as "Other Assets Especially Mentioned," "Substandard," "Doubtful," "Loss"
or words of similar effect are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were paid off or charged off by it or its Subsidiaries before the
date of this Agreement.
4.1.18 CORE DEPOSITS AND CAPITAL. NPB's Core Deposits for the month
of March 1998 is not less than $58,000,000. NP's Capital is at least
$7,900,000. NPB's Capital is at least $7,700,000.
4.1.19 LITIGATION. No material litigation, proceeding or controversy
before any court or governmental agency is pending, and there is no pending
claim, action or proceeding against NP or any of its Subsidiaries, which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on it or to materially hinder or delay consummation of the transactions
contemplated hereby, and, to the best knowledge of its Executive Officers after
reasonable inquiry, no such litigation, proceeding, controversy, claim or action
has been threatened or is contemplated.
4.1.20 INSURANCE. NP and each of its Subsidiaries have taken all
requisite action (including the making of claims and the giving of notices)
under their respective directors' and officers' liability insurance policy or
policies in order to preserve all rights under such policies with respect to all
matters known to it (other than matters arising in connection with, and the
transactions contemplated by, this Agreement). Annex 8 lists all directors' and
officers' liability insurance policies and other material insurance policies
maintained by it or its Subsidiaries.
4.1.21 LABOR MATTERS. Neither NP nor any of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract, or
other agreement or understanding with a labor union or labor organization, nor
is it or any of its Subsidiaries the subject of any proceeding asserting that it
or any such Subsidiary has committed an unfair labor practice or seeking to
compel it or such Subsidiary to bargain with any labor organization as to wages
and conditions of employment, nor is there any strike or other labor dispute
involving it or any of its Subsidiaries pending or threatened.
4.1.22 EMPLOYEE BENEFITS.
(i) For purposes of this Agreement, "Plan" or "Plans", individually
or collectively, means any "employee benefit plan," as defined in Section 3(3)
of ERISA, maintained by NP or NPB, as the case may be.
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(ii) Annex 9 sets forth a list, as of the date of this Agreement, of
(a) all bonus, deferred compensation, pension, retirement, profit-sharing,
thrift, savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans, (b) all material employment or
severance contracts and (c) all other material employee benefit plans that cover
employees or former employees of it and its Subsidiaries (its "Compensation
Plans"). True and complete copies of the Compensation Plans (and, as
applicable, copies of summary plan descriptions, governmental filings (on Form
5500 series or otherwise), actuarial reports and reports under Financial
Accounting Standards Board Statement No. 106 relating to such Compensation
Plans) covering NP's current employees or those of its Subsidiaries
(collectively, "Employees"), including Plans and related amendments, have been
made available to the other parties to this Agreement.
(iii) All of NP's Plans covering Employees (other than "multi-
employer plans" within the meaning of ERISA Sections 3(37) or 4001(a)(3)), to
the extent subject to ERISA, are in substantial compliance with ERISA. Each of
NP's Plans that is an "employee pension benefit plan" within the meaning of
ERISA Section 3(2) ("Pension Plan") and that is intended to be qualified under
Section 401(a) of the Code, has received a favorable determination letter from
the Internal Revenue Service, and NP is not aware of any circumstances likely to
result in revocation of any such favorable determination letter. No litigation
relating to its Plans is pending or, to the knowledge of its Executive Officers,
threatened. Neither it nor any of its Subsidiaries has engaged in a transaction
with respect to any Plan that, assuming the taxable period of such transaction
expired as of the date of this Agreement, could subject it or any of its
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or
ERISA Section 502(i).
(iv) No liability under Subtitle C or D of Title IV of ERISA (other
than payment of applicable premiums) has been or is expected to be incurred by
NP or any of its Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of ERISA Section 4001(a)(15),
currently or formerly maintained by any of them, or the single-employer plan of
any entity that is considered one employer with it under ERISA Section 4001 or
Section 414 of the Code (an "ERISA Affiliate"). It and its Subsidiaries and
ERISA Affiliates have not incurred and do not expect to incur any material
withdrawal liability with respect to a multi-employer plan under Subtitle I of
Title IV of ERISA (regardless of whether based on contributions of ERISA
Affiliates). Neither it, its Subsidiaries nor any of its ERISA Affiliates has
been notified by any multi-employer plan to which it or any of its subsidiaries
or ERISA Affiliates is contributing, or may be obligated to contribute, that
such multi-employer plan is currently in reorganization or insolvency or that
such multi-employer plan intends to terminate or has been terminated under ERISA
Section 4041A. No notice of a "reportable event" within the meaning of ERISA
Section 4043, for which the 30-day reporting requirement has not been waived,
has been required to be filed for any of its Pension Plans or by any of its
ERISA Affiliates within the 12-month period ending on the date of this
Agreement. Neither it, its Subsidiaries nor any of their respective ERISA
Affiliates has incurred or is aware of any facts that are reasonably likely to
result in any liability under ERISA Sections 4069 or 4204.
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(v) All material contributions NP or any of its Subsidiaries are or
were required to make under the terms of any of its Plans have been timely made
or have been reflected in its Financial Statements. Neither any of its Pension
Plans nor any single-employer plan of any of its ERISA Affiliates has an
"accumulated funding deficiency" (whether or not waived) within the meaning of
Section 412 of the Code or ERISA Section 302. Neither it nor any of its
Subsidiaries or its ERISA Affiliates has provided, or is required to provide,
security to any Pension Plan or to any single-employer plan of an ERISA
Affiliate under Code Sections 401(a)(29) or 412(f)(3) or ERISA Sections 306, 307
or 4204.
(vi) Except as disclosed in the NP Financial Statements, neither it
nor any of its Subsidiaries has any obligations for retiree health and life
benefits.
(vii) No provision of the documents governing any Plan contains
restrictions on the rights of NP or its Subsidiaries to amend or terminate any
Plan without incurring liability under the Plan other than normal liabilities
for benefits.
(viii) Except as disclosed in the NP Financial Statements or
otherwise disclosed in this Agreement or in the related Annexes, neither the
Transaction nor the Mergers will not result in (a) vesting, acceleration, or
increase of any amounts payable under any Compensation Plan, (b) any material
increase in benefits under any Compensation Plan or (c) payment of any severance
or similar compensation under any Compensation Plan.
(ix) NP's obligations under any existing executive supplemental
retirement Plan ("ESI Plan") will not at any time exceed the value, as reflected
on NPB's books (reported consistent with GAAP), of insurance policies owned by
the NPB on the lives of the officers covered by the ESI Plan.
4.1.23 BROKER'S OR FINDER'S FEES. No agent, broker, person or firm
acting on behalf of NP or NPB, or under its authority, is or will be entitled to
any commission, broker's, finder's or financial advisory fee in connection with
the Transaction or the Merger.
4.2 REPRESENTATIONS AND WARRANTIES OF HFC.
HFC represents and warrants to Selling Shareholder that (i) it has all
requisite corporate power and authority to enter into and carry out its
obligations under this Agreement, and (ii) the execution and performance of this
Agreement by HFC does not violate any judgment, order, decree, statue, rule or
governmental regulation to which HFC may be subject, or any agreement or
instrument to which HFC is a party or by which it may be bound.
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SECTION 5.
CONDUCT AND TRANSACTIONS PRIOR TO CLOSING
5.1 CONDUCT OF NP'S AND NPB'S BUSINESS PRIOR TO CLOSING.
NP and NPB each covenant that, prior to Closing:
5.1.1 AVAILABILITY OF BOOKS, RECORDS AND PROPERTIES.
(i) The books, records, properties, contracts and documents of NP
and NPB will be available at all reasonable times to HFC, Bank and their
counsel, accountants and other representatives. Such items will be open for
inspection, audit and direct verification of loan or deposit balances,
collateral receipts and such other transactions or documentation as HFC or Bank
deem reasonably relevant to the Transaction. NP and NPB will cooperate fully in
such inspection and audit, and will make available all information reasonably
requested by HFC or Bank.
(ii) Upon request by HFC or Bank, NP and NPB will request that any
third parties involved in the preparation or review of the NP Financial
Statements or NP Subsequent Financial Statements disclose to HFC and Bank the
work papers or any similar materials related to such financial statements.
5.1.2 ORDINARY AND USUAL COURSE. Without prior written consent of HFC
or Bank, NP and NPB will conduct their respective business only in the ordinary
and usual course and will not do any of the following:
(i) Effect any stock split or other recapitalization with respect to
NP Common Stock or the shares of NPB; issue, pledge or encumber in any way any
shares of such capital stock; or grant any option for shares of such capital
stock.
(ii) Declare or pay any dividend, or make any other distribution,
either directly or indirectly, with respect to NP Common Stock or the shares of
NPB (except that NPB may declare a dividend to NP).
(iii) Dispose of assets or make any commitment other than in the
ordinary and usual course of business.
(iv) Solicit or accept deposit accounts of a different type from
accounts previously accepted by NPB or at rates materially in excess of rates
previously paid by NPB except to reflect changes in prevailing interest rates,
or incur any indebtedness for borrowed money.
(v) Acquire an ownership interest or a leasehold interest in any real
property, whether by foreclosure or otherwise, without making an appropriate
environmental evaluation in advance of obtaining such interest and without
providing to HFC such evaluation and at least 30 days' advance notice.
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(vi) Enter into any other transaction or make any expenditure other
than in the ordinary and usual course of its business except for expenses
reasonably related to completion of the Transaction.
(vii) Take any action which would materially and adversely affect or
delay their ability or the ability of HFC and Bank to obtain any necessary
approvals, consents or waivers of any governmental authority required for the
Transaction or the Mergers or to perform their respective covenants and
agreements under this Agreement.
5.1.3 CONTINUING REPRESENTATION AND WARRANTY. They will not do or
cause to be done anything that would cause any representation or warranty in
Section 4 of this Agreement to be untrue or inaccurate if made at Closing,
except as otherwise contemplated or required by this Agreement or consented to
in writing by HFC or Bank.
5.1.4 MAINTENANCE OF PROPERTIES. Each will maintain its respective
properties and equipment (and related insurance or its equivalent) in accordance
with good business practice.
5.1.5 PRESERVATION OF BUSINESS ORGANIZATION. Each will use all
reasonable effort to:
(i) Preserve its respective business organization.
(ii) Retain the services of management and employees consistent with
such program for consolidation of redundant employment positions resulting from
the Transaction as shall be developed in cooperation with HFC.
(iii) Preserve the goodwill of suppliers, customers and others with
whom NP and NPB have business relations.
5.1.6 SENIOR MANAGEMENT. Without prior consultation with HFC or Bank,
neither NP nor NPB will make any change with respect to present management
personnel having the rank of vice-president or higher.
5.1.7 COMPENSATION. Except as provided in Section 7.4 of this
Agreement, NP and NPB will not permit any increase in the current or deferred
compensation payable or to become payable by NP or NPB to any of its directors,
officers, employees, agents or consultants other than normal increments in
compensation in accordance with NP's and NPB's established policies with respect
to the timing and amounts of such increments. Without the prior written
approval of HFC and Bank, and except as provided in Section 7.3 of this
Agreement, NP and NPB will not commit to, execute or deliver any employment
agreement with any party not terminable without expense with two weeks notice.
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5.1.8 UPDATE OF FINANCIAL STATEMENTS. NP will deliver Subsequent NP
Financial Statements to HFC, as soon as possible and not later than thirty (30)
days following the end of each relevant period. The Subsequent NP Financial
Statements:
(i) Will be prepared from the books and records of NP and NPB.
(ii) Will present fairly the financial position and operating results
of NP and NPB at the times indicated and for the periods covered.
(iii) Will be prepared in accordance with GAAP (except for the absence
of notes), consistently applied through the periods covered, subject to normal
year-end adjustments.
(iv) Will reflect all material liabilities, contingent or otherwise,
of NP and NPB on the respective dates and for the respective periods covered,
except for liabilities not required to be so reflected in accordance with GAAP.
5.1.9 ACQUISITION PROPOSALS/TERMINATION FEE.
(i) NP agrees that neither it nor any of its Subsidiaries shall, and
NP shall direct and use its best efforts to cause its directors, officers,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, initiate, solicit, encourage or take any other action to
facilitate any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to Selling Shareholder) with respect
to a merger, consolidation, sale of NP Common Stock to an ESOP or similar
transaction involving, or any purchase of all or any significant portion of the
assets or equity securities of, NP or any of its Subsidiaries (any such proposal
or offer being hereinafter referred to as an "Acquisition Proposal") or, except
to the extent legally required for the discharge by the board of directors of
its fiduciary duties as advised in writing by such board's counsel, engage in
any negotiations concerning, or provide any confidential information or data to
any Person relating to, an Acquisition Proposal, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal. NP will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any of the foregoing. NP will take the necessary steps to inform the
appropriate individuals or entitles referred to in the first sentence hereof of
the obligations undertaken in this Section 5.1.9 of this Agreement. NP will
notify HFC immediately if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations are sought to be
initiated or continued with NP.
(ii) If prior to September 30, 1999, Control of NP is acquired by a
third party, by merger, purchase of assets, acquisition of stock or otherwise,
then unless (a) the Agreement was terminated by Selling Shareholder pursuant to
Sections 8.1.1, 8.1.2 or 8.1.3 of this Agreement, or (b) the representations and
warranties of HFC in the Agreement were false in any material respect as of the
date of this Agreement or HFC was in material default of its covenants in the
Agreement prior to such change of control, NP will promptly pay to HFC the
amount of $500,000 as complete
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reimbursement for its direct and indirect expenses incurred in proceeding with
this Transaction.
5.1.10 STATUS OF TITLE/LEASEHOLD INTERESTS. NP and NPB will provide
HFC and Bank with status of title reports issued by a title insurance company
reasonably satisfactory to HFC showing unencumbered fee simple title or vendee's
interest to all real property owned by NP and NPB, and unencumbered leasehold
interests in all real property leased by NP or NPB, and containing only such
exceptions, reservations and encumbrances as may be consented to in writing by
HFC or are described in clauses (a) through (d) of Section 4.1.7(i) of this
Agreement. With respect to such real property, NP and NPB will also provide to
HFC copies of existing title policies held in their files, unless NP or NPB have
reason to know of subsequent changes or unless HFC expressly requests an updated
policy for any specific piece of property. Any updated policy will be an ALTA
extended owner's policy with no exception other than those set forth above.
5.1.11 ENVIRONMENTAL ASSESSMENTS. NP will obtain Phase I
environmental assessments for any real property on which NP or any of its
Subsidiaries maintains an office and, upon request by HFC, for any
nonresidential OREO. Oral reports of such environmental assessments will be
delivered to HFC no later than eight (8) weeks, and written reports will be
delivered to HFC no later than ten (10) weeks, following the date of such
request. NP will obtain, at HFC's expense, Phase II environmental assessments
for properties identified by HFC on the basis of such Phase I environmental
assessments.
5.1.12 DIRECTORS' AND OFFICERS' LIABILITY. Immediately prior to the
Effective Date, NP shall notify its directors' and officers' liability insurers
of the Transaction and of all pending or threatened claims, actions, suits,
proceedings or investigations asserted or claimed against any Person entitled to
indemnification pursuant to Section 9.4 of this Agreement and known to NP, or
circumstances reasonably deemed by HFC to be likely to give rise thereto, in
accordance with terms and conditions of the applicable policies.
5.2 SUBMISSION TO REGULATORY AUTHORITIES.
Representatives of HFC and Bank will prepare and file with applicable
regulatory agencies, applications for approvals, waivers or other actions deemed
necessary or desirable, in the opinion of their counsel, in order to consummate
the Transaction and the Mergers. Representatives of Selling Shareholder, NP and
NPB will cooperate in the preparation of such applications and other documents
as reasonably requested by HFC. As appropriate, HFC will provide copies of such
applications for review by NP. These applications are expected to include:
(i) An application to the Federal Reserve and related filings regarding
the Stock Purchase.
(ii) Filings and coordination with the Washington Secretary of State with
respect to Merger I, pursuant to the Corporate Code.
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(iii) An application to the FDIC and Director and related filings
regarding Merger II.
5.3 PUBLIC ANNOUNCEMENTS.
Subject to written advice of legal counsel with respect to legal
requirements relating to public disclosure of matters related to the subject
matter of this Agreement, the timing and content of any announcements, press
releases or other public statements concerning the Transaction shall occur upon,
and be determined by, the mutual consent of NP and HFC.
5.4 CONSENTS.
Selling Shareholder will vote their shares of NP Common Stock in favor of
Merger I and each corporate party to this Agreement will use its best efforts to
obtain the consent or approval of any Person whose consent or approval is
required in order to permit HFC, Bank, Selling Shareholder and NPB to consummate
the Transaction and the Mergers.
5.5 FURTHER ACTIONS.
5.5.1 EFFORTS TO CONSUMMATE THE TRANSACTION. The parties to this
Agreement will use their best efforts in good faith to make all such
arrangements, do or cause to be done all such acts and things, and execute and
deliver all such certificates and other instruments and documents as may be
reasonably necessary or appropriate in order to consummate the Transaction
promptly.
5.5.2 POLICIES OF NP. At the request of HFC, NP will use its best
efforts to modify and change its loan and real estate valuation policies and
practices (including loan classifications and levels of reserves) and its fixed
asset amortization and expense procedures prior to the Effective Date so as to
be consistent on a mutually satisfactory basis with those of HFC and GAAP. NP's
and NPB's representations, warranties, covenants and conditions contained in
this Agreement will not be deemed to be untrue or breached or unfulfilled in any
respect for any purpose as a consequence of any modifications or changes
undertaken solely on account of this Section 5.5.2.
5.5.3 APPOINTMENT OF DIRECTOR BY HFC. HFC agrees that, following the
Effective Date, it will appoint one current NP Board Member acceptable to HFC,
as a director of HFC.
5.5.4 NPB SIGNAGE. HFC agrees that, following the Effective Date,
and to the extent permissible under applicable regulatory constraints, certain
existing NPB signage will be retained at the former NPB locations in addition to
the Heritage Bank identifying signage at such locations.
5.6 NOTICE.
NP and NPB will provide HFC and Bank with prompt written notice of:
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(i) Any events that, individually or in the aggregate, can reasonably be
expected to have a Material Adverse Effect with respect to NP or NPB.
(ii) The commencement of any proceeding against NP or NPB by or before any
court or governmental agency that, individually or in the aggregate, can
reasonably be expected to have a Material Adverse Effect with respect to NP or
NPB.
(iii) Acquisition of an ownership or leasehold interest in any real
property, as specified in Section 5.1.2 of this Agreement.
5.7 CONFIDENTIALITY.
Subject to the requirements of law, each party will keep confidential, and
will exercise its best efforts to cause its representatives to keep
confidential, all information and documents obtained pursuant to this Agreement
unless such information (i) was already known to such party, (ii) becomes
available to such party from other sources not known by such party to be bound
by a confidentiality obligation, (iii) is disclosed with prior written approval
of the party to which such information pertains or (iv) is or becomes readily
ascertainable from published information or trade sources. In the event that
this Agreement is terminated or the transactions contemplated by this Agreement
shall otherwise fail to be consummated, each party to this Agreement shall
promptly cause all copies of documents or extracts thereof containing
information and data as to another party hereto to be returned to the party
which furnished the same.
SECTION 6.
APPROVALS AND CONDITIONS
6.1 REQUIRED APPROVALS.
The obligations of the parties to this Agreement are subject to the
approval of the Transaction by the Federal Reserve and expiration of any
required waiting period. Consummation of the Mergers are subject to and
conditioned upon consummation of the Transaction and approval of the Mergers by
all regulatory agencies having jurisdiction with respect to the Mergers.
6.2 CONDITIONS TO OBLIGATIONS OF HFC AND BANK.
All obligations of HFC and Bank pursuant to this Agreement are subject to
satisfaction of the following conditions at or before Closing:
6.2.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of NP and NPB contained in this Agreement or in any certificate or
other instrument delivered in connection with this Agreement will be true and
correct in all material respects at Closing, with the same force and effect as
though such
-19-
<PAGE>
representations and warranties had been made on and as of Closing, except to the
extent that such representations and warranties are by their express provisions
made as of a specified date, in which case such representations and warranties
shall be true and correct in all material respects as of such date. NP and NPB
will have delivered to HFC and Bank their respective certificates to that
effect, executed by the chief executive officer of NP and dated as of Closing.
6.2.2 COMPLIANCE. NP and NPB each will have performed and complied
in all material respects with all terms, covenants and conditions of this
Agreement on or before Closing. NP and NPB will have delivered to HFC and Bank
their respective certificates to that effect, executed by the chief executive
officer of NP and dated as of Closing.
6.2.3 NO MATERIAL ADVERSE EFFECT. Since December 31, 1997, there
will have been no material damage, destruction or loss (whether or not covered
by insurance) and no other event, individually or in the aggregate, constituting
or reasonably expected by HFC to constitute a Material Adverse Effect with
respect to NP or NPB.
6.2.4 FINANCIAL CONDITION. The following will be true and the
certificates of NP and NPB referred to in Subsection 6.2.2 will so state:
(i) NP's and NPB's Capital will not be less than $7,999,000 and
$7,736,000, respectively, plus net income determined in accordance with GAAP and
less (a) payments made pursuant to Section 7.4 hereof and (b) expenses related
to the Transaction in an amount not to exceed $200,000, and in the case of NPB
only, less dividends paid to NP.
(ii) Core Deposits of NPB will not be less than $58,000,000.
(iii) NPB's allowance for possible loan and lease losses will not be
less than 1.36% of NPB's total outstanding loans and leases, and will be
adequate to absorb NPB's anticipated loan and lease losses.
(iv) The reserves set aside for any contingent liabilities of NP and
NPB will be adequate to absorb all reasonably anticipated losses.
6.2.5 NO GOVERNMENTAL PROCEEDINGS. No action or proceeding will have
been commenced or threatened by any governmental agency to restrain or prohibit
or invalidate the Transaction.
6.2.6 EXECUTION OF ADDITIONAL AGREEMENTS. The agreements described
in Section 7 of this Agreement will have been executed and delivered to HFC and
Bank.
6.2.7 LEGAL OPINION. Graham & Dunn, P.C., counsel for NP and NPB,
will have delivered to HFC and Bank an opinion, dated as of Closing, in form and
substance acceptable to HFC and its counsel.
-20-
<PAGE>
6.2.8 RECEIPT OF TITLE POLICY. HFC will have received the title
insurance policy or policies required by Section 5.1.10 of this Agreement.
6.2.9 CORPORATE AND SHAREHOLDER ACTION. Each of the following will
have approved the Transaction:
(i) The Boards of Directors of NP and NPB.
(ii) Selling Shareholder, as sole shareholder of NP.
(iii) NP, as shareholder of NPB.
6.2.10 RESIGNATION OF DIRECTORS. Each of the directors of NP and NPB
will have tendered their written resignation as directors of NP and/or NPB to be
effective upon consummation of the Transaction.
6.3 CONDITIONS TO OBLIGATIONS OF SELLING SHAREHOLDER, NP AND NPB.
All obligations of Selling Shareholder, NP and NPB pursuant to this
Agreement are subject to satisfaction of the following conditions at or before
Closing:
6.3.1 There shall not have occurred, on or prior to Closing, any
event which would cause a reasonable person to doubt the ability of HFC to
perform its obligations under this Agreement.
6.3.2 CORPORATE ACTION. The Board of Directors of HFC will have
approved the Transaction.
SECTION 7.
SELLING SHAREHOLDER, OFFICERS AND EMPLOYEES
7.1 SELLING SHAREHOLDER.
The Selling Shareholder will enter into a written agreement, in the form
attached to this Agreement as Exhibit C, providing that, for a period of two
years after Closing, no such person will become involved, directly or
indirectly, as a principal shareholder, director or officer of any financial
institution that competes with HFC, Bank or any of their affiliates in Pierce
County.
7.2 EMPLOYEES.
HFC and Bank intend that their current personnel policies will apply to any
current employees of NP and NPB who are retained in the service of HFC and Bank
after Closing. This expression of intent will not be construed to create a
contract of employment with such employees of NP or NPB.
-21-
<PAGE>
7.3 OFFICERS' EMPLOYMENT CONTRACTS.
At or prior to execution of this Agreement, Messrs. Winship, Manning and
Carlson will enter into employment contracts with Bank, effective as of the
Closing, in a form mutually agreeable to the parties.
7.4 INITIAL PAYMENTS TO SENIOR MANAGEMENT.
Prior to Closing, NPB will enter into bonus/deferred payment agreements
with Messrs. Winship, Manning and Carlson providing for payment to each officer
of a cash bonus equal to approximately three times total cash compensation of
each officer for the year 1997 (reduced as necessary to avoid treatment as a
payment subject to Section 280G of the Internal Revenue Code). The agreements
will provide that (i) 20% of the amount to be paid to each officer will be paid
immediately following Closing; (ii) 15% of the amount to be paid to each officer
will be paid each six months following the date of Closing; and (iii) the
balance of the amount to be paid to each officer will be paid 30 months
following the date of Closing.
7.5 EMPLOYEE BENEFIT ISSUES.
7.5.1 COMPARABILITY OF BENEFITS. HFC and Bank confirm to NP and NPB
their present intention to provide employees of NPB who become employees of Bank
with employee benefit programs in the aggregate generally not less favorable to
such employees than those presently being provided to employees of NP and NPB
and those being provided to employees of HFC and Bank on the date of Closing.
7.5.2 TREATMENT OF PAST SERVICE. For purposes of participation,
vesting and benefit accruals in HFC's other employee benefit programs, employees
of NPB who become employees of Bank will receive credit for prior service with
NP and/or NPB for purposes of determining eligibility and vesting, but not for
determining benefit accruals. For a reasonable period after Closing, not to
exceed six months, any non-continuing employee also will be given an opportunity
to apply for open positions with HFC or any of its banking subsidiaries, and HFC
and such Subsidiary will use their best efforts to give prompt notice of job
postings to such employees.
7.5.3 NO CONTRACT CREATED. Except as provided in Section 7.3 of this
Agreement, nothing in this Agreement will give any employee a right to
continuing employment.
7.6 OFFICE AND SECRETARY SUPPORT FOR MR. P.K. WALLERICH.
HFC will provide Mr. P.K. Wallerich with:
(i) Office space and secretarial assistance at the former NPB building for
at least six months following the Closing.
-22-
<PAGE>
(ii) Office space and secretarial assistance inside or outside of the
former NPB building, at the discretion of HFC, for an additional two and one-
half years following Closing, at a cost not to exceed $2,500 per month.
(iii) Space for personal and business files for five years following
Closing.
SECTION 8.
TERMINATION OF AGREEMENT AND ABANDONMENT OF TRANSACTION
8.1 TERMINATION.
This Agreement and the Transaction may be terminated at any time before
Closing, whether before or after approval of this Agreement by the Selling
Shareholder, NP, NPB, HFC and Bank as follows, and in no other manner:
8.1.1 MUTUAL CONSENT. By mutual consent of the parties to this
Agreement, if so determined by the Selling Shareholder and the Board of
Directors of each corporate party, so determined by a vote of a majority of the
members of its entire Board.
8.1.2 SATISFACTION OF CONDITIONS. By Selling Shareholder, NP and NPB
at any time on or before September 30, 1998 if any condition set forth in
Sections 6.1 or 6.3 of this Agreement is rendered impossible to be satisfied by
such date (other than as a result of a breach of this Agreement by Selling
Shareholder, NP or NPB), and by HFC and Bank at any time on or before September
30, 1998 if any condition set forth in Sections 6.1 or 6.2 of this Agreement is
rendered impossible to be satisfied by such date (other than as a result of a
breach of this Agreement by HFC or Bank).
8.1.3 TRANSACTION NOT CONSUMMATED. By HFC and Bank or by Selling
Shareholder, NP and NPB if the Transaction is not consummated by September 30,
1998, provided that no party seeking to terminate is then in material breach of
any representation, warranty, covenant or other agreement contained in this
Agreement.
8.1.4 BREACH. By Selling Shareholder, NP and NPB or by HFC and Bank
in the event of a material breach of any representation, warranty, covenant or
agreement contained in this Agreement, which breach would result in the failure
to satisfy the closing condition set forth in Sections 6.1 and 6.3 in the case
of NP and NPB, or Section 6.1, 6.2.1, or 6.2.2, in the case of HFC and Bank, and
which breach cannot be cured within 30 days after written notice of such breach
is given by the non-breaching party to the party committing such breach.
8.2 COST ALLOCATION UPON TERMINATION.
In connection with the termination of this Agreement, NP, NPB, HFC and Bank
each will pay their own out-of-pocket costs incurred in connection with this
Agreement, and will have no other liability to any other party; provided,
however, that no party to
-23-
<PAGE>
this Agreement shall be relieved or released from any liabilities or damages
arising out of its intentional or willful breach of any provision of this
Agreement or by a lack of good faith efforts that result in the failure to
perform or fulfill any representation, warranty, covenant or condition set forth
in this Agreement.
SECTION 9.
MISCELLANEOUS
9.1 NOTICES.
Any notice, request, instruction or other document to be given under this
Agreement will be in writing and will be delivered personally or sent by
registered or certified mail, postage prepaid, addressed as follows:
North Pacific Bancorporation/ North Pacific Bancorporation
North Pacific Bank 5448 South Tacoma Way
Tacoma, WA 98409
Attn: P.K. Wallerich, Chairman
with a copy to: Steven M. Klein, Esq. or
Mark C. Lewington, Esq.
Graham & Dunn, P.C.
1420 Fifth Avenue, 38th Floor
Seattle, WA 98101
Heritage Financial Corporation/ Heritage Financial Corporation
Heritage Savings Bank 201 5th Avenue S.W.
Olympia WA 98502
Attn: Don Rhodes, Chairman, and
Chief Executive Officer
with a copy to: J. James Gallagher, Esq. or
Sandra L. Gallagher, Esq.
Gordon, Thomas, Honeywell, Malanca,
Peterson & Daheim, P.L.L.C.
1201 Pacific Avenue, Suite 2200
P.O. Box 1157
Tacoma, WA 98402
or to such other address or person as any party may designate by written notice
to the other.
-24-
<PAGE>
9.2 WAIVERS AND EXTENSIONS.
NP, NPB, Selling Shareholder, HFC or Bank may, by, written instrument,
extend the time for the performance of any of the obligations or other acts of
any other party, and may waive:
(i) any inaccuracies of any other party in the representations and
warranties contained in this Agreement or in any document delivered in
connection with this Agreement;
(ii) compliance with any of the covenants of any other party; and
(iii) any other party's performance of any obligations pursuant to this
Agreement and any other condition precedent set out in Section 6 of this
Agreement.
Any waiver or extension pursuant to this Agreement will be executed by
Selling Shareholder and by an authorized officer of any other party so electing.
9.3 CONSTRUCTION AND EXECUTION IN COUNTERPARTS.
Except as otherwise expressly provided here, this Agreement: (i) covers the
entire understanding of HFC, Bank, Selling Shareholder, NP and NPB, and no
modification or amendment of its terms or conditions will be effective unless in
writing and signed by Selling Shareholder and a duly authorized officer of NP,
HFC and Bank; (ii) will not be interpreted by reference to any of the titles or
headings to the Sections or Subsections of this Agreement, which have been
inserted for convenience only and are not deemed a substantive part of this
Agreement; (iii) is deemed to include all amendments to this Agreement, each of
which is made a part of this Agreement by this reference; and (iv) may be
executed in one or more counterparts, each of which will be deemed an original,
but all of which taken together will constitute one and the same document.
9.4 INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
On and after the Effective Date, HFC will indemnify and defend those
persons now (or at Closing) acting as directors and executive officers of NP and
NPB from and against any and all claims, losses, liabilities, costs, and
expenses (including reasonable attorney fees) arising from any of such persons'
actions in such capacities prior to the Effective Date, to the full extent that
NP and/or NPB now are so obligated under applicable law or under their
respective articles of incorporation or bylaws in effect at the date of this
Agreement. For a period of three years after the Effective Date, HFC will use
reasonable efforts to cause to be maintained in effect (with reputable and
financially sound insurers) director and officer liability insurance
substantially similar to that maintained by NP or NPB with respect to claims
arising from facts or events which occurred before the Effective Date.
-25-
<PAGE>
9.5 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS.
Except for the covenants set forth in Section 5.7 of this Agreement (as to
confidentiality), the representations, warranties and covenants set forth in
this Agreement will not survive Closing or the termination of this Agreement.
9.6 ATTORNEYS' FEES AND COSTS.
In the event of any dispute or litigation with respect to the terms and
conditions or enforcement of rights or obligations arising by reason of this
Agreement or the Transaction, the prevailing party in any such litigation will
be entitled to receipt of its costs and expenses, including reasonable
attorneys' fees.
9.7 GOVERNING LAW.
This Agreement will be governed by and construed in accordance with the
laws of the State of Washington, except to the extent that certain matters may
be governed by federal law.
SECTION 10.
AMENDMENTS
Subject to applicable law, this Agreement and the form of any attached
Exhibit or Annex may be amended upon authorization of Selling Shareholder and
the boards of directors of NP, NPB, HFC and Bank.
DATED this 3rd day of April, 1998
-26-
<PAGE>
HERITAGE FINANCIAL CORPORATION
By: /s/ Donald V. Rhodes
----------------------
Donald V. Rhodes
Its: Chairman, President and Chief
Executive Officer
Attest:
/s/ Wendy K. Gauksheim
- -----------------------
Secretary
HERITAGE SAVINGS BANK
By: /s/ Donald V. Rhodes
----------------------
Donald V. Rhodes
Its: Chairman, President and Chief
Executive Officer
Attest:
/s/ Wendy K. Gauksheim
- -----------------------
Secretary
-27-
<PAGE>
SELLING SHAREHOLDER
/s/ Peter K. Wallerich
----------------------
Peter K. Wallerich
/s/ Marylu Wallerich
----------------------
Marylu Wallerich
STATE OF WASHINGTON )
) ss.
County of Pierce )
I certify that I know or have satisfactory evidence that Peter K. Wallerich
and Marylu Wallerich are the persons who appeared before me, and said persons
acknowledged that they signed this instrument and acknowledged it to be their
free and voluntary act for the uses and purposes mentioned in the instrument.
DATED this 3rd day of April, 1998.
/s/ Jill L. Myers
------------------
(Type/Print Name above)
Notary Public in and for the
State of Washington,
residing at Gig Harbor
My appointment expires: 5/9/98
NORTH PACIFIC BANCORPORATION
By: /s/ Peter K. Wallerich
------------------------
Peter K. Wallerich
Its: Chairman and Chief Executive Officer
Attest:
/s/ Scott D. Winship
- --------------------
Secretary
NORTH PACIFIC BANK
-28-
<PAGE>
By: /s/ Scott D. Winship
----------------------
Scott D. Winship
Its: President and Chief Executive Officer
Attest:
/s/ Peter K. Wallerich
- -----------------------
Chairman
STATE OF WASHINGTON )
)ss
COUNTY OF PIERCE )
On this 3rd day of April, 1998, before me personally appeared Donald V.
Rhodes, to me known to be the Chairman, President and Chief Executive Officer of
Heritage Financial Corporation, the corporation that executed the foregoing
instrument, who acknowledged said instrument to be the free and voluntary act
and deed of said corporation, for the uses and purposes mentioned there, and who
stated on oath that he or she was authorized to execute said instrument, and
that the seal affixed (if any) was the official seal of said corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to this
document as of the day and year first written above.
/s/ Jill L. Myers
-------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at Gig Harbor
My Commission expires: 5/9/98
STATE OF WASHINGTON )
)ss
COUNTY OF PIERCE )
On this 3rd day of April, 1998, before me personally appeared Donald V.
Rhodes, to me known to be the Chairman, President and Chief Executive Officer of
Heritage Savings Bank, the corporation that executed the foregoing instrument,
who acknowledged said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes mentioned there, and who stated on
oath that he was authorized to execute said instrument, and that the seal
affixed (if any) was the official seal of said corporation.
-29-
<PAGE>
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to this
document as of the day and year first written above.
/s/ Jill L. Myers
-------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at: Gig Harbor
My Commission expires: 5/9/98
-30-
<PAGE>
STATE OF WASHINGTON )
)ss
COUNTY OF PIERCE )
On this 3rd day of April, 1998, before me personally appeared Peter K.
Wallerich, to me known to be the Chairman and Chief Executive Officer of North
Pacific Bancorporation the corporation that executed the foregoing instrument,
who acknowledged said instrument to be the free and voluntary act and deed of
said corporation, for the uses and purposes mentioned there, and who stated on
oath that he was authorized to execute said instrument, and that the seal
affixed (if any) was the official seal of said corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to this
document as of the day and year first written above.
/s/ Jill L. Myers
-------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at: Gig Harbor
My Commission expires: 5/9/98
STATE OF WASHINGTON )
)ss
COUNTY OF PIERCE )
On this 3rd day of April, 1998, before me personally appeared Scott D.
Winship, to me known to be the President and Chief Executive Officer of North
Pacific Bank, the corporation that executed the foregoing instrument, who
acknowledged said instrument to be the free and voluntary act and deed of said
corporation, for the uses and purposes mentioned there, and who stated on oath
that he was authorized to execute said instrument, and that the seal affixed (if
any) was the official seal of said corporation.
IN WITNESS OF THE FOREGOING, I have set my hand and official seal to this
document as of the day and year first written above.
/s/ Jill L. Myers
-------------------------------------
NOTARY PUBLIC in and for the State of
Washington, residing at: Gig Harbor
My Commission expires: 5/9/98
-31-
<PAGE>
ANNEX 1
[SECTION 4.1.1]
OFFICES OF EACH BANK
1. HERITAGE SAVINGS BANK
Main Branch Tumwater Branch
- ----------- ---------------
201 - 5th Avenue S.W. 5301 Capitol Blvd.
Olympia, WA 98501 Tumwater, WA 98501
Thurston County Home Loan Center West Olympia Branch
- -------------------------------- -------------------
520 Water Street 900 Cooper Point Road S.W.
Olympia, WA 98501 Olympia, WA 98502
Lacey Branch Indian Summer Branch
- ------------ --------------------
4400 Pacific Avenue S.E. 5800 Rainier Loop S.E.
Lacey, WA 98503 Lacey, WA 98513
Shelton Branch
Shelton Branch Lakewood Branch
- -------------- ---------------
301 East Wallace Kneeland Blvd. 9802 Gravelly Lake Dr. S.W.
Suite 115 Tacoma, WA 98499
Shelton, WA 98584
Spanaway Branch
Spanaway Branch Pierce County Business Banking Branch
- --------------- -------------------------------------
15211 Pacific Avenue So. 1201 Pacific Avenue
Tacoma, WA 98444 Fountain Court, Suite 5
Tacoma, WA 98402
80th and Pacific Branch
- -----------------------
8002 Pacific Avenue
Tacoma, WA 98408
2. NORTH PACIFIC BANK
Main Office
-----------
5448 South Tacoma Way
P.O. Box 9188
Tacoma, WA 98409-0188
Branch Office
-------------
8801 South Tacoma Way
Tacoma, WA 98499-4546
-32-
<PAGE>
Loan Production Office (not opened)
-----------------------------------
2016 South 320th Street
Building "B", Suite "N"
Federal Way, Washington 98003
-33-
<PAGE>
ANNEX 2
[SECTION 4.1.3]
NP SHARES
1. NP OPTIONS
None
<PAGE>
ANNEX 3
[SECTION 4.1.4]
SUBSIDIARIES
1. NORTH PACIFIC BANCORPORATION
North Pacific Bank is a wholly owned subsidiary of North Pacific
Bancorporation.
North Pacific Financial Services, Inc. is a wholly owned subsidiary of
North Pacific Bank.
North Pacific Mortgage Company is a wholly owned subsidiary of North
Pacific Bank.
<PAGE>
ANNEX 4
[SECTION 4.1.7]
PROPERTIES
Lease which is not Assignable without Consent of Other Party
Parties Date Assignment Provision
- ------- ---- --------------------
NPB and Cratsenberg Properties February 27, 1998 Section Nine: Assignment
and Subletting
. No assignment by Tenant
without consent of
Landlord
<PAGE>
ANNEX 5
[SECTION 4.1.8]
ENVIRONMENTAL MATTERS
None.
<PAGE>
ANNEX 6
[SECTION 4.1.12]
MATERIAL CONTRACTS
<TABLE>
<CAPTION>
Agreement Parties Date
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Lease Agreement NPB and Cratsenberg February 27, 1998
Properties
- ---------------------------------------------------------------------------------------
Software Maintenance NPB and Jack Henry & January 25, 1994
Agreement Associates
- ---------------------------------------------------------------------------------------
Software Maintenance NPB and Goldleaf December 1, 1996
Agreement Technologies, Inc.
- ---------------------------------------------------------------------------------------
Business Manager License NPB and Private Business, January 12, 1994
Agreement Inc.
- ---------------------------------------------------------------------------------------
Capital Debenture NPB and debenture September 10, 1991
Agreement holders
- ---------------------------------------------------------------------------------------
Participating Bank NPB and Columbus Bank and March 27, 1997
Agreement - Credit Card Trust Company
Program
- ---------------------------------------------------------------------------------------
Licensing Agreement North Pacific Financial January 4, 1996
Services, Inc. and Pierce
County
- ---------------------------------------------------------------------------------------
Death or Disability NPB and Peter Wallerich Unexecuted
Benefits Agreement
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ANNEX 7
[SECTION 4.1.17]
ASSET CLASSIFICATION
This material was omitted from this filing as it contained confidential
information related to NP's customers
<PAGE>
ANNEX 8
[SECTION 4.1.20]
INSURANCE
Policy Number Insurer Type
- -----------------------------------------------------------------------
46DO00108-3 Bancinsure, Inc. Directors and Officers
- -----------------------------------------------------------------------
126720-04697210001 Aetna Insurance Paid-up Life Insurance
- -----------------------------------------------------------------------
L356661-00 Allmerica Financial Exceptional Life for P.K.
Wallerich
- -----------------------------------------------------------------------
L360932-00 Allmerica Financial Exceptional Life for Paul
Manning
- -----------------------------------------------------------------------
9331-62458 Regence Blue Shield Group Health
- -----------------------------------------------------------------------
9341-92570 Regence Blue Shield Group Health
- -----------------------------------------------------------------------
<PAGE>
ANNEX 9
[SECTION 4.1.22]
EMPLOYEE BENEFITS
. North Pacific Bank Employee Stock Ownership Plan, dated December 31, 1996.
. A self-administered plan for Barbara Hansen dated October, 1986.
<PAGE>
EXHIBIT A
MERGER AGREEMENT I
TO MERGE
NORTH PACIFIC BANCORPORATION
AND
HERITAGE FINANCIAL CORPORATION
THIS Merger Agreement I (the "Merger Agreement") dated as of _________,
1998, is between HERITAGE FINANCIAL CORPORATION, a Washington corporation
("HFC"), and NORTH PACIFIC BANCORPORATION, a Washington corporation ("NP"). HFC
and NP are sometimes called the "Constituent Corporations."
RECITALS
1. HFC and NP and their respective subsidiaries have entered into a Plan
of Stock Purchase and Agreement to Merge dated as of March ___, 1998 (the
"Master Agreement"), providing for, among other things, (a) the acquisition of
all issued and outstanding shares of NP by HFC (the "Stock Purchase"); and (b)
following consummation of the Stock Purchase, the merger of NP with and into
HFC, upon the terms and conditions provided in the Master Agreement and this
Merger Agreement, all in accordance with the provisions of the Corporate Code
(the "Merger").
2. HFC has authorized capital stock of 15,000,000 shares of common stock,
no par value ("HFC Common Stock") of which 9,751,512 shares were outstanding at
March ____, 1998.
3. NP has authorized capital stock of 50,000 shares of common stock,
$1.00 par value per share (the "NP Common Stock"), of which 5,154 shares were
outstanding at March ____, 1998. At the Effective Time of the Merger, all issued
and outstanding shares of NP will be owned by HFC.
4. Unless the context otherwise require, capitalized terms defined in
this Merger Agreement, shall have the meaning set forth under the "Definitions"
heading of the Master Agreement.
5. At least a majority of the respective Board of Directors of HFC and NP
deem it advisable and in the best interests of the respective corporations and
their respective shareholders or shareholder that the Merger be so consummated.
AGREEMENTS
HFC and NP, subject to the conditions set forth in the Master Agreement and
this Merger Agreement, in consideration of the premises and of the mutual
covenants and agreements contained there and here and of the benefits to accrue
to them, agree that the Constituent Corporations be merged into a single
corporation which shall be
<PAGE>
HFC, and agree, prescribe and set forth (among other provisions) the terms and
conditions of the Merger, the motive carrying the same into effect and the
manner and basis of converting the shares of each of the Constituent
Corporations as follows:
ARTICLE 1
MERGER
Subsequent to and conditioned upon Closing of the Stock Purchase, NP shall
be merged into HFC in accordance with the applicable provisions of the Corporate
Code upon the filing of appropriate Articles of Merger with the Washington
Secretary of State, as provided in the Corporate Code. The Effective Time
specified in such filing is referred to as the Effective Time. At the Effective
Time, the separate existence of NP shall cease except to the extent provided by
law in the case of a corporation after its merger into another corporation and
HFC shall continue under the laws of Washington as the surviving corporation
(the "Surviving Corporation").
ARTICLE 2
CERTIFICATE OF INCORPORATION AND
BYLAWS OF SURVIVING CORPORATION
Section 2.1 The Articles of Incorporation of HFC as in effect immediately
prior to the Effective Time shall continue in full force and effect as the
Articles of Incorporation of the Surviving Corporation until thereafter duly
amended.
Section 2.2 The Bylaws of HFC as in effect immediately prior to the
Effective Time shall continue in full force and effect as the Bylaws of the
Surviving Corporation until thereafter duly amended.
ARTICLE 3
BOARD OF DIRECTORS AND OFFICERS OF
SURVIVING CORPORATION
Section 3.1 As of the Effective Time, the members of the Board of
Directors and the officers of HFC as constituted immediately prior to the
Effective Time shall continue as members of the Board of Directors and the
officers of the Surviving Corporation. If a vacancy shall exist on the Board of
Directors of the Surviving Corporation by reason of the failure or inability of
any of the above-described persons to serve as a director, such vacancy may be
filled in the manner provided in the Articles of Incorporation and the Bylaws of
the Surviving Corporation.
ARTICLE 4
MANNER OF TRANSFERRING SHARES OF STOCK OF NORTH PACIFIC
Section 4.1 As of the Effective Time, each share of NP Common Stock, which
is held immediately prior to the Effective Time by HFC, the sole shareholder of
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<PAGE>
NP, will and by virtue of the Merger and without any actions by the holder
thereof, the canceled and all rights in respect thereof will cease.
Section 4.2 The shares of capital stock of HFC issued and outstanding at
the Effective Time will continue to be issued and outstanding shares of the
Surviving Corporation.
Section 4.3 The amount of capital stock of HFC, as the Surviving
Corporation, will be equal to the combined capital of the Constituent
Corporations, adjusted, however, for changes (including necessary or appropriate
accounting adjustments) between March ____, 1998 and the Effective Time of the
Merger.
ARTICLE 5
EFFECTIVENESS
Appropriate Articles of Merger shall be delivered to the Washington
Secretary of State for filing, all in accordance with the applicable provisions
of the Corporate Code, and the officers of each of the Constituent Corporations
shall execute all such other documents and shall take all such other actions as
may be necessary to effect the Merger in accordance with this Merger Agreement.
ARTICLE 6
EFFECTS OF THE MERGER
Section 6.1 Upon and after the Effective Time, the Surviving Corporation
shall possess all the rights, privileges, powers and franchises of a public as
well as of a private nature, and be subject to all of the restrictions,
disabilities and duties, of the Constituent Corporations; and all the rights,
privileges, powers and franchises of the Constituent Corporations, and all
property, real, personal and mixed, and all debts due to either of the
Constituent Corporations on whatever account, as well for stock subscriptions as
all other things in action or belonging to each of the Constituent Corporations
shall be vested in the Surviving Corporation; and all property, rights,
privileges, powers and franchises, and all and every other interest, shall be
thereafter as effectually the property of the Surviving Corporation as they were
of the Constituent Corporations, and the title to any real estate vested by deed
or otherwise in either of these Constituent Corporations shall not revert or be
in any way impaired by reason of the Merger; but all rights of creditors and all
liens upon any property of either of the Constituent Corporations shall be
preserved unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall thenceforth attach to the Surviving Corporation and may be
enforced against it to the same extent as if said debts, liabilities and duties
had been incurred or contracted by it.
Section 6.2 If at any time after the Effective Time, the Surviving
Corporation shall consider or be advised that any further deeds, assignments or
assurances in law or any other things are necessary, desirable or proper to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation,
the title to any property or rights of
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<PAGE>
the Constituent Corporations acquired or to be acquired by reason of, or as a
result of, the Merger, the Constituent Corporations agree that the Surviving
Corporations and its proper officers and directors shall execute and deliver all
such property, deeds, assignments and assurances in law and do all things
necessary, desirable or proper to vest, perfect or confirm title to such
property or rights in the Surviving Corporation and otherwise to carry out the
purposes of this Merger Agreement and that the proper officers and directors of
the Constituent Corporations and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of the Constituent
Corporations or otherwise to take any and all such action.
ARTICLE 7
CONDITIONS TO CLOSING
Obligations of both NP and HFC to proceed with closing of this Merger are
conditioned upon (a) consummation of the Stock Purchase; and (b) approval of the
Merger by HFC as the sole shareholder of NP.
ARTICLE 8
TERMINATION OF MASTER AGREEMENT AND ABANDONMENT OF MERGER
Section 8.1 This Merger Agreement and the Merger contemplated hereby may
be terminated and abandoned at any time before appropriate Articles of Merger
have been filed with the Washington Secretary of State, whether before or after
approval of this Merger Agreement by the shareholder of NP, and shall
automatically terminate without further action by either of the parties hereto
in the event the Master Agreement is terminated in accordance with its terms.
Section 8.2 At any time prior to filing of appropriate Articles of Merger
with the Washington Secretary of State, the parties hereto may, by written
agreement approved by their Boards of Directors and subject to Section 9.2 of
the Master Agreement, (a) extend the time for the performance of any of the
obligations or other acts of the parties hereto; (b) waive compliance with any
of the conditions, covenants or agreements contained in this Merger Agreement,
or (c) amend or modify any of the provisions of the this Merger Agreement.
Section 8.3 If for any reason this Merger Agreement ceases to be binding
upon the Constituent Corporations because of termination as provided herein or
otherwise, it shall thereafter be void without further action by the shareholder
NP.
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<PAGE>
ARTICLE 9
MISCELLANEOUS
Section 9.1 This Merger Agreement may be executed several counterparts,
each of which shall be deemed an original, but all of which counterparts
collectively shall constitute one instrument representing the Merger Agreement.
Section 9.2 Except as otherwise provided in this Merger Agreement, nothing
herein expressed or implied is intended, or shall be construed, to confer upon
or give any person, firm or corporation, other than the constituent corporations
and their shareholder and their successors and assigns, any rights or remedies
under or by reason of this Merger Agreement.
Section 9.3 This Merger Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Washington.
IN WITNESS WHEREOF, the constituent corporations have caused this Merger
Agreement to be executed by their duly authorized officers as of the date first
above written.
NORTH PACIFIC BAN CORPORATION HERITAGE FINANCIAL CORPORATION
By:_________________________ By:_________________________
Its:________________________ Its:________________________
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<PAGE>
EXHIBIT B
MERGER AGREEMENT II
TO MERGE
NORTH PACIFIC BANK
AND
HERITAGE SAVINGS BANK
This MERGER AGREEMENT, dated as of ________________, 1998, is by and
between HERITAGE SAVINGS BANK ("the Bank" or the "Continuing Bank") and NORTH
PACIFIC BANK ("NPB").
RECITALS
1. The Bank is a state savings banking corporation duly organized,
validly existing and in good standing under the laws of the State of Washington,
with its principal office located in the City of Olympia, County of Thurston,
State of Washington. As of December 31, 1998, the Bank had authorized capital
stock of ___________ shares of common stock, ____ par value per share, of which
all issued and outstanding shares are owned by Heritage Financial Corporation
("HFC").
2. NPB is a state commercial banking corporation duly organized, validly
existing and in good standing under the laws of the State of Washington, with
its principal office located in the City of Tacoma, County of Pierce, State of
Washington. NPB has authorized capital stock of 8,000 shares of common stock,
$100.00 par value per share, of which all issued and outstanding shares are
currently owned by North Pacific Bancorporation ("NP").
3. On April 3, 1998, a Plan of Stock Purchase and Agreement to Merge (the
"Master Agreement") was entered into by and between HFC, Bank, NP, and NPB,
providing for (a) the acquisition of all issued and outstanding shares of common
stock of NP by HFC (the "Stock Purchase"); (b) the merger of NP with and into
HFC ("Merger I"), following consummation of the Stock Purchase; and (c) the
merger of NPB with and into the Bank following consummation of Merger I ("Merger
II").
4. At the time of consummation of the Merger II both NPB and the Bank
will be wholly owned subsidiaries of HFC.
5. The Boards of Directors of both NPB and the Bank have approved the
Master Agreement and this Merger Agreement, and have authorized their execution
and delivery.
6. The following terms defined in this Recital shall, for all purposes of
this Merger Agreement, have the meanings specified:
<PAGE>
a. The term "Continuing Bank" means Heritage Savings Bank, as the bank
resulting from the Merger, upon and as of the Effective Time of the Merger
of NPB and the Bank pursuant to this Merger Agreement;
b. The term "Effective Date" of the Merger means the date in the Certificate
of Merger issued by the Washington Department of Financial Institutions,
Division of Banks ("Division") on which the Division specifies therein that
the Merger shall become effective;
c. The term "Effective Time" of the Merger means the specific time of day on
the Effective Date of the Merger at which the Division in its Certificate
referred to in Recital 6(b) specifies that the Merger shall become
effective;
d. The term "Merger" means the merger of NPB with and into the Bank pursuant
to the terms and conditions of this Merger Agreement;
7. Unless inconsistent with terms defined in this Plan, capitalized terms
used herein shall have the meanings set forth under the "Definitions" heading of
the Master Agreement.
AGREEMENTS
In consideration of the foregoing and the mutual agreements set forth
below, NPB and the Bank each represent, covenant, and agree as follows:
ARTICLE 1
MERGER
NPB will be merged with and under the Charter of the Bank. The closing (the
"Closing") of the Merger will take place at the principal office of the Bank, as
soon as possible after satisfaction of the conditions set forth in Section 4 of
this Agreement, or at such other time or place as the parties may agree (the
date of Closing being referred to herein as the "Closing Date").
ARTICLE 2
EFFECTS OF THE MERGER
Section 2.1. At the Effective Time of the Merger, (i) the corporate
existence of NPB and the Bank will be merged into and continued in the
Continuing Bank; (ii) the name of the Continuing Bank will be Heritage Bank;
(iii) the Articles of Incorporation and Bylaws of the Bank as in effect prior to
the Effective Time will be the Articles of Incorporation and Bylaws of the
Continuing Bank; and (iv) the head office and branch offices of the Bank will
become branch offices of the Continuing Bank. The principal and other offices of
the Continuing Bank are listed on EXHIBIT A to this Agreement.
Section 2.2. At and after the Effective Time, (i) the Board of Directors
of the Continuing Bank will consist of those persons listed on EXHIBIT B, who
will serve in
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<PAGE>
such capacity until the next annual meeting of shareholders or until such time
as their respective successors have been elected and qualified; and (ii) the
executive officers of the Bank immediately prior to the Effective Time of the
Merger and such executive officers of NPB as have been identified prior to the
Effective Time (all as set forth in EXHIBIT C) will serve as executive officers
of the Continuing Bank, in accordance with the Articles of Incorporation and
Bylaws of the Bank.
Section 2.3. At and after the Effective Time, the Merger shall have all
the effects set forth in Sections 30.49.060 and 30.49.080 of the Revised Code of
Washington and other applicable law.
ARTICLE 3
MANNER OF TRANSFERRING SHARES
OF STOCK OF NPB
At and as of the Effective Time of the Merger, and by reason of the Merger
becoming effective:
Section 3.1 Shares of capital stock of NPB owned by HFC will not be
converted in the Merger, but will be canceled and all rights in respect thereof
will cease to exist.
Section 3.2 The shares of capital stock of the Bank issued and outstanding
at the Effective Time of the Merger will continue to be issued and outstanding
shares of the Continuing Bank.
Section 3.3 The amount of capital stock, surplus and undivided profits of
the Continuing Bank on the Effective Date will be combined with that of NPB and
when so combined will be equal to the combined capital accounts of the merging
banks.
ARTICLE 4
CONDITIONS TO CLOSING
Section 4.1 The obligations of both NPB and the Bank to proceed with the
Closing are conditioned upon (i) consummation of the Stock Purchase; (ii)
consummation of Merger I; (iii) approval of the Merger by HFC, as the sole
shareholder of both NPB and the Bank; (iv) approved by the Division; and (v)
approved by the FDIC.
Section 4.2 Both NPB and the Bank will use their best efforts to promptly
prepare and file with the regulatory agencies mentioned in Section 4(a), such
applications and documents as may be appropriate to secure all necessary
approvals for the Merger.
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<PAGE>
ARTICLE 5
TERMINATION/AMENDMENT
Section 5.1 This Merger Agreement and the Merger contemplated by it may be
terminated and abandoned, as provided in the Master Agreement, at any time
before the Division has issued a Certificate of Merger, whether before or after
approval of the Merger by the shareholder of the parties, and will automatically
terminate without further action by either of the parties in the event the
Master Agreement is terminated in accordance with its terms.
Section 5.2 At any time prior to issuance by the Division of a Certificate
of Merger, the parties may, by written agreement approved by their Boards of
Directors and subject to Section 9.2 of the Master Agreement, (i) extend the
time for the performance of any of the obligations or other acts of the parties
hereto; (ii) waive compliance with any of the conditions, covenants or
agreements contained in this Merger Agreement; or (iii) amend or modify any of
the provisions of this Merger Agreement.
Section 5.2 If for any reason this Merger Agreement ceases to be binding
upon NPB and the Continuing Bank because of termination as herein provided or
otherwise, it will be void without further action by the shareholders of either
party.
ARTICLE 6
MISCELLANEOUS
Section 6.1 This Merger Agreement will be binding upon and benefit the
parties and their respective successors and assigns, provided, however, that
neither this Merger Agreement nor any right under it may be assigned by any
party without the consent of the other party.
Section 6.2 This Merger Agreement may be amended, and any provision
waived, but only in writing signed by the party against whom such amendment or
waiver is sought to be enforced. Except as otherwise expressly provided, no
person other than the parties to this Merger Agreement will have any right under
this Merger Agreement or be entitled to the benefit of any of its provisions.
Section 6.3 This Merger Agreement may be executed in one or more
counterparts, all of which will together constitute one and the same instrument
and will become effective when one or more counterparts have been signed by NPB
and delivered to the Bank and one or more counterparts have been signed by the
Bank and delivered to NPB.
Section 6.4 This Merger Agreement will be governed by and construed in
accordance with the laws of the State of Washington.
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<PAGE>
TO WITNESS THE FOREGOING, NPB and the Bank have caused this Merger
Agreement to be executed in counterparts by their duly authorized officers as of
the date first above written.
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<PAGE>
EXHIBIT A to Merger Agreement II
Principal and Other Offices of Continuing Bank
<PAGE>
EXHIBIT B to Merger Agreement II
Board of Directors of Continuing Bank
The following is a list of persons who will serve as directors of the
Continuing Bank until the next annual meeting of the shareholder or until such
time as respective successor has been elected and qualified. The mailing address
for all directors is _________________________________.
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<PAGE>
EXHIBIT C to Merger Agreement II
Officers of Continuing Bank
The following is a list of executive officers (including title) of the
Continuing Bank. The mailing address of each executive officer is
_______________________
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<PAGE>
EXHIBIT C
SELLING SHAREHOLDER'S AGREEMENT
This Agreement is made and entered into as of the 3rd day of April, 1998 by
and between Heritage Financial Corporation, a Washington corporation ("HFC") and
Peter K. Wallerich and Marylu Wallerich (collectively "Selling Shareholder"),
the owner of all outstanding Common Stock of North Pacific Bancorporation
("NP").
RECITALS
1. Pursuant to the terms of the Plan of Stock Purchase and Agreement to
Merge, dated as of the 3rd day of April, 1998 (the "Agreement") among HFC,
Heritage Savings Bank (the "Bank"), Selling Shareholder, NP and North Pacific
Bank ("NPB"), all of the issued and outstanding shares of NP will be acquired by
HFC (the "Stock Purchase"), following which it is intended that NP will be
merged with HFC, and NPB will be merged with Bank (the "Mergers").
2. The obligation of HFC and Bank to consummate the stock purchase
contemplated by the Agreement is conditioned upon their receipt of non-
competition agreements from the Selling Shareholder.
AGREEMENT
In consideration of the performance of HFC and Bank under the Agreement,
and for other good and valuable consideration, Selling Shareholder agrees for a
period of two (2) years after the Effective Date, as defined in the Agreement,
they will not, directly or indirectly, become interested in, as a principal
shareholder, director or officer of, any financial institution that competes
with HFC or any of its subsidiaries or their affiliates within Pierce County in
the State of Washington.
For purposes of this Agreement, the term "principal shareholder" means any
person who owns, directly or indirectly, 5% or more of the outstanding shares of
any class of equity security of a company.
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<PAGE>
Selling Shareholder recognizes and agrees that any breach of this Agreement
by Selling Shareholder will entitle HFC and Bank and any of their successors or
assigns to injunctive relief and/or specific performance, as well as any other
legal or equitable remedies to which such entities may otherwise be entitled.
Executed of the 3rd day of April, 1998.
HERITAGE FINANCIAL CORPORATION SELLING SHAREHOLDER
By: /s/ Donald V. Rhodes /s/ Peter K. Wallerich
----------------------------- ------------------------------
Its: Chairman and Chief Executive Peter K. Wallerich
-----------------------------
Officer
-----------------------------
/s/ Marylu Wallerich
------------------------------
Marylu Wallerich
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 6,893
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<TOTAL-ASSETS> 322,806
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0
0
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<EXTRAORDINARY> 0
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<NET-INCOME> 2,415
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
<YIELD-ACTUAL> 8.63
<LOANS-NON> 294
<LOANS-PAST> 0
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