<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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HERITAGE FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Washington 6712 91-1857900
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification No.)
jurisdiction Classification Code
of incorporation) Number)
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201 Fifth Avenue S.W.
Olympia, Washington 98501
(360) 943-1500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Donald V. Rhodes
Heritage Financial Corporation
201 Fifth Avenue S.W.
Olympia, Washington 98501
(360) 943-1500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies To:
Ann W. Langston Sandra L. Gallagher
GERRISH & MCCREARY, P.C. GORDON, THOMAS, HONEYWELL,
700 Colonial Road, Suite 200 MALANCA, PETERSON & DAHEIM, PLLC
Memphis, TN 38117 1201 Pacific Avenue, Suite 2200
(901) 767-0900 Tacoma, WA 98402
(253) 572-5050
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this registration statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed maximum
Amount maximum aggregate Amount of
Title of each class of to be offering price offering registration
securities to be registered registered(1) per share(2) price(2) fee
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<S> <C> <C> <C> <C>
Common Stock, no par value...... 1,100,000 shares $4.96 $5,452,000 $1,515.66
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</TABLE>
(1) Represents the maximum number of shares of the Registrant's Common Stock to
be issued in connection with the Merger described herein.
(2) Calculated pursuant to Rule 457(f)(2) solely for the purpose of the
registration fee based on the book value per share of common stock of
Washington Independent Bancshares, Inc. as of the latest practicable date
prior to the filing of this Registration Statement.
The Registrant amends this registration statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective under Section 8(a) of the Securities Act of
1933 or until the registration statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may determine.
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<PAGE>
[WASHINGTON INDEPENDENT BANCSHARES, INC. LETTERHEAD]
JANUARY , 1999
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Washington Independent Bancshares, Inc., which will be held on ,
February , 1999, at .m. at , , Washington. At the
Special Meeting, you will be asked to consider and vote upon a proposal to
approve an Agreement and Plan of Merger, dated as of September 28, 1998,
pursuant to which Washington Independent Bancshares, Inc. will merge into
Heritage Financial Corporation, Olympia, Washington. If the Washington
Independent Bancshares, Inc. merger agreement is approved, Washington
Independent Bancshares, Inc. shareholders will become shareholders of Heritage
Financial Corporation, and Washington Independent Bancshares, Inc.'s sole
subsidiary, Central Valley Bank, National Association, will become a wholly
owned subsidiary of Heritage Financial Corporation.
The proposed merger has been approved by the Board of Directors of each
company. YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE BEST
INTERESTS OF WASHINGTON INDEPENDENT BANCSHARES, INC. AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER AGREEMENT.
The merger is subject to certain conditions, including approval of the
Agreement and Plan of Merger by Washington Independent Bancshares, Inc.'s
shareholders and approval of the merger by regulatory authorities.
The terms of the merger are described in the attached Proxy Statement, which
also serves as a Prospectus for the Heritage Financial Corporation shares of
common stock to be issued in the merger. The complete text of the Agreement and
Plan of Merger appears as Appendix A to the Proxy Statement/Prospectus. Please
read these materials carefully and consider the information contained in them.
If you have any questions regarding this material in advance of the Special
Meeting, please feel free to call Mr. D. Michael Broadhead, President of
Central Valley Bank at (509) 865-2511.
Approval of the Agreement and Plan of Merger requires the affirmative vote
of the holders of two-thirds of the outstanding shares of Washington
Independent Bancshares, Inc. common stock. Consequently, failure to vote will
have the same effect as a vote against the proposal. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE BE CERTAIN TO COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD, AND RETURN IT PROMPTLY IN THE POSTAGE-PAID
ENVELOPE PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON IF YOU WISH. IF FOR ANY REASON YOU SHOULD DESIRE TO
REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS VOTED AT THE SPECIAL
MEETING. YOU SHOULD NOT SEND IN CERTIFICATES FOR YOUR WASHINGTON INDEPENDENT
BANCSHARES, INC. SHARES AT THIS TIME.
On behalf of the Board of Directors, I urge you to vote FOR approval of the
Merger Agreement.
Very truly yours,
Glenn J. Rasmussen
Secretary/Treasurer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC.
537 WEST SECOND
TOPPENISH, WASHINGTON 98948
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY , 1999
TO THE SHAREHOLDERS OF WASHINGTON INDEPENDENT BANCSHARES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Washington
Independent Bancshares, Inc. will be held on , February , 1999, at
.m., at , , Washington.
The Special Meeting is for the following purposes:
1. WIB MERGER AGREEMENT. To consider and vote upon a proposal to approve the
Agreement and Plan of Merger dated as of September 28, 1998, as more fully
described in the accompanying Proxy Statement/Prospectus, and attached as
Appendix A to the Proxy Statement/Prospectus.
2. OTHER MATTERS. To act upon such other matters as may properly come before
the Special Meeting or any adjournment thereof.
Only holders of record of WIB common stock, no par value per share, at the
close of business on January , 1999, the record date for the Special Meeting,
are entitled to vote at the Special Meeting or any adjournments or
postponements of that meeting.
Shareholders desiring to do so may dissent from the merger and obtain
payment for their shares under the provisions of the Washington Business
Corporation Act, Chapter 23B.13, a copy of which is included in the Proxy
Statement/Prospectus as Appendix B. See "THE MERGER--Dissenters' Rights of
Appraisal" and Appendix B.
All shareholders are cordially invited to attend the Special Meeting.
Whether or not you do so, it is important that you complete, sign, date and
promptly return the accompanying Proxy card in the enclosed postage-paid
envelope in order to vote your shares of WIB common stock. Shareholders may
revoke proxies previously submitted by completing a later-dated proxy, by
written revocation delivered to WIB's Secretary at or before the Special
Meeting, or by appearing, withdrawing the proxy and voting at the Special
Meeting in person. Attendance at the Special Meeting will not of itself revoke
a previously submitted proxy.
By order of the Board of Directors,
Glenn J. Rasmussen
Secretary/Treasurer
Toppenish, Washington
January , 1999
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. APPROVAL
OF THE WIB MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF HOLDERS OF TWO-
THIRDS OF THE OUTSTANDING SHARES OF WIB COMMON STOCK. IN ORDER TO ENSURE THAT
THE REQUISITE VOTES ARE OBTAINED, AND IN ORDER TO ENSURE A QUORUM, WE URGE YOU
TO SIGN, DATE AND RETURN THE ENCLOSED PROXY.
<PAGE>
PROSPECTUS PROXY STATEMENT
OF OF
HERITAGE FINANCIAL CORPORATION WASHINGTON INDEPENDENT BANCSHARES,
("HERITAGE") INC.
("WIB")
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WHAT IS THIS DOCUMENT?
This Proxy Statement/Prospectus is a Prospectus for shares of Heritage
Financial Corporation common stock to be issued under the terms of the
Agreement and Plan of Merger between Heritage Financial Corporation and
Washington Independent Bancshares, Inc. (the "WIB Merger Agreement"), if the
merger of Heritage Financial Corporation with Washington Independent
Bancshares, Inc. is consummated. The actual number of shares of Heritage
Financial Corporation common stock to be issued will be determined by the
terms of the WIB Merger Agreement.
This Proxy Statement/Prospectus also is a Proxy Statement to the
shareholders of Washington Independent Bancshares, Inc. in connection with the
solicitation of proxies by its Board of Directors for use at the special
meeting of shareholders and any postponements or adjournments of that meeting.
The Special Meeting of Shareholders of Washington Independent Bancshares, Inc.
is to be held on February , 1999 (the "WIB Special Meeting").
PLEASE NOTE
These terms as used in this Proxy Statement/Prospectus refer to these
companies or banks:
"Heritage" refers to Heritage Financial Corporation.
"Heritage Bank" refers to Heritage Bank, the wholly-owned subsidiary bank
of Heritage.
"WIB" refers to Washington Independent Bancshares, Inc.
"Central Valley Bank" refers to Central Valley Bank, N.A., the wholly-owned
subsidiary bank of WIB.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS WIB BEING ACQUIRED BY HERITAGE?
A: The Boards of Directors of WIB and Heritage believe the proposed merger
is in the best interests of their companies and will provide significant
benefits to their shareholders, customers and employees. The Boards believe
the proposed merger will create a combined company in Heritage that will be
larger and better able to compete in the rapidly changing and consolidating
financial institutions industry. The background and reasons for the proposed
merger are discussed on pages .
Q: AS A WIB SHAREHOLDER, WHAT WILL I RECEIVE IN THE WIB MERGER?
A: As a WIB shareholder, you will have the right to receive shares of
Heritage common stock in exchange for each share of WIB common stock you own.
Heritage will not issue any fractional shares in the WIB merger. Instead, as a
WIB shareholder, you will receive cash for any fraction of a Heritage share in
an amount calculated under the terms of the WIB Merger Agreement.
The number of shares of Heritage common stock to be issued in exchange for
each share of WIB common stock and each vested option to acquire WIB common
stock will be calculated based on the average closing price of Heritage common
stock over a 45 consecutive trading day period ending five days prior to the
i
<PAGE>
scheduled effective date of the WIB merger. The number of shares of Heritage
common stock to be issued in exchange for your WIB common stock and the vested
options to acquire WIB common stock ("Vested WIB Options") will fluctuate
depending on the average closing price of Heritage common stock. The total
number of shares of Heritage common stock to be issued in the WIB merger will
be 1,000,000 if the average closing price is more than $12.25. If the average
closing price is less than or equal to $12.25 and greater than or equal to
$10.00, the total number of shares will increase up to 1,050,000 shares
according to a formula in the WIB Merger Agreement. If the average closing
price is below $10.00, WIB will have the option to terminate the WIB Merger
Agreement and Heritage will have the option to increase the number of shares to
be issued to WIB's shareholders according to another formula in the WIB Merger
Agreement. If the average closing price is below $10.00 and WIB does not decide
to give notice to terminate the proposed WIB Merger Agreement, the total number
of shares to be issued in the WIB merger will be 1,050,000. Assuming the total
number of shares to be issued in the merger is 1,050,000 and no Vested WIB
Options are outstanding, each of the 1,760,449 shares of WIB common stock would
be converted into .5964 shares of Heritage common stock.
Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "Risk Factors" on page 12. You also should review the
factors considered by the Board of Directors of WIB. See "Background and
Reasons for the WIB Merger" on page 16.
Q: WHAT HAPPENS AS THE MARKET PRICE OF HERITAGE COMMON STOCK FLUCTUATES?
A: The market value of Heritage common stock will fluctuate before and after
the closing of the merger. The value of the Heritage common stock that WIB
shareholders will receive in the merger will fluctuate as well. It could
increase or decrease. You should obtain current market prices for shares of
Heritage common stock.
Q: WHAT WILL HAPPEN TO WIB AND ITS SUBSIDIARY BANK IN THE MERGER?
A: WIB will merge into Heritage and WIB will no longer be a separate
company. Heritage will be the surviving company in the merger and will continue
to exist after the merger is completed. The businesses and operations of
Heritage and WIB will be combined into a single, larger company. Central Valley
Bank, WIB's subsidiary, will continue to operate as separate, wholly-owned
subsidiary of Heritage after the merger.
Q: WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A: We are working to complete the merger by the end of February 1999. There
could be delays.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: As a shareholder of WIB, we expect that the exchange of shares by WIB
shareholders generally will be tax free to WIB shareholders for U.S. federal
income tax purposes. WIB shareholders will have to pay taxes on any cash
received for fractional shares or if they exercise their dissenters' rights. To
review the tax consequences of the merger, see pages 24-25.
YOUR TAX CONSEQUENCES WILL DEPEND ON YOUR PERSONAL SITUATION. YOU SHOULD
CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF
THE MERGER TO YOU AS A SHAREHOLDER OF WIB.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve the WIB Merger Agreement which provides
for the merger of WIB into Heritage. Approval of the proposal requires the
affirmative vote of 2/3 of the outstanding shares of WIB common stock. THE WIB
BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE WIB MERGER AGREEMENT AND
RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE WIB MERGER AGREEMENT.
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Q: WHAT DO I NEED TO DO NOW?
A: As a shareholder of WIB, your enclosed proxy card requires you to
indicate how you want to vote on the transaction. Just indicate on your proxy
card how you want to vote, and sign and mail it in the enclosed envelope as
soon as possible so that your shares will be represented at your special
meeting.
If you sign and send in your proxy card and do not indicate how you want to
vote, your proxy will be voted in favor of the proposal on your proxy card. If
you do not return a signed proxy card or vote in person at the WIB Special
Meeting or if you abstain, the effect will be a vote against the merger.
You are encouraged to sign and mail your proxy card even if you plan to
attend the special meeting and vote your shares in person. If you do sign your
proxy card and send it in, you can take back your proxy at any time until the
special meeting and either change your vote or attend the special meeting and
vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares for you only if you provide
instructions to your broker on how to vote. You should instruct your broker how
to vote your shares, following the directions your broker provides. Without
instructions from you to your broker, your shares will not be voted and this
will effectively be a vote against the proposed merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. We will send you written instructions for exchanging your stock
certificates for Heritage common stock certificates after the merger is
completed.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document or if you want to ask any
questions about the merger, you should contact:
Central Valley Bank
D. Michael Broadhead, President
537 West Second
Toppenish, WA 98948
Telephone: (509) 865-2511
You should rely only on the information contained in this Proxy
Statement/Prospectus or information that we have referred you to review. We
have not authorized anyone to provide you with different information.
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THE COMMON STOCK OF HERITAGE TO BE ISSUED IN CONNECTION WITH THE WIB MERGER
HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF HERITAGE COMMON STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
This Proxy Statement/Prospectus is first being mailed to shareholders of WIB
on or about January , 1999.
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The date of this Proxy Statement/Prospectus is January , 1999.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................... i
AVAILABLE INFORMATION..................................................... 1
SUMMARY................................................................... 2
Parties to the WIB Merger............................................... 2
WIB Special Meeting..................................................... 2
WIB Shares Outstanding and Entitled to Vote; Record Date................ 3
Vote Required by WIB Shareholders....................................... 3
Voting, Solicitation, and Revocation of Proxies for WIB................. 3
Recommendation of the Board of Directors and Opinion of Financial
Advisor................................................................ 4
Reasons for and Background of the WIB Merger............................ 4
Dissenters' Rights of WIB Shareholders.................................. 4
The WIB Merger Agreement................................................ 5
Certain Federal Income Tax Consequences................................. 6
Accounting Treatment.................................................... 6
Certain Differences in Shareholders' Rights............................. 6
Resale Restrictions on Affiliates of WIB................................ 7
Directors and Management of Heritage Following the Merger............... 7
Risk Factors............................................................ 7
Share Information and Comparative Market Prices......................... 7
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.......................... 7
RISK FACTORS.............................................................. 12
THE WIB SPECIAL MEETING................................................... 14
Time, Date and Place of the WIB Special Meeting......................... 14
Purpose of the WIB Special Meeting...................................... 14
Shares Outstanding and Entitled to Vote; Record Date for WIB............ 14
Required WIB Vote....................................................... 14
Conflicting Interest Relationships and Process and Procedures of the
Boards of Directors of WIB and Heritage................................ 15
Voting and Revocation of WIB Proxies.................................... 15
Solicitation of Proxies by WIB.......................................... 16
THE PROPOSED MERGER....................................................... 16
Background and Reasons for the WIB Merger............................... 16
Opinion of WIB's Financial Advisor, Columbia Financial Advisors......... 18
Procedure for Exchange of WIB Common Stock for Heritage Common Stock.... 20
Conditions to Consummation of the WIB Merger............................ 21
Termination Provisions.................................................. 22
Possible Adjustment to the WIB Conversion Ratio......................... 22
Effective Date of the WIB Merger........................................ 23
Employment Agreements for WIB Employees................................. 23
Expenses and Fees Related to the WIB Merger............................. 23
Regulatory Approval of the WIB Merger................................... 23
Directors and Executive Officers Following the Merger................... 24
Interests of Certain Persons in the Merger.............................. 24
Material Federal Income Tax Consequences of the Merger.................. 24
Accounting Treatment of the Merger...................................... 25
Rights of Dissenting Shareholders of WIB................................ 25
Termination Fee......................................................... 27
Resales of Heritage Common Stock to be Received by Certain Stockholders
of WIB................................................................. 27
</TABLE>
iv
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<TABLE>
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Page
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<S> <C>
COMPARATIVE MARKET PRICES AND DIVIDENDS.................................. 28
Heritage............................................................... 28
WIB.................................................................... 28
DESCRIPTION OF HERITAGE COMMON STOCK..................................... 29
INFORMATION ABOUT HERITAGE............................................... 30
General................................................................ 30
Recent Developments....................................................
Year 2000 Issues.......................................................
INFORMATION ABOUT WIB.................................................... 57
Business of WIB........................................................ 57
Management's Discussion and Analysis of Financial Condition and Results
of Operations of WIB.................................................. 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF WIB.... 63
INTEREST OF HERITAGE MANAGEMENT IN CERTAIN TRANSACTIONS.................. 70
SUPERVISION AND REGULATION............................................... 70
CERTAIN DIFFERENCES IN RIGHTS OF HERITAGE AND WIB SHAREHOLDERS........... 74
HERITAGE'S RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS..................... 77
EXPERTS.................................................................. 77
LEGAL MATTERS............................................................ 78
FAIRNESS OPINION......................................................... 78
APPENDICES
Appendix A--Agreement and Plan of Merger by and between Heritage and WIB,
dated September 28, 1998...................................... A-1
Appendix B--Rights of Dissenting Stockholders as set forth in Chapter
23B.13 of the Washington Business Corporation Act............. B-1
Appendix C--Opinion of Columbia Financial Advisors to WIB on WIB Merger.. C-1
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS OF WIB..................................... F-1
</TABLE>
v
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AVAILABLE INFORMATION
Heritage is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, under the Exchange
Act, Heritage files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Copies of these
reports, proxy statements and other information can be obtained, at prescribed
rates, at the Public Reference Section of the Commission at 450 Fifth Street,
NW, Room 1024, Washington, DC 20549, and can be inspected and copied at the
public reference facilities of the Commission in Washington, D.C. and at the
Commission's Regional Offices located at 7 World Trade Center, Suite 1300, New
York, NY 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661. The Commission also maintains a site on the World
Wide Web regarding issuers like Heritage that file electronically with the
Commission. The Web site contains reports, proxy and information statements
and other information. The address of that Web site is http://www.sec.gov.
Heritage has filed a registration statement on Form S-4 under the
Securities Act of 1933, as amended (the "1933 Act") with respect to the
Heritage common stock to be issued in conjunction with the merger. This Proxy
Statement/Prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted under the
rules and regulations of the Commission. The registration statement and the
schedules and the exhibits filed as part of it may be inspected and copied, at
prescribed rates, at the addresses of the Commission set forth above. Heritage
common stock is traded on the Nasdaq National Market under the symbol "HFWA."
Reports, proxy statements and other information concerning Heritage may be
inspected at the offices of Nasdaq National Market, 1735 K Street, N.W.,
Washington, DC 20006-1500.
This Proxy Statement/Prospectus incorporates important business and
financial information about Heritage that is not included in or delivered with
this Proxy Statement/Prospectus. The following documents filed with the
Commission by Heritage are incorporated by reference in this Proxy
Statement/Prospectus (Commission File No. 000-29480):
(1) Heritage's Annual Report on Form 10-K for the year ended June 30,
1998;
(2) Heritage's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998;
(3) Heritage's Annual Meeting Proxy Statement for the 1998 Annual Meeting
of Shareholders; and
(4) Heritage's Current Reports on Form 8-K dated August 21, 1998, October
8, 1998, October 29, 1998 and December 30, 1998.
Heritage also incorporates by reference additional documents filed by it
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement/Prospectus and prior to final adjournment of the
WIB Special Meeting. Any statement contained in this Proxy
Statement/Prospectus or in a document incorporated or deemed to be
incorporated by reference in this Proxy Statement/Prospectus shall be deemed
to be modified or superseded to the extent that a statement contained herein
or in any subsequently filed document which also is, or is deemed to be,
incorporated by reference herein modifies or supersedes such statement.
Copies of the information incorporated by reference in this Proxy
Statement/Prospectus may be obtained upon written or oral request to
Mr. James Hastings
Vice President and Treasurer
Heritage Financial Corporation
201 5th Ave. S.W.
Olympia, WA 98501
Telephone (360) 943-1500
All information contained in or incorporated by reference in this Proxy
Statement/Prospectus relating to Heritage has been supplied by Heritage and
all information relating to WIB has been supplied by WIB.
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SAFE HARBOR FOR FORWARD LOOKING INFORMATION
Statements concerning future performance, development or events,
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 condition. Additional information on these and other factors
which could affect Heritage's financial results are included in filings by
Heritage with the Commission.
2
<PAGE>
SUMMARY
Introduction
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. This summary is not intended to be complete
and should be read in conjunction with the more detailed information contained
elsewhere in this Proxy Statement/Prospectus. Stockholders of WIB should read
the entire Proxy Statement/Prospectus carefully.
Parties to the WIB Merger
Heritage Financial Corporation
Heritage is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended, and was incorporated in the State of Washington in
August 1997. Heritage was organized for the purpose of acquiring all the stock
of Heritage Bank upon its reorganization from a mutual holding company form of
organization to the stock holding company form of organization.
Heritage is primarily engaged in the business of planning, directing, and
coordinating the business activities of its wholly-owned subsidiary, Heritage
Bank, which was organized in 1927. Heritage Bank is a Washington chartered
savings bank whose deposits are insured by the Federal Deposit Insurance
Corporation under the Savings Association Insurance Fund (SAIF) and the Bank
Insurance Fund (BIF). Heritage acquired North Pacific Bank, a Washington
chartered commercial bank located in Tacoma, Washington, effective June 12,
1998. North Pacific Bank was merged into Heritage Bank, effective November 20,
1998.
The principal executive offices of Heritage are located at 201 5th Ave. S.
W., Olympia, Washington 98501, and the telephone number is (360) 943-1500. You
can get additional information about the business and financial condition of
Heritage in certain documents incorporated in this Proxy Statement/Prospectus
by reference. See "AVAILABLE INFORMATION."
Washington Independent Bancshares, Inc.
WIB is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended, and is incorporated in the State of Washington. WIB
provides its customers with banking services through its wholly-owned
subsidiary, Central Valley Bank.
The principal executive offices of WIB are located at 537 West Second,
Toppenish, Washington 98948, and its telephone number is (509) 865-2511. See
"INFORMATION ABOUT WIB."
WIB Special Meeting:
Date, Time and Place
The Special Meeting of WIB shareholders will be held on February , 1999, at
.m., at .
Purpose of the WIB Special Meeting
The purpose of the WIB Special Meeting is to (i) consider and vote on the
WIB Merger Agreement providing for the merger of WIB into Heritage and the
conversion of shares of WIB common stock and Vested WIB Options into the right
to receive shares of Heritage common stock, and (ii) act upon other matters, if
any, that properly come before the WIB Special Meeting.
3
<PAGE>
WIB Shares Outstanding and Entitled to Vote; Record Date
The WIB Board has fixed the close of business on January , 1999 as the
record date for determining the shareholders entitled to notice of and to vote
at the WIB Special Meeting. Only those holders of shares of WIB common stock of
record on the WIB record date will be entitled to notice of and to vote at the
WIB Special Meeting. Each share of WIB common stock will be entitled to one
vote. At the WIB record date, there were 1,760,449 shares of WIB common stock
outstanding and entitled to vote at the WIB Special Meeting.
Vote Required by WIB Shareholders
The WIB Merger Agreement must be approved by the affirmative vote of the
holders of two-thirds of the outstanding shares of WIB common stock entitled to
vote at the WIB Special Meeting. Abstentions and non-votes will have the same
effect as votes cast against approval of the WIB Merger Agreement.
At the WIB record date, the directors and executive officers and their
affiliates beneficially owned an aggregate of 1,089,992 shares of WIB common
stock, which represents approximately 62% of the shares entitled to vote at the
WIB Special Meeting. Each director of WIB has agreed to vote his shares in
favor of the WIB Merger Agreement.
Voting, Solicitation, and Revocation of Proxies for WIB
Holders of WIB common stock may vote either in person or by properly
executed proxy. Shares of WIB common stock represented by a properly executed
proxy received before or at the WIB Special Meeting will, unless your proxy is
revoked, be voted by the instructions indicated on your proxy. If no
instructions are indicated on a properly executed proxy, the shares represented
by that proxy will be voted FOR the proposal to approve the WIB Merger
Agreement. Failure to return your proxy card or to vote in person at the WIB
Special Meeting will have the effect of a vote cast against the WIB Merger
Agreement. If any other matters are properly presented at the WIB Special
Meeting for consideration, including, among other things, a motion to adjourn
the WIB Special Meeting to another time and/or place, (including, without
limitation, for the purpose of soliciting additional proxies), the persons
named in the proxy and acting thereunder will have discretion to vote on such
matters in accordance with their best judgment. However, no proxy which is
voted against the proposal to approve the WIB Merger Agreement will be voted in
favor of any adjournment or postponement. A proxy marked ABSTAIN with respect
to the proposal to approve the WIB Merger Agreement may be voted in favor of a
proposal to adjourn or postpone the WIB Special Meeting in the discretion of
the persons named in the proxy. As of the date hereof, the WIB Board knows of
no such other matters.
Any proxy given pursuant to this solicitation or otherwise may be revoked by
the person giving it at any time before it is voted by delivering to Glenn J.
Rasmussen, WIB's Secretary, at 537 West Second, Toppenish, Washington 98948, on
or before the taking of the vote at the WIB Special Meeting, a written notice
of revocation bearing a later date than the proxy or a later dated proxy
relating to the same shares of WIB common stock, or by attending the WIB
Special Meeting and voting in person. Attendance at the WIB Special Meeting
will not in itself constitute revocation of a proxy.
The proxy for the WIB Special Meeting is being solicited on behalf of the
WIB Board. The expense of soliciting proxies for the WIB Special Meeting will
be paid by WIB. All costs and expenses incurred in connection with the WIB
Merger Agreement and the transactions under that agreement are to be paid by
the party incurring such expenses. Proxies will be solicited principally by
mail, but may also be solicited by the directors, officers, and other employees
of WIB in person or by telephone, facsimile or other means of communication.
Such directors, officers, and employees will receive no compensation for such
solicitation in addition to their regular compensation, but may be reimbursed
for out-of-pocket expenses in connection with such solicitation. Brokers and
others who hold WIB common stock on behalf of another will be asked to
4
<PAGE>
forward proxy material and related documents to the beneficial owners of such
stock, and WIB will reimburse them for their expenses in doing so.
Recommendation of the Board of Directors and Opinion of Financial Advisor
The Board of Directors of WIB believes that the WIB merger is in the best
interests of WIB shareholders, and unanimously recommends a vote FOR approval
of the WIB Merger Agreement.
The Board of Directors of WIB has received from Columbia Financial Advisors,
an opinion that the terms of the WIB merger are fair, from a financial point of
view, to the shareholders of WIB. A copy of that opinion, dated January 5,
1999, is attached as Appendix C. You should read this opinion in its entirety
with respect to the assumptions made, the matters considered and the
limitations of the review undertaken in rendering the opinion. See "THE
PROPOSED MERGER--Opinion of WIB's Financial Advisor."
Reasons for and Background of the WIB Merger
The Board of Directors of WIB has unanimously determined that the WIB merger
is fair to and in the best interests of WIB shareholders, employees and the
community. In making this determination, the WIB Board considered a variety of
factors, including the value of Heritage common stock that the shareholders of
WIB will receive in exchange for their shares of WIB common stock, the
financial and managerial resources provided by Heritage which will enhance the
ability of WIB's subsidiary, Central Valley Bank, to provide competitive and
comprehensive services in the market in which it operates, and the parties'
shared belief in community banking, which emphasizes responsiveness to local
markets and the delivery of personalized services to customers. The WIB Board
believes that the merger will allow WIB shareholders to realize a premium for
their shares and will also continue to allow Central Valley Bank to provide the
advantages of personal community banking to its current customers. See "THE
PROPOSED MERGER--Background and Reasons for the WIB Merger."
Dissenters' Rights of WIB Shareholders
Under certain conditions and by fully complying with specific procedures
required by the Washington Business Corporation Act, WIB shareholders will have
the right to dissent from the WIB merger. If the WIB merger is completed, as a
shareholder you may be entitled to receive cash for the fair value of your
shares of WIB common stock. See "THE PROPOSED MERGER--Rights of Dissenting
shareholders" and "Appendix B."
The WIB Merger Agreement
Pricing Terms
On September 28, 1998, the WIB Merger Agreement was executed by Heritage and
WIB. Pursuant to the WIB Merger Agreement, at the effective date of the WIB
merger, WIB will merge into Heritage, and all WIB common stock issued and
outstanding as of the effective date of the WIB merger and all Vested WIB
Options will be converted into the right to receive shares of Heritage common
stock. The number of shares of Heritage common stock to be issued to WIB
Shareholders in the WIB merger will depend upon the average trading price of
Heritage common stock prior to closing of the WIB merger and will range from
between a total of 1,000,000 to 1,050,000 shares of Heritage common stock. This
conversion ratio is described in detail in Section 2.1 of the WIB Merger
Agreement (the "WIB Conversion Ratio"). It is possible that more than 1,050,000
shares of Heritage common stock will be issued in the WIB merger, but only if
the average trading price of Heritage common stock on the Nasdaq National
Market over a 45 consecutive trading day period ending five days prior
5
<PAGE>
to the closing of the WIB merger is below $10.00 per share, and WIB elects to
terminate the agreement, and Heritage overrides that termination election by
issuing additional shares in the WIB merger.
Procedure for Exchange of WIB Common Stock
Promptly after the effective date of the WIB merger, Heritage will cause an
exchange agent selected by Heritage (the "Exchange Agent") to mail to the
former shareholders of WIB a form letter of transmittal, together with
instructions for the exchange of WIB shareholders' certificates representing
shares of WIB common stock for certificates representing shares of Heritage
common stock. WIB shareholders should not send their stock certificates until
they receive the form letter of transmittal and instructions. See "THE PROPOSED
MERGER--Procedure for Exchange of WIB Common Stock for Heritage Common Stock."
Regulatory Approval and Other Conditions to WIB Merger
The WIB merger is subject to approval by the Federal Reserve. An application
for the required approval has been filed with the Federal Reserve and approval
was granted by the Federal Reserve on December 17, 1998.
Consummation of the WIB merger is subject to various other conditions,
including receipt of the required approval of the WIB shareholders, receipt of
certain customary legal opinions, confirmation that the transaction can be
accounted for as a pooling of interests, and the absence of any material
adverse change in the financial condition or results of operations of WIB or
Heritage. See "THE PROPOSED MERGER--Conditions to Consummation of the WIB
Merger."
Termination Provisions of WIB Merger Agreement
The WIB Merger Agreement may be terminated at any time before the effective
date of the WIB merger (i) by the mutual consent of the Boards of Directors of
Heritage and WIB; (ii) by the Board of Directors of either Heritage or WIB in
the event of a material breach of any agreement, covenant, representation or
warranty by the other party, if the breaching party fails to correct the breach
promptly after receiving notice of the breach; (iii) by either party if the WIB
merger is not consummated by April 30, 1999; (iv) by either party if the
required approval of the WIB shareholders is not obtained at the WIB Special
Meeting or any adjournments thereof; or (v) by the Board of Directors of WIB if
certain fluctuations in the market price of Heritage common stock occur, and
Heritage does not exercise its option to increase the WIB Conversion Ratio as
provided in the WIB Agreement. See "THE PROPOSED MERGER--Termination
Provisions."
Effective Date of the WIB Merger
The WIB merger will be effective on the date and at the time when the
Articles of Merger have been delivered to and accepted by the Secretary of
State of Washington for filing. See "THE PROPOSED MERGER--WIB Effective Date."
Employment Agreements
Central Valley Bank has entered into employment agreements with D. Michael
Broadhead, Joe Perry, Richard Maison, and Larry Holt which will become
effective on the effective date of the WIB merger. See "THE PROPOSED MERGER--
Employment Agreements."
Interests of Certain Persons in the WIB Merger
In addition to the employment agreements described above, certain members of
WIB's management and its Board of Directors may be deemed to have interests in
the WIB merger that are in addition to their interests
6
<PAGE>
as WIB shareholders generally. These interests include, among others, (i) the
appointment of one representative director of WIB, Mr. Melvin R. Lewis, to the
Board of Directors of Heritage and (ii) the agreement by Heritage to indemnify
the present and former directors, officers and employees of WIB and Central
Valley Bank to the fullest extent that WIB would have been permitted by
Washington law and its Articles of Incorporation and Bylaws, against all
liabilities and the costs and expense of defending claims of liabilities. Also,
Donald V. Rhodes and Daryl D. Jensen serve on the boards of Heritage and WIB.
As stated above, certain employees of Central Valley Bank have entered into
employment contracts with Central Valley Bank that become effective when the
merger is effected. See "THE PROPOSED MERGERS--Interests of Certain Persons in
the Mergers."
Certain Federal Income Tax Consequences
The WIB merger has been structured as a tax-free corporate reorganization
for federal income tax purposes, except for the receipt of cash after exercise
of dissenters' rights, cash in lieu of issuing fractional shares, and the
receipt of shares of Heritage common stock in exchange for Vested WIB Options.
Consummation of the WIB merger requires prior receipt of an opinion of Gerrish
& McCreary, P.C., counsel for Heritage, as to the tax treatment of the merger.
See "THE PROPOSED MERGER--Material Federal Income Tax Consequences of the
Mergers."
Because of the complexities of federal and state income tax laws, as a WIB
shareholder, you are urged to consult with your tax advisor in order to
determine the specific tax consequences to you as a shareholder as a result of
the merger, including federal, foreign, state, and local tax consequences. This
Proxy Statement/Prospectus does not include a discussion of the tax
consequences that may result from any foreign, state, local, or other tax law.
See "THE PROPOSED MERGER--Material Federal Income Tax Consequences of the
Merger."
Accounting Treatment
The merger is expected to be accounted for as a pooling-of-interests. See
"THE PROPOSED MERGER--Accounting Treatment".
Certain Differences in Shareholders' Rights
On the effective date of the WIB merger, WIB shareholders, whose rights are
governed by WIB's articles of incorporation and bylaws and the Washington
Business Corporation Act, will automatically become Heritage shareholders, and
their rights as Heritage shareholders will be determined by Heritage's Articles
of Incorporation and Bylaws and the Washington Business Corporation Act.
The rights of Heritage shareholders differ from the rights of WIB
shareholders in certain respects, some of which constitute additional anti-
takeover provisions provided for in the governing documents of Heritage. See
"THE PROPOSED MERGER--Certain Differences in Rights of Heritage and WIB
Stockholders."
Resale Restrictions on Affiliates of WIB
WIB has agreed to obtain from each individual identified by it as
affiliates, an agreement providing that such person will not sell or otherwise
transfer any Heritage common stock to be received by such person as a result of
the WIB merger, except in compliance with the 1933 Act and as permitted under
the accounting rules governing the pooling of interests method of accounting.
See "THE PROPOSED MERGER--Resales of Heritage common stock to be Received by
Certain shareholders of WIB."
7
<PAGE>
Directors and Management of Heritage Following the Merger
Pursuant to the WIB Merger Agreement and contingent on completion of the
merger transaction, Heritage will expand its board and cause the appointment of
a non-management director of WIB who resides in eastern Washington to its Board
of Directors, as recommended by WIB. WIB has recommended Mr. Melvin R. Lewis
for appointment to the Heritage Board. See "THE PROPOSED MERGER--Directors and
Executive Officers Following the Merger."
Risk Factors
In deciding whether to approve the WIB merger, WIB shareholders should
carefully evaluate the matters set forth under "RISK FACTORS."
Share Information and Comparative Market Prices
Heritage common stock is traded on the Nasdaq National Market under the
symbol "HFWA." See "COMPARATIVE MARKET PRICES AND DIVIDENDS--Heritage."
No broker makes a market in WIB common stock, and trading has not otherwise
been extensive. The trades that have occurred cannot be characterized as
amounting to an established public trading market. WIB common stock is traded
by individuals on a personal basis and is not listed on any exchange or traded
on the over-the-counter market, and the prices recorded reflect only the
transactions known to management.
The following table shows the closing sales prices reported on the Nasdaq
National Market for Heritage common stock on September 27, 1998, the last
trading date preceding public announcement of the WIB merger. The table also
shows the most recent known sales price for WIB common stock before September
27, 1998.
<TABLE>
<CAPTION>
Per Share Price on
September 27, 1998
(Before WIB announcement)
-------------------------
<S> <C>
Heritage common stock $11.06
WIB common stock $ 3.75
</TABLE>
The closing price per share of Heritage Common Stock on January 19, 1999 was
$9.94. Assuming the total number of shares to be issued in the merger is
1,050,000 and no Vested WIB Options are outstanding, each of the 1,760,449
shares of WIB common stock would be converted into .5964 shares of Heritage
common stock. This would equate to an equivalent per share price of WIB common
stock of $5.93.
The market price for Heritage common stock will fluctuate between the date
of this Proxy Statement/Prospectus and the effective date of the WIB merger,
which will be at least one month. The market value per share of the Heritage
common stock that WIB shareholders ultimately receive in the merger could be
more or less than the market value on the date of this Proxy
Statement/Prospectus. Shareholders of WIB are advised to obtain current market
quotations for Heritage common stock. No assurance can be given as to the
market price of the Heritage common stock at the effective date of the WIB
merger.
8
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables set forth selected financial data for Heritage and WIB
on an historical basis, and unaudited pro forma selected financial data
reflecting the consummation of the WIB merger.
Unaudited pro forma selected financial data assume the merger was effective
as of July 1, 1993 with the issuance and exchange of 1,050,000 shares of
Heritage common stock to acquire all the WIB outstanding stock at the beginning
of each period. The selected financial data for Heritage and WIB and the
unaudited pro forma selected financial information have been prepared based on
the historical financial statements of Heritage and WIB for each of the periods
presented. The data should be read in conjunction with the historical financial
statements, related notes and other financial information included elsewhere in
this Proxy Statement/Prospectus for Heritage and WIB. This information is
presented assuming that the merger will be accounted for under the pooling-of-
interests method of accounting. See "THE PROPOSED MERGER--Accounting
Treatment."
The results of operations for the three month period ended September 30,
1998, may not be indicative of the results of operations to be achieved for the
six months ended December 31, 1998, or for future periods. Effective December
31, 1998, Heritage has decided to change its year end for financial reporting
from June 30 to December 31. The unaudited pro forma selected financial
information does not purport to represent the actual results of operations or
the financial condition of the combined companies had the merger actually
occurred in the periods or on the dates indicated. Prior to December 31, 1998,
Heritage's Fiscal year ended on June 30. WIB's historical and pro forma
financial data have been restated assuming a June 30 fiscal year end for WIB.
9
<PAGE>
HERITAGE FINANCIAL CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months Ended
For the year ended June 30, September 30,
------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Net interest income.... $ 6,788 $ 8,227 $ 8,332 $ 9,512 $ 13,013 $ 2,645 $ 4,673
Provision for loan
losses................ -- -- -- (270) 120 30 90
Noninterest income..... 4,019 3,040 4,298 3,347 3,791 893 1,139
Noninterest expense.... 7,421 7,425 8,422 11,105 11,093 2,563 3,723
Provision for income
taxes................. 1,154 1,308 1,435 (245) 1,963 335 722
Net income............. 2,232 2,534 2,773 2,269 3,628 610 1,277
Earnings per share (1)
Basic.................. NA 0.27 0.30 0.24 0.38 0.07 0.13
Diluted................ NA 0.27 0.30 0.24 0.37 0.06 0.13
Dividend payout ratio
(2)................... NM NM 7.64% 10.05% 19.74% 37.38% 34.62%
Performance Ratios:
Net interest margin
(3)................... 3.83% 4.57% 4.31% 4.50% 4.80% 4.70% 5.08%
Efficiency ratio (4)... 68.67% 65.90% 66.68% 77.89% 66.01% 72.44% 64.06%
Return on average
assets................ 1.18% 1.30% 1.31% 0.99% 1.24% 1.00% 1.26%
Return on average
equity................ 13.05% 11.67% 11.38% 8.62% 6.15% 8.87% 5.43%
<CAPTION>
At June 30, At September 30,
------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets........... $194,102 $204,897 $222,052 $242,164 $415,851 $ 248,704 $ 417,900
Loans receivable, net.. 123,258 150,526 161,744 199,188 265,813 202,028 280,799
Loans held for sale.... 4,110 5,944 5,286 6,323 6,411 5,451 5,995
Deposits............... 165,922 174,797 191,119 209,781 314,120 216,948 314,216
Federal Home Loan Bank
advances.............. -- -- -- 890 698 -- 693
Other borrowed funds... 4,100 3,252 -- -- 1,132 -- 894
Shares outstanding
(5)................... 9,269 9,294 9,298 9,318 9,656 9,318 9,776
Stockholders' equity... 20,662 23,065 25,633 27,714 93,862 28,324 95,231
Book value per share... $ 2.23 $ 2.48 $ 2.76 $ 2.97 $ 9.72 $ 3.04 $ 9.74
Equity to assets
ratio................. 10.64% 11.26% 11.54% 11.44% 22.57% 11.39% 22.79%
Asset Quality Ratios:
Nonperforming loans to
loans................. 0.07% 0.06% 0.03% 0.06% 0.13% 0.16% 0.13%
Allowance for loan
losses to loans....... 1.32% 1.09% 1.11% 1.32% 1.28% 1.32% 1.25%
Allowance for loan
losses to
nonperforming loans.... 1776.04% 1791.67% 3672.55% 2069.17% 959.89% 808.72% 925.00%
Nonperforming assets to
total assets.......... 0.05% 0.05% 0.02% 0.05% 0.09% 0.14% 0.09%
Other Data:
Number of banking
offices............... 5 7 8 10 12 10 12
Number of full-time
equivalent employees.. 119 116 136 145 192 145 188
</TABLE>
- --------
(1) Heritage Bank became a stock-owned company as of January 31,1994. Per
share data prior to 1995 is not applicable.
(2) Dividend payout ratio is dividends declared per share divided by earnings
per share. Cash dividends prior to January 1998 stock offering and
conversion are not comparable to prior periods due to the former mutual
holding company's waiver of its pro rata cash dividends.
(3) Net interest margin is net interest income divided by average interest
earning assets.
(4) The efficiency ratio is recurring noninterest expense divided by the sum
of net interest income and noninterest income, excluding nonrecurring
items. Heritage Bank paid a one-time deposit assessment of $1.09 million
to the Savings Association Insurance Fund in November 1996. This was
excluded from the calculation of the efficiency ratio for 1997.
(5) Shares outstanding prior to January 8, 1998 are based on the historical
common shares outstanding for Heritage Bank on the dates indicated
multiplied by the exchange ratio utilized in the stock conversion
(5.1492). On January 8, 1998, the former stockholders of Heritage Bank
received 5.1492 shares of Heritage Financial Corporation's common stock
for each share of the Bank's common stock exchanged.
10
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Three Months
Ended
For the Year Ended June 30, September 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Net interest income... $ 1,564 $ 1,911 $ 2,172 $ 2,491 $ 2,976 $ 742 $ 746
Provision for loan
losses............... -- -- -- 5 29 5 10
Noninterest income.... 283 349 496 447 597 131 165
Noninterest expense... 1,579 1,869 2,083 2,328 2,574 615 708
Provision for income
taxes................ -- 37 182 233 311 95 76
Net income............ 268 354 403 372 659 158 117
Earnings per share
Basic............... 0.24 0.30 0.27 0.24 0.42 0.10 0.07
Diluted............. 0.23 0.29 0.25 0.22 0.39 0.09 0.07
Dividend payout ra-
tio.................. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Performance Ratios:
Net interest margin... 6.33% 7.03% 6.53% 6.24% 6.20% 6.54% 5.74%
Efficiency ratio...... 85.49% 82.70% 78.07% 79.24% 72.04% 70.45% 77.72%
Return on average as-
sets................. 0.96% 1.14% 1.07% 0.82% 1.24% 1.24% 0.81%
Return on average eq-
uity................. 11.98% 12.97% 10.76% 9.35% 14.96% 15.05% 9.97%
<CAPTION>
At June 30, At September 30,
------------------------------------------- ------------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.......... $29,256 $34,930 $40,493 $49,193 $55,124 $ 53,863 $ 61,000
Loans receivable,
net.................. 19,771 23,569 29,655 34,502 37,942 36,807 39,764
Deposits.............. 25,340 30,720 35,924 44,453 49,473 48,877 55,663
Federal Home Loan Bank
advances............. -- -- -- -- -- -- --
Other borrowed funds.. -- -- -- -- -- -- --
Shares outstanding.... 1,122 1,204 1,547 1,545 1,597 1,545 1,760
Stockholders' equity.. 2,259 3,423 3,869 4,095 4,592 4,018 4,952
Book value per share.. $ 2.01 $ 2.84 $ 2.50 $ 2.65 $ 2.88 $ 2.60 $ 2.81
Equity to assets ra-
tio.................. 7.72% 9.80% 9.55% 8.32% 8.33% 7.46% 8.12%
Asset Quality Ratios:
Nonperforming loans to
loans................ 0.09% 0.49% 0.30% 0.04% 0.04% 0.04% 0.02%
Allowance for loan
losses to loans...... 1.75% 1.52% 1.16% 1.01% 1.01% 0.96% 0.97%
Allowance for loan
losses to
nonperforming loans.. 1955.56% 308.47% 392.13% 2715.38% 2412.50% 2542.86% 3920.00%
Nonperforming assets
to total assets...... 0.06% 0.34% 0.22% 0.03% 0.03% 0.03% 0.02%
Other Data:
Number of banking
offices.............. 3 3 4 4 4 4 5
Number of full-time
equivalent
employees............ 25 29 34 35 37 36 39
</TABLE>
11
<PAGE>
HERITAGE FINANCIAL CORPORATION AND WASHINGTON INDEPENDENT BANCSHARES, INC.
SELECTED FINANCIAL DATA
PRO FORMA COMBINED
<TABLE>
<CAPTION>
Three Months Ended
For the year ended June 30, September 30,
------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Data:
Net interest income.... $ 8,352 $ 10,138 $ 10,504 $ 12,003 $ 15,989 $ 3,387 $ 5,419
Provision for loan
losses................ -- -- -- (265) 149 35 100
Noninterest income..... 4,302 3,389 4,794 3,794 4,388 1,024 1,304
Noninterest expense.... 9,000 9,294 10,505 13,433 13,667 3,178 4,431
Provision for income
taxes................. 1,154 1,345 1,617 (12) 2,274 430 798
Net income............. 2,500 2,888 3,176 2,641 4,287 768 1,394
Earnings per share (1)
Basic................. NA 0.28 0.31 0.25 0.40 0.07 0.13
Diluted............... NA 0.28 0.31 0.25 0.39 0.07 0.13
Dividend payout ratio
(2)................... 0.0% 6.2% 6.7% 8.6% 16.9% 29.7% 31.6%
Performance Ratios:
Net interest margin
(3)................... 4.14% 4.89% 4.63% 4.78% 5.01% 5.01% 5.16%
Efficiency ratio (4)... 71.12% 68.71% 68.67% 85.04% 67.07% 72.05% 65.91%
Return on average
assets................ 1.15% 1.28% 1.27% 0.96% 1.24% 1.04% 1.21%
Return on average
equity................ 12.93% 11.81% 11.30% 8.71% 6.76% 9.69% 5.65%
<CAPTION>
At June 30, At September 30,
------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets........... $223,358 $239,827 $262,545 $291,357 $470,975 $ 302,567 $ 478,900
Loans receivable, net.. 143,029 174,095 191,399 233,690 303,755 238,835 320,563
Loans held for sale.... 4,110 5,944 5,286 6,323 6,411 5,451 5,995
Deposits............... 191,262 205,517 227,043 254,234 363,593 265,825 369,879
Federal Home Loan Bank
advances.............. -- -- -- 890 698 -- 693
Other borrowed funds... 4,100 3,252 -- -- 1,132 -- 894
Shares Outstanding..... 10,319 10,344 10,348 10,368 10,706 10,368 10,826
Stockholders' equity... 22,921 26,488 29,502 31,809 98,454 32,342 100,183
Book value per share... $ 2.22 $ 2.56 $ 2.85 $ 3.07 $ 9.20 $ 3.12 $ 9.31
Equity to assets
ratio................. 10.26% 11.04% 11.24% 10.92% 20.90% 10.69% 20.92%
Asset Quality Ratios:
Nonperforming loans to
loans................. 0.08% 0.12% 0.07% 0.06% 0.12% 0.14% 0.12%
Allowance for loan
losses to loans....... 1.38% 1.14% 1.12% 1.28% 1.25% 1.27% 1.21%
Allowance for loan
losses to
nonperforming loans... 1,804.39% 973.83% 1,587.14% 2,126.71% 1,020.26% 876.54% 999.50%
Nonperforming assets to
total assets.......... 0.05% 0.09% 0.05% 0.05% 0.08% 0.12% 0.08%
Other Data:
Number of banking
offices............... 8 10 12 14 16 14 17
Number of full-time
equivalent employees.. 144 145 170 180 229 181 227
</TABLE>
- --------
(1) Heritage Bank became a stock-owned company as of January 31,1994. Per share
data prior to 1995 is not applicable.
(2) Dividend payout ratio is dividends declared per share divided by earnings
per share. Cash dividends prior to January 1998 stock offering and
conversion are not comparable to prior periods due to the former mutual
holding company's waiver of its pro rata cash dividends.
(3) Net interest margin is net interest income divided by average interest
earning assets.
(4) The efficiency ratio is recurring noninterest expense divided by the sum of
net interest income and noninterest income, excluding nonrecurring items.
Heritage Bank paid a one-time deposit assessment of $1.09 million to the
Savings Association Insurance Fund in November 1996. This was excluded from
the calculation of the efficiency ratio for 1997.
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RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
these factors should be given careful consideration by shareholders of WIB in
evaluating the WIB merger.
Prospects of Heritage After the Merger
The banking and financial services industry is highly competitive. If an
undetermined number of present customers of Heritage and WIB are not retained
by Heritage after the merger or additional expenses are incurred in keeping
them, this could have a negative effect on future results for Heritage.
Continuing profitability for Heritage will depend in part on maintaining the
revenues of Heritage's combined banking subsidiaries after the merger. Also,
Heritage's continuing profitability will depend in part on its being able to
integrate the operations of WIB and the operations of the recently acquired
North Pacific Bank with Heritage's own operations promptly and efficiently and
on Heritage being correct in its assumptions about the financial impact of the
WIB merger and the recent North Pacific Bank transaction. There is a risk that
the integration of the operations of an acquired institution may not be
completed on schedule or may be more difficult and costly than expected. We can
give you no assurance that Heritage and its banking subsidiaries will be able
to realize the benefits anticipated to be received after the merger because of
uncertainties after the merger.
Heritage is an entity separate and distinct from its banking subsidiary,
Heritage Bank, but the principal sources of Heritage's revenues are interest on
investments of Heritage and dividends from Heritage Bank's and (if the WIB
merger is effected) Central Valley Bank's operations. Regulations limit the
amount of dividends that by Heritage's banking subsidiary(ies) can pay to
Heritage without prior regulatory approval.
Growth and Competition
Heritage has grown not only through the recent conversion transaction but
also by acquiring North Pacific Bank Tacoma, Washington and will grow with the
proposed WIB merger. Heritage may try to grow by acquiring other financial
institutions and opening de novo branches. However, the market for acquisitions
of financial institutions is highly competitive. Any acquisitions will be
subject to regulatory approval. There can be no assurance to you that Heritage
will obtain the required approvals. Heritage may not be successful in the
future in identifying or attracting acquisition candidates, integrating
acquired institutions or preventing deposit erosion at acquired institutions.
Heritage's ability to continue to grow through acquisitions will depend on
maintaining sufficient regulatory capital and on economic conditions.
Heritage Bank and Central Valley Bank face substantial competition for loans
and deposits in the communities they serve. Competition includes other banks,
thrifts and trust companies, credit unions, finance companies, insurance
companies, mortgage banking operations, money market funds and other financial
and non-financial companies that offer products that are similar to those
offered by Heritage Bank and Central Valley Bank. Some of these competitors
have greater financial resources than Heritage and offer services within the
market areas served by Heritage. There can be no assurance that Heritage's
efforts will continue to be successful.
Dependence on Management
The value of an investment in Heritage common stock is somewhat dependent on
the ability of Heritage's management, particularly its Chairman, President and
Chief Executive Officer, Donald V. Rhodes, to successfully manage Heritage
after the recent North Pacific Bank acquisition and the proposed WIB merger. If
Heritage's management is not able to satisfactorily perform its duties, the
benefits to an investor in Heritage common stock could be less than those
anticipated. There is no guaranty that the current management of Heritage or
WIB will continue to be employed by Heritage and its subsidiaries after the
merger, except as provided for in the employment agreements with certain
officers and key employees which include noncompetition provisions. Loss of the
services of certain members of management of Heritage could have a negative
effect on Heritage's business and prospects. Heritage believes that its future
success will depend upon
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its ability to attract, retain and motivate qualified personnel. There can be
no assurance to you that Heritage will be successful in such endeavors.
Heritage's Year 2000 Readiness Disclosure
Heritage knows that it needs to ensure that its operations will not be
adversely impacted by Year 2000 software failures. This issue affects computer
systems that have time-sensitive programs that may not properly recognize the
Year 2000. Heritage has completed a company wide review to determine the extent
to which all programs used in its business are Year 2000 compliant. Heritage
Bank utilizes a service bureau to perform its most mission critical data
processing services related to its loans, deposits, general ledger and other
financial applications. Currently, that service bureau has completed the
software programming for all of its applications used by Heritage Bank. Testing
of these service bureau programs began in November 1998 and is expected to be
completed by mid-1999.
Heritage has evaluated its major third party business relationships,
including vendors and its borrowers. The significant dependence on the service
bureau creates potential exposure for Heritage, but management fully expects
the service bureau to meet the scheduled time table for both software
modifications and for testing which would insure that Heritage's mission
critical applications would be Year 2000 compliant by July 1999. Heritage has
analyzed the extent that Year 2000 issues could have a negative impact on its
borrowers' business operations, particularly its commercial borrowers. Heritage
has performed an initial assessment of each major borrower and established an
ongoing assessment as part of Heritage's credit granting and loan review
process.
Heritage has prepared a contingency plan with time tables to pursue various
alternatives based on failure of the service bureau to adequately modify and/or
provide sufficient testing and validation resources for Heritage and the
service bureau to insure the mission critical applications are Year 2000
compliant. The most likely worst case scenario would be that the testing and
the validation of the software modifications are not completed by the scheduled
deadline of July 1999. This worst case scenario could increase Heritage's
overall expected Year 2000 cost, but management believes that this scenario is
not likely to occur. If the scenario should occur, the impact of these
additional costs would not be material to Heritage's financial position and
results of operation. There can be no assurances to you on the outcome of
Heritage's preparation for the Year 2000 issues.
Limited Market For Heritage Common Stock
Heritage issued its initial capital stock on January 7, 1998 and listed its
common stock on the Nasdaq National Market on January 9, 1998. The trading
volume in Heritage common stock has been limited at times during the past year.
The average trading volume has been approximately 25,000 shares per trading
day. Under these circumstances, shareholders of WIB acquiring Heritage common
stock could have difficulty disposing of their shares on short notice if a
limited number of willing buyers are available for Heritage common stock. There
can be no assurance to you that an active trading market for Heritage common
stock will continue to develop.
Importance Of Mortgage Banking Operations Of Heritage Bank
Mortgage banking activities significantly influence Heritage Bank's results
of operations. Heritage Bank's mortgage banking operations involve the
origination and sale of mortgage loans primarily for the purpose of generating
income. The profitability of mortgage banking operations depends primarily on
managing the volume of loan originations and sales and the expenses associated
with loan originations so that gains on the sale of loans together with any
recurring fee income exceeds the costs of this activity. Changes in the level
of interest rates and the condition of local and national economies affect the
amount of loans originated by Heritage Bank and demanded by investors to whom
the loans are sold. Generally, Heritage Bank's loan origination and sale
activity and, therefore, its results of operations, may be adversely affected
by an increasing interest rate environment to the extent such environment
results in decreased loan demand by borrowers and/or investors. Accordingly,
the volume of loan originations and the profitability of this activity can vary
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significantly from period to period. In addition, Heritage Bank's results of
operations are affected by the amount of non-interest expenses associated with
mortgage banking activities, such as compensation and benefits, occupancy and
equipment expenses, and other operating expenses. During periods of reduced
loan demand, Heritage Bank's results of operations may be adversely affected to
the extent it is unable to reduce expenses commensurate with the decline in
loan originations.
Expansion Of Heritage's Non-Residential Lending
Heritage has changed the relative concentration of its loan portfolio in
recent years. One-to-four family permanent residential loans have decreased as
a percent of the entire portfolio while the percent of commercial business
loans has increased. The larger portion of Heritage's total loan portfolio
consists of loans other than 1-to-4 family permanent residential loans,
including multi-family and commercial real estate, construction, commercial and
consumer loans. Although such loans typically have higher yields than 1-to-4
family residential loans, such loans are typically more sensitive to economic
conditions, involve higher concentrations of investment in a single borrower or
project (with the exception of consumer loans), are more difficult to monitor,
and carry a higher level of credit risk than do permanent residential loans.
There can be no assurance that Heritage's attempt to address these risks by
utilizing conservative underwriting procedures, requiring real estate as
collateral for most commercial business loans and limiting its out-of-area
loans and its multi-family and commercial construction loans will be
successful.
Anti-takeover Provisions of Heritage
Certain provisions of the Articles of Incorporation and Bylaws of Heritage
may be deemed to have an "anti-takeover" effect on Heritage. These provisions
may have the effect of discouraging a future takeover attempt that is not
approved by the Heritage Board, but which individual Heritage shareholders may
deem to be in their best interest or in which shareholders may receive a
substantial premium for their shares over current market prices. Heritage's
Articles and Bylaws also contain provisions making the removal of incumbent
board members difficult to accomplish.
THE WIB SPECIAL MEETING
Time, Date and Place of the WIB Special Meeting
The WIB Special Meeting will be held on , February , 1999, at
.m., at , , Washington.
Purpose of the WIB Special Meeting
The purpose of the WIB Special Meeting is to:
(i) consider and vote upon a proposal to approve the WIB Merger
Agreement, providing for, among other things, the merger of WIB with and
into Heritage and, the conversion of shares of WIB common stock and Vested
WIB Options into shares of Heritage common stock; and
(ii) act upon such matters, if any, as may properly come before the WIB
Special Meeting.
Shares Outstanding and Entitled to Vote; Record Date for WIB
The WIB Board has fixed the close of business on January , 1999, as the
record date for determining the shareholders of WIB entitled to notice of and
to vote at the WIB special meeting. Holders of record of WIB common stock on
the WIB record date are entitled to one vote per share, and are also entitled
to exercise dissenters' rights if certain procedures are followed. See "THE
MERGER--Dissenters' Rights of Appraisal" and Appendix B.
At the WIB record date, there were 1,760,449 shares of WIB common stock
outstanding and entitled to vote at the WIB special meeting.
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Required WIB Vote
The affirmative vote of two thirds of all shares of WIB common stock
outstanding on the record date is required to approve the WIB Merger Agreement.
WIB's shareholders are entitled to one vote for each share of common stock
held.
The presence of a majority of the outstanding shares of WIB common stock in
person or by proxy is necessary to constitute a quorum of shareholders for the
WIB Special Meeting. For this purpose, abstentions and broker non-votes (i.e.,
proxies from brokers or nominees indicating that such person has not received
instructions from the beneficial owners or other persons entitled to vote
shares as to a matter with respect to which the broker or nominees do not have
discretionary power to vote) are counted in determining the shares present at a
meeting. For voting purposes, only shares affirmatively voted "FOR" the
approval of the WIB Merger Agreement, and neither abstentions nor broker non-
votes, will be counted as favorable votes in determining whether the WIB Merger
Agreement is approved by the holders of WIB common stock. As a consequence,
abstentions and broker non-votes will have the same effect as votes against
approval of the WIB Merger Agreement.
As of the record date, WIB's directors and executive officers and their
affiliates owned and were entitled to vote 1,089,992 shares at the WIB Special
Meeting, representing approximately 62% of the outstanding shares of WIB common
stock. Each WIB director has agreed to vote all shares of WIB common stock held
or controlled by him in favor of approval of the WIB Merger Agreement.
Conflicting Interest Relationships and Process and Procedures of the Boards of
Directors of WIB and Heritage
Donald V. Rhodes is Chairman, President and Chief Executive Officer of
Heritage, and he is Chairman, President and Chief Executive Officer of WIB and
Chairman and Chief Executive Officer of both Heritage Bank and Central Valley
Bank. Daryl D. Jensen is a director of Heritage, and he is a director of WIB.
The Boards of Directors of Heritage and WIB recognized these dual, and
potentially conflicting, roles of Messrs. Rhodes and Jensen in regard to the
proposed WIB merger transaction and, in compliance with the Washington Business
Corporation Act, the Heritage Board and the WIB Board each appointed an
acquisition committee of the board to negotiate with the other party. Neither
Mr. Rhodes nor Mr. Jensen served on or had any other role on the committee of
either board in its negotiations with the other party.
The acquisition committee of the Heritage board negotiated the terms of the
WIB Conversion Ratio and obtained independent advice as it chose. The Heritage
board met to receive the report and recommendation of the acquisition
committee.
At that board meeting, Mr. Rhodes and Mr. Jensen disclosed their stock
ownership and other interests in WIB to the Heritage board. Mr. Rhodes and Mr.
Jensen did not participate in the Heritage board meeting or vote on the
proposed WIB transaction. Only the non-interested board members of Heritage
discussed and voted on resolutions regarding the proposed WIB merger
transaction.
The board of WIB followed the same procedures as the Heritage board in
appointing an acquisition committee of the WIB board to negotiate with
Heritage. This committee of the WIB board with input from independent advisors
made a report and recommendation to the WIB board on the proposed merger with
Heritage. Mr. Rhodes and Mr. Jensen disclosed their stock ownership and other
interests in Heritage to the WIB board. Mr. Rhodes and Mr. Jensen did not
participate in the WIB board meeting or vote on the proposed merger with
Heritage. Only the non-interested board members of WIB discussed and voted on
resolutions regarding the proposed Heritage merger transaction.
Voting and Revocation of WIB Proxies
Holders of WIB common stock may vote either in person or by properly
executed proxy. Shares of WIB common stock represented by a properly executed
proxy received before or at the WIB special meeting will, unless such proxy is
revoked, be voted by the instructions indicated on such proxy. If no
instructions are
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indicated on a properly executed proxy, the shares represented by that proxy
will be voted FOR the proposal to approve the WIB Merger Agreement. Failure to
return a signed proxy card or to vote in person at the WIB Special Meeting will
have the effect of a vote cast against the WIB Merger Agreement.
If any other matters are properly presented at the WIB Special Meeting for
consideration, including, among other things, a motion to adjourn the WIB
Special Meeting to another time and/or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
proxy and acting thereunder will have discretion to vote on such matters in
accordance with their best judgment; provided, however, that no proxy which is
voted against the proposal to approve the WIB Merger Agreement will be voted in
favor of any such adjournment or postponement. A proxy marked ABSTAIN with
respect to the proposal to approve the WIB Merger Agreement may be voted in
favor of a proposal to adjourn or postpone the WIB Special Meeting in the
discretion of the persons named in the proxy. As of the date hereof, the WIB
Board knows of no such other matters.
Any proxy given pursuant to this solicitation or otherwise may be revoked by
the person giving it at any time before it is voted by delivering to Glen J.
Rasmussen, WIB's Secretary, at 537 West Second, Toppenish, Washington 98948, on
or before the taking of the vote at the Special Meeting, a written notice of
revocation bearing a later date than the proxy or a later dated proxy relating
to the same shares of WIB common stock, or by attending the Special Meeting and
voting in person. Attendance at the WIB Special Meeting will not in itself
constitute revocation of a proxy.
Solicitation of Proxies by WIB
WIB will bear the costs solicitation of proxies from its shareholders. In
addition to using the mails, proxies may be solicited by personal interview,
telephone and wire. Banks, brokerage houses, other institutions, nominees, and
fiduciaries will be requested to forward their proxy soliciting material to
their principals and obtain authorization for the execution of proxies.
Officers and other employees of WIB may solicit proxies personally. WIB is not
expected to pay any compensation for the solicitation of proxies, but will,
upon request, pay the standard charges and expenses of banks, brokerage houses,
other institutions, nominees, and fiduciaries for forwarding proxy materials to
and obtaining proxies from their principals.
WIB STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARD.
THE PROPOSED MERGER
This section of the Proxy Statement/Prospectus describes certain aspects of
the merger. These descriptions are not complete. You should review the WIB
Merger Agreement, which is attached as Appendix A to this Proxy
Statement/Prospectus, carefully and in its entirety.
Background and Reasons for the WIB Merger
WIB was formed in 1981 and acquired its banking subsidiary, Central Valley
Bank, in April 1982, at which time Central Valley Bank's assets totaled
approximately $20 million. Central Valley Bank operated profitably until 1985.
The bank experienced significant loan losses in 1986 and 1987, which
necessitated the hiring of a new management team to operate Central Valley Bank
and a recapitalization of WIB and Central Valley Bank. Specifically, in 1986
Mr. Donald V. Rhodes, current Chairman, President and Chief Executive Officer
of WIB and Chairman and Chief Executive Officer of Central Valley Bank, and Mr.
Michael Broadhead, current President of Central Valley Bank, were hired and
within the next several years restored WIB to profitable operations. In 1989,
Mr. Rhodes also became President and Chief Executive Officer of Heritage Bank
and also became Chairman in 1990. Under the leadership of Mr. Rhodes and Mr.
Broadhead, WIB's assets have grown to $61 million, as of September 30, 1998,
and WIB has continued to operate profitably, with profits from 1997 operations
of $564,000. Mr. Daryl D. Jensen, who has served as a director of Heritage Bank
since 1985, was appointed to the Board of Directors of WIB in 1981 and to the
Board of Directors of Central Valley Bank in 1989.
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In 1994, Central Valley Bank opened its first branch office in Yakima,
Washington, and experienced significant growth in loans, deposits and total
assets. Since that time, Central Valley Bank has continued to pursue a growth
strategy in this market, currently operating out of its Union Gap branch, a
temporary modular unit in downtown Yakima, and a newly constructed branch
office on Nob Hill Boulevard. Central Valley Bank has also experienced
substantial growth in non-interest expense, reflecting the cost incurred to
establish the new Yakima offices and to staff Central Valley Bank for
anticipated growth.
WIB's Board has considered and discussed the critical issues facing Central
Valley Bank as it pursues its growth strategy. Continuing consolidations in the
banking business were noted together with increasing competition from both bank
and non-bank sources. The WIB Board concluded that in order to fully capitalize
on its market opportunities in the Yakima Valley, Central Valley Bank would
need to continue to expand through de novo branching, though the WIB Board
realized that additional borrowings or stock offerings may be necessary to
supplement Central Valley Bank's capital to support this growth.
Since 1994, Heritage has more than doubled its number of banking locations.
In January 1998, Heritage completed its conversion from a mutual holding
company to a full public company. This conversion resulted in approximately $63
million in net new capital for Heritage. This new capital has significantly
enhanced Heritage's ability to take advantage of acquisition opportunities
which expand its geographic and product market and help create a balance sheet
more characteristic of a commercial banking institution.
Because of Heritage's aggressive plans for growth through the acquisition of
well-managed, profitable commercial banks in attractive markets, in June of
1998, Mr. Rhodes began discussions with other members of senior management and
the Board of WIB and Central Valley Bank as to the possible combination of
Heritage and WIB. In view of the decade of partnership that has existed between
management of Heritage and WIB, and the interest shown by both parties in a
possible transaction, serious negotiations were begun in July of 1998 that led
to agreement between the parties.
In July of 1998, the WIB Board met to discuss the possibility of a merger
transaction with Heritage. At that time, the WIB Board established three goals
that should be achieved in any merger: (1) enhanced shareholder value and stock
liquidity, (2) continuity of management and employees of Central Valley Bank,
and (3) an enhanced ability to provide customers with a wider variety of
products and services. The Board then reviewed a proposed term sheet provided
by Heritage and authorized an acquisition committee of the WIB Board, comprised
of directors Brulotte, Peterson and Rasmussen, to negotiate a conversion ratio
for Heritage and WIB shares in the transaction. As a result of continuing
negotiations between the parties, Heritage proposed that the transaction be
priced using either (i) a fixed exchange, where 1,000,000 shares of Heritage
common stock would be exchanged for all outstanding shares and vested options
of WIB, or (ii) a floating exchange where a fluctuating number of Heritage
shares would be exchanged for WIB shares and vested options based on a fixed
dollar value of the price of Heritage common stock for a brief period prior to
closing.
In late July 1998, WIB retained the services of an investment banker,
Columbia Financial Advisors, Inc., ("Columbia") to assist in evaluating the
business combination with Heritage, and the acquisition committee recommended
to the full Board of WIB that the transaction be structured with a fixed
conversion ratio, which it had determined to be in the best interests of WIB's
shareholders.
On August 31, 1998, the Board of WIB and Central Valley Bank reviewed,
approved and executed a final Agreement and Plan of Merger between WIB and
Heritage. At a meeting held on September 1, 1998, the Board of Directors of
Heritage determined not to proceed with the transaction at that time because of
significant fluctuations in the stock market that had recently occurred.
Further negotiations between the parties ensued in early September and at a
meeting of the Heritage Board on September 17, 1998, the Heritage Board
determined it to be appropriate to recommence action on the proposed WIB
transaction and to approve the proposed WIB Merger Agreement, subject to
certain amendments which were negotiated between the parties. The amendments
made to the WIB Merger Agreement were as follows: (1) the number of Heritage
shares to be issued in the exchange was increased by up to an additional 50,000
shares depending upon the average stock price of Heritage for a specified
period prior to closing of the
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transaction; (2) the walkaway price was changed from $12.25 to $10.00; and (3)
the effective date of the WIB Merger Agreement was changed to October 1, 1998
or such sooner date that Heritage completed its due diligence review of WIB
and Central Valley Bank. On September 18, 1998 the Board of Directors of WIB
and Central Valley Bank determined the amended WIB Merger Agreement to be in
the best interests of its shareholders and unanimously approved and entered
into the WIB Merger Agreement effective as of September 28, 1998.
The WIB Board of Directors believes that the terms of the merger, which are
the product of arms-length negotiations between representatives of WIB and
Heritage, are fair and in the best interests of WIB and its shareholders. In
the course of reaching its determination, the WIB Board consulted with legal
counsel with respect to the legal duties of the WIB Board, the terms of the
Merger Agreement and the issues related thereto; with its accountants with
respect to certain financial aspects of the transaction; with its financial
advisor with respect to the financial aspects and fairness of the transaction;
and with senior management regarding, among other things, operational and due
diligence matters.
In reaching its decision that the WIB Merger Agreement is fair and in the
best interests of WIB and its shareholders, the WIB Board considered the
fairness opinion of Columbia, and a number of additional factors. The material
factors considered by the WIB Board are as follows:
. WIB shareholder value would be significantly enhanced by the value of
Heritage common stock being issued in the merger;
. Heritage stock is traded in the over-the-counter market and quoted on the
Nasdaq National Market, thus creating a far more liquid security for WIB
shareholders;
. The merger is structured as a tax-free exchange of stock, permitting WIB
shareholders the opportunity to continue to invest in a community banking
organization;
. Heritage's financial condition, business and prospects and the economic
prospects of its market appear to be attractive;
. The merger would facilitate the delivery of additional services to
Central Valley Bank customers;
. The financial and managerial resources provided by Heritage will enhance
Central Valley Bank's ability to compete in its market area;
. The combined organization is expected to provide increased opportunities
to employees; and
. The merger is expected to receive regulatory approval.
The WIB Board did not ascribe relative or specific weights to any factor in
its evaluation of the merger.
Opinion of WIB's Financial Advisor, Columbia Financial Advisors
Columbia has delivered a written opinion to the WIB Board to the effect
that, as of the date of this Proxy Statement/Prospectus, the consideration to
be received by WIB common shareholders pursuant to the terms of the WIB Merger
Agreement is fair to such stockholders from a financial point of view. The
Exchange Ratio of .5787 shares based upon the price calculation described
below of Heritage common stock for each share of WIB has been determined by
WIB and Heritage through negotiations. The Columbia opinion is directed only
to the fairness, from a financial point of view, of the consideration to be
received and does not constitute a recommendation to any WIB stockholder as to
how such shareholder should vote at the Special Meeting. Assuming a closing
date of December 28, 1998, or the forty-five trading days beginning on October
21, 1998 and ending on December 23, 1998, when the Heritage common stock price
averaged $10.81, the value of Heritage common stock is approximately $6.26 per
share of WIB common stock.
WIB retained Columbia as its exclusive financial advisor pursuant to an
engagement letter dated July 28, 1998 in connection with the merger. Columbia
is a regionally recognized investment banking firm that is regularly engaged
in the valuation of businesses and securities in connection with mergers and
acquisitions. The WIB Board selected Columbia to act as WIB's exclusive
financial advisor based on Columbia's experience in mergers and acquisitions
and in securities valuation generally.
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On January 5, 1999, Columbia issued its Opinion to the WIB Board that, in
its opinion as investment bankers, the terms of the merger as provided in the
WIB Merger Agreement are fair, from a financial view point, to WIB, the Bank
and its shareholders. The full text of the Columbia Opinion, which sets forth
the assumptions made, matters considered, and limits on its review, is attached
hereto as Appendix C. The summary of the Columbia Opinion in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion. WIB SHAREHOLDERS ARE URGED TO READ THE ENTIRE COLUMBIA
OPINION.
In rendering its opinion to WIB, Columbia reviewed, among other things,
historical financial data of WIB, certain internal financial data and
assumptions of WIB prepared for financial planning and budgeting purposes
furnished by the management of WIB and, to the extent publicly available, the
financial terms of certain change of control transactions involving Northwest
community banks. Columbia discussed with WIB's management the financial
condition, current operating results, and business outlook for WIB. Columbia
also reviewed certain publicly available information concerning Heritage and
certain financial and securities data of Heritage and companies deemed similar
to Heritage. Columbia discussed with Heritage's management the financial
condition, current operating results, and business outlook for Heritage and
Heritage's plans relating to WIB. In rendering its opinion, Columbia relied,
without independent verification, on the accuracy and completeness of all
financial and other information reviewed by it and did not attempt to verify or
to make any independent evaluation or appraisal of the assets of WIB or
Heritage nor was it furnished any such appraisals. WIB did not impose any
limitations on the scope of the Columbia investigation in arriving at its
opinion. Columbia analyzed the total Purchase Price on a cash equivalent fair
market value basis using standard evaluation techniques (as discussed below)
including comparable sales multiples, net present value analysis, and net asset
value based on certain assumption of projected growth, earnings and dividends
and a range of discount rates from 16% to 18%.
Net Asset Value is the value of the net equity of a bank, including every
kind of property and value. This approach normally assumes the liquidation on
the date of appraisal with the recognition of the investment securities gains
or losses, real estate appreciation or depreciation, adjustments to the loan
loss reserve, discounts to the loan portfolio and changes in the net value of
other assets. As such, it is not the best evaluation approach when valuing a
going concern because it is based on historical costs and varying account
methods. Even if the assets and liabilities are adjusted to reflect prevailing
market prices and yields (which is often of limited accuracy due to the lack of
readily available date), it still results in a liquidation value. In addition,
since this approach fails to account for the values attributable to the going
concern such as the interrelationship among WIB's assets and liabilities,
customer relations, market presence, image and reputation, staff expertise and
depth, little weight is given by Columbia to the net asset value approach to
valuation.
Market Value is generally defined as the price, established on an "arms-
length" basis, at which knowledgeable, unrelated buyers and sellers would
agree. The "hypothetical" market value for a small bank with a thin market for
its common stock is normally determined by comparison to the average price to
stockholders equity, price to earnings, and price to total assets, adjusting
for significant differences in financial performance criteria and for any lack
of marketability or liquidity of the buyer. The market value in connection with
the evaluation of control of a bank is determined by the previous sales of
small banks in the state or region. In valuing a business enterprise, when
sufficient comparable trade data are available, the market value approach
deserves greater weighting than the net asset value approach and similar weight
as the investment value approach as discussed below.
Columbia maintains a comprehensive data base concerning prices paid for
banking institutions in the Northwest, particularly Eastern Washington and
Eastern Oregon banking institutions, during 1988 through 1998. This data base
provides comparable pricing and financial performance data for banking
institutions sold or acquired. Organized by different peer groups, these data
present medians of financial performance and purchase price levels, thereby
facilitating a valid comparative purchase price analysis. In analyzing the
transaction value of WIB, Columbia has considered the market approach and has
evaluated price to stockholders equity and price to earnings multiples and the
price to total assets percentage for transactions involving Washington and
Oregon banking organizations with total assets greater than $100 million that
sold for 100% common stock from January 1988 to June 1998.
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Comparable Sales Multiples. Columbia calculated a "Merger Consideration--
Adjusted Book Value" for WIB's June 30, 1998 stockholders equity and the
estimated December 31, 1998 stockholders' equity adjusted for the price to
stockholders equity ratios for a sample of Northwest banking institutions with
assets of below $150 million which sold between January 1, 1992 through June 1,
1998 and a sample of Northwest banking institutions with total assets of below
$150 million which sold between January 1, 1996 and June 1, 1998. The
calculations are $5.07 and $5.43 per share, respectively, for the June 30, 1998
stockholders' equity for the two samples. For the estimated December 31, 1998
stockholders' equity, the calculations are $5.58 and $5.97, respectively. For
WIB's 1997 net income for the twelve months prior to June 30, 1998, the
calculations are $4.59 and $4.98, respectively.
Transaction Value as a Percentage of Total Assets. Columbia calculated the
percentage of total assets which the transaction represents as a price level
indicator. The transaction value as a percentage of total assets facilitates a
truer price level comparison with comparable banking organizations, regardless
of the differing levels of stockholders equity and earnings. In this instance,
a transaction value of $6.26 per WIB share results in a transaction value as a
percentage of total assets of 20.5%. The median price as a percentage of total
assets for a sample of Northwest banking institutions with total assets of
below $150 million which sold between January 1, 1996 and June 1, 1998 was
19.8% and 20.5%, respectively.
Investment Value is sometimes referred to as the income or earnings value.
One investment value method frequently used estimates the present value of an
institution's future earnings or cash flow which is discussed below.
Net Present Value Analysis. The investment or earnings value of any banking
organization's stock is an estimate of the present value of future benefits,
usually earnings, dividends, or cash flow, which will accrue to the stock. An
earnings value is calculated using an annual future earning stream over a
period of time of not less than five years and the residual or terminal value
of the earnings stream after five years, using WIB's estimates of future growth
and an appropriate capitalization or discount rate. Columbia's calculations
were based on an analysis of the banking industry, WIB's earnings, and the
competitive situation in WIB's market area. Using discount rates of 16% and
18%, acceptable discount rates considering the risk-return relationship most
investors would demand for an investment of this type as of the valuation date,
the "Net Present Value of Future Earnings" provided a range of $5.11 to $6.10
per share.
When the net asset value, market value and investment value approaches are
subjectively weighed, using the appraiser's experience and judgment, it is
Columbia's opinion that the proposed transaction is fair, from a financial
point of view to the WIB shareholders.
Pursuant to the terms of the Engagement Letter, WIB has agreed to pay
Columbia a fee of $30,000 for its services as financial advisor, including this
fairness opinion. In addition, WIB has agreed to reimburse Columbia for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel, and to indemnify Columbia against certain liabilities.
Procedure for Exchange of WIB Common Stock for Heritage Common Stock
As soon as practicable after the effective date of the WIB merger, Heritage
will have delivered to each of the former shareholders and vested option
holders of WIB a transmittal letter for use in delivering their WIB common
stock certificates or option agreements. After the Exchange Agent for Heritage
receives a properly completed transmittal letter and the certificate(s) or
option agreement(s) representing a WIB shareholder's shares of or options to
acquire WIB common stock, the Exchange Agent for Heritage will issue and mail a
certificate representing the Heritage common stock into which the WIB common
stock or vested option has been converted, and a check for the cash, if any,
payable in respect to any fractional Heritage common stock issuable.
The registered holder of any certificate(s) representing WIB common stock
who has lost or destroyed such certificate(s), can obtain certificate(s) for
Heritage common stock (and cash for any fractional share) to
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<PAGE>
which such WIB shareholder is entitled, if the WIB shareholder delivers to the
Exchange Agent for Heritage: (a) a sworn statement certifying such loss or
destruction and specifying the circumstances thereof, and (b) a lost
instrument bond with a corporate security, satisfactory to the Exchange Agent,
indemnifying Heritage against any loss or expense which it may incur as a
result of such lost or destroyed certificate(s) presented at a later time.
Conditions to Consummation of the WIB Merger
Consummation of the WIB merger is subject to certain material conditions,
including, but not limited to:
(i) Approval of the WIB Merger Agreement by the holders of at least 2/3
of the issued and outstanding shares of WIB common stock;
(ii) Receipt of all necessary state and federal regulatory approvals,
including approval by the Federal Reserve as required for consummation of
the proposed WIB merger;
(iii) Receipt by Heritage of the opinion of WIB's legal counsel as
required by the WIB Merger Agreement;
(iv) Receipt by Heritage of an opinion from Heritage's counsel and
receipt by WIB of an opinion from WIB's legal counsel to the effect that
the WIB merger will constitute a tax-free merger under Section 368(a)(1)(A)
of the Code, and no gain or loss will be recognized by the shareholders of
WIB and Heritage, except for cash paid to dissenting shareholders of WIB
and cash paid in lieu of fractional shares;
(v) Heritage will have received concurrence of its determination that the
WIB merger should be accounted for as a pooling-of-interests;
(vi) WIB will have received a fairness opinion from the firm it has
engaged to the effect that the proposed merger is fair to its shareholders
from a financial point of view;
(vii) The shares of Heritage common stock to be issued to the WIB
shareholders will have been approved for listing on the Nasdaq National
Market;
(viii) The shares of WIB common stock for which cash is to be paid
pursuant to dissenter's rights of appraisal under Washington law will not
exceed in the aggregate 5% of the outstanding shares of WIB common stock;
(ix) There will not have been any material adverse change in the
financial position or results of operations of WIB or Heritage;
(x) No order, decree or injunction will enjoin or prohibit the WIB
merger;
(xi) The shares of Heritage common stock to be issued to the WIB
shareholders will have been registered with the Securities and Exchange
Commission and Heritage will have complied with all states securities laws
related to the WIB merger;
(xii) The employment agreements required by the WIB Merger Agreement will
have been executed;
(xiii) Affiliate agreements, directors' agreements and officers'
certificates as required by the WIB Merger Agreement will have been
received by Heritage, and an officer's certificate from Heritage will have
been received by WIB; and
(xiv) On the effective date of the WIB merger, the capital of WIB will
not be less than $4.750 million, and Central Valley Bank's allowance for
possible loan and lease losses will not be less than 1% of that bank's
total outstanding loans and leases and in all cases will be adequate to
absorb that bank's anticipated loan and lease losses.
Termination Provisions
The WIB Merger Agreement may be terminated at any time before the effective
date of the WIB merger:
(i) by the mutual consent of the Boards of Directors of Heritage and WIB;
(ii) by the Board of Directors of any party in the event of a material
breach of any representation or warranty by any other, if the breaching
party fails to correct the breach;
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<PAGE>
(iii) by the Board of Directors of Heritage or WIB if the WIB merger is
not consummated by April 30, 1999;
(iv) by Heritage or WIB's Board of Directors if the required shareholder
approval is not obtained at the appropriate Special Meeting; or
(v) by the Board of Directors of WIB if the average closing price of the
Heritage common stock is less than $10.00 per share, and Heritage does not
elect to adjust the WIB Conversion Ratio. See "The Proposed Merger--
Possible Adjustment to the WIB Conversion Ratio."
Possible Adjustment to the WIB Conversion Ratio
For purposes of understanding this possible adjustment to the WIB Conversion
Ratio, the following definitions apply:
"Average Closing Price" means the average of the last reported sale
prices per share of Heritage common stock as reported on The Nasdaq Stock
Market (as reported in The Wall Street Journal or, if not reported therein,
another mutually agreed upon authoritative source) for the 45 consecutive
trading days on the Nasdaq Stock Market on which such shares are traded
ending at the close of trading on the Determination Date.
"Determination Date" means the date occurring 5 days before the effective
date of the WIB merger.
Each share of WIB common stock will be converted into the right to receive a
portion of the total number of shares of Heritage common stock based on each
WIB shareholder's ownership of the total number of issued and outstanding
shares of WIB common stock immediately before the effective date of the WIB
merger and the total number of Vested WIB Options outstanding immediately
before the effective date of the WIB merger. Total number of shares of Heritage
common stock to be issued to the holders of WIB common stock and Vested WIB
Options will be determined and subject to adjustment, as follows:
1. If the Average Closing Price of Heritage common stock is more than
$12.25, 1,000,000 shares of common stock; or
2. If the Average Closing Price of Heritage common stock is $12.25 or
below, but no less than $10.00, 1,000,000 shares of common stock plus that
number of shares of Heritage common stock equal to the product (rounded to
the next whole share) of the following formula;
[($12.25 minus Average Closing Price) divided by $2.25] multiplied by
50,000; or
3. If the Average Closing Price of Heritage common stock is below $10.00
and if Heritage makes an election to consummate to the WIB merger following
WIB's written notice of termination under the terms of the WIB Merger
Agreement, the number of shares of Heritage common stock to be issued shall
equal the sum (rounded to the next whole share) of the following formula:
($10,000,000 divided by Average Closing Price) plus 50,000; or
4. If the Average Closing Price of Heritage common stock is below $10.00
and WIB does not provide written notice of termination to Heritage under
the terms of the WIB Merger Agreement, 1,050,000 shares of Heritage common
stock.
The number of shares to be issued to each WIB shareholder may vary based on
the above formula for the total number of Heritage common shares to be issued.
If the Average Closing Price is less than $10.00, WIB may elect to exercise its
right to terminate the WIB Merger Agreement. If WIB makes the election to
terminate, it must give Heritage written notice on or before the second day
after the Determination Date. During the three day period commencing on the
date of that notice, Heritage has the option of increasing the total number of
Heritage common shares to be issued to WIB shareholders as set forth in sub-
item (3) above. If Heritage makes an election to increase the number of shares
to be issued within this three day period, Heritage must give prompt written
notice to WIB of the election, and no termination of the WIB Merger Agreement
will occur.
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<PAGE>
Effective Date of the WIB Merger
Subject to the conditions to the obligations of the parties to consummate
the WIB merger, the effective date of the WIB merger will be when the Articles
of Merger have been accepted for filing by the Secretary of State of Washington
under the Washington Business Corporation Act.
We can give you no assurance that the necessary shareholder and regulatory
approvals can be obtained or that other conditions precedent to the WIB merger
can or will be satisfied. Heritage and WIB expect all conditions to completing
the WIB merger will be satisfied so that the WIB merger can be completed by the
end of February 1999. Delays in the WIB merger could occur.
Employment Agreements for WIB Employees
On the effective date of the WIB merger, Heritage will enter into employment
agreements with D. Michael Broadhead, Joe Perry, Richard Maison, and Larry
Holt. The employment agreements with these individuals are Exhibits D, E, F,
and G to the WIB Merger Agreement which is Appendix A to this Proxy
Statement/Prospectus.
Expenses and Fees Related to the WIB Merger
Each party to the WIB Merger Agreement will pay its own expenses incurred in
connection with WIB merger, including the cost of soliciting proxies for the
WIB Special Meeting and the printing costs and expenses incurred in connection
with this Proxy Statement/Prospectus and the Heritage registration statement.
Regulatory Approval of the WIB Merger
The merger requires the prior approval of the Federal Reserve, pursuant to
Section 3 of the Bank Holding Company Act of 1956, as amended ("BHCA"). In
granting its approval under Section 3 of the BHCA, the Federal Reserve must
take into consideration, among other factors, the financial and managerial
resources and future prospects of the institution and the convenience and needs
of the communities to be served. Applicable law prohibits the Federal Reserve
from approving the merger if (i) it would result in a monopoly or be in
furtherance of any combination or conspiracy to monopolize or attempt to
monopolize the business of banking in any part of the United States, or (ii)
its effect in any area of the country may be to substantially lessen
competition or to tend to create a monopoly, or (iii) it would be a restraint
of trade in any other manner, unless the Federal Reserve finds that any anti-
competitive effects are outweighed clearly by the public interest and the
probable effect of the transaction in meeting the convenience and needs of the
communities to be served. Under the BHCA, the merger may not be consummated
until the 30th day following the date of Federal Reserve approval, which may be
shortened by the Federal Reserve to the 15th day, during which time the United
States Department of Justice may challenge the transaction on anti-trust
grounds. The commencement of any anti-trust action would stay the effectiveness
of the Federal Reserve's approval, unless a court specifically orders
otherwise.
The merger cannot be completed until Heritage has received the required
regulatory approval. Application for approval of the Federal Reserve has been
submitted for the WIB merger. This application was approved by the Federal
Reserve on December 17, 1998.
Neither Heritage nor WIB is aware of any material governmental approvals or
actions that are required for consummation of the merger, except as described
above. If any other approval or action should be required, it presently is
contemplated that such approval or action would be sought.
Directors and Executive Officers Following the Merger
The officers and directors of Heritage will remain the same following the
merger, except that under the WIB Agreement, immediately after the effective
date of the WIB merger, Heritage will cause its Board to be expanded by one
position and an outside (non-management) director of WIB who resides in eastern
Washington will be appointed to the Heritage Board to serve until his successor
is elected and qualified. The WIB Board has recommended that Mr. Melvin R.
Lewis be appointed to the Heritage Board.
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<PAGE>
Interests of Certain Persons in the Merger
The WIB Agreement provides that on or after the effective date of the WIB
merger, Heritage will:
. Appoint one non-management director of WIB to the Heritage Board. Melvin
R. Lewis has been recommended by WIB for this appointment.
. Enter into employment agreements with D. Michael Broadhead, Joe Perry,
Richard Maison and Larry Holt.
. Indemnify the present and former directors, officers and employees of WIB
and the Central Valley Bank against all costs or expenses, judgments,
fines, losses, claims, damages or liabilities incurred, to the fullest
extent that WIB would have been permitted under Washington law and the
WIB Articles of Incorporation or Bylaws in effect on the date of the WIB
Merger Agreement to indemnify such person. Heritage will also advance
expenses as incurred to the fullest extent under applicable law.
Material Federal Income Tax Consequences of the Merger
THE FOLLOWING IS A SUMMARY OF MATERIAL, ANTICIPATED FEDERAL INCOME TAX
CONSEQUENCES OF THE WIB MERGER. THIS SUMMARY IS BASED ON THE FEDERAL INCOME TAX
LAWS NOW IN EFFECT AND AS CURRENTLY INTERPRETED; IT DOES NOT TAKE INTO ACCOUNT
POSSIBLE CHANGES IN SUCH LAWS OR INTERPRETATIONS, INCLUDING AMENDMENTS TO
APPLICABLE STATUTES OR REGULATIONS OR CHANGES IN JUDICIAL OR ADMINISTRATIVE
RULINGS, SOME OF WHICH MAY HAVE RETROACTIVE EFFECT.
THIS SUMMARY DOES NOT TRY TO ADDRESS ALL ASPECTS OF THE POSSIBLE FEDERAL
INCOME TAX CONSEQUENCES OF THE WIB MERGER AND IS NOT INTENDED AS TAX ADVICE TO
ANY PERSON. IN PARTICULAR, AND WITHOUT LIMITING THE FOREGOING, THIS SUMMARY
DOES NOT ADDRESS THE FEDERAL INCOME TAX CONSEQUENCES OF THE WIB MERGER TO
SHAREHOLDERS BECAUSE OF THEIR PARTICULAR CIRCUMSTANCES OR STATUS. THIS SUMMARY
DOES NOT ADDRESS ANY CONSEQUENCES OF THE WIB MERGER UNDER ANY STATE, LOCAL,
ESTATE OR FOREIGN TAX LAWS. THIS SUMMARY DOES NOT ADDRESS THE TAX CONSEQUENCES
TO HOLDERS OF VESTED OPTIONS TO ACQUIRE WIB COMMON STOCK WHO EXCHANGE THOSE
OPTIONS FOR SHARES OF HERITAGE COMMON STOCK.
AS A SHAREHOLDER OF WIB, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE WIB MERGER INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICATION AND EFFECT OF FEDERAL, FOREIGN, STATE,
LOCAL AND OTHER TAX LAWS, AND THE IMPLICATIONS OF ANY PROPOSED CHANGES IN THE
TAX LAWS.
A federal income tax ruling with respect to the proposed merger was not
requested from the Internal Revenue Service. Heritage has received an opinion
of its legal counsel, Gerrish & McCreary, P.C., Memphis, Tennessee, concerning
certain federal income tax consequences of the proposed merger under federal
income tax law, and this discussion is qualified in its entirety by such
opinion.
It is the opinion of Gerrish & McCreary, P.C. that:
1. The WIB merger will be treated for federal income tax purposes as a
tax-free merger under Section 368(a)(1)(A) of the Internal Revenue Code of
1986, as amended.
2. No gain or loss will be recognized by Heritage or WIB or the
shareholders of WIB upon the exchange of the common stock of WIB for
Heritage common stock, except by the shareholders of WIB who receive cash
in lieu of any fractional share otherwise issuable.
3. Shareholders of WIB who dissent from the merger will be treated as
having received such payment as a distribution and redemption of their
shares of stock as required by Section 356(a) of the Code. Holders of WIB
common stock electing to exercise their Dissenters' Rights should consult
their own tax advisors as to the tax treatment in their particular
circumstance.
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4. The aggregate tax basis of Heritage common stock received by
shareholders of WIB will be the same as the basis of WIB common stock
surrendered in exchange therefor.
5. The holding period of Heritage common stock received by the
shareholders of WIB common stock will include the period in which WIB
common stock surrendered for Heritage common stock was held, provided that
the WIB common stock is a capital asset in the hand of the shareholders of
WIB on the date of exchange.
Among other things, the opinion of Gerrish & McCreary, P.C. was based on
shareholders of WIB maintaining sufficient equity ownership interest in
Heritage after the merger. The Internal Revenue Service takes the position for
purposes of issuing an advance ruling on reorganizations that the shareholders
of an acquired corporation (in other words, WIB) must maintain a continuing
equity ownership interest in the acquiring corporation (in other words,
Heritage) equal, in terms of value, to at least 50% of their interest in the
acquired corporation. Moreover, shares of the acquired corporation and the
acquiring corporation held by shareholders of the acquired corporation and
otherwise sold, redeemed or disposed of before or shortly after the applicable
effective date are taken into account. Management of Heritage has represented
that it has no plan or intention to cause Heritage to redeem or otherwise
reacquire the shares of Heritage common stock issued in the WIB merger. In
addition to the foregoing requirements, certain additional matters must be true
with respect to the WIB merger and Heritage believes that these factual matters
will be satisfied.
Accounting Treatment of the WIB Merger
The merger is intended to be accounted for as a pooling-of-interests. Under
generally accepted accounting principles, the assets and liabilities of
Heritage and WIB will be carried forward on the consolidated books of Heritage
after the effective dates of the merger at the amounts recorded on the
respective books of each party before the merger. Net income of Heritage for
the year ended in which the merger occurs will include the net income of
Heritage as well as WIB for the entire fiscal period in which the merger
occurs. After the merger, the reported income of Heritage for each year before
the merger will be combined with that of WIB and restated as income of the
combined company. The unaudited pro forma financial information included in
this Proxy Statement/Prospectus reflects the merger using the "pooling-of-
interests" method of accounting.
Rights of Dissenting Shareholders of WIB
WIB is a Washington corporation governed by the Washington Business
Corporation Act ("Washington Act"). The Washington Act governs the rights of
dissent of the shareholders of WIB.
Pursuant to Chapter 23B.13 of the Washington Act (the text of which is
attached in full as Appendix B to this Proxy Statement/Prospectus), as a
shareholder of WIB, you are entitled to dissent from and obtain payment of the
fair value of your shares if the merger is completed and you are a shareholder
entitled to vote on the merger ("Dissenters' Rights").
As a shareholder of WIB, if you wish to assert your Dissenters' Rights, you:
1. must give to WIB before the vote is taken on the merger, written
notice of your intent to demand payment for your shares if the proposed
merger is effectuated, and
2. must not vote your shares in favor of the proposed merger.
AS A SHAREHOLDER OF WIB, IF YOU DO NOT SATISFY THE ABOVE REQUIREMENTS, YOU
WILL NOT BE ENTITLED TO PAYMENT FOR YOUR SHARES PURSUANT TO YOUR DISSENTERS'
RIGHTS.
A shareholder's failure to vote against the proposed merger will not in
itself constitute a waiver of Dissenters' Rights. A vote against the proposed
merger will not by itself be deemed to satisfy the notice requirements under
the Washington Act with respect to Dissenter's Rights.
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Shareholders of WIB must give written notice regarding their intent to
assert their Dissenters' Rights to Glenn Rasmussen, Secretary/Treasurer,
Washington Independent Bancshares, Inc., 537 West Second, Toppenish,
Washington 98948.
If the WIB merger is approved at the WIB Special Meeting, Heritage, as the
surviving corporation, will deliver a written Dissenters' Notice to all WIB
shareholders who satisfied the above requirements regarding asserting
Dissenters' Rights. The Dissenters' Notice must be sent no later than ten (10)
days after the effective date of the WIB merger and must contain the
information described below for Dissenters' Notices.
All Dissenters' Notices to shareholders of WIB, must, in addition to other
items, provide the following:
1. State where the payment demand must be sent and where and when
certificates for shares must be deposited;
2. Tell holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes certain specific
information;
4. Set a date by which Heritage must receive the payment demand, which
date may not be fewer than 30 days nor more than 60 days after the date the
Dissenters' Notice is delivered; and
5. Be accompanied by a copy of Chapter 23B.13 of the Washington Act.
A shareholder who receives a Dissenters' Notice must demand payment of
Heritage, certify whether the dissenting shareholder acquired beneficial
ownership of the shares of WIB before the date required to be set forth in the
Dissenters' Notice, and deposit the shareholder's certificates under the terms
of the Dissenters' Notice. If a dissenting shareholder demands payment and
deposits the shareholder's share certificates in this manner, the dissenting
shareholder will retain all of their rights of a shareholder in the company
until the proposed merger is effected. A dissenting shareholder who does not
demand payment or deposit the shareholder's share certificates where required
by the Dissenters' Notice, is not entitled to payment for the shareholder's
shares pursuant to Dissenters' Rights.
Except as otherwise provided in the Washington Act, within 30 days of the
later of the effective date of the WIB merger, or the date Heritage receives a
payment demand, Heritage shall pay each dissenting WIB shareholder who
complied with the law, the amount Heritage estimates to be the fair value of
the shareholder's shares, plus accrued interest. The payment must be
accompanied by certain information, including certain financial information
and a statement and explanation of Heritage's estimate of the fair value of
the shares.
A dissenter may reject Heritage's offer of fair value and demand in writing
payment of the shareholder's estimated fair value and interest due, if (i) the
dissenter believes the amount offered is less than the fair value of the
dissenter's shares or that interest due is incorrectly calculated; or (ii)
Heritage fails to make payment and does not return the deposited certificates
or release certain transfer restrictions within 60 days after the date for
demanding payment.
If a demand for payment remains unsettled, Heritage shall commence a
proceeding within 60 days after receiving the payment demand and petition the
court to determine the fair value of the dissenter's shares and accrued
interest. If Heritage does not commence the proceedings within the 60 day
period, it shall pay each dissenter whose demand remains unsettled the amount
demanded.
The court in an appraisal proceeding shall determine all costs of the
proceeding. The costs shall be assessed against Heritage unless the court
finds the dissenter acted arbitrarily, vexatiously or not in good faith in
demanding payment. The court also may assess fees and expenses of counsel and
experts for the respective parties.
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THE FOREGOING SUMMARY IS NOT A COMPLETE STATEMENT OF THE WASHINGTON ACT WITH
RESPECT TO DISSENTERS' RIGHTS, BUT IT IS INTENDED MERELY TO APPRISE THE
SHAREHOLDERS OF WIB THAT SUCH RIGHTS EXIST. ANY SHAREHOLDER OF WIB WHO INTENDS
TO EXERCISE RIGHTS TO DISSENT SHOULD CAREFULLY READ CHAPTER 23B.13 OF THE
WASHINGTON BUSINESS CORPORATION ACT, ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS. FAILURE TO COMPLY STRICTLY WITH THE STATUTORY PROCEDURES
IN THE WASHINGTON ACT MAY RESULT IN THE FORFEITURE OF DISSENTERS' RIGHTS.
Termination Fee
As a condition and inducement to Heritage entering into the WIB Merger
Agreement, WIB has agreed to pay Heritage a termination fee under certain
circumstances. A fee of $400,000 may be demanded by Heritage in the event that
(i) prior to the WIB Special Meeting WIB solicits, initiates or encourages an
acquisition proposal from a third party other than Heritage or provides
nonpublic information to any third party other than Heritage in connection with
a potential acquisition proposal, (ii) WIB shareholders do not approve the WIB
merger at the WIB Special Meeting, and (iii) prior to October 31, 1999 a third
party other than Heritage acquires control of WIB. WIB will not be required to
pay the termination fee if the representations and warranties of Heritage in
the WIB Merger Agreement were false in any material respect as of the date of
the WIB Special Meeting or Heritage was in material default of its covenants in
the WIB Merger Agreement as of the date of the WIB Special Meeting. In the WIB
Merger Agreement, WIB has agreed not to solicit, initiate or encourage a third
party acquisition proposal without the prior written consent of Heritage.
Resales of Heritage Common Stock to be Received by Certain Shareholders of WIB
Heritage has registered under the Securities Act of 1933, as amended (the
"1933 Act"), the Heritage common stock to be issued to WIB shareholders and
vested optionholders in the merger. Such registration does not cover resales by
shareholders of WIB who may be deemed to control or to be controlled by or be
under common control with WIB at the time of the Special Meeting (the
"Affiliates") or those who were Affiliates of Heritage before the merger.
Heritage common stock issued pursuant to the merger to persons who are not
Affiliates of WIB will be freely transferable without restriction. Heritage
common stock issued pursuant to the merger to persons who are Affiliates of WIB
will be subject to certain restrictions on transfer as set forth in Rule 145 of
the Securities and Exchange Commission.
WIB has agreed to use its best efforts to provide Heritage with such
information as may be reasonably necessary for Heritage to determine the
identity of those persons who may be deemed to be Affiliates of WIB and a list
of those persons who WIB believes may be deemed to be its Affiliates. Heritage
will determine the identity of those individuals whom it deems to be Affiliates
of WIB. Heritage must receive from each Affiliate an agreement not to transfer
any Heritage common stock issued to such Affiliate until financial statements
covering at least 30 days of post-merger combined operations of Heritage and
WIB have been published. The Affiliates must agree that they will not transfer
any Heritage common stock received in the merger except in compliance with the
1933 Act, the rules and regulations and regulations of the Commission
promulgated thereunder and applicable restrictions due to pooling-of-interests
accounting treatment.
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COMPARATIVE MARKET PRICES AND DIVIDENDS
Heritage Market Prices and Dividends
Heritage common stock is traded on the Nasdaq National Market under the
symbol HFWA. At September 30, 1998, Heritage had approximately 1,467
shareholders of record (not including the number of persons or entities
holding stock in nominee or street name through various brokerage firms) and
9,863,708 outstanding shares of common stock. The following table sets forth
for the quarters indicated the range of high and low bid information per share
of the common stock of Heritage as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Quarter ended:
----------------------------------------
June
March 31 30 September 30 December 31
-------- ------ ------------ -----------
<S> <C> <C> <C> <C>
High................................... $15.50 $16.06 $15.00 $12.38
Low.................................... $12.63 $13.50 $ 8.88 $ 9.13
</TABLE>
Since its stock offering in January 1998, Heritage has declared the
following quarterly cash dividends:
<TABLE>
<CAPTION>
Declared Cash Dividend per share Record Date Paid
- -------- ----------------------- ---------------- ----------------
<S> <C> <C> <C>
March 24, 1998....... $0.035 April 6, 1998 April 15, 1998
June 23, 1998........ $0.040 July 6, 1998 July 15, 1998
September 18, 1998... $0.045 October 6, 1998 October 15, 1998
December 17, 1998.... $0.050 January 15, 1999 January 25, 1999
</TABLE>
Dividends from Heritage depend, in part, upon earnings from the investment
of the net proceeds from the Conversion retained by Heritage and receipt of
dividends from its subsidiary bank. The FDIC and the Division have the
authority under their supervisory powers to prohibit the payment of dividends
by Heritage Bank to Heritage. For a period of ten years after the Conversion,
Heritage Bank may not, without prior approval of the Division, declare or pay
a cash dividend in an amount in excess of one-half of (i) the greater of
Heritage Bank's net income for the current fiscal year or (ii) the average of
Heritage Bank's net income for the current fiscal year and not more than two
of the immediately preceding fiscal years. In addition, Heritage Bank may not
declare or pay a cash dividend on its common stock if the effect thereof would
be to reduce Heritage Bank's net worth below the amount required for the
liquidation account. Other than the specific restrictions mentioned above,
current regulations allow Heritage and its subsidiary bank to pay dividends on
its common stock if Heritage's or Heritage Bank's regulatory capital would not
be reduced below the statutory capital requirements set by the Federal Reserve
and the FDIC.
WIB Market Prices and Dividends
No broker makes a market in WIB common stock, and trading has not otherwise
been extensive. The trades that have occurred cannot be characterized as
amounting to an established public trading market. WIB common stock is traded
by individuals on a personal basis and is not listed on any exchange or traded
on the over-the-counter market, and the prices recorded reflect only the
transactions known to management. Due to the limited information available,
the following data may not accurately reflect the actual market value of WIB
common stock. The following data includes trades between individual investors,
as reported to WIB (which acts as its own transfer agent).
<TABLE>
<CAPTION>
WIB Common Stock Prices
Number of Shares -----------------------
Period Reported as Traded High Low Cash Dividends Paid
- ------ ------------------ ----------------------- -------------------
<S> <C> <C> <C> <C>
1998............ 10,575 $ 3.75 $ 3.75 - 0 -
1997............ 12,764 $ 3.75 $ 2.75 - 0 -
1996............ 25,226 $ 2.65 $ 2.40 - 0 -
</TABLE>
As of September 30, 1998 there were 378 shareholders of record of WIB
common stock.
29
<PAGE>
DESCRIPTION OF HERITAGE COMMON STOCK
Heritage has authorized capital stock consisting of 15,000,000 shares of
common stock, no par value per share, of which 9,917,314 shares are issued and
outstanding at December 31, 1998, all of which are validly issued, fully paid
and non-assessable. 464,726 shares of Heritage common stock are subject to
options as of the date of this Proxy Statement/Prospectus. It is anticipated
that up to an additional 1,050,000 shares of Heritage common stock will be
issued in the WIB merger in exchange for all the WIB common stock and Vested
WIB Options to acquire WIB common stock.
There are no other outstanding securities or other obligations which are
convertible into shares or options, warrants, rights, calls or other
commitments of any nature relating to the unissued shares of Heritage common
stock.
Heritage can pay dividends out of statutory surplus or from certain net
profits if, as and when declared by its Board. The payment of dividends by
Heritage is subject to limitations which are imposed by law and applicable
regulation. See "Supervision And Regulation". The holders of Heritage common
stock will be entitled to receive and share equally in dividends as may be
declared by the Heritage Board out of funds legally available for the payment
of dividends. If Heritage issues any of its preferred stock, the holders of
that preferred stock may have priority over the holders of Heritage common
stock with respect to dividends.
Holders of Heritage common stock have exclusive voting rights in Heritage.
Shareholders of Heritage common stock elect the Heritage Board and act on such
other matters as are required to be presented to them under Washington law or
as are otherwise presented to them by the Heritage Board. Each holder of
Heritage common stock is entitled to one vote per share and has no right to
accumulate votes in the election of directors. If Heritage issues preferred
stock, holders of Heritage preferred stock also may possess voting rights.
Certain matters require a vote of 66.66% of the outstanding shares entitled to
vote on those matters.
In the event of liquidation, dissolution or winding up of Heritage, the
holders of Heritage common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
Heritage available for distribution. If Heritage preferred stock is issued, the
holders of that preferred stock may have a priority over the holders of
Heritage common stock in the event of liquidation or dissolution.
Holders of Heritage common stock are not entitled to preemptive rights with
respect to any shares which may be issued. The Heritage common stock is not
subject to redemption.
See "The Proposed Merger--Certain Differences in Rights of Heritage and WIB
Shareholders."
30
<PAGE>
INFORMATION ABOUT HERITAGE
General
Heritage Financial Corporation is a bank holding company incorporated in the
State of Washington in August 1997. Heritage was organized for the purpose of
acquiring all of the capital stock of Heritage Bank upon its reorganization
from a mutual holding company form of organization to the stock holding company
form of organization (the "Conversion"). Heritage Bank was organized in 1927.
Heritage is primarily engaged in the business of planning, directing and
coordinating the business activities of its wholly owned subsidiary, Heritage
Bank. Heritage Bank is a Washington-chartered savings bank whose deposits are
insured by the Federal Deposit Insurance Corporation (FDIC) under the Savings
Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF). Heritage
Bank conducts business from its main office in Olympia, Washington and its
eleven branch offices located in Thurston, Pierce and Mason Counties. Effective
June 12, 1998, Heritage acquired North Pacific Bank, a Washington-chartered
commercial bank whose deposits are insured by the FDIC under the Bank Insurance
Fund (BIF). North Pacific Bank merged with Heritage Bank effective November 20,
1998.
The business of Heritage Bank consists primarily of attracting deposits from
the general public and providing loan products to businesses and individuals in
its market area. Heritage originates for sale or investment purposes first
mortgage loans on residential properties located in western Washington; and
makes business loans, residential construction loans, income property loans and
consumer loans, primarily second mortgage loans. Heritage Bank is involved in
Small Business Administration lending and provides trade financing services.
Financial and other information relating to Heritage, including information
relating to Heritage's directors and executive officers, is set forth in
Heritage's Annual Report on Form 10-K for the year ended June 30, 1998;
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998; and
Heritage's Annual Meeting Proxy Statement for the 1998 Annual Meeting, copies
of which may be obtained from Heritage as indicated under "AVAILABLE
INFORMATION" on pages 1-2.
31
<PAGE>
Recent Developments
On October 15, 1998, the Board of Directors of Heritage approved by
resolution the changing of Heritage's fiscal year end from June 30 to December
31. Heritage will file a Form 10-K for the six months ending December 31, 1998
to report financial information for the interim period.
At the Annual Meeting of Shareholders of Heritage on October 15, 1998, the
shareholders approved the Heritage 1998 Stock Option and Restricted Option
Plan. Under the terms of this plan, a maximum of 395,000 shares of Heritage
common stock can be reserved for issuance upon the exercise of stock options,
and up to an additional 66,125 shares of common stock can be reserved for award
as restricted stock. The plan options and awards may be granted to employees
and directors of Heritage and persons offered employment by Heritage, but only
employees may be granted incentive stock options. The 1998 Stock Option and
Restricted Stock Award Plan is generally similar to the 1997 Stock Option and
Restricted Stock Award Plan that was adopted by Heritage shareholders in
September 1996. On November 19, 1998, the Board approved a grant of options
totaling 92,700 shares to directors and officers pursuant to this plan.
On December 17, 1998, Heritage and Harbor Bancorp, Inc., Aberdeen,
Washington, announced that they had terminated their plans to merge. This
proposed transaction was announced in mid-August, 1998.
Year 2000 Issues
Heritage 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.
Heritage has completed the identification phase in which management has
determined the extent to which all programs used in its business are Year 2000
compliant. Heritage Bank utilizes a service bureau to perform its most mission
critical data processing services related to its loans, deposits, general
ledger and other financial applications. Currently, the service bureau has
completed the software programming for all of its applications used by Heritage
Bank. Testing of these service bureau programs will commence in November 1998
and are expected to be completed by mid-1999.
Heritage has evaluated its major third party business relationships,
including vendors and its borrowers. The significant dependence on the service
bureau creates potential exposure for Heritage; however, management fully
expects the service bureau to meet the scheduled timetable for both software
modifications and for testing which would ensure that Heritage's mission
critical applications would be Year 2000 compliant by July 1999. Heritage has
analyzed the extent that Year 2000 issues could adversely impact their
borrowers' business operations, particularly its commercial borrowers. Heritage
has performed an initial assessment of each major borrower and has established
an ongoing assessment as part of Heritage's credit granting and loan review
process.
Management expects Heritage's costs related to Year 2000 issues to amount to
approximately $230,000. Of this total, approximately $43,000 has been incurred
in the year ended June 30, 1998. Of the remaining costs, approximately $165,000
was incurred to replace the former North Pacific Bank telephone and voice mail
system and modify the existing Heritage Bank telecommunications systems in
preparation of the merger of operations. This was completed in October, 1998.
Heritage has prepared a contingency plan with timetables to pursue various
alternatives based on failure of the service bureau to adequately modify and/or
provide sufficient testing and validation resources for Heritage and the
service bureau to ensure the mission critical applications are Year 2000
compliant. The most likely worst case scenario would be that the testing and
validation of the software modifications were not completed by the scheduled
deadline of July 1999. This worst case scenario could increase Heritage's
overall expected Year 2000 costs; however, management believes that this
scenario is not probable to occur and if the scenario should occur, that the
impact of these additional costs would not be material to Heritage's financial
position and results of operations.
32
<PAGE>
INFORMATION ABOUT WIB
Business of WIB
WIB was established in 1981 as a corporation organized under the laws of the
State of Washington doing business as a bank holding company under the Bank
Holding Company Act of 1956, and subject to the regulation of the Board of
Governors of the Federal Reserve System. WIB conducts all of its banking
operations through its wholly owned subsidiary, Central Valley Bank, a national
banking association subject to regulation of the Office of the Comptroller of
Currency (the "OCC"). WIB acquired Central Valley Bank on April 1, 1982.
Central Valley Bank currently has five offices, one in Toppenish, one in
Wapato, and three in Yakima. At September 30, 1998, WIB had $61 million in
total assets, and $56 million in total deposits.
Central Valley Bank is a community-oriented bank that has emphasized service
to the small business and agricultural sector of the economy. In recent years,
Central Valley Bank has pursued a growth strategy by expanding into the Yakima
market. Central Valley Bank focuses on business and professional lending in the
Yakima and lower valley areas, while continuing to service the agricultural
industry in its primary market area. Central Valley Bank offers commercial
banking services to its customers, including commercial loans, accounts
receivable and inventory financing, consumer installment loans, acceptance of
deposits, and personal savings and checking accounts.
Competition
Competition in the banking industry is significant and has intensified in
recent years. Furthermore, competition from outside the traditional banking
system from investment banking firms, insurance companies and related
industries offering bank-like products has widened the competition for deposits
and loans.
WIB operates in a highly competitive and concentrated banking environment,
competing for deposits, loans and other financial services with a number of
larger and well-established banks, savings and loan associations, credit unions
and other financial and nonfinancial institutions, many of which have more
locations or offer higher rates of interest than Central Valley Bank.
Competition for funds also comes from issuers of corporate and governmental
securities, insurance companies, mutual funds, and other financial
intermediaries. Other than with respect to large certificates of deposit,
Central Valley Bank competes for deposits by offering a variety of deposit
accounts at rates generally competitive with similar financial institutions in
its market area. Central Valley Bank's principal competitive advantage with
respect to the larger state-wide financial institutions is its status as a
local community bank, offering products and services tailored to the needs of
the local community. Central Valley Bank's competition for loans comes
primarily from the same financial institutions with which it competes for
deposits. Central Valley Bank competes for loan originations primarily through
the level of interest rates and loan fees charged, the variety of commercial
and mortgage loan products offered, and the efficiency and quality of services
provided to borrowers. Factors that effect loan competition include the
availability of lendable funds, local and national economic conditions, current
interest rate levels, and loan demand.
The branches of the major banks and saving and loans associations have
competitive advantages over Central Valley Bank in that they have high public
visibility and are able to maintain advertising and marketing activity on a
much larger scale that Central Valley Bank can economically maintain. Because
single-borrower lending limits imposed by law are dependent upon the capital of
the institution, the branches of larger institutions with substantial capital
bases are also at an advantage with respect to applications for loans that are
in excess of Central Valley Bank's legal lending limits.
At present, there are eight commercial banks, three thrifts and eight credit
unions operating in Central Valley Bank's market area that offer some of the
services offered by Central Valley Bank, and that may be in direct competition
for the customers Central Valley Bank seeks to attract. Because of the
extensive experience of management of Central Valley Bank in its trade area and
the business contacts of management and the directors, management believes that
Central Valley Bank has been able to compete effectively for business.
33
<PAGE>
As of June 30, 1997 (the most recent date for which such information is
readily available), Central Valley Bank held a 4% share of the Yakima County
commercial bank deposit market.
Properties
Central Valley Bank conducts its business from its main office at 537 West
Second Avenue, Toppenish, Washington, and four full service branches, one in
Wapato, Washington at 119 East Third Street, and three in Yakima, Washington,
at 2205 South First Street, 301 West Yakima Avenue, and 3919 West Nob Hill
Boulevard.
The main office building and the property on which the building is located
are owned by Central Valley Bank. The buildings and property for the Wapato and
Union Gap (South First Street) branch offices are also owned by Central Valley
Bank. The downtown Yakima branch, at 301 West Yakima Avenue, is located in a
1,536 square foot temporary modular unit owned by Central Valley Bank. The
modular unit is located on land leased by Central Valley Bank. Premises, Inc.,
a subsidiary of WIB, leases the premises and land for the Nob Hill branch in
Yakima, which commenced operations in July 1998.
Employees
At September 30, 1998, WIB had 39 full time equivalent employees. None of
WIB's employees are represented by a union organization or other collective
bargaining group, and management considers its relations with the employees to
be very good.
Legal Proceedings
WIB is from time to time a party to various legal proceedings arising in the
ordinary course of its business. Management believes that there is no
threatened or pending proceedings against WIB or Central Valley Bank which, if
determined adversely, would have a material effect on the business or financial
position of either, respectively.
Management's Discussion and Analysis of Financial Condition
and Results of Operation's of WIB
General. WIB, through its wholly owned subsidiary, Central Valley Bank,
operates five branches in rural communities in the greater Yakima Valley. WIB's
primary source of revenue is derived from providing loans to customers, who are
predominately small and middle-market businesses and individuals involved in
agriculture related businesses.
Financial Condition and Results of Operations as of and for theNine months
ended September 30, 1998 and 1997
Overview. Total assets of $61.0 million as of September 30, 1998 represents
a 13.3% increase over total assets of $53.9 million as of September 30, 1997.
This growth is attributed to continued strong loan demand funded through growth
in core deposits.
Net income. For the nine months ended September 30, 1998 and 1997, WIB's net
income was $448,000 and $394,000, respectively. Net income for the nine months
ended September 30, 1998 increased $54,000 or 13.7% over the same period in
1997. The increase in earnings is due to increased net interest income achieved
through growth in loans and investments.
Noninterest income. Noninterest income for the period ended September 30,
1998 increased $152,000, or 44.8%, to $491,000 from $339,000 for the same
period in 1997. This increase was attributable to increased gains on sales of
residential mortgage loans and increases in service charges on deposits.
34
<PAGE>
Noninterest expense. Noninterest expense for the nine months ended September
30, 1998 increased $245,000, or 13.8%, to $2.02 million from $1.78 million for
the same period in 1997. The increase in expenses was principally in
compensation, occupancy and other expenses and primarily due to the opening of
the Nob Hill (Yakima) branch in July 1998.
Financial Condition and Results of Operations for the years ended December 31,
1997 and 1996
Overview. Total assets of $54.5 million at December 31, 1997 represents a
16.7% increase over assets of $46.7 million at December 31, 1996.
Net income. For the years ended December 31, 1997 and 1996, net income was
$564,000 and $344,000, respectively, an increase of $220,000, or 64.0%, from
1996 to 1997. The increase in earnings is attributable to a $567,000, or 25.2%,
increase in net interest income due to $8.6 million, or 23.9%, growth in the
average balance of loans and investments.
Noninterest expense. Non interest expense for the year ended December 31,
1997 increased $177,000, or 7.9%, to $2.4 million from $2.2 million for 1996.
The increase was centered in compensation and occupancy expenses which was
attributable to Central Valley Bank's asset growth of over 16%.
Loan Quality, Liquidity, Capital
Provision for Loan Losses. The allowance for loan losses represents
management's current estimate of amounts required to absorb losses on existing
loans. The allowance of $392,000 at September 30, 1998 is an increase of
$24,000 or 6.5% from the December 31, 1997 allowance of $368,000. The allowance
represents 0.98% of total loans at September 30, 1998. However, Central Valley
Bank's loan portfolio contains $10 million (25% of the loan portfolio) in
government guaranteed loans (either through Farm Service Agency or the Small
Business Administration). Excluding the $8.7 million guaranteed portion of
these loans, the allowance represents 1.25% of the nonguaranteed portion of the
loan portfolio at September 30, 1998. The $368,000 allowance at December 31,
1997 is an increase of $17,000 or 4.8% from the 1996 allowance of $351,000. The
allowance represents 1.05% of loans at December 31, 1997, as compared to 1.15%
at December 31, 1996.
Determination of the appropriate allowance level is based on, among other
things, an analysis of various factors including historical loss experience
based on volumes and types of loans, volumes and trends in delinquencies and
nonaccrual loans, trends in portfolio volume, results of internal and
independent external credit reviews, and anticipated economic conditions in
WIB's market area. Management determines the adequacy of its loan loss reserves
through a formula taking into consideration nonperforming loans, special
mention credits and substandard loans. Management reviews all loans classified
as Other Assets Especially Mentioned, Substandard, Doubtful or Loss on a
monthly basis and sets reserve levels commensurate with management's assessment
of the risk of loss and the loans classification. Based on this analysis,
management considers the allowance for possible loan losses to be adequate for
the periods indicated.
Liquidity and Sources of Funds. Central Valley Bank's primary sources of
funds are customer deposits, loan repayments, maturities of investment
securities, net income, and short term Federal Funds purchased from
correspondent banks. Scheduled loan repayments are relatively stable sources of
funds while deposit inflows and unscheduled loan prepayments are not. Deposit
inflows and unscheduled loan prepayments are influenced by general interest
rate levels, interest rates on other investments, competition, economic
conditions and other factors.
Total deposits at September 30, 1998, December 31, 1997 and December 31,
1996 were $55.7 million, $49.4 million and $42.0 million, respectively. Deposit
growth from December 31, 1997 to September 30, 1998 was 12.7%. Central Valley
Bank does not accept brokered deposits. A concerted effort has been made to
attract deposits in the market area it serves through competitive pricing and
delivery of quality products.
35
<PAGE>
Management anticipates that the Bank will continue relying on customer
deposits, loan repayments, maturities of investment securities, net income and
short term Federal Funds Purchased from correspondent banks to provide
liquidity. Although deposit balances have shown historical growth, such
balances may be influenced by changes in the banking industry, interest rates
available on other investments, general economic condition, competition and
other factors. Borrowings may be used on a short-term basis to compensate for
reductions in other sources of funds.
Capital. The primary capital-to-asset leverage ratio for Central Valley Bank
was 7.95% at September 30, 1998, as compared to 8.50% at December 31, 1997, and
8.67% at December 31, 1996. In 1989, the federal banking regulators adopted
risk based capital guidelines under which one of four risk weights is applied
to balance sheet assets, each with different capital requirements based on the
credit risk of the asset. The total risk-based capital ratios were 12.05% at
September 30, 1998, and 12.05% and 15.95% at December 31, 1997 and 1996,
respectively. As of September 30, 1998, the Bank was considered "well
capitalized" under regulatory risk based capital guidelines.
Lending
Central Valley Bank's policy is to originate loans primarily in its local
market area. Central Valley Bank's loan underwriting policies focus on
assessment of each borrower's ability to service and repay the debt, and the
availability of collateral that can be used to secure the loan. Depending on
the nature of the borrower and the purpose and amount of the loan, the Bank's
loans may be secured by a variety of collateral, including crops, business
assets, real estate, and personal assets. Many business loans may also be
dependent upon the personal guarantees of owners of the business. The Bank's
loans are generally classified by the ability of the borrower to repay and the
principal asset pledged as collateral to secure the loan.
The Bank's commercial and industrial loans consist primarily of secured
revolving operating lines of credit and business term loans. Commercial real
estate loans include loans for various purposes where the primary collateral is
commercial real estate. Real estate construction loans include loans made in
connection with custom and "spec" (build to sell) construction of residential
and commercial buildings and loans made to borrowers who build residential and
commercial buildings for resale. The majority of loans within the Bank's
portfolio have terms of five years or less or have adjustable interest rates.
Such rates are principally tied to the prime rate as published in the Wall
Street Journal.
Consumer installment loans and other loans, while representing a smaller
percentage of total outstanding loans, include home equity loans, auto loans
and revolving personal lines of credit.
Types of Loans. The following table sets forth the composition of the Bank's
loan portfolio by type of loan as of the dates indicated. The composition of
loans at September 30, 1998 and for the years ended December 31, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1998 1997 1996
--------------- ---------------- ---------------
Percent Percent
of Percent of
Amount Total Amount of Total Amount Total
------- ------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans (1).......... $18,052 45.0% $14,314 41.0% $12,913 42.2%
Real estate-construction...... 1,872 4.7% 850 2.4% 399 1.3%
Real estate-mortgage.......... 18,839 46.9% 18,444 52.8% 16,321 53.3%
Consumer loans................ 1,393 3.4% 1,320 3.8% 970 3.2%
------- ------ ------- ------ ------- ------
Total....................... $40,156 100.0% $34,928 100.0% $30,603 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
- --------
(1) Includes agricultural loans
36
<PAGE>
Loan Maturities and Sensitivities to Changes in Interest Rates. The
following table shows the maturity analysis of loans with predetermined
interest rates (fixed) outstanding by type as of September 30, 1998. In
addition, the table shows the amount of all variable rate loans which will
reprice or mature in the corresponding period.
<TABLE>
<CAPTION>
Greater
Than 1 Year Greater
Within 1 But Within Than
Year 5 Years 5 Years Total
-------- ----------- ------- -------
<S> <C> <C> <C> <C>
Commercial loans.......................... $14,001 $ 3,348 $ 703 $18,052
Real estate--construction................. 1,872 -- -- 1,872
Real estate--mortgage..................... 2,241 9,579 7,019 18,839
Consumer loans............................ 544 790 59 1,393
------- ------- ------ -------
Total................................... $18,658 $13,717 $7,781 $40,156
======= ======= ====== =======
Fixed rate loans.......................... $ 2,475 8,732 356 $11,563
Variable or adjustable rate loans......... 28,097 -- 496 28,593
------- ------- ------ -------
Total................................... $30,572 $ 8,732 $ 852 $40,156
======= ======= ====== =======
</TABLE>
Risk Elements. The following table states as of September 30, 1998, December
31, 1997 and 1996 nonperforming and past due loans.
<TABLE>
<CAPTION>
December 31,
September 30, -------------
1998 1997 1996
------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans................................... $ 10 $ 16 $ 17
Restructured loans................................. -- -- --
---- ------ ------
Total nonperforming loans........................ 10 16 17
Real estate owned.................................. -- -- --
---- ------ ------
Total nonperforming assets....................... $ 10 $ 16 $ 17
==== ====== ======
Accruing loans past due 90 days or more............ $-- $ -- $ --
</TABLE>
Nonperforming Loans. Accrual of interest on loans is discontinued when
reasonable doubt exists as to the collectibility of the loan or the unpaid
interest, or when payment of principal or interest is contractually 90 days
past due, unless the loan is well secured and in the process of collection.
Upon such discontinuance, the loan is placed on nonaccrual status and any
accrued but unpaid interest is charged against income in that period. Accrual
of interest is resumed only when the borrower demonstrates an ability to make
scheduled payments of both principal and interest.
At September 30, 1998, there were no commitments to lend additional funds to
borrowers whose loans were classified as nonaccrual. The Bank is not aware of
any loans that continue to accrue interest at September 30, 1998 that
management reasonably expects will have a materially negative impact on future
operating results. The Bank's management is not aware of any information
concerning any material loans, other than those discussed as risk elements
above that causes it to have doubts as to the ability of the borrowers to
comply with terms of the loans.
Summary of Loan Loss Experience
Analysis of Allowance for Loan Losses. The Bank maintains the allowance for
loan losses at a level sufficient to provide for estimated loan losses based on
evaluation of known and inherent risks in the loan portfolio. Management
determines the adequacy of the allowance based on reviews of individual
credits, recent loss experience, current economic conditions, the risk
characteristics of classified loans, and other pertinent
37
<PAGE>
factors. Credits deemed uncollectible are charged to the allowance. Provisions
for credit losses and recoveries on loans previously charged off are added to
the allowance. The following is an analysis of the activity in the allowance
for loan losses for the period ended September 30, 1998 and the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
For the Year
Ended
Nine Months December 31,
Ending --------------
Sept. 30, 1998 1997 1996
-------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................. $ 368 $ 351 $ 348
Provision for loan losses...................... 28 16 --
Charge-offs.................................... 5 8 5
Recoveries..................................... 1 9 8
----- ------ ------
Net (charge-offs) recoveries................. (4) $ 1 $ 3
----- ------ ------
Balance at end of period....................... $ 392 $ 368 $ 351
===== ====== ======
Ratio of net (charge-offs) recoveries to
average outstanding loans during period....... (0.01)% -- % 0.01%
</TABLE>
Asset and Liability Management. Central Valley Bank's results of operations
depend substantially on net interest income. Interest income and interest
expense are affected by general economic conditions, competition in the market
place, market interest rates and repricing and maturity characteristics of the
Bank's assets and liabilities. Exposure to interest rate risk is primarily a
function of differences between the maturity and repricing schedules of assets
(principally loans and investment securities) and liabilities (principally
deposits). Assets and liabilities are described as interest sensitive for a
given period of time when they mature or can reprice within that period. The
difference between the amount of interest sensitive assets and interest
sensitive liabilities is referred to as the interest sensitivity "GAP" for any
given period.
Certain shortcomings are inherent in the interest sensitivity GAP method of
analysis presented in the following table. For example, although certain assets
and liabilities may have similar repricing characteristics, they may react in
different degrees to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates.
The following table sets forth the dollar amount of interest sensitive
assets and interest sensitive liabilities at September 30, 1998 and difference
between them for the maturity or repricing periods indicated.
<TABLE>
<CAPTION>
Greater Greater
1 Year or than 1 Year to than
Less 5 Years 5 Years Total
--------- -------------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest Earning Assets
Loans............................... $30,572 $ 8,732 $ 852 $40,156
Investment securities............... 2,692 4,798 230 7,720
Federal funds....................... 7,000 -- -- 7,000
------- ------- ------ -------
Total interest earning assets..... $40,264 $13,530 $1,082 $54,876
Interest Bearing Liabilities
Savings and interest bearing demand
deposits........................... $19,824 $ -- $ -- $19,824
Time deposits....................... 20,418 3,802 -- 24,220
------- ------- ------ -------
Total interest bearing
liabilities...................... $40,241 $ 3,802 $ -- $44,044
Net interest rate sensitivity
gap.............................. $ 22 $ 9,728 $1,082 $10,832
</TABLE>
38
<PAGE>
Investment Activities
Investments classified as held-to-maturity are accounted for at amortized
cost and WIB has the positive intent and ability to hold those securities to
maturity. Unrealized gains and losses on investment securities classified as
available-for-sale are excluded from earnings and reported, net of federal
income taxes, as a separate component of stockholders' equity.
The Bank's investment policy is approved by its Board. It has been the
policy of the Bank to maintain relatively high levels of liquidity to meet loan
funding and deposit outflow requirements. The following table sets forth the
investment securities portfolio of the Bank.
Analysis of Investment Securities. The amortized cost and estimated market
values of investments are as follows as of September 30, 1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
US Treasury Securities and
obligations of US Government
Agencies.......................... $3,225 $ 22 $-- $3,247
Mortgage backed securities......... 452 -- -- 452
Other securities................... 99 131 -- 230
------ ---- ---- ------
$3,776 $153 $-- $3,929
====== ==== ==== ======
Held-to-maturity securities:
US Treasury Securities and
obligations of US Government
Agencies.......................... $3,495 $ 23 $-- $3,518
State and municipal securities..... 296 1 2 295
------ ---- ---- ------
$3,791 $ 24 $ 2 $3,813
====== ==== ==== ======
</TABLE>
Maturity Distribution of investment Securities. The scheduled maturities of
investment securities at September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Due in Due after One Due After Five
One Year Year through Years through
or less Five Years Fifteen Years Total
-------- ------------- -------------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
$2,692 $4,346 $452 $7,490
</TABLE>
39
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT OF WIB
The following table sets forth certain information regarding beneficial
ownership of WIB common stock at September 30, 1998 by (i) each director and
executive officer, (ii) all directors and executive officers as a group, and
(iii) each person known by WIB to be the beneficial owner of more than 5% of
the outstanding shares of WIB common stock.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Percent of Class
Name and Address(1) Before the Merger(2) Before the Merger
- ------------------- -------------------- -----------------
<S> <C> <C>
Mark A. Bouchey........................ 38,606 2.19%
D. Michael Broadhead................... 69,670(3) 3.96%
Ronald L. Brulotte..................... 53,864 3.06%
Gary B. Christensen.................... 37,700(4) 2.14%
Frederick M. Goldberg.................. 182,236(5) 10.35%
Daryl D. Jensen........................ 62,773 3.57%
Melvin R. Lewis........................ 31,040(6) 1.76%
Dennis H. Peterson..................... 133,199 7.57%
Glenn J. Rasmussen..................... 15,200 *
Donald V. Rhodes....................... 122,237 6.94%
Dennis H. Richardson................... 12,000(7) *
Frank J. Roberts....................... 97,539(8) 5.54%
Estate of Donald B. Murphy............. 233,928 13.27%
All directors and executive officers as
a group (12 persons).................. 1,089,992 61.71%
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise noted, the address for all of the named persons is 527
West Second, Toppenish, WA 98948
(2) Unless otherwise indicated, represents shares over which each individual
exercises sole voting or investment power, subject to community property
laws (where applicable). Includes 6,000 shares issuable to executive
officers and directors under options exercisable within 60 days.
(3) Includes: (i) 1,000 shares held jointly with adult children, over which Mr.
Broadhead shares voting and investment power; and (ii) 5,000 shares owned
held by M & M Family Limited Partnership, for which Mr. Broadhead is a 50%
partner.
(4) Includes 9,000 shares held by Powell-Christensen, Inc., for which Mr.
Christensen is the President and co-owner.
(5) Includes: (i) 146,915 shares held by the Fred Goldberg Family LLC, for
which Mr. Goldberg is a member; and (ii) 11,762 shares held by Goldberg
Investments, for which Mr. Goldberg is a 50% partner.
(6) Includes 500 shares held by the Lewis Limited LLC, for which Mr. Lewis is a
member.
(7) Includes 10,000 shares held by Haney Truck Line, for which Mr. Richardson
is the President and owner.
(8) Includes 81,662 shares held by Jones & Roberts Co., for which Mr. Roberts
is a 38% partner.
As of September 30, 1998, Messers. Donald V. Rhodes and Daryl D. Jensen
beneficially owned, respectively, 2.6% and 1.2% of the issued and outstanding
shares of Heritage common stock.
40
<PAGE>
INTEREST OF HERITAGE MANAGEMENT IN CERTAIN TRANSACTIONS
In addition to his position as Chairman, President and Chief Executive
Officer of Heritage, Mr. Donald V. Rhodes is the Chairman of the Board,
President and Chief Executive Officer of WIB and Chairman and Chief Executive
Officer of Central Valley Bank. Mr. Daryl D. Jensen, a director of Heritage and
Heritage Bank, is also a director of WIB and Central Valley Bank. Mr. Rhodes
beneficially owns 6.94% of WIB's common stock and Mr. Jensen beneficially owns
3.57% of such common stock.
During fiscal year 1998, certain directors and executive officers of
Heritage, Heritage Bank and North Pacific (before its merger with Heritage
Bank), and their associates, were customers of Heritage Bank and/or North
Pacific, and it is anticipated that such individuals will continue to be
customers of Heritage Bank and/or North Pacific in the future. All transactions
between Heritage Bank, North Pacific Bank, and their executive officers and
directors, and their associates, were made in the ordinary course of business
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
and, in the opinion of management, did not involve more than the normal risk of
collectability or present other unfavorable features.
SUPERVISION AND REGULATION
Heritage and WIB (the "Companies") and their subsidiary banks are subject to
extensive federal and Washington state legislation, regulation and supervision.
These laws and regulations are primarily intended to protect depositors and the
FDIC rather than shareholders of the Companies. The laws and regulations
affecting banks and bank holding companies have changed significantly over
recent years, and there is reason to expect that similar changes will continue
in the future. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects
of the Companies. The Companies are unable to predict the nature or the extent
of the effects on their businesses and earnings that any change in fiscal or
monetary policies or new federal or state legislation may have in the future.
The following information is qualified in its entirety by reference to the
particular statutory and regulatory provisions described in this discussion.
The Companies. The Companies are each subject to regulation as a bank
holding company within the meaning of the Bank Holding Company Act of 1956, as
amended, (the "BHCA"). As such, the Companies are supervised by the Federal
Reserve.
The Federal Reserve has the authority to order bank holding companies to
cease and desist from unsound practices and violations of conditions imposed on
it. The Federal Reserve is also empowered to assess civil money penalties
against companies and individuals who violate the BHCA or orders or regulations
thereunder in amounts up to $1.0 million per day or order termination of non-
banking activities of non-banking subsidiaries of bank holding companies, and
to order termination of ownership and control of a non-banking subsidiary by a
bank holding company. Certain violations may also result in criminal penalties.
The FDIC is authorized to exercise comparable authority under the Federal
Deposit Insurance Act and other statutes with respect to state nonmember banks
such as the Banks.
The Federal Reserve takes the position that a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Board's position that in serving as a source of
strength to its subsidiary banks, bank holding companies should be prepared to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank
41
<PAGE>
holding company's failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Board to
be an unsafe and unsound banking practice or a violation of the Board's
regulations or both. The Federal Deposit Insurance Act requires an
undercapitalized institution to submit to the Federal Reserve a capital
restoration plan with a guarantee by each company having control of the bank's
compliance with the plan.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of any company which is not a
bank or from engaging in any activities other than those of banking, managing
or controlling banks and certain other subsidiaries, or furnishing services to
or performing services for its subsidiaries. One principal exception to these
prohibitions allows a bank holding company to acquire an interest in companies
whose activities are found by the Federal Reserve, by order or by regulation,
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Each of the Companies must obtain the approval of the
Federal Reserve before it acquires all, or substantially all, of any bank, or
ownership or control of more than 5% of the voting shares of a bank.
Each of the Companies is required under the BHCA to file an annual report
and periodic reports with the Federal Reserve and such additional information
as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve
may examine a bank holding company and any of its subsidiaries and charge the
company for the cost of such an examination.
The Companies and any subsidiaries which it may control are deemed
"affiliates" within the meaning of the Federal Reserve Act, and transactions
between bank subsidiaries of the company and its affiliates are subject to
certain restrictions. With certain exceptions, the Companies and their
subsidiaries are prohibited from tying the provision of certain services, such
as extensions of credit, to other services offered by the Companies or their
affiliates.
Bank 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%. 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
(which does not include unrealized gains and losses on securities), less
goodwill and certain identifiable intangible assets, while Tier II capital
includes the allowance for loan losses and subordinated debt, both subject to
certain limitations. Regulatory risk-based capital guidelines require Tier I
capital of 4% of risk-adjusted assets and minimum total capital ratio (combined
Tier I and Tier II) of 8%.
Banks. Heritage Bank is a Washington state-chartered savings bank, the
deposits of which are insured by the FDIC. Heritage Bank is subject to
supervision and regulation by the FDIC and the Washington Department of
Financial Institutions, Division of Banking (the "Division"). Although Heritage
Bank is not a member of the Federal Reserve System, the Federal Reserve
supervisory authority over Heritage can also affect the Heritage Bank.
Central Valley Bank is a national banking association organized under
federal law, the deposits of which are insured by the FDIC. Central Valley Bank
is subject to supervision and regulation by the Office of the Comptroller of
the Currency (the "OCC"), the regulator of national banks.
Among other things, applicable federal and state statutes and regulations
which govern a bank's operations relate to minimum capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
mergers and consolidation, borrowings, issuance of securities, payment of
dividends, establishment of branches and other aspects of its operations. The
Division, the FDIC and the OCC also have authority to prohibit banks under
their supervision from engaging in what they consider to be unsafe and unsound
practices.
The subsidiary banks are required to file periodic reports with their
respective regulatory authorities and are subject to periodic examinations and
evaluations by those regulatory authorities. Based upon such an evaluation, the
regulators may revalue the assets of an institution and require that it
establish specific reserves to compensate for the differences between the
regulator-determined value and the book value of such assets. These
examinations must be conducted every 12 months, except that certain well-
capitalized banks may be
42
<PAGE>
examined every 18 months. The FDIC and the Division may each accept the results
of an examination by the other in lieu of conducting an independent
examination.
As subsidiaries of a bank holding company, the banks are subject to certain
restrictions in their dealings with the Companies and with other companies that
may become affiliated with the Companies.
In addition to earnings on the portion of net stock offering proceeds
retained by Heritage, dividends paid by the subsidiary banks to each of the
Companies will provide substantially all of the Companies' cash flow.
Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Banks, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect
to such distributions. The FDIC has established the qualifications necessary to
be classified as a "well-capitalized" bank, primarily for assignment of FDIC
risk-based 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%. The Banks qualified as "well-capitalized" at June 30, 1998 and
at September 30, 1998.
Federal laws generally bar institutions which are not well capitalized from
accepting brokered deposits. The FDIC has issued rules which prohibit under-
capitalized institutions from soliciting or accepting such deposits. Adequately
capitalized institutions are allowed to solicit such deposits, but only to
accept them if a waiver is obtained from the FDIC.
Other Regulatory Developments. Congress has enacted significant federal
banking legislation in recent years. Included in this legislation have been the
FIRREA and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). FIRREA, among other thing, (i) created two deposit insurance funds
administered by the FDIC, the Bank Insurance Fund ("BIF") and the SAIF; (ii)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other financial services from local FHLBs; (iii)
restructured the federal regulatory agencies for savings associations; and (iv)
greatly enhanced the regulators enforcement powers over financial institutions
and their affiliates.
FDICIA had substantially more impact than FIRREA in establishing a more
rigorous regulatory environment. Under FDICIA, regulatory authorities are
required to enact a number of new regulations, substantially all of which are
now effective. These regulations include, among other things, (i) a new method
for calculating deposit insurance premiums based on risk, (ii) restrictions on
acceptance of brokered deposits except by well-capitalized institutions, (iii)
additional limitations on loans to executive officers and directors of banks,
(iv) the employment of interest rate risk in the calculation of risk-based
capital, (v) safety and soundness standards that take into consideration, among
other things, management, operations, asset quality, earnings and compensation,
(vi) a five-tiered rating system from well-capitalized to critically
undercapitalized, along with the prompt corrective action the agencies may take
depending on the category, and (vii) new disclosure and advertising
requirements with respect to interest paid on savings accounts.
FDICIA and regulations adopted by the FDIC impose additional requirements
for annual independent audits and reporting when a bank begins a fiscal year
with assets of $500 million or more. Such banks, or their holding companies,
are also required to establish audit committees consisting of directors who are
independent of management.
Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Act") provides banks with greater opportunities
to merge with other institutions and to open branches nationwide.
The Interstate Banking Act also allows a bank holding company whose
principal operations are in one state to apply to the Federal Reserve for
approval to acquire a bank that is headquartered in a different state. States
cannot "opt out" but may impose minimum time periods, not to exceed five years,
for the target bank's existence.
The Interstate Banking Act also allows bank subsidiaries of bank holding
companies to establish "agency" relationships with their depository institution
affiliates. In an agency relationship, a bank can accept
43
<PAGE>
deposits, renew time deposits, close and service loans, and receive payments
for a depository institution affiliate. States cannot "opt out".
In addition, the Interstate Banking Act allows banks whose principal
operations are located in different states to apply to federal regulators to
merge. This provision took effect June 1, 1997, unless states enacted laws to
either (i) authorize such transactions at an earlier date or (ii) prohibit such
transactions entirely. The Interstate Banking Act also allows banks to apply to
establish de novo branches in states in which they do not already have a branch
office. This provision took effect June 1, 1997, but (i) states must enact laws
to permit such branching and (ii) a bank's primary federal regulator must
approve any such branch establishment. The Washington legislature passed
legislation that allows, subject to certain conditions, mergers or other
combinations, relocations of banks' main office and branching across state
lines in advance of the June 1, 1997, date established by federal law.
Further effects on the Companies and the Banks may result from the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Community
Development Act"). The Community Development Act (i) establishes and funds
institutions that are focused on investing in economically distressed areas and
(ii) streamlines the procedures for certain transactions by financial
institutions with federal banking agencies.
Among other things, the Community Development Act requires the federal
banking agencies to (i) consider the burdens that are imposed on financial
institutions when new regulations are issued or new compliance burdens are
created and (ii) coordinate their examinations of financial institutions when
more than one agency is involved. The Community Development Act also
streamlines the procedures for forming certain one-bank holding companies and
engaging in authorized non-banking activities.
The subsidiary bank's deposit accounts are insured by the FDIC under the
SAIF and BIF, to the maximum extent permitted by law. The subsidiary bank pays
deposit insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized",
"adequately capitalized" or " undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
under the FDIC as described above. The matrix so created results in nine
assessment risk classifications.
Pursuant to recent changes in federal law, the FDIC imposed a special
assessment on each depository institution with SAIF-assessable deposits which
resulted in the SAIF achieving its designated reserve ratio. In connection
therewith, the FDIC reduced the assessment schedule for SAIF members, effective
January 1, 1997, to a range of 0% to 0.27%, with most institutions, including
Heritage Bank, paying 0%. This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of approximately 0.06%
of SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation ("FICO") in the 1980s to help
fund the thrift industry cleanup. BIF-assessable deposits will be charged an
assessment to help pay interest on the FICO bonds at a rate of approximately
.013% until the earlier of December 31, 1999 or the date upon which the last
savings association ceases to exist, after which time the assessment will be
the same for all insured deposits.
Recent legislative changes provide for the merger of the BIF and SAIF into
the Deposit Insurance Fund on January 1, 1998, but only if no insured
depository institution is a savings association on that date. The recent act
contemplates the development of a common charter for all federally chartered
depository institutions and the abolition of separate charters for national
banks and federal savings associations. It is not known what form the common
charter may take and what effect, if any, the adoption of a new charter would
have on the operation of the subsidiary banks.
In addition to the changes to the BIF and SAIF assessment rates implemented
by the recent legislation, various regulatory relief provisions were enacted.
The new legislation includes, among other things, changes to
44
<PAGE>
(i) the Truth in Lending Act and the Real Estate Settlement Procedures Act to
coordinate and simplify the two laws' disclosure requirements; (ii) eliminate
civil liability for violations of the Truth in Savings Act after five years;
(iii) streamline the application process for a number of bank holding company
and bank applications; (iv) establish a privilege from discovery in any civil
or administrative proceeding or bank examination for any fair lending self-test
results conducted by, or on behalf of, a financial institution in certain
circumstances; (v) repeal the FDICIA requirement that independent public
accountants attest to compliance with designated safety and soundness
regulations; (vi) impose a continuous regulatory review of regulations to
identify and eliminate outdated and unnecessary rules; and (vii) various other
miscellaneous provisions to reduce bank regulatory burden.
Heritage is also subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the Securities Exchange Act of
1934.
CERTAIN DIFFERENCES IN RIGHTS OF HERITAGE AND WIB SHAREHOLDERS
As a result of the merger, on the effective dates of the WIB merger,
shareholders of WIB will exchange their shares of common stock in WIB for
shares of common stock in Heritage and will become shareholders of Heritage.
Thereafter the rights as shareholders of the WIB shareholders will be
determined by Heritage's Articles of Incorporation and Bylaws. The following is
a summary of the material differences in the rights of shareholders of Heritage
and WIB. Heritage and WIB are Washington corporations governed by the
Washington Business Corporation Act. Therefore, there are no material
differences between the rights of an Heritage shareholder and the rights of a
shareholder of WIB solely under the Washington Act. This summary does not
purport to be a complete discussion of, and is qualified in its entirety by
reference to, the Washington Act and the articles of incorporation and bylaws
of each company.
Authorized Capital Stock. Heritage currently is authorized to issue
15,000,000 shares of common stock, no par value, of which 9,917,314 shares were
issued and outstanding as of December 31, 1998. Heritage has 2,500,000 shares
of preferred stock, no par value per share, authorized and none of these
preferred shares are issued and outstanding. The Board of Directors of Heritage
may issue additional shares of Heritage common stock up to the maximum amount
permitted by the Articles of Incorporation without further action by the
shareholders of Heritage. The Heritage Board has sole authority to determine
the terms of any one or more series of preferred stock, including voting
rights, conversion rates, and liquidation preferences.
WIB currently is authorized to issue up to 10,000,000 shares of common
stock, no par value per share. On the WIB record date, there were 1,760,449
shares of common stock outstanding and outstanding options for the purchase of
44,500 shares of WIB common stock under WIB's employee and director stock
option plans. WIB is authorized to issue up to 200,000 shares of preferred
stock. There currently are no shares of WIB preferred stock outstanding. WIB's
Board is authorized, without further shareholder action, to issue the WIB
preferred stock shares with such designations, preferences and rights as the
Board may determine.
Preemptive Rights. Shareholders of Heritage and WIB have no preemptive
rights to subscribe to any additional securities that Heritage may issue. The
Board of each company may issue authorized shares of each company's common
stock without further shareholder vote, unless required for a particular
transaction by applicable law. Preemptive rights are rights to purchase a pro
rata amount of subsequently issued common stock. The absence of preemptive
rights may cause dilution of a shareholder's interest in Heritage without
specific shareholder authority.
Voting Rights. The shareholders of Heritage and WIB are entitled to one vote
per share in the election of directors and all matters to come before the
respective shareholders. The shareholders of Heritage and WIB do not have
cumulative voting.
Special Meetings of Shareholders. Special meetings of the shareholders of
Heritage may be called by the Chairman, the President, a majority of the Board
of Directors or shareholders holding at least 1/10 of all shares
45
<PAGE>
entitled to vote at the special meeting. Special meetings of shareholders of
WIB may be called at any time by the Chairman, the President, a majority of the
Board of Directors or by 3 shareholders owning in the aggregate not less than
10% of the stock of WIB issued and outstanding and entitled to vote.
Directors. Heritage's Articles provide for a Board of Directors to serve
staggered three year terms. Shareholders of Heritage vote only for candidates
in the class of directors whose terms expire at the time of the annual
shareholders' meeting. The members of the Board of Directors of WIB do not
serve staggered terms; such directors serve one-year terms which expire at the
time of the annual meeting of shareholders.
The staggered classification and election of members to a board of directors
could make it more difficult for shareholders to effect a significant change in
the overall composition of the board, thus perpetuating the tenure of
management.
The Heritage Articles of Incorporation provide that any or all of the
directors of Heritage may be removed by a vote of the majority of the entire
Board for cause, and only upon the vote of 66.66% of the outstanding shares of
voting stock of Heritage. In the absence of this provision, the vote of the
holders of a majority of the outstanding shares of Heritage common stock could
remove the entire board, but only with cause, and replace it with persons of
the shareholders' choice. WIB shareholders, by an affirmative majority vote,
may remove any director from office with or without cause before his or her
term expires.
Amendment of Articles of Incorporation and Bylaws. Amendments to Heritage's
Articles of Incorporation must be approved by a majority of the Heritage Board
and also by a majority of the outstanding share of voting stock. An exception
to this requirement is that an affirmative votes of at least 66.66% of the
outstanding voting stock entitled to vote is required to amend or repeal
certain provisions of the Heritage Articles of Incorporation. These provisions
requiring the greater vote include the provision limiting voting rights, the
provisions relating to approval of certain business combinations, the number
and classification of directors, director and officer indemnification by
Heritage, and amendment of the Heritage Articles of Incorporation. These
provisions render more difficult the accomplishment of a merger or the
assumption of control by a principal shareholder, and such provisions make the
removal of management more difficult.
Unless applicable law requires a different vote with respect to a particular
provision in the Heritage Bylaws, the Bylaws may be amended or repealed by a
majority vote of the Board of Heritage.
WIB's Articles of Incorporation may be amended only upon the affirmative
vote of the holders of 2/3 of WIB's outstanding voting stock. The WIB Board may
make certain amendments, as listed in the Washington Code, to the Articles of
Incorporation without shareholder approval. Either the WIB shareholders or the
Board of Directors may amend WIB's Bylaws.
Liquidation. In the event of the liquidation, dissolution or winding up of
Heritage or WIB, whether voluntary or involuntary, the holders of the common
stock of each of these companies will be entitled to share ratably in any of
the assets or funds that are available for distribution to its shareholders
after the satisfaction of its liabilities and after preferences of any
outstanding preferred stock.
Dividend Rights. Subject to such preferences as may be applicable to any
preferred stock, dividends may be paid on common stock of a Washington
corporation as and when declared by the board of directors out of funds legally
available for the payment of dividends. The ability of Heritage and WIB to pay
dividends basically depends on the amount of dividends paid to it by their
respective subsidiaries. Accordingly, the dividend restrictions imposed on the
subsidiaries by statute or regulation may effectively limit the amount of
dividends the corporation can pay. See "SUPERVISION AND REGULATION--Dividends".
Indemnification and Limitation of Liability. The Articles of Incorporation
of Heritage and WIB provide for the indemnification of directors and certain
officers.
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The Articles of Heritage and WIB also direct the Board of Directors to pay
reasonable expenses of defense incurred by, or to satisfy a judgment or fine
against a current or former director. Indemnification will be made in
connection with any personal legal liability incurred by the individual while
acting for or on behalf of the company in his or her capacity as a director or
officer (if the officer is also a director) unless the board of directors finds
that there is clear and convincing evidence that the individual has engaged in
"egregious conduct" or a court determines that the liability was the result of
"egregious conduct." The indemnified party must agree to repay any expense
advances (if such party is adjudged not to be entitled to them) and the board
of directors is entitled to require security for advances. "Egregious" conduct
is defined as intentional misconduct, a knowing violation of law or
participation in any transaction from which the person will personally receive
a benefit in money, property, or services to which that person is not legally
entitled. The Articles of Heritage and WIB also include a provision that limits
the liability of directors from any personal liability to the company or its
shareholders for conduct not found to have been egregious.
"Anti-Takeover" Provisions. Certain provisions of the Heritage Articles of
Incorporation and Bylaws may be deemed to have an "anti-takeover" effect. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Heritage Board, but which individual Heritage
shareholders may deem to be in their best interest or in which shareholders may
receive a substantial premium for their shares over current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions in the Heritage Articles and
Bylaws also will render the removal of incumbent members of the Board or
management or Heritage more difficult.
1. Policy of Independence. The Heritage Board has adopted a statement of
policy that Heritage intends to remain independent for the foreseeable future.
Holders of Heritage common stock should not have the expectation that Heritage
may be merged into or its assets sold to another company in the foreseeable
future.
2. Restrictions on Acquisitions of Securities. The Heritage Articles provide
that for a period of five years from the effective date of the Heritage
conversion from a mutual to stock form of ownership, no person may acquire
directly or indirectly beneficial ownership of more than 10% of any class of
equity security of Heritage, unless such offer of acquisition has been approved
in advance by a 2/3 vote of the continuing directors of Heritage. This
provision does not apply to any employee stock benefit plan of Heritage. In
addition, during such five year period, no shares beneficially owned in
violation of this percentage limitation, as determined by the Heritage Board,
will be entitled to vote in connection with any matter submitted to
shareholders for a vote. The Heritage articles also provide for further
restrictions on voting rights of shares owned in excess of 10% of any class of
equity security of Heritage beyond five years after the Heritage conversion.
Specifically, the Heritage Articles provide that if, at any time after five
years from the conversion, any person acquires the beneficial ownership of more
than 10% of any class of equity security of Heritage, then, with respect to
each vote in excess of 10%, the record holders of voting stock of Heritage
beneficially owned by such person will be entitled to cast only 1/100th of one
vote with respect to each vote in excess of 10% of the voting power of the
outstanding shares of Heritage voting stock which such record holders would
otherwise be entitled to cast without giving effect to this provision. The
aggregate voting power of such record holders will be allocated proportionately
among such record holders. An exception from this restriction is provided if
the acquisition of more than 10% of the securities receive the prior approval
of a 2/3 vote of continuing directors of Heritage. Under the Heritage Articles,
the restriction on voting shares beneficially owned in violation of these
limitations is imposed automatically. In order to prevent the imposition of
such restrictions, the Heritage Board must take affirmative action approving in
advance a particular offer to acquire or an acquisition. Unless the Heritage
Board takes such affirmative action, the provision would operate to restrict
the voting by beneficial owners of more than 10% or Heritage common stock in a
proxy contest.
3. Shareholder Vote Required to Approve Business Combinations with Principal
Shareholders. The Heritage Articles require the approval of the holders of at
least 66.66% of the Heritage outstanding shares of voting stock to approve
certain business combinations involving a person related to Heritage, except in
cases where the proposed transaction has been approved in advance by a majority
of the members of the Heritage Board who are not affiliated with the related
person and were directors before the time
47
<PAGE>
the related person became related to Heritage. The person related to Heritage
in this situation includes any individual, corporation, partnership or other
entity which beneficially owns or controls, directly or indirectly, 10% or more
of the outstanding shares of voting stock of Heritage or an affiliate of such
related person.
4. Shareholder Nominations Proposals. The Heritage Articles require a
shareholder who intends to nominate a candidate for election to the Heritage
Board, or to raise new business at a shareholder meeting, to give not less than
30 nor more than 50 days' advance notice to the Secretary of Heritage. The
notice provision requires a shareholder who desires to raise new business to
provide certain information to Heritage concerning the nature of the new
business, the shareholder and the shareholder's interest in the business
matter. Similarly, a shareholder wishing to nominate any person for election as
a director must provide Heritage with certain information concerning the
nominee and the proposing shareholder.
WIB's Articles of Incorporation and the Washington Code contain certain
provisions which may limit or prevent certain acquisitions. WIB's Articles of
Incorporation allow the WIB Board to consider non-monetary factors in
evaluating certain takeover bids. Specifically, the Articles allow the WIB
Board, in determining what is in the best interests of WIB and its
shareholders, to consider all relevant factors, including the effects on its
employees, customers, suppliers, and other constituents of WIB and its
subsidiaries and on the communities which WIB and its subsidiaries operate. In
addition, the authorization of Preferred Stock, which is intended primarily as
a financing tool and not as a defense to takeovers, may potentially be used by
management to make more difficult uninvited attempts to acquire control of WIB
(e.g., by diluting the ownership interest of a substantial shareholder,
increasing the amount of consideration necessary for a shareholder to obtain
control, or selling authorized by unissued shares to friendly third parties).
THE FOREGOING DISCUSSION OF CERTAIN SIMILARITIES AND MATERIAL DIFFERENCES
BETWEEN THE RIGHTS OF HERITAGE AND WIB STOCKHOLDERS IS ONLY A SUMMARY OF
CERTAIN PROVISIONS AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
SIMILARITIES AND DIFFERENCES, AND IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO
WASHINGTON CODE AND THE FULL TEXT OF THE ARTICLES OF INCORPORATION AND BYLAWS
OF HERITAGE AND WIB.
HERITAGE'S RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
KPMG LLP, independent accountants, have continuously served as the
independent accountants for Heritage from its formation in August 1997 through
the present.
EXPERTS
The consolidated financial statements of Heritage Financial Corporation as
of June 30, 1997 and 1998, and for each of the years in the three year period
ended June 30, 1998, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Washington Independent Bancshares,
Inc. as of and for the years ended December 31, 1997 and 1996, included in this
Proxy Statement/Prospectus have been so included in reliance upon the report of
Knight, Vale & Gregory, Inc. P.S., independent certified public accountants,
given on their authority of said firm as experts in accounting and auditing.
48
<PAGE>
LEGAL MATTERS
Gerrish & McCreary, P.C., counsel to Heritage Financial Corporation, has
passed upon the validity of the issuance of shares of Heritage common stock to
be issued in connection with the WIB merger and the Federal income tax
treatment of the mergers. Jeffrey C. Gerrish, a principal in Gerrish &
McCreary, P.C., is the beneficial owner of 10,000 shares of Heritage common
stock.
FAIRNESS OPINION
Columbia Financial Advisors, an investment banking firm, has issued its
opinion that the WIB merger is fair and equitable from a financial point of
view to the shareholders of WIB. See "THE PROPOSED MERGER--Opinion of WIB's
Financial Advisor."
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
Washington Independent Bancshares, Inc.
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets--Unaudited September 30, 1998 and Audited
December 31, 1997 and 1996............................................. F-3
Consolidated Statements of Income--Unaudited Nine Months Ended September
30, 1998 and 1997 and Audited Years Ended December 31, 1997 and 1996... F-4
Consolidated Statements of Shareholders Equity and Comprehensive In-
come--Unaudited Nine Months Ended September 30, 1998 and Audited Years
Ended December 31, 1997 and 1996....................................... F-5
Consolidated Statements of Cash Flows--Unaudited Nine Months Ended Sep-
tember 30, 1998 and 1997 and Audited Years Ended December 31, 1997 and
1996................................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Washington Independent Bancshares, Inc.
Toppenish, Washington
We have audited the accompanying consolidated balance sheets of Washington
Independent Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Washington Independent Bancshares, Inc. and Subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington
January 16, 1998
F-2
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998, and December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
September 30, ----------------
1998 1997 1996
------------- ------- -------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Cash and due from banks............................. $ 3,236 $ 3,783 $ 3,653
Federal funds sold.................................. 7,000 7,150 4,500
Securities available for sale....................... 3,929 730 191
Securities held to maturity......................... 3,791 5,531 5,158
Loans............................................... 40,156 34,928 30,602
Allowance for credit losses......................... (392) (368) (351)
-------- ------- -------
Net loans..................................... 39,764 34,560 30,251
-------- ------- -------
Premises and equipment.............................. 2,246 1,866 2,038
Accrued interest receivable......................... 709 563 565
Other assets........................................ 325 294 313
-------- ------- -------
Total assets.................................. $ 61,000 $54,477 $46,669
======== ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Liabilities
Deposits:
Demand.......................................... $ 11,619 $10,677 $ 9,077
Savings and interest-bearing demand............. 19,824 17,809 17,299
Time............................................ 24,220 20,884 15,653
-------- ------- -------
Total deposits................................ 55,663 49,370 42,029
-------- ------- -------
Accrued interest payable.......................... 164 146 101
Note payable...................................... -- 451 600
Other liabilities................................. 221 263 314
-------- ------- -------
Total liabilities............................. $ 56,048 $50,230 $43,044
======== ======= =======
Shareholders' Equity
Preferred stock (par value: $10); authorized
200,000 shares; no shares issued................. $ -- $ -- $ --
Common stock (no par value); authorized 10,000,000
shares; issued 1,760,449 shares--1998; 1,572,449
shares--1997; 1,545,472 shares--1996............. 6,475 6,230 6,197
Accumulated deficit............................... (1,624) (2,072) (2,636)
Net unrealized gains on securities available for
sale, net of tax of $52 --1998; $46--1997;$33--
1996............................................. 101 89 64
-------- ------- -------
Total shareholders' equity.................... 4,952 4,247 3,625
-------- ------- -------
Total liabilities and shareholders' equity.... $ 61,000 $54,477 $46,669
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1998 and 1997, and Years Ended December 31,
1997 and 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- -------------
1998 1997 1997 1996
----------- ---------- ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans.................................. $3,051 $2,791 $3,797 $3,112
Federal funds sold..................... 221 126 213 168
Securities available for sale.......... 122 14 12 9
Securities held to maturity............ 210 281 376 249
------ ------ ------ ------
Total interest income................ 3,604 3,212 4,398 3,538
------ ------ ------ ------
Interest Expense
Deposits............................... 1,329 1,100 1,534 1,225
Federal funds purchased and note
payable............................... 35 39 51 67
------ ------ ------ ------
Total interest expense............... 1,364 1,139 1,585 1,292
------ ------ ------ ------
Net interest income.................... 2,240 2,073 2,813 2,246
------ ------ ------ ------
Provision for Credit Losses.............. 28 10 16 --
------ ------ ------ ------
Net interest income after provision for
credit losses......................... 2,212 2,063 2,797 2,246
------ ------ ------ ------
Non-Interest Income
Service charges on deposit accounts.... 300 250 339 340
Gain on sale of foreclosed real
estate................................ -- -- -- 56
Other operating income................. 191 89 140 145
------ ------ ------ ------
Total non-interest income............ 491 339 479 541
------ ------ ------ ------
Non-Interest Expense
Salaries............................... 911 796 1,099 1,024
Employee benefits...................... 174 154 205 188
Occupancy and equipment................ 310 286 387 325
Data processing........................ 84 79 109 103
FDIC and OCC assessments............... 23 21 28 22
Legal and professional fees............ 45 31 43 39
Other.................................. 473 408 551 544
------ ------ ------ ------
Total non-interest expense........... 2,020 1,775 2,422 2,245
------ ------ ------ ------
Income before income taxes............. 683 627 854 542
Income Taxes............................. 235 233 290 198
------ ------ ------ ------
Net income............................. $ 448 $ 394 $ 564 $ 344
====== ====== ====== ======
Earnings Per Share Data
Basic earnings per share............... $ .27 $ .25 $ .37 $ .22
Diluted earnings per share............. .27 .24 .34 .21
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 1998, and Years Ended December 31, 1997 and
1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Gains on
Securities
Common Accumulated Available
Stock Deficit for Sale Total
------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996..... $6,189 $(2,980) $ 42 $3,251
Net income..................... -- 344 -- 344
Retirement of common stock
(1,341 shares)................ (5) -- -- (5)
Valuation adjustment of
securities available for sale,
net of tax.................... -- -- 22 22
Options exercised (10,000
shares)....................... 13 -- -- 13
------ ------- ---- ------
Balance, December 31, 1996... 6,197 (2,636) 64 3,625
Net income..................... -- 564 -- 564
Retirement of common stock (23
shares)....................... (1) -- -- (1)
Valuation adjustment of
securities available for sale,
net of tax.................... -- -- 25 25
Options exercised (27,000
shares)....................... 34 -- -- 34
------ ------- ---- ------
Balance, December 31, 1997... 6,230 (2,072) 89 4,247
Net income (unaudited)......... -- 448 -- 448
Valuation adjustment of
securities available for sale,
net of tax (unaudited)........ -- -- 12 12
Options exercised (188,000
shares) (unaudited)........... 245 -- -- 245
------ ------- ---- ------
Balance, September 30, 1998
(unaudited)................. $6,475 $(1,624) $101 $4,952
====== ======= ==== ======
<CAPTION>
Nine Months Ended
September 30,
----------------------- ---
1998 1997
----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Comprehensive Income
Net income................... $448 $ 394
Increase in unrealized gain
on securities available for
sale, net of tax............ 12 --
---- ------
Comprehensive income......... $460 $ 394
==== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997, and Years Ended December 31,
1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- ----------------
1998 1997 1997 1996
----------- ---------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income......................... $ 448 $ 394 $ 564 $ 344
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for credit losses...... 28 10 16 --
Depreciation..................... 155 142 202 173
Amortization of goodwill......... -- 9 12 46
Investment accretion--net........ (13) (14) (22) (17)
Deferred income tax.............. 7 -- 5 37
(Increase) decrease in accrued
interest receivable............. (146) (176) 2 (63)
Increase in accrued interest
payable......................... 18 57 45 24
Other--net....................... (78) 12 (58) (7)
------- ------- ------- -------
Net cash provided by operating
activities........................ 419 434 766 537
------- ------- ------- -------
Cash Flows from Investing Activities
Increase in federal funds sold..... 150 150 (2,650) (250)
Proceeds from maturities of
securities held to maturity and
available for sale................ 3,997 800 1,725 2,802
Purchases of securities held to
maturity.......................... (496) (2,078) (2,082) (4,318)
Purchases of securities available
for sale.......................... (4,935) (3) (499) --
Increase in loans made to
customers, net of principal
collections....................... (5,233) (6,567) (4,333) (4,904)
Proceeds from sales of premises and
equipment......................... -- -- -- 19
Purchases of premises and
equipment......................... (537) (16) (30) (750)
Other.............................. 1 1 8 68
------- ------- ------- -------
Net cash used in investing
activities........................ (7,053) (7,713) (7,861) (7,333)
------- ------- ------- -------
Cash Flows from Financing Activities
Increase in deposits............... 6,293 6,848 7,341 8,069
Retirement of common stock......... -- (1) (1) (5)
Repayments on note payable......... (451) (113) (149) (150)
Exercise of stock options.......... 245 -- 34 13
------- ------- ------- -------
Net cash provided by financing
activities........................ 6,087 6,734 7,225 7,927
------- ------- ------- -------
Net increase (decrease) in cash and
due from banks.................... (547) (545) 130 1,131
Cash and Due from Banks
Beginning of period................ 3,783 3,653 3,653 2,522
------- ------- ------- -------
End of period...................... $ 3,236 $ 3,108 $ 3,783 $ 3,653
======= ======= ======= =======
Supplemental Disclosures of Cash Flow
Information
Cash payments:
Interest......................... $ 1,346 $ 1,082 $ 1,540 $ 1,268
Income taxes..................... 210 135 318 76
Supplemental Disclosures of Non-Cash
Investing Activities
Foreclosed real estate acquired in
settlement of loans............... $ -- $ -- $ -- $ 284
Valuation adjustment of securities
available for sale, net of tax.... 12 -- 25 22
Loans made on sales of foreclosed
real estate....................... -- -- -- 339
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
Note 1--Summary of Significant Accounting Policies
Principles of Consolidation and Operations
The consolidated financial statements include the accounts of Washington
Independent Bancshares, Inc. (the Company) and its wholly owned subsidiaries,
Central Valley Bank, N.A. (the Bank) and WIB Premises, Inc. All significant
intercompany transactions and balances have been eliminated. The Company is a
holding company which operates primarily through its major subsidiary, the
Bank.
The Bank operates four branches in rural communities in the greater Yakima
Valley. The Bank's primary source of revenue is providing loans to customers,
who are predominately small and middle market businesses and individuals
involved in agriculture related businesses.
Consolidated Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. 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 date of the balance sheet, and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
Certain prior year amounts have been reclassified to conform to the 1997
presentation. All dollar amounts are stated in thousands, except per share
information.
Securities Available for Sale
Securities available for sale consist of debt securities which may be sold
to implement the Company's asset/liability management strategies, and in
response to changes in interest rates and similar factors, and certain equity
securities. Securities available for sale are reported at fair value.
Unrealized gains and losses, net of the related deferred tax effect, are
reported as a net amount in a separate component of shareholders' equity.
Realized gains and losses on securities available for sale, determined using
the specific identification method, are included in earnings. Amortization of
premiums and accretion of discounts are recognized in interest income over the
period to maturity.
Securities Held to Maturity
Debt securities for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income over the
period to maturity.
Loans
Loans are stated at the amount of unpaid principal, reduced by an allowance
for credit losses. Interest on loans is accrued daily based on the principal
amount outstanding.
Generally the accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due or when they are past due 90 days as to principal or interest. When
interest accrual is discontinued, all unpaid accrued interest is reversed
against current income. If management determines that the ultimate
collectibility of principal is in doubt, cash receipts on nonaccrual loans are
applied to reduce the principal balance.
F-7
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allowance for Credit Losses
The allowance for credit losses is maintained at a level considered adequate
to provide for losses that can be reasonably anticipated. The allowance for
credit losses is increased by provisions charged to operations and reduced by
loans charged off, net of recoveries. The allowance is based on management's
periodic evaluation of potential losses in the loan portfolio after
consideration of historical loss experience, adverse situations that may affect
the borrowers' ability to repay, the estimated value of any underlying
collateral, economic conditions, the results of examination of individual
loans, the evaluation of the overall portfolio by senior credit personnel and
federal and state regulatory agencies, and other risks inherent in the
portfolio. This evaluation requires the use of current estimates, which may
vary from the ultimate collectibility experienced in the future. The estimates
used are reviewed periodically and, as adjustments become necessary, they are
charged to operations in the period in which they become known.
When management determines that it is possible that a borrower will be
unable to repay all amounts due according to the terms of the loan agreement,
including scheduled interest payments, the loan is considered impaired. The
amount of impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or when the
primary source of repayment is provided by real estate collateral, at the fair
value of the collateral less estimated selling costs. The amount of impairment
and any subsequent charges are recorded through the provision for credit losses
as an adjustment to the allowance for credit losses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation,
which is computed on the straight-line method over the estimated useful lives
of the assets. Gains or losses on dispositions are reflected in earnings.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, foreclosure are to
be sold, and are recorded at the lower of the recorded amount of the loan, or
the fair value of the properties less estimated costs of disposal. Any write-
down to fair value at the time of transfer to foreclosed real estate is charged
to the allowance for credit losses. Properties are evaluated regularly to
ensure that the recorded amounts are supported by their current fair values,
and that valuation allowances to reduce the carrying amounts to fair value less
estimated costs to dispose are recorded as necessary. Additions to or
reductions from valuation allowances are recorded in income.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
The Bank and WIB Premises, Inc. provide for income taxes on a separate
return basis and remit to the Company amounts currently payable.
F-8
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash Equivalents
The Company considers all amounts included in the balance sheets caption
"Cash and due from banks" to be cash equivalents.
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method, in accordance with APB No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements. However, the required pro
forma disclosures have been provided in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation.
Amortization of Goodwill
The cost of the investment in the Bank in excess of the fair value of its
net assets at date of purchase is being amortized over a period of fifteen
years using the straight-line method.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128),
which the Company adopted in the fourth quarter of 1997. SFAS No. 128 requires
a dual presentation of basic and diluted earnings per share. Basic earnings per
share exclude dilution and are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share reflect
the potential dilution that could occur if common shares were issued pursuant
to the exercise of options under the Company's stock option plans. Earnings per
share for 1996 have been restated to conform to the presentation required by
SFAS No. 128.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statements of
Accounting Standards Nos. 130, Reporting Comprehensive Income, and 131,
Disclosures about Segments of an Enterprise and Related Information, both of
which are effective for years beginning after December 31, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components of
comprehensive income will have to be reported in a financial statement that is
displayed with the same prominence as other financial statements. Also, the
accumulated balance of other comprehensive income will have to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. SFAS No. 131 requires that public enterprises
report financial and descriptive information about their reportable operating
segments. Both of these pronouncements will require additional disclosures
about the Company's operations, but are not anticipated to have any effect on
financial position or results of operations.
Note 2--Restricted Assets
Federal Reserve Board regulations require that the Bank maintain certain
minimum reserve balances on deposit with the Federal Reserve Bank. The amounts
of such balances for the years ended December 31, 1997 and 1996 were
approximately $400,000 annually.
F-9
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Debt and Equity Securities
Debt and equity securities have been classified according to management's
intent. The carrying amount of securities and their approximate fair values are
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Securities Available for Sale
December 31, 1997
U.S. Government and agencies....... $ 499 $ 3 $ -- $ 502
Equity security.................... 25 131 -- 156
Federal Reserve Bank stock......... 72 -- -- 72
------ ---- ---- ------
$ 596 $134 $ -- $ 730
====== ==== ==== ======
December 31, 1996
Equity security.................... 25 96 -- 121
Federal Reserve Bank stock......... 70 -- -- 70
------ ---- ---- ------
$ 95 $ 96 $ -- $ 191
====== ==== ==== ======
Securities Held to Maturity
December 31, 1997
U.S. Treasury securities........... $5,179 $ 13 $ 1 $5,191
State and municipal securities..... 352 1 -- 353
------ ---- ---- ------
$5,531 $ 14 $ 1 $5,544
====== ==== ==== ======
December 31, 1996
U.S. Treasury securities........... $4,776 $ 7 $ 9 $4,774
State and municipal securities..... 382 6 -- 388
------ ---- ---- ------
$5,158 $ 13 $ 9 $5,162
====== ==== ==== ======
</TABLE>
The scheduled maturities of debt securities held to maturity and available
for sale at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Available for
Held to Maturity Sale
---------------- ---------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------ --------- -----
<S> <C> <C> <C> <C>
Due in one year or less..................... $3,391 $3,393 $-- $--
Due from one year to five years............. 2,140 2,151 499 502
------ ------ ---- ----
Total..................................... $5,531 $5,544 $499 $502
====== ====== ==== ====
</TABLE>
Securities carried at approximately $2,700,000 at December 31, 1997 and
$4,500,000 at December 31, 1996 were pledged to secure public deposits and for
other purposes required or permitted by law.
F-10
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Loans
Loans at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Real estate:
Farmland................................................... $ 7,000 $ 7,679
1-4 family residential..................................... 4,328 3,247
Construction............................................... 850 399
Commercial................................................. 7,780 5,883
Agricultural................................................. 8,228 7,551
Commercial................................................... 5,422 4,873
Consumer..................................................... 1,320 970
------- -------
Total loans.............................................. $34,928 $30,602
======= =======
</TABLE>
Changes in the allowance for credit losses for the years years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year..................................... $351 $348
Provision for credit losses...................................... 16 --
Charge-offs...................................................... (8) (5)
Recoveries....................................................... 9 8
---- ----
Net recoveries................................................. 1 3
---- ----
Balance at end of year......................................... $368 $351
==== ====
</TABLE>
The recorded investment in impaired loans was $16,000 and $17,000 at
December 31, 1997 and 1996, respectively. At December 31, 1997, there was no
specific allocation of the allowance for credit losses. At December 31, 1996,
specific allocations of $2,000 of the allowance for credit losses were made for
impaired loans. No allocation of the allowance for credit losses was considered
necessary for the remaining impaired loans. The average recorded investment in
impaired loans during the years ended December 31, 1997 and 1996 was $16,000
and $158,000, respectively. In 1997 and 1996, interest income recognized on
impaired loans, which was collected in cash, totaled $1,000.
At December 31, 1997, there were no commitments to lend additional funds to
borrowers whose loans have been modified. There were no loans over 90 days past
due still accruing interest at December 31, 1997 or 1996.
Certain related parties of the Bank, principally Bank directors and their
associates, were loan customers of the Bank in the ordinary course of business
during 1997 and 1996. Total loans outstanding at December 31, 1997 and 1996 to
key officers and directors were $225,000 and $78,000, respectively. During
1997, loan advances totaled $1,117,000, and loan repayments totaled $970,000 on
these loans.
F-11
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Premises and Equipment
The components of premises and equipment at December 31 are:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land.......................................................... $ 472 $ 472
Buildings..................................................... 1,848 1,848
Equipment, furniture and fixtures............................. 960 933
------ ------
Total cost.................................................. 3,280 3,253
Less accumulated depreciation................................. 1,414 1,215
------ ------
Total premises and equipment................................ $1,866 $2,038
====== ======
</TABLE>
The Bank leases equipment and premises under operating leases. Rental
expense for leased premises and equipment was $55,000 and $46,000 for 1997 and
1996, respectively.
Minimum net rental commitments under noncancellable leases having an
original or remaining term of more than one year are as follows at December 31,
1997:
<TABLE>
<S> <C>
1998..................................................................... $34
1999..................................................................... 16
2000..................................................................... 12
2001..................................................................... 3
---
Total minimum payments required........................................ $65
===
</TABLE>
Certain leases contain renewal options from five to ten years and escalation
clauses based on increases in property taxes and other costs.
Note 6--Deposits
The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000, was approximately $3,568,000 and $2,487,000 at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
1998................................................................. $18,696
1999................................................................. 2,188
-------
$20,884
=======
</TABLE>
Note 7--Preferred Stock Redemption and Note Payable
During the first quarter of 1995, Key Bank, former holder of the Company's
preferred stock, tendered all of its shares of preferred stock in exchange for
$7.50 cash for each share, pursuant to an offer made by the Company. The
preferred shares were then retired, and the difference between the cost and the
stated value of $2.28 per share was added to common stock. The purchase of
these shares was financed by the utilization of $750,000 of long-term debt as
follows:
Note payable to Key Bank of Washington in semi-annual installments of
$75,000 plus interest at prime plus .75% (9.25% at December 31, 1997),
secured by Bank common stock equal to 130% of the loan amount, maturing
December 30, 2000.
F-12
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total minimum principal payments due are as follows for future years ending
December 31:
<TABLE>
<S> <C>
1998................................................................ $151
1999................................................................ 150
2000................................................................ 150
----
$451
====
</TABLE>
The terms of the loan agreement contain, among other provisions,
requirements for maintaining minimum tangible net worth of not less than
$2,900,000 and minimum total risk-based capital of the Bank of at least 10%, as
well as restrictions related to dividends. The Company was in compliance with
these requirements as of December 31, 1997.
Note 8--Income Taxes
Income taxes are comprised of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current............................................................ $285 $161
Deferred........................................................... 5 37
---- ----
Income taxes..................................................... $290 $198
==== ====
</TABLE>
The following is a reconciliation between the statutory and the effective
federal income tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
Percent of Percent of
Pretax Pretax
Amount Income Amount Income
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Income tax at statutory rates........... $290 34.0% $184 34.0%
Increase (decrease) resulting from:
Tax-exempt income..................... (6) (.7) (7) (1.3)
Amortization of goodwill.............. 4 .5 16 2.9
Other................................. 2 .2 5 .9
---- ---- ---- ----
Total income tax expense............ $290 34.0% $198 36.5%
==== ==== ==== ====
</TABLE>
F-13
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Assets
Provision for credit losses..................................... $ 18 $ 14
Depreciation.................................................... 7 --
Deferred compensation........................................... 41 44
---- ----
Total deferred tax assets..................................... 66 58
---- ----
Deferred Tax Liabilities
Unrealized gain on securities available for sale................ 46 33
Deferred income................................................. 114 94
Depreciation.................................................... -- 7
---- ----
Total deferred tax liabilities................................ 160 134
---- ----
Net deferred tax liabilities.................................. $ 94 $ 76
==== ====
</TABLE>
Note 9--Commitments and Contingencies
Financial Instruments with Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers. The
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. A summary
of the Bank's commitments at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Commitments to extend credit:
Commercial and agricultural................................. $5,655 $8,977
Real estate secured......................................... 834 124
Credit card lines........................................... 876 753
------ ------
Total commitments to extend credit........................ $7,365 $9,854
====== ======
Standby letters of credit................................. $ 215 $ 35
====== ======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank's experience has been that approximately 45% of loan commitments are drawn
upon by customers. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation
of the party. Collateral held varies, but may include accounts receivable,
inventory, livestock, crops, property and equipment, residential real estate,
and income-producing commercial and agricultural properties.
F-14
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above, and is required in instances where the Bank deems
necessary.
The Bank has agreements with commercial banks for lines of credit totaling
$3,900,000. All were unused as of December 31, 1997.
Note 10--Concentration of Credit Risk
Most of the Bank's business activity is with customers located in the State
of Washington. Investments in state and municipal securities involve
governmental entities within the State. Standby letters of credit were granted
primarily to commercial borrowers. The Bank, as a matter of practice, generally
does not extend credit to any single borrower or group of related borrowers in
excess of $600,000.
Note 11--Benefit Plans
401(k) Plan
The Bank has a 401(k) plan which covers substantially all employees who meet
eligibility requirements set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. The Bank's contribution to the plan
is determined by the Board of Directors. The Bank's contribution for the years
ended December 31, 1997 and 1996 was $19,000 and $16,000, respectively.
Stock Option Plans
At December 31, 1997, the Company has employee and director stock-based
option plans, which are described below. The Company applies APB Opinion No. 25
and related interpretations in accounting for these plans. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
stock option plans been determined based on fair value at grant date for awards
granted in 1997 and 1996, consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to these
pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income:
As reported.................................................... $564 $344
Pro forma...................................................... 559 334
Earnings per share:
Basic:
As reported.................................................... $.37 $.22
Pro forma...................................................... .36 .22
Diluted:
As reported.................................................... .34 .21
Pro forma...................................................... .34 .20
</TABLE>
F-15
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant, based
on the Black-Scholes option-pricing model and using the following weighted-
average assumptions: dividends yield 0% for each quarter; risk-free interest
rates of 6%; and expected lives of 3, 5 and 8 years for the options. All
options granted begin vesting one calendar year after grant date at 33% a year.
Employee Stock Option Plan
The Company's 1988 stock option plan, as amended on September 30, 1994,
reserves a total of 250,000 shares of common stock for option to key employees,
as defined in the plan. The exercise price for the option may not be less than
the fair value of the Company's stock at the date of grant. Options vest
ratably over three years, beginning one calendar year after the grant date.
Options expire on the fifth anniversary of the respective dates of vesting, or
in accordance with various termination clauses enumerated within the plan. At
December 31, 1997, options to purchase 199,500 shares of common stock were
outstanding.
Director Stock Option Plan
The Company's 1988 stock option plan was expanded in November 1994 to allow
for the Company to reserve an additional 50,000 of its no par value common
stock to be granted to directors. Options vest ratably over three years,
beginning in the second year of grant. Options expire on the fifth anniversary
of the respective dates of vesting, or in accordance with various termination
clauses enumerated within the plan. At December 31, 1997, options to purchase
33,000 shares of common stock were outstanding.
Employee and Director Stock Option Summary
A summary of the status of the Company's employee and director stock option
plans as of December 31, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ 230,000 $1.40 254,000 $1.19
Granted..................................... 29,500 3.19 12,000 2.58
Exercised................................... (27,000) 1.25 (10,000) 1.25
Forfeited................................... -- -- (26,000) 1.58
------- -------
Outstanding at end of year................ 232,500 1.62 230,000 1.40
======= =======
Options exercisable at year-end........... 168,800 1.29 172,666 1.18
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 is $1.20 and $.94, respectively.
F-16
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes information about employee and director stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00 to $1.25.......... 155,000 1.5 $1.07 138,800 $1.05
$2.40 to $2.50.......... 51,000 6.1 2.42 30,000 2.40
$3.00 to $3.25.......... 19,000 7.5 3.07 -- --
$3.75................... 7,500 7.8 3.75 -- --
------- -------
232,500 3.2 1.62 168,800 1.29
======= =======
</TABLE>
Compensation Agreements
The Bank has a deferred compensation agreement which credits its president
with a $10,000 per year retirement benefit through 2005. The Bank also has an
agreement with its president which will pay twelve months' salary to him upon a
change of control of the Bank. In addition, the Bank has a deferred
compensation agreement with one of its former officers which provides for
payment of $55,000.
Benefits for these agreements may be funded by life insurance policies
purchased by the Bank, which have cash surrender values of $207,000 and
$202,000 at December 31, 1997 and 1996, respectively, and are included in other
assets on the balance sheets. Liabilities for these agreements, which are
accrued over their expected time to payment, were $121,000 and $111,000 at
December 31, 1997 and 1996, respectively, and are included in other liabilities
on the balance sheets. Expenses related to these agreements totaled $15,000 and
$17,000 in 1997 and 1996, respectively.
Note 12--Condensed Financial Information--Parent Company Only
Condensed Balance Sheets--December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Assets
Cash........................................................... $ 43 $ 6
Securities available for sale.................................. 156 122
Investment in subsidiaries..................................... 4,502 4,093
Goodwill....................................................... -- 12
Due from subsidiaries.......................................... 134 107
------ ------
Total assets................................................. $4,835 $4,340
====== ======
Liabilities and Shareholders' Equity
Deferred taxes................................................. $ 44 $ 33
Income taxes payable........................................... 93 82
Note payable................................................... 451 600
Shareholders' equity........................................... 4,247 3,625
------ ------
Total liabilities and shareholders' equity................... $4,835 $4,340
====== ======
</TABLE>
F-17
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Parent Company Only
Condensed Statements of Income--Years Ended December 31
<TABLE>
<S> <C> <C>
Operating Income
Dividends received from subsidiaries........................... $ 207 $ 212
Investment income.............................................. 6 5
----- -----
Total operating income....................................... 213 217
----- -----
Operating Expenses
Amortization of goodwill....................................... 12 46
Other.......................................................... 60 71
----- -----
Total operating expenses..................................... 72 117
----- -----
Income before income taxes and equity in undistributed income
of subsidiaries............................................... 141 100
----- -----
Income Tax Benefit............................................... 15 23
----- -----
Income before equity in undistributed income of subsidiaries... 156 123
===== =====
Equity in Undistributed Income of Subsidiaries................... 408 221
----- -----
Net income................................................... $ 564 $ 344
===== =====
Parent Company Only
Condensed Statements of Cash Flows--Years Ended December 31:
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Cash Flows from Operating Activities
Net income..................................................... $ 564 $ 344
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed income of subsidiaries............... (408) (221)
Amortization................................................. 12 46
Other........................................................ (15) (23)
----- -----
Net cash provided by operating activities...................... 153 146
----- -----
Cash Flows from Financing Activities
Redemption of preferred stock and retired common stock......... (1) (5)
Exercise of stock options...................................... 34 13
Repayment on note payable...................................... (149) (150)
----- -----
Net cash used in financing activities.......................... (116) (142)
----- -----
Net increase in cash........................................... 37 4
Cash
Beginning of year.............................................. 6 2
----- -----
End of year.................................................... $ 43 $ 6
===== =====
</TABLE>
F-18
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13--Condensed Financial Information--Bank Only
Condensed Balance Sheets--December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Assets
Cash and due from banks...................................... $ 3,783 $ 3,653
Federal funds sold........................................... 7,150 4,500
Securities available for sale................................ 574 70
Securities held to maturity.................................. 5,531 5,158
Loans, net of allowance for credit losses of $368 in 1997;
$351 in 1996................................................ 34,560 30,251
Premises and equipment....................................... 1,716 1,876
Other assets................................................. 856 861
------- -------
Total assets............................................... $54,170 $46,369
======= =======
Liabilities and Shareholder's Equity
Deposits..................................................... $49,413 $42,036
Other liabilities............................................ 406 403
Shareholder's equity......................................... 4,351 3,930
------- -------
Total liabilities and shareholder's equity................. $54,170 $46,369
======= =======
Condensed Statements of Income--Years Ended December 31:
Interest Income
Loans........................................................ $ 3,797 $ 3,112
Securities................................................... 596 416
------- -------
Total interest income...................................... 4,393 3,528
Interest Expense............................................. 1,534 1,228
------- -------
Net interest income........................................ 2,859 2,300
Provision for Credit Losses.................................. 16 --
------- -------
Net interest income after provision for credit losses...... 2,843 2,300
------- -------
Non-Interest Income.......................................... 479 541
Non-Interest Expenses........................................ 2,389 2,180
------- -------
Income before income taxes................................. 933 661
Income Taxes................................................. 305 221
------- -------
Net income................................................. $ 628 $ 440
======= =======
</TABLE>
Note 14--Regulatory Matters
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines of the regulatory framework for prompt
corrective action, the Bank must meet specific capital adequacy guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
F-19
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined in the regulations) to
total average assets (as defined), and minimum ratios of Tier 1 and total
capital (as defined) to risk-weighted assets (as defined). Under the regulatory
framework for prompt corrective action, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based, and total risk-based ratios as set forth in the
table.
As of December 31, 1997, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
Actual capital amounts and ratios are also presented in the table:
<TABLE>
<CAPTION>
To be Well
Capitalized
Under
Prompt
Capital Corrective
Adequacy Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Tier 1 capital (to average
assets)
Consolidated............... $4,158 8.27% $2,012 4.00% N/A N/A
Bank....................... 4,262 8.50 2,005 4.00 $2,507 5.00%
Tier 1 capital (to risk-
weighted assets)
Consolidated............... 4,158 10.78 1,542 4.00 N/A N/A
Bank....................... 4,262 11.10 1,536 4.00 2,304 6.00
Total capital (to risk-
weighted assets)
Consolidated............... 4,536 11.76 3,085 8.00 N/A N/A
Bank....................... 4,630 12.05 3,073 8.00 3,841 10.00
December 31, 1996
Tier 1 capital (to average
assets)
Consolidated............... $3,549 7.83% $1,813 4.00% N/A N/A
Bank....................... 3,930 8.67 1,813 4.00 $2,266 5.00%
Tier 1 capital (to risk-
weighted assets)
Consolidated............... 3,549 13.35 1,064 4.00 N/A N/A
Bank....................... 3,930 14.70 1,069 4.00 1,604 6.00
Total capital (to risk-
weighted assets)
Consolidated............... 3,883 14.60 2,127 8.00 N/A N/A
Bank....................... 4,263 15.95 2,138 8.00 2,673 10.00
</TABLE>
Management believes, as of December 31, 1997, that the Company and the Bank
meet the capital requirements to which they are subject.
National banks can initiate dividend payments in a given year, without prior
regulatory approval, equal to net profits, as defined, for that year plus
retained net profits for the preceding two years. The Bank can distribute as
dividends to the parent company approximately $1,062,000 as of December 31,
1997.
F-20
<PAGE>
WASHINGTON INDEPENDENT BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Earnings Per Share Disclosures
Following is information regarding the calculation of basic and diluted
earnings per share for the years indicated.
<TABLE>
<CAPTION>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1997
Basic earnings per share:
Net income.............................. $564 $1,545,524 $.37
Effect of dilutive securities:
Options................................. -- 105,153 (.03)
Diluted earnings per share:
---- ---------- ----
Net income.............................. $564 $1,650,677 $.34
==== ========== ====
Year Ended December 31, 1996
Basic earnings per share:
Net income.............................. $344 $1,543,454 $.22
Effect of dilutive securities:
Options................................. -- 105,129 (.01)
Diluted earnings per share:
---- ---------- ----
Net income.............................. $344 $1,648,583 $.21
==== ========== ====
</TABLE>
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Between
HERITAGE FINANCIAL CORPORATION
and
WASHINGTON INDEPENDENT BANCSHARES, INC.
CENTRAL VALLEY BANK, N.A.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated as of September 28, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS............................................................ A-5
DEFINITIONS......................................................... A-6
ARTICLE I. MERGER................................................... A-9
1.1 THE MERGER.................................................... A-9
1.2 EFFECTIVE DATE................................................ A-10
ARTICLE II. CONSIDERATION........................................... A-10
2.1 EFFECT ON COMPANY COMMON STOCK AND COMPANY OPTIONS............ A-10
2.2 EXCHANGE PROCEDURES........................................... A-12
2.3 EXCEPTION SHARES.............................................. A-13
2.4 RESERVATION OF RIGHT TO REVISE TRANSACTION.................... A-13
ARTICLE III. ACTIONS PENDING CONSUMMATION........................... A-13
3.1 CAPITAL STOCK................................................. A-13
3.2 DIVIDENDS, ETC................................................ A-13
3.3 INDEBTEDNESS; LIABILITIES; ETC................................ A-14
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC................... A-14
3.5 LIENS AND ENCUMBRANCES........................................ A-14
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC...................... A-14
3.7 BENEFIT PLANS................................................. A-14
3.8 CONTINUANCE OF BUSINESS....................................... A-14
3.9 AMENDMENTS.................................................... A-14
3.10 CLAIMS........................................................ A-14
3.11 CONTRACTS..................................................... A-14
3.12 LOANS......................................................... A-14
3.13 TRANSACTION EXPENSES.......................................... A-15
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.......................... A-15
4.1 THE COMPANY AND THE BANK REPRESENTATIONS AND WARRANTIES....... A-15
4.2 HERITAGE REPRESENTATIONS AND WARRANTIES....................... A-23
ARTICLE V. COVENANTS................................................ A-25
5.1 BEST EFFORTS.................................................. A-25
5.2 THE PROXY..................................................... A-25
5.3 REGISTRATION STATEMENT; COMPLIANCE WITH SECURITIES LAWS....... A-25
5.4 REGISTRATION STATEMENT EFFECTIVENESS.......................... A-25
5.5 PRESS RELEASES................................................ A-26
5.6 ACCESS; INFORMATION........................................... A-26
5.7 TERMINATION FEE............................................... A-26
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS
PREPARATION................................................... A-27
5.9 BLUE-SKY FILINGS.............................................. A-27
5.10 AFFILIATE AGREEMENTS.......................................... A-27
5.11 CERTAIN POLICIES OF THE COMPANY AND THE BANK.................. A-27
5.12 STATE TAKEOVER LAW............................................ A-27
5.13 NO RIGHTS TRIGGERED........................................... A-27
5.14 SHARES LISTED................................................. A-28
5.15 REGULATORY APPLICATIONS....................................... A-28
5.16 REGULATORY DIVESTITURES....................................... A-28
5.17 CURRENT INFORMATION........................................... A-28
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.18 INDEMNIFICATION.................................................. A-28
5.19 APPOINTMENT OF DIRECTORS......................................... A-29
5.20 OPERATION OF THE BANK............................................ A-29
5.21 BENEFIT PLANS.................................................... A-29
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER................... A-29
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS........................... A-29
6.2 CONDITIONS TO OBLIGATIONS OF HERITAGE............................ A-30
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND THE BANK................ A-31
ARTICLE VII. TERMINATION............................................... A-32
7.1 GROUNDS FOR TERMINATION.......................................... A-32
7.2 CONSEQUENCES OF TERMINATION...................................... A-32
ARTICLE VIII. OTHER MATTERS............................................ A-32
8.1 SURVIVAL......................................................... A-32
8.2 WAIVER; AMENDMENT................................................ A-33
8.3 COUNTERPARTS..................................................... A-33
8.4 GOVERNING LAW.................................................... A-33
8.5 EXPENSES......................................................... A-33
8.6 CONFIDENTIALITY.................................................. A-33
8.7 NOTICES.......................................................... A-33
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES............... A-34
8.9 HEADINGS......................................................... A-34
</TABLE>
EXHIBITS
Exhibit A Approval by Directors of Washington Independent Bancshares,
Inc.
Exhibit B Director's Agreement
Exhibit C Washington Independent Bancshares, Inc. Affiliate Undertakings
and Agreements
Exhibit D Employment Agreement of D. Michael Broadhead
Exhibit E Employment Agreement of Joe Perry
Exhibit F Employment Agreement of Richard Maison
Exhibit G Employment Agreement of Larry Holt
Exhibit H Legal Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson
& Daheim, P.L.L.C.
Exhibit I Legal Opinion of Gerrish & McCreary, P.C.
SCHEDULES
COMPANY DISCLOSURES
Schedule 3.2 Dividends
Schedule 3.3 Indebtedness, Liabilities
Schedule 3.4 Changes to Line of Business, Operating Procedures, etc.
Schedule 3.6 New or Changes to Compensation, Employment Agreements, etc.
Schedule 3.7 New or Modifications to Benefit Plans
Schedule 3.11 New or Changes to Material Contracts
Schedule 3.13 Transaction Expenses
Schedule 4.1(C) Shares Outstanding
Schedule 4.1(D) Subsidiaries
Schedule 4.1(G) No Defaults--Agreements Requiring Third Party Consent
Schedule 4.1(H) Financial Reports
Schedule 4.1(I) Undisclosed Liabilities
Schedule 4.1(J) No Events Causing Material Adverse Effect
Schedule 4.1(L) Litigation, Regulatory Action
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Schedule 4.1(M) Compliance with Laws
Schedule 4.1(N) Material Contracts
Schedule 4.1(Q)(1) List of Employee Benefit Plans
Schedule 4.1(Q)(2) Employee Benefit Plans Not Qualified Under ERISA
Schedule 4.1(Q)(6) Obligations for Retiree Health and Life Benefits
Schedule 4.1(Q)(7) Agreements Resulting in Payments to Employees Under Any
Compensation and Benefit Plan with Respect to Proposed
Transaction
Schedule 4.1(T) Asset Classification
Schedule 4.1(V) Insurance
Schedule 4.1(W) Affiliates
Schedule 4.1(Z)(2) Pending Proceedings with Respect to Environmental Matters
Schedule 4.1(Z)(3) Pending Proceedings with Respect to Environmental Matters
Involving Loan/Fiduciary Property
Schedule 4.1(Z)(4) Pending Proceedings with Respect to Environmental Matters
Listed in Sections 4.1(Z)(2) or (3)
Schedule 4.1(Z)(5) Actions During Ownership Which could have Material Adverse
Effect with Respect to Environmental Matters
Schedule 4.1(Z)(6) Actions Prior to Ownership Which could Have Material
Adverse Effect with Respect to Environmental Matters
Schedule 4.1(AA) Tax Reports Matters
Schedule 4.1(CC) Derivative Contracts
Schedule 4.1(EE)(1) Employment Contracts Requiring Payment in Connection with
Termination
Schedule 4.1(EE)(2) Leases with Aggregate Annual Rent Exceeding $10,000
Schedule 4.1(EE)(3) Material Contracts with Affiliates
HERITAGE FINANCIAL CORPORATION DISCLOSURES
Schedule 4.2(C) Shares
Schedule 4.2(F) No Defaults
Schedule 4.2(G) Financial Reports
Schedule 4.2(H) No Events Causing Material Adverse Effect
Schedule 4.2(I) Litigation, Regulatory Action
Schedule 4.2(L) Derivative Contracts
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 28th day of September, 1998
(this "Plan"), is between WASHINGTON INDEPENDENT BANCSHARES, INC. (the
"Company"), CENTRAL VALLEY BANK, N.A.(the "Bank"), and HERITAGE FINANCIAL
CORPORATION ("Heritage").
RECITALS
(A) THE COMPANY. The Company is a company duly organized and existing in
good standing under the laws of the State of Washington, with its principal
executive offices located in Toppenish, Washington. The Company is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended. As
of the date of this Plan, the Company has 10,000,000 authorized shares of
common stock, no par value per share ("Company Common Stock"), of which
1,760,449 shares of Company Common Stock are issued and outstanding and 200,000
authorized shares of preferred stock of which none are outstanding. As of the
date of this Plan, the Company has 49,000 shares of Company Common Stock
reserved for issuance under employee stock option plans pursuant to which
options covering 35,500 shares of Company Common Stock are outstanding (the
"Employee Options"). As of the date of this Plan, the Company has 26,000 shares
of Company Common Stock reserved for issuance under director stock option plans
pursuant to which options covering 9,000 shares of Company Common Stock are
outstanding (the "Director Options"). The Employee Options and the Director
Options that are vested immediately prior to the Effective Date are referred to
collectively in this Plan as "Company Options." As of June 30, 1998, the
Company had capital of $4,613,000, divided into common stock of $2,337,000,
surplus of $3,931,000, accumulated deficit of $1,742,000 and unrealized gains
of $87,000.
(B) THE BANK. The Bank is a national banking association duly organized and
existing in good standing under the laws of the United States of America, with
its principal executive offices located in Toppenish, Washington. As of the
date of this Plan, the Bank has 200,000 authorized shares of common stock,
$20.00 par value per share ("Bank Common Stock") (no other class of capital
stock being authorized), of which 200,000 shares of Bank Common Stock are
issued and outstanding. All of the issued and outstanding shares of Bank Common
Stock are owned by the Company, the sole shareholder of the Bank. As of June
30, 1998, the Bank had capital of $4,591,000, divided into common stock of
$1,700,000 surplus of $720,000, and undivided profits of $2,169,000.
(C) HERITAGE. Heritage is a corporation duly organized and existing in good
standing under the laws of the State of Washington, with its principal
executive offices located in Olympia, Washington. Heritage is a registered bank
holding company under the Bank Holding Company Act of 1956, as amended. As of
the date of this Plan, Heritage has 2,500,000 authorized shares of preferred
stock, no par value per share, of which none of these shares are issued or
outstanding, and Heritage has 15,000,000 authorized shares of common stock, no
par value per share ("Heritage Common Stock"), of which 9,781,082 shares of
Heritage Common Stock are issued and outstanding as of June 30, 1998. As of
June 30, 1998, Heritage had capital of $93,862,000 divided into common stock
and surplus of $70,509,000 and undivided profits of $23,353,000.
(D) VOTING AGREEMENT. As a condition and an inducement to Heritage's
willingness to enter into this Plan, the directors and officers of the Bank and
the Company have entered into agreements in the forms attached to this Plan as
Exhibit A and Exhibit B, pursuant to which, among other things, each such
individual has agreed to vote his or her shares of Company Common Stock in
favor of approval of the actions contemplated by this Plan at the Meeting (as
defined Below) and to refrain from competing with Heritage and its
Subsidiaries.
(E) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
Schedule 4.1(C). or paragraph (A) of the Recitals to this Plan, or as
authorized by this Plan: there are no shares of capital stock of the Company or
the Bank authorized and reserved for issuance; neither the Company nor the Bank
has any Rights
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<PAGE>
(as defined below) issued or outstanding; and neither the Company or the Bank
has any commitment to authorize, issue or sell any such shares or any Rights.
The term "Rights" means securities or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
or any options, calls or commitments relating to, shares of capital stock.
There are no preemptive rights with respect to the Company Common Stock.
(F) APPROVALS. At meetings of the respective Boards of Directors of the
Company, the Bank, and Heritage, each such Board has approved and authorized
the execution of this Plan in counterparts.
In consideration of their mutual promises and obligations, the Parties
further agree as follows:
DEFINITIONS
(A) DEFINITIONS. Capitalized terms used in this Plan have the following
meanings:
"Appraisal Laws" has the meaning assigned to such term in Section 1.1(E).
"Asset Classification" has the meaning assigned to such term in Section
4.1(T).
"Bank" has the meaning assigned to such term in the first paragraph of this
Plan.
"Bank Common Stock" has the meaning assigned to such term in paragraph (B)
of the Recitals.
"Bank Financial Reports" has the meaning assigned to such term in Section
4.1(H).
"Capital" means capital stock, surplus and retained earnings determined in
accordance with GAAP.
"Code" has the meaning assigned to such term in Section 4.1(Q)(2).
"Company" has the meaning assigned to such term in the first paragraph to
this Plan.
"Company Common Stock" has the meaning assigned to such term in paragraph
(A) of the Recitals.
"Company Common Stock Conversion Ratio" has the meaning assigned to such
term in Section 2.1(F).
"Company Option" means an Employee Option or Director Option that is vested
immediately prior to the Effective Date.
"Company Option Conversion Ratio" has the meaning assigned to such term in
Section 2.1(E).
"Company Optionholders" means holders of outstanding Company Options.
"Company Shareholders" means holders of Company Common Stock.
"Compensation and Benefit Plans" has the meaning assigned to such term in
Section 4.1(Q)(1).
"Continuing Corporation" has the meaning assigned to such term in Section
1.1(A).
"Continuing Employees" has the meaning assigned to such term in Section
8.9.
"Department" means the Washington Department of Financial Institutions.
"Derivatives Contract" means an exchange-traded or over-the-counter swap,
forward, future, option, cap, floor or collar financial contract or any other
contract that (1) is not included on the balance sheet of the
A-6
<PAGE>
Holding Company Financial Reports or the Heritage Financial Reports, as the
case may be, and (2) is a derivative contract (including various combinations
of the foregoing).
"Director Options" has the meaning assigned to such term in paragraph (A) of
the Recitals.
"Dissenting Shares" means the shares of Company Common Stock held by those
shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.2.
"Employee Options" has the meaning assigned to such term in paragraph (A) of
the Recitals.
"Employment Agreement" means any of Exhibits D, E, F and G.
"Environmental Law" means (1) any federal, state, and/or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, legal doctrine, order, judgment, decree, injunction, requirement or
agreement with any governmental entity, relating to (a) the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, groundwater, drinking water supply, surface land, subsurface
land, plant and animal life or any other natural resource) or to human health
or safety, or (b) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of hazardous Material, in each case as amended and as now in
effect, including the Federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, and the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970, and (2) any common
law or equitable doctrine (including injunctive relief and tort doctrines such
as negligence, nuisance, trespass and strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 4.1(Q)(2).
"ERISA Affiliate" has the meaning assigned to such term in Section
4.1(Q)(3).
"ERISA Plans" has the meaning assigned to such term in Section 4.1(Q)(2).
"Exception Shares" means shares held by any of the Company's Subsidiaries or
by Heritage or any of its Subsidiaries, in each case other than in a fiduciary
capacity or as a result of debts previously contracted.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under such statute.
"Exchange Agent" has the meaning assigned to such term in Section 2.6.
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Reports" has the meaning assigned to such term in Section 4.1(H).
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"GAAP" means generally accepted accounting principles.
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<PAGE>
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
including any oil or other petroleum product, toxic waste, pollutant
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste or petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos, asbestos containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"Holding Company Financial Reports" has the meaning assigned to such term in
Section 4.1(H).
"Indemnified Party" has the meaning assigned to such term in Section
5.18(A).
"Heritage" has the meaning assigned to such term in the first paragraph of
the Plan.
"Heritage Common Stock" has the meaning assigned to such term in paragraph
(c) of the Recitals.
"Loan/Fiduciary Property" means any property owned or controlled by the
Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries holds a security or other interest, and where required by the
context, includes any such property where the Company or any of its
Subsidiaries constitutes the owner or operator of such property, but only with
respect to such property.
"Material Adverse Effect" means, with respect to any Party, an event,
occurrence or circumstance (including (i) the making of any provisions for
possible loan and lease losses, write-downs or other real estate owned and
taxes, and (ii) any breach of a representation or warranty contained in this
Plan by such Party) that (a) has or is reasonably likely to have a material
adverse effect on the financial condition, results of operations, business or
prospects of such Party and its Subsidiaries, taken as a whole, or (b) would
materially impair such Party's ability to perform its obligations under this
Plan or the consummation of any of the transactions contemplated by this Plan.
"Meetings" have the meaning assigned to such term in Section 5.2.
"Merger" has the meaning assigned to such term in Section 1.1(A).
"Merger Consideration" means the aggregate of the shares of Heritage Common
Stock issuable pursuant to the Merger.
"Multiemployer Plans" has the meaning assigned to such term in Section
4.1(Q)(2).
"NASDAQ" means the National Association of Securities Dealers Automated
Quotations system.
"OCC" means the Office of the Comptroller of the Currency, the regulator of
national banks.
"Option Conversion Shares" has the meaning assigned to such term in Section
2.1(B).
"Participation Facility" means any facility in which the Company or any of
its Subsidiaries participates in the management and, where required by the
context, includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section 4.1(Q)(2).
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, governmental
body, or other entity.
"Plan" means this Agreement and Plan of Merger.
A-8
<PAGE>
"Previously Disclosed" with respect to information, means that the
information is provided by a Party in a Schedule that is delivered
contemporaneously with the execution of this Plan.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Registration Statement" has the meaning assigned to such term in Section
5.2.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"RCW" means the Revised Code of Washington, as amended.
"Rights" has the meaning assigned to such term in paragraph (E) of the
Recitals.
"Securities Act" means the Securities Act of 1933, as amended, together with
the rules and regulations promulgated under such statute.
"SEC" means the Securities and Exchange Commission.
"Share Conversion Ratio" has the meaning assigned to such term in Section
2.1(F).
"Subsidiary" means, with respect to any entity, each partnership, limited
liability company, or corporation the majority of the outstanding partnership
interests, membership interests, capital stock or voting power of which is (or
upon the exercise of all outstanding warrants, options and other rights would
be) owned, directly or indirectly, at the time in question by such entity.
"Tax Returns" has the meaning assigned to such term in Section 4.1(AA).
"Taxes" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, withholding or similar taxes imposed on the income,
properties or operations of the respective Party or its Subsidiaries, together
with any interest, additions, or penalties relating to such taxes and any
interest charged on those additions or penalties.
"Third Party" means a person within the meaning of Section 3(a)(9) and
13(d)(3) of the Exchange Act, excluding (1) the Company or any Subsidiary of
the Company, and (2) Heritage or any Subsidiary of Heritage.
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in this
Plan or unless the context clearly requires otherwise, the terms defined in
this Plan include the plural as well as the singular; the words "hereof,"
"herein," "hereunder," "in this Plan" and other words of similar import refer
to this Plan as a whole and not to any particular Article, Section or other
subdivision; and references in this Plan to Articles, Section, Schedules, and
Exhibits refer to Articles and Sections of and Schedules and Exhibits to this
Plan. Whenever the words "include," "includes," or "including" are used in this
Plan, they shall be deemed to be followed by the words "without limitation."
Unless otherwise stated, references to Subsections refer to the Subsections of
the Section in which the reference appears. All pronouns used in this Plan
include the masculine, feminine and neuter gender, as the context requires. All
accounting terms used in this Plan that are not expressly defined in this Plan
have the respective meanings given to them in accordance with GAAP.
ARTICLE I. MERGER
1.1 THE MERGER. Subject to the provisions of this Plan, on the Effective
Date:
(A) THE CONTINUING CORPORATION. In accordance with the terms of RCW Ch.
23B.11, the Company shall merge into Heritage (the "Merger"), the separate
existence of the Company shall cease and Heritage (the "Continuing
Corporation") shall survive, and the name of the Continuing Corporation shall
be "Heritage Financial Corporation."
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<PAGE>
(B) RIGHTS, ETC. Upon consummation of the Merger, the Continuing Corporation
shall possess all of the rights, privileges, immunities and franchises, of a
public as well as of a private nature, of each of the merging corporations; and
all property, real, personal and mixed, and all debts due on whatever account,
and all other choses in action, and all and every other interest, of or
belonging to or due to each of the corporations so merged, shall be deemed to
be vested in the Continuing Corporation without further act or deed; and the
title to any real estate or any interest therein, vested in each of such
corporations, shall not revert or be in any way impaired by reason of the
Merger.
(C) LIABILITIES. The Continuing Corporation shall be responsible and liable
for all the liabilities, obligations and penalties of each of the corporations
so merged.
(D) ARTICLES OF INCORPORATION; BY LAWS; DIRECTORS; OFFICERS. The Articles of
Incorporation and Bylaws of the Continuing Corporation shall be those of
Heritage, as in effect immediately prior to the Merger becoming effective. The
directors and officers of Heritage in office immediately prior to the Merger
becoming effective shall be the directors and officers of the Continuing
Corporation, who shall hold office until such time as their successors are
elected and qualified, except that the Board of Directors of Heritage shall be
expanded by one position immediately after the Effective Date of the Merger and
an outside (non-management) director of the Company who resides in eastern
Washington as recommended by the Company shall be appointed by the Board of
Directors of Heritage to fill that position.
(E) DISSENTING SHARES. Notwithstanding anything to the contrary in this
Plan, each Dissenting Shareholder who, as of the Effective Date of the Merger,
has not effectively withdrawn or lost his dissenters' rights under RCW 23B.13
(the "Appraisal Laws") shall not be converted into or represent a right to
receive any of the Merger Consideration, but the holder of such Dissenting
Share shall be entitled only to such rights as are granted by the Appraisal
Laws, unless and until such holder shall have failed to perfect or shall have
effectively withdrawn or lost the right to payment under the Appraisal Laws, in
which case each such share shall be deemed to have been converted at the
Effective Date into his or her portion of the Merger Consideration. Each holder
of Dissenting Shares who becomes entitled to payment for his Company Common
Stock pursuant to the provisions of the Appraisal laws shall receive payment
for such Dissenting Shares from the Company (but only after the amount thereof
shall have been agreed upon or finally determined pursuant to the Appraisal
Laws).
1.2 EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" of the Merger will be the tenth business day after the
fulfillment or waiver of each condition precedent set forth in, and the
granting of each approval (and expiration of any waiting period) required by,
Article VI. A business day is any day other than a Saturday, Sunday or legal
holiday in the State of Washington. If the Merger is not consummated in
accordance with this Plan on or prior to April 30, 1999, the Company or
Heritage may terminate this Plan in accordance with Article VII. On the
Effective Date, Heritage and the Company shall execute and deliver to the
Secretary of State of the State of Washington articles of merger in accordance
with applicable law.
ARTICLE II. CONSIDERATION
2.1 EFFECT ON COMPANY COMMON STOCK AND COMPANY OPTIONS. Subject to the
provisions of this Plan, on the Effective Date, by virtue of the Merger and
without any action on the part of Heritage or the Company:
(A) CONVERSION OF COMPANY COMMON STOCK AND COMPANY OPTIONS. The purchase
price paid by Heritage to the holders of Company Common Stock ("Company
Shareholders") and holders of Company Options ("Company Optionholders") (the
"Merger Consideration") shall be:
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<PAGE>
(1) if the Average Closing Price (as defined below) of Heritage
Common Stock is more than $12.25, 1,000,000 shares of Heritage Common
Stock; or
(2) if the Average Closing Price (as defined below) of Heritage
Common Stock is $12.25 or below, but no less than $10.00, 1,000,000
shares of Heritage Common Stock plus that number of shares of Heritage
Common Stock equal to the product (rounded to the next whole share) of
the following formula:
[($12.25 minus Average Closing Price) divided by $2.25] multiplied by
50,000; or
(3) if the Average Closing Price (as defined below) of Heritage
Common Stock is below $10.00 and if Heritage makes an election under
Section 7.1(E) of this Plan to consummate the Plan following the
Company's written notice of termination under Section 7.1(E) of this
Plan, the Merger Consideration shall be that number of shares of
Heritage Common Stock equal to the sum (rounded to the next whole
share) of the following formula:
($10,000,000 divided by Average Closing Price) plus 50,000; or
(4) if the Average Closing Price (as defined below) of Heritage
Common Stock is below $10.00 and if the Company does not provide
written notice of termination under Section 7.1(E) of this Plan,
1,050,000 shares of Heritage Common Stock.
All of the issued and outstanding shares of Company Common Stock, other than
Dissenting Shares and Exception Shares, and all outstanding Company Options
shall be converted into the right to receive a portion of the Merger
Consideration based upon each Company Shareholder's and Company Optionholder's
ownership of the total number of issued and outstanding shares of Company
Common Stock and outstanding Company Options immediately prior to the Effective
Date, as described in Subsections (E) and (F) below.
For purposes of this Plan, the following terms shall have the means
indicated:
"Average Closing Price" means the average of the last reported sale prices
per share of Heritage Common Stock as reported on The Nasdaq Stock Market or
such successor exchange on which Heritage Common Stock may then be traded (as
reported in The Wall Street Journal or, if not reported therein, in another
mutually agreed upon authoritative source) for the 45 consecutive trading days
on The Nasdaq Stock Market or such successor exchange on which Heritage Common
Stock may then be traded ending at the close of trading on the Determination
Date.
"Determination Date" means the date occurring 5 days prior to the Effective
Date.
(B) FRACTIONAL SHARES. Fractional shares of Heritage Common Stock shall not
be issued. Any Company Shareholder or Company Optionholder entitled to receive
a fractional share shall receive a cash payment in lieu thereof equal to the
value of the fractional share based on the average sales price per share of
Heritage Common Stock for all trades occurring on NASDAQ during the period of
ten (10) trading days on which one or more trades take place and which ends
immediately prior to the fifth day prior to the Effective Date ("Pricing
Average").
(C) CANCELLATION OF COMPANY COMMON STOCK AND COMPANY OPTIONS. All shares of
Company Common Stock issued and outstanding and all Employee Options and
Director Options outstanding immediately prior to the Effective Date shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist as of the Effective Date, and each holder of a certificate
or other documentation representing any such shares of Company Common Stock or
Company Options shall cease to have any rights with respect thereto, except the
right to receive the portion of the Merger Consideration applicable to such
shares or Company Options in consideration therefor upon surrender of such
certificate or other documentation in accordance with the Plan, without
interest, or, if applicable, cash in accordance with the Appraisal Laws. After
the Effective Date, there shall be no transfers on the stock transfer books of
the Company or the
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Continuing Corporation of the shares of Company Common Stock that were issued
and outstanding immediately prior to the Effective Date.
(D) ANTI-DILUTION. If prior to the Effective Date, shares of Heritage
Common Stock or Company Common Stock shall be changed into a different number
of shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares, readjustment or similar transactions, or if a
stock dividend shall be declared, appropriate and proportionate adjustment or
adjustments will be made in the conversion ratios set forth in this Section
2.1.
(E) COMPANY OPTION CONVERSION RATIO. Each Company Option outstanding
immediately prior to the Effective Date shall be converted into the right to
receive that number of shares of Heritage Common Stock equal to the quotient
of the following formula (because the outstanding Company Options are
convertible into shares of Company Common Stock at varying exercise prices,
this formula is to be applied on a Company Option per Company Option basis,
each application thereof producing a "Company Option Conversion Ratio"):
(Company Common Stock Value minus Exercise Price of a Company Option)
divided by Pricing Average
The Company Common Stock Value is determined by solving for (x) in the
following equation:
A(x) + B(x-y) = C(z)
Where:
A = number of outstanding shares of Company Common Stock immediately prior
to the Effective Date
B = number of outstanding Company Options immediately prior to the
Effective Date
C = Merger Consideration as determined under Section 2.1(A) of this Plan
x = Company Common Stock Value
y = weighted average exercise price of outstanding Company Options
immediately prior to the Effective Date
z = Pricing Average as defined in Section 2.1(B), above
To determine the aggregate value of all Company Options outstanding
immediately prior to the Effective Date, the Company Common Stock Value is
reduced by the weighted average exercise price of the Company Options
outstanding immediately prior to the Effective Date and that difference is
multiplied by the number of Company Options outstanding immediately prior to
the Effective Date. The number of shares of Heritage Common Stock to be issued
in the aggregate to the Company Optionholders as of the Effective Date (the
"Option Conversion Shares") will be equal to the quotient of the aggregate
value of all Company Options outstanding immediately prior to the Effective
Date (computed as described in the preceding sentence) divided by the Pricing
Average.
(F) COMPANY COMMON STOCK CONVERSION RATIO. The total number of Option
Conversion Shares shall be subtracted from the Merger Consideration and the
resulting difference shall be divided by the number of shares of Company
Common Stock outstanding immediately prior to the Effective Date the quotient
of which shall be the Company Common Stock Conversion Ratio. The number of
shares of Company Common Stock held by each Company Shareholder immediately
prior to the Effective Date shall be multiplied by the Company Common Stock
Conversion Ratio to determine the number of shares of Heritage Common Stock to
be received by each Company Shareholder.
2.2 EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, Heritage shall send or cause to be sent to each former Company
Shareholder and Company Optionholder of record immediately prior to the
Effective Date transmittal materials for use in exchanging such shareholder's
certificates for Company Common Stock and Company Options for the
consideration set forth in this Article II. The certificates representing the
shares of Heritage Common Stock into which shares of such Company
Shareholder's Company Common Stock and such Company Optionholder's Company
Options are converted on the Effective Date, any fractional share or check
that such shareholder or optionholder shall be entitled to
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receive, and any dividends paid on such shares of Heritage Common Stock for
which the record date for determination of shareholders entitled to such
dividends is on or after the Effective Date, will be delivered to such
shareholder or optionholder only upon delivery to Heritage's exchange agent
(the "Exchange Agent") of the certificates representing all of such shares of
Company Common Stock (or indemnity satisfactory to Heritage and the Exchange
Agent, in their judgment, if any of such certificates are lost, stolen or
destroyed) and documentary evidence satisfactory to Heritage and the Exchange
Agent of the holding of Company Options. No interest will be paid on any such
fractional share check or dividends to which the holder of such shares or
options shall be entitled to receive upon such delivery. Certificates or
options surrendered for exchange by any person constituting an "affiliate" of
the Company for purposes of Rule 145 of the Securities Act shall not be
exchanged for certificates representing Heritage Common Stock until Heritage
has received a written agreement from such person as specified in Section 5.10.
2.3 EXCEPTION SHARES. Each of the Exception Shares of Company Common Stock
shall be canceled and retired upon consummation of the Merger, and no
consideration shall be issued in exchange therefor.
2.4 RESERVATION OF RIGHT TO REVISE TRANSACTION. In its sole discretion, and
notwithstanding any other provision in this Plan to the contrary, Heritage may
at any time change the method of effecting its acquisition of the Company and
the Bank; provided, however, that (A) no such change shall alter or change the
amount or kind of consideration to be issued to holders of Company Common Stock
or Company Options as provided for in this Plan, (B) no such change shall
adversely affect the tax treatment to the Company Shareholders as a result of
receiving such consideration, and (C) no delay caused by such a change shall be
the basis upon which Heritage terminates this Plan pursuant to Section 7.1(C).
If Heritage elects to change the method of acquisition, the Company and the
Bank will cooperate with and assist Heritage with any necessary amendment to
this Plan, and with the preparation and filing of such applications, documents,
instruments and notices as may be necessary or desirable, in the opinion of
counsel for Heritage, to obtain all necessary shareholder approvals and
approvals of any regulatory agency, administrative body or other governmental
entity.
ARTICLE III. ACTIONS PENDING CONSUMMATION
Unless otherwise agreed to in writing by Heritage, each of the Company and
the Bank shall conduct its and each of its Subsidiaries' business in the
ordinary and usual course consistent with past practice and shall use its best
efforts to maintain and preserve its and each of its Subsidiaries' business
organization, employees and advantageous business relationships and retain the
services of its and each of its Subsidiaries' officers and key employees
identified by Heritage, and neither the Company nor the Bank, without the prior
written consent of Heritage, will (or cause or allow any of its Subsidiaries
to):
3.1 CAPITAL STOCK. Except for or as otherwise expressly permitted by this
Plan, or Company Options, or as Previously Disclosed in Schedule 4.1(C), issue,
sell or otherwise permit to become outstanding any additional shares of capital
stock of the Company, the Bank or any of their Subsidiaries, or any Rights with
respect thereto, or enter into any agreement with respect to the foregoing, or
permit any additional shares of Company Common Stock to become subject to
grants of Employee Options or Director Options, stock appreciation rights or
similar stock-based employee or director compensation rights.
3.2 DIVIDENDS, ETC. Except as set forth on Schedule 3.2, make, declare or
pay any dividend on or in respect of, or declare or make any distribution on,
or directly or indirectly combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock or, other than as permitted in or
contemplated by this Plan, authorize the creation or issuance of, or issue, any
additional shares of its capital stock or any Rights with respect thereto.
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3.3 INDEBTEDNESS; LIABILITIES; ETC. Except as set forth on Schedule 3.3,
other than in the ordinary course of business consistent with past practice,
incur any indebtedness for borrowed money, assume, guarantee, endorse or
otherwise as an accommodation become responsible or liable for the obligations
of any other individual, corporation or other entity; provided, however, the
Company shall incur no indebtedness for borrowed money or engage in any of the
actions described in this Section 3.3.
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC. Except as may be directed
by any regulatory agency, (A) change its lending, investment, liability
management or other material banking policies in any material respect, except
such changes as are in accordance and in an effort to comply with Section 5.11,
or (B) commit to incur any further capital expenditures beyond those Previously
Disclosed in Schedule 3.4 other than in the ordinary course of business and not
exceeding $25,000 individually or $100,000 in the aggregate prior to the
Effective Date.
3.5 LIENS AND ENCUMBRANCES. Impose, or suffer the imposition, on any shares
of stock of any of its Subsidiaries, any lien, charge or encumbrance, or permit
any such lien, charge or encumbrance to exist.
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously Disclosed
in Schedule 3.6, enter into or amend any employment, severance or similar
agreement (other than the Employment Agreements) or arrangement with any of its
directors, officers or employees, or grant any salary or wage increase, amend
the terms of any Company Option or increase any employee benefit (including
incentive or bonus payments), except normal individual increases (not exceeding
5% for any employee of Company or Bank whose salary is $25,000 or more) in
regular compensation to employees in the ordinary course of business consistent
with past practice.
3.7 BENEFIT PLANS. Except as Previously Disclosed in Schedule 3.7 and except
as expressly contemplated by the Employment Agreements, enter into or modify
(except as may be required by applicable law) any pension, retirement, stock
option, stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement related thereto,
in respect of any of its directors, officers or other employees, including
taking any action that accelerates the vesting or exercise of any benefits
payable thereunder.
3.8 CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion of its
assets, business or properties, that is material to the Company and its
Subsidiaries taken as a whole, or merge or consolidate with, or acquire all or
any portion of, the business or property of any other entity that is material
to the Company and its Subsidiaries taken as a whole (except foreclosures or
acquisitions by the Bank in its fiduciary capacity, in each case in the
ordinary course of business consistent with past practice).
3.9 AMENDMENTS. Amend its articles of incorporation or bylaws.
3.10 CLAIMS. Settle any claim, litigation, action or proceeding involving
any liability for money damages or restrictions upon the operations of the
Company or any of its Subsidiaries.
3.11 CONTRACTS. Except as previously disclosed on Schedule 3.11, enter into,
renew, terminate or make any change in any material contract, agreement or
lease, except in the ordinary course of business consistent with past practice
with respect to contracts, agreements and leases that are terminable by it
without penalty on no more than 60 days prior written notice.
3.12 LOANS. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except that
the Bank shall not, without the prior consent of Heritage's Chief Executive
Officer or Chief Financial Officer, make any new loan or modify, restructure or
renew any existing nonperforming loan (defined as on non-accrual status, or 90
days or more past due) to any borrower if the amount of the resulting loan,
when aggregated with all other loans or extension of credit to
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such Person (or which would be required to be aggregated for loans-to-one-
borrower limitations), would be in excess of $350,000 for any new customer or
$350,000 to any customer as of the date of this Plan, except that (i) single-
family residential loans may be made in amounts that would not exceed
applicable FHLMC and FNMA limits, and (ii) such limits shall not apply to SBA,
FmHA, USDA Rural Development or other governmental or governmental agency
guaranteed amounts.
3.13 TRANSACTION EXPENSES. Incur expenses in connection with the
transactions contemplated by this Plan that exceed the amounts set forth in
Schedule 3.13.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 THE COMPANY AND THE BANK REPRESENTATIONS AND WARRANTIES. Each of the
Company and the Bank hereby represents and warrants to Heritage as follows:
(A) RECITALS. The facts set forth in the Recitals of this Plan with
respect to the Company and its Subsidiaries are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Each of the Company and its
Subsidiaries is duly qualified to do business and is in good standing in
the States of the United States and foreign jurisdictions where the failure
to be duly qualified, individually or in the aggregate, is reasonably
likely to have a Material Adverse Effect on it. Each of the Company and its
Subsidiaries has in effect all federal, state, local and foreign government
authorizations necessary for it to own or lease its properties and assets
and to carry on its business as it is now conducted, the absence of which,
individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it. The Bank is an "insured depository institution" as
defined in the Federal Deposit Insurance Act, as amended, and applicable
regulations under such statute, and its deposits are insured by the Bank
Insurance Fund of the FDIC.
(C) SHARES. The outstanding shares of the Company and its Subsidiaries'
capital stock are validly issued and outstanding, fully paid and
nonassessable (except for the application of 12 U.S.C. (S)55 to the shares
of Bank Common Stock), and subject to no preemptive rights. Except as
Previously Disclosed in Schedule 4.1(C) and paragraph (A) of the Recitals,
there are no shares of capital stock or other equity securities of the
Company or its Subsidiaries outstanding and no outstanding Rights with
respect thereto.
(D) THE COMPANY SUBSIDIARIES. The Company has Previously Disclosed in
Schedule 4.1(D) a list of all of its Subsidiaries. Each of its Subsidiaries
that is a bank is an "insured depository institution" as defined in the
Federal Deposit Insurance Act, as amended, and applicable regulations under
such statute. No equity securities of any of its Subsidiaries are or may
become required to be issued (other than to the Company or one of its
Subsidiaries) by reason of any Rights with respect thereto. There are no
contracts, commitments, understandings or arrangements by which any of its
Subsidiaries is or may be bound to sell or otherwise issue any shares of
such Subsidiary's capital stock, and there are no contracts, commitments,
understandings or arrangements relating to the rights of the Company or its
Subsidiaries, as applicable, to vote or to dispose of such shares. All of
the shares of capital stock of each of its Subsidiaries held by the Company
or one of its Subsidiaries are fully paid and nonassessable and are owned
by the company or one of its Subsidiaries free and clear of any charge,
mortgage, pledge, security interest, restriction, claim, lien or
encumbrance. Each of its Subsidiaries is in good standing under the laws of
the jurisdiction in which it is incorporated or organized, and is duly
qualified to do business and in good standing in the jurisdictions where
the failure to be duly qualified is reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect on it. Except as
Previously Disclosed in Schedule 4.1(D), it does not own beneficially,
directly or indirectly, any shares of any equity securities or similar
interests of any corporation, bank, partnership, joint venture, business
trust, association or other organization. In the case of representations by
the Company, the deposits of its Subsidiaries that are banks are insured by
the Bank Insurance Fund of the FDIC.
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(E) CORPORATE POWER. Each of the Company and its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to the receipt of approval by its
shareholders referred to in Section 6.1, this Plan has been authorized by
all necessary corporate action of the Company and each of its Subsidiaries
that is a Party, and is a valid and binding agreement of the Company and
such Subsidiaries, enforceable against the Company and such Subsidiaries in
accordance with its terms, subject to bankruptcy, insolvency and other laws
of general applicability relating to or affecting creditors' rights and to
general equity principles.
(G) NO DEFAULTS. Subject to the approval by its shareholders referred to
in Section 6.1, the required regulatory approvals referred to in Section
6.1, and the required filings under federal and state securities laws, and
except as Previously Disclosed in Schedule 4.1(G), the execution, delivery
and performance of this Plan and the consummation by the Company and each
of its Subsidiaries that is a Party to the transactions contemplated by
this Plan do not and will not (1) constitute a breach or violation of, or a
default under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of
the Company or of any of its Subsidiaries or to which the Company or any of
its Subsidiaries or its or their properties is subject or bound, which
breach, violation or default is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on it, (2) constitute a breach
or violation of, or a default under, the articles of incorporation, charter
or bylaws of it or any of its Subsidiaries, or (3) require any consent or
approval under any such law, rule, regulation, judgment, decree, order,
governmental permit or license or the consent or approval of any other
party to any such agreement, indenture or instrument, other than any such
consent or approval that, if not obtained, would not be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it.
(H) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.1(H),
(1) as to the Company, its audited consolidated balance sheet as of
December 31, 1997 and the related statements of income, changes in
shareholders' equity and cash flows for the fiscal year ended December 31,
1997 (collectively, the "Holding Company Financial Reports"), and (2) as to
each of the Company's Subsidiaries that is a bank, its call report for the
fiscal year ended December 31, 1997, and all other financial reports filed
or to be filed subsequent to December 31, 1997, in the form filed with the
OCC (in each case, the "Bank Financial Reports" and together with the
Holding Company Financial Reports, the "Financial Reports") did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they
were made, not misleading; and each of the balance sheets in or
incorporated by reference into the Financial Reports (including the related
notes and schedules thereto) fairly presents and will fairly present the
financial position of the entity or entities to which it relates as of its
date, and each of the statements of income and changes in shareholders'
equity and cash flows or equivalent statement since the Bank Financial
Reports (including any related notes and schedules thereto) fairly presents
and will fairly present the results of operations, changes in shareholders'
equity and cash flows, as the case may be, of the entity or entities to
which it relates for the periods set forth therein, in each case for the
Holding Company Financial Reports in accordance with GAAP during the
periods involved, and in each case for the Bank Financial Reports in
accordance with regulatory accounting principles during the periods
involved, except in each case as may be noted therein, subject to normal
and recurring year-end audit adjustments in the case of unaudited
statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Except as Previously Disclosed on
Schedule 4.1(I), neither the Company nor any of its Subsidiaries has any
obligation or liability (contingent or otherwise) that, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect on
it, except (1) as reflected in its Holding Company Financial Reports prior
to the date of this Plan, and (2) for commitments and obligations made, or
liabilities incurred, in the ordinary course of business consistent with
past practice since December 31, 1997. Except as Previously Disclosed on
Schedule 4.1(I), since December 31, 1997, neither the Company nor any of
its Subsidiaries has incurred or paid any obligation or liability
(including any obligation or liability incurred in connection with any
acquisitions in which any
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form of direct financial assistance of the federal government or any agency
thereof has been provided to any Subsidiary) that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.1(J), since
December 31, 1997, no event has occurred that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on
Company or the Bank.
(K) PROPERTIES. Except as reserved against in its Holding Company
Financial Reports, the Company and each of its Subsidiaries have good and
marketable title, free and clear of all liens, encumbrances, charges,
defaults, or equities of any character, to all of the properties and
assets, tangible and intangible, reflected in its Holding Company Financial
Reports as being owned by the Company or its Subsidiaries as of the dates
thereof other than those that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect on it, except those
sold or otherwise disposed of in the ordinary course of business. All
buildings and all material fixtures, equipment, and other property and
assets that are held under leases or subleases by the Company or any of its
Subsidiaries are held under valid leases or subleases enforceable in
accordance with their respective terms, other than any such exceptions to
validity or enforceability that, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect on it.
(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed in
Schedule 4.1(L), no litigation, proceeding or controversy before any court
or governmental agency is pending that, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on the Company or
any of its Subsidiaries or that alleges claims under any fair lending law
or other law relating to discrimination, including the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and
the Home Mortgage Disclosure Act, and, to the best of its knowledge, no
such litigation, proceeding or controversy has been threatened; and except
as Previously Disclosed in Schedule 4.1(L), neither the Company nor any of
its Subsidiaries or any of its or their material properties or their
officers, directors or controlling persons is a party to or is subject to
any order, decree, agreement, board resolution, memorandum of understanding
or similar arrangement with, or a commitment letter or similar submission
to, any Regulatory Authority, and neither the Company nor any of its
Subsidiaries has been advised by any of such Regulatory Authorities that
such authority is contemplating issuing or requesting (or is considering
the appropriateness of issuing or requesting) any such order, decree,
agreement, board resolution, memorandum or understanding, commitment letter
or similar submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in Schedule
4.1(M), each of the Company and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and approvals
of, and has made all filing, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to own
its businesses presently conducted and that are material to the
business of it and its Subsidiaries taken as a whole; all such permits,
licenses, certificates of authority, orders and approvals are in full
force and effect and, to its best knowledge, no suspension or
cancellation of any of them is threatened; and all such filings,
applications and registrations are current;
(2) has received no notification or communication from any Regulatory
Authority or the staff thereof (a) asserting that the Company or any of
its Subsidiaries is not in compliance with any of the statutes,
regulations or ordinances which such Regulatory Authority enforces,
which, as a result of such noncompliance in any such instance,
individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on the Company or its Subsidiaries, (b)
threatening to revoke any license, franchise, permit or governmental
authorization, which revocation, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or
its Subsidiaries, or (c) requiring any of the Company or its
Subsidiaries (or any of its or their officers, directors or controlling
persons) to enter into a cease and desist order, agreement or
memorandum of understanding (or requiring the board of directors
thereof to adopt any resolution or policy);
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(3) is not required to give prior notice to any federal banking or
thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive;
(4) is in compliance in all material respects with all fair lending
laws or other laws relating to discrimination, including the Equal
Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act and the Home Mortgage Disclosure Act; and
(5) has adopted and is implementing a program to address any problems
associated with the capacity and capability of the computer software,
hardware, code and programs utilized by the Company, its Subsidiaries
and their vendors to properly process transactions after December 31,
1999.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in Schedule
4.1(N), none of the Company or its Subsidiaries, nor any of their
respective assets, businesses or operations, is a party to, or is bound or
affected by, or receives benefits under, any contract or agreement which is
a "material contract" within the meaning of Item 601(b)(10) of Regulation
S-K promulgated by the SEC. Neither the Company nor any of its Subsidiaries
is in default under any contract, agreement, commitment, arrangement,
lease, insurance policy or other instrument to which it is a party, by
which its respective assets, business or operations may be bound or
affected or under which it or any of its respective assets, business or
operations receives benefits, which default individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries, and there has not occurred any event in
connection with any material contract, agreement or amendment thereto, that
with the lapse of time or the giving notice or both, would constitute such
a default. Except as Previously Disclosed in Schedule 4.1(N), neither the
Company nor any of its Subsidiaries is subject to or bound by any contract
containing covenants that limit the ability of the Company or any of its
Subsidiaries to compete in any line of business or with any Person or that
involve any restriction of geographical area in which, or method by which,
the Company or any of its subsidiaries may carry on its business (other
than as may be required by law or any applicable Regulatory Authority).
(O) REPORTS. Since January 1, 1993, each of the Company and its
Subsidiaries has filed all reports and statements, together with any
amendments required to be made with respect thereto; that it was required
to file with (1) the Department, (2) the OCC, (3) the Federal Reserve
Board, and (4) any other Regulatory Authorities having jurisdiction with
respect to the Company and its Subsidiaries. As of their respective dates
(and without giving effect to any amendments or modifications filed after
the date of this Plan with respect to reports and documents filed before
the date of this Plan), each of such reports and documents, including the
financial statements, exhibits and schedules thereto, complied in all
material respects with all of the statutes, rules and regulations enforced
or promulgated by the Regulatory Authority with which they were filed and
did not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
(P) NO BROKERS. All negotiation relative to this Plan and the
transactions contemplated by this Plan have been carried on by it directly
with the other Parties and no action has been taken by it that would give
rise to any valid claim against any party for a brokerage commission,
finder's fee or other like payment.
(Q) EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.1(Q)(1) contains a complete list of all bonus,
deferred compensation, pension, retirement, profit-sharing, thrift
savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans, all employment or severance
contracts, all medical, dental, health and life insurance plans, all
other employee benefit plans, contracts or arrangements and any
applicable "change of control" or similar provisions in any plan,
contract or arrangement maintained or contributed to by the Company or
any of its Subsidiaries for the benefit of employees, former employees,
directors, former directors or their beneficiaries (the "Compensation
and Benefit Plans"). True and complete copies of all Compensation and
Benefit Plans of the Company and its
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Subsidiaries, including any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto,
have been supplied to the other Parties.
(2) All "employee benefit plans" within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), other than "multiemployer plans" within the meaning of
Section 3(37) of ERISA ("Multiemployer Plans"), covering employees or
former employees of the Company and it Subsidiaries (the "ERISA
Plans"), to the extent subject to ERISA, are in substantial compliance
with ERISA. Except as Previously Disclosed in Schedule 4.1(Q)(2) each
ERISA Plan which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan") and which is intended
to be qualified under Section 401(a) of the Internal Revenue Code of
1986 (as amended, the "Code") has received a favorable determination
letter from the Internal Revenue Service, and it is not aware of any
circumstances reasonably likely to result in the revocation or denial
of any such favorable determination letter or the inability to receive
such a favorable determination letter. There is no material pending or,
to its knowledge, threatened litigation relating to the ERISA Plans.
Neither the Company nor any of its Subsidiaries has engaged in a
transaction with respect to any ERISA Plan that could subject the
Company or any of its Subsidiaries to a tax or penalty imposed by
either Section 4975 of the Code or Section 502(i) of ERISA in an amount
which would be material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is expected to be incurred by the Company or any of its Subsidiaries
with respect to any ongoing, frozen or terminated "single-employer
plan," within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by any of them, or the single-employer plan of any
entity which is considered one employer with the Company under Section
4001(a)(15) of ERISA or Section 414 of the Code (an "ERISA Affiliate").
Neither the Company nor any of its Subsidiaries presently contributes
to a Multiemployer Plan, nor have they contributed to such a plan
within the past five calendar years. No notice of a "reportable event,"
within the meaning of Section 4043 of ERISA for which the 30-day
reporting requirement has not been waived, has been required to be
filed for any Pension Plan or by any ERISA Affiliate within the past
12-month period.
(4) All contributions required to be made under the terms of any
ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412
of the Code or Section 302 of ERISA. Neither the Company nor any of its
Subsidiaries has provided, or is required to provide, security to any
Pension Plan or to any single-employer plan of an ERISA Affiliate
pursuant to Section 401(a)(29) of the Code.
(5) Under each Pension Plan which is a single-employer plan, as of
the last day of the most recent plan year, the actuarially determined
present value of all "benefit liability," within the meaning of Section
4001(1)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan's most recent actuarial valuation)
did not exceed the then current value of the assets of such plan, and
there has been no material change in the financial condition of such
plan since the last day of the most recent plan year.
(6) Neither the Company nor any of its subsidiaries has any
obligations for retiree health and life benefits under any plan, except
as set forth in Schedule 4.1(Q)(6). There are no restrictions on the
rights of the Company or any of its Subsidiaries to amend or terminate
any such plan without incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.1(Q)(7) and except
as expressly contemplated by the Employment Agreements, neither the
execution and delivery of this Plan nor the consummation of the
transactions contemplated by this Plan will (a) result in any payment
(including severance, unemployment compensation, golden parachute or
otherwise) becoming due to any director or any employee of the Company
or any of its Subsidiaries under any Compensation and Benefit Plan or
otherwise from the Company or any of its Subsidiaries, (b) increase any
benefits
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otherwise payable under any Compensation and Benefit Plan, or (c)
result in any acceleration of the time of payment or vesting of any
such benefit.
(R) NO KNOWLEDGE. The Company and its Subsidiaries know of no reason why
the regulatory approvals referred to in Section 6.1 should not be obtained,
why Heritage will not be able to account for the Merger as a pooling of
interests, or why the Merger should not qualify as a reorganization under
Section 368(a) of the Code.
(S) LABOR AGREEMENTS. Neither the Company 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 the Company or any of its Subsidiaries the subject of a proceeding
asserting that it or any such Subsidiary has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or
seeking to compel it or such Subsidiary to bargain with any labor
organization as to wages and conditions of employment, nor is there any
strike or other labor dispute involving it or any of its Subsidiaries
pending or, to the best of its knowledge, threatened, nor is it aware of
any activity involving its or any of the Subsidiaries' employees seeking to
certify a collective bargaining unit or engaging in any other organization
activity.
(T) ASSET CLASSIFICATION. The Company and its Subsidiaries have
Previously Disclosed in Schedule 4.1(T) a list, accurate and complete in
all material respects, of the aggregate amounts of loans, extensions of
credit or other assets of the Company and its Subsidiaries that have been
classified by it as of June 30, 1998 (the "Asset Classification"); and no
amounts of loans, extensions of credit or other assets that have been
classified as of June 30, 1998 by any regulatory examiner as "Other Loans
Specially Mentioned," "Substandard," "Doubtful," "Loss," or words of
similar import are excluded from the amounts disclosed in the Asset
Classification, other than amounts of loans, extensions of credit or other
assets that were charged off by the Company or any Subsidiary prior to June
30, 1998 and which have been Previously Disclosed to Heritage.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses shown on the balance sheet in the June 30, 1998 Bank Financial
Reports was, and the allowance for possible loan losses to be shown on
subsequent Holding Company Financial Reports and Bank Financial Reports was
and will be, adequate in the opinion of the Board of Directors of the
Company to provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding (including accrued interest
receivable) as of the date thereof.
(V) INSURANCE. Each of the Company and its Subsidiaries has taken all
requisite action (including the making of claims and the giving of notices)
pursuant to its directors' and officers' liability insurance policy or
policies in order to preserve all rights thereunder with respect to all
matters that are known to the Company, except for such matters that,
individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect on the Company or its Subsidiaries. Set forth in
Schedule 4.1(V) is a list of all insurance policies maintained by or for
the benefit of the Company or its Subsidiaries or their respective
directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in Schedule 4.1(W), to the
best of the Company's knowledge, there is no person who, as of the date of
this Plan, may be deemed to be an "affiliate" of the Company as that term
is used in Rule 145 under the Securities Act.
(X) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. The Company and its
Subsidiaries have taken all necessary action to exempt this Plan and the
transactions contemplated by this Plan from, and this Plan and such
transactions are exempt from (1) any applicable state takeover laws,
including, but not limited to, RCW Ch. 23B.19, as amended, and (2) any
takeover-related provisions of the Company's and its Subsidiaries' articles
of incorporation.
(Y) NO FURTHER ACTION. The Company and its Subsidiaries have taken all
action so that the entering into of this Plan and the consummation of the
transactions contemplated by this Plan (including the Merger) or any other
action or combination of actions, or any other transaction, contemplated by
this Plan do not and will not (1) require a vote of shareholders (other
than as set forth in Section 6.1), or
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(2) result in the grant of any rights to any Person under the articles of
incorporation, charter or bylaws of the Company or any of its Subsidiaries
or under any agreement to which the Company or any such Subsidiaries is a
party, or (3) restrict or impair in any way the ability of the other
Parties to exercise the rights granted under this Plan.
(Z) ENVIRONMENTAL MATTERS.
(1) To the Company's knowledge, it and each of its Subsidiaries, the
Participation Facilities and the Loan/Fiduciary Properties are, and
have been, in compliance with all Environmental laws, except for
instances of noncompliance that are not reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on the Company
or its Subsidiaries.
(2) There is no proceeding pending or, to the Company's knowledge,
threatened before any court, governmental agency or board or other
forum in which the Company or any of its Subsidiaries or any
Participation Facility has been, or with respect to threatened
proceedings, reasonably would be expected to be, named as a defendant
or potentially responsible party (a) for alleged noncompliance
(including by any predecessor) with any Environmental law, or (b)
relating to the release or threatened release into the environment of
any Hazardous Material, whether or not occurring at or on a site owned,
leased or operated by the Company or any of its Subsidiaries or any
Participation Facility, except for such proceedings pending or
threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or its
Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(2).
(3) There is no proceeding pending or, to the Company's knowledge,
threatened before any court, governmental agency or board or other
forum in which any Loan/Fiduciary Property (or the Company or any of
its Subsidiaries in respect of any Loan/Fiduciary Property) has been,
or with respect to threatened proceedings, reasonably would be expected
to be, named as a defendant or potentially responsible party (a) for
alleged noncompliance (including by any predecessor) with any
Environmental Law, or (b) relating to the release or threatened release
into the environment of any Hazardous Material, whether or not
occurring at or on a Loan/Fiduciary Property, except for such
proceedings pending or threatened that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on
the Company or have been Previously Disclosed in Schedule 4.1(Z)(3).
(4) To the Company's knowledge, there is no reasonable basis for any
proceeding of a type described in subparagraph (2) or (3) of this
paragraph (Z), except as has been Previously Disclosed in Schedule
4.1(Z)(4).
(5) To the Company's knowledge, during the period of (a) ownership or
operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of
any Participation Facility by the Company or any of its Subsidiaries,
or (c) holding of a security or other interest in a Loan/Fiduciary
Property by the Company or any of its Subsidiaries, there have been no
releases of Hazardous Material in, on, under or affecting any such
property, Participation Facility or Loan/Fiduciary Property, except for
such releases that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or its
Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(5).
(6) To the Company's knowledge, prior to the period of (a) ownership
or operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of
any Participation Facility by the Company or any of its Subsidiaries,
or (c) holding of a security or other interest in a Loan/Fiduciary
Property by the Company or any of its Subsidiaries, there were no
releases of Hazardous Material in, on, under or affecting any such
property, Participation Facility or Loan) Fiduciary Property, except
for such releases that are not reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect on the Company or its
Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(6).
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(AA) TAX REPORTS. Except as Previously Disclosed in Schedule 4.1(AA), (1)
all reports and returns with respect to Taxes that are required to be filed
by or with respect to the Company or its Subsidiaries, including
consolidated federal income tax returns of the Company and its Subsidiaries
(collectively, the "Tax Returns"), have been duly filed or requests for
extensions have been timely filed and have not expired, for periods ended
on or prior to the most recent fiscal year-end, except to the extent all
such-failures to file, taken together, are not reasonably likely to have a
Material Adverse Effect on the Company or its Subsidiaries, and such Tax
Returns were true, complete and accurate in all material respects, (2) all
Taxes shown to be due on the Tax Returns have been paid in full, (3) the
Tax Returns have been examined by the Internal Revenue Service or the
appropriate state, local or foreign taxing authority, or the period for
assessment of the Taxes in respect of which such Tax Returns were required
to be filed has expired, (4) all Taxes due with respect to completed and
settled examinations have been paid in full, (5) no issues have been raised
by the relevant taxing authority in connection with the examination of any
of the Tax Returns which are reasonably likely, individually or in the
aggregate, to result in a determination that would have a Material Adverse
Effect on the Company or its Subsidiaries, except as reserved against in
the Holding Company Financial Reports of the Company, and (6) no waivers of
statutes of limitations (excluding such statutes that relate to years under
examination by the Internal Revenue Service) have been given by or
requested with respect to any Taxes of the Company or its Subsidiaries.
(BB) ACCURACY OF INFORMATION. The statements with respect to the Company
and its Subsidiaries contained in this Plan, the Schedules and any other
written documents executed and delivered by or on behalf of the Company or
any other Party pursuant to the terms of or relating to this Plan are true
and correct in all material respects, and such statements and documents do
not omit any material fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
(CC) DERIVATIVES CONTRACTS. None of the Company or its Subsidiaries is a
party to or has agreed to enter into a Derivatives Contract or owns
securities that are referred to as "structured notes" except for those
Derivatives Contracts and structured notes Previously Disclosed in Schedule
4.1(CC). Schedule 4.1(CC) includes a list of any assets of the Company or
its Subsidiaries that are pledged as security for each such Derivatives
Contract.
(DD) ACCOUNTING CONTROLS. Each of the Company and its subsidiaries has
devised and maintained systems of internal controls sufficient to provide
reasonable assurances that (1) all material transactions are executed in
accordance with management's general or specific authorization, (2) all
material transactions are recorded as necessary to permit the preparation
of financial statements in conformity with GAAP, and to maintain proper
accountability for items, (3) access to the material property and assets of
the Company and its Subsidiaries is permitted only in accordance with
management's general or specific authorization, and (4) the recorded
accountability for items is compared with the actual levels at reasonable
intervals and appropriate action is taken with respect to any differences.
(EE) COMMITMENTS AND CONTRACTS. Neither the Company nor any of its
Subsidiaries is a party or subject to any of the following (whether written
or oral, express or implied):
(1) except as Previously Disclosed in Schedule 4.1(EE)(1) and except
for the Employment Agreements, any employment contract or understanding
(including any understandings or obligations with respect to severance
or termination pay liabilities or fringe benefits) with any present or
former officer, director or employee (other than those which are
terminable at will by the Company or any such Subsidiary without any
obligation on the part of the Company or any such Subsidiary to make
any payment in connection with such termination);
(2) except as Previously Disclosed in Schedule 4.1(EE)(2), any real
or personal property lease with annual rental payments aggregating
$10,000 or more; or
(3) except as Previously Disclosed in Schedule 4.1(EE)(3), any
material contract with any affiliate.
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(FF) YEAR 2000 COMPLIANCE. The Company has adopted and is implementing a
program to address identified problems associated with the capacity and
capability of the computer software, hardware, code and programs utilized
by the Company, its Subsidiaries and their vendors to properly process
transactions after December 31, 1999.
4.2 HERITAGE REPRESENTATIONS AND WARRANTIES. Heritage hereby represents and
warrants to the Company and the Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of the Plan with
respect to Heritage are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. Heritage is duly qualified to
do business and is in good standing in the States of the United States and
foreign jurisdictions where the failure to be duly qualified, individually
or in the aggregate, is reasonably likely to have a Material Adverse Effect
on it. Each of Heritage and its Subsidiaries has in effect all federal,
state, local, and foreign governmental authorizations necessary for it to
own or lease its properties and assets and to carry on its business as it
is now conducted, the absence of which, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on Heritage.
(C) SHARES. The outstanding shares of the Heritage's capital stock are
validly issued and outstanding, fully paid and nonassessable, and subject
to no preemptive rights. Except as Previously Disclosed in Schedule 4.2(C),
there are no shares of capital stock or other equity securities of it or
its Subsidiaries outstanding and no outstanding Rights with respect
thereto.
(D) CORPORATE POWER. Heritage has the corporate power and authority to
carry on its business as it is now being conducted and to own all its
material properties and assets.
(E) CORPORATE AUTHORITY. This Plan and each of the Employment Agreements
have been authorized by all necessary corporate action of Heritage, and
each such agreement is a valid and binding agreement of Heritage,
enforceable against Heritage in accordance with its terms, subject to
bankruptcy, insolvency and other laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
(F) NO DEFAULTS. Subject to the receipt of approval by its shareholders
and the receipt of the required regulatory approvals referred to in Section
6.1, and the required filings under federal and state securities laws, and
except as Previously Disclosed in Schedule 4.2(F), the execution, delivery
and performance of this Plan and each of the Employment Agreements and the
consummation by Heritage and each of its Subsidiaries that is a Party of
the transactions contemplated by this Plan do not and will not
(1) constitute a breach or violation of, or a default under, any law, rule
or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of Heritage or of any of its
Subsidiaries or to which Heritage or any of its Subsidiaries or its or
their properties is subject or bound, which breach, violation or default is
reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Heritage, (2) constitute a breach or violation of, or a
default under, the articles of incorporation, charter or bylaws of it or
any of its Subsidiaries, or (3) require any consent or approval under any
such law, rule, regulation, judgment, decree, order, governmental permit or
license or the consent or approval of any other party to any such
agreement, indenture or instrument, other than any such consent or approval
that, if not obtained, would not be reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect on Heritage.
(G) FINANCIAL REPORTS. Except as Previously Disclosed in Schedule 4.2(G),
in the case of Heritage, its Registration Statement on form S-1 (as
amended) and its Quarterly Report on Form 10Q for the fiscal quarter ended
March 31, 1998, and all other documents filed or to be filed subsequent to
March 31, 1998 under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act, in the form filed with the SEC (in each such case, the "Heritage
Financial Reports"), did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading; and each of the
balance sheets in or incorporated by reference into the Heritage Financial
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Reports (including the related notes and schedules thereto) fairly presents
and will fairly present the financial position of the entity or entities to
which it relates as of its date, and each of the statement of income and
changes in shareholders' equity and cash flows or equivalent statements in
the Heritage Financial Reports (including any related notes and schedules
thereto) fairly presents and will fairly present the results of operations,
changes in shareholders, equity and changes in cash flows, as the case may
be, of the entity or entities to which it relates for the periods set forth
therein, in each case in accordance with GAAP, except as may be noted
therein, subject to normal and recurring year-end audit adjustments in the
case of unaudited statements.
(H) NO EVENTS. Except as Previously Disclosed on Schedule 4.2(H), since
December 31, 1997, no event has occurred which is reasonably likely to have
a Material Adverse Effect on it.
(I) LITIGATION; REGULATORY ACTION. Except as Previously disclosed in
Schedule 4.2(I) no litigation, proceeding or controversy before any court
or governmental agency is pending that, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on Heritage or its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the
Fair Housing Act, the Community Reinvestment Act and the Home Mortgage
Disclosure Act, and, to the best of its knowledge, no such litigation,
proceeding or controversy has been threatened; and except as Previously
Disclosed in Schedule 4.2(I), neither Heritage nor any of its Subsidiaries
or any of its or their material properties or their officers, directors or
controlling persons is a party to or is subject to any order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, any Regulatory Authority, and
neither Heritage nor any of its Subsidiaries has been advised by any of
such Regulatory Authorities that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting)
any such order, decree, agreement, memorandum of understanding, commitment
letter or similar submission.
(J) REPORTS. Since September 30, 1995, each of Heritage or its
Subsidiaries has filed all reports and statements, together with any
amendments required to be made with respect thereto, that is required to
file with (1) the FDIC, (2) the Department, (3) the Federal Reserve Board,
and (4) any other Regulatory Authorities having jurisdiction with respect
to Heritage and its Subsidiaries. As of their respective dates (and without
giving effect to any amendments or modifications filed after the date of
this Plan with respect to reports and documents filed before the date of
this Plan), each of such reports and documents, including the financial
statements, exhibits and schedules thereto, complied in all material
respects with all of the statutes, rules and regulations enforced or
promulgated by the Regulatory Authority with which they were filed land did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(K) ACCURACY OF INFORMATION. The statements with respect to Heritage and
its Subsidiaries contained in this Plan, the Schedules and any other
written documents executed and delivered by or on behalf of Heritage or any
other Party pursuant to the terms of this Plan are true and correct in all
material respects, and such statements and documents do not omit any
material fact necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading.
(L) DERIVATIVES CONTRACTS. None of Heritage or its Subsidiaries is a
party to or has agreed to enter into a Derivatives Contract or owns
securities that are referred to as "structured notes" except for those
Derivatives Contracts and structured notes Previously Disclosed in Schedule
4.2(L). Schedule 4.2(L) includes a list of any assets of Heritage or its
Subsidiaries that are pledged as security for each such Derivatives
Contract.
(M) ABSENCE OF UNDISCLOSED LIABILITIES. Neither Heritage nor any of its
Subsidiaries has any obligation or liability (contingent or otherwise)
that, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect on it, except (1) as reflected the Heritage
Financial Reports prior to the date of this Plan, and (2) for commitments
and obligations made, or liabilities incurred, in the ordinary course of
business consistent with past practice since December 31, 1997. Since
December 31,
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1997, neither Heritage nor any of its Subsidiaries has incurred or paid any
obligation or liability (including any obligation or liability incurred in
connection with any acquisitions in which any form of direct financial
assistance of the federal government or any agency thereof has been
provided to any Subsidiary) that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on it.
(N) YEAR 2000 COMPLIANCE. Heritage has adopted and is implementing a
program to address identified problems associated with the capacity and
capability of the computer software, hardware, code and programs utilized
by Heritage, its Subsidiaries and their vendors to properly process
transactions after December 31, 1999.
ARTICLE V. COVENANTS
Each of the Company and the Bank hereby covenants to Heritage, and Heritage
hereby covenants to the Company and the Bank, that:
5.1 BEST EFFORTS. Subject to the terms and conditions of this Plan and, in
the case of the Company and the Bank, to the exercise by their respective
Boards of Directors of such Boards' fiduciary duties, each party shall use its
best efforts in good faith to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or desirable, or
advisable under applicable laws, so as to permit consummation of the Merger by
January 31, 1999, and to otherwise enable consummation of the transactions
contemplated by this Plan, and shall cooperate fully with the other Parties to
that end.
5.2 THE PROXY. In the case of the Company: it shall promptly assist Heritage
in the preparation of a joint proxy statement (the "Proxy Statement") to be
mailed to the holders of the Company Common Stock and the holders of Heritage
Common Stock in connection with the transactions contemplated by this Plan and
to be filed by Heritage in a registration statement (the "Registration
Statement") with the SEC as provided in Section 5.8, which shall conform to all
applicable legal requirements. Heritage and Company shall call special meetings
(the "Meetings") of the holders, respectively, of Company Common Stock and
Heritage Common Stock to be held as soon as practicable for purposes of voting
upon the transactions contemplated by this Plan and Heritage and Company shall
use their best efforts to solicit and obtain shareholder votes in favor of the
transactions contemplated by this Plan and, subject to the exercise of their
fiduciary duties, the Boards of Directors of the Company and Heritage shall
recommend approval of such transactions by such respective holders.
5.3 REGISTRATION STATEMENT, COMPLIANCE WITH SECURITIES LAWS. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up
to and including the date of the Meetings, such Registration Statement, and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by or on behalf of the Company relating to
the Company or its Subsidiaries and by or on behalf of Heritage relating to
Heritage or its subsidiaries, (A) will comply in all material respects with the
provisions of the Securities Act and any other applicable statutory or
regulatory requirements, and (B) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading; provided,
however, in no event shall any Party be liable for any untrue statement of a
material fact or omission to state a material fact in the registration
Statement made in reliance upon, and in conformity with, written information
concerning another Party furnished by or on behalf of such other party
specifically for use in the Registration Statement.
5.4 REGISTRATION STATEMENT EFFECTIVENESS. In the case of Heritage: it will
advise the Company, promptly after Heritage receives notice thereof, of the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension
of the qualification of the Heritage Common Stock for offering or sale in any
jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
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5.5 PRESS RELEASES. The Company and the Bank will not, without the prior
approval of Heritage, and Heritage will not (and will cause its Subsidiaries
not to), without the prior approval of the Company, issue any press release or
written statement for general circulation relating to the transactions
contemplated by this Plan, except as otherwise required by law.
5.6 ACCESS; INFORMATION.
(A) Upon reasonable notice, the Company and the Bank shall afford
Heritage and Heritage shall afford the Company and Heritage's and the
Company's respective officers, employees, counsel, accountants and other
authorized representatives, access, during normal business hours throughout
the period up to the Effective Date, to all of their respective properties,
books, contracts, commitments and records. During such period, the Company
and the Bank shall furnish promptly to Heritage and Heritage shall furnish
promptly to the Company (and cause their respective accountants and other
agents to furnish promptly) (1) a copy of each material report, schedule
and other document filed by the Company and its Subsidiaries or Heritage
and its Subsidiaries with any Regulatory Authority, and (2) all other
information concerning the business, properties and personnel as Company or
Heritage, respectively, may reasonably request, provided that no
investigation pursuant to this Section 5.6 shall affect or be deemed to
modify or waive any representation or warranty made by the Company or the
Bank or Heritage in this Plan or the conditions to the obligations of the
Company and the Bank or Heritage to consummate the transactions
contemplated by this Plan; and
(B) The Company and Heritage will not use any information obtained
pursuant to this Section 5.6 for any purpose unrelated to the consummation
of the transactions contemplated by this Plan and, if this Plan is
terminated, will hold all confidential information and documents obtained
pursuant to this paragraph in confidence (as provided in Section 8.6)
unless and until such time as such information or documents become publicly
available other than by reason of any action or failure to act by Company
or Heritage or as it is advised by counsel that any such information or
document is required by law or applicable stock exchange rule to be
disclosed, and in the event of the termination of this Plan, Company and
Heritage will, upon request by the other, deliver to the other all
documents so obtained by it or destroy such documents and, in the case of
destruction, will certify such fact to the other.
5.7 TERMINATION FEE.
(A) Without the prior written consent of Heritage, the Company shall not,
and it shall cause its Subsidiaries not to, solicit, initiate or encourage
inquiries or proposals with respect to, or, except to the extent that the
Board of Directors of the Company determines in its good faith judgment
after receipt of advice in writing of counsel that such response is
reasonably required in order to discharge its fiduciary duties, furnish any
nonpublic information relating to or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or a substantial equity interest in, the Company
or any of its Subsidiaries or any merger or other business combination with
the Company or any of its Subsidiaries other than as contemplated by this
Plan("Acquisition Proposal"); it shall instruct its and its Subsidiaries'
officers, directors, agents, advisors and affiliates to refrain from doing
any of the foregoing; and it shall notify Heritage immediately if any such
inquiries or proposals are received by, or any such negotiations or
discussions are sought to be initiated with, the Company or any of its
Subsidiaries.
(B) If (1) an Acquisition Proposal occurs prior to the Meetings, (2) the
approval of the Company's shareholders contemplated by Section 6.1 is not
obtained at the special meeting of Company's shareholders, and (3) prior to
October 31, 1999, a Third Party acquires control of the Company or the Bank
by merger, purchase of assets, acquisition of stock or otherwise, then
unless the representations and warranties of Heritage in this Plan were
false in any material respect as of the date of Company's special meeting
of shareholders or Heritage was in material default of its covenants in
this Plan as of such date, the Company will promptly pay to Heritage the
amount of $400,000. For the purposes of this subsection (B), a Third Party
will be deemed to have acquired control of the Company or the Bank when the
Third Party possesses, directly or indirectly, the power to direct or cause
the direction of the management and
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policies of the Company or the Bank, whether through the ownership of
voting interests, by contract, or otherwise.
5.8 REGISTRATION STATEMENT PREPARATION; REGULATORY APPLICATIONS PREPARATION.
In the case of Heritage: Heritage shall, as promptly as practicable following
the date of this Plan, prepare and file the Registration Statement with the SEC
with respect to the shares of Heritage Common Stock to be issued to the holders
of Company Common Stock and Company Options pursuant to this Plan, and Heritage
shall use its best efforts to cause the Registration Statement to be declared
effective as soon as practicable after the filing thereof. Heritage shall, as
promptly as practicable following the date of this Plan, prepare and file all
necessary notices or applications with Regulatory Authorities having
jurisdiction with respect to the transactions contemplated by this Plan.
5.9 BLUE-SKY FILINGS. In the case of Heritage: Heritage shall use its best
efforts to obtain, prior to the effective date of the Registration Statement,
any necessary state securities laws or "blue sky" permits and approvals,
provided that Heritage shall not be required by virtue thereof to submit to
general jurisdiction in any state.
5.10 AFFILIATE AGREEMENTS. Company and the Bank will use their best efforts
to induce each person who may be deemed to be an "affiliate" of, respectively,
Company or the Bank for purposes of Rule 145 under the Securities Act, to
execute and deliver to Heritage on or before the mailing of the joint Proxy
Statement for the Meetings, an agreement in the form attached hereto as Exhibit
D for "affiliates" of the Company, restricting the disposition of such
affiliate's shares of Company Common Stock and the shares of Heritage Common
Stock to be received by such person in exchange for such person's shares of
Company Common Stock or Company Options. Heritage agrees to use its best
efforts to maintain the availability of Rule 145 for use by such "affiliates".
5.11 CERTAIN POLICIES OF THE COMPANY AND THE BANK. In the case of each of
the Company and the Bank: Each shall, at Heritage's request, modify and change
its loan, litigation and other reserve and real estate valuation policies and
practices (including loan classifications and levels of reserves), and
generally conform its operating, lending and compliance policies and
procedures, immediately prior to the Effective Date so as to be consistent on a
basis satisfactory to Heritage; provided, however, that prior to any such
modification or change, Heritage shall certify that the conditions to the
obligation of Heritage under Section 6.1 and 6.2 to consummate the transactions
contemplated by this Plan, other than the condition set forth in Section
6.1(G), have been satisfied or waived. The Company's and the Bank's
representations, warranties, covenants and conditions contained in this Plan
shall not be deemed to be untrue, breached or unsatisfied in any respect for
any purpose as a consequence of any modifications or changes undertaken
pursuant to this Section 5.11.
5.12 STATE TAKEOVER LAW. In the case of the Company: The Company shall not
take any action that would cause the transactions contemplated by this Plan to
be subject to any applicable state takeover statute, and the Company shall take
all necessary steps to exempt (or ensure the continued exemption of) the
transactions contemplated by this Plan from, or, if necessary, challenge the
validity or applicability of, any applicable state takeover law.
5.13 NO RIGHTS TRIGGERED. In the case of the Company: Except for those
consents of Third Parties Previously Disclosed on Schedule 4.1(G), the Company
shall take all necessary steps to ensure that the entering into of this Plan
and the consummation of the transactions contemplated by this Plan (including
the Merger) and any other action or combination of actions, or any other
transactions contemplated by this Plan, do not and will not (A) result in the
grant of any rights to any Person under the articles of incorporation or bylaws
of the Company or under any agreement to which the Company or any of its
Subsidiaries is a party, or (B) restrict or impair in any way the ability of
Heritage to exercise the rights granted under this Plan.
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5.14 SHARES LISTED. In the case of Heritage: Heritage shall use its best
efforts to cause to be listed, prior to the Effective Date, on the NASDAQ
National Market upon official notice of issuance the shares of Heritage Common
Stock to be issued to the holders of Company Common Stock and Company Options.
5.15 REGULATORY APPLICATIONS. Heritage shall, and shall cause its
Subsidiaries to (A) promptly prepare and submit applications to the appropriate
Regulatory Authorities for approval of the Merger, and (B) promptly make all
other appropriate filings to secure all other approvals, consents and rulings
that are necessary for the consummation of the Merger by Heritage.
5.16 REGULATORY DIVESTITURES. In the case of the Company: No later than the
Effective Date, the Company shall cease engaging in such activities as Heritage
shall advise the Company in writing are not permitted to be engaged in by
Heritage under applicable law following the Effective Date and, to the extent
required by any Regulatory Authority as a condition of approval of the
transactions contemplated by this Plan, the Company shall divest any Subsidiary
engaged in activities or holding assets that are impermissible for Heritage or
its Subsidiaries, on terms and conditions agreed to by Heritage; provided,
however, that prior to taking such action, Heritage shall certify that the
conditions to the obligations of Heritage under Sections 6.1 and 6.2 to
consummate the transactions contemplated by this Plan, other than the
conditions set forth in Section 6.1(G), have been satisfied or waived.
5.17 CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective Date,
each of the Company and Heritage shall, and shall cause its representatives
to, confer on a regular and frequent basis with representatives of the
other.
(B) Each of the Company and Heritage shall promptly notify the other of
(1) any material change in the business or operations of it or its
Subsidiaries, (2) any material complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any
Regulatory Authority relating to it or its Subsidiaries, (3) the initiation
or threat of material litigation involving or relating to it or its
Subsidiaries, or (4) any event or condition that might reasonably be
expected to cause any of its representations or warranties set forth in
this Plan not to be true and correct in all material respects as of the
Effective Date or prevent it or its Subsidiaries from fulfilling its or
their obligations under this Plan.
5.18 INDEMNIFICATION.
(A) From and after the Effective Date, Heritage shall indemnify, defend
and hold harmless the present and former directors, officers and employees
of the Company and its Subsidiaries (each, an "Indemnified Party") against
all costs or expenses (including reasonable attorneys' fees), judgments,
fines, losses, claims, damages or liabilities incurred in connection with
any claim, action, suite, proceeding or investigation, whether civil,
criminal, administrative or investigative, and arising out of matters
existing or occurring at or prior to the Effective Date (including the
transactions contemplated by this Plan), whether asserted or claimed prior
to, at or after the Effective Date, to the fullest extent that the Company
would have been permitted under Washington law and its articles of
incorporation or bylaws in effect on the date of this Plan to indemnify
such person (and Heritage will also advance expenses as incurred to the
fullest extent permitted under applicable law so long as the person to whom
expenses are advanced provides an undertaking to repay such advances within
a reasonable period of time if it is ultimately determined that applicable
law does not allow for such indemnification).
(B) Any Indemnified Party wishing to claim indemnification under
paragraph (A) of this Section 5.18, upon learning of such claim, action,
suit, proceeding or investigation, shall promptly notify Heritage thereof,
provided, however, that the failure so to notify shall not affect the
obligations of Heritage under paragraph (A) of this Section 5.18 (unless
such failure materially and adversely increases Heritage's liability under
such paragraph (A)). In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Date ), (1) Heritage shall have the right to assume the defense thereof and
Heritage shall pay all reasonable fees and expenses of such counsel for the
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Indemnified parties promptly as statements therefor are received; provided,
however, that Heritage shall be obligated pursuant to this paragraph (B) to
pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction for any single action, suit or proceeding, (2) the Indemnified
Parties will cooperate in the defense of any such matter, and (3) Heritage
shall not be liable for any settlement effected without its prior written
consent.
(C) If Heritage or any of its successors or assigns shall consolidate
with or merge into any other entity and shall not be the continuing or
surviving entity of such consolidation or merger or shall transfer all or
substantially all of its assets to any entity, then and in each case,
proper provision shall be made so that the successors and assigns of
Heritage shall assume the obligations set forth in this Section 5.18.
(D) Heritage shall pay all expenses, including attorneys' fees, that may
be incurred by any Indemnified party in enforcing the indemnity and other
obligations provided for in this Section 5.18. The rights of each
Indemnified Party under this Section 5.18 shall be in addition to any other
rights such Indemnified party may have under the articles of incorporation
or bylaws of the Company or under applicable Washington law.
(E) Effective as of the Effective Date, Heritage shall cause all the
directors of the Bank to become covered under the directors' and officers'
liability insurance policy maintained by Heritage for its own directors and
officers which includes coverage for prior acts.
5.19 APPOINTMENT OF DIRECTORS. Immediately after the Effective Date,
Heritage will cause its board to be expanded by one position and cause the
appointment of an outside (non-management) director of the Company who resides
in eastern Washington as recommended by the Company to the Board of Directors
of Heritage to hold office until such time as his or her successor is elected
and qualified.
5.20 OPERATION OF THE BANK. The Bank shall operate as a separately chartered
subsidiary of Heritage until at least December 31, 2003 unless the boards of
Heritage and/or the Bank in the exercise of their fiduciary duties determine to
combine the Bank with a subsidiary of Heritage prior to or following such date.
5.21 BENEFIT PLANS. Upon consummation of the Merger, all employees of the
Company and its Subsidiaries shall be deemed to be at-will employees of
Heritage and its Subsidiaries except for those employees who are parties to the
Employment Agreements (all such employees being "Continuing Employees"). From
and after the Effective Date, employees of the Company and its Subsidiaries
shall be entitled to participate in the pension, employee benefit and similar
plans (including employee stock ownership, stock option, bonus or other
incentive plans) on substantially the same terms and conditions as similarly
situated employees of Heritage and its Subsidiaries. For the purpose of
determining eligibility to participate in such plans and the vesting and
related calculations of benefits under such plans (but not for the accrual of
benefits), Heritage shall give effect to years of service with the Company or
the Company's Subsidiaries, as the case may be, as if such service were with
Heritage or its Subsidiaries.
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each party to consummate the transactions contemplated by this Plan are subject
to the written waiver by such Party or the fulfillment on or prior to the
Effective Date of each of the following conditions:
(A) SHAREHOLDER VOTES. This Plan shall have been duly approved by the
requisite votes of the Company Shareholders and Heritage's shareholders
under applicable law and the articles of incorporation and bylaws,
respectively, of the Company and Heritage.
(B) REGULATORY APPROVALS. The Parties shall have procured all necessary
regulatory consents and approvals by the appropriate Regulatory
Authorities, and any waiting periods relating thereto shall have expired;
provided, however, that no such approval or consent shall have imposed any
condition
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<PAGE>
or requirement not normally imposed in such transactions that, in the
opinion of Heritage, would deprive Heritage of the material economic or
business benefits of the transactions contemplated by this Plan.
(C) NO INJUNCTION. There shall not be in effect any order, decree or
injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated by this
Plan.
(D) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC or any other
Regulatory Authority.
(E) BLUE-SKY PERMITS. Heritage shall have received all state securities
laws and "blue sky" permits necessary to consummate the Merger.
(F) TAX OPINIONS. Heritage shall have received an opinion from Gerrish &
McCreary, P.C. and the Company shall have received an opinion from Gordon,
Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. to the effect that
(1) the Merger constitutes a reorganization under Section 368 of the Code,
and (2) no gain or loss will be recognized by shareholders of the Company
who receive shares of Heritage Common Stock in exchange for their shares of
the Company Common Stock, except that gain or loss may be recognized as to
cash received in the Merger, and, in rendering their opinions, Gerrish &
McCreary, P.C. and Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim,
P.L.L.C. may require and rely upon representations contained in
certificates of officers of Heritage, the Company and others. The Parties
acknowledge that the Merger Consideration received by Company Optionholders
in exchange for their Company Options will be a taxable event for each
Company Optionholder.
(G) NASDAQ LISTING. The shares of Heritage Common Stock to be issued
pursuant to this Plan shall have been approved for listing on the NASDAQ
National Market subject only to official notice of issuance.
(H) FAIRNESS OPINIONS. The Company shall have received, immediately prior
to the mailing of the Proxy Statement to the Company Shareholders, an
opinion of Columbia Financial Advisors to the effect that the financial
terms of the Merger are fair from a financial point of view to the Company
Shareholders. Heritage shall have received, immediately prior to the
mailing of the Proxy Statement to Heritage's shareholders, an opinion of
Ryan, Beck & Co. to the effect that the financial terms of the Merger are
fair from a financial point of view to Heritage's shareholders.
(I) EMPLOYMENT CONTRACTS. The Employment Agreements attached as Exhibits
D, E, F and G shall have been duly executed and delivered by all parties to
such Employment Agreements.
6.2 CONDITIONS TO OBLIGATIONS OF HERITAGE. The obligations of Heritage to
consummate the transactions contemplated by this Plan also are subject to the
written waiver by Heritage or the fulfillment on or prior to the Effective Date
of each of the following conditions:
(A) LEGAL OPINION. Heritage shall have received an opinion, dated the
Effective Date, of Gordon, Thomas, Honeywell, Malanca, Peterson, Daheim,
P.L.L.C., counsel for the Company and the Bank, in the form of Exhibit H.
(B) POOLING OPINION. Heritage shall have received the opinion of KPMG
Peat Marwick LLP, Heritage's independent auditors, dated as of the
Effective Date, to the effect that the Merger will be accounted for as a
pooling of interests under applicable accounting principles.
(C) OFFICERS' CERTIFICATE. (1) Each of the representations and warranties
contained in this Plan of the Company and the Bank shall be true and
correct in all material respects (except the representations and warranties
in Section 4.1(C) and those representations and warranties that are
qualified by reference to "Material Adverse Effect" or any other
materiality caveat, which shall be true and correct in all respects) as of
the date of this Plan and upon the Effective Date with the same effect as
though all such representations and warranties had been made on the
Effective Date, except for any such representations and warranties that
specifically relate to an earlier date, which shall be true and correct as
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of such earlier date and except as otherwise provided in Section 5.11, and
(2) each and all of the agreements and covenants of the Company and the
Bank to be performed and complied with pursuant to this Plan on or prior to
the Effective Date shall have been duly performed and complied with in all
material respects, and Heritage shall have received a certificate signed by
the chief executive officers, chief financial officers, and chief lending
officers of the Company and the Bank dated the Effective Date, to such
effect.
(D) RECEIPT OF AFFILIATE AGREEMENTS. Heritage shall have received from
each affiliate of the Company the agreement referred to in Section 5.10.
(E) ADVERSE CHANGE. During the period from December 31, 1997 to the
Effective Date, there shall not have been any material adverse change in
the financial position or results of operations of the Company or the Bank,
nor shall the Company or the Bank have sustained any loss or damage to its
properties, whether or not insured, that materially affects its ability to
conduct its business; and Heritage shall have received a certificate dated
the Effective Date signed by the Chief Executive Officers of the Company
and the Bank to such effect.
(F) DISSENTERS' RIGHTS. The number of shares of Company Common Stock for
which cash is to be paid because dissenters' rights of appraisal under the
Appraisal Laws shall have been effectively preserved as of the Effective
Date or because of payment of cash in lieu of fractional shares of Heritage
Common Stock shall not exceed in the aggregate 5% of the outstanding shares
of Company Common Stock.
(G) CAPITAL. The Company's Capital shall not be less than $4.750 million
on the Effective Date.
(H) ALLOWANCE FOR LOAN AND LEASE LOSSES. As of the Effective Date, the
Bank's allowance for possible loan and lease losses shall not be less than
1% of the Bank's total outstanding loans and leases and in all cases will
be adequate to absorb the Bank's anticipated loan and lease losses.
(I) DIRECTOR'S AGREEMENTS. Heritage shall have received from each
director of Company and the Bank (other than D. Michael Broadhead, who will
be a party to a separate employment agreement) the Director's Agreement
attached as Exhibit B.
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND THE BANK. The obligations of
the Company and the Bank to consummate the transactions contemplated by this
Plan also are subject to the written waiver by the Company and the Bank or the
fulfillment on or prior to the Effective Date of each of the following
conditions:
(A) LEGAL OPINION. The Company and the Bank shall have received an
opinion, dated the Effective Date, of Gerrish & McCreary, P.C., special
counsel for Heritage, in the form of Exhibit I.
(B) OFFICER'S CERTIFICATE. (1) Each of the representations and warranties
of Heritage contained in this Plan shall be true and correct in all
material respects (except the representations and warranties in Section
4.2(C) and those representations and warranties that are qualified by
reference to "Material Adverse Effect" or any other materiality caveat,
which shall be true and correct in all respects) as of the date of this
Plan and upon the Effective Date with the same effect as though all such
representations and warranties had been made on the Effective Date, except
for any such representations and warranties that specifically relate to an
earlier date, which shall be true and correct as of such earlier date, and
(2) each and all of the agreements and covenants of Heritage to be
performed and complied with pursuant to this Plan on or prior to the
Effective Date shall have been duly performed and complied with in all
material respects, and the Company and the Bank shall have received a
certificate signed by an executive officer of Heritage dated the Effective
Date, to such effect.
(C) ADVERSE CHANGE. During the period from December 31, 1997 to the
Effective Date, there shall not have been any material adverse change in
the financial position or results of operations of Heritage, nor shall
Heritage have sustained any loss or damage to its properties, whether or
not insured, that materially affects its ability to conduct its business;
and the Company shall have received a certificate dated the Effective Date
signed by the Chief Executive Officer of Heritage to such effect.
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<PAGE>
ARTICLE VII. TERMINATION
7.1 GROUNDS FOR TERMINATION. This plan may be terminated prior to the
Effective Date, either before or after receipt of required shareholder
approvals:
(A) MUTUAL CONSENT. By the mutual consent of Heritage and the Company, if
the Board of Directors of each so determines by vote of a majority of the
members of its entire board.
(B) BREACH. By Heritage or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of (A) a material breach by the other party of any representation or
warranty contained in this Agreement, which breach cannot or has not been
cured within 30 days after the giving of written notice to the breaching
party of such breach, or (B) a material breach by the other party of any of
the covenants or agreements contained in this Agreement, which breach
cannot be or has not been cured within 30 days after the giving of written
notice to the breaching party of such breach.
(C) DELAY. By Heritage or the Company, if its Board of Directors so
determines by vote of a majority of the members of the entire Board, in the
event that the Merger is not consummated by April 30, 1999; provided,
however, that a Party that is in material breach of any of the provisions
of this Plan shall not be entitled to terminate the Plan pursuant to this
Section 7.1(C).
(D) NO SHAREHOLDER APPROVAL. By Heritage or the Company, if its Board of
Directors so determines by a vote of a majority of the members of its
entire Board, in the event that either of the shareholder approvals
contemplated by Section 6.1 is not obtained at the Meetings, including any
adjournment or adjournments of the Meetings.
(E) MARKET PRICE DECLINE. By the Company, if the Average Closing Price
shall be less than $10.00. If the Company elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall
give to Heritage written notice on or before the second day after the
Determination Date. During the three-day period commencing on the date of
such notice, Heritage shall have the option of increasing the Merger
Consideration pursuant to Section 2.1(A)(3) of this Plan. If Heritage makes
an election contemplated by the preceding sentence, within such three-day
period, it shall give prompt written notice to Company of such election,
whereupon no termination shall have occurred pursuant to this Section and
this Agreement shall remain in effect in accordance with its terms.
7.2 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to Section 5.7 (Termination Fee), in
the event of the termination or abandonment of this Plan pursuant to the
provisions of Section 7.1, this Plan shall become void and have no force or
effect, without any liability on the part of the Parties or any of their
respective directors or officers or shareholder with respect to this Plan.
(B) OTHER CONSEQUENCES. Notwithstanding anything in this Plan to the
contrary, no termination of this Plan will relieve any Party of any
liability for breach of this Plan or for any misrepresentation under this
Plan or be deemed to constitute a waiver of any remedy available for such
breach or misrepresentation. In any action or proceeding in connection with
such breach or misrepresentation, the prevailing party will be entitled to
reasonable attorney's fees and expenses.
ARTICLE VIII. OTHER MATTERS
8.1 SURVIVAL. Only those agreements and covenants in the Plan that by their
express terms apply in whole or in part after the Effective Date shall survive
the Effective Date. All other representations, warranties, and covenants shall
be deemed only to be conditions of the Merger and shall not survive the
Effective Date. If the Merger is abandoned and this Plan is terminated, the
provisions of Article VII shall apply and the agreements of the Parties in
Sections 5.6(B), 8.5 and 8.6 shall survive such abandonment and termination.
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<PAGE>
8.2 WAIVER; AMENDMENT. Prior to the Effective Date, any provision of this
Plan may be (A) waived in writing by the Party benefited by the provision, or
(B) amended or modified at any time (including the structure of the
transactions contemplated by this Plan) by agreement in writing among the
Parties approved by their respective Boards of Directors and executed in the
same manner as this Plan, except that, after the vote by the shareholders of
the Company, the consideration to be received by the shareholders of the
Company for each share of Company Common Stock shall not thereby be altered.
Nothing contained in this Section 8.2 is intended to modify Heritage's rights
pursuant to Section 2.4.
8.3 COUNTERPARTS. This Plan may be executed in one or more counterparts,
including facsimile counterparts, each of which shall be deemed to constitute
an original. This Plan shall become effective when one counterpart has been
signed by each Party.
8.4 GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Washington, except as federal law may
be applicable.
8.5 EXPENSES. Each Party will bear all expenses incurred by it in connection
with this Plan and the transactions contemplated by this Plan, except printing
expenses which shall be shared equally between the Company and Heritage.
8.6 CONFIDENTIALITY. Except as otherwise provided in Section 5.6(B), each of
the Parties and their respective agents, attorneys and accountants will
maintain the confidentiality of all information provided in connection herewith
which has not been publicly disclosed.
8.7 NOTICES. All notices, requests and other communications hereunder to a
"Party" shall be in writing and shall be deemed to have been duly given when
delivered by hand, telegram, certified or registered mail, overnight courier,
telecopy or telex (confirmed in writing) to such party at its address set forth
below or such other address as such party may specify by notice to the Parties.
If to Heritage to:
Heritage Financial Corporation
201 5th Avenue SW
Olympia, WA 98501
Attn: John Clees, Director
President and CEO
Telephone: 360-943-1500
Telecopy: 360-705-9163
Copies to:
Jeffrey C. Gerrish
and
P. Thomas Parrish
Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38117
Telephone: 901-767-0900
Telecopy: 901-684-2339
If to the Company or the Bank, to:
Washington Independent Bancshares, Inc.
537 West Second
Toppenish, WA 98948
Attn: D. Michael Broadhead, Assistant Secretary
Telephone: 509-865-2511
Telecopy: 509-865-2086
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<PAGE>
Copies to:
Sandra L. Gallagher
Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.
1201 Pacific Avenue, Suite 2200
Tacoma, WA 98402
Telephone: 253-620-6519
Telecopy: 253-572-2230
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan represents
the entire understanding of the Parties with reference to transactions
contemplated by this Plan, and supersedes any and all other oral or written
agreements previously made. Nothing in this Plan, expressed or implied, is
intended to confer upon any Person, other than the Parties or their respective
successors, any rights, remedies, obligations or liabilities under or by reason
of this Plan.
8.9 HEADINGS. The headings contained in this Plan are for reference purposes
only and are not part of this Plan.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this instrument to be executed
in counterparts by their duly authorized officers, all as of the day and year
first above written.
Heritage Financial Corporation
By: /s/ John Clees
---------------------------------
Name: John Clees
Title: Director And Chairman Of
Acquisition Committee
Washington Independent Bancshares, INC.
By: /s/ Dennis H. Peterson
---------------------------------
Name: Dennis H. Peterson
Title: Vice President, Director
and Member of Acquisition
Committee
By: /s/ Glenn Rasmussen
---------------------------------
Name: Glenn Rasmussen
Title: Secretary/Treasurer,
Director and Chairman of
Acquisition Committee
Central Valley Bank, N.A.
By: /s/ D. Michael Broadhead
---------------------------------
Name: D. Michael Broadhead
Title: President
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<PAGE>
Exhibit A
APPROVAL BY DIRECTORS OF
WASHINGTON INDEPENDENT BANCSHARES, INC.
AND CENTRAL VALLEY BANK, N.A.
Each of the undersigned who together comprise all of the members of the
Board of Directors of Washington Independent Bancshares, Inc. (the "Company")
and Central Valley Bank, N.A., (the "Bank"), approves the Agreement and Plan of
Merger dated as of September 28, 1998 (the "Plan") between Heritage Financial
Corporation, the Company, and the Bank, and, except as otherwise required by
applicable law, including without limitation his fiduciary duties to the
Company's shareholders, agrees to (a) vote his shares of Company Common Stock
in favor of the transactions contemplated by the Plan (collectively, the
"Merger"), (b) recommend to the shareholders of the Company that they approve
the Plan, and (c) refrain from any actions or omissions inconsistent with the
foregoing.
This approval may be executed in one or more facsimile counterparts, each of
which shall be deemed an original, but all of which taken together will
constitute one and the same document.
/s/ /s/
_____________________________________ _____________________________________
Mark Bouchey Mel Lewis
/s/ /s/
_____________________________________ _____________________________________
D. Michael Broadhead Dennis Peterson
/s/ /s/
_____________________________________ _____________________________________
Ronald Brulotte Glenn Rasmussen
/s/ /s/
_____________________________________ _____________________________________
Gary Christensen Donald V. Rhodes
/s/ /s/
_____________________________________ _____________________________________
Frederick Goldberg Dennis Richardson
/s/ /s/
_____________________________________ _____________________________________
Daryl Jensen Frank Roberts
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<PAGE>
Exhibit B
DIRECTOR'S AGREEMENT
This Agreement is made and entered into as of the 28th day of September,
1998, between HERITAGE FINANCIAL CORPORATION, a Washington corporation
("Heritage") and ("Director"), a director of Washington Independent
Bancshares, Inc. ("Bancorp") and/or Central Valley Bank, N.A. (the "Bank")
(Bancorp and the Bank, collectively, being the "Company").
RECITALS
1. Pursuant to the terms of the Agreement and the Plan of Merger dated as of
the 28th day of September, 1998 (the "Plan") among Heritage and the Company,
Bancorp will be merged into Heritage, and the Bank will become the wholly owned
subsidiary of Heritage.
2. The obligation of Heritage to consummate the transactions contemplated by
the Plan is conditioned upon its receipt of non-competition agreements from
directors of the Company.
3. Director is a shareholder of Bancorp as well as a director of the
Company.
AGREEMENT
In consideration of the performance of Heritage under the Plan, Director
agrees that for a period of eighteen (18) months after he ceases to be a
director of the Bank or its successor, he will not, directly or indirectly,
become interested in, as a promoter, principal shareholder, director or officer
of, any financial institution that competes or will compete with Heritage or
any of its subsidiaries or their affiliates within Yakima County in the State
of Washington (the "County").
Director also agrees that during this eighteen (18) month period, Director
will not directly or indirectly solicit or attempt to solicit on behalf or for
the benefit of any financial institution (i) any employees of the Company,
Heritage, or any of their subsidiaries or affiliates, to leave their employment
for employment with another financial institution or (ii) any customers of the
Company, Heritage, or any of their subsidiaries or affiliates to remove their
business from the Company, Heritage, or any of their subsidiaries or
affiliates. Solicitation prohibited under this section includes solicitation by
any means, including, without limitation, meetings, telephone calls, letters or
other mailings, electronic communication of any kind, and internet
communications.
For purposes of this Agreement, the term "principal shareholder" means any
person who owns, directly or indirectly, five percent (5%) or more of the
outstanding shares of any voting class of equity security of a company.
Director recognizes and agrees that any breach of this Agreement by him will
entitle Heritage and any of its 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. The substantially prevailing
party in any such dispute will be entitled to recover from the other party its
costs and expenses, including specifically, reasonable attorneys' fees.
The provisions of this Agreement are severable, and the invalidity of any
provision will not affect the validity of other provisions. If a court of
competent jurisdiction deems that the duration, geographic scope, or other
restriction imposed by this Agreement is unenforceable, such court may reform
the restriction as is necessary to make such restriction enforceable.
Executed as of the 28th day of September, 1998.
DIRECTOR
HERITAGE FINANCIAL CORPORATION
_____________________________________
By: _________________________________
Its: ________________________________
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<PAGE>
Exhibit C
WASHINGTON INDEPENDENT BANCSHARES, INC.
AFFILIATE UNDERTAKINGS AND AGREEMENTS
A. The undersigned understands that he or she may be deemed to be an
"affiliate" of Washington Independent Bancshares, Inc. ("Company") with respect
to the matters set forth below, and further understands that:
1. Pursuant to the Agreement and Plan of Merger, dated September 28, 1998
(the "Plan"), between Heritage Financial Corporation ("Heritage"), the
Company, and its wholly owned subsidiary Central Valley Bank, N.A.,
execution of this document is a condition to the merger transaction
("Merger") contemplated by the Plan.
2. Pursuant to the Securities and Exchange Commission ("SEC") Rule 145
("Rule 145") under the Securities Act of 1933, as amended ("Act"), the
transferability of the Heritage Common Stock received by affiliates in
connection with the Merger will be restricted.
B. The undersigned hereby agrees and undertakes not to transfer, sell or
otherwise dispose of any shares of Heritage Common Stock received in connection
with the Merger, except (a) pursuant to an effective Registration Statement
under the Act covering such Heritage Common Stock, or (b) as permitted by the
provisions of Rule 145 under the Act, or (c) if the undersigned furnishes to
Heritage an opinion of counsel, satisfactory to counsel for Heritage, to the
effect that registration under the Act is not required for the proposed sale,
transfer or other disposition, or (d) if the undersigned furnishes to Heritage
a copy of a "no-action" or interpretive letter from the staff of the SEC to the
effect that the proposed sale, transfer or other disposition of such Heritage
Common Stock may be effected without registration under the Act.
C. The undersigned hereby agrees that the undersigned will not sell,
transfer, or otherwise dispose of the undersigned's interests in, or reduce the
undersigned's risk relative to, any of the shares of Heritage Common Stock into
which the undersigned's shares of Company Common Stock are converted upon
consummation of the Merger until such time as the requirements of SEC
Accounting Series Release Nos. 130 and 135 ("ASR 130 and 135") have been met.
The undersigned understands that ASR 130 and 135 relate to publication of
financial results of post-Merger combined operations of Heritage and Company.
Heritage agrees that it will publish such results within 45 days after the end
of the first full fiscal quarter of Heritage containing the required period of
post-Merger combined operations.
D. The undersigned is not aware of any plan or intention on the part of any
Company shareholder or shareholders collectively holding 50% or more of the
outstanding shares of the Company to sell or otherwise dispose of Heritage
Common Stock to be received in the Merger.
E. The undersigned understands that Heritage will furnish to the undersigned
upon his or her written request a written statement that Heritage has complied
with the reporting requirements specified in paragraph (c)(1) of Rule 144 under
the Act, and that Heritage will so comply as long as the undersigned holds the
Heritage Common Stock received in connection with the Merger.
F. The undersigned further understands and agrees that Heritage will issue
stop-transfer instructions to its transfer agent respecting shares of Heritage
Common Stock issued to the undersigned in connection with the Merger, and that
the restrictive legend set forth below will be placed on certificates delivered
to the undersigned evidencing such shares of Heritage Common Stock:
"The shares evidenced by this certificate were received by an "affiliate"
of a corporation in a transaction (the acquisition of Washington
Independent Bancshares, Inc.) pursuant to Rule 145 of the Securities and
Exchange Commission under the Securities Act of 1933, as amended. The
transferability, sale or other disposition of these shares is thus
restricted. Reference is made to a letter agreement and undertaking signed
by such affiliate, a copy of which is on file in the principal office of
Heritage Financial Corporation, for a description of the restrictions on
the transfer of shares represented hereby."
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G. The term "Heritage Common Stock" as used in this letter shall mean and
include not only the common stock of Heritage as presently constituted, but
also any other stock which may be issued in exchange for, in lieu of, or in
addition to, all or any party of such common stock.
H. This Agreement may be signed in one or more facsimile counterparts, each
of which will be deemed an original, but all of which taken together will
constitute one and the same document.
IN WITNESS WHEREOF, I have signed my name on this day of , 1998.
_____________________________________
Director, Executive Officer, or
Principal Shareholder
_____________________________________
Print Name
Accepted and Agreed To:
HERITAGE FINANCIAL CORPORATION
By: _________________________________
Its: ________________________________
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Exhibit D
CENTRAL VALLEY BANK, N.A.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), signed September 28, 1998, between
CENTRAL VALLEY BANK, N.A. (the "Bank") and D. MICHAEL BROADHEAD ("Executive")
takes effect on the effective date of the Merger ("Effective Date").
RECITALS
A. Washington Independent Banshares, Inc. which is the parent company of the
Bank, intends to merge into Heritage Financial Corporation. ("Heritage"), and
the Bank will thereby become the wholly owned subsidiary of Heritage (the
"Merger") under the terms of the Agreement and Plan of Merger dated as of
September 28, 1998 ("Plan") between the parties.
B. Executive is presently the Bank's President. The Bank wishes to continue
Executive's employment in that capacity under the terms and conditions of this
Agreement.
C. Under the terms of this Agreement, Executive wishes to continue his
employment with the Bank (or its successor, if any) for the period provided in
this Agreement.
AGREEMENT
The parties agree as follows.
1. Employment. The Bank will continue Executive's employment during the Term
and any Extended Term (as defined below), and Executive accepts employment by
the Bank, on the terms and conditions set forth in this Agreement. Executive's
title will be "President."
2. Effective Date and Term.
(a) Term. The initial term of this Agreement ("Term") commences on the
Effective Date and terminates on December 31, 2002.
(b) Automatic Renewal. This Agreement shall renew automatically at the
end of the Term for one additional year (an "Extended Term") and shall
renew automatically at the end of the Extended Term for additional
successive one year terms (each successive one year term also an "Extended
Term") unless Executive gives the Bank or Bank gives the Executive written
notice at least 90 days before the end of the Term or an Extended Term (as
the case may be) of his or its intent that this Agreement not be renewed.
(c) Abandonment of the Merger. If the Plan terminates before Closing,
this Agreement will not become effective and will be void.
3. Duties. Executive will faithfully and diligently perform the duties
assigned to Executive from time to time by the Bank's board of directors, by
Heritage's board of directors, or by the President or CEO of Heritage. In the
event that Heritage elects to merge the Bank into Heritage Bank or some other
affiliate or Heritage, then the title and duties of Executive with respect to
the entity surviving such merger shall be determined by the President and CEO
of Heritage or his designee. Executive will use his best efforts to perform his
duties and will devote his full time and attention to these duties during
working hours during the Term and any Extended Term. These duties will include,
without limitation, the following:
(a) Bank Performance. Executive will be responsible for all aspects of
the Bank's performance, including, without limitation, directing that daily
operational and managerial matters are performed in a manner consistent
with Heritage's and the Bank's policies. These duties will also include
formulating and
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implementing the Bank's expansion strategies and performing all other tasks
in connection with the Bank's management and affairs that are normal and
customary to Executive's position.
(b) Integration with Heritage. Executive will participate in the
integration of the Bank's commercial banking activities with Heritage's
existing operations.
(c) Development and Preservation of Business. Executive will be
responsible for the development and preservation of banking relationships
and other business development efforts (including appropriate civic and
community activities) in the Bank's market areas.
(d) Report to Board. Executive will report directly to the Bank's CEO or
to the CEO of Heritage as designated from time to time. The Bank's or
Heritage's board of directors may, from time to time, modify Executive's
title or add to, delete from, or modify Executive's performance
responsibilities to accommodate management succession, as well as any other
management objectives of the Bank or of Heritage subject to Section 10(b)
of this Agreement. Executive will assume any additional positions, duties,
and responsibilities as may reasonably be requested of him with or without
additional compensation, as appropriate and consistent with Sections 3(a),
3(b), and 3(c) of this Agreement.
4. Salary; Vacation. During the Term, Executive will receive a base salary
of not less than $110,000 per year, to be paid in accordance with the Bank's
regular payroll schedule for executives. During any Extended Term, Executive
will receive a base salary of not less than his base salary at the time of the
commencement of the then current Extended Term, to be paid in accordance with
the Bank's regular payroll schedule for executives. Executive will be entitled
to four weeks of vacation during the Term or any Extended Term. Payment, if
any, for unused vacation time will be according to bank policy in effect at the
time.
5. Incentive Compensation. The Bank's board of directors, subject to
ratification by Heritage's board of directors, will determine the amount of
bonus, if any, to be paid by the Bank to Executive for each year during the
Term or any Extended Term. Executive will participate in any existing or
subsequent management incentive plan of Heritage or Bank to the same extent as
officers with similar responsibilities. Executive's bonus, if any, will reflect
Executive's contribution to the performance of the Bank during the year.
6. Income Deferral and Benefits.
(a) Subject to eligibility requirements and in accordance with and
subject to any policies adopted by the Bank's or Heritage's board of
directors with respect to any benefit plans or programs, Executive will be
entitled to receive benefits (including stock options) comparable to those
offered to other executive officers of Heritage and its subsidiaries with
position and duties comparable to those of Executive. Neither the Bank nor
Heritage through this Agreement obligates itself to make any particular
benefits available to its employees or executive officers.
(b) In addition to the regular compensation and benefits provided to
Executive by this Agreement, Bank shall pay Executive on December 31, 2005
(whether or not Executive is still employed with Bank at or prior to that
time) a sum (not to exceed $200,000) of $40,000, plus $10,000 for each full
year of service at Bank or its successor completed by Executive.
(c) In the event Executive dies during the term of this Agreement, Bank
shall pay to Executive's estate the sum of $100,000 or the amount which has
been vested pursuant to paragraph 6(b) whichever is greater with the amount
not to exceed $200,000. Such amount will be payable within 90 days of death
and shall be in lieu of any amount payable pursuant to paragraph 6(b)
above.
(d) Bank agrees to provide Executive with a vehicle for Executive's
business use.
7. Business Expenses. The Bank will reimburse Executive for ordinary and
necessary expenses (including, without limitation, travel, entertainment, and
similar expenses) incurred in performing and promoting the Bank's business.
Executive will present from time to time itemized accounts of these expenses,
subject to any limits of Bank policy or the rules and regulations of the
Internal Revenue Service.
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8. Termination.
(a) Termination By Bank for Cause. If, before the end of the Term or any
Extended Term, the Bank terminates Executive's employment for Cause or
Executive terminates his employment without Good Reason, the Bank will pay
Executive the salary earned and expenses reimbursable under this Agreement
incurred through the date of Executive's termination. Executive will have
no right to receive compensation or other benefits for any period after
termination under this section 8(a), and Executive will be subject to the
noncompetition and nonsolicitation requirements of Section 12 through the
remainder of the Term or Extended Term in which termination occurs and for
the three-year period following such Term or Extended Term in which
termination occurs.
(b) Other Termination By Bank. If before the end of the Term or any
Extended Term, the Bank terminates Executive's employment without Cause or
Executive terminates his employment for Good Reason (defined below), the
Bank will pay Executive for the remainder of the Term or Extended Term in
which termination occurs the salary Executive would have been entitled to
under this Agreement if his employment had not terminated. If Executive is
terminated pursuant to this Section 8(b), Executive will be subject to the
noncompetition and nonsolicitation requirements of Section 12 only through
the remainder of the Term or Extended Term in which termination occurs.
(c) Death or Disability. This Agreement terminates (1) if Executive dies
or (2) if Executive is unable to perform his duties and obligations under
this Agreement for a period of 90 days as a result of a physical or mental
disability arising at any time during the term of this Agreement (such
inability being "Disabled"), unless with reasonable accommodation Executive
could continue to perform his duties under this Agreement and making these
accommodations would not require the Bank to expend any funds. The Bank or
its successor's Board of Directors, acting in good faith, will make the
final determination of whether Executive is Disabled, and for purposes of
making such determination, may require Executive to submit to a physical
examination by a physician mutually agreed upon by Executive and the Board
of Directors. If termination occurs under this Section 8(c), Executive or
his estate will be entitled to receive only the compensation and benefits
earned and expenses reimbursable through the date of such termination.
(d) Termination Related to a Change in Control.
(1) Termination by Bank. If the Bank, or its successor in interest by
merger, or its transferee in the event of a purchase and assumption
transaction, for reasons other than Executive's death, disability, or
Cause (1) terminates Executive's employment within one year following a
Change in Control (as defined below) or (2) terminates Executive's
employment before the Change in Control but on or after the date that
any party either announces or is required by law to announce any
prospective Change in Control transaction and a Change in Control
occurs within twelve months after the termination, the Bank will pay
Executive an amount equal to 36 months of Executive's Base Salary for
the calendar year in which Executive's employment is terminated (the
"Change in Control Payment").
(2) Termination by Executive. If Executive terminates Executive's
employment, with or without Good Reason, within one year following a
Change in Control, the Bank will pay Executive the Change in Control
Payment.
(e) Limitations on Payments Related to Change in Control. Notwithstanding
any other provision of this Agreement:
(1) the Change in Control Payment will be less than the amount that
would cause it to be a "parachute payment" within the meaning of
Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code");
(2) the Change in Control Payment will be reduced by any salary that
Executive receives from the Bank or its successor after the Change in
Control; and
(3) Executive's right to receive the Change in Control Payment
terminates (i) immediately, if before the Change in Control transaction
closes, Executive terminates his employment without Good
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Reason or the Bank terminates Executive's employment for Cause, or (ii)
one year after a Change in Control occurs.
(f) Definition of "Change in Control". "Change in Control" means a change
"in the ownership or effective control" or "in the ownership of a
substantial portion of the assets" of Heritage, within the meaning of
Section 280G of the Internal Revenue Code.
(g) Return of Bank Property. If and when Executive ceases for any reason
to be employed by Bank, Executive must return to the Bank all keys, pass
cards, identification cards and any other property of the Bank or Heritage.
At the same time, Executive also must return to the Bank all originals and
copies (whether in hard copy, electronic or other form) of any documents,
drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals,
and specifications which constitute proprietary information or material of
the Bank or Heritage. The obligations in this paragraph include the return
of documents and other materials which may be in Executive's desk at work,
in Executive's car or place of residence, or in any other location under
Executive's control.
9. Definition of "Cause". "Cause" means any one or more of the following:
(a) Willful misfeasance or gross negligence in the performance of
Executive's duties;
(b) Conviction of a crime in connection with his duties;
(c) Conduct demonstrably and significantly harmful to the Bank, as
reasonably determined by the Bank's or Heritage's board of directors on the
advice of legal counsel of Bank or Heritage; or
(d) Permanent disability, meaning a physical or mental impairment which
renders Executive incapable of substantially performing the duties required
under this Agreement, and which is expected to continue rendering Executive
so incapable for the reasonably foreseeable future.
10. Definition of "Good Reason". "Good Reason" means only any one or more of
the following:
(a) Reduction, without Executive's consent, of Executive's salary or
elimination of any compensation or benefit plan benefiting Executive,
unless the reduction or elimination is generally applicable to
substantially all similarly situated Bank Executives (or Executives of a
successor or controlling entity of the Bank) formerly benefited;
(b) The assignment to Executive without his consent of any authority or
duties materially inconsistent with Executive's position as of the date of
this Agreement; or
(c) A relocation or transfer of Executive's current business office that
would require Executive to commute on a regular basis more than 60 miles
each way from his current business office at the Bank on the date of this
Agreement, unless Executive consents to the relocation or transfer.
11. Confidentiality. Executive will not, after signing this Agreement,
including during and after its Term, use for his own purposes or disclose to
any other person or entity and confidential information concerning the Bank or
Heritage or their business operations or customers, unless (1) the Bank or
Heritage consents to the use or disclosure of their respective confidential
information, (2) the use or disclosure is consistent with Executive's duties
under this Agreement, or (3) disclosure is required by law or court order.
12. Noncompetition.
(a) Participation in a Competition Business. During the Term or any
Extended Term and for three years after expiration of Term or any Extended
Term (such three years being the "Post-Term Period") (regardless of whether
Executive's employment ends at the end of the Term or any Extended Term or
at some other point after the end of the Term or any Extended Term),
Executive will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including,
without limitation, as a shareholder, member, partner, director, officer,
manager, investor, organizer, "founder," employee, consultant, or agent;
provided, however, that Executive may acquire and own an interest not to
exceed 2% of the total equity interest in any publicly held entity whose
equity
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securities are listed on a national securities exchange (even if such
entity is a Competing Business). Executive's noncompetition obligations for
the Post-Term Period will not apply if (1) Executive's employment during
the Term or any Extended Term is terminated without Cause, (2) Executive
terminates his employment during the Term or any Extended Term for Good
Reason, or (3) the Bank or its successor declines to employ Executive after
expiration of the Term or any Extended Term.
(b) No Solicitation. During the Term or any Extended Term and the Post-
Term Period (regardless of whether Executive's employment ends at the end
of the Term or any Extended Term or at some other point after the end of
the Term or any Extended Term) Executive will not directly or indirectly
solicit or attempt to solicit (1) any employees located in Yakima County in
Washington State (the "County") of the Bank, Heritage, or any of Heritage's
Subsidiaries, to leave their employment or (2) and customers located in
Yakima County of the Bank , Heritage, or any of Heritage's Subsidiaries to
remove their business from the Bank, Heritage, or any of Heritage's
Subsidiaries, or to participate in any manner in a Competing Business.
Solicitation prohibited under this Section includes solicitation by any
means, including, without limitation, meetings, letters or other mailings,
electronic communications of any kind, and internet communications.
Executive's nonsolicitation obligations for the Post-Term Period will not
apply if (1) Executive's employment during the Term or any Extended Term is
terminated without Cause, (2) Executive terminates his employment during
the Term or any Extended Term for Good Reason, or (3) the Bank or its
successor declines to employ Executive after expiration of the Term or any
Extended Term.
(c) Employment Outside the County. Nothing in this Agreement prevents
Executive from accepting employment after the end of the Term or any
Extended Term outside the County from a Competing Business, as long as
Executive will not (a) act as an employee or other representative or agent
of the Competing Business within the County (b) have any responsibilities
for the Competing Business' operations within the County.
(d) Competing Business. "Competing Business" means any financial
institution or trust company that competes with, or will compete in the
County with, Heritage, the Bank, or any of Heritage's Subsidiaries . The
term "Competing Business" includes, without limitation, any start-up or
other financial institution or trust company in formation.
13. Enforcement.
(a) The Bank and Executive stipulate that, in light of all of the facts
and circumstances of the relationships between Executive and the Bank, the
agreements referred to in Sections 11 and 12 (including without limitation
their scope, duration and geographic extent) are fair and reasonably
necessary for the protection of the Bank's and Heritage's confidential
information, goodwill and other protectable interests. If a court of
competent jurisdiction should decline to enforce any of those covenants and
agreements, Executive and the Bank request the court to reform these
provisions to restrict Executive's use of confidential information and
Executive's ability to compete with the Bank and Heritage to the maximum
extent, in time, scope of activities, and geography, the court finds
enforceable.
(b) Executive acknowledges that the Bank and Heritage will suffer
immediate and irreparable harm that will not be compensable by damages
alone, if Executive repudiates or breaches any of the provisions of
Sections 11 or 12 or threatens or attempts to do so. For this reason, under
these circumstances, the Bank and Heritage, in addition to and without
limitation of any other rights, remedies or damages available to it at law
or in equity, will be entitled to obtain temporary, preliminary, and
permanent injunctions in order to prevent or restrain the breach, and
neither the Bank nor Heritage will be required to post a bond as a
condition for the granting of this relief.
14. Adequate Consideration. Executive specifically acknowledges the receipt
of adequate consideration for the covenants contained in Sections 11 and 12 and
that the Bank is entitled to require him to comply with these Sections. These
Sections will survive termination of this Agreement. Executive represents that
if his employment is terminated, whether voluntarily or involuntarily,
Executive has experience and capabilities sufficient to enable Executive to
obtain employment in areas which do not violate this Agreement and the Bank's
enforcement of a remedy by way of injunction will not prevent Executive from
earning a livelihood.
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15. Arbitration.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this
Agreement, to arbitration under the American Arbitration Association's
rules then in effect (or under any other form of arbitration mutually
acceptable to the parties). A single arbitrator agreed on by the parties
will conduct the arbitration. If the parties cannot agree on a single
arbitrator, each party must select one arbitrator and those two arbitrators
will select a third arbitrator. This third arbitrator will hear the
dispute. The arbitrator's decision is final (except as otherwise
specifically provided by law) and binds the parties, and either party may
request any court having jurisdiction to enter a judgment and to enforce
the arbitrator's decision. The arbitrator will provide the parties with a
written decision naming the substantially prevailing party in the action.
This prevailing party is entitled to reimbursement from the other party for
its costs and expenses, including reasonable attorney's fees.
(b) Governing Law. All proceedings will be held at a place designated by
the arbitrator in Thurston County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
(c) Exception to Arbitration. Notwithstanding the above, if Executive
violates Sections 11 or 12, the Bank will have the right to initiate the
court proceedings described in Section 13(b), in lieu of an arbitration
proceeding under this Section 15. The Bank may initiate these proceeding
wherever appropriate within Washington State; but Executive will consent to
venue and jurisdiction in Thurston County, Washington.
16. Miscellaneous Provisions.
(a) Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms
in the Plan.
(b) Entire Agreement. This Agreement constitutes the entire understanding
between the parties concerning its subject matter and supersedes all prior
agreements. Accordingly, Executive specifically waives the terms of and all
of his rights under all employment, change-in-control and salary
continuation agreements, whether written or oral, he has entered into with
the Bank or any of its Subsidiaries or affiliates.
(c) No Right to Continued Employment. Nothing in this Agreement, express
or implied, is intended to confer upon Executive the right to continued
employment with the Bank after the Initial Term.
(d) Binding Effect. This Agreement will bind and inure to the benefit of
the Bank's, Heritage's, and Executive's heirs, legal representatives,
successors and assigns.
(e) Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due
under it, this party will be entitled to reimbursement from the other party
for any and all of its out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection
with the enforcement or collection.
(f) Waiver. Any waiver by a party of its rights under this Agreement must
be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not
operate as a waiver of any other breach by the breaching party.
(g) Counsel Review. Executive acknowledges that he has had the
opportunity to consult with independent counsel with respect to the
negotiation, preparation, and execution of this Agreement.
(h) Assignment. The services to be rendered by executive under this
Agreement are unique and personal. Accordingly, Executive may not assign
any of his rights or duties under this Agreement.
(i) Amendment. This Agreement may not be modified or amended except by a
written instrument signed by both parties with the prior written consent of
Heritage.
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(j) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(k) Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that
certain matters may be governed by federal law. Except as otherwise
provided in Section 15(c), the parties must bring any legal proceeding
arising out of this Agreement in Thurston County, Washington, and the
parties will submit to jurisdiction in that county.
(l) Counterparts. This Agreement may be executed in one or more facsimile
counterparts, each of which will be deemed an original, but all of which
taken together will constitute one and the same document.
Signed: September 28, 1998:
CENTRAL VALLEY BANK, N.A.
/s/
_____________________________________
By: Donald V. Rhodes
Its: Chief Executive Officer
D. MICHAEL BROADHEAD, individually
/s/
_____________________________________
D. Michael Broadhead
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Exhibit E
CENTRAL VALLEY BANK, N.A.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), signed September 28, 1998, between
CENTRAL VALLEY BANK, N.A. (the "Bank") and DAVID J. PERRY ("Employee") takes
effect on the effective date of the Merger ("Effective Date").
RECITALS
A. Washington Independent Banshares, Inc. which is the parent company of the
Bank, intends to merge into Heritage Financial Corporation ("Heritage"), and
the Bank will thereby become the wholly owned subsidiary of Heritage (the
"Merger") under the terms of the Agreement and Plan of Merger dated as of
September 28, 1998 ("Plan") between the parties.
B. Employee is presently the Bank's Senior Vice President. The Bank wishes
to continue Employee's employment in that capacity under the terms and
conditions of this Agreement.
C. Under the terms of this Agreement, Employee wishes to continue his
employment with the Bank (or its successor, if any) for the period provided in
this Agreement.
AGREEMENT
The parties agree as follows.
1. Employment. The Bank will continue Employee's employment during the Term,
and Employee accepts employment by the Bank, on the terms and conditions set
forth in this Agreement. Employee's title will be "Senior Vice President."
2. Effective Date and Term.
(a) Term. The term of this Agreement ("Term") commences on the Effective
Date and terminates on December 31, 2001.
(b) Automatic Renewal. This Agreement shall renew automatically at the
end of the Term for one additional year (an "Extended Term") and shall
renew automatically at the end of the Extended Term for additional
successive one year terms (each successive one year term also an "Extended
Term") unless Employee gives the Bank or Bank gives the Employee written
notice at least 90 days before the end of the Term or an Extended Term (as
the case may be) of his or its intent that this Agreement not be renewed.
(c) Abandonment of the Merger. If the Plan terminates before Closing,
this Agreement will not become effective and will be void.
3. Duties. Employee will faithfully and diligently perform the duties
assigned to Employee from time to time by the Bank's President or his designee
as designated from time to time, consistent with the duties that have been
normal and customary to Employee's position. Employee will use his best efforts
to perform his duties and will devote his full time and attention to these
duties during working hours. Employee will report directly to the Bank's
President or his designee. The Bank's or Heritage's board of directors may,
from time to time, modify Employee's title or performance responsibilities,
subject to Section 10(b) of this Agreement, to accommodate management
succession, as well as any other management objectives of the Bank or of
Heritage subject to Section 10(b) of this Agreement. In the event that Heritage
elects to merge the bank into Heritage Bank or some other affiliate of
Heritage, then the title and duties of Employee with respect to the entity
surviving such merger shall be determined by the President and CEO of Heritage
or his designee. Employee
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will assume any additional positions, duties, and responsibilities as may
reasonably be requested of him with or without additional compensation, as
appropriate and consistent with this Section 3.
4. Salary. Initially, Employee will receive a base salary of not less than
$73,800 per year, to be paid in accordance with the Bank's regular payroll
schedule for employees.
5. Incentive Compensation. The Bank's board of directors, subject to
ratification by Heritage's board of directors, will determine the amount of
bonus, if any, to be paid by the Bank to Employee for each year during the
Initial Term. Employee will participate in any existing or subsequent
management incentive plan of Heritage or Bank to the same extent as officers
with similar responsibilities. Employee's bonus, if any, will reflect
Employee's contribution to the performance of the Bank during the year.
6. Income Deferral and Benefits. Subject to eligibility requirements and in
accordance with and subject to any policies adopted by the Bank's or Heritage's
board of directors with respect to any benefit plans or programs, Employee will
be entitled to receive benefits (including stock options) similar to those
offered to other officers of Heritage and its subsidiaries with position and
duties comparable to those of Employee. Neither the Bank nor Heritage through
this Agreement obligates itself to make any particular benefits available to
its employees or executive officers.
7. Business Expenses. The Bank will reimburse Employee for ordinary and
necessary expenses (including, without limitation, travel, entertainment, and
similar expenses) incurred in performing and promoting the Bank's business.
Employee will present from time to time itemized accounts of these expenses,
subject to any limits of Bank policy or the rules and regulations of the
Internal Revenue Service.
8. Termination.
(a) Termination By Bank for Cause. If, before the end of the Term or any
Extended Term, the Bank terminates Employee's employment for Cause or
Employee terminates his employment without Good Reason, the Bank will pay
Employee the salary earned and expenses reimbursable under this Agreement
incurred through the date of Employee's termination. Employee will have no
right to receive compensation or other benefits for any period after
termination under this section 8(a), and Employee will be subject to the
noncompetition and nonsolicitation requirements of Section 12 through the
remainder of the Term or any Extended Term in which termination occurs and
for the two-year period following the Term or any Extended Term in which
termination occurs.
(b) Other Termination By Bank. If before the end of the Term or any
Extended Term, the Bank terminates Employee's employment without Cause or
Employee terminates his employment for Good Reason (defined below), the
Bank will pay Employee for the remainder of the Term or any Extended Term
the salary Employee would have been entitled to under this Agreement if his
employment had not terminated. If Employee is terminated pursuant to this
Section 8(b), Employee will be subject to the noncompetition and
nonsolicitation requirements of Section 12 through the remainder of the
Term or any Extended Term in which termination occurs only.
(c) Death or Disability. This Agreement terminates (1) if Employee dies
or (2) if Employee is unable to perform his duties and obligations under
this Agreement for a period of 90 days as a result of a physical or mental
disability arising at any time during the term of this Agreement (inability
being "disabled"), unless with reasonable accommodation Employee could
continue to perform his duties under this Agreement and making these
accommodations would not require the Bank to expend any funds. The Bank or
its successor's Board of Directors, acting in good faith, will make the
final determination of whether Employee is Disabled, and for purposes of
making such determination, may require Employee to submit to a physical
examination by a physician mutually agreed upon by Employee and the Board
of Directors. If termination occurs under this Section 8(c), Employee or
his estate will be entitled to receive only the compensation and benefits
earned and expenses reimbursable through the date of such termination.
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(d) Termination Related to a Change in Control.
(1) Termination by Bank. If the Bank, or its successor in interest by
merger, or its transferee in the event of a purchase and assumption
transaction, for reasons other than Employee's death, disability, or
Cause (1) terminates Employee's employment within one year following a
Change in Control (as defined below) or (2) terminates Employee's
employment before the Change in Control but on or after the date that
any party either announces or is required by law to announce any
prospective Change in Control transaction and a Change in Control
occurs within twelve months after the termination, the Bank will pay
Employee an amount equal to 24 months of Employee's base salary for the
calendar year in which Employee's employment is terminated (the "Change
in Control Payment").
(2) Termination by Employee. If Employee terminates Employee's
employment, with or without Good Reason, within one year following a
Change in Control, the Bank will pay employee the Change in Control
Payment.
(e) Limitations on Payments Related to Change in Control. Notwithstanding
any other provision of this Agreement:
(1) the Change in Control Payment will be less than the amount that
would cause it to be a "parachute payment" within the meaning of
Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code");
(2) the Change in Control Payment will be reduced by any salary that
Employee receives from the Bank or its successor after the Change in
Control; and
(3) Employee's right to receive the Change in Control Payment
terminates (i) immediately, if before the Change in Control transaction
closes, Employee terminates his employment without Good Reason or the
Bank terminates Employee's employment for Cause, or (ii) one year after
a Change in Control occurs.
(f) Definition of "Change in Control". "Change in Control" means a change
"in the ownership or effective control" or "in the ownership of a
substantial portion of the assets" of Heritage, within the meaning of
Section 280G of the Internal Revenue Code.
(g) Return of Bank Property. If and when Employee ceases, for any reason,
to be employed by the Bank, Employee must return to the Bank all keys, pass
cards, identification cards and any other property of the Bank or Heritage.
At the same time, Employee also must return to the Bank all originals and
copies (whether in hard copy, electronic or other form) of any documents,
drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals,
and specifications which constitute proprietary information or material of
the Bank or Heritage. The obligations in this paragraph include the return
of documents and other materials which may be in Employee's desk at work,
in Employee's car or place of residence, or in any other location under
Employee's control.
9. Definition of "Cause". "Cause" means any one or more of the following:
(a) Willful misfeasance or gross negligence in the performance of
Employee's duties;
(b) Conviction of a crime in connection with his duties;
(c) Conduct demonstrably and significantly harmful to the Bank, as
reasonably determined by the Bank's or Heritage's board of directors on the
advice of legal counsel of the Bank or Heritage; or
(d) Permanent disability, meaning a physical or mental impairment which
renders Employee incapable of substantially performing the duties required
under this Agreement, and which is expected to continue rendering Employee
so incapable for the reasonably foreseeable future.
10. Definition of "Good Reason". "Good Reason" means only any one or more of
the following:
(a) Reduction, without Employee's consent, of Employee's salary or
elimination of any compensation or benefit plan benefiting Employee, unless
the reduction or elimination is generally
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applicable to substantially all similarly situated Bank employees (or
employees of a successor or controlling entity of the Bank) formerly
benefited;
(b) The assignment to Employee without his consent of any authority or
duties materially inconsistent with Employee's position as of the date of
this Agreement; or
(c) A relocation or transfer of Employee's current business office that
would require Employee to commute on a regular basis more than 60 miles
each way from his current business office at the Bank on the date of this
Agreement, unless Employee consents to the relocation or transfer.
11. Confidentiality. Employee will not, after signing this Agreement,
including during and after its Term, use for his own purposes or disclose to
any other person or entity any confidential information concerning the Bank or
Heritage or their business operations or customers, unless (1) the Bank or
Heritage consents to the use or disclosure of their respective confidential
information, (2) the use or disclosure is consistent with Employee's duties
under this Agreement, or (3) disclosure is required by law or court order.
12. Noncompetition.
(a) Participation in a Competition Business. During the Term or any
Extended Term and for two years after expiration of Term or any Extended
Term (such two years being the "Post-Term Period") (regardless of whether
Employee's employment ends at the end of the Term or any Extended Term or
at some other point after the end of the Term or any Extended Term),
Employee will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including,
without limitation, as a shareholder, member, partner, director, officer,
manager, investor, organizer, "founder," employee, consultant, or agent;
provided, however, that Employee may acquire and own an interest not to
exceed 2% of the total equity interest in any publicly held entity whose
equity securities are listed on a national securities exchange (whether or
not such entity is a Competing Business). Employee's noncompetition
obligations for the Post-Term Period will not apply if (1) Employee's
employment during the Term or any Extended Term is terminated without
Cause, (2) Employee terminates his employment during the Term or any
Extended Term for Good Reason, or (3) the Bank or its successor declines to
employ Employee after expiration of the Term or any Extended Term.
(b) No Solicitation. During the Term, any Extended Term and the Post-Term
Period (regardless of whether Employee's employment ends at the end of the
Term or any Extended Term or at some other point after the end of the Term
or any Extended Term) Employee will not directly or indirectly solicit or
attempt to solicit (1) any employees located in Yakima County in Washington
State (the "County") of the Bank, Heritage, or any of Heritage's
Subsidiaries, to leave their employment or (2) any customers located in
Yakima County of the Bank, Heritage, or any of Heritage's Subsidiaries to
remove their business from the Bank, Heritage, or any of Heritage's
Subsidiaries, or to participate in any manner in a Competing Business.
Solicitation prohibited under this Section includes solicitation by any
means, including, without limitation, meetings, letters or other mailings,
electronic communications of any kind, and internet communications.
Employee's nonsolicitation obligations for the Post-Term Period will not
apply if (1) Employee's employment during the Term or any Extended Term is
terminated without Cause, (2) Employee terminates his employment during the
Term or any Extended Term for Good Reason, or (3) the Bank or its successor
declines to employ Employee after expiration of the Term or any
Extended Term.
(c) Employment Outside the County. Nothing in this Agreement prevents
Employee from accepting employment after the end of the Term outside the
County from a Competing Business, as long as Employee will not (a) act as
an employee or other representative or agent of the Competing Business
within the County (b) have any responsibilities for the Competing Business'
operations within the County.
(d) Competing Business. "Competing Business" means any financial
institution or trust company that competes with, or will compete in the
County with, Heritage, the Bank, or any of Heritage's Subsidiaries. The
Term "Competing Business" includes, without limitation, any start-up or
other financial institution or trust company in formation.
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13. Enforcement.
(a) The Bank and Employee stipulate that, in light of all of the facts
and circumstances of the relationships between Employee and the Bank, the
agreements referred to in Sections 11 and 12 (including without limitation
their scope, duration and geographic extent) are fair and reasonably
necessary for the protection of the Bank's and Heritage's confidential
information, goodwill and other protectable interests. If a court of
competent jurisdiction should decline to enforce any of those covenants and
agreements, Employee and the Bank request the court to reform these
provisions to restrict Employee's use of confidential information and
Employee's ability to compete with the Bank and Heritage to the maximum
extent, in time, scope of activities, and geography, the court finds
enforceable.
(b) Employee acknowledges that the Bank and Heritage will suffer
immediate and irreparable harm that will not be compensable by damages
alone, if Employee repudiates or breaches any of the provisions of Sections
11 or 12 or threatens or attempts to do so. For this reason, under these
circumstances, the Bank and Heritage, in addition to and without limitation
of any other rights, remedies or damages available to it at law or in
equity, will be entitled to obtain temporary, preliminary, and permanent
injunctions in order to prevent or restrain the breach, and neither the
Bank nor Heritage will be required to post a bond as a condition for the
granting of this relief.
14. Adequate Consideration. Employee specifically acknowledges the receipt
of adequate consideration for the covenants contained in Sections 11 and 12 and
that the Bank is entitled to require him to comply with these Sections. These
Sections will survive termination of this Agreement. Employee represents that
if his employment is terminated, whether voluntarily or involuntarily, Employee
has experience and capabilities sufficient to enable Employee to obtain
employment in areas which do not violate this Agreement and the Bank's
enforcement of a remedy by way of injunction will not prevent Employee from
earning a livelihood.
15. Arbitration.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this
Agreement, to arbitration under the American Arbitration Association's
rules then in effect (or under any other form of arbitration mutually
acceptable to the parties). A single arbitrator agreed on by the parties
will conduct the arbitration. If the parties cannot agree on a single
arbitrator, each party must select one arbitrator and those two arbitrators
will select a third arbitrator. This third arbitrator will hear the
dispute. The arbitrator's decision is final (except as otherwise
specifically provided by law) and binds the parties, and either party may
request any court having jurisdiction to enter a judgment and to enforce
the arbitrator's decision. The arbitrator will provide the parties with a
written decision naming the substantially prevailing party in the action.
This prevailing party is entitled to reimbursement from the other party for
its costs and expenses, including reasonable attorney's fees.
(b) Governing Law. All proceedings will be held at a place designated by
the arbitrator in Thurston County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
(c) Exception to Arbitration. Notwithstanding the above, if Employee
violates Sections 11 or 12, the Bank will have the right to initiate the
court proceedings described in Section 13(b), in lieu of an arbitration
proceeding under this Section 15. The Bank may initiate these proceeding
wherever appropriate within Washington State; but Employee will consent to
venue and jurisdiction in Thurston County, Washington.
16. Miscellaneous Provisions.
(a) Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms
in the Plan.
(b) Entire Agreement. This Agreement constitutes the entire understanding
between the parties concerning its subject matter and supersedes all prior
agreements. Accordingly, Employee specifically
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waives the terms of and all of his rights under all employment, change-in-
control and salary continuation agreements, whether written or oral, he has
entered into with the Bank or any of its Subsidiaries or affiliates.
(c) No Right to Continued Employment. Nothing in this Agreement, express
or implied, is intended to confer upon Employee the right to continued
employment with the Bank after the Term.
(d) Binding Effect. This Agreement will bind and inure to the benefit of
the Bank's, Heritage's, and Employee's heirs, legal representatives,
successors and assigns.
(e) Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due
under it, this party will be entitled to reimbursement from the other party
for any and all of its out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection
with the enforcement or collection.
(f) Waiver. Any waiver by a party of its rights under this Agreement must
be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not
operate as a waiver of any other breach by the breaching party.
(g) Counsel Review. Employee acknowledges that he has had the opportunity
to consult with independent counsel with respect to the negotiation,
preparation, and execution of this Agreement.
(h) Assignment. The services to be rendered by Employee under this
Agreement are unique and personal. Accordingly, Employee may not assign any
of his rights or duties under this Agreement.
(i) Amendment. This Agreement may not be modified or amended except by a
written instrument signed by both parties with the prior written consent of
Heritage.
(j) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(k) Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that
certain matters may be governed by federal law. Except as otherwise
provided in Section 15(c), the parties must bring any legal proceeding
arising out of this Agreement in Thurston County, Washington, and the
parties will submit to jurisdiction in that county.
(l) Counterparts. This Agreement may be executed in one or more facsimile
counterparts, each of which will be deemed an original, but all of which
taken together will constitute one and the same document.
Signed: September 28, 1998:
CENTRAL VALLEY BANK, N.A.
/s/
_____________________________________
By: Donald V. Rhodes
Its: Chief Executive Officer
DAVID J. PERRY, individually
/s/
_____________________________________
David J. Perry
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Exhibit F
CENTRAL VALLEY BANK, N.A.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), signed September 28, 1998, between
CENTRAL VALLEY BANK, N.A. (the "Bank") and LARRY HOLT ("Employee") takes effect
on the effective date of the Merger ("Effective Date").
RECITALS
A. Washington Independent Banshares, Inc. which is the parent company of the
Bank, intends to merge into Heritage Financial Corporation ("Heritage"), and
the Bank will thereby become the wholly owned subsidiary of Heritage (the
"Merger") under the terms of the Agreement and Plan of Merger dated as of
September 28, 1998 ("Plan") between the parties.
B. Employee is presently the Bank's Vice President. The Bank wishes to
continue Employee's employment in that capacity under the terms and conditions
of this Agreement.
C. Under the terms of this Agreement, Employee wishes to continue his
employment with the Bank (or its successor, if any) for the period provided in
this Agreement.
AGREEMENT
The parties agree as follows.
1. Employment. The Bank will continue Employee's employment during the Term,
and Employee accepts employment by the Bank, on the terms and conditions set
forth in this Agreement. Employee's title will be "Vice President."
2. Effective Date and Term.
(a) Term. The term of this Agreement ("Term") commences on the Effective
Date and terminates on December 31, 2000.
(b) Automatic Renewal. This Agreement shall renew automatically at the
end of the Term for one additional year (an "Extended Term") and shall
renew automatically at the end of the Extended Term for additional
successive one year terms (each successive one year term also an "Extended
Term") unless Employee gives the Bank or Bank gives the Employee written
notice at least 90 days before the end of the Term or an Extended Term (as
the case may be) of his or its intent that this Agreement not be renewed.
(c) Abandonment of the Merger. If the Plan terminates before Closing,
this Agreement will not become effective and will be void.
3. Duties. Employee will faithfully and diligently perform the duties
assigned to Employee from time to time by the Bank's President or his designee
as designated from time to time, consistent with the duties that have been
normal and customary to Employee's position. Employee will use his best efforts
to perform his duties and will devote his full time and attention to these
duties during working hours. Employee will report directly to the Bank's
President or his designee. The Bank's or Heritage's board of directors may,
from time to time, modify Employee's title or performance responsibilities,
subject to Section 10(b) of this Agreement, to accommodate management
succession, as well as any other management objectives of the Bank or of
Heritage subject to Section 10(b) of this Agreement. In the event that Heritage
elects to merge the bank into Heritage Bank or some other affiliate of
Heritage, then the title and duties of Employee with respect to the entity
surviving such merger shall be determined by the President and CEO of Heritage
or his designee. Employee
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will assume any additional positions, duties, and responsibilities as may
reasonably be requested of him with or without additional compensation, as
appropriate and consistent with this Section 3.
4. Salary. Initially, Employee will receive a base salary of not less than
$56,640 per year, to be paid in accordance with the Bank's regular payroll
schedule for employees.
5. Incentive Compensation. The Bank's board of directors, subject to
ratification by Heritage's board of directors, will determine the amount of
bonus, if any, to be paid by the Bank to Employee for each year during the
Initial Term. Employee will participate in any existing or subsequent
management incentive plan of Heritage or Bank to the same extent as officers
with similar responsibilities. Employee's bonus, if any, will reflect
Employee's contribution to the performance of the Bank during the year.
6. Income Deferral and Benefits. Subject to eligibility requirements and in
accordance with and subject to any policies adopted by the Bank's or Heritage's
board of directors with respect to any benefit plans or programs, Employee will
be entitled to receive benefits (including stock options) similar to those
offered to other officers of Heritage and its subsidiaries with position and
duties comparable to those of Employee. Neither the Bank nor Heritage through
this Agreement obligates itself to make any particular benefits available to
its employees or executive officers.
7. Business Expenses. The Bank will reimburse Employee for ordinary and
necessary expenses (including, without limitation, travel, entertainment, and
similar expenses) incurred in performing and promoting the Bank's business.
Employee will present from time to time itemized accounts of these expenses,
subject to any limits of Bank policy or the rules and regulations of the
Internal Revenue Service.
8. Termination.
(a) Termination By Bank for Cause. If, before the end of the Term or any
Extended Term, the Bank terminates Employee's employment for Cause or
Employee terminates his employment without Good Reason, the Bank will pay
Employee the salary earned and expenses reimbursable under this Agreement
incurred through the date of Employee's termination. Employee will have no
right to receive compensation or other benefits for any period after
termination under this section 8(a), and Employee will be subject to the
noncompetition and nonsolicitation requirements of Section 12 through the
remainder of the Term or any Extended Term in which termination occurs and
for the two-year period following the Term or any Extended Term in which
termination occurs.
(b) Other Termination By Bank. If before the end of the Term or any
Extended Term, the Bank terminates Employee's employment without Cause or
Employee terminates his employment for Good Reason (defined below), the
Bank will pay Employee for the remainder of the Term or any Extended Term
the salary Employee would have been entitled to under this Agreement if his
employment had not terminated. If Employee is terminated pursuant to this
Section 8(b), Employee will be subject to the noncompetition and
nonsolicitation requirements of Section 12 through the remainder of the
Term or any Extended Term in which termination occurs only.
(c) Death or Disability. This Agreement terminates (1) if Employee dies
or (2) if Employee is unable to perform his duties and obligations under
this Agreement for a period of 90 days as a result of a physical or mental
disability arising at any time during the term of this Agreement (inability
being "disabled"), unless with reasonable accommodation Employee could
continue to perform his duties under this Agreement and making these
accommodations would not require the Bank to expend any funds. The Bank or
its successor's Board of Directors, acting in good faith, will make the
final determination of whether Employee is Disabled, and for purposes of
making such determination, may require Employee to submit to a physical
examination by a physician mutually agreed upon by Employee and the Board
of Directors. If termination occurs under this Section 8(c), Employee or
his estate will be entitled to receive only the compensation and benefits
earned and expenses reimbursable through the date of such termination.
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(d) Termination Related to a Change in Control.
(1) Termination by Bank. If the Bank, or its successor in interest by
merger, or its transferee in the event of a purchase and assumption
transaction, for reasons other than Employee's death, disability, or
Cause (1) terminates Employee's employment within one year following a
Change in Control (as defined below) or (2) terminates Employee's
employment before the Change in Control but on or after the date that
any party either announces or is required by law to announce any
prospective Change in Control transaction and a Change in Control
occurs within twelve months after the termination, the Bank will pay
Employee an amount equal to 12 months of Employee's base salary for the
calendar year in which Employee's employment is terminated (the "Change
in Control Payment").
(2) Termination by Employee. If Employee terminates Employee's
employment, with or without Good Reason, within one year following a
Change in Control, the Bank will pay employee the Change in Control
Payment.
(e) Limitations on Payments Related to Change in Control. Notwithstanding
any other provision of this Agreement:
(1) the Change in Control Payment will be less than the amount that
would cause it to be a "parachute payment" within the meaning of
Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code");
(2) the Change in Control Payment will be reduced by any salary that
Employee receives from the Bank or its successor after the Change in
Control; and
(3) Employee's right to receive the Change in Control Payment
terminates (i) immediately, if before the Change in Control transaction
closes, Employee terminates his employment without Good Reason or the
Bank terminates Employee's employment for Cause, or (ii) one year after
a Change in Control occurs.
(f) Definition of "Change in Control". "Change in Control" means a change
"in the ownership or effective control" or "in the ownership of a
substantial portion of the assets" of Heritage, within the meaning of
Section 280G of the Internal Revenue Code.
(g) Return of Bank Property. If and when Employee ceases, for any reason,
to be employed by the Bank, Employee must return to the Bank all keys, pass
cards, identification cards and any other property of the Bank or Heritage.
At the same time, Employee also must return to the Bank all originals and
copies (whether in hard copy, electronic or other form) of any documents,
drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals,
and specifications which constitute proprietary information or material of
the Bank or Heritage. The obligations in this paragraph include the return
of documents and other materials which may be in Employee's desk at work,
in Employee's car or place of residence, or in any other location under
Employee's control.
9. Definition of "Cause". "Cause" means any one or more of the following:
(a) Willful misfeasance or gross negligence in the performance of
Employee's duties;
(b) Conviction of a crime in connection with his duties;
(c) Conduct demonstrably and significantly harmful to the Bank, as
reasonably determined by the Bank's or Heritage's board of directors on the
advice of legal counsel of the Bank or Heritage; or
(d) Permanent disability, meaning a physical or mental impairment which
renders Employee incapable of substantially performing the duties required
under this Agreement, and which is expected to continue rendering Employee
so incapable for the reasonably foreseeable future.
10. Definition of "Good Reason". "Good Reason" means only any one or more of
the following:
(a) Reduction, without Employee's consent, of Employee's salary or
elimination of any compensation or benefit plan benefiting Employee, unless
the reduction or elimination is generally
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applicable to substantially all similarly situated Bank employees (or
employees of a successor or controlling entity of the Bank) formerly
benefited;
(b) The assignment to Employee without his consent of any authority or
duties materially inconsistent with Employee's position as of the date of
this Agreement; or
(c) A relocation or transfer of Employee's current business office that
would require Employee to commute on a regular basis more than 60 miles
each way from his current business office at the Bank on the date of this
Agreement, unless Employee consents to the relocation or transfer.
11. Confidentiality. Employee will not, after signing this Agreement,
including during and after its Term, use for his own purposes or disclose to
any other person or entity and confidential information concerning the Bank or
Heritage or their business operations or customers, unless (1) the Bank or
Heritage consents to the use or disclosure of their respective confidential
information, (2) the use or disclosure is consistent with Employee's duties
under this Agreement, or (3) disclosure is required by law or court order.
12. Noncompetition.
(a) Participation in a Competition Business. During the Term or any
Extended Term and for one year after expiration of Term or any Extended
Term (such one year being the "Post-Term Period") (regardless of whether
Employee's employment ends at the end of the Term or any Extended Term or
at some other point after the end of the Term or any Extended Term),
Employee will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including,
without limitation, as a shareholder, member, partner, director, officer,
manager, investor, organizer, "founder," employee, consultant, or agent;
provided, however, that Employee may acquire and own an interest not to
exceed 2% of the total equity interest in any publicly held entity whose
equity securities are listed on a national securities exchange (whether or
not such entity is a Competing Business). Employee's noncompetition
obligations for the Post-Term Period will not apply if (1) Employee's
employment during the Term or any Extended Term is terminated without
Cause, (2) Employee terminates his employment during the Term or any
Extended Term for Good Reason, or (3) the Bank or its successor declines to
employ Employee after expiration of the Term or any Extended Term.
(b) No Solicitation. During the Term, any Extended Term and the Post-Term
Period (regardless of whether Employee's employment ends at the end of the
Term or any Extended Term or at some other point after the end of the Term
or any Extended Term) Employee will not directly or indirectly solicit or
attempt to solicit (1) any employees located in Yakima County in Washington
State (the "County") of the Bank, Heritage, or any of Heritage's
Subsidiaries, to leave their employment or (2) and customers located in
Yakima County of the Bank, Heritage, or any of Heritage's Subsidiaries to
remove their business from the Bank, Heritage, or any of Heritage's
Subsidiaries, or to participate in any manner in a Competing Business.
Solicitation prohibited under this Section includes solicitation by any
means, including, without limitation, meetings, letters or other mailings,
electronic communications of any kind, and internet communications.
Employee's nonsolicitation obligations for the Post-Term Period will not
apply if (1) Employee's employment during the Term or any Extended Term is
terminated without Cause, (2) Employee terminates his employment during the
Term or any Extended Term for Good Reason, or (3) the Bank or its successor
declines to employ Employee after expiration of the Term or any Extended
Term.
(c) Employment Outside the County. Nothing in this Agreement prevents
Employee from accepting employment after the end of the Term outside the
County from a Competing Business, as long as Employee will not (a) act as
an employee or other representative or agent of the Competing Business
within the County (b) have any responsibilities for the Competing Business'
operations within the County.
(d) Competing Business. "Competing Business" means any financial
institution or trust company that competes with, or will compete in the
County with, Heritage, the Bank, or any of Heritage's Subsidiaries . The
Term "Competing Business" includes, without limitation, any start-up or
other financial institution or trust company in formation.
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13. Enforcement.
(a) The Bank and Employee stipulate that, in light of all of the facts
and circumstances of the relationships between Employee and the Bank, the
agreements referred to in Sections 11 and 12 (including without limitation
their scope, duration and geographic extent) are fair and reasonably
necessary for the protection of the Bank's and Heritage's confidential
information, goodwill and other protectable interests. If a court of
competent jurisdiction should decline to enforce any of those covenants and
agreements, Employee and the Bank request the court to reform these
provisions to restrict Employee's use of confidential information and
Employee's ability to compete with the Bank and Heritage to the maximum
extent, in time, scope of activities, and geography, the court finds
enforceable.
(b) Employee acknowledges that the Bank and Heritage will suffer
immediate and irreparable harm that will not be compensable by damages
alone, if Employee repudiates or breaches any of the provisions of Sections
11 or 12 or threatens or attempts to do so. For this reason, under these
circumstances, the Bank and Heritage, in addition to and without limitation
of any other rights, remedies or damages available to it at law or in
equity, will be entitled to obtain temporary, preliminary, and permanent
injunctions in order to prevent or restrain the breach, and neither the
Bank nor Heritage will be required to post a bond as a condition for the
granting of this relief.
14. Adequate Consideration. Employee specifically acknowledges the receipt
of adequate consideration for the covenants contained in Sections 11 and 12 and
that the Bank is entitled to require him to comply with these Sections. These
Sections will survive termination of this Agreement. Employee represents that
if his employment is terminated, whether voluntarily or involuntarily, Employee
has experience and capabilities sufficient to enable Employee to obtain
employment in areas which do not violate this Agreement and the Bank's
enforcement of a remedy by way of injunction will not prevent Employee from
earning a livelihood.
15. Arbitration.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this
Agreement, to arbitration under the American Arbitration Association's
rules then in effect (or under any other form of arbitration mutually
acceptable to the parties). A single arbitrator agreed on by the parties
will conduct the arbitration. If the parties cannot agree on a single
arbitrator, each party must select one arbitrator and those two arbitrators
will select a third arbitrator. This third arbitrator will hear the
dispute. The arbitrator's decision is final (except as otherwise
specifically provided by law) and binds the parties, and either party may
request any court having jurisdiction to enter a judgment and to enforce
the arbitrator's decision. The arbitrator will provide the parties with a
written decision naming the substantially prevailing party in the action.
This prevailing party is entitled to reimbursement from the other party for
its costs and expenses, including reasonable attorney's fees.
(b) Governing Law. All proceedings will be held at a place designated by
the arbitrator in Thurston County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
(c) Exception to Arbitration. Notwithstanding the above, if Employee
violates Sections 11 or 12, the Bank will have the right to initiate the
court proceedings described in Section 13(b), in lieu of an arbitration
proceeding under this Section 15. The Bank may initiate these proceeding
wherever appropriate within Washington State; but Employee will consent to
venue and jurisdiction in Thurston County, Washington.
16. Miscellaneous Provisions.
(a) Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms
in the Plan.
(b) Entire Agreement. This Agreement constitutes the entire understanding
between the parties concerning its subject matter and supersedes all prior
agreements. Accordingly, Employee specifically
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waives the terms of and all of his rights under all employment, change-in-
control and salary continuation agreements, whether written or oral, he has
entered into with the Bank or any of its Subsidiaries or affiliates.
(c) No Right to Continued Employment. Nothing in this Agreement, express
or implied, is intended to confer upon Employee the right to continued
employment with the Bank after the Term.
(d) Binding Effect. This Agreement will bind and inure to the benefit of
the Bank's, Heritage's, and Employee's heirs, legal representatives,
successors and assigns.
(e) Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due
under it, this party will be entitled to reimbursement from the other party
for any and all of its out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection
with the enforcement or collection.
(f) Waiver. Any waiver by a party of its rights under this Agreement must
be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not
operate as a waiver of any other breach by the breaching party.
(g) Counsel Review. Employee acknowledges that he has had the opportunity
to consult with independent counsel with respect to the negotiation,
preparation, and execution of this Agreement.
(h) Assignment. The services to be rendered by Employee under this
Agreement are unique and personal. Accordingly, Employee may not assign any
of his rights or duties under this Agreement.
(i) Amendment. This Agreement may not be modified or amended except by a
written instrument signed by both parties with the prior written consent of
Heritage.
(j) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(k) Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that
certain matters may be governed by federal law. Except as otherwise
provided in Section 15(c), the parties must bring any legal proceeding
arising out of this Agreement in Thurston County, Washington, and the
parties will submit to jurisdiction in that county.
(l) Counterparts. This Agreement may be executed in one or more facsimile
counterparts, each of which will be deemed an original, but all of which
taken together will constitute one and the same document.
Signed: September 28, 1998:
Central Valley Bank, N.A.
/s/
_____________________________________
By: Donald V. Rhodes
Its: Chief Executive Officer
LARRY HOLT , individually
/s/
_____________________________________
Larry Holt
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Exhibit G
CENTRAL VALLEY BANK, N.A.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), signed September 28, 1998, between
CENTRAL VALLEY BANK, N.A. (the "Bank") and RICHARD MAISON ("Employee") takes
effect on the effective date of the Merger ("Effective Date").
RECITALS
A. Washington Independent Banshares, Inc. which is the parent company of the
Bank, intends to merge into Heritage Financial Corporation ("Heritage"), and
the Bank will thereby become the wholly owned subsidiary of Heritage (the
"Merger") under the terms of the Agreement and Plan of Merger dated as of
September 28, 1998 ("Plan") between the parties.
B. Employee is presently the Bank's Senior Vice President. The Bank wishes
to continue Employee's employment in that capacity under the terms and
conditions of this Agreement.
C. Under the terms of this Agreement, Employee wishes to continue his
employment with the Bank (or its successor, if any) for the period provided in
this Agreement.
AGREEMENT
The parties agree as follows.
1. Employment. The Bank will continue Employee's employment during the Term,
and Employee accepts employment by the Bank, on the terms and conditions set
forth in this Agreement. Employee's title will be "Senior Vice President."
2. Effective Date and Term.
(a) Term. The term of this Agreement ("Term") commences on the Effective
Date and terminates on December 31, 2000.
(b) Automatic Renewal. This Agreement shall renew automatically at the
end of the Term for one additional year (an "Extended Term") and shall
renew automatically at the end of the Extended Term for additional
successive one year terms (each successive one year term also an "Extended
Term") unless Employee gives the Bank or Bank gives the Employee written
notice at least 90 days before the end of the Term or an Extended Term (as
the case may be) of his or its intent that this Agreement not be renewed.
(c) Abandonment of the Merger. If the Plan terminates before Closing,
this Agreement will not become effective and will be void.
3. Duties. Employee will faithfully and diligently perform the duties
assigned to Employee from time to time by the Bank's President or his designee
as designated from time to time, consistent with the duties that have been
normal and customary to Employee's position. Employee will use his best efforts
to perform his duties and will devote his full time and attention to these
duties during working hours. Employee will report directly to the Bank's
President or his designee. The Bank's or Heritage's board of directors may,
from time to time, modify Employee's title or performance responsibilities,
subject to Section 10(b) of this Agreement, to accommodate management
succession, as well as any other management objectives of the Bank or of
Heritage subject to Section 10(b) of this Agreement. In the event that Heritage
elects to merge the bank into Heritage Bank or some other affiliate of
Heritage, then the title and duties of Employee with respect to the entity
surviving such merger shall be determined by the President and CEO of Heritage
or his designee. Employee
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will assume any additional positions, duties, and responsibilities as may
reasonably be requested of him with or without additional compensation, as
appropriate and consistent with this Section 3.
4. Salary. Initially, Employee will receive a base salary of not less than
$77,040 per year, to be paid in accordance with the Bank's regular payroll
schedule for employees.
5. Incentive Compensation. The Bank's board of directors, subject to
ratification by Heritage's board of directors, will determine the amount of
bonus, if any, to be paid by the Bank to Employee for each year during the
Initial Term. Employee will participate in any existing or subsequent
management incentive plan of Heritage or Bank to the same extent as officers
with similar responsibilities. Employee's bonus, if any, will reflect
Employee's contribution to the performance of the Bank during the year.
6. Income Deferral and Benefits. Subject to eligibility requirements and in
accordance with and subject to any policies adopted by the Bank's or Heritage's
board of directors with respect to any benefit plans or programs, Employee will
be entitled to receive benefits (including stock options) similar to those
offered to other officers of Heritage and its subsidiaries with position and
duties comparable to those of Employee. Neither the Bank nor Heritage through
this Agreement obligates itself to make any particular benefits available to
its employees or executive officers.
7. Business Expenses. The Bank will reimburse Employee for ordinary and
necessary expenses (including, without limitation, travel, entertainment, and
similar expenses) incurred in performing and promoting the Bank's business.
Employee will present from time to time itemized accounts of these expenses,
subject to any limits of Bank policy or the rules and regulations of the
Internal Revenue Service.
8. Termination.
(a) Termination By Bank for Cause. If, before the end of the Term or any
Extended Term, the Bank terminates Employee's employment for Cause or
Employee terminates his employment without Good Reason, the Bank will pay
Employee the salary earned and expenses reimbursable under this Agreement
incurred through the date of Employee's termination. Employee will have no
right to receive compensation or other benefits for any period after
termination under this Section 8(a), and Employee will be subject to the
noncompetition and nonsolicitation requirements of Section 12 through the
remainder of the Term or any Extended Term in which termination occurs and
for the two-year period following the Term or any Extended Term in which
termination occurs.
(b) Other Termination By Bank. If before the end of the Term or any
Extended Term, the Bank terminates Employee's employment without Cause or
Employee terminates his employment for Good Reason (defined below), the
Bank will pay Employee for the remainder of the Term or any Extended Term
the salary Employee would have been entitled to under this Agreement if his
employment had not terminated. If Employee is terminated pursuant to this
Section 8(b), Employee will be subject to the noncompetition and
nonsolicitation requirements of Section 12 through the remainder of the
Term or any Extended Term in which termination occurs only.
(c) Death or Disability. This Agreement terminates (1) if Employee dies
or (2) if Employee is unable to perform his duties and obligations under
this Agreement for a period of 90 days as a result of a physical or mental
disability arising at any time during the term of this Agreement (inability
being "disabled"), unless with reasonable accommodation Employee could
continue to perform his duties under this Agreement and making these
accommodations would not require the Bank to expend any funds. The Bank or
its successor's Board of Directors, acting in good faith, will make the
final determination of whether Employee is Disabled, and for purposes of
making such determination, may require Employee to submit to a physical
examination by a physician mutually agreed upon by Employee and the Board
of Directors. If termination occurs under this Section 8(c), Employee or
his estate will be entitled to receive only the compensation and benefits
earned and expenses reimbursable through the date of such termination.
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(d) Termination Related to a Change in Control.
(1) Termination by Bank. If the Bank, or its successor in interest by
merger, or its transferee in the event of a purchase and assumption
transaction, for reasons other than Employee's death, disability, or
Cause (1) terminates Employee's employment within one year following a
Change in Control (as defined below) or (2) terminates Employee's
employment before the Change in Control but on or after the date that
any party either announces or is required by law to announce any
prospective Change in Control transaction and a Change in Control
occurs within twelve months after the termination, the Bank will pay
Employee an amount equal to 12 months of Employee's base salary for the
calendar year in which Employee's employment is terminated (the "Change
in Control Payment").
(2) Termination by Employee. If Employee terminates Employee's
employment, with or without Good Reason, within one year following a
Change in Control, the Bank will pay employee the Change in Control
Payment.
(e) Limitations on Payments Related to Change in Control. Notwithstanding
any other provision of this Agreement:
(1) the Change in Control Payment will be less than the amount that
would cause it to be a "parachute payment" within the meaning of
Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code");
(2) the Change in Control Payment will be reduced by any salary that
Employee receives from the Bank or its successor after the Change in
Control; and
(3) Employee's right to receive the Change in Control Payment
terminates (i) immediately, if before the Change in Control transaction
closes, Employee terminates his employment without Good Reason or the
Bank terminates Employee's employment for Cause, or (ii) one year after
a Change in Control occurs.
(f) Definition of "Change in Control". "Change in Control" means a change
"in the ownership or effective control" or "in the ownership of a
substantial portion of the assets" of Heritage, within the meaning of
Section 280G of the Internal Revenue Code.
(g) Return of Bank Property. If and when Employee ceases, for any reason,
to be employed by the Bank, Employee must return to the Bank all keys, pass
cards, identification cards and any other property of the Bank or Heritage.
At the same time, Employee also must return to the Bank all originals and
copies (whether in hard copy, electronic or other form) of any documents,
drawings, notes, memoranda, designs, devices, diskettes, tapes, manuals,
and specifications which constitute proprietary information or material of
the Bank or Heritage. The obligations in this paragraph include the return
of documents and other materials which may be in Employee's desk at work,
in Employee's car or place of residence, or in any other location under
Employee's control.
9. Definition of "Cause". "Cause" means any one or more of the following:
(a) Willful misfeasance or gross negligence in the performance of
Employee's duties;
(b) Conviction of a crime in connection with his duties;
(c) Conduct demonstrably and significantly harmful to the Bank, as
reasonably determined by the Bank's or Heritage's board of directors on the
advice of legal counsel of the Bank or Heritage; or
(d) Permanent disability, meaning a physical or mental impairment which
renders Employee incapable of substantially performing the duties required
under this Agreement, and which is expected to continue rendering Employee
so incapable for the reasonably foreseeable future.
10. Definition of "Good Reason". "Good Reason" means only any one or more of
the following:
(a) Reduction, without Employee's consent, of Employee's salary or
elimination of any compensation or benefit plan benefiting Employee, unless
the reduction or elimination is generally
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applicable to substantially all similarly situated Bank employees (or
employees of a successor or controlling entity of the Bank) formerly
benefited;
(b) The assignment to Employee without his consent of any authority or
duties materially inconsistent with Employee's position as of the date of
this Agreement; or
(c) A relocation or transfer of Employee's current business office that
would require Employee to commute on a regular basis more than 60 miles
each way from his current business office at the Bank on the date of this
Agreement, unless Employee consents to the relocation or transfer.
11. Confidentiality. Employee will not, after signing this Agreement,
including during and after its Term, use for his own purposes or disclose to
any other person or entity and confidential information concerning the Bank or
Heritage or their business operations or customers, unless (1) the Bank or
Heritage consents to the use or disclosure of their respective confidential
information, (2) the use or disclosure is consistent with Employee's duties
under this Agreement, or (3) disclosure is required by law or court order.
12. Noncompetition.
(a) Participation in a Competition Business. During the Term or any
Extended Term and for one year after expiration of Term or any Extended
Term (such one year being the "Post-Term Period") (regardless of whether
Employee's employment ends at the end of the Term or any Extended Term or
at some other point after the end of the Term or any Extended Term),
Employee will not become involved with a Competing Business or serve,
directly or indirectly, a Competing Business in any manner, including,
without limitation, as a shareholder, member, partner, director, officer,
manager, investor, organizer, "founder," employee, consultant, or agent;
provided, however, that Employee may acquire and own an interest not to
exceed 2% of the total equity interest in any publicly held entity whose
equity securities are listed on a national securities exchange (whether or
not such entity is a Competing Business). Employee's noncompetition
obligations for the Post-Term Period will not apply if (1) Employee's
employment during the Term or any Extended Term is terminated without
Cause, (2) Employee terminates his employment during the Term or any
Extended Term for Good Reason, or (3) the Bank or its successor declines to
employ Employee after expiration of the Term or any Extended Term.
(b) No Solicitation. During the Term, any Extended Term and the Post-Term
Period (regardless of whether Employee's employment ends at the end of the
Term or any Extended Term or at some other point after the end of the Term
or any Extended Term) Employee will not directly or indirectly solicit or
attempt to solicit (1) any employees located in Yakima County in Washington
State (the "County") of the Bank, Heritage, or any of Heritage's
Subsidiaries, to leave their employment or (2) and customers located in
Yakima County of the Bank, Heritage, or any of Heritage's Subsidiaries to
remove their business from the Bank, Heritage, or any of Heritage's
Subsidiaries, or to participate in any manner in a Competing Business.
Solicitation prohibited under this Section includes solicitation by any
means, including, without limitation, meetings, letters or other mailings,
electronic communications of any kind, and internet communications.
Employee's nonsolicitation obligations for the Post-Term Period will not
apply if (1) Employee's employment during the Term or any Extended Term is
terminated without Cause, (2) Employee terminates his employment during the
Term or any Extended Term for Good Reason, or (3) the Bank or its successor
declines to employ Employee after expiration of the Term or any Extended
Term.
(c) Employment Outside the County. Nothing in this Agreement prevents
Employee from accepting employment after the end of the Term outside the
County from a Competing Business, as long as Employee will not (a) act as
an employee or other representative or agent of the Competing Business
within the County (b) have any responsibilities for the Competing Business'
operations within the County.
(d) Competing Business. "Competing Business" means any financial
institution or trust company that competes with, or will compete in the
County with, Heritage, the Bank, or any of Heritage's Subsidiaries . The
Term "Competing Business" includes, without limitation, any start-up or
other financial institution or trust company in formation.
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13. Enforcement.
(a) The Bank and Employee stipulate that, in light of all of the facts
and circumstances of the relationships between Employee and the Bank, the
agreements referred to in Sections 11 and 12 (including without limitation
their scope, duration and geographic extent) are fair and reasonably
necessary for the protection of the Bank's and Heritage's confidential
information, goodwill and other protectable interests. If a court of
competent jurisdiction should decline to enforce any of those covenants and
agreements, Employee and the Bank request the court to reform these
provisions to restrict Employee's use of confidential information and
Employee's ability to compete with the Bank and Heritage to the maximum
extent, in time, scope of activities, and geography, the court finds
enforceable.
(b) Employee acknowledges that the Bank and Heritage will suffer
immediate and irreparable harm that will not be compensable by damages
alone, if Employee repudiates or breaches any of the provisions of Sections
11 or 12 or threatens or attempts to do so. For this reason, under these
circumstances, the Bank and Heritage, in addition to and without limitation
of any other rights, remedies or damages available to it at law or in
equity, will be entitled to obtain temporary, preliminary, and permanent
injunctions in order to prevent or restrain the breach, and neither the
Bank nor Heritage will be required to post a bond as a condition for the
granting of this relief.
14. Adequate Consideration. Employee specifically acknowledges the receipt
of adequate consideration for the covenants contained in Sections 11 and 12 and
that the Bank is entitled to require him to comply with these Sections. These
Sections will survive termination of this Agreement. Employee represents that
if his employment is terminated, whether voluntarily or involuntarily, Employee
has experience and capabilities sufficient to enable Employee to obtain
employment in areas which do not violate this Agreement and the Bank's
enforcement of a remedy by way of injunction will not prevent Employee from
earning a livelihood.
15. Arbitration.
(a) Arbitration. At either party's request, the parties must submit any
dispute, controversy or claim arising out of or in connection with, or
relating to, this Agreement or any breach or alleged breach of this
Agreement, to arbitration under the American Arbitration Association's
rules then in effect (or under any other form of arbitration mutually
acceptable to the parties). A single arbitrator agreed on by the parties
will conduct the arbitration. If the parties cannot agree on a single
arbitrator, each party must select one arbitrator and those two arbitrators
will select a third arbitrator. This third arbitrator will hear the
dispute. The arbitrator's decision is final (except as otherwise
specifically provided by law) and binds the parties, and either party may
request any court having jurisdiction to enter a judgment and to enforce
the arbitrator's decision. The arbitrator will provide the parties with a
written decision naming the substantially prevailing party in the action.
This prevailing party is entitled to reimbursement from the other party for
its costs and expenses, including reasonable attorney's fees.
(b) Governing Law. All proceedings will be held at a place designated by
the arbitrator in Thurston County, Washington. The arbitrator, in rendering
a decision as to any state law claims, will apply Washington law.
(c) Exception to Arbitration. Notwithstanding the above, if Employee
violates Sections 11 or 12, the Bank will have the right to initiate the
court proceedings described in Section 13(b), in lieu of an arbitration
proceeding under this Section 15. The Bank may initiate these proceeding
wherever appropriate within Washington State; but Employee will consent to
venue and jurisdiction in Thurston County, Washington.
16. Miscellaneous Provisions.
(a) Defined Terms. Capitalized terms used as defined terms, but not
defined in this Agreement, will have the meanings assigned to those terms
in the Plan.
(b) Entire Agreement. This Agreement constitutes the entire understanding
between the parties concerning its subject matter and supersedes all prior
agreements. Accordingly, Employee specifically
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waives the terms of and all of his rights under all employment, change-in-
control and salary continuation agreements, whether written or oral, he has
entered into with the Bank or any of its Subsidiaries or affiliates.
(c) No Right to Continued Employment. Nothing in this Agreement, express
or implied, is intended to confer upon Employee the right to continued
employment with the Bank after the Term.
(d) Binding Effect. This Agreement will bind and inure to the benefit of
the Bank's, Heritage's, and Employee's heirs, legal representatives,
successors and assigns.
(e) Litigation Expenses. If either party successfully seeks to enforce
any provision of this Agreement or to collect any amount claimed to be due
under it, this party will be entitled to reimbursement from the other party
for any and all of its out-of-pocket expenses and costs including, without
limitation, reasonable attorneys' fees and costs incurred in connection
with the enforcement or collection.
(f) Waiver. Any waiver by a party of its rights under this Agreement must
be written and signed by the party waiving its rights. A party's waiver of
the other party's breach of any provision of this Agreement will not
operate as a waiver of any other breach by the breaching party.
(g) Counsel Review. Employee acknowledges that he has had the opportunity
to consult with independent counsel with respect to the negotiation,
preparation, and execution of this Agreement.
(h) Assignment. The services to be rendered by Employee under this
Agreement are unique and personal. Accordingly, Employee may not assign any
of his rights or duties under this Agreement.
(i) Amendment. This Agreement may not be modified or amended except by a
written instrument signed by both parties with the prior written consent of
Heritage.
(j) Severability. The provisions of this Agreement are severable. The
invalidity of any provision will not affect the validity of other
provisions of this Agreement.
(k) Governing Law and Venue. This Agreement will be governed by and
construed in accordance with Washington law, except to the extent that
certain matters may be governed by federal law. Except as otherwise
provided in Section 15(c), the parties must bring any legal proceeding
arising out of this Agreement in Thurston County, Washington, and the
parties will submit to jurisdiction in that county.
(l) Counterparts. This Agreement may be executed in one or more facsimile
counterparts, each of which will be deemed an original, but all of which
taken together will constitute one and the same document.
Signed: September 28, 1998:
CENTRAL VALLEY BANK, N.A.
/s/
_____________________________________
By: Donald V. Rhodes
Its: Chief Executive Officer
RICHARD MAISON, individually
/s/
_____________________________________
Richard Maison
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Exhibit H
, 1998
Heritage Financial Corporation
201 5th Avenue SW
Olympia, WA 98501
Re: Agreement and Plan of Merger
Ladies and Gentlemen:
We have acted as counsel for Washington Independent Banshares, Inc. (the
"Company"), a corporation organized under the laws of the State of Washington,
and Central Valley Bank, N.A. (the "Bank"), a national banking association
organized under the laws of the United States of America, in connection with
the merger of Company with Heritage Financial Corporation ("Heritage"),
pursuant to an Agreement and Plan of Merger dated September 28, 1998 (the
"Plan"). This opinion letter is rendered pursuant to Section 6.2(A) of the
Plan. Capitalized terms used but not defined in this opinion letter have the
meanings assigned to such terms in the Plan.
This opinion letter is governed by, and must be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business
Law (1991). As a result, this opinion letter is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this opinion
letter should be read in conjunction with the Accord. The law covered by the
opinions expressed in this letter is limited to the Federal Law of the United
States and the laws of the State of Washington. We express no opinion with
respect to the effect of the laws of any other jurisdiction.
In conducting our examination, we have assumed, without investigation, the
genuineness of all signatures, the legal capacity of natural persons, the
correctness of all certificates, the authenticity of all documents and
instruments submitted to us as originals, the conformity to original documents
and instruments of all such documents and instruments submitted to us as
certified or photostatic or facsimile copies and the authenticity of the
originals of such copies, and the accuracy and completeness of all records made
available to us by the Company and the Bank. In conducting our examination of
these documents and instruments, we also have assumed, without investigation,
that each party to such documents and instruments (other than the Company and
the Bank) has (a) the power and capacity to enter into and perform all of its
obligations under such documents and instruments; (b) duly authorized all
requisite actions with respect to such documents and instruments; and (c) duly
executed and delivered such documents and instruments.
We have assumed, without investigation, the accuracy of all statements,
representations, and warranties as to factual matters, written or oral, made by
officers and employees of, and accountants for, the Bank and by public
officials. We also assume that the Plan is binding upon and enforceable in
accordance with its terms and against Heritage.
In rendering the opinions expressed in this letter, we have examined and
relied upon such records, documents, instruments, certificates of public
officials and certificates of officers and employees of and accountants for the
Company and the Bank as we have deemed appropriate, including:
1. A certificate of existence or authorization dated , 1998 issued
by the Washington Secretary of State ("Company Certificate of Good
Standing") with respect to the Company and a certificate of existence dated
, 1998 issued by the Comptroller of the Currency ("Bank Certificate
of Good Standing") with respect to the Bank.
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2. The Company's Articles of Incorporation, as amended, certified by the
Washington Secretary of State as of , 1998 and the Bank's Articles of
Association, as amended, certified by the Comptroller of the Currency as of
, 1998;
3. The Company's Bylaws, as amended, certified by the Secretary of the
Company and the Bank's Bylaws, as amended, certified by the Cashier of the
Bank;
4. Resolutions of the Bank's and the Company's respective Board of
Directors, authorizing actions relating to the transactions contemplated by
the Plan; and
5. The Plan.
The opinions expressed in this letter are subject to the following
qualifications:
1. Our opinion regarding the Company's and the Bank's respective status
as organizations validly existing and in good standing under Washington and
Federal law, respectively, is based solely upon the Company Certificate of
Good Standing and Bank Certificate of Good Standing.
2. Our opinion regarding the enforceability of the Plan may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium,
or similar laws generally affecting the enforcement of the rights of
creditors and by generally applicable principles of equity.
3. A Washington court, or federal court applying Washington law, may
consider extrinsic evidence of the circumstances surrounding the making of
the Plan to ascertain the intent of the parties using the language employed
in the Plan, regardless of whether or not the language used is plain and
unambiguous on its face, and may incorporate additional or supplementary
terms into the Plan.
4. As used in this opinion letter, the expression "to our actual
knowledge" means the conscious awareness of facts or other information by
the lawyers in our office actively representing the Company or the Bank in
connection with the transactions contemplated by the Plan. We have not
undertaken any independent investigation or review of our files nor
canvassed all the lawyers in our office. Except as otherwise set forth in
this opinion letter, we have not reviewed any agreements, orders, writs,
judgments or decrees or made any inquiry of the Company or the Bank.
We express no opinion as to: (i) any anti-trust or tax laws; (ii) provisions
relating to venue, jurisdiction, governing law, waiver of remedies (or the
delay or omission of enforcement of such provisions), or disclaimers or
liability limitations with respect to third parties; (iii) provisions for
payment or reimbursement of costs and expenses (including, without limitation,
attorney fees) in excess of statutory limits or amounts determined to be
reasonable by any court or other tribunal; and (iv) severability and
indemnification provisions.
Based upon the foregoing and subject to the qualifications, limitations and
assumptions set forth in this opinion letter, we are of the opinion that:
1. The Company is a corporation validly existing and in good standing
under the laws of the State of Washington. The Bank is a national banking
association validly existing and in good standing under the laws of the
United States of America.
2. The Company and the Bank have the corporate power and authority to
execute, deliver and perform the Plan.
3. The execution, delivery and performance of the Plan have been duly
authorized by all necessary corporate action on the part of the Company and
the Bank, and the Plan constitutes the Company's and the Bank's legal,
binding and valid obligation, enforceable and in accordance with its terms.
4. Execution of the Plan and consummation of the transactions
contemplated by the Plan will not violate the Company's or the Bank's
respective Articles of Incorporation/Association or Bylaws nor, to our
actual knowledge, breach or result in a default under an existing
obligation of the Company or the Bank under any material contract to which
the Company or the Bank is a party.
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5. All issued and outstanding shares of the Company's and the Bank's
capital stock have been duly authorized and are validly issued, fully paid,
non-assessable (except for the application of 12 U.S.C. (S)55 to shares of
Bank Common Stock), and are free of preemptive rights except those created
by the respective Articles of Incorporation/Association of the Company or
the Bank or by contract.
6. All of the Company Options have been duly authorized and validly
granted.
7. To our actual knowledge, there are no pending or threatened claims,
actions, suits or legal or equitable proceedings before any court or
governmental agency which, in our opinion would be, individually or in the
aggregate, reasonably likely to result in liability in excess of $25,000 or
prevent consummation of the transactions contemplated by the Plan.
8. To our actual knowledge, no information about Company or the Bank in
the Registration Statement contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading.
The foregoing is rendered solely for your benefit in connection with the
above-described transaction. You may not, without our prior express written
approval, deliver copies of this letter or extracts therefrom to any other
person, and no one other than you is entitled to rely upon the foregoing.
Sincerely,
GORDON, THOMAS, HONEYWELL,
MALANCA, PETERSON & DAHEIM, P.L.L.C.
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Exhibit I
, 1998
Washington Independent Banshares
537 West Second
Toppenish, WA 98948
Re: Agreement and Plan of Merger
Ladies and Gentlemen:
We have acted as counsel for Heritage Financial Corporation ("Heritage"), a
corporation organized under the laws of the State of Washington, in connection
with the merger of Heritage with Washington Independent Banshares, Inc. (the
"Company"), a corporation organized under the laws of the State of Washington,
and Central Valley Bank, N.A. (the "Bank"), a national banking association
organized under the laws of the United States of America, pursuant to an
Agreement and Plan of Merger dated September 28, 1998 (the "Plan"). This
opinion letter is rendered pursuant to Section 6.3(A) of the Plan. Capitalized
terms used but not defined in this opinion letter have the meanings assigned to
such terms in the Plan.
This opinion letter is governed by, and must be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business
Law (1991). As a result, this opinion letter is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, and this opinion
letter should be read in conjunction with the Accord. The law covered by the
opinions expressed in this letter is limited to the Federal Law of the United
States and the laws of the State of Washington. We express no opinion with
respect to the effect of the laws of any other jurisdiction.
In conducting our examination, we have assumed, without investigation, the
genuineness of all signatures, the legal capacity of natural persons, the
correctness of all certificates, the authenticity of all documents and
instruments submitted to us as originals, the conformity to original documents
and instruments of all such documents and instruments submitted to us as
certified or photostatic or facsimile copies and the authenticity of the
originals of such copies, and the accuracy and completeness of all records made
available to us by Heritage. In conducting our examination of these documents
and instruments, we also have assumed, without investigation, that each party
to such documents and instruments (other than Heritage ) has (a) the power and
capacity to enter into and perform all of its obligations under such documents
and instruments; (b) duly authorized all requisite actions with respect to such
documents and instruments; and (c) duly executed and delivered such documents
and instruments.
We have assumed, without investigation, the accuracy of all statements,
representations, and warranties as to factual matters, written or oral, made by
officers and employees of, and accountants for, Heritage and by public
officials. We also assume that the Plan is binding upon and enforceable in
accordance with its terms and against the Company and the Bank.
In rendering the opinions expressed in this letter, we have examined and
relied upon such records, documents, instruments, certificates of public
officials and certificates of officers and employees of and accountants for
Heritage as we have deemed appropriate, including:
1. A certificate of existence or authorization dated , 1998 issued
by the Washington Secretary of State ("Certificate of Good Standing");
2. Heritage's Articles of Incorporation, as amended, certified by the
Washington Secretary of State as of , 1998;
3. Heritage's Bylaws, as amended, certified by the Secretary of Heritage;
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4. Resolutions of Heritage's Board of Directors, authorizing actions
relating to the transactions contemplated by the Plan; and
5. The Plan.
The opinions expressed in this letter are subject to the following
qualifications:
1. Our opinion regarding Heritage's status as a corporation validly
existing and in good standing under Washington law is based solely upon the
Certificate of Good Standing.
2. Our opinion regarding the enforceability of the Plan may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium,
or similar laws generally affecting the enforcement of the rights of
creditors and by generally applicable principles of equity.
3. A Washington court, or federal court applying Washington law, may
consider extrinsic evidence of the circumstances surrounding the making of
the Plan to ascertain the intent of the parties using the language employed
in the Plan, regardless of whether or not the language used is plain and
unambiguous on its face, and may incorporate additional or supplementary
terms into the Plan.
4. As used in this opinion letter, the expression "to our actual
knowledge" means the conscious awareness of facts or other information by
the lawyers in our office actively representing Heritage in connection with
the transactions contemplated by the Plan. We have not undertaken any
independent investigation or review of our files nor canvassed all the
lawyers in our office. Except as otherwise set forth in this opinion
letter, we have not reviewed any agreements, orders, writs, judgments or
decrees or made any inquiry of Heritage
We express no opinion as to: (i) any anti-trust or tax laws; (ii) provisions
relating to venue, jurisdiction, governing law, waiver of remedies (or the
delay or omission of enforcement of such provisions), or disclaimers or
liability limitations with respect to third parties; (iii) provisions for
payment or reimbursement of costs and expenses (including, without limitation,
attorney fees) in excess of statutory limits or amounts determined to be
reasonable by any court or other tribunal; and (iv) severability and
indemnification provisions.
Based upon the foregoing and subject to the qualifications, limitations and
assumptions set forth in this opinion letter, we are of the opinion that:
1. Heritage is a corporation validly existing and in good standing under
the laws of the State of Washington.
2. Heritage has the corporate power and authority to execute, deliver and
perform its obligations under the Plan.
3. The execution, delivery and performance of the Plan have been duly
authorized by all necessary corporate action on the part of Heritage.
4. The execution of the Plan and consummation of the transactions
contemplated by the Plan will not violate Heritage's Articles of
Incorporation or Bylaws nor, to our actual knowledge, breach or result in a
default under an existing obligation of Heritage under any material
contract to which Heritage is a party.
5. The Plan constitutes the legal, valid and binding obligation of
Heritage enforceable against Heritage in accordance with its terms.
6. The shares to be issued in connection with the Plan have been duly
authorized and, when issued as contemplated by the Plan, will be validly
issued, fully paid and nonassessable, and are free of preemptive rights
except those created by the Articles of Incorporation of Heritage or by
contract.
7. The Registration Statement became effective under the Securities Act
on , 1998, and to our actual knowledge: (a) no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or threatened by the
Securities and Exchange Commission and (b) with respect to information
contained in the Registration Statement regarding Heritage, such
information did not contain any untrue statement of a material fact or omit
to
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state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading.
8. To our actual knowledge, there are no pending or threatened claims,
actions, suits or legal or equitable proceedings before any court or
governmental agency which, in our opinion would be, individually or in the
aggregate, reasonably likely to result in liability in excess of $25,000 or
prevent consummation of the transactions contemplated by the Plan.
The foregoing is rendered solely for your benefit in connection with the
above-described transaction. You may not, without our prior express written
approval, deliver copies of this letter or extracts therefrom to any other
person, and no one other than you is entitled to rely upon the foregoing.
Sincerely,
Gerrish & McCreary, P.C.
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Appendix B
Chapter 13 of the Washington Business Corporation Act
23B.13.010 Definitions. As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under RCW 23B.13.020 and who exercises that right when and in
the manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
23B.13.020 Right to dissent.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW 23B.11.030,
23B.11.080, or the articles of incorporation and the shareholder is
entitled to vote on the merger, or (ii) if the corporation is a subsidiary
that is merged with its parent under RCW 23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
RCW 23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
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(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action fails to comply with
the procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955 the articles of incorporation, or the bylaws, or is fraudulent with
respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair
value of the shareholder's shares shall terminate upon the occurrence of any
one of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030 Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person and
notifies the corporation in writing of the name and address of each person on
whose behalf the shareholder asserts dissenters' rights. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the dissenter dissents and the dissenter's other shares were registered
in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder has power to direct the vote.
23B.13.200 Notice of dissenters' rights.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter and be accompanied by a copy of this
chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days after
the effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210 Notice of intent to demand payment.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights must (a) deliver to the corporation
before the vote is taken written notice of the shareholder's intent to demand
payment for the shareholder's shares if the proposed action is effected, and
(b) not vote such shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for the shareholder's shares under
this chapter.
23B.13.220 Dissenters' notice.
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
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(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the
date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230 Duty to demand payment.
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220 must
demand payment, certify whether the shareholder acquired beneficial ownership
of the shares before the date required to be set forth in the dissenters'
notice pursuant to RCW 23B.13.220(2)(c), and deposit the shareholder's
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's share
certificates under subsection (1) of this section retains all other rights of a
shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.240 Share restrictions.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is effected or the restriction is released under RCW 23B.13.260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until the effective date of
the proposed corporate action.
23B.13.250 Payment.
(1) Except as provided in RCW 23B.13.270, within thirty days of the later of
the effective date of the proposed corporate action, or the date the payment
demand is received, the corporation shall pay each dissenter who complied with
RCW 23B.13.230 the amount the corporation estimates to be the fair value of the
shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any;
(b) An explanation of how the corporation estimated the fair value of
the shares;
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(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260 Failure to take action.
(1) If the corporation does not effect the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release any transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it must
send a new dissenters' notice under RCW 23B.13.220 and repeat the payment
demand procedure.
23B.13.270 After-acquired shares.
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of the dissenter's demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares, an explanation of
how the interest was calculated, and a statement of the dissenter's right to
demand payment under RCW 23B.13.280.
23B.13.280 Procedure if shareholder dissatisfied with payment or offer.
(1) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate, less any payment under RCW
23B.13.250, or reject the corporation's offer under RCW 23B.13.270 and demand
payment of the dissenter's estimate of the fair value of the dissenter's shares
and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.13.270 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within
sixty days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within thirty days after the corporation
made or offered payment for the dissenter's shares.
23B.13.300 Court action.
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
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(2) The corporation shall commence the proceeding in the superior court of
the county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of this
chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled
to the same discovery rights as parties in other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment
(a) for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the corporation,
or (b) for the fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under RCW
23B.13.270.
23B.13.310 Court costs and counsel fees.
(1) The court in a proceeding commenced under RCW 23B.13.300 shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of appraisers appointed by the court. The court shall assess the costs against
the corporation, except that the court may assess the costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under RCW 23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.
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January 5, 1999
Board of Directors
Washington Independent Bancshares
P.O. Box 70
Toppenish, WA 98948
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Washington Independent Bancshares ("WIB") of the
consideration to be received by such shareholders pursuant to the terms of the
Merger Agreement and Plan of Merger, dated September 28, 1998, (the
"Agreement") between WIB and Heritage Financial Corporation ("HFWA").
In connection with the proposed merger transaction (the "Merger") whereby
WIB will merge into HFWA, each issued and outstanding share of WIB common stock
and vested stock option (along with their associated rights) at the effective
time of the Merger (other than (i) shares of holders of which are exercising
appraisal rights pursuant to applicable law and (ii) shares held directly by or
indirectly by WIB or any subsidiary thereof other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall be
converted into the right to receive .5787 HFWA shares, except for fractional
shares which will receive a proportional amount of cash (the Merger
"Consideration"). Assuming a closing date of December 28, 1998, for the forty-
five trading days beginning on October 21, 1998 and ending on December 23,
1998, when the HFWA common stock price averaged $10.81, the value of HFWA
common stock is approximately $6.26 per share of WIB common stock.
Columbia Financial Advisors, Inc. ("CFAI") as a part of its investment
banking services, is periodically engaged in the valuation of banks and advises
the directors, officers and shareholders of both public and private banks and
thrift institutions with respect to the fairness, from a financial point of
view, of the consideration to be received in transactions such as that proposed
by the Agreement. With particular regard to our qualifications for rendering an
opinion as to the fairness, from a financial point of view, of the
Consideration to be received by holders of the shares from HFWA pursuant to the
Merger, CFAI has advised Washington and Oregon community banks regarding
fairness of capital transactions. WIB has agreed to pay CFAI a fee for this
opinion letter.
In connection with rendering this opinion, we have, among other things: (I)
reviewed the Agreement; (ii) reviewed WIB's financial information for the
twelve months ended December 31, 1997 and for the nine months ended September
30, 1998; (iii) reviewed certain internal financial analyses and certain other
forecasts for WIB prepared by and reviewed with the management of WIB; (iv)
conducted interviews with senior management of WIB regarding the past and
current business operations, results thereof, financial condition and future
prospects of WIB; (v) reviewed the current market environment generally and the
banking environment in particular; (vi) reviewed the prices paid in certain
recent mergers and acquisitions in the banking industry on a regional basis;
(vii) reviewed HFWA's audited financial information for the fiscal year ended
June 30, 1998 and three months ended September 30, 1998 including the
prospectus for HFWA's common stock offering of November 12, 1997, the 10-KSB
and the 10-QSB filed with the U.S. Securities and Exchange Commission; (ix)
reviewed the price ranges and dividend history for HFWA common stock; (x) and
reviewed such other information, studies and analyses and performed such other
investigations and took into account such other matters as we deemed
appropriate.
In conducting our review and arriving at our opinion, we have relied on the
accuracy and completeness of all information supplied or otherwise made
available to us, and we have not independently verified such information nor
have we undertaken an independent appraisal of the assets or liabilities of the
WIB or HFWA. With respect to the financial forecasts referred to above, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgment of the senior management of
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WIB. This opinion is necessarily based upon circumstances and conditions as
they exist and can be evaluated as of the date of this letter. We have not been
authorized to solicit and did not solicit other entities for purposes of a
business combination with WIB.
This opinion is based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof.
We are not expressing any opinion herein as to the prices at which shares of
HFWA Common Stock have traded or may trade at any future date.
This opinion is not intended to be and does not constitute a recommendation
to any stockholder as to how such stockholder should vote with respect to the
merger.
In reliance upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the Merger Consideration to be received by the shareholders of
WIB pursuant to the Agreement is fair, from a financial point of view, to the
shareholders of WIB.
We hereby consent to the reference to our firm in the proxy statement or
prospectus related to the merger transaction and to the inclusion of our
opinion as an exhibit to the proxy statement or prospectus related to the
merger transaction.
Very truly yours,
COLUMBIA FINANCIAL ADVISORS, INC.
By: _________________________________
Robert J. Rogowski
Principal
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Heritage Financial Corporation's Articles of Incorporation provide, among
other things, for the indemnification of directors, and authorize the Board to
pay reasonable expenses incurred by, or to satisfy a judgment or fine against,
a current or former director in connection with any personal legal liability
incurred by the individual while acting for Heritage Financial Corporation
within the scope of his or her employment, and which was not the result of
conduct finally adjudged to be "egregious" conduct. "Egregious" conduct is
defined as intentional misconduct, a knowing violation of law, or participation
in any transaction from which the person will personally receive a benefit in
money, property, or services to which that person is not legally entitled. The
Articles of Incorporation also include a provision that limits the liability of
directors of Heritage Financial Corporation from any personal liability to the
company or its shareholders for conduct not found to have been egregious .
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
2 Agreement and Plan of Merger Between Heritage Financial Corporation
and Washington Independent Bancshares, Inc. and Central Valley
Bank, N.A.
3(a) Articles of Incorporation of Heritage Financial Corporation
3(b) Bylaws of Heritage Financial Corporation
5 Opinion of Gerrish & McCreary, P.C.
8 Tax Opinion of Gerrish & McCreary, P.C.
21 Subsidiary of Heritage Financial Corporation
23(a) Consent of KPMG LLP
23(b) Consent of Knight, Vale & Gregory, Inc. P.S.
23(c) Consent of Columbia Financial Advisors
23(d) Consent of Gerrish & McCreary, P.C. (included in Exhibit 5)
24 Power of Attorney--Signature Page of the Registration Statement
99 Washington Independent Bancshares, Inc. Form of Proxy
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-1
<PAGE>
(3) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(4) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (3) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any actin, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(7) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(8) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement.
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 (Section 239.13 of this chapter) or Form
S-8 (Section 239.16B of this chapter), and the information
II-2
<PAGE>
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Olympia, State of
Washington, on January 20, 1999.
Heritage Financial Corporation
/s/ Donald V. Rhodes
By: _________________________________
Donald V. Rhodes
Chairman, President and Chief
Executive Officer
/s/ James Hastings
By: _________________________________
James Hastings
Vice President, Treasurer
And Principal Accounting Officer
KNOW ALL MEN BY THESE PRESENTS: That the undersigned, a Director or Officer,
or both, of Heritage Financial Corporation (the "Corporation"), acting pursuant
to authorization of the Board of Directors of the Corporation hereby appoints
Donald V. Rhodes and James Hastings, attorney-in-fact and agents for me and in
my name and on behalf, individually and as a Director or Officer, or both, of
the Corporation to sign a Registration Statement on Form S-4 and any amendments
(including post effective amendments) and supplements thereto, of the
corporation to be filed with the Securities and Exchange Commission pursuant to
any applicable rule under the Securities Act of 1933, as amended (the "Act")
with respect to the issue and sale of not more than 1,100,000 shares of common
stock, no par value, of the Corporation, said shares to be exchanged to the
shareholders of Washington Independent Bancshares, Inc. with respect to the
merger by and between Washington Independent Bancshares, Inc. and the
Corporation, and generally to do and perform all things necessary to be done in
connection with the foregoing as fully in all respects as I could do
personally.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 20th day of January 1999.
Signature Title Date
/s/ Donald V. Rhodes Chairman, President January 20,
- ------------------------------------- Chief Executive 1999
Donald V. Rhodes Officer and
Director
/s/ James Hastings Vice President, January 20,
- ------------------------------------- Treasurer and 1999
James Hastings Principal
Accounting Officer
/s/ John A. Clees Director January 20,
- ------------------------------------- 1999
John A. Clees
II-4
<PAGE>
Signature Title Date
/s/ James P. Senna Director January 20,
- ------------------------------------- 1999
James P. Senna
/s/ Peter K. Wallerich Director January 20,
- ------------------------------------- 1999
Peter K. Wallerich
/s/ Daryl D. Jensen Director January 20,
- ------------------------------------- 1999
Daryl D. Jensen
/s/ H. Edward Odegard Director January 20,
- ------------------------------------- 1999
H. Edward Odegard
/s/ Lynn P. Brunton Director January 20,
- ------------------------------------- 1999
Lynn P. Brunton
/s/ Philip S. Weigand Director January 20,
- ------------------------------------- 1999
Philip S. Weigand
II-5
<PAGE>
HERITAGE FINANCIAL CORPORATION
FORM S-4 REGISTRATION STATEMENT
Index to Exhibits
<TABLE>
<C> <S>
2 Agreement and Plan of Merger Between Heritage Financial Corporation and
Washington Independent Bancshares, Inc. and Central Valley Bank, N.A.
(included as Appendix A to the Proxy Statement/Prospectus that is a part
of this Registration Statement) incorporated herein by reference.
3(a) Articles of Incorporation of Heritage Financial Corporation, (filed as
Exhibit 3.1 to the S-1 Registration Statement of Heritage Financial
Corporation as filed with the Commission on September 12, 1997,
Registration No. 333-35573) incorporated herein by reference.
3(b) Bylaws of Heritage Financial Corporation (filed as Exhibit 3.2 of the S-
1 Registration Statement of Heritage Financial Corporation as filed with
the Commission on September 12, 1997, Registration No. 333-35573)
incorporated herein by reference.
5 Opinion of Gerrish & McCreary, P.C.
8 Tax Opinion of Gerrish & McCreary, P.C.
21 Subsidiary of Heritage Financial Corporation
23(a) Consent of KPMG LLP
23(b) Consent of Knight, Vale & Gregory, Inc. P.S.
23(c) Consent of Columbia Financial Advisors
23(d) Consent of Gerrish & McCreary, P.C. (included in Exhibit 5)
24 Power of Attorney--Signature Page of the Registration Statement
99 Washington Independent Bancshares, Inc. Form of Proxy
</TABLE>
<PAGE>
EXHIBIT 5
January 19, 1999
Heritage Financial Corporation
201 5th Avenue SW
Olympia, WA 98501
Ladies & Gentlemen:
In connection with the registration under the Securities Act of 1933 (the "Act")
of 1,050,000 shares (the "Securities") of Common Stock, no par value, of
Heritage Financial Corporation, a corporation (the "Company"), we, as your
special counsel, have examined such corporate records, certificates and other
documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion. Upon the basis of such
examination, we advise you that, in our opinion, when the registration statement
relating to the Securities (the "Registration Statement") has become effective
under the Act, the terms of the sale of the Securities have been duly
established in conformity with the company's articles of incorporation, and the
Securities have been duly issued and sold as contemplated by the Registration
Statement and upon consummation of the merger of Washington Independent
Bancshares, Inc. with and into the Company, the Securities will be validly
issued, fully paid and nonassessable.
We have relied as to certain matters on information obtained from public
officials, officers of the Company and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the heading "Legal
Opinions" in the Prospectus. In giving such consent, we do not thereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act.
GERRISH & McCREARY, P.C.
/s/ Gerrish & McCreary, P.C.
<PAGE>
EXHIBIT 8
January 19, 1999
Heritage Financial Corporation
201 5th Avenue, SW
Olympia, WA 98501
Re: Proposed Merger of Washington Independent Bancshares, Inc.
with and into Heritage Financial Corporation
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax consequences
resulting from the proposed merger of Washington Independent Bancshares, Inc.
("WIB"), a Washington corporation, with and into Heritage Financial Corporation
("Heritage"), a Washington corporation, as set forth and more fully described in
the Agreement and Plan of Merger between Heritage and WIB, dated September 28,
1998 (the "Agreement"), including the exhibits attached thereto.
We have acted as special counsel to Heritage with respect to the proposed merger
of WIB into Heritage (the "Merger"). In this capacity and for purposes of
rendering this opinion, we have examined (i) the Internal Revenue Code of 1986,
as amended (the "Code") and Treasury Regulations, (ii) the legislative history
of applicable sections of the Code, and (iii) appropriate Internal Revenue
Service and court decisional authority. In addition, we have examined such
documents as we have deemed appropriate, including (i) the Agreement, (ii) the
Registration Statement on Form S-4 filed by Heritage (the "Registration
Statement") pursuant to which Heritage is issuing additional shares of its
common stock, no par value, to the stockholders of WIB pursuant to the Merger,
which includes the Proxy Statement/Prospectus for the WIB Special Meeting, and
(iii) such additional documents as we have considered relevant. All terms used
herein shall, except where the context otherwise indicates, be deemed to have
the meanings assigned to such terms in the Agreement and Registration Statement.
In our examination of such documents, we have assumed, with your consent, that
all documents submitted to us as photocopies are accurate reproductions of the
originals thereof, that such originals are authentic, that all such documents
have been or will be duly executed to the extent required, and that all
statements set forth in such documents are accurate.
In reaching our opinion, we have relied on certain representations made by the
management of Heritage and WIB, including the representations, warranties and
covenants in the Agreement, and have examined such documents, records and other
instruments as we have deemed necessary or appropriate, including, without
limitation, the Agreement and the Registration Statement. We have assumed that
Heritage and WIB have been previously and will be in the future maintained and
operated in
<PAGE>
conformance with the laws of the State of Washington and the United States and
the terms of the aforementioned documents.
Heritage is a registered bank holding company organized and existing under the
laws of the State of Washington. Heritage has authorized capital stock
consisting of 15,000,000 shares of common stock, no par value ("Heritage Common
Stock"), of which __________ shares of Heritage Common Stock are issued and
outstanding and of which __________ shares of Heritage Common Stock are subject
to outstanding options as of _____________, 1998. Heritage has 2,500,000 shares
of preferred stock, no par value per share, authorized and none of these
preferred shares are issued and outstanding.
WIB is a registered bank holding company organized and existing under the laws
of the State of Washington. WIB has authorized capital stock consisting of
10,000,000 shares of common stock, no par value ("WIB Common Stock") and 200,000
shares of preferred stock. No shares of the preferred stock are issued. As of
_________, 1998, 1,760,449 shares of WIB Common Stock are issued and outstanding
and 75,000 shares of WIB Common Stock are reserved for issuance pursuant to WIB
employee stock option plans and/or director stock option plans under which
options covering 44,500 shares of WIB Common Stock are outstanding.
Other than as noted above, there are no outstanding securities or obligations
which are convertible into shares of stock or options, rights, calls or any
other commitments of any nature relating to the unissued shares of Heritage
Common Stock or WIB Common Stock.
Subject to the terms and conditions of the Agreement, at the Effective Date of
the Merger, the following transactions will be consummated:
1. WIB shall be merged with and into Heritage in accordance with Chapter
23B.11 of the Revised code of Washington, as amended (the "Washington
Law"), whereby each share of WIB Common Stock (no par value) issued and
outstanding and each vested option to acquire a share of WIB Common Stock,
other than shares whose holders have perfected their rights to dissent from
the Merger and shares held by Heritage, shall be converted into and
exchanged, as described in the Agreement, for shares of newly issued
Heritage Common Stock, no par value. Heritage shall survive the Merger and
continue to be governed by the laws of the State of Washington. The former
stockholders of WIB shall become stockholders of Heritage. No fractional
shares of Heritage Common Stock will be issued. The former WIB stockholders
entitled to fractional shares of Heritage Common Stock shall be paid cash
by Heritage in lieu of any fractional share interest, the value of which
shall be equal to the "Pricing Average" as defined in the Agreement. The
Merger shall be consummated pursuant to the terms of the Agreement, which
has been approved and adopted by the Boards of Directors of WIB and
Heritage.
2. The Merger is subject to various conditions, including, among others,
approval by the holders of record of two-thirds of the
<PAGE>
outstanding WIB Common Stock at the WIB Special Meeting, approval by all
applicable regulatory authorities, and that no more than 5% of the shares
of WIB Common Stock outstanding will be surrendered for cash by dissenters.
This opinion is conditioned on the following assumptions and representations
being made by management of Heritage and WIB in connection with the Merger
transaction at or before the Effective Date:
1. The Merger shall be consummated pursuant to and in accordance with the
Agreement which represents the entire understanding of Heritage and WIB
with respect to the Merger.
2. The fair market value of newly issued Heritage Common Stock, no par value,
and other consideration, if any, to be received by WIB stockholders will be
approximately equal to the fair market value of the WIB Common Stock to be
surrendered in exchange therefor.
3. After consummation of the Merger transaction, Heritage will continue its
historical business in a substantially unchanged manner.
4. The value of the Continuing Proprietary Interest (as defined below), as of
the Effective Date of the Merger, will be at least 50% of the value, as of
the Effective Date, of the Existing Proprietary Interest (as defined below)
of WIB. For purpose of this representation:
a. The Continuing Proprietary Interest means all of the shares of outstanding
WIB Common Stock as of the Effective Date of the Merger, other than shares
of WIB Common Stock: (i) exchanged in the Merger for consideration other
than Heritage Common Stock (including WIB Common Stock surrendered or
exchanged for cash or other property by Dissenters); (ii) acquired in
connection with the Merger (other than in exchange for the Heritage Common
Stock) by Heritage or by a person related to Heritage (within the meaning
of Section 1.368-1(e)(3) of the Income Tax Regulations); (iii) exchanged in
the Merger for Heritage Common Stock that, pursuant to a plan or intention
existing as of the Effective Date, is either redeemed by Heritage or
acquired (other than in exchange for Heritage Common Stock) by a person
related to Heritage (within the meaning of Section 1.368-1(e)(3) of the
Income Tax Regulations); or (iv) acquired prior to the Effective Date and
in connection with the Merger by persons related to WIB (within the meaning
of Section 1.368-1(e)(3)(i)(B) of the Income Tax Regulations), other than
in exchange for Heritage Common Stock or WIB Common Stock. For purposes of
this representation, the optional or mandatory redemption of Heritage
Common Stock by Heritage pursuant to the terms of the stock will not be
treated as undertaken in connection with the Merger if it occurs more than
five years after the Merger;
<PAGE>
b. The Existing Proprietary Interest means: (i) all of the shares of
outstanding WIB Common Stock as of the Effective Date of the Merger
(including shares acquired prior to the Effective Date and in connection
with the Merger by persons related to WIB); (ii) shares of WIB Common Stock
redeemed prior to the Effective Date and in connection with the Merger; and
(iii) the amount of any extraordinary distributions made by WIB with
respect to its stock prior to the Effective Date and in connection with the
Merger. For purpose of this representation, extraordinary distributions
will not include periodic dividends that are consistent with WIB's historic
dividend practice;
c. An acquisition of Heritage Common Stock or of WIB Common Stock by a person
acting as an intermediary for Heritage, WIB, or a person related to
Heritage or WIB (within the meaning of Section 1.368-1(e)(3) of the
Income Tax Regulations) will be treated as made by Heritage, WIB, or the
related person, respectively; and
d. Any reference to Heritage or WIB includes a reference to any successor or
predecessor of such corporation to the extent provided in Section 1.368-
1(e)(5) of the Income Tax Regulations.
5. Heritage has no intention or plan to reacquire any of its stock issued in
the Merger. To the best of the knowledge of the management of Heritage, no
person related to Heritage (within the meaning of Section 1.368-1(e)(3)
of the Income Tax Regulations) and no person acting as an intermediary for
Heritage or such a related person has a plan or intention to acquire any of
the Heritage Common Stock issued in the Merger.
6. Heritage has no plan or intention to sell or otherwise dispose of any of
the assets of WIB acquired in the Merger, except for dispositions made in
the ordinary course of business or transfers described in Section 368
(a)(2)(C) of the Code.
7. WIB stockholders who perfect their rights to dissent from the Merger in
accordance with Section 23B.13.010 et seq. of the Washington Law shall be
paid the value for shares of WIB Common Stock. The value to be paid shall
be determined in accordance with Washington Law.
8. The liabilities of WIB assumed by Heritage and the liabilities to which the
transferred assets of WIB are subject were incurred by WIB in the ordinary
course of its business.
9. Following the Merger, Heritage will continue the historic business of WIB
or use a significant portion of WIB's historic business assets in a
business. For purposes of this representation, Heritage will be deemed to
satisfy this requirement if (a) the members of Heritage's qualified group
(as defined in Section 1.368-1(d)(4)(ii) of the Income Tax Regulations),
in the aggregate, continue the historic business of WIB or use a
significant portion of WIB's historic business assets in a
<PAGE>
business, or (b) the foregoing activities are undertaken by a partnership
in which (i) the members of Heritage's qualified group, in the aggregate,
own at least a 33-1/3% capital and/or profits interest in the partnership,
or (ii) one or more members of the qualified group has active and
substantial management functions as a partner with respect to the
partnership business and the members of the qualified group, in the
aggregate, own at least a 20% capital and/or profits interest in the
partnership.
10. Each party to the Agreement will pay its own expenses incurred in
connection with the Merger, including the cost of soliciting proxies for
the WIB Special Meeting and printing costs and expenses incurred in
connection with the Proxy Statement/Prospectus, except that Heritage shall
pay the filing fees payable in connection with the Registration Statement
of which the Proxy Statement/Prospectus forms a part. In the event that
the Merger is not consummated for any reason, Heritage and WIB each have
agreed to pay the expenses arising from the negotiation and preparation of,
and filings and solicitations with respect to, the Agreement and the
transactions contemplated by such Agreement.
11. There is no intercorporate indebtedness existing between Heritage or any of
its affiliates and WIB or any of its affiliates that was issued, acquired,
or will be settled at a discount.
12. Neither Heritage nor WIB is an "investment company" as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
13. WIB is not under the jurisdiction of a court in a case under Title 11 of
the United States Code or similar case within the meaning of Section
368(a)(3)(A) of the Code.
14. Both the fair market value and the total adjusted basis of the assets of
WIB transferred to Heritage will equal or exceed the sum of the liabilities
assumed by Heritage, plus the amount of the liabilities, if any, to which
the transferred assets are subject.
15. None of the compensation received by any stockholder-employee of WIB will
be separate consideration for, or allocable to, any of his or her shares of
WIB Common Stock; none of the shares of Heritage Common Stock received by
any stockholder-employee will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any stockholder-
employee will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arm's-length for similar
services.
16. The payment of cash to WIB stockholders in lieu of fractional shares of
Heritage Common Stock was not separately bargained for consideration and is
being made solely for the purpose of saving Heritage the expense and
inconvenience of issuing fractional shares.
<PAGE>
17. WIB has not owned during the past five years, any shares of Heritage Common
Stock.
Based solely on the information submitted and on the representations set forth
above and assuming that the Merger will take place as described in the Agreement
and that the representations made by Heritage and WIB are true and correct at
the time of the consummation of the Merger, our opinion is as follows:
1. Provided the proposed Merger of WIB with and into Heritage qualifies as a
statutory merger under Washington Law, the Merger will be a reorganization
within the meaning of Section 368(a)(1)(A) of the Code. Heritage and WIB
will each be "a party to a reorganization" within the meaning of Section
368(b) of the Code.
2. No gain or loss will be recognized to WIB stockholders upon the exchange of
WIB Common Stock solely for Heritage Common Stock (Section 354 of the
Code). We express no opinion on the tax treatment to holders of vested
options to acquire shares of WIB Common Stock who receive shares of
Heritage Common Stock in exchange for their options.
3. The tax basis of the Heritage Common Stock received by the WIB stockholders
will be the same as the basis of the WIB Common Stock surrendered in
exchange therefor (Section 358(a)(1) of the Code).
4. The holding period of the Heritage Common Stock received by the
stockholders of WIB will include the period during which WIB Common Stock
surrendered therefore was held, provided the stock of WIB is a capital
asset in the hands of the stockholders of WIB on the date of the exchange
(Section 1223(1) of the Code).
5. The payment of cash to WIB stockholders in lieu of fractional share
interests of Heritage Common Stock will be treated for federal income tax
purposes as if the fractional shares were distributed as part of the Merger
and then redeemed by Heritage in payment of and in exchange for the shares,
as provided for in Section 302(a) of the Code, depending on the attribution
rules of Section 318 of the Code. Assuming a stockholder's stock is a
capital asset, a stockholder receiving such cash will recognize capital
gain or loss equal to the difference between the amount of cash received
and the stockholder's adjusted basis in the fractional share interest.
6. Where a dissenting stockholder of WIB receives cash in exchange for his or
her WIB Common Stock, such cash will be treated as having been received by
the stockholder as a distribution in redemption of his or her stock subject
to the provisions and limitations of Section 302 of the Code.
No opinion is expressed about the tax treatment of the Merger transaction under
other provisions of the Code and regulations or about the federal income tax or
state income tax treatment of any condition existing at the time of or other tax
consequences resulting from the Merger transaction
<PAGE>
that are not specifically covered above. This opinion is addressed only to you
and concerns only the transaction described above. This opinion may be relied
upon only by you.
We consent to the inclusion of this opinion in the Registration Statement on
Form S-4 of Heritage relating to the Merger and the reference to our firm under
the caption "Legal Matters" and the caption "Material Federal Income Tax
Consequences of the Merger" in the Proxy Statement/Prospectus which is part of
the Registration Statement.
Very Truly Yours,
GERRISH & McCREARY, P.C.
<PAGE>
EXHIBIT 21
HERITAGE FINANCIAL CORPORATION
Subsidiary
Name Jurisdiction of Incorporation
- ---- -----------------------------
Heritage Bank Washington
Olympia, Washington
<PAGE>
EXHIBIT 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Heritage Financial Corporation
We consent to the use of our report dated July 30, 1998 with respect to the
consolidated financial statements of Heritage Financial Corporation as of June
30, 1997, and 1998 and for each of the years in the three year period ended
June 30, 1998, incorporated herein by reference and to the reference to our
firm under the headings "Heritage's Relationship With Independent Accountants"
and "Experts" in the registration statement.
KPMG LLP
Seattle, Washington
January 19, 1999
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Washington Independent Bancshares, Inc.
Toppenish, Washington
We hereby consent to the use of our report dated January 16, 1998 with
respect to the consolidated financial statements of Washington Independent
Bancshares, Inc. as of and for the years ended December 31, 1997 and 1996,
included herein, and to the reference to our firm under the headings "Experts"
in the registration statement.
Knight, Vale & Gregory, Inc., P.S.
Tacoma, Washington
January 19, 1999
<PAGE>
EXHIBIT 23(c)
Consent of Columbia Financial Advisors
We hereby consent to the inclusion in this registration statement on Form S-
4 of our opinion dated September 28, 1998 and to all references to our firm in
the registration statement.
COLUMBIA FINANCIAL ADVISORS
<TABLE>
<C> <S>
/s/ Robert J. Rogowski
By: __________________________
</TABLE>
January 19, 1999
<PAGE>
REVOCABLE PROXY OF WASHINGTON INDEPENDENT BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY ___, 1999
The undersigned hereby appoints Donald V. Rhodes and D. Michael Broadhead
and each of them (with full power to act alone) as proxies, with full power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, all the shares of Washington Independent Bancshares, Inc. ("WIB") common
stock, no par value per share, held of record by the undersigned on __________,
1999, at a Special Meeting of Shareholders to be held at
__________________________, Yakima, Washington on February ___, 1999, at
_______. __m., local time, and at any and all adjournments of such Special
Meeting, as follows:
1. Merger Agreement. A proposal to approve the Agreement and Plan of
Merger dated as of September 28, 1998, providing for the merger of WIB with and
into Heritage Financial Corporation.
[_] FOR [_] AGAINST [_] ABSTAIN
2. Other Matters. To act upon such other matters as may properly come
before the Special Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF THE
MERGER AGREEMENT
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED "FOR" THE LISTED PROPOSITION. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING. HOWEVER, IF ANY OTHER MATTERS
ARE PROPERLY PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE
WITH THE RECOMMENDATIONS OF MANAGEMENT. THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS.
Please sign exactly as your name appears on this form of proxy. When
signing as attorney, executor, administrator, trustee or guardian, please give
your full title. If shares are held jointly, each holder must sign. In the
event that you are present and elect to vote at the Special Meeting or at any
adjournment thereof, you must notify the secretary of WIB at the Special Meeting
of your decision to terminate this proxy, and then the power of said attorneys
and proxies shall be deemed terminated and of no further force and effect.
The undersigned acknowledges that prior to the execution of this proxy he
or she received from WIB notice of the Special Meeting and a Proxy
Statement/Prospectus for that meeting.
Dated ______________, 1999.
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Print name of shareholder Print name of shareholder
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED POSTAGE
PRE-PAID ENVELOPE
