<PAGE> 1
As filed with the Securities and Exchange Commission on April 10, 1998
Registration No. ____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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WASHINGTON BANKING COMPANY
(Name of small business issuer in its charter)
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WASHINGTON 6712 91-1725825
(State or jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer
or organization) Classification Code Number) Identification Number)
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1421 S.W. BARLOW STREET, OAK HARBOR, WASHINGTON 98277 (360) 679-3121
(Address, including zip code, and telephone number, including
area code of registrant's principal executive offices)
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MICHAL D. CANN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WASHINGTON BANKING COMPANY
1421 S.W. BARLOW STREET
OAK HARBOR, WASHINGTON 98277
(360) 679-3121
(Name, address, including zip code and telephone number, including
area code, of agent for service) Copies of communications to
J. JAMES GALLAGHER, ESQ.
SANDRA L. GALLAGHER, ESQ.
GORDON THOMAS, HONEYWELL,
MALANCA, PETERSON & DAHEIM, P.L.L.C.
1201 PACIFIC AVENUE, SUITE 2200
P.O. BOX 1157
TACOMA, WASHINGTON 98401-1157
(253) 572-5050
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APPROXIMATE DATE OF PROPOSED SALE OF TO THE PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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==========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) UNIT (2) PRICE (2) REGISTRATION FEE
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Common stock, no par value _____ shares $ $10,350,000 $3,053.25
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(1) Includes an option to purchase ________ shares granted to the underwriter to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee, in
accordance with Rule 457(c).
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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WASHINGTON BANKING COMPANY
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CROSS-REFERENCE SHEET
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Form SB-2 Item No. and Caption Location or Heading in the Prospectus
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1. Forepart of Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages Insider Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Shareholders
8. Plan of Distribution Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Management; Principal and Selling
Owners and Management Shareholders
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Underwriting
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of
Operations; Business
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market For Common Equity and Related Market for Common Stock; Dividends;
Stockholder Matters Description of Capital Stock
21. Executive Compensation Management
22. Financial Statements Washington Banking Company and Whidbey
Island Bank Consolidated Financial
Statements
23. Changes In and Disagreements with Experts
Accountants on Accounting and Financial
Disclosure
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INFORMATION CONTAINED HERIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY ____, 1998
________ Shares
[LOGO]
WASHINGTON BANKING COMPANY
Common Stock
(No Par Value Per Share)
Of the ______ shares of common stock, no par value (the "Common
Stock"), offered hereby (the "Offering"), ______ shares are being offered by
Washington Banking Company (the "Company") and ____ shares are being offered by
certain existing shareholders of the Company (the "Selling Shareholders"). See
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of shares by the Selling Shareholders. Prior to this Offering
there has been no public market for the Common Stock and there can be no
assurance that any active trading market will develop. Application has been made
for inclusion of the Common Stock on the Nasdaq National Market under the symbol
"WBCO". It is currently estimated that the initial public offering price of the
Common Stock will be between $________ and $________ per share. For a discussion
of factors considered in determining the initial public offering price, see
"Underwriting."
Ryan, Beck & Co. (the "Underwriter" or "Ryan Beck") has reserved up to
______ shares of the Common Stock offered hereby for sale at the price to the
public to certain of the Company's directors, officers and employees. See
"Management - Directors and Certain Executive Officers of the Company."
---------------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE ___ HEREOF FOR A DISCUSSION OF CERTAIN
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
OTHERWISE.
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UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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Per Share............................ $ $ $ $
Total (3)............................ $ $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting estimated expenses of $______ payable by the Company
and $____ payable by the Selling Shareholders.
(3) The Company has granted the Underwriter a 30-day option to purchase up
to ______ additional shares to cover over-allotments, if any. See
"Underwriting." If all such additional shares are purchased, the total
price to public, underwriting discounts and commissions, proceeds to
the company and proceeds to selling shareholders will be $_______,
$________, $_________, and $_______, respectively.
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as, and if delivered to and accepted by the Underwriter, and
subject to their right to reject orders in whole or in part and to certain other
conditions.
---------------------------------
RYAN, BECK & CO.
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THE DATE OF THIS PROSPECTUS IS MAY ___, 1998.
<PAGE> 4
MAP OF MARKET AREAS
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE
MARKET PRICE OF THE COMMON STOCK, THE PURCHASE OF COMMON STOCK TO COVER SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE EFFECTED
ON THE NASDAQ NMS OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements contained elsewhere in this
Prospectus. Except as otherwise indicated, all information in this Prospectus
has been adjusted for the 100-for-1 stock split effective March 26, 1998. Except
as otherwise indicated, all information in this Prospectus assumes no exercise
of the Underwriter's over-allotment option. Unless the context clearly suggests
otherwise, references in this Prospectus to the Company include its wholly-owned
subsidiary, Whidbey Island Bank. This Prospectus contains certain
forward-looking statements within the meaning of federal securities laws. Actual
results and the timing of certain events could differ materially from those
projected in the forward-looking statements due to a number of factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Washington Banking Company (the "Company") is a registered bank holding
company whose wholly-owned subsidiary, Whidbey Island Bank (the "Bank"),
conducts a full-service commercial banking business. Headquartered in Oak
Harbor, Washington, the Company provides a full range of commercial banking
services to small and medium-sized businesses, professionals and other
individuals through nine branch offices located on Whidbey Island and Camano
Island in Island County, as well as the Burlington (Skagit County) and
Bellingham (Whatcom County) communities in northwestern Washington.
The Company's market area of Island County, Skagit County and Whatcom
County encompasses three distinct economies. Island County's largest population
center, Oak Harbor, is dominated by a large military presence with naval
operations at Naval Air Station Whidbey Island ("NAS Whidbey Island"). NAS
Whidbey Island and the jobs it generates contribute significantly to the
county's economy. NAS Whidbey Island was on the federal government's list of
potential base closures in 1991 but has since been removed from that list and
has not been on recommended base closure lists prepared since 1991. See "Risk
Factors -- Geographic Concentration." Agriculture, forestry and construction
also contributes significantly to the economy of the county. Due to its natural
beauty, the county attracts tourism and has a significant number of retirement
communities. Skagit County's economy has historically been a primarily forestry
and agricultural based economy. In recent years, manufacturing, mining,
construction and service/retail businesses in Skagit County have grown, along
with the county's population. Whatcom County, which borders Canada, has
experienced an upsurge in population and industry over the past several years.
It is the home of Western Washington University, one of the State of
Washington's four year academic centers, and has an economy with a strong
manufacturing base, as well as a strong academic-research and
vocational-technical base. The United States Customs Service and municipal,
county and state governments give the County additional employment stability.
Management believes that the county benefits from the U.S.-Canada Free Trade
Agreement that took effect January 1, 1989.
The Bank began operations in 1961 on Whidbey Island. Until early 1994,
the Company limited its physical presence to Island County (Whidbey Island and
neighboring Camano Island), and particularly to Whidbey Island, a 45 mile long
island that runs parallel to the mainland area of Washington north of Everett
and south of Bellingham, but had no presence on the mainland. In view of the
threatened closure of NAS Whidbey Island, the Company determined that it would
be prudent to diversify geographically beyond Island County. With the
consolidation of the large regional banks operating in Washington, and the
resulting dislocation of customers, the Company saw an opportunity to expand
onto the mainland along the northern I-5 corridor. In February 1994, the Company
opened a loan production office in Burlington, Washington (Skagit County). Loan
growth in the Burlington office was strong and the Company determined that it
would pursue its growth strategy in and around Skagit County and north into
Whatcom County. In pursuit of that growth strategy, the Company has targeted
areas north of Everett, Washington and areas contiguous to Whidbey Island into
which it would expand.
The primary factors considered in determining the areas of geographic
expansion are customer demand and the availability of experienced managers,
lending officers and branch personnel with a long standing community presence
and extensive banking relationships. The Company also emphasizes the hiring of
experienced personnel with extensive industry knowledge when considering lending
product expansion.
3
<PAGE> 6
Due to the favorable response in Burlington, the Company converted the
Burlington loan production office into a full service branch in August 1995. In
late 1996, the Company targeted Bellingham for expansion , hired an experienced
manager and lending officer with a long standing community presence and in
early 1997 opened a full service branch in downtown Bellingham.
The Company has experienced substantial growth since 1995, with assets
increasing to $160.1 million at December 31, 1997 from $99.5 million at year end
1995. During that same period, loans receivable increased to $117.5 million from
$63.1 million, deposits grew to $146.4 million from $88.5 million and
shareholders' equity increased to $13.0 million from $10.4 million. Net income
for the year ended December 31, 1997 increased to $1.9 million from $1.3 million
for the year ended December 31, 1995.
The Company's objective is to continue, over the next several years, to
expand its geographical presence outside of Whidbey Island, while solidifying
its market position on the Island. To deliver the Company's products more
effectively and efficiently, the Company's market strategy is to locate in its
targeted growth areas full service branch offices which provide all of the
Company's products and services supported by mini branches, grocery or retail
store branches and/or automated teller machines ("ATM's") in the areas
surrounding that central location in order to further service customers.
Acquisition of banks or branches will also be used as a means of expansion if
appropriate opportunities are presented. The Company also expects to invest in
technology to facilitate telephone, personal computer and Internet banking,
but with its primary commitment being to provide exceptional personal service.
Currently, the Company's geographical expansion is expected to be
concentrated in the Burlington/Mount Vernon area of the Skagit Valley, the
Anacortes area to the north of Whidbey Island, and in other areas of Skagit
County and in the Bellingham area of Whatcom County. Additional geographic
expansion areas will be considered if they meet the Company's criteria.
In pursuit of its growth strategy, the Company expects to relocate the
Bellingham office to a larger office by the end of 1998 and in the second
quarter of 1998 to open a full service branch (which has already been
constructed) in Anacortes and a grocery store branch on Camano Island to
complement its existing Camano Island branch. By year end 1998 the Company
anticipates opening grocery store or mini branch locations in the Mount Vernon
and Bellingham areas and other areas complementing its existing branch
structure. It also anticipates opening a full-service branch in Freeland,
Washington which is located in the southern part of Whidbey Island.
While continuing to geographically expand, management's strategy is to
continue to provide a high level of personal service to its customers and to
expand loan, deposit and other products and services that it offers its
customers. Maintenance of asset quality will be emphasized by controlling
nonperforming assets and adhering to prudent underwriting standards. In
addition, management will strive to improve operating efficiencies to further
manage noninterest expense and will continue to improve internal operating
systems.
The Company's expansion activity can be expected to require the
expenditures of substantial sums to purchase or lease real property and
equipment and hire experienced personnel.
The Company's principal executive office is located at 1421 S.W. Barlow
Street, Oak Harbor, Washington 98277. Its telephone number is (360) 679-3121.
THE OFFERING
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Common Stock Offered by the Company........................... __________ Shares
Common Stock Offered by the Selling Shareholders.............. __________ Shares
Common Stock Outstanding Immediately Prior to Offering........ 1,872,700 Shares
Common Stock to be Outstanding After Offering................. __________ Shares (1)
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4
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Use of Proceeds............. The Company intends to contribute approximately
$_______ million of net proceeds to the Bank to
support the anticipated future growth of the
Bank and the remainder of the net proceeds will
be used by the Company for general corporate
purposes. The Bank intends to use the capital
received from the Company to support its growth,
including the opening of new full service and
more limited service branches. The Bank may
also use a portion of the proceeds to purchase
branch offices of other financial institutions
located in its market area should such
opportunities arise. See "Use of Proceeds."
Directed Shares............. __________ shares, or ______% of the Offering,
have been reserved for the Company's directors,
officers and employees.
Dividends................... The Company has paid an annual dividend of $0.19
per share, $0.18 per share and $0.17 per share
in 1997, 1996 and 1995, respectively, and a
semi-annual dividend of $0.10 per share for the
first two quarters of 1998. The Company
anticipates paying a regular quarterly cash
dividend in the future, although there can be no
assurance that it will do so. See "Dividends."
Risk Factors................ The purchase of the Common Stock involves
certain risks. See "Risk Factors."
Nasdaq Symbol............... "WBCO" (Application has been made for listing on
Nasdaq National Market). See "Market for Common
Stock."
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(1) Does not include ________ shares issuable upon exercise of the Underwriter's
over-allotment option, or 311,800 shares issuable at prices ranging from
$4.40 per share to $13.88 per share upon exercise of outstanding options.
See "Underwriting" and "Management."
5
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SUMMARY CONSOLIDATED FINANCIAL DATA
The information presented below for the years ended December 31, 1997,
1996 and 1995 is derived from the audited consolidated financial statements and
notes thereto of the Company ("Company's Financial Statements"). This
information does not purport to be complete and should be read in conjunction
with the Company's Financial Statements appearing elsewhere in this Prospectus.
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AT OR FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1997 1996 1995
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(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
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OPERATING DATA:
Net interest income $ 7,543 $ 5,912 $ 5,139
Provision for loan losses 647 350 220
Noninterest income 1,607 1,424 1,060
Noninterest expense 5,781 4,684 4,124
Provision for income taxes 818 738 534
Net income 1,904 1,564 1,321
PER SHARE DATA:
Net income, basic $ 1.02 $ 0.84 $ 0.71
Net income, diluted 0.96 0.82 0.70
Book value 6.96 6.21 5.56
Dividend 0.19 0.18 0.17
BALANCE SHEET DATA:
Total assets $160,068 $117,280 $ 99,454
Loans receivable, net of unearned fees 117,535 81,269 63,136
Allowance for loan losses 1,296 796 620
Deposits 146,394 105,212 88,506
Shareholders' equity 13,035 11,570 10,357
SELECTED PERFORMANCE RATIOS:
Return on average assets 1.35% 1.49% 1.44%
Return on average equity 15.21 13.91 13.14
Net interest margin(1)(3) 5.94 6.27 6.26
Net interest spread(2)(3) 5.13 5.44 5.34
Noninterest expense to average assets 4.09 4.46 4.50
Efficiency ratio(4) 63.18 63.85 66.53
ASSET QUALITY RATIOS:
Nonperforming loans to period-end loans 0.98% 1.44% 0.42%
Allowance for loan losses to period-end loans 1.10 0.98 0.98
Allowance for loan losses to nonperforming loans 112.60 67.98 235.74
Nonperforming assets to total assets(5) 0.74 1.00 0.37
Net loan charge-offs to average
loans outstanding 0.15 0.25 0.29
CAPITAL RATIOS:
Total risk-based capital 11.63% 14.97% 16.58%
Tier 1 risk-based capital 10.67 14.00 15.64
Leverage ratio 8.08 10.19 10.69
Equity to assets ratio 8.14 9.87 10.41
OTHER DATA:
Number of banking offices 9 8 8
Number of full time equivalent employees (6) 116 90 88
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(1) Net interest margin is net interest income divided by average interest
earning assets.
(2) Net interest spread is the difference between the average yield on interest
earning assets and the average costs of interest bearing liabilities.
(3) For purposes of this calculation, interest earned on non-taxable
securities has been computed on a 34% tax equivalent basis.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(5) Nonperforming assets consist of nonaccrual and restructured loans and real
estate owned.
(6) The increase in full-time equivalent employees in 1997 reflected branch
openings and anticipated branch openings, increase in lending personnel and
executive and administrative personnel.
[END OF BOX]
6
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RISK FACTORS
An investment in the Common Stock offered hereby involves certain
risks. Prospective investors should carefully consider, among others, the
factors noted below.
AGGRESSIVE GROWTH STRATEGY
The Company is pursuing a strategy of aggressive growth, the success of
which will depend on its ability to manage credit risks, control costs and
provide competitive products and services while rapidly expanding its geographic
presence by branching or acquiring other banks or branches of banks. During the
period from December 31, 1995 to December 31, 1997, the Company's assets grew to
$160.1 million from $99.5 million, or by 60.9%. Additionally, the Company's
expansion plans anticipate the opening of approximately six de novo full-service
or mini branches by year end 1999. There can be no assurances that the Company
will be successful in increasing its volume of loans and deposits at acceptable
risk levels and upon acceptable terms, expanding its asset base to a targeted
size, managing the costs and implementation risks associated with its growth
strategy, integrating any acquired institutions or branches or preventing
deposit erosion at acquired institutions or branches. Also, there can be no
assurance that the Company's expansion plans when implemented will be
profitable. Any acquisitions or branching by the Company will be subject to
regulatory approvals and there can be no assurance that the Company will succeed
in securing such approvals. The Company's ability to pursue its growth strategy
also may be adversely affected by general economic conditions. See "Business --
Introduction" and "-- Competition."
The banking industry generally has seen a trend toward automation of
delivery of banking services, a reduction in the number of full-service branch
offices and a de-emphasis on personal service. This trend appears to be the
result of efforts by banks to reduce costs and increase efficiency. While the
Company seeks to improve its capacity to utilize technological innovations, its
strategy is based on the belief that customer demand for personal contact and
strategically placed branch offices will continue for the foreseeable future.
Thus, the Company is continuing to expand its branch network and the
availability to customers of well-trained and highly motivated personnel at a
time when many banks are consolidating their branch networks and automating
customer responses. There can be no assurance that this strategy will be
successful or that technological advances by its competitors will not result in
the loss of customer relationships. As a result of this strategy, the Company's
cost for providing banking services may generally be higher than that of many of
its competitors for the foreseeable future.
NO PRIOR MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiations
between the Company and the Underwriter and may be different than the market
price for the Common Stock following the Offering. The Company has filed an
application to have the Common Stock approved for quotation on the Nasdaq
National Market. One of the requirements for initial quotation of the Common
Stock is the presence of three market makers. The Underwriter has advised the
Company that it intends to make a market in the Common Stock following the
completion of the Offering so long as the volume of trading activity and certain
other market-making considerations justify it doing so. While the Company
anticipates that it will be able to obtain the commitment from at least two
other broker-dealers to act as market makers for the Common Stock, there can be
no assurance there will be three or more market makers for the Common Stock.
Making a market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those prices,
subject to securities laws and regulatory constraints. Additionally, the
development of a liquid public market depends on the existence of willing buyers
and sellers, the presence of which is not within the control of the Company or
any market maker. The number of active buyers and sellers of the Common Stock at
any particular time may be limited. Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice.
Investors should not view the Common Stock as a short term investment. There can
be no assurance that an active and liquid trading market for the Common Stock
will develop or that, if developed, it will continue, nor is there any assurance
that persons purchasing shares will be able to sell them at or above the
purchase price. See "Market for Common Stock."
7
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CERTAIN LENDING RISKS
Since 1995, the Company has expanded, and continues to expand, its loan
portfolio rapidly. From year end 1995 to December 31, 1997, the Company's loan
portfolio has grown to $117.5 million from $63.1 million, or by 86.2%. The
Company has focused significant resources on commercial loans collateralized by
equipment, inventory, accounts receivable or other business assets, including
loans to finance automobile dealer inventories. Commercial business lending
generally involves greater credit risk than one to four family mortgage lending.
In addition, the Company has rapidly expanded its consumer lending primarily by
placing more emphasis on the origination of automobile loans generated
principally through automobile dealers. Such indirect automobile loans are
generally considered to have more risk than directly originated automobile
loans. Although the Company has not incurred significant credit losses in recent
periods, there can be no assurance that the Company will not incur significant
credit losses in the future.
GEOGRAPHIC CONCENTRATION
Substantially all of the Company's lending activities are to customers
on Whidbey and Camano Island and in the Northwest/Skagit Valley and Bellingham
regions of Washington. The Company's growth and profitability depend upon
economic conditions in those areas. Unfavorable changes in economic conditions
affecting those areas, such as in the agricultural, forestry and manufacturing
industries, or a significant decline in the large military base presence in Oak
Harbor may have a material adverse impact on the risk of loss associated with
the loan portfolio and on operations of the Company in general.
The Company is headquartered in Oak Harbor, Washington located on the
northern section of Whidbey Island. A large military base, NAS Whidbey Island,
is also located in Oak Harbor. NAS Whidbey Island was on the federal
government's list of recommended military closures in 1991, but has since been
removed. However, no assurance can be given that the base will not be on a list
of recommended base closures in the future. If the base closed, the economic
vitality of the community will be dependent upon the ability of the local
economy to diversify and closure of NAS Whidbey Island could have a material
adverse impact on the local economy and the Company. At March 15, 1998,
approximately 7,700 military and 1,400 civilian persons in the Company's
market area were employed by NAS Whidbey Island.
POSSIBLE DILUTIVE EFFECT OF STOCK OPTION PLANS
In furtherance of its employee compensation program, the Company plans
to seek shareholder approval for the adoption of an amendment to its Employee
Stock Option Plan increasing the number of shares subject to options which will
then be available for grant to selected officers and employees. The Company
intends that the total number of shares subject to options (from both the
present plan and the anticipated amended plan) will be equal to approximately
15% of the total pro forma shares of Common Stock to be outstanding upon
completion of the Offering. Any increase in the number of shares subject to
options would have a dilutive effect on shareholders' ownership interests if the
additional shares are authorized but unissued shares rather than shares acquired
in the open market.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of Michal D. Cann, its
President and Chief Executive Officer. A failure to promptly replace Mr. Cann
with a person of comparable ability and experience should his services become
unavailable, could have a material adverse effect on the Company. Although the
Company recently has hired Larry Scodeller, its Executive Vice President and
Chief Operating Officer, in part in order to provide a replacement for Mr. Cann
should his services become unavailable, no assurance can be given that a
replacement for Mr. Cann would be available readily, if at all. See
"Management."
ABILITY TO MAKE DIVIDEND PAYMENTS
The Company is a legal entity separate and distinct from the Bank.
Because the Company's principal business activity is limited to owning the Bank
the Company's payments of dividends on the Common Stock will generally be funded
from dividends received by the Company from the Bank. Washington law limits the
aggregate amount of cash dividends that the Bank may pay to the Company, its
sole shareholder. The Bank's ability to make dividend payments
8
<PAGE> 11
to the Company is subject to the Bank's continuing profitable operations and
there can be no assurance that future earnings of the Bank will support
sufficient dividend payments to the Company.
COMPETITION
The Company 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, credit unions and other financial
and non-financial institutions. Some of the financial institutions with which
the Company competes are not subject to the same regulation as the Company. Many
of the Company's competitors have substantially higher lending limits than the
Company and offer certain services, including trust and international banking
services, that the Company does not provide. There can be no assurance that the
Company's competitive efforts will continue to be successful.
IMPACT OF INTEREST RATES
The results of operations for commercial banks, including the Bank, may
be materially and adversely affected by changes in prevailing economic
conditions, including changes in interest rates and the monetary and fiscal
policies of the federal government. Although the current interest rate
environment is favorable for many financial institutions, including the Company,
such an environment is unlikely to continue indefinitely. The Company's
profitability, like that of many financial institutions, is dependent to a large
extent upon net interest income, which is the difference between interest income
on interest earning assets, such as loans and investments, and interest expense
on interest bearing liabilities, such as deposits and borrowings. When interest
bearing liabilities mature or reprice more quickly than interest earning assets
in a given period, a significant increase in market rates of interest could
adversely affect net interest income. Conversely, when interest earning assets
mature or reprice more quickly than interest bearing liabilities, falling
interest rates could result in a decrease in net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Asset/Liability Management."
ANTI-TAKEOVER PROVISIONS
Certain provisions included in the Company's Articles of Incorporation
will assist the Company in maintaining its independence as a separate, publicly
owned corporation. The Articles provide for the election of directors to
staggered terms of three years and for their removal without cause only upon the
vote of holders of 66-2/3% of the outstanding voting shares. The Articles also
include a requirement that certain transactions (including certain business
combinations) with principal shareholders must be approved by the holders of not
less than 66-2/3% of the shares attributable to persons other than the principal
shareholder. Moreover, all of the Company's directors (in their capacities as
individual shareholders) and certain individual shareholders are subject to a
certain Stock Buy and Sell Agreement ("Buy-Sell Agreement") which provides for a
right of first refusal among the directors and those shareholders to purchase
each other's shares of the Company's common stock. Approximately 14% of the
total issued and outstanding shares of the Company are subject to the Buy-Sell
Agreement. Further, the Articles contain a provision that requires the Company's
Board of Directors to consider certain non-monetary factors in evaluating any
acquisition bid. Finally, the Articles provide, among other things, that the
Company may issue preferred stock, without prior shareholder approval, in one or
more series, with such relative rights and preferences as the Board of Directors
may determine.
These provisions, and certain provisions contained in the Washington
Business Corporation Act, which prohibit certain significant business
transactions if not accomplished in accordance with the statute, collectively
and individually, may discourage transactions such as mergers, or tender offers
or terms which certain of the Company's shareholders may consider beneficial. As
a result, holders of the common stock may potentially be deprived of an
opportunity to sell their shares at a premium over market price. See "Stock
Buy-Sell Agreement" and "Description of Capital Stock - Anti-Takeover Measures."
Payments to certain key members of management of the Company would be
required pursuant to severance agreements, in the event of a change in control
of the Bank or the Company which would make a potential takeover bid more
expensive. See "Management -- Severance Agreements."
9
<PAGE> 12
GOVERNMENT REGULATION
The Company is subject to extensive federal and Washington state
legislation, regulation and supervision. These laws and regulations are
primarily intended to protect depositors and the deposit insurance fund, not
shareholders of the Company. The Company is subject to regulation by the Board
of Governors of the Federal Reserve System. Whidbey Island Bank, as a
state-charted bank, is subject to supervision by the Federal Deposit Insurance
Corporation (the "FDIC") and the Washington Department of Financial
Institutions, Division of Banks (the "Division"). Recently enacted, proposed and
future legislation and regulations have had, will continue to have, or may have
a material effect on the business, operations and prospects of the Company. Some
of the legislative and regulatory changes may increase the Company's cost of
doing business and place other financial institutions in a stronger competitive
position. The Company is unable to predict the nature or extent of the effects
on its business and earnings that any fiscal or monetary policies, or new
federal or state legislation or regulations, may have in the future. See
"Supervision and Regulation."
USE OF PROCEEDS
The net proceeds of the Company from the Offering after deducting the
Underwriting Discount and estimated expenses are projected to be approximately
$______ million ($_______ million if the Underwriter's over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. The Company intends to contribute
approximately $_______ million of net proceeds to the Bank to support the
anticipated future growth of the Bank and the remainder of the net proceeds will
be used by the Company for general corporate purposes. The Bank intends to use
the capital received from the Company to support its growth including the
opening of new full service and more limited service branches. The Bank may also
use a portion of the proceeds to purchase branch offices of other financial
institutions in its market area should such opportunities arise.
DILUTION
The net tangible book value of the Company at December 31, 1997 was
approximately $13.0 million, or $6.96 per share of Common Stock. Net tangible
book value per share represents the Company's total tangible assets less its
total liabilities, divided by the total number of outstanding shares of Common
Stock. After giving effect to the sale of _________ shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$_______ per share (the midpoint of the proposed range of offering prices) and
the application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company at December 31, 1997 would have been
approximately $____ million or $____ per share of Common Stock. This represents
an immediate increase in such net tangible book value of $______ per share to
the existing shareholders of the Company and an immediate dilution in net
tangible book value of $ ___________ per share to purchasers of Common Stock in
the Offering. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $ _________
Net tangible book value per share before Offering............ $6.96
Increase per share attributable to new investors............. _____
Pro forma net tangible book value per share after Offering............ _________
Dilution per share to new investors................................... $
===========
</TABLE>
During the past five years officers, directors and affiliated persons
of such officers and directors have purchased Common Stock of the Company at
prices ranging from $3.93 to $14.00, as adjusted for the 100-for-1 split
effective March 26, 1998, compared to the price to the public at which Common
Stock is being offered by the Company hereby.
MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common
Stock and only isolated privately negotiated sales of the Common Stock have
occurred. According to information furnished to the Company, during the twelve
months ended March 31, 1998, sales of stock took place at prices ranging from
$8.05 to $14.00, as adjusted for the 100-for-1 stock split effective March 26,
1998. Those transactions may not be representative of value of the Common Stock.
The Company has filed an application to have the Common Stock approved for
quotation on the
10
<PAGE> 13
Nasdaq National Market under the symbol "WBCO." Once approved for quotation on
the Nasdaq National Market, the Common Stock's continued qualification for
quotation requires that a total of at least three securities firms make a market
in the Common Stock. The Underwriter has advised the Company that it intends to
use its best efforts to make a market in the Common Stock and to encourage other
securities firms to do the same, but it has no obligation to do so. Making a
market involves maintaining bid and asked quotations for the Common Stock and
being able as principal to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. There can be no assurance that an active and liquid trading market
for the Common Stock will develop or that quotation of the Common Stock will be
available on the Nasdaq National Market as contemplated.
DIVIDENDS
Since 1995, Company has paid the following annual amounts on a per
share basis, as adjusted for the 100-for-1 stock split effective March 26, 1998,
as dividends to its shareholders:
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1997 $0.19
1996 0.18
1995 0.17
</TABLE>
The Board of Directors dividend policy is to review the Company's
financial performance, capital adequacy, cash resources, regulatory
restrictions, economic conditions and other factors, and if such review is
favorable, to declare and pay a cash dividend. For 1997 and prior years,
dividends have been paid on an annual basis. After completion of the Offering,
the Company intends to pay any dividends on a quarterly basis. As a transition
to quarterly dividends, on March 26, 1998, the Board of Directors of the Company
declared a dividend in the amount of $0.10 per outstanding share of Common Stock
(adjusted for the 100-for-1 stock split effective March 26, 1998) for the first
two quarters of 1998. Although the Company anticipates payment of a regular
quarterly cash dividend, future dividends are subject to these limitations and
to the discretion of the Board of Directors, and could be reduced or eliminated.
The ability of the Company to pay dividends will depend on the profitability of
the Bank, the need to retain or increase capital, and the dividend restrictions
imposed upon the Bank by applicable banking law. See "Supervision and
Regulation."
11
<PAGE> 14
CAPITALIZATION
The following table, which should be read in conjunction with the
Consolidated Financial Statements and Notes thereto contained elsewhere in this
Prospectus, presents the capitalization of the Company, at December 31, 1997, on
an actual basis (adjusted to reflect the 100-for-1 stock split effective March
26, 1998, and the reduction in par value to no par value) and as adjusted for
the issuance of ________ shares of Common Stock offered by the Company hereby at
a price to the public of $______ per share and application of the estimated net
proceeds therefrom. Certain of the "As Adjusted" numbers are pro forma estimates
and are provided for illustration purposes only. The price to the public will be
established by the Company and the Underwriter at the date of the Prospectus and
the estimated net proceeds and certain of the "As Adjusted" amounts shown below
will vary depending on the price to the public.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
ACTUAL AS ADJUSTED (1)
------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, no par value; 20,000 shares authorized; no shares $ -- $ --
issued and outstanding.
Common Stock, no par value, 10,000,000 shares authorized; 1,872,700
shares issued and outstanding, _____ shares as adjusted (2) 2,943
Retained earnings 10,075
Unrealized gain on investments, net 17
--
Total shareholders' equity $13,035 $ --
======= =====
Capital Ratios:
Total risk-based capital ratio 11.63% %
Tier I risk-based capital ratio 10.67
Leverage ratio 8.08
</TABLE>
- ----------
(1) Assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting."
(2) Does not include 311,800 shares issuable at prices ranging from $4.40 per
share to $13.88 per share upon exercise of outstanding options. See
"Management."
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The information presented below for the years ended December 31, 1997,
1996 and 1995 is derived from the audited consolidated financial statements and
notes thereto of the Company's Financial Statements. This information does not
purport to be complete and should be read in conjunction with the Company's
Financial Statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Total interest income $ 11,901 $ 8,858 $ 7,613
Total interest expense 4,358 2,946 2,474
---------- ---------- ----------
Net interest income 7,543 5,912 5,139
Provision for loan losses 647 350 220
---------- ---------- ----------
Net interest income after provision for loan losses 6,896 5,562 4,919
Service charges and other fees 1,116 1,024 893
Other noninterest income 491 400 167
---------- ---------- ----------
Total noninterest income 1,607 1,424 1,060
Total noninterest expense 5,781 4,684 4,124
---------- ---------- ----------
Income before income taxes 2,722 2,302 1,855
Provision for income taxes 818 738 534
---------- ---------- ----------
Net income $ 1,904 $ 1,564 $ 1,321
========== ========== ==========
Weighted average number of common shares outstanding 1,873,921 1,864,000 1,863,167
Weighted average number of diluted common shares outstanding 1,986,512 1,919,415 1,882,132
PER SHARE DATA:
Net income, basic $ 1.02 $ 0.84 $ 0.71
Net income, diluted 0.96 0.82 0.70
Book value 6.96 6.21 5.56
Dividends 0.19 0.18 0.17
BALANCE SHEET DATA:
Total assets $ 160,068 $ 117,280 $ 99,454
Loans receivable, net of unearned fees 117,535 81,269 63,136
Allowance for loan losses 1,296 796 620
Deposits 146,394 105,212 88,506
Shareholders' equity 13,035 11,570 10,357
SELECTED PERFORMANCE RATIOS:
Return on average assets 1.35% 1.49% 1.44%
Return on average equity 15.21 13.91 13.14
Net interest margin(1)(3) 5.94 6.27 6.26
Net interest spread(2)(3) 5.13 5.44 5.34
Noninterest expense to average assets 4.09 4.46 4.50
Efficiency ratio(4) 63.18 63.85 66.53
Dividend payout ratio(5) 18.6 21.4 23.9
ASSET QUALITY RATIOS:
Nonperforming loans to period-end loans 0.98% 1.44% 0.42%
Allowance for loan losses to period-end loans 1.10 0.98 0.98
Allowance for loan losses to nonperforming loans 112.60 67.98 235.74
Nonperforming assets to total assets(6) 0.74 1.00 0.37
Net loan charge-offs to average loans outstanding 0.15 0.25 0.29
CAPITAL RATIOS:
Total risk-based capital 11.63% 14.97% 16.58%
Tier 1 risk-based capital 10.67 14.00 15.64
Leverage ratio 8.08 10.19 10.69
Equity to assets ratio 8.14 9.87 10.41
OTHER DATA:
Number of banking offices 9 8 8
Number of full time equivalent employees(7) 116 90 88
</TABLE>
- ----------
(1) Net interest margin is net interest income divided by average interest
earning assets.
(2) Net interest spread is the difference between the average yield on
interest earning assets and the average costs of interest bearing
liabilities.
(3) For purposes of this calculation, interest earned on
non-taxable securities has been computed on a 34% tax equivalent basis.
(4) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(5) The dividend payout ratio is dividends declared per share divided by net
income per share, basic.
(6) Nonperforming assets consists of nonaccrual loans, restructured loans and
Real Estate Owned.
(7) The increase in full-time equivalent employees in 1997 reflected branch
openings and anticipated branch openings, increase in lending personnel
and executive and administrative personnel.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Company. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes thereto contained elsewhere in this
Prospectus.
OVERVIEW
The Bank began operations in 1961, with its headquarters at Coupeville,
Washington, located on Whidbey Island. The Company was formed as a bank holding
company in April of 1996 and currently holds all of the issued and outstanding
Common Stock of the Bank. Currently, the Company and the Bank are headquartered
in Oak Harbor. The Company's only significant business activity has been to hold
the Common Stock of the Bank and invest its available funds in accounts at the
Bank.
The Company's objective is to continue, over the next several years, to
expand its geographical presence outside of Whidbey Island, while solidifying
its market position on the Island. Currently, the geographical expansion is
expected to be concentrated in the Burlington/Mt. Vernon area of the Skagit
Valley, the Anacortes area to the north of Whidbey Island, and in other areas of
Skagit County and in the Bellingham area of Whatcom County. Additional
geographic expansion areas will be considered if experienced managers and
lending officers with a long standing presence in the area and extensive
relationships are available and requisite customer demand exists. Such expansion
activity can be expected to require the expenditures of substantial sums to
purchase or lease real property and equipment and hire experienced personnel.
The Company's results of operations are dependent to a large degree on
net interest income. Interest income and cost of funds are affected
significantly by general economic conditions, particularly changes in market
interest rates, and by government policies and the actions of regulatory
authorities. The Company also generates noninterest income primarily through
service charges and fees, and other sources including merchant credit card
account fees. The Company's noninterest expenses consist primarily of
compensation and employee expense, and occupancy expense.
FINANCIAL CONDITION.
Total assets increased to $160.1 million at December 31, 1997 from
$117.3 million at December 31, 1996, and $99.5 million at December 31, 1995, an
annual growth rate of 26.9% This increase resulted primarily from growth in the
loan portfolio, which was funded by deposit growth.
Total loans amounted to $117.5 million, $81.3 million and $63.1 million
at December 31, 1997, 1996 and 1995, respectively. Commercial loans grew to
$48.2 million at December 31, 1997 from $23.4 million at December 31, 1995 while
consumer loans increased to $33.7 million from $15.5 million during that same
period. Commercial loans as a percentage of total loans increased to 41% at
December 31, 1997 from 37.1% at December 31, 1995, and consumer loans increased
to 28.7% of total loans from 24.5% at those dates. Real estate loans decreased
to 19.5% of total loans, at year end 1997 from 27.1% at year end 1995, while
real estate construction loans decreased to 10.8% from 11.3%. See "Business" -
Lending Activities."
Total investment securities were $29.7 million and $26.0 million at
December 31, 1997, and 1996, respectively. The increase in 1997 reflected the
investment of excess liquidity. Premises and equipment, net, were $4.3 million
and $3.5 million at December 31, 1997 and 1996, respectively. The increase in
1997 reflects upgrading computer systems and remodeling of the administrative
and other offices.
Deposit accounts totaled $146.4 million, $105.2 million and $88.5
million at December 31, 1997, 1996 and 1995, respectively. Management attributes
this increase to the Bank's aggressive marketing campaign of time deposits and
an increase in deposits resulting from expanding commercial loan relationships.
Shareholders' equity was $13.0 million, $11.6 million and $10.4 million at
December 31, 1997, 1996 and 1995, respectively. These increases primarily
reflect net income less dividends paid to shareholders.
14
<PAGE> 17
RESULTS OF OPERATIONS
Fiscal Years Ended December 31, 1997, 1996 and 1995
Net Income. The Company reported net income of $1.9 million, $1.6
million and $1.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase for each year was primarily attributable to an
increase in net interest income and to a lesser extent increases in noninterest
income partially offset by increases in noninterest expenses and an increase in
the provision for loan losses.
Net Interest Income. For most financial institutions, the primary
component of earnings is net interest income. Net interest income is the
difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and Company borrowings. Changes in net interest income result from changes in
volume, spread and margin. For this purpose, volume refers to the average dollar
level of interest-earning assets and interest bearing liabilities, spread refers
to the difference between the average yield on interest earning assets and the
average cost of interest bearing liabilities, and margin refers to net interest
income divided by average interest earning assets and is influenced by the level
and relative mix of interest earning assets and interest bearing liabilities.
During the fiscal years ended December 31, 1997, 1996 and 1995, average interest
earning assets were $129.7 million, $96.0 million, and $83.3 million,
respectively. During these same periods, the Company's net interest margins were
5.94%, 6.27%, and 6.26%, respectively.
Net interest income for the years ended December 31, 1997, 1996 and
1995 was $7.5 million, $5.9 million and $5.1 million, respectively. The increase
in fiscal year 1997 was $1.6 million, or 27.6% and in 1996 was $773,000, or 15%.
Net interest income was favorably affected by average interest earning assets
increasing more rapidly than average interest bearing liabilities, with the
difference funded by growth in noninterest bearing deposits and shareholders'
equity. Average interest earning assets increased $33.6 million and $12.7
million for fiscal years ended 1997 and 1996, respectively, while average
interest bearing liabilities increased by $29.0 million and $12.0 million for
the same periods.
The yield on average interest earning assets decreased to 9.30% for the
year ended December 31, 1997 from 9.34% for the year ended December 31, 1996 as
a result of a general decline in yields on loans to 10.18% in 1997 from 10.59%
in 1996 due to a decrease in market interest rates and competitive pressures.
The rate on total average interest bearing liabilities increased to 4.17% in
1997 from 3.90% for 1996, as the Company increased both the volume and rate paid
on deposit liabilities. The yield on interest earning assets increased to 9.34%
for the year ended December 31, 1996 from 9.23% for the year ended December 31,
1995. This increase is due primarily to an increase in the rates earned on
investment securities in 1996 as the yield on taxable investment securities
increased to 5.90% in 1996 from 5.55% in 1995. An improved mix of interest
earning assets also contributed to the improvement as higher yielding loans grew
to 72.1% of interest earning assets in 1996 from 70.3% in 1995. The rate paid on
interest bearing liabilities grew by one basis point to 3.90% in 1996 from 3.89%
in 1995 as a decrease in the rate paid on Certificates of Deposits to 5.61% in
1996 from 5.98% in 1995 was more than offset by increases in the rates paid on
other categories of deposits in 1996 and a less favorable deposit mix in 1996.
Average interest bearing liabilities increased by 38.4% at December 31, 1997
compared to 1996 and by 18.8% at December 31, 1996 compared to 1995, with higher
costing certificates of deposit increasing more rapidly than interest bearing
demand and money market accounts during each period. These factors caused the
average net interest spread to decrease to 5.13% for the year ended December 31,
1997 from 5.44% for the year ended December 31, 1996.
Average Balances and Average Rates Earned and Paid. The following table
sets forth for the periods indicated information with regard to average balances
of assets and liabilities, as well as the total dollar amounts of interest
income from interest earning assets and interest expense on interest bearing
liabilities, resultant yields or costs, net interest income, net interest
spread, net interest margin and ratio of average interest earning asset to
average interest bearing liabilities.
15
<PAGE> 18
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1997 1996
------------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE PAID YIELD/COST BALANCE PAID YIELD/COST
-------- -------- ----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans $100,243 $10,207 10.18% $ 69,237 $7,334 10.59%
Federal funds sold 2,187 116 5.30 2,343 126 5.38
Investments
Taxable 17,986 1,118 6.22 18,315 1,080 5.90
Non-taxable (1) 9,241 616 6.67 6,132 426 6.95
-------- ------- ---- -------- ------ ----
Interest earning assets 129,657 12,057 9.30 96,027 8,966 9.34
Noninterest earning assets 11,775 8,917
-------- --------
Total assets $141,432 $104,944
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing demand and
money market accounts $ 40,600 $ 1,193 2.94% $ 28,753 $ 739 2.57%
Savings accounts 21,789 778 3.57 20,036 704 3.51
Certificates of deposits 42,220 2,387 5.65 26,777 1,503 5.61
-------- ------- ---- -------- ------ ----
Interest bearing liabilities 104,609 4,358 4.17 75,566 2,946 3.90
Noninterest bearing liabilities 24,301 18,133
-------- --------
Total liabilities 128,910 93,699
Shareholders' equity 12,522 11,245
-------- --------
Total liabilities and shareholders'
equity $141,432 $104,944
======== ========
Net interest income (1) $ 7,699 $6,020
------- ------
Net interest spread (1) 5.13% 5.44%
----- -----
Net interest margin (1) 5.94% 6.27%
----- -----
Interest earning assets to
interest bearing liabilities 123.94% 127.08%
------- -------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995
------------------------------------
INTEREST
AVERAGE EARNED/ AVERAGE
BALANCE PAID YIELD/COST
-------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Loans $58,609 $6,253 10.67
Federal funds sold 4,092 231 5.65
Investments
Taxable 16,346 908 5.55
Non-taxable (1) 4,293 296 6.90
------- ------ ----
Interest earning assets 83,340 7,688 9.23
Noninterest earning assets 8,226
-------
Total assets $91,566
=======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing demand and
money market accounts $24,556 $ 610 2.48%
Savings accounts 17,868 598 3.35
Certificates of deposits 21,184 1,266 5.98
------- ------ ----
Interest bearing liabilities 63,608 2,474 3.89
Noninterest bearing liabilities 17,903
-------
Total liabilities 81,511
Shareholders' equity 10,055
-------
Total liabilities and shareholders'
equity $91,566
=======
Net interest income (1) $5,214
------
Net interest spread (1) 5.34%
-----
Net interest margin (1) 6.26%
-----
Interest earning assets to
interest bearing liabilities 131.02%
-------
</TABLE>
- ----------
(1) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 34% in 1997,
1996 and 1995. These adjustments were $156,000, $108,000, and $76,000 for
the years ended December 31, 1997, 1996 and 1995.
16
<PAGE> 19
Rate/Volume Analysis. The following table sets forth the amounts of the
changes in consolidated net interest income attributable to changes in volume
and to changes in interest rates. Changes attributable to the combined effect of
volume and interest rate have been allocated proportionately to the changes due
to volume and the change due to interest rate.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------------------ ------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
---------------------- ----------------------
TOTAL TOTAL
INCREASE/ INCREASE/
VOLUME RATE DECREASE VOLUME RATE DECREASE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 3,284 $ (411) $ 2,873 $ 1,134 $ (53) $ 1,081
Securities (1) 171 57 228 222 80 302
Federal funds sold (8) (2) (10) (99) (6) (105)
-------- -------- -------- -------- -------- --------
Total interest income 3,447 (356) 3,091 1,257 21 1,278
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand and money
market accounts 304 150 454 104 25 129
Savings accounts 62 12 74 73 33 106
Certificates of deposit 867 17 884 334 (97) 237
-------- -------- -------- -------- -------- --------
Total interest expense 1,233 179 1,412 511 (39) 472
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income $ 2,214 $ (535) $ 1,679 $ 746 $ 60 $ 806
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
- ----------
(1) Interest income on non-taxable investments is presented on a fully
taxable-equivalent basis using the federal statutory rate of 34% in 1997,
1996 and 1995. These adjustments were $156,000, $108,000, and $76,000 for
the years ended December 31, 1997, 1996 and 1995.
Provision for Loan Losses. Provision for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. For the years ended
December 31, 1997, 1996 and 1995, net loan charge-offs amounted to $147,000,
$174,000 and $168,000, respectively. The Company's provision for loan losses for
the years ended December 31, 1997, 1996 and 1995 totaled $647,000, $350,000 and
$220,000, respectively. The provision for loan losses was increased
substantially in 1997 and 1996 to keep pace with the strong growth in the loan
portfolio. During 1997, the allowance for loan losses increased by $500,000 to
1.1% of loans and 112.6% of nonperforming loans at December 31, 1997. The
allowance represented 0.98% of loans at December 31, 1996 and 1995.
Noninterest Income. Noninterest income for the years ended December 31,
1997, 1996 and 1995 was $1.6 million, $1.4 million and $1.1 million,
respectively. The increases of $183,000 in 1997 and $364,000 in 1996 both
reflect an increase in service charges on deposit accounts and other fees and an
increase in merchant credit card account fees due to an expansion of that
program in late 1995.
Noninterest Expense. Noninterest expense for the years ended December
31, 1997, 1996 and 1995 was $5.8 million, $4.7 million and $4.1 million,
respectively. Increases in noninterest expense were primarily related to
compensation and employee benefits, occupancy expense and merchant credit card
and data processing expenses. These increases reflect the rapid expansion of the
Company which began in late 1995 and is more fully reflected in 1996 and 1997.
Included in increased salaries and benefits expense in 1997 were increased
staffing levels in executive and administrative personnel, branch personnel and
additions to mortgage lending and consumer lending departments. A portion of the
preopening expenses for two new branches opening in the first half of fiscal
1998 were also reflected in 1997 noninterest expense. The Company expects this
trend in increased noninterest expense to continue as a result of continued
planned expansion. Set forth below is a schedule showing additional detail
concerning increases in the Company's noninterest expense for 1997 compared with
1996 and 1995:
17
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
INCREASE/ INCREASE/
DECREASE DECREASE
1997 1996 1995 1997 VS. 1996 1996 VS. 1995
------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Salaries and benefits $3,494 $2,678 $2,366 $ 816 $312
Less: loan origination costs 1,109 659 646 450 13
------ ------ ------ ------ ----
Net salaries and benefits (as reported) 2,385 2,019 1,720 366 299
Occupancy expense 1,033 745 766 288 (21)
Merchant credit card expense 358 236 18 122 218
Office supplies and printing 275 220 228 55 (8)
Insurance expense 271 251 222 20 29
Data processing 219 125 80 94 45
Consulting and professional fees 202 165 176 37 (11)
Other 1,038 923 914 115 9
------ ------ ------ ------ ----
Total noninterest expense $5,781 $4,684 $4,124 $1,097 $560
====== ====== ====== ====== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds are customer deposits, cash and demand
balances due from other banks, federal funds sold, short-term investments and
investment securities available for sale. These funds, together with loan
repayments, are used to make loans and to fund continuing operations. In
addition, at December 31, 1997 the Company had unused lines of credit with the
Federal Home Loan Bank of Seattle ("FHLB") of $24.0 million and unused lines of
credit with financial institutions in the amount of $11.0 million, with no
advances on these lines of credit at December 31, 1997. The Company expects to
use FHLB advances to supplement its funding sources.
Total deposits were $146.4 million, $105.2 and $88.5 million at
December 31, 1997, 1996 and 1995, respectively. The increases in deposits were
39.2% and 18.9%, respectively, in 1997 and 1996. The Company, by policy, has not
accepted brokered deposits. It has made a concerted effort to attract deposits
in the market area it serves through competitive pricing and the delivery of
quality service.
The Company's deposits are expected to fluctuate according to the level
of the Company's deposit market share, economic conditions, and normal seasonal
variations, among other things. Certificates of deposit are the only deposit
group that have stated maturity dates. At December 31, 1997, the Company had
$56.1 million in certificates of deposit of which approximately $52.2 million,
or 93%, are scheduled to mature prior to December 31, 1998. Based on prior
experience, the Company anticipates that a substantial portion of outstanding
certificates of deposit will renew upon maturity.
Management anticipates that the Bank will rely primarily upon customer
deposits, loan repayments and current earnings to provide liquidity, and will
use such funds primarily to make loans and to purchase securities, primarily
issued by the federal government and state and local governments.
The Company's shareholders' equity increased to $13.0 million at
December 31, 1997 from $11.6 million at December 31, 1996. At December 31, 1997,
shareholders' equity was 8.14% of total assets compared to 9.87% of total assets
at December 31, 1996. The decrease in this ratio for the year ended December 31,
1997 is primarily a result of an increase in total assets of $42.8 million from
December 31, 1996 to December 31, 1997. The increase in total assets is due
primarily to an increase in total loans, and to a lesser extent, to an increase
in prepaid and other assets.
18
<PAGE> 21
CAPITAL RATIOS
The Company is subject to minimum capital requirements. See
"Supervision and Regulation." As the following table indicates, at December 31,
1997, and as adjusted to reflect the issuance and sale of Common Stock, at a
price to the public of $______ per share, and the application of the net
proceeds therefrom, the Company exceeded regulatory capital requirements. The
price to the public will be established by the Company and the Underwriter at
the date of the Prospectus and the estimated net proceeds will vary depending on
the price to the public.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------
MINIMUM WELL-CAPITALIZED ACTUAL AS ADJUSTED
REQUIREMENT REQUIREMENT RATIO RATIO
----------- ---------------- ------ -----------
<S> <C> <C> <C> <C>
Total risk-based capital ratio 8.00% 10.00% 11.63%
Tier 1 risk-based capital ratio 4.00% 6.00% 10.67%
Leverage ratio 4.00% 5.00% 8.08%
</TABLE>
Management expects that the net proceeds of the Offering, together with
internally generated funds, will allow the Company to remain "well-capitalized"
for regulatory purposes, although there can be no assurance that additional
capital will not be required in the near future due to greater-than-expected
growth, or otherwise.
ASSET/LIABILITY MANAGEMENT
The Company's results of operations depend substantially on its net
interest income. Like most financial institutions, the Company's interest income
and cost of funds are affected by general economic conditions and by competition
in the market place.
The purpose of asset/liability management is to provide stable net
interest income growth by protecting the Company's earnings from undue interest
rate risk, which arises from volatile interest rates and changes in the balance
sheet mix, and by managing the risk/return relationships between liquidity,
interest rate risk, market risk, and capital adequacy. The Company maintains an
asset/liability management policy that provides guidelines for controlling
exposure to interest rate risk by utilizing the following ratios and trend
analysis: liquidity, equity, volatile liability dependence, portfolio
maturities, maturing assets and maturing liabilities. The Company's policy is to
control the exposure of its earnings to changing interest rates by generally
endeavoring to maintain a position within a narrow range around an "earnings
neutral position," which is defined as the mix of assets and liabilities that
generate a net interest margin that is least affected by interest rate changes.
In order to control interest rate risk in a rising interest rate
environment, management's philosophy is to shorten the average maturity of the
investment portfolio in order to achieve a more asset-sensitive position,
therefore allowing quicker repricings and maximizing net interest margin.
Conversely, in a declining interest rate environment, management's philosophy is
to lengthen the average maturity of the investment portfolio, thereby becoming
more liability sensitive. In each case, the Company attempts to stay within its
established range around the earnings neutral position it has identified.
When suitable lending opportunities are not sufficient to utilize
available funds, the Company has generally invested such funds in securities,
primarily U.S. Treasury securities, securities issued by governmental agencies,
municipal securities and corporate obligations. The securities portfolio
contributes to the Company's profits and plays an important part in the overall
interest rate management. However, management of the securities portfolio alone
cannot balance overall interest rate risk. The securities portfolio must be used
in combination with other asset/liability techniques to actively manage the
balance sheet. The primary objectives in the overall management of the
securities portfolio are safety, liquidity, yield, asset/liability management
(interest rate risk), and investing in securities that can be pledged for public
deposits.
In reviewing the needs of the Company with regard to proper management
of its asset/liability program, the Company's management estimates its future
needs, taking into consideration historical periods of high loan demand and
19
<PAGE> 22
low deposit balances, estimated loan and deposit increases (due to increased
demand through marketing), and forecasted interest rate changes.
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An income
simulation model is the primary tool used to assess the direction and magnitude
of changes in net interest income resulting from changes in interest rates. Key
assumptions in the model include prepayment speeds on mortgage-related assets,
cash flows and maturities of other investment securities, loan and deposit
volumes and pricing. These assumptions are inherently uncertain and, as a
result, the model cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes and changes in market conditions and
management strategies, among other factors.
Based on the results of the income simulation model as of December 31,
1997, the Company would expect an increase in net interest income of $213,000 if
interest rates increase from current rates by 100 basis points and a decrease
in net interest income of $213,000 if interest rates decrease from current
rates by 100 basis points.
The analysis of an institution's interest rate gap (the difference
between the repricing of interest earning assets and interest bearing
liabilities during a given period of time) is another standard tool for the
measurement of the exposure to interest rate risk. The Company believes that
because interest rate gap analysis does not address all factors that can affect
earnings performance, it should be used in conjunction with other methods of
evaluating interest rate risk.
The following table sets forth the estimated maturity or repricing, and
the resulting interest rate gap of the Company's interest earning assets and
interest earning liabilities at December 31, 1997. The interest rate gaps
reported in the table arise when assets are funded with liabilities having
different repricing intervals. The amounts shown below could be significantly
affected by external factors such as changes in prepayment assumptions, early
withdrawals of deposits and competition.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT DECEMBER 31, 1997
-----------------------------------------------------------------------
0-3 MONTHS 3-12 MONTHS 1-5 YEARS OVER 5 YEARS TOTAL
---------- ----------- --------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 1,750 $ -- $ -- $ -- $ 1,750
Investment securities 1,000 4,052 17,335 7,324 29,711
Loans 46,537 19,472 44,600 6,926 117,535
-------- -------- -------- -------- --------
Total interest earning assets $ 49,287 $ 23,524 $ 61,935 $ 14,250 $148,996
======== ======== ======== ======== ========
Interest earning assets to total
interest earning assets 33.08% 15.79% 41.57% 9.56% 100.00%
======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand accounts $ 23,917 $ -- $ -- $ -- $ 23,917
Money market accounts 20,602 -- -- -- 20,602
Savings accounts 21,710 -- -- -- 21,710
Certificates of deposit 16,832 35,336 3,980 -- 56,148
-------- -------- -------- -------- --------
Total interest bearing liabilities $ 83,061 $ 35,336 $ 3,980 $ -- $122,377
======== ======== ======== ======== ========
Interest bearing liabilities to total 67.87% 28.87% 3.25% --% 100.00%
======== ======== ======== ======== ========
interest bearing liabilities
Interest sensitivity gap ($33,774) ($11,812) $ 57,955 $ 14,250 $ 26,619
======== ======== ======== ======== ========
Cumulative interest sensitivity gap ($33,774) ($45,586) $ 12,369 $ 26,619
======== ======== ======== ========
Cumulative interest sensitivity gap as
a percentage of total assets (21.10)% (28.48)% 7.73% 16.63%
======== ======== ======== ========
</TABLE>
20
<PAGE> 23
The table illustrates that if assets and liabilities reprice in the
time intervals indicated in the table, the Company is liability sensitive 0-12
months and asset sensitive thereafter. Thus the table indicates that in an
environment of increasing interest rates, the net interest income of the Company
would be adversely affected and in a declining interest rate environment, the
Company's net interest income would be favorably affected. As stated above,
certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
interest rates. For instance, while the table is based on the assumption that
interest bearing demand accounts, money market accounts and savings accounts are
immediately sensitive to movements in rates, the Company expects that in a
changing rate environment the amount of the adjustment in interest rates for
such accounts would be less than the adjustment in categories of assets which
are considered to be immediately sensitive. Additionally, certain assets have
features which restrict changes in the interest rates of such assets both on a
short-term basis and over the lives of such assets. Further, in the event of a
change in market interest rates, prepayment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an increase in market interest rates. Due to these shortcomings,
the Company places primary emphasis on its income simulation model when managing
its exposure to changes in interest rates.
EFFECTS OF INFLATION AND CHANGING PRICES
The primary impact of inflation on the Company's operations is
increased operating costs. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.
RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). This
statement provides standards for reporting comprehensive, or all inclusive,
income. In the Company's case, based on current operations, it would include as
an addition or deduction to reported net income, the change in the unrealized
gain on investments. This statement will not affect reported net income of the
Company. SFAS No. 130 will be effective in the Company's 1998 financial
statements and will require restatement of all prior periods shown on the
financial statements.
21
<PAGE> 24
BUSINESS
INTRODUCTION
The Company is a registered bank holding company whose wholly owned
subsidiary, Whidbey Island Bank, conducts a full-service commercial banking
business. The Bank is a Washington state chartered bank. Its deposits are
insured by the FDIC. Headquartered in Oak Harbor, Washington, the Company
provides a full range of commercial banking services to small and medium-sized
businesses, professionals and other individuals through nine branch offices
located on Whidbey Island and Camano Island in Island County, as well as the
Burlington (Skagit County) and Bellingham (Whatcom County) communities in
northwestern Washington.
The Company's business includes commercial loan, real estate loan and
construction loan portfolios. The Company is also active in the consumer banking
field, and provides a range of personal and consumer-oriented loan programs,
including installment loans, home improvement loans and direct and indirect
automobile loans.
The Company provides a range of deposit and other services for
individual and businesses, including checking and savings accounts, as well as
money market accounts, high yield certificates, individual retirement accounts,
safe deposit boxes and other consumer and business related financial services.
The Company also offers for sale nondeposit investment products through the
Bank's subsidiary WIB Financial Services, Inc.
LENDING ACTIVITIES
General
The Company provides a broad array of loan products to small and
medium-size business customers and to individuals. Since December 31, 1995, the
Company has significantly increased commercial business loans and consumer loans
as a percentage of its total loan portfolio and significantly decreased one to
four family real estate loans originated for the Company's portfolio as a
percentage of its total loan portfolio. The Company presently originates one to
four family real estate loans for third party long term lenders. During the same
period, the percentage of loans consisting of commercial and five or more family
real estate loans has also increased while real estate construction loans have
remained fairly constant as a percentage of the total loan portfolio.
The following table sets forth at the dates indicated the Company's
loan portfolio composition by type of loan.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 48,242 41.0% $ 34,522 42.4% $ 23,441 37.1%
Real estate commercial and
5 or more family residential 8,711 7.4 5,593 6.9 3,876 6.2
Real estate construction 12,646 10.8 8,389 10.3 7,100 11.3
Real estate one to four family 14,258 12.1 13,264 16.3 13,225 20.9
Consumer 33,721 28.7 19,568 24.1 15,494 24.5
--------- --------- --------- --------- --------- ---------
Subtotal 117,578 100.0% 81,336 100.0% 63,136 100.0%
========= ========= =========
Allowance for loan losses (1,296) (796) (620)
Less: deferred loan fees and other (43) (67) (104)
--------- --------- ---------
Net loans $ 116,239 $ 80,473 $ 62,412
========= ========= =========
</TABLE>
22
<PAGE> 25
The following table presents at December 31, 1997 (i) the aggregate
maturities of loans in the named categories of the Company's loan portfolio and
(ii) the aggregate amounts of variable and fixed rate loans that mature after
one year:
<TABLE>
<CAPTION>
WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL
------------- --------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $15,625 $16,962 $15,655 $ 48,242
Real estate construction 7,391 2,045 3,210 12,646
------- ------- ------- --------
Total $23,016 $19,007 $18,865 $ 60,888
======= ======= ======= ========
Fixed-rate loans $ 55,432
Variable-rate loans 62,146
--------
Total $117,578
--------
--------
</TABLE>
Commercial Loans. Commercial business lending is the primary focus of
the Company's lending activities. Commercial loans increased to $48.2 million at
December 31, 1997, representing 41.0% of its total loans, from $34.5 million, or
42.4%, at December 31, 1996 and $23.4 million, or 37.1%, at December 31, 1995.
Commercial loans include both secured and unsecured loans for working capital
and expansion. Short-term working capital loans generally are secured by
accounts receivable, inventory and/or equipment. The Company also makes term
commercial loans secured by equipment and real estate. Lending decisions are
based on an evaluation of the financial strength, management and credit history
of the borrower, and the quality of the collateral securing the loan. With few
exceptions, the Company requires personal guarantees and secondary sources of
repayment.
Commercial loans also are provided through the U.S. Small Business
Administration ("SBA loans"), an independent agency of the Federal Government,
which guarantees up to 75 - 80% of the loan amount. SBA loans are generally made
to small and medium size businesses. Once the SBA loan has been funded, the
Company has followed a practice of selling the guaranteed portions of SBA loans
in the secondary market. The guaranteed portions of these loans are generally
sold at a premium. At December 31, 1997, the Company had outstanding $1.5
million, or 3.1% of its commercial loan portfolio, in SBA commercial business
loans.
In 1997, the Company increased the origination of commercial loans to
automobile dealers to finance their inventories when the Company hired a lending
officer with substantial experience with dealer inventory financing and indirect
vehicle lending. At December 31, 1997, the Company had outstanding $2.4 million,
or 5.0% of its commercial loan portfolio, in dealer inventory loans to used
automobile dealers. With few exceptions, these loans are personally guaranteed
by the owner of the dealership. Such loans are often riskier than other types of
commercial loans and involve a higher degree of monitoring. Subject to market
conditions, the Company anticipates increasing its lending to automobile
dealers.
Commercial loans generally provide greater yields and reprice more
frequently than other types of loans, such as real estate loans. More frequent
repricing means that commercial loans are more sensitive to changes in interest
rates.
Real Estate Loans. Real estate loans are made for purchasing,
constructing and refinancing one to four family, five or more family and
commercial properties. The Company offers fixed and adjustable rate options. The
Company provides customers access to long-term conventional real estate loans
through its mortgage loan department which makes Federal National Mortgage
Association ("FNMA")--conforming loans for the account of third parties and
sells them in the secondary market.
Residential one to four family loans amounted to $14.3 million at
December 31, 1997, representing 12.1% of total loans, compared to $13.3 million,
or 16.3% at December 31, 1996 and $13.2 million, or 20.9%, at December 31, 1995.
The Company's portfolio of residential mortgage loans are secured by properties
located within the Company's market area. In 1997, the Company hired an
experienced mortgage lender and expanded the origination of residential loans
for the account of third parties. Loans originated for the account of third
parties are closed by the third party and therefore are not shown on the
Company's financial statements. The Company receives a fee for each such loan
originated. During the year ended December 31, 1997, the Company's total gross
loan originations of residential loans for the account of third parties were
$12.3 million, compared with $7.9 million for the year ended December 31, 1996
and
23
<PAGE> 26
$5.9 million for the year ended December 31, 1995. The Company anticipates that
it will continue to be an active originator of residential loans for the account
of third parties. The Company also anticipates taking steps to qualify to become
a seller of conforming residential mortgages to the Federal Home Loan Mortgage
Corporation ("FHLMC") and FNMA. After qualifying, the Company will consider
originating for sale to FHLMC and/or FNMA conforming residential mortgage loans,
depending on market conditions.
The Company has made, and anticipates continuing to make, on a
selective basis, five or more family and commercial real estate loans. Five or
more family and commercial real estate lending increased to $8.7 million,
representing 7.4% of total loans, from $5.6 million, or 6.9%, and $3.9 million,
or 6.2%, at December 31, 1996 and 1995, respectively. This lending has involved
loans secured principally by apartment buildings and commercial buildings for
office, storage and warehouse space. Generally in underwriting commercial real
estate loans, the Company requires the personal guaranty of borrowers and a
minimum cash flow to debt service ratio of 1.25 to 1. Loans secured by
commercial real estate may be greater in amount and involve a greater degree of
risk than one to four family residential mortgage loans. Payments on such loans
are often dependent on successful operation or management of the properties.
Construction loans amounted to $12.6 million, or 10.8% of total loans,
at December 31, 1997 compared with $8.4 million, or 10.3%, and $7.1 million, or
11.3%, at December 31, 1996 and 1995, respectively. The Company originates one
to four family residential construction loans for the construction of custom
homes (where the home buyer is the borrower) and provides financing to builders
for the construction of pre-sold homes and speculative residential construction.
Speculative residential lending amounted to $2.6 million, or 20.6% of the total
construction loan portfolio at December 31, 1997. The average loan size at
December 31, 1997 was approximately $98,000. With few exceptions, the Company
limits to four the number of unsold homes being built by each builder. The
Company lends to builders who have demonstrated a favorable record of
performance and profitable operations and who are building in markets that
management believes it understands and in which it is comfortable with the
economic conditions. The Company also makes commercial real estate construction
loans, generally for owner-occupied properties. The Company further endeavors to
limit its construction lending risk through adherence to established
underwriting procedures. Also, the Company generally requires documentation of
all draw requests and utilizes loan officers to inspect the project prior to
paying any draw requests from the builder. With few exceptions, the Company
requires personal guarantees and secondary sources of repayment on construction
loans.
Consumer Loans. At December 31, 1997, consumer loans constituted $33.7
million, or 28.7% of total loans, compared with $19.6 million, or 24.1%, and
$15.5 million, or 24.5%, at December 31, 1996 and 1995, respectively. Consumer
loans made by the Company include automobile loans, boat and recreational
vehicle financing, home equity and home improvement loans and miscellaneous
secured and unsecured personal loans. The Company also makes automobile loans
for used vehicles originated indirectly by selected automobile dealers located
in the Company's market areas. With the hiring of an experienced vehicle dealer
lender in 1997, the Company increased such lending. At December 31, 1997, $10.0
million, or 29.7%, of the Company's consumer loan portfolio consisted of
indirect automobile loans. The Company intends to continue to emphasize indirect
automobile loans and to gradually expand its purchase of dealer-originated
contracts to include recreational vehicles, trailers, motorcycles and other
vehicles. Consumer loans generally can carry significantly greater risks than
other loans, even if secured, if the collateral consists of rapidly depreciating
assets such as automobiles and equipment. Repossessed collateral securing a
defaulted consumer loan may not provide an adequate source of repayment of the
loan. Consumer loan collections are sensitive to job loss, illness and other
personal factors. The Company attempts to manage the risks inherent in consumer
lending by following established credit guidelines and underwriting practices
designed to minimize risk of loss. Indirect automobile and other vehicle loans
may involve greater risk than other consumer loans, including direct automobile
loans, such as dealer fraud. To mitigate these risks, the Company has limited
its indirect automobile loan purchases primarily to approximately 15 dealerships
that are established and well known in its market areas. In addition, the
Company has put in place systems designed to limit the risks inherent in dealer
originated loans.
The Company also offers VISA credit cards to its customers. At December
31, 1997, $943,000 of credit card balances were outstanding representing 2.8% of
the Company's consumer loan portfolio and less than 1% of its total portfolio.
Past due amounts on the Company's credit card portfolio have been minimal. At
December 31, 1997, approximately $2,800, or 0.3% of outstanding credit card
balances were past due. Home equity loans are also available through use of
VISA credit cards. Credit card home equity loans amounted to $2.7 million at
December 31,1997.
Loan Approvals. The Company's loan policies and procedures establish
the basic guidelines governing its lending operations. Generally, the guidelines
address the types of loans that the Company seeks, target markets, underwriting
and collateral requirements, terms, interest rate and yield considerations and
compliance with laws and regulations. All loans
24
<PAGE> 27
or credit lines are subject to approval procedures and amount limitations. These
limitations apply to the borrower's total outstanding indebtedness to the
Company, including the indebtedness of any guarantor. The policies are reviewed
and approved at least annually by the Board of Directors of the Company. The
Company supplements its own supervision of the loan underwriting and approval
process with periodic loan audits by internal loan examiners and outside
professionals experienced in loan review work.
Responsibility for loan production and loan underwriting is divided,
with the Executive Vice President being responsible for loan production and the
Chief Lending Officer being responsible for loan underwriting and approval. On
an annual basis, the Board of Directors determines the President's lending
authority, who then delegates lending authorities to the Chief Lending Officer
and other lending officers of the Company. Delegated authorities may include
loans, letters of credit, overdrafts, uncollected funds, and such other
authorities as determined by the Board or the President within his delegated
authority.
The President has authority to approve loans up to the lending limit
set by the Board of Directors, which was $500,000 for secured loans and $300,000
for unsecured loans at December 31, 1997. All loans above the lending limit of
the President are reviewed for approval by the Directors Loan Committee, up to
the Company's pre-established house lending limit. The Directors Loan Committee
consists of the President and four outside directors as appointed by the Board
of Directors of the Company. All loans above the house lending limit up to the
Company's statutory loan-to-one borrower limitation (also known as the legal
lending limit) require approval of the full Board of Directors. The Company's
legal lending limit was $2.6 million at December 31, 1997. The Company seldom
makes loans approaching its legal lending limit.
COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Company enters into various
types of transactions that include commitments to extend credit that are not
included in loans receivable, net, presented on the Company's consolidated
balance sheets. The Company applies the same credit standards to these
commitments as it uses in all its lending activities and has included these
commitments in its lending risk evaluations. The Company's exposure to credit
loss under commitments to extend credit is represented by the amount of these
commitments. See Notes to Financial Statements.
NONPERFORMING ASSETS
The following table sets forth, for the periods indicated, information
with respect to the Company's nonaccrual loans, restructured loans, total
nonperforming loans (nonaccrual loans plus restructured loans), and total
nonperforming assets.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans $ 498 $ 390 $ 77
Restructured loans 653 781 186
-------- -------- --------
Total nonperforming loans 1,151 1,171 263
Real estate owned 30 -- 108
-------- -------- --------
Total nonperforming assets $ 1,181 $ 1,171 $ 371
======== ======== ========
Accruing loans past due 90 days or more $ -- $ 2 $ 165
Potential problem loans 11 7 --
Allowance for loan losses 1,296 796 620
Nonperforming loans to period end loans 0.98% 1.44% 0.42%
Allowance for loan losses to period-end loans 1.10 0.98 0.98
Allowance for loan losses to nonperforming loans 112.60 67.98 235.74
Nonperforming assets to total assets 0.74 1.00 0.37
</TABLE>
The Consolidated Financial Statements are prepared on the accrual basis
of accounting, including the recognition of interest income on its loan
portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a
nonaccrual basis when there are serious doubts about the collectibility of
principal or interest. Generally, the Company's policy is to place a loan on
nonaccrual status when the loan becomes past due 90 days. Amounts received on
non-accrual loans
25
<PAGE> 28
generally are applied first to principal and then to interest only after all
principal has been collected. Restructured loans are those for which
concessions, including the reduction of interest rates below a rate otherwise
available to that borrower or the deferral of interest or principal, have been
granted due to the borrower's weakened financial condition. Interest on
restructured loans is accrued at the restructured rates when it is anticipated
that no loss of original principal will occur. Potential problem loans are loans
which are currently performing and are not included in nonaccrual or
restructured loans above, but about which there are serious doubts as to the
borrower's ability to comply with present repayment terms and, therefore, will
likely be included later in nonaccrual, past due or restructured loans. These
loans are considered by management in assessing the adequacy of the allowance
for loan losses.
At December 31, 1997, the Company had $498,000 of nonaccrual loans.
Interest on nonaccrual loans foregone was approximately $49,000 for the year
ended December 31, 1997 and $46,000 and $4,000 for the years ended December 31,
1996 and 1995, respectively.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered
adequate by management to provide for anticipated loan losses based on
management's assessment of various factors affecting the loan portfolio,
including a review of problem loans, business conditions and loss experience and
an overall evaluation of the quality of the underlying collateral. The allowance
is increased by provisions charged to operations and reduced by loans charged
off, net of recoveries.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
The following table shows the allocation of the allowance for loan
losses at December 31, 1997, 1996 and 1995. The allocation is based on an
evaluation of defined loan problems, historical ratios of loan losses and other
factors which may affect future loan losses in the categories of loans shown.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance applicable to:
Commercial 437 41.0% $ 266 42.4% $ 146 37.1%
Real estate mortgage 206 19.5 139 23.2 105 27.1
Real estate construction 115 10.8 64 10.3 44 11.3
Consumer 307 28.7 157 24.1 97 24.5
Unallocated 231 -- 170 -- 228 --
-------- -------- -------- -------- -------- --------
Total $ 1,296 100.00% $ 796 100.00% $ 620 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Represents total of all outstanding loans in each category as a percent of
total loans outstanding.
26
<PAGE> 29
The following table sets forth for the periods indicated information
regarding changes in the Company's allowance for loan losses:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $ 796 $ 620 $ 568
Charge-offs:
Commercial (43) (166) (52)
Real estate (11) -- (34)
Consumer (106) (63) (85)
-------- -------- --------
Total charge-offs $ (160) $ (229) $ (171)
======== ======== ========
Recoveries:
Commercial $ -- $ 49 $ --
Real estate -- -- --
Consumer 13 6 3
-------- -------- --------
Total recoveries 13 55 3
Net charge-offs (147) (174) (168)
Provision for loan losses 647 350 220
-------- -------- --------
Balance at end of period $ 1,296 $ 796 $ 620
======== ======== ========
Ratio of loan charge-offs to average loans outstanding
0.15% 0.25% 0.29%
</TABLE>
INVESTMENT ACTIVITIES
The Company's portfolio of investment securities (securities held to
maturity and securities available for sale) increased by $3.7 million from
December 31, 1996 to 1997. The investment portfolio consists primarily of U.S.
Treasury and government agency securities, municipal securities and corporate
obligations. Municipal securities represented 33.0% or $9.8 million, of the
Company's investment portfolio at December 31, 1997. The Company has purchased
nonrated municipal obligations of local and surrounding areas. Approximately
32.0% of the municipal securities in the Company's investment portfolio were
rated below "A", or its equivalent, or unrated. Corporate obligations amounted
to $7.6 million, or 25.7% of the Company's investment portfolio, at December
31, 1997. At December 31, 1997, all corporate obligations held by the Company
were rated A, or its equivalent, or better. The average maturity of the
securities portfolio was approximately three years at December 31, 1997.
Investment securities designated as held to maturity are those
securities which the Company has the ability and the intent to hold to maturity.
Events which may be reasonably anticipated are considered when determining the
Company's intent to hold investment securities for the foreseeable future.
Investment securities designated as held to maturity are carried at cost,
adjusted for amortization for premiums and accretions of discounts. Securities
to be held for indefinite periods of time and not intended to be held to
maturity are classified as available for sale and carried at fair value with any
unrealized gains or losses reflected as an adjustment to shareholders' equity.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates and/or significant
prepayment risks. At December 31, 1997, the investment portfolio consisted of
19% available for sale securities and 81% held to maturity investments.
The Company expects to more actively manage its investment portfolio in
the future and would expect that available for sale securities would increase as
a percent of total investment securities.
The following table summarizes the amortized costs, gross unrealized
gains and losses and the resulting market value of securities available for
sale:
27
<PAGE> 30
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
US Treasury $4,996 $ 26 $ -- $5,022
US Agency 500 (1) 499
------ ------ ------ ------
Total $5,496 $ 26 $ (1) $5,521
====== ====== ====== ======
DECEMBER 31, 1996
US Treasury $4,972 $ 20 $ (3) $4,989
====== ====== ====== ======
</TABLE>
The following table summarizes the recorded value, gross unrealized
gains and losses and the resulting market value of investment securities held to
maturity as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
GROSS GROSS
RECORDED UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
US Treasury $ 997 $ 2 $ -- $ 999
US Agency 4,996 21 (5) 5,012
Municipal 9,796 257 (3) 10,050
Corporate obligations 7,648 52 (8) 7,692
Other securities 71 -- -- 71
-------- -------- -------- --------
Total $ 23,508 $ 332 $ (16) $ 23,824
======== ======== ======== ========
DECEMBER 31, 1996:
US Treasury $ 995 $ 2 $ (3) $ 994
US Agency 6,514 21 (21) 6,514
Municipal 6,754 88 (30) 6,812
Corporate obligations 6,332 14 (39) 6,307
Other securities 58 -- -- 58
-------- -------- -------- --------
Total $ 20,653 $ 125 $ (93) $ 20,685
======== ======== ======== ========
</TABLE>
The following table summarizes the amortized cost and recorded and
market values of securities available-for-sale and held-to-maturity at December
31, 1997, by contractual maturity groups:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------
AMORTIZED COST RECORDED VALUE MARKET VALUE
-------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amounts maturing:
Within One Year $ 5,048 $ 5,052 $ 5,048
One to Five Years 17,314 17,335 17,453
Five to Ten Years 5,928 5,928 6,113
Over Ten Years 714 714 731
------- ------- -------
Total $29,004 $29,029 $29,345
======= ======= =======
</TABLE>
28
<PAGE> 31
The following table provides the carrying values, maturities and
weighted average yields of the Company's investment portfolio at December 31,
1997:
<TABLE>
<CAPTION>
MATURING
----------------------------------------------------------------------------------------
LESS THAN ONE ONE TO FIVE FIVE TO TEN OVER TEN
YEAR YEARS YEARS YEARS TOTAL
------------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasuries
Balance $ 2,496 $ 3,523 $ -- $ -- $ 6,019
Weighted average yield 5.25% 6.02% --% --% 5.70%
U.S. Agency
Balance $ 1,501 3,994 $ -- $ -- 5,495
Weighted average yield 6.14% 6.29% --% --% 6.25%
Municipal
Balance $ 55 $ 3,840 $ 5,759 $ 142 $ 9,796
Weighted average yield 5.00% 4.97% 4.88% 5.00% 4.92%
Corporate obligations & other
Balance $ 1,000 $ 5,978 $ 169 $ 572 $ 7,719
Weighted average yield 5.75% 7.21% 5.56% 5.59% 6.86%
FHLB Stock
Balance $ -- $ -- $ 682 $ -- $ 682
Weighted average yield --% --% 6.00% --% 6.00%
Total
Balance $ 5,052 $ 17,335 $ 6,610 $ 714 $ 29,711
Weighted average yield 5.61% 6.26% 5.01% 5.47% 5.85%
</TABLE>
The Company does not engage in, nor does it presently intend to engage
in, securities trading activities and therefore does not maintain a trading
account.
At December 31, 1997, there were no securities of any issuer (other
than governmental agencies) that exceeded 10% of the Company's shareholders'
equity.
SOURCES OF FUNDS
Deposit Activities
The Company provides a range of deposit services, including
non-interest bearing checking accounts, interest bearing checking and savings
accounts, money market accounts and certificates of deposit. These accounts
generally earn interest at rates established by management based on competitive
market factors and management's desire to increase or decrease certain types or
maturities of deposits. The Company does not pay brokerage commissions to
attract deposits. It strives to establish customer relations to attract core
deposits in non-interest bearing transactional accounts and thus to reduce its
costs of funds.
29
<PAGE> 32
The following table sets forth for the periods indicated the pro forma
combined average balances outstanding and average interest rates for each major
category of deposits.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995
------------------ -------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest bearing demand and
money market accounts $ 40,600 2.94% $28,753 2.57% $24,556 2.48%
Savings accounts 21,789 3.57 20,036 3.51 17,868 3.35
Certificates of deposit 42,220 5.65 26,777 5.61 21,184 5.98
-------- ------- -------
Total interest bearing deposits 104,609 75,566 63,608
Demand and other noninterest
bearing deposits 21,346 17,487 17,207
-------- ------- -------
Total average deposits $125,955 4.17% $93,053 3.90% $80,815 3.89%
======== ======= =======
</TABLE>
The following table sets forth at the dates indicated the amounts and
maturities of certificates of deposit with balances of $100,000 or more at
December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
Remaining maturity:
Less than three months $ 4,516
Three to six months 1,462
Six to twelve months 8,880
Over twelve months 367
-------
Total $15,225
=======
</TABLE>
OTHER PRODUCTS AND SERVICES
Other Banking Products and Services. To enable it to offer more
personalized service to its customers, the Company offers or expects to offer
additional products and services for its customers. Products and services
currently offered are a debit card program, automated teller machines at some of
its office locations and drive-through facilities at most of its branches. The
Company offers automated telephone banking service with 24-hour access to
accounts. During 1998, the Company expects to increase the number of ATM's it
offers and to upgrade its automated banking services.
Other Financial Services. The Company through its subsidiary, WIB
Financial Services, Inc., provides nondeposit investment products to its
customers.
COMPETITION
The Company experiences strong competition in its service area from a
number of commercial banks, savings banks, savings and loan associations, and
credit unions. See "Risk Factors -- Competition."
While federal legislation has increased competition between different
types of financial institutions for both deposits and loans, the impact of other
"nonbank" financial service products such as money market funds has been
significant, particularly in competing for deposits. See "Supervision and
Regulation."
30
<PAGE> 33
LITIGATION
In the ordinary course of business, the Company is subject to claims,
counter actions and other litigation. At December 31, 1997, in the opinion of
the Company's management and outside legal counsel, the ultimate liability, if
any, resulting from such claims or lawsuits will not be material to the
financial condition of the Company.
BANK PREMISES
The Company owns the property and buildings of its branches at Oak
Harbor (2), Coupeville, Burlington, Camano Island, Whidbey City and Clinton, and
leases the buildings and property of its branches at Langley and Bellingham. The
Company owns the building housing its Anacortes branch, which is situated on
land leased to the Company. The Company will also lease space for its grocery
store branch on Camano Island, which is scheduled to open once construction on
the grocery store is completed, sometime in the second quarter of 1998. In
addition to the branch offices, the Company's administrative offices in Oak
Harbor occupy approximately 10,000 square feet, of which approximately 6,000
square feet are situated on property owned by the Company and approximately
4,000 square feet are situated on property leased by the Company. The Company
also owns separate parcels of real property in Freeland (where the Company
expects to open a full service branch by year end 1998) and Bellingham (where
the Company expects to relocate its current Bellingham office by year end 1998).
COMPUTER/YEAR 2000
Management is presently evaluating its systems and software as well as
contacting software vendors and others with which it conducts business for
potential Year 2000 problems. This issue affects computer systems that have
time-sensitive programs that may not properly recognize the Year 2000, which
could result in major system failures or miscalculations for companies that have
not successfully adopted their systems or applications. In 1997, the Company
appointed a Year 2000 Committee to evaluate computer systems that may be
affected by Year 2000. Although the work of the Year 2000 Committee has not been
completed, management does not expect any material difficulties. The Company has
budgeted $150,000 to complete the evaluation and implementation of any required
changes.
EMPLOYEES
The Company had 116 full time equivalent employees at December 31,
1997. None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. These references are qualified in their
entirety by the referenced statutes and regulations. In addition, some statutes
and regulations which apply to and regulate the operation of the banking
industry might exist which are not referenced below. Changes in applicable
statutes and regulations may have a material effect on the business of the Bank
and the Company.
THE COMPANY
GENERAL. The Company is subject to the Bank Holding Company Act of 1956
("BHCA"), as amended, which places it under the supervision of the Federal
Reserve. In general, the BHCA limits the business of bank holding companies to
owning or controlling banks and engaging in other activities related to banking.
Certain recent legislation designed to expand interstate branching and relax
federal restrictions on interstate banking may expand opportunities for bank
holding companies (for additional information see below under the subheading
"The Bank - Interstate Banking and Branching"). However, the full impact of this
legislation on the Company is unclear at this time.
FEDERAL RESERVE REGULATION. A bank holding company must obtain the
approval of the Federal Reserve: (1) before acquiring direct or indirect
ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank; (2) before merging or consolidating with another
bank holding company; and (3) before acquiring substantially-all of the assets
of any additional banks.
31
<PAGE> 34
The Company is required to file annual and certain interim reports as
may be required from time to time by the Federal Reserve. In addition, the
Federal Reserve will perform periodic examinations of the Company.
HOLDING COMPANY CONTROL OF NON-BANKS. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company which is not a bank or a bank holding
company unless the Federal Reserve determines that the activities of such
company are so closely related to banking or managing or controlling banks as to
be a proper incident thereto. In making such determinations, the Federal Reserve
considers whether the performance of such activities by a bank holding company
would offer advantages to the public that would outweigh possible adverse
effects. For example, the Federal Reserve has by regulation determined that
activities such as, among others, (i) operating an industrial loan company,
industrial bank, savings association, mortgage company, finance company, trust
company, credit card company or factoring company, (ii) performing certain data
processing operations, (iii) leasing personal or real property, subject to
certain exceptions, and (iv) providing investment and financial advice, are so
closely related to banking as to be a proper incident thereto within the meaning
of the BHCA. On the other hand, activities such as real estate brokerage and
syndication, land development, property management, underwriting of life
insurance not related to credit transactions, and, with certain exceptions,
securities underwriting and equity funding, are not so closely related to
banking as to be a proper incident thereto within the meaning of the BHCA. In
the future, the Federal Reserve may from time to time add to or delete from the
list of activities permissible for bank holding companies.
TRANSACTIONS WITH AFFILIATES. The Company and the Bank are deemed
"affiliates" within the meaning of the Federal Reserve Act, which restricts
transactions between affiliates. Covered transactions include, subject to
specific exceptions, loans by bank subsidiaries to affiliates, investments by
bank subsidiaries in securities issued by an affiliate, the taking of such
securities as collateral, and the purchase of assets by a bank subsidiary from
an affiliate.
SUPPORT OF BANK SUBSIDIARIES. Under Federal Reserve policy, a bank
holding company is expected to act as a source of financial and managerial
strength to, and commit resources to support, each of its subsidiary banks. Any
capital loans a bank holding company makes to its subsidiary banks are
subordinate to deposits and to certain other indebtedness of those subsidiary
banks. The Crime Control Act of 1990 provides that, in the event of a bank
holding company's bankruptcy, the bankruptcy trustee will assume any commitment
the bank holding company has made to a federal bank regulatory agency to
maintain the capital of a subsidiary bank, and this obligation will be entitled
to a priority of payment.
CAPITAL ADEQUACY REQUIREMENTS. Banks and bank holding companies are
required to maintain certain minimum capital requirements. See "The
Bank--Capital Adequacy Requirements."
TIE-IN ARRANGEMENTS. The Company and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit, sale or lease of property or furnishing of services. For example, with
certain exceptions, the Bank cannot condition an extension of credit to a
customer on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor.
STATE LAW RESTRICTIONS. As a Washington corporation, the Company is
subject to certain limitations and restrictions under applicable Washington
corporate law, including limitations and restrictions relating to:
indemnification of directors, distributions to shareholders, transactions
involving directors, officers or interested shareholders, maintenance of books,
records, and minutes, and observance of certain corporate formalities.
SECURITIES LAWS. Bank securities are generally exempt from registration
under the Federal Securities Act of 1933 and applicable state securities laws.
However, the securities issued by the Company will be subject to the
registration requirements of the 1933 Act and applicable state securities laws
unless exemptions are otherwise available.
CONTROL TRANSACTIONS. The Change in Bank Control Act of 1978, as
amended, prohibits a person or group of persons from acquiring "control" of a
bank holding company unless the Federal Reserve has been given 60 days' prior
written notice of the proposed acquisition, and within that time period, the
Federal Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made before the expiration of the
disapproval period if the Federal Reserve issues written notice of its intent
not to disapprove the action.
32
<PAGE> 35
In addition, any company would be required to obtain the approval of
the Federal Reserve under the BHCA before acquiring 25% (5% if the acquiring
company is a bank holding company) or more of the outstanding shares of the
Company, or otherwise to obtain control over the Company.
THE BANK
GENERAL. Despite some recent legislative initiatives to reduce
regulatory burdens, banking remains a highly regulated industry. Legislation
enacted from time to time may increase the cost of doing business, limit or
expand permissible activities, or affect the competitive balance between banks
and other financial and non-financial institutions. Proposals to change the laws
and regulations governing the operations and taxation of banks and other
financial institutions are frequently made in Congress, in state legislatures,
and before various bank regulatory agencies. In addition, there continue to be
proposals in Congress to restructure the banking system.
Some of the significant areas of bank regulation, including significant
federal legislation affecting state-chartered banks, are generally discussed
below.
REGULATION OF STATE BANKS. Washington State banks are subject to
primary regulation and examination by the Division, and are also subject to
supervision, examination, and regulation by the FDIC.
Applicable federal and state statutes and regulations governing a
bank's operations relate, among other matters, to capital requirements, required
reserves against deposits, investments, loans, legal lending limits, mergers and
consolidations, borrowings, issuances of securities, payment of dividends (see
below), establishment of branches, and dealings with affiliated persons. The
FDIC has authority to prohibit banks under their supervision from engaging in
what they consider to be unsafe and unsound practices in conducting their
business. Depository institutions are also affected significantly by the actions
of the Federal Reserve as it attempts to control the money supply and credit
availability in order to influence the economy.
DIVIDENDS. Dividends paid to the Company by the Bank are the primary
source of the Company's cash flow. Various federal and state statutory
provisions limit the amount of dividends that the Bank is permitted to pay to
the Company without regulatory approval. Federal Reserve policy further limits
the circumstances under which bank holding companies may declare dividends.
If, in the opinion of the FDIC, a depository institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the institution, could
include the payment of dividends), the FDIC may require, after notice and
hearing, that such institution cease and desist from such practice. In addition,
the FDIC and the Federal Reserve have issued policy statements which provide
that insured banks and bank holding companies should generally pay dividends
only out of current operating earnings.
Washington state regulations restrict capital distributions by
institutions like the Bank, including dividends. Such restrictions are tied to
the institution's capital levels after giving effect to such distributions.
REGULATION OF MANAGEMENT. Federal law (1) sets forth circumstances
under which officers or directors of a bank may be removed by the institution's
federal supervisory agency, (2) places restraints on lending by a bank to its
executive officers, directors, principal shareholders, and their related
interests; and (3) prohibits management personnel of a bank from serving as a
director or in other management positions of another financial institution whose
assets exceed a specified amount or which has an office within a specified
geographic area.
CONTROL OF FINANCIAL INSTITUTIONS. No person may acquire "control" of a
bank unless the appropriate federal agency has been given 60 days prior written
notice and within that time the agency has not disapproved the acquisition.
Substantial monetary penalties may be imposed for violation of the change in
control or other provisions of banking laws. Washington banking laws further
require that 30 days before the acquisition of control, defined as direct or
indirect ownership, control or power to vote 25% or more of the outstanding
stock of a bank, the acquiring party must file with the Washington Division an
application containing certain specified information. Acquisitions of control in
violation of the statute are deemed void.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") became effective on August 9, 1989. Among other things,
FIRREA (1) phased in significant increases in the FDIC insurance premiums paid
by commercial banks; (2) created two deposit insurance pools within the FDIC,
one to insure commercial
33
<PAGE> 36
bank and savings bank deposits (the Bank Insurance Fund, or "BIF") and the other
to insure savings association deposits (the Savings Association Insurance Fund,
or "SAIF"); (3) for the first time, permitted bank holding companies to acquire
healthy savings associations; (4) permitted commercial banks that meet certain
housing-related asset requirements to secure advances and other federal services
from their local Federal Home Loan Banks; and (5) greatly enhanced the
regulators' enforcement powers by removing procedural barriers and sharply
increasing the civil and criminal penalties for violating statutes and
regulations.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was enacted into law in late 1991. As required by FDICIA,
numerous regulations have been adopted by federal bank regulatory agencies,
including the following: (1) federal bank regulatory authorities have
established five different capital levels for banks and, as a general matter,
enable banks with higher capital levels to engage in a broader range of
activities; (2) the Federal Reserve has issued regulations requiring
standardized disclosures with respect to interest paid on deposits; and (3) the
FDIC has (i) imposed restrictions on the acceptance of brokered deposits by
weaker banks; (ii) implemented risk-based deposit insurance premiums; and (iii)
issued regulations requiring state-chartered banks to comply with certain
restrictions with respect to equity investments and activities in which the
banks act as principal.
FDICIA recapitalized the BIF and required the FDIC to maintain the BIF
and SAIF at 1.25% of insured deposits by increasing deposit insurance premiums
as necessary to maintain such ratio. FDICIA also required federal bank
regulatory authorities to prescribe (1) non-capital standards of safety and
soundness; (2) operational and managerial standards for banks; (3) asset and
earnings standards for banks and bank holding companies addressing such areas as
classified assets, capital, and stock price; and (4) standards for compensation
of executive officers and directors of banks. However, this provision was
modified by recent legislation to allow federal regulatory agencies to implement
these standards through either guidelines or regulations.
INTERSTATE BANKING AND BRANCHING. 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 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 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 allowed, subject to certain conditions, mergers or other
combinations, relocations of banks' main offices and branching across state
lines in conjunction with the passage of the Interstate Banking Act.
CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve, the FDIC, and the
Office of the Comptroller of the Currency (collectively, the "Federal Banking
Agencies") have established uniform capital requirements for all commercial
banks. Bank holding companies are also subject to certain minimum capital
requirements. A bank that does not achieve and maintain required capital levels
may be subject to supervisory action through the issuance of a capital directive
to ensure the maintenance of adequate capital levels. In addition, banks are
required to meet certain guidelines concerning the maintenance of an adequate
allowance for loan and lease losses.
The Federal Banking Agencies' "risk-based" capital guidelines establish
a systematic, analytical framework that makes regulatory capital requirements
more sensitive to differences in risk profiles among banking organizations,
takes off-balance sheet exposures into explicit account in assessing capital
adequacy, and minimizes disincentives to holding liquid, low-risk assets. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into several categories, with high levels of capital being
required for the categories perceived as representing greater risk. The risk
weights assigned to assets and credit equivalent amounts of off-balance sheet
items are based primarily on credit risk. Other types of exposure, such as
interest rate, liquidity and funding risks, as well as asset quality problems,
are not factored into the risk-based ratio. Such risks, however, will be taken
into account in determining a final assessment of an
34
<PAGE> 37
organization's capital adequacy. Under these new regulations, banks are required
to achieve a minimum total risk-based capital ratio of 8% and a minimum Tier I
risk-based capital ratio of 4%.
The Federal Banking Agencies also have adopted leverage ratio standards
that require commercial banks such as the Bank to maintain a minimum ratio of
core capital to total assets (the "Leverage Ratio") of at least 4%. Any
institution operating at or near this level is expected to have well-diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity and good earnings, and in general, to be a strong banking
organization without any supervisory, financial or operational weaknesses or
deficiencies. Any institutions experiencing or anticipating significant growth
would be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels (e.g., an additional cushion of at
least 100 to 200 basis points, depending upon the particular circumstances and
risk profile).
Regulations adopted by the Federal Banking Agencies require such
agencies to take certain "prompt corrective action" when a bank fails to meet
certain capital requirements. The regulations establish and define five capital
levels at which an institution is deemed to be "well-capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically, undercapitalized." In order to be "well-capitalized,' an
institution must maintain, at least 10% total risk based capital, 6% Tier 1
risk-based capital, and a 5% Leverage Ratio. Increasingly severe restrictions
are imposed on the payment of dividends and management fees, asset growth and
other aspects of the operations of institutions that fall below the category of
"adequately capitalized" (which requires at least 8% total risk-based capital,
4% Tier I risk-based capital, and a 4% Leverage Ratio). Undercapitalized
institutions are required to develop and implement capital plans acceptable to
the appropriate federal regulatory agency. Such plans must require that any
company that controls the undercapitalized institution must provide certain
guarantees that the institution will comply with the plan until it is adequately
capitalized. As of the date of this Prospectus, the Bank was not subject to any
regulatory order, agreement, or directive with respect to meeting a specific
capital level for any capital measure.
The minimum ratio of total capital to risk-adjusted assets (including
certain off-balance sheet items, such as stand-by letters of credit) required by
the Federal Reserve for bank holding companies is 8%. At least one-half of the
total capital must be Tier I capital; the remainder may consist of Tier 2
capital. Bank holding companies are also subject to minimum Leverage Ratio
guidelines. These guidelines provide for a minimum Leverage Ratio of 3% for bank
holding companies meeting certain specified criteria, including achievement of
the highest supervisory rating. All other bank holding companies are required to
maintain a Leverage Ratio which is at least 100 to 200 basis points higher (4%
to 5%). These guidelines provide that banking organizations experiencing
internal growth or making acquisitions are expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
FDIC INSURANCE. Generally, customer deposit accounts in the Bank are
insured by the FDIC for up to a maximum amount of $100,000. The FDIC has adopted
a risk-based insurance assessment system. Under this system, depository
institutions are required to pay assessments to their respective insurance fund
(BIF or SAIF) based upon the institution's risk classification, with a minimum
assessment of $2,000 annually. The Bank's deposits are insured through the BIF,
which currently has an annual assessment rate ranging from 0.0% to 0.27% of
insured deposits, depending on an institution's risk classification.
The risk classification is based on an assignment of the institution by
the FDIC to one of three capital groups and to one of three supervisory
subgroups. The capital groups are "well capitalized," "adequately capitalized,"
and "undercapitalized." The three supervisory subgroups are Group "A" (for
financially sound institutions with only a few minor weaknesses), Group "B" (for
those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action). The Bank's
assessment is currently set at zero for the BIF.
In addition, since January 1, 1997, BIF members are charged an
assessment of approximately .013 % 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. The Bank's assessments in 1997 totaled
approximately $16,000.
COMMUNITY REINVESTMENT ACT ("CRA"). The Federal Banking Agencies have
each adopted regulations and examination procedures to ensure that a bank is
helping to meet the credit needs of all segments of its communities, including
low-and-moderate-income neighborhoods. At its most recent CRA examination, the
Bank received a rating of "outstanding."
35
<PAGE> 38
OTHER DEVELOPMENTS. In addition to the changes to the BIF and SAIF
assessment rates implemented by the legislation which was recently passed as
part of the 1996 Omnibus spending bill, various regulatory relief provisions
were enacted. These provisions include, among other things, changes to (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; and (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.
MANAGEMENT
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning the
directors and certain executive officers of the Company, including the number
and percentage of shares of the Company's Common Stock owned by each such person
and his or her principal occupation during the last five years. Directors are
elected for three years terms. The terms are staggered such that approximately
one-third of the directors are elected each year. Executive officers are elected
generally to serve at the discretion of the Company's Board of Directors.
<TABLE>
<CAPTION>
COMMON STOCK SHARES PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OFFICER OWNED PRIOR TO PERCENT PRIOR TO RESERVED FOR FOLLOWING THE
OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING(1) THE OFFERING PURCHASE(2) OFFERING(3)
- ---------------------------------------------------------- --------------- ---------------- ------------- ------------
<S> <C> <C> <C> <C>
Michal D. Cann, 49 3,300 0.18%
President and Chief Executive Officer of
Washington Banking Company since 1996 and President
and Chief Executive Officer of Whidbey Island Bank
and President and Secretary of WIB Financial
Services, Inc since 1993. Mr. Cann has been a director of
the Company since 1992. Mr. Cann has 27 years of banking
experience, serving as the President of Valley Bank, Mt.
Vernon, Washington and in other senior management
positions in other banks and bank holding companies. Mr.
Cann also serves as a member of the Compensation,
Building, Marketing, EDP and Directors' Loan committees
of the Company's Board of Directors.
Orlan Dean, 74 10,000 0.53%
Retired general manager of Don Boyer Chevrolet.
Mr. Dean is a life long resident of Coupeville,
Washington. Mr. Dean has been a director of the Company
since 1985. Mr. Dean also serves as a member of the
Marketing and Audit committees of the Company's Board of
Directors.
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
COMMON STOCK SHARES PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OFFICER OWNED PRIOR TO PERCENT PRIOR TO RESERVED FOR FOLLOWING THE
OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING (1) THE OFFERING PURCHASE (2) OFFERING (3)
- -------------------------------------------------------- ---------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Marlen Knutson, 65 5,200(4) 0.28%
President of Knutson Hauling, an excavation
company and retired owner of Knutson Distributors, Inc.
Mr. Knutson has served as Chairman of Valley Bank of Mt.
Vernon, Washington. Mr. Knutson has been a director of
the Company since 1996. Mr. Knutson also serves as a
member of the Compensation, Building and Directors' Loan
committees of the Company's Board of Directors.
Karl C. Krieg, III, 61 14,700 0.79%
President of Krieg Construction, Inc., Krieg
Concrete Products, Inc., Krieg Development Group, Inc.
and KK&D Developments, Inc. Mr. Krieg is a life long
resident of Oak Harbor, Washington. Mr. Krieg has been a
director of the Company since 1990. Mr. Krieg also
serves as a member of the Compensation, Building and EDP
committees of the Company's Board of Directors.
Jay T. Lien, 54 22,900(5) 1.22%
President of Dan Garrison, Inc., a real estate
company. Mr. Lien has been a director of the Company
since 1987. Mr. Lien is a life long resident of the
Stanwood/Camano Island area and at one time was employed
as a banker in that area. Mr. Lien also serves as a
member of the Audit, Compensation, Directors' Loan and
Marketing committees of the Company's Board of Directors.
Robert B. Olson, 62 27,100 1.45%
Co-owner and manager of H&H Properties, Inc., a
land development company. Mr. Olson has served as the
President and Chief Executive Officer of a community
bank in Olympia, Washington. Mr. Olson has been a
director of the Company since 1992. Mr. Olson also
serves as a member of the Audit, Compensation and
Directors' Loan committees of the Company's Board of
Directors and Chairman of the Marketing Committee of the
Company's Board of Directors.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
COMMON STOCK SHARES PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OFFICER OWNED PRIOR TO PERCENT PRIOR TO RESERVED FOR FOLLOWING THE
OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING (1) THE OFFERING PURCHASE (2) OFFERING (3)
- -------------------------------------------------------- ---------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Anthony B. Pickering, 50 3,000 0.16%
Owner of Max Dale's Restaurant. Mr.
Pickering has been a director of the Company since
1996. Mr. Pickering also serves as a member of
the Audit and EDP committees of the Company's
Board of Directors.
Alvin J. Sherman, 66 11,500 0.61%
Retired. Until recently, Mr. Sherman was a
co-owner of Sherman Farms, Inc. Mr. Sherman is a
life long resident of Coupeville, Washington and
his father, Clark Sherman, was involved with the
formation of the Bank. Mr. Sherman has been a
director of the Company since 1996. Mr. Sherman
also serves as a member of the Marketing,
Building, Directors' Loan and EDP committees of
the Company's Board of Directors.
Edward J. (Bud) Wallgren, 59 30,600(6) 1.63%
President of Island O.K. Tires, Inc. and
the owner of six Les Schwab Tire stores in
Northwestern Washington. Mr. Wallgren has been a
director of the Company since 1991 and Chairman of
the Board of the Company since 1996. Mr. Wallgren
also serves as a member of the Marketing,
Compensation and Directors' Loan committees of the
Company's Board of Directors.
Phyllis A. Hawkins, 49 5,000 0.27%
Senior Vice President and Chief Financial
Officer of Whidbey Island Bank. Prior to becoming
the Senior Vice President and Chief Financial
Officer in 1996, Ms. Hawkins served as Senior Vice
President and Cashier. She began working for
Whidbey Island Bank in 1969 and has held various
positions in operations, human resources and
auditing since that time. Ms. Hawkins is also a
non-voting member of the Audit Committee of Whidbey
Island Bank and previously served as the Chairman
of the ALCO and Risk Management Committee of the
Bank.
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
COMMON STOCK SHARES PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OFFICER OWNED PRIOR TO PERCENT PRIOR TO RESERVED FOR FOLLOWING THE
OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING (1) THE OFFERING PURCHASE (2) OFFERING (3)
- -------------------------------------------------------- ---------------- ---------------- ------------ -------------
<S> <C> <C> <C> <C>
Andrew C. Hunter, 42 400 0.02%
Senior Vice President/Loan Administrator
of Whidbey Island Bank. Mr. Hunter is a native of
Northwestern Washington. From January 1993 to
January 1995, Mr. Hunter served as a Vice
President of Whidbey Island Bank. Mr. Hunter is a
non-voting member of the Loan and Audit Committees
of Whidbey Island Bank.
Larry Scodeller, 56 -- --%
Executive Vice President and Chief
Operating Officer of Whidbey Island Bank beginning
in January 1998. Mr. Scodeller is a native of
Northwestern Washington. Mr. Scodeller has 27
years of banking experience, having served as
Senior Vice President and Chief Financial Officer
of Bellingham National Bank and as Executive Vice
President and Chief Financial Officer at Peoples
Bank in Lynden, Washington. Mr. Scodeller is a
non-voting member of all Committees of Whidbey
Island Bank.
All directors and executive officers as a group 133,700 7.14%
(12 persons)
</TABLE>
- ----------
(1) As adjusted for the 100-for-1 stock split effective March 26, 1998.
(2) The Underwriter has reserved up to _______ shares of the Common Stock
offered hereby for sale at the price to the public to certain of the
Company's directors, officers and employees.
(3) Assuming no exercise of the Underwriter's over-allotment option.
(4) All of these shares are owned by Knutson Hauling, Inc. Profit & Sharing
Trust, for which Mr. Knutson, is the Trustee.
(5) 3,600 of the 22,900 shares are owned by Dan Garrison, Inc. Profit Sharing
Plan, for which Mr. Lien is the Trustee.
(6) 4,900 of the 30,600 shares are owned by Island O.K. Tires, Inc. Profit
Sharing Plan for which Mr. Wallgren is the Trustee.
RECENT ADDITION TO MANAGEMENT
In light of the Company's recent substantial growth, the Company's
Board of Directors hired Mr. Larry Scodeller as Executive Vice President and
Chief Operating Officer. His extensive background, knowledge of the Company's
market areas and experience with larger financial institutions is expected to be
of significant assistance to the Company in managing its rapid growth. In
particular, Mr. Scodeller's experience with larger community banks is expected
to assist the Company in development of systems and procedures that will
provide effective control during such growth. The addition of Mr. Scodeller
should allow Mr. Cann additional time and flexibility to focus on implementing
the strategic objectives of the Company. The addition of Mr. Scodeller also
provides the Company with a possible replacement for Mr. Cann should his
services become unavailable.
39
<PAGE> 42
DIRECTOR COMPENSATION
Cash Compensation. In 1997 members of the Board of Directors of the
Company received a fee in the amount of $700 for each Board meeting, plus an
additional $200 per meeting for special Board meetings of the Company, each
committee meeting and meeting of the Board of WIB Financial Services, Inc. that
such director attended.
Director Stock Option Plan. In order to attract and retain qualified
directors, in 1993 the Board of Directors and the shareholders of the Company
adopted an Director Stock Option Plan (the "Plan"). The Plan makes available
100,000 shares for issuance pursuant to the grant of nonqualified options to
directors of the Company. The Plan is presently administered by the Company's
Board of Directors (the "Plan Administrator"). The exercise price for the shares
subject to an option will be such price as is determined by the Plan
Administrator, but not less than the net book value of the Common Stock. Options
granted under the Plan are not transferable except by will or the laws of
descent and distribution. The Board of Directors has the authority to terminate
the Plan at any time and will terminate upon the tenth anniversary of its
effective date. The Plan may be amended by the Board of Directors without
shareholder approval, except that no such amendment may increase the shares of
Common Stock that may be issued under the Plan (except to adjust for any stock
split or other subdivision or consolidation of shares).
During 1997, each director, other than Mr. Cann, the Company's
President and Chief Executive Officer, who received options under the Employee
Stock Option Plan, was granted an option to purchase 2,600 shares of the
Company's Common Stock, as adjusted for the 100-for-1 stock split effective
March 26, 1998. The exercise price of each option was $13.88 per share.
EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation for services
rendered to the Company in all capacities paid or accrued for the fiscal year
ended December 31, 1997 to the Company's Chief Executive Officer who is the only
executive officer of the Company whose aggregate cash and cash equivalent forms
of compensation exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------------------- --------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION GRANTED COMPENSATION(3)
---------------------------- -------- ------- ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Michal D. Cann $109,590 $20,000 (1) 5,000 (2) $4,078
President and Chief Executive
Officer
</TABLE>
- ----------
(1) The aggregate amount of prerequisites and other personal benefits provided
to such executive is less than the lesser of 10% of the total annual
salary and bonus of such executive or $50,000.
(2) As adjusted for the 100-for-1 stock split effective March 26, 1998.
(3) The amounts disclosed in this column includes matching contributions under
the Company's 401(k) and profit sharing plans.
SEVERANCE AGREEMENTS
Certain executives in key managerial positions have entered into
Executive Severance Agreements with the Bank. The purpose of these agreements is
to ensure that these executives will be available to assist the Board of
Directors of the Bank in responding to and, if appropriate, completing any
proposed change of control of the Bank.
The provisions of the Severance Agreements are triggered by a "Change
in Control" which means a change "in the ownership or effective control" or "in
the ownership of a substantial portion of the assets" of the Bank, with the
quoted phrases of this sentence having the same meaning when used in Section 280
G(b)(2)(A) of the Internal Revenue Code.
Severance payments are conditioned on a termination of the executive as
a result of the change in control. Severance payments are basically as follows:
Michal D. Cann, two times highest annual compensation paid during previous three
years; Larry Scodeller two times highest compensation paid during previous three
years; Phyllis A.
40
<PAGE> 43
Hawkins, one and one-half times highest annual compensation paid during the
previous three years; Andrew C. Hunter, one and one-half times highest annual
compensation paid during the previous three years; Alice Birkner, one and
one-half times highest annual compensation paid during the previous three years;
and Jan Libbey, one and one half times the highest compensation paid during the
previous three years.
EMPLOYEE BENEFITS
Employee Stock Option Plan. In order to attract and retain qualified
personnel, in 1992 the Board of Directors and the shareholders of the Company
adopted an Employee Stock Option Plan (the "Plan"). The Plan makes available
300,000 shares for issuance pursuant to the grant of "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended, or nonqualified options to officers and key employees of the Company.
The Plan is presently administered by the Company's Board of Directors (the
"Plan Administrator"). The exercise price for the shares subject to an option
will be at such price as is determined by the Plan Administrator, but in the
case of incentive stock options, will not be less than the fair market value of
the Common Stock on the date of grant of the incentive stock option. Options
granted under the Plan are not transferable except by will or the laws of
descent and distribution. All options granted under the Plan expire not more
than ten years from the date of grant.
The Board of Directors has the authority to terminate the Plan at any
time and it will terminate upon the tenth anniversary of its effective date. The
Plan may be amended by the Board of Directors without shareholder approval,
except that no such amendment may (a) increase the shares of Common Stock that
may be issued under the Plan (except to adjust for any stock split or other
subdivision or consolidation of shares), or (b) change the class of employees
that may be granted options.
During 1997, options were granted to the following named executive
officers:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED (1) FISCAL YEAR ($/SHARE) (1) DATE
---- -------------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Michal D. Cann 5,000 14.5% $13.88 2007
Larry Scodeller 10,000 29.0 $13.88 2007
</TABLE>
- ----------
(1) As adjusted for the 100-for-1 stock split effective March 26, 1998.
The table below provides information on exercises of options during
1997 by executive officers and information with respect to unexercised options
held by the named executive officers at December 31, 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES UNDERLYING IN-THE-MONEY OPTIONS
SHARES ACQUIRED ON VALUE REALIZED UNEXERCISED OPTIONS (#) ($) EXERCISABLE/
NAME EXERCISE (#) (1) ($) EXERCISABLE/UNEXERCISABLE (1) UNEXERCISABLE (1)
- ---------------- ------------------- -------------- ------------------------------- --------------------
<S> <C> <C> <C> <C>
Michal D. Cann -- $-- 32,300/17,700 $293,692/$94,209
Larry Scodeller -- -- 0/10,000 $0/$0
</TABLE>
- ----------
(1) As adjusted for the 100-for-1 stock split effective March 26, 1998.
401(k) Profit Sharing Plan. The Company maintains a salary savings
401(k) plan for its employees, including its executive officers. All persons
employed for at least one year who are at least 21 years of age and with a
minimum of 1,000 hours per year may participate in the plan. Employees who
participate may contribute a portion of their salary, the first 5% of which is
matched by the employer at 50% up to certain specified limits.
41
<PAGE> 44
CERTAIN TRANSACTIONS
Certain directors and executive officers of the Company and their
associates are customers of the Company and it is anticipated that they will
continue to be customers of the Company in the future. All transactions between
the Company and directors, executive officers, 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 collectibility or present other unfavorable
features. At December 31, 1997, loans to directors and executive officers
aggregated $1.8 million, representing 13.4% of shareholders' equity. All loans
to directors and executive officers must be approved by the full Board of
Directors of the Bank.
STOCK BUY-SELL AGREEMENT
All of the Company's directors, as well as certain individual
shareholders, are subject to a Stock Buy and Sell Agreement in their individual
capacities as shareholders. Shares subject to the Buy-Sell Agreement constituted
approximately 14% of the total issued and outstanding common stock of the
Company on December 31, 1997. Essentially, the Buy-Sell Agreement provides a
right of first refusal among the directors and those certain shareholders to
purchase each other's shares of the Company's common stock. The Buy-Sell
Agreement terminates automatically upon the dissolution or entry into
receivership of the Company and, unless extended by written agreement of the
holders of two-thirds of the shares subject to it, in March 2003. The Buy-Sell
Agreement may tend to limit the volume of shares available for trading by other
shareholders and may discourage a bidder from offering to purchase the Company
as a going concern.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of the common stock as of December 31, 1997 (as adjusted for the
100-for-1 stock split effective March 26, 1998), and as adjusted to reflect the
issuance and sale by the Company of _________ shares of Common Stock offered by
the Company in the Offering (assuming no exercise of the Underwriter's over
allotment option) and the sale of ____________ shares of Common Stock by the
Selling Shareholders, by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding common stock of the Company
and (ii) each of the Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO THE OFFERING OWNED AFTER OFFERING
-------------------------- --------------------------
SHARES
NAME AND ADDRESS NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
</TABLE>
The Company knows of no arrangements, the operation of which may at a
subsequent date result in a change of control of the Company.
DESCRIPTION OF CAPITAL STOCK
The following is a summary of certain provisions of the Articles of
Incorporation of the Company, as well as certain provisions of applicable law.
This summary does not purport to be complete, and is qualified by reference to
those documents and applicable law.
COMMON STOCK
The Company's authorized common stock consists of 10,000,000 shares of
common stock, no par value per share. On the date of this Prospectus, there were
1,872,700 (as adjusted for 100-for-1 split effective March 26, 1998) shares of
Common Stock outstanding. Upon the closing of the Offering, there will be
________ shares of Common Stock outstanding. The common stock is subject to the
rights and preferences of any of the Company's preferred stock which may be
issued in the future.
42
<PAGE> 45
PREFERRED STOCK
The Company has authorized 20,000 preferred shares with no par value
per share, none of which are issued and outstanding. The Board of Directors of
the Company is authorized, with the approval of the Directors and without
further shareholder action, to issue preferred stock with such designations,
preferences and rights as the Board may determine.
VOTING RIGHTS
The holders of the Company common stock are entitled to one vote for
each share held on all matters presented for a vote, including the election of
directors. The Articles of Incorporation provide that stockholders do not have
cumulative voting rights. The Board of Directors is authorized to determine the
voting rights of any preferred stock which may be issued.
DIVIDENDS
Dividends may be paid on the common stock of the Company as and when
declared by the Board of Directors out of funds legally available for the
payment of dividends. The ability of the Company to pay dividends will largely
depend upon the amount of dividends paid to it by the Bank and any subsequent
acquired operations. Accordingly, the dividend restrictions imposed on the Bank
by applicable state banking law will impact the amount of dividends that the
Company could pay.
NO PREEMPTIVE RIGHTS
The Articles of Incorporation of the Company provide that no holder of
shares of any class of capital stock shall have any preemptive right (i.e. the
right of first refusal to acquire shares offered by the Company) to acquire
unissued shares of capital stock, other than such rights, if any, as the Board
of Directors, in its discretion, may from time to time determine.
REPURCHASE OF OWN SHARES
The Company generally may repurchase its own shares, subject to certain
restrictions under applicable state, federal banking and securities laws.
LIQUIDATION RIGHTS
In the event of liquidation of the Company, the holders of the
Company's capital stock are entitled to receive, pro rata, any assets remaining
after provisions for liabilities.
ANTI-TAKEOVER MEASURES
The Company's Articles of Incorporation and Bylaws, as well as the
Washington Business Corporation Act ("WBCA"), contain certain provisions which
may limit or prevent certain acquisitions. These provisions may have the effect
of lengthening the time required for a person to acquire control of the Company
through a tender offer, proxy contest or otherwise, and may deter any potential
unfriendly offers or other efforts to obtain control of the Company. This could
deprive the Company's shareholders of opportunities to realize a premium for
their Company Common Stock, even in circumstances where such action was favored
by a majority of the Company's shareholders. The following description of
certain provisions of the Company's Articles of Incorporation and Bylaws and the
WBCA is general in nature, and is qualified in its entirety by reference to
those provisions.
Articles of Incorporation and Bylaws. The Company's Articles of
Incorporation contain a requirement that any "interested shareholder
transaction" (as defined in the Articles) be approved by the affirmative vote of
not less than 66-2/3% of the total shares attributable to persons other than an
"interested shareholder" (as defined in the Articles). The requirement for
"supermajority" approval of certain "interested shareholder transactions" is not
required if the Company's board of directors has approved the transaction or if
certain other conditions concerning nondiscrimination among shareholders and
receipt of fair value are satisfied. The supermajority approval provisions can
only be amended by a two-thirds vote of the shares which are not owned or
controlled by "interested shareholders."
43
<PAGE> 46
The Articles of Incorporation also require the Company's board to
consider non-monetary factors in evaluating certain takeover bids. Specifically,
the Articles require the Company's board, in determining what is in the best
interests of Company and its shareholders, to consider all relevant factors,
including the effects on its employees, customers, suppliers, and other
constituents of the Company and its subsidiaries and on the communities which
the Company and its subsidiaries are located.
The Articles of Incorporation also authorize the issuance of preferred
stock, which is intended primarily as a financing tool and not as a defense
against takeovers. However, the issuance of preferred stock may potentially used
by management to make more difficult uninvited attempts to acquire control of
the Company (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 but unissued shares to friendly third
parties).
The Articles of Incorporation provide that the Board of Directors of
the Company is to be divided into three classes, each of which is to contain
approximately one-third of the whole number of the members of the Board. The
members of each class are elected to serve three year terms, with the terms of
office of all members of one class expiring each year so that approximately
one-third of the total number of directors are elected each year. The classified
Board provisions are intended to provide continuity of the Board of Directors
and to make it more difficult for a shareholder group to fully use its voting
power to gain control of the Board of Directors.
The Articles of Incorporation also provide that a director may be
removed from office prior to the expiration of his term only for cause or by a
vote of 66-2/3% of the shares entitled to vote. Cause for removal exists only if
the Board has reasonable grounds to believe that the Company will suffer
substantial injury as a result of a director's gross negligence or dishonesty.
The Bylaws provide that vacancies on the Board, unless caused by a vote of the
shareholders, may be filled by the remaining directors.
WBCA Provisions. In addition to the provisions contained in the
Company's Articles of Incorporation and Bylaws, the WBCA also requires prior
approval by a majority of the Board of Directors of a target company in certain
acquisition transactions. The WBCA prohibits corporations that have a class of
voting stock registered with the Commission pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") such as the
Company, from engaging in any Significant Business Transactions (defined to
include merger(s) or consolidations; certain sales, leases, exchanges,
mortgages, pledges, transfers, or other dispositions or encumbrances of assets;
termination of 5% or more of a corporation's employees; issuances or redemptions
of stock; sales of assets, liquidation, or dissolution of a corporation;
reclassifications of a corporation's securities; and allowing an acquiring
person or other affiliate or associate to receive any disproportionate benefit
as a shareholder) for a period of five years after a person or group acquires
10% or more of a corporation's outstanding voting stock, unless the acquisition
is approved in advance by majority vote of the board of directors. This
provision will not apply to a person who "inadvertently" acquires 10% of the
shares, if such person divests himself as soon as practicable of sufficient
shares to fall below the 10% threshold. Any acquisition that violates this
statute is deemed to be void and the proposed acquiror's certificate of
authority to transact business in Washington is revoked.
INDEMNIFICATION
The Articles of Incorporation of the Company provide, among other
things, for the indemnification of the Company's directors, and authorizes 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 the Company 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 which limits the liability of directors
of the Company from any personal liability to the Company, or its shareholders
for conduct not found to have been egregious.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions set
forth in the Underwriting Agreement, to purchase from the Company the shares of
Common Stock offered hereby.
44
<PAGE> 47
The Underwriting Agreement provides that the obligation of the
Underwriter to purchase the shares of Common Stock offered hereby is subject to
the approval of certain legal matters by counsel and various other conditions.
The Underwriting Agreement also provides that the Underwriter is committed to
purchase all of the shares of Common Stock offered hereby, if any are purchased
(except for any shares that may be purchased through exercise of the
Underwriter's over-allotment option which may be exercised by the Underwriter in
whole or in part).
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover of this Prospectus and to certain dealers at such price less a
concession not in excess of $___________ per share. After the Offering, the
public offering price and such concession may be changed by the Underwriter. The
Underwriters may allow and such dealers may re-allow a concession not in excess
of $_________ per share to certain other dealers. The Common Stock is offered
subject to receipt and acceptance by the Underwriter, and to certain other
conditions, including the right to reject orders in whole or in part.
Prior to this Offering, there has been no public market for the Common
Stock. See "Market For Common Stock." The public offering price will be
determined by negotiation between the Company and the Underwriter based upon
market conditions, the Company's present and historical results of operations,
the Company's current financial condition, estimates of the business potential
and prospects of the Company and other relevant factors. There can be no
assurance that an active trading market will develop for the Common Stock, that
purchasers in the Offering will be able to sell their shares at or above the
Offering price, or as to the price at which the Common Stock may trade in the
public market from time to time subsequent to the Offering.
Ryan Beck currently intends to make a market in the Common Stock, as
permitted by applicable laws and regulations. Ryan Beck, however, is not
obligated to make a market in such shares and any such market making may be
discontinued at any time at the sole discretion of Ryan Beck.
The Company has granted the Underwriter an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to
____________ additional shares of Common Stock, respectively, at the public
offering price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. To the extent the Underwriter exercises the option,
the Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Common Stock. The Underwriter may
exercise such option solely to cover over-allotments, if any, incurred in
connection with the sale of shares of Common Stock offered hereby.
The Underwriting Agreement provides that the Company and the Selling
Shareholders have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that the Underwriter may be required to make in respect thereof.
All of the executive officers and directors of the Company and Selling
Shareholders have agreed that, for a period of 180 days after the day on which
the Registration Statement (as hereafter defined) become effective by order of
the Commission, they will not, without the prior written consent directly or
indirectly, offer for sale, sell, contract to sell, or grant any option to sell
(including, without limitation, any short sale), pledge, establish an open
"put-equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act, transfer, assign or otherwise dispose of any shares of the Common Stock or
securities exchangeable for or convertible into shares of the Common Stock, or
any option, warrant or other right to acquire such shares, or publicly announce
the intention to do any of the foregoing.
During and after the Offering, the Underwriter may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock. The Underwriter
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
Offering for their account may be reclaimed by the syndicate if such securities
are repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market, and these activities, if commenced, may be discontinued at any
time. These transactions may be effected on the Nasdaq National Market, in the
over-the-counter market or otherwise.
45
<PAGE> 48
ADDITIONAL INFORMATION
The Company has filed a registration statement on Form SB-2 (together
with all amendments and exhibits thereto, the "Registration Statement") with the
Securities and Exchange Commission under the 1933 Act with respect to the Common
Stock being offered hereby. This Prospectus is part of the Registration
Statement. As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement. A copy of
the Registration Statement may be examined without charge at the Commission's
principal offices at 450 Fifth Street, N.W., Washington D.C. 20549, and at the
regional offices of the Commissioner located at 7 World Trade Center, Suite
1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago
Illinois 60661. Copies of all or any part thereof may be obtained from the
Public Reference Section of the Commission upon payment of certain fees
prescribed by the Commission. Copies of such materials may also be obtained from
the website that the Commission maintains at http://www.sec.gov. Although the
Prospectus contains a discussion of the material aspects of the documents filed
as exhibits to the Registration Statement, statements contained in this
Prospectus as the contents of any contract or other document are not necessarily
complete and, in such instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by an independent public accounting
firm.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C.,
Tacoma, Washington. Certain legal matters will be passed upon for the
Underwriter by Breyer & Aguggia, Washington, D.C.
EXPERTS
Recent Change in Accounting Firms. On December 15, 1997, the Company
engaged KPMG Peat Marwick LLP as the Company's principal accountant. Prior to
KPMG Peat Marwick LLP's engagement, David O. Christensen CPA and Consultant,
PLLC, ("David O. Christensen") independent certified public accountants, had
served as the principal independent accountant for the Company and rendered its
report with respect to the Company's consolidated financial statements for the
years ended December 31, 1996 and 1995. The recommendation to change accountants
was made by management of the Company and was approved by the Board of Directors
effective November 20, 1997.
In the two most recent fiscal years preceding the Board's action, there
were no disagreements with David O. Christensen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to David O. Christensen's satisfaction, would
have caused them to make reference to the subject matter of the disagreement in
connection with their report. David O. Christensen's reports on the Company's
statements for such fiscal year did not contain any adverse opinion or
disclaimer of opinion, nor were such reports modified or qualified in any
respect.
Financial Statements. The consolidated financial statements of the
Company, as of and for the year ended December 31, 1997 included in the
Prospectus have been audited by KPMG Peat Marwick LLP, independent auditors, to
the extent indicated in their report thereon and included herein. The
consolidated financial statements of the Company as of December 31, 1996 and
1995, included in the Prospectus have been audited by David O. Christensen,
independent auditor, to the extent indicated in his report thereon and included
herein. Such financial statements have been included herein and in the
registration statement in reliance upon the reports of KPMG Peat Marwick LLP and
David O. Christensen, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firms as experts in accounting
and auditing.
46
<PAGE> 49
WASHINGTON BANKING COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP................................. F-2
Report of David O. Christensen CPA and Consultant, PLLC......... F-3
Consolidated Statements of Financial Condition at December 31,
1997 and 1996................................................... F-4
Consolidated Statements of Income for the years ended December
31, 1997, 1996, 1995............................................ F-5
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.......................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................ F-7
Notes to Consolidated Financial Statements...................... F-8
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Washington Banking Company:
We have audited the accompanying consolidated statement of financial
condition of Washington Banking Company and subsidiary as of December 31, 1997,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Washington Banking Company and subsidiary as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 20, 1998, except for note 16
which is as of March 26, 1998
F-2
<PAGE> 51
[DAVID CHRISTENSEN LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Washington Banking Company
We have audited the accompanying consolidated statement of condition of
Washington Banking Company and subsidiary as of December 31, 1996, and 1995, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Washington
Banking Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
David O. Christensen
Vancouver, Washington
January 31, 1997, except for Note (16),
as to which the date is April 10, 1998.
F-3
<PAGE> 52
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash and due from banks..................................... $ 6,263 5,455
Federal funds sold.......................................... 1,750 500
-------- -------
Total cash and cash equivalents................... 8,013 5,955
-------- -------
Federal Home Loan Bank stock................................ 682 322
Investment securities, available-for-sale................... 5,521 4,989
Investment securities, held-to-maturity..................... 23,508 20,653
-------- -------
Total investment securities....................... 29,711 25,964
-------- -------
Loans receivable, net....................................... 116,239 80,473
Premises and equipment, net................................. 4,287 3,521
Other real estate owned..................................... 30 --
Deferred tax asset.......................................... 370 273
Other assets................................................ 1,418 1,094
-------- -------
Total assets...................................... $160,068 117,280
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. 146,394 105,212
Other liabilities......................................... 639 498
-------- -------
Total liabilities................................. 147,033 105,710
-------- -------
Shareholders' equity:
Preferred stock, no par value. Authorized 20,000 shares;
no shares issued or outstanding........................ -- --
Common stock, no par value. Authorized 10,000,000 shares,
issued and outstanding 1,872,700 and 1,864,000 shares
in 1997 and 1996, respectively......................... 2,943 3,032
Retained earnings......................................... 10,075 8,527
Unrealized gain on investments, net....................... 17 11
-------- -------
Total shareholders' equity........................ 13,035 11,570
-------- -------
Total liabilities and shareholders' equity........ $160,068 117,280
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 53
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.............................. $ 10,207 7,334 6,253
Interest on taxable investment securities............... 1,082 1,055 908
Interest on tax-exempt investment securities............ 460 318 221
Dividends on FHLB stock................................. 36 25 --
Interest on Federal funds sold.......................... 116 126 231
--------- --------- ---------
Total interest income........................... 11,901 8,858 7,613
Interest expense.......................................... 4,358 2,946 2,474
--------- --------- ---------
Net interest income............................. 7,543 5,912 5,139
Provision for loan losses................................. 647 350 220
--------- --------- ---------
Net interest income after provision for loan
losses........................................ 6,896 5,562 4,919
--------- --------- ---------
Non-interest income:
Service charges on deposits............................. 1,116 1,024 893
Other................................................... 491 400 167
--------- --------- ---------
Total non-interest income....................... 1,607 1,424 1,060
--------- --------- ---------
Non-interest expense:
Salaries and benefits................................... 2,385 2,019 1,720
Occupancy expense....................................... 1,033 745 766
Merchant credit card expense............................ 358 236 18
Office supplies and printing............................ 275 220 228
Insurance expense....................................... 271 251 222
Data processing......................................... 219 125 80
Consulting and professional fees........................ 202 165 176
Other................................................... 1,038 923 914
--------- --------- ---------
Total non-interest expense...................... 5,781 4,684 4,124
--------- --------- ---------
Income before income taxes...................... 2,722 2,302 1,855
Provision for income taxes................................ 818 738 534
--------- --------- ---------
Net income...................................... $ 1,904 1,564 1,321
========= ========= =========
Net income per share, basic............................... $ 1.02 0.84 0.71
========= ========= =========
Net income per share, diluted............................. $ 0.96 0.82 0.70
========= ========= =========
Average number of shares outstanding, basic............... 1,873,921 1,864,000 1,863,167
========= ========= =========
Average number of shares outstanding, diluted............. 1,986,512 1,919,415 1,882,132
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 54
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
--------------- RETAINED ON SECURITIES, SHAREHOLDERS'
SHARES AMOUNT EARNINGS NET OF TAX EQUITY
------ ------ -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994................... 1,860 $3,014 6,295 (34) 9,275
Cash dividend at $0.17 per share................ -- -- (317) -- (317)
Net change in unrealized gain (loss) on
securities available-for-sale................. -- -- -- 60 60
Net income...................................... -- -- 1,321 -- 1,321
Stock options exercised......................... 4 18 -- -- 18
----- ------ ------ --- ------
Balances at December 31, 1995................... 1,864 3,032 7,299 26 10,357
Cash dividend at $0.18 per share................ -- -- (336) -- (336)
Net change in unrealized gain (loss) on
securities available-for-sale................. -- -- -- (15) (15)
Net income...................................... -- -- 1,564 -- 1,564
----- ------ ------ --- ------
Balances at December 31, 1996................... 1,864 3,032 8,527 11 11,570
Cash dividend at $0.19 per share................ -- -- (356) -- (356)
Net change in unrealized gain (loss) on
securities available-for-sale................. -- -- -- 6 6
Net income...................................... -- -- 1,904 -- 1,904
Repurchased and retired stock................... (15) (200) -- -- (200)
Stock options exercised......................... 24 111 -- -- 111
----- ------ ------ --- ------
Balances at December 31, 1997................... 1,873 $2,943 10,075 17 13,035
===== ====== ====== === ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 55
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,904 1,564 1,321
Adjustments to reconcile net income to net cash provided
by operating activities:
Federal Home Loan Bank stock dividends............... (36) (25) --
Deferred income tax benefit.......................... (99) (11) (42)
Amortization/accretion of investment
premiums/discounts, net........................... 271 (4) 57
Provision for loan losses............................ 647 350 220
Depreciation of premises and equipment............... 323 248 214
Loss on sale of premises and equipment............... 2 -- 1
Net increase in other assets......................... (324) (132) (394)
Net increase (decrease) in other liabilities......... 141 (93) 324
Gain on the sale of other real estate owned.......... -- (30) --
------- ------- -------
Net cash provided by operating activities......... 2,829 1,867 1,701
------- ------- -------
Cash flows from investing activities:
Purchases of investment securities, available-for-sale.... (2,860) (3,500) (2,500)
Maturities of investment securities, available-for-sale... 2,000 4,000 4,500
Purchases of investment securities, held-to-maturity...... (6,770) (8,455) (7,060)
Maturities of investment securities, held-to-maturity..... 3,980 4,715 2,515
Net increase in loans..................................... (36,443) (18,411) (7,510)
Purchases of premises and equipment....................... (1,097) (641) (1,742)
Proceeds from sale of premises and equipment.............. 6 -- 2
Purchases of Federal Home Loan Bank stock................. (324) (22) (275)
Proceeds from sales of other real estate owned............ -- 138 --
------- ------- -------
Net cash used in investing activities............. (41,508) (22,176) (12,070)
------- ------- -------
Cash flows from financing activities:
Net increase in deposits.................................. 41,182 16,706 15,605
Dividends paid on common stock............................ (356) (336) (317)
Proceeds from stock options exercised..................... 111 -- 18
Cash paid for common stock retired........................ (200) -- --
------- ------- -------
Net cash provided by financing activities......... 40,737 16,370 15,306
------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 2,058 (3,939) 4,937
Cash and cash equivalents at beginning of year.............. 5,955 9,894 4,957
------- ------- -------
Cash and cash equivalents at end of year.................... $ 8,013 5,955 9,894
======= ======= =======
Supplemental information:
Loans foreclosed and transferred to real estate owned..... $ 30 -- 108
Cash paid for interest.................................... 4,236 2,907 2,351
Cash paid for taxes....................................... 1,000 736 534
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 56
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Washington Banking Company (WBC), a Washington State bank holding company
was formed on April 30, 1996. Whidbey Island Bank (WIB or Bank), the principal
subsidiary of WBC, is a Washington State commercial bank. The business of the
Bank, which is focused in the northern area of Western Washington, consists
primarily of attracting deposits from the general public and originating loans.
Although WIB has a diversified loan portfolio and its market area currently
enjoys a stable economic climate, a substantial portion of its borrowers'
ability to repay their loans is dependent upon the economic conditions affecting
this area related to the agricultural, forestry and manufacturing industries,
and the large military base presence in Oak Harbor, Washington.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Washington Banking Company and its wholly-owned subsidiary, Whidbey Island Bank
(Company). The consolidated financial statements of the Company have been
prepared in conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
periods. Actual results could differ from these estimates. All significant
intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand and due from banks and Federal funds sold, having original
maturities of three months or less.
(d) Investment Securities
Investment securities available-for-sale include securities that management
intends to use as part of its overall asset/liability management strategy and
that may be sold in response to changes in interest rates and resultant
prepayment risk and other related factors. Securities available-for-sale are
carried at fair value, and unrealized gains and losses (net of related tax
effects) are excluded from earnings but are included in shareholders' equity.
Upon realization, such gains and losses will be included in earnings using the
specific identification method.
Investment securities held-to-maturity are comprised of debt securities for
which the Bank has positive intent and ability to hold to maturity and are
carried at cost, adjusted for amortization of premiums and accretion of
discounts using the interest method over the estimated lives of the securities.
Management determines the appropriate classification of investment
securities as either available-for-sale, held-to-maturity, or held for trading
at the purchase date.
(e) Loans Receivable, Net
Loans receivable, net, are stated at the unpaid principal balance, net of
premiums, unearned discounts, net deferred loan origination fees, and the
allowance for loan losses.
F-8
<PAGE> 57
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Loans are placed on nonaccrual status when collection of principal or
interest is considered doubtful (generally loans past due 90 days or more).
Interest income previously accrued on these loans, but not yet received, is
reversed in the current period. Interest subsequently recovered is credited to
income in the period collected.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized in interest income using the interest method over
the estimated life of the individual loans, adjusted for actual prepayments.
Amortization of deferred loan origination fees are suspended during periods in
which the related loan is in nonaccrual status.
(f) Allowance for Loan Losses
A valuation allowance for loans is based on management's estimate of the
amount necessary to recognize possible losses inherent in the loan portfolio. In
determining the level to be maintained, management evaluates many factors
including the borrowers' ability to repay, the value of underlying collateral,
historical loss experience, delinquency analyses, and economic and market trends
and conditions. In the opinion of management, the present allowance is adequate
to absorb reasonably foreseeable loan losses.
A loan is considered impaired when, based upon currently known information,
it is deemed probable that the Company will be unable to collect all amounts due
according to the original terms of the agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, based on the loan's
observable market price or the fair value of collateral, if the loan is
collateral dependent.
While management uses available information to recognize losses on these
loans, future additions to the allowances may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
losses on loans. Such agencies may require the Bank to make additions to the
allowance based on their judgments about information available to them at the
time of their examinations.
(g) Other Real Estate Owned
All real estate acquired in satisfaction of a loan is considered held for
sale and reported as "real estate owned." Real estate owned is carried at the
lower of cost or fair value less estimated cost of disposal.
(h) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. The estimated useful lives used to
compute depreciation include buildings and building improvements, 15 to 40
years; land improvements, 10 to 25 years; and furniture, fixtures and equipment,
3 to 15 years.
(i) Federal Income Taxes
The Company files a consolidated federal income tax return. The Company's
provision for income taxes is based upon taxes payable for the current year, as
well as changes in deferred taxes during the current year. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the periods in which those temporary differences are expected to be
recovered or settled. The effect
F-9
<PAGE> 58
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
on the deferred tax assets and liabilities of a change in tax rate is recognized
in income in the period that includes the enactment date.
(j) Federal Home Loan Bank Stock
The Company's investment in Federal Home Loan Bank (FHLB) stock is carried
at par value, which reasonably approximates its fair value. As a member of the
FHLB system, the Company is required to maintain a minimum level of investment
in FHLB stock based on specific percentages of its outstanding mortgages, total
assets or FHLB advances. At December 31, 1997, the Company's minimum required
investment was approximately $480. The Company may request redemption at par
value of any stock in excess of the minimum required investment. Stock
redemptions are at the discretion of the FHLB.
(k) Stock Based Compensation
During 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, effective for years beginning after December 15, 1995.
The statement requires expanded disclosures of stock-based compensation
arrangements and encourages (but does not require) application of the fair value
recognition provision in the statement. Under the fair value recognition method,
compensation cost is measured at the grant date of the option, based on the
value of the award and is recognized over the vesting period. Under existing
rules ("intrinsic value based method"), compensation cost is the excess, if any,
of the market value of the stock at grant date over the amount an employee must
pay to acquire the stock. None of the Company's stock options have any intrinsic
value at grant date and, under Accounting Principles Board (APB) Opinion No. 25,
no compensation cost has been recognized for them. SFAS No. 123 does not alter
the existing accounting rules for employee stock-based programs. Companies may
continue to follow rules outlined in APB Opinion No. 25, but are now required to
disclose the pro forma amounts of net income and earnings per share that would
have been reported had they elected to follow the fair value recognition
provision of SFAS No. 123. Effective January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, but has determined that it will
continue to measure its employee stock-based compensation arrangements under the
provisions of APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for its stock option plans.
(l) Computation of Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per share
(EPS). It simplifies the standards in APB Opinion No. 15, Earnings per Share,
for computing EPS by replacing primary earnings per share with basic earnings
per share and by altering the calculation of diluted EPS, which replaces fully
diluted EPS. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. All prior
period EPS figures have been restated to conform to the provisions of this
statement.
(m) Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This SFAS establishes standards for reporting and displaying comprehensive
income and its components in general-purpose financial statements. Comprehensive
net income includes net income and several other items that current accounting
standards require to be recognized outside of net income. This SFAS is effective
for fiscal years beginning after December 15, 1997, and as such, will be adopted
by the Company in 1998.
F-10
<PAGE> 59
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(n) Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with the
1997 financial statement presentation.
(2) RESTRICTIONS ON CASH BALANCES
The Company is required to maintain an average reserve with the Federal
Reserve Bank or maintain such reserve balance in the form of cash. The amount of
required reserve balance on December 31, 1997 and 1996 was approximately $511
and $213, respectively, and was met by holding cash and maintaining an average
balance with the Federal Reserve Bank.
(3) INVESTMENT SECURITIES
The amortized costs and estimated market values of investment securities at
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997
----
INVESTMENTS AVAILABLE-FOR-SALE:
U.S. Treasury securities........................ $ 4,996 26 -- 5,022
U.S. Government agency securities............... 500 -- (1) 499
------- --- --- ------
Total investment securities
available-for-sale.................... $ 5,496 26 (1) 5,521
======= === === ======
INVESTMENTS HELD-TO-MATURITY:
U.S. Treasury securities........................ $ 997 2 -- 999
U.S. Government agency securities............... 4,996 21 (5) 5,012
State and political subdivisions................ 9,796 257 (3) 10,050
Corporate obligations........................... 7,648 52 (8) 7,692
Other investments............................... 71 -- -- 71
------- --- --- ------
Total investment securities
held-to-maturity...................... $23,508 332 (16) 23,824
======= === === ======
1996
----
INVESTMENTS AVAILABLE-FOR-SALE:
U.S. Treasury securities........................ $ 4,972 20 (3) 4,989
======= === === ======
INVESTMENTS HELD-TO-MATURITY:
U.S. Treasury securities........................ $ 995 2 (3) 994
U.S. Government agency securities............... 6,514 21 (21) 6,514
State and political subdivisions................ 6,754 88 (30) 6,812
Corporate obligations........................... 6,332 14 (39) 6,307
Other investments............................... 58 -- -- 58
------- --- --- ------
Total investment securities
held-to-maturity...................... $20,653 125 (93) 20,685
======= === === ======
</TABLE>
F-11
<PAGE> 60
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The amortized cost and fair value of investment securities by contractual
maturity at December 31, 1997 are as shown below:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------
DATES OF MATURITIES
--------------------------------------------------
UNDER 1 1 TO 5 OVER 5 TO OVER 10
YEAR YEARS 10 YEARS YEARS TOTAL
------- ------ --------- ------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Amortized cost............................... $1,992 3,004 -- -- 4,996
Market value................................. 1,996 3,026 -- -- 5,022
U.S. Government agency securities:
Amortized cost............................... -- 500 -- -- 500
Market value................................. -- 499 499
------ ----- -- -- -----
Total:
Amortized cost..................... $1,992 3,504 -- -- 5,496
Market value....................... 1,996 3,525 -- -- 5,521
====== ===== == == =====
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY
----------------
DATES OF MATURITIES
---------------------------------------------------
UNDER 1 1 TO 5 OVER 5 TO OVER 10
YEAR YEARS 10 YEARS YEARS TOTAL
------- ------ --------- ------- ------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Amortized cost............................. $ 500 497 -- -- 997
Market value............................... 500 499 -- -- 999
U.S. Government agency securities:
Amortized cost............................. 1,501 3,495 -- -- 4,996
Market value............................... 1,498 3,514 -- -- 5,012
State and political subdivisions:
Amortized cost............................. 55 3,840 5,759 142 9,796
Market value............................... 55 3,913 5,939 143 10,050
Corporate bonds and other:
Amortized cost............................. 1,000 5,978 169 572 7,719
Market value............................... 999 6,002 174 588 7,763
------ ------ ----- --- ------
Total:
Amortized cost................... $3,056 13,810 5,928 714 23,508
Market value..................... 3,052 13,928 6,113 731 23,824
====== ====== ===== === ======
</TABLE>
Included in other assets is accrued interest on investment securities
amounted to $407 and $372 as of December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, investment securities with amortized cost
values of $997 and $995, respectively, were pledged to secure public deposits
and for other purposes as required or permitted by law.
F-12
<PAGE> 61
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio composition, based upon the purpose and primary source
of repayment of the loans, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- ------
<S> <C> <C>
Commercial loans......................................... $ 48,242 34,522
Real estate loans........................................ 22,969 18,857
Real estate construction loans........................... 12,646 8,389
Consumer loans........................................... 33,721 19,568
-------- ------
117,578 81,336
Less allowance for loan losses........................... 1,296 796
Net deferred loan fees................................... 43 67
-------- ------
Net loans.............................................. $116,239 80,473
======== ======
</TABLE>
As of December 31, 1997 and 1996, the Company had loans to persons serving
as directors and executive officers, and to entities related to such individuals
aggregating $1,752 and $1,561, respectively. All loans were made on essentially
the same terms and conditions as comparable transactions with other persons, and
do not involve more than the normal risk of collectibility.
Included in other assets is accrued interest on loans receivable amounted
to $772 and $552 as of December 31, 1997 and 1996, respectively.
The following is an analysis of the changes in the allowance for loan
losses:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
Beginning balance................................... $ 796 620 568
Provision for loan losses........................... 647 350 220
Recoveries.......................................... 13 55 3
Charge-offs......................................... (160) (229) (171)
------ ---- ----
Ending balance...................................... $1,296 796 620
====== ==== ====
</TABLE>
At December 31, 1997 and 1996, the Company had impaired loans of $1,162 and
$1,171, respectively. Of these impaired loans, $285 and $358 have related
valuation allowances of $112 and $121, while $1,087 and $813 did not require a
valuation allowance. Average impaired loans for 1997 and 1996 totaled $1,350 and
$862, respectively. The Company has no commitment to extend additional credit on
loans which are nonaccrual or impaired at December 31, 1997.
If interest income on impaired loans had been accrued in accordance with
their original terms, approximately $49, $46 and $4 of interest income would
have been recorded in 1997, 1996, and 1995, respectively.
F-13
<PAGE> 62
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------ -----
<S> <C> <C>
Land and buildings.......................................... $3,063 2,969
Furniture and equipment..................................... 2,011 1,902
Land improvements........................................... 218 163
Computer software........................................... 359 335
Construction in progress.................................... 898 533
------ -----
6,549 5,902
Less accumulated depreciation............................... 2,262 2,381
------ -----
$4,287 3,521
====== =====
</TABLE>
(6) DEPOSITS
Deposits at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Certificates of deposit................................. $ 56,148 31,607
Passbook and savings accounts........................... 21,710 21,753
Money market accounts................................... 20,602 11,338
NOW accounts............................................ 23,917 21,355
Noninterest-bearing demand.............................. 24,017 19,159
-------- -------
$146,394 105,212
======== =======
</TABLE>
Certificates of deposit at December 31, 1997 mature as follows:
<TABLE>
<CAPTION>
LESS THAN 1 TO 2 2 TO 3 3 TO 4 4 TO 5
1 YEAR YEARS YEARS YEARS YEARS TOTAL
--------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Time deposits of $100,000 or
more............................. $14,858 367 -- -- -- 15,225
All other time deposits............ 37,310 2,713 562 142 196 40,923
------- ----- --- --- --- ------
$52,168 3,080 562 142 196 56,148
======= ===== === === === ======
</TABLE>
(7) INCOME TAXES
Federal income tax expense (benefit) at December 31 consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense.................................... $917 750 546
Deferred tax benefit................................... (99) (12) (12)
---- --- ---
$818 738 534
==== === ===
</TABLE>
F-14
<PAGE> 63
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents major components of the net deferred federal
income tax asset resulting from differences between financial reporting and tax
bases at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss allowances...................................... $374 209
Deferred compensation..................................... 76 80
Deferred loan fees........................................ 15 29
Other..................................................... -- 27
---- ---
Total deferred tax assets......................... 465 345
---- ---
Deferred tax liabilities:
Premises and equipment.................................... 66 57
FHLB stock................................................ 21 9
Market value adjustment of investment securities
available-for-sale..................................... 8 6
---- ---
Total deferred tax liabilities.................... 95 72
---- ---
Deferred taxes asset, net......................... $370 273
==== ===
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective tax rate is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
Income tax expense at federal statutory rate.......... $ 925 783 631
Interest income on tax exempt securities.............. (129) (99) (86)
Other, net............................................ 22 54 (11)
----- --- ---
$ 818 738 534
===== === ===
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1997 and 1996. The Company has determined that it is not required to establish a
valuation allowance for the deferred tax assets as management believes it is
more likely than not that the deferred tax asset of $465 and $345 at December
31, 1997 and 1996, respectively, will be realized principally through carryback
to taxable income in prior years, future reversals of existing taxable temporary
differences and, to a minor extent, future taxable income.
(8) LEASING ARRANGEMENTS
The Company is obligated under a number of noncancelable operating leases
for land and buildings. The majority of these leases have renewal options. In
addition, some of the leases contain escalation clauses tied to the consumer
price index with caps.
In 1997, the Company entered into a lease for land. The lease includes
options to purchase the property which may be exercised at the end of each fifth
year during the term of the lease.
F-15
<PAGE> 64
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company's future minimum rental payments required under land, buildings
and equipment operating leases that have initial or remaining noncancelable
lease terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1998.............................. $ 123
1999.............................. 101
2000.............................. 54
2001.............................. 54
2002.............................. 54
Thereafter.......................... 1,305
------
Total..................... $1,691
======
</TABLE>
Rent expense applicable to operating leases for the years ended December
31, 1997, 1996 and 1995 was $87, $9 and $1, respectively.
(9) COMMITMENTS
(a) Commitments to Extend Credit
In the normal course of business, the Company enters into financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers. These instruments, which include commitments to extend credit and
standby letters of credit, involve varying degrees of credit and interest rate
risk that are not reflected in the financial statements. These instruments
generally have fixed expiration dates and do not necessarily represent future
cash requirements since they often expire without being drawn upon. The
Company's criteria for issuing such instruments are the same as those for loans
made in the normal course of business.
Commitments to extend credit are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1997 1996
------- -----
<S> <C> <C>
Loan commitments........................................... $20,959 9,496
Standby letters of credit.................................. 648 301
</TABLE>
(b) Lines of Credit
The Company had unused lines of credit with the FHLB of $24,010 at December
31, 1997. The Company also had unused lines of credit with financial
institutions amounting to $11,000 at December 31, 1997.
F-16
<PAGE> 65
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) EARNINGS PER SHARE
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
------ -------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders......... $1,904 1,873,921 $1.02
Effect of dilutive securities: stock options.... -- 112,591
------ ---------
DILUTED EPS..................................... $1,904 1,986,512 $0.96
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
------ -------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders......... $1,564 1,864,000 $0.84
Effect of dilutive securities: stock options.... -- 55,415 --
------ ---------
DILUTED EPS..................................... $1,564 1,919,415 $0.82
====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
------ -------------- ----------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders....... $1,321 1,863,167 $0.71
Effect of dilutive securities: stock
options..................................... -- 18,965 --
------ ---------
Diluted EPS................................... $1,321 1,882,132 $0.70
====== ========= =====
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
(a) Severance Agreements
The Company has entered into employment contracts with six senior officers
that provide benefits under certain conditions following a termination without
cause following a change of control of the Company.
(b) 401(k) Profit Sharing Plan
During 1994, the Board of Directors approved a 401(k)/profit sharing plan.
The plan covers substantially all full-time employees and many part-time
employees once they meet the age and length of service requirements. Employees
vest in the plan over a six-year period. The 401(k) plan allows for a voluntary
salary reduction, under which eligible employees are permitted to defer a
portion of their salaries, with the Company contributing a percentage of the
employee's contribution to the employee's account. In addition, the amount of
the profit sharing is discretionary and determined each year by the Board of
Directors.
The Company's contributions for the years ended December 31, 1997, 1996 and
1995 under the 401(k) feature was $50, $37 and $17, respectively. This
represents a match of the participating employees' salary deferral up to 50%,
50% and 25% of the first 5% of the compensation deferred in 1997, 1996 and 1995,
F-17
<PAGE> 66
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
respectively. The Company also contributed $16, $24 and $43 for the years ended
December 31, 1997, 1996 and 1995 under the profit-sharing feature of the plan.
(12) SHAREHOLDERS' EQUITY
(a) Stock Option Plans
In 1992, the WIB shareholders approved the adoption of an employee stock
option plan, providing for the award of up to 300,000 shares of nonqualified or
incentive stock options to employees of WIB at the discretion of a committee
appointed by the Board of Directors. In addition to the employee stock option
plan adopted in 1992, the Bank's shareholders approved the adoption of a 1993
director stock option plan, providing for the award of up to 100,000 shares of
nonqualified stock options to directors of the Bank at the discretion of the
Board of Directors. The 1993 plan does not affect any options granted under the
1992 plan. In 1996, the shareholders of WIB approved the transfer of both stock
option plans to WBC.
Under both of these stock option plans, on the date of grant, the exercise
price of the option must at least equal the net book value for shares issued as
nonqualified stock options, and must at least equal the market value of common
stock for shares issued as incentive stock options.
Stock options vest ratably over five years and expire five years after they
become fully vested.
The following table summarizes incentive or nonqualified stock option
activity under the 1992 plan for the years ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year.... 201,500 $ 5.09 182,000 $4.80 162,000 $4.56
Options granted................. 34,500 13.88 19,500 7.83 30,000 6.12
Less exercised.................. -- -- -- -- (4,000) 4.40
Expired or canceled............. -- -- -- -- (6,000) 4.40
------- ------ ------- ----- ------- -----
Balance at end of year.......... 236,000 $ 6.38 201,500 $5.09 182,000 $4.80
======= ====== ======= ===== ======= =====
Options exercisable at
year-end...................... 146,545 118,245 79,341
Weighted average fair value per
share of options granted...... $2.74 $1.58 $1.05
</TABLE>
Financial data pertaining to outstanding incentive stock options at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TOTAL VESTED EXERCISE
EXPIRATION SHARES SHARES PRICE
---------- ------- ------- --------
<S> <C> <C> <C>
February 22, 2003.............................. 110,000 102,400 $4.40
March 24, 2004................................. 15,000 11,400 4.60
December 15, 2004.............................. 27,000 16,470 5.05
December 31, 2005.............................. 30,000 12,000 6.12
April 1, 2006.................................. 2,500 875 6.35
December 31, 2006.............................. 17,000 3,400 8.05
December 31, 2007.............................. 34,500 -- 13.88
------- -------
236,000 146,545
======= =======
</TABLE>
F-18
<PAGE> 67
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes stock option activity of the nonqualified
shares under the 1993 plan for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year.......... 80,500 $ 4.69 80,500 $4.69 72,500 $4.53
Options granted....................... 20,800 13.88 -- -- 8,000 6.12
Less exercised........................ (23,700) 4.71 -- -- -- --
Expired or canceled................... (1,800) 5.36 -- -- -- --
-------- ------ ------ ----- ------ -----
Balance at end of year................ 75,800 $ 7.19 80,500 $4.69 80,500 $4.69
======== ====== ====== ===== ====== =====
Options exercisable at year-end....... 48,475 53,225 37,025
Weighted average fair value per share
of options granted.................. $2.37 $0.78 $0.78
</TABLE>
Financial data pertaining to outstanding nonqualified stock options at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TOTAL VESTED EXERCISE
EXPIRATION SHARES SHARES PRICE
---------- ------ ------ --------
<S> <C> <C> <C>
February 22, 2003................................ 37,500 36,375 $4.50
March 24, 2004................................... 12,500 9,500 4.60
December 31, 2005................................ 5,000 2,600 6.12
December 31, 2007................................ 20,800 -- 13.88
------ ------
75,800 48,475
====== ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under the minimum value method described above, as permitted in SFAS No.
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Net income, as reported............................ $1,904 1,564 1,321
Net income, pro forma.............................. 1,862 1,550 1,313
Basic EPS, as reported............................. 1.02 0.84 0.71
Basic EPS, pro forma............................... 0.99 0.83 0.70
Diluted EPS, as reported........................... 0.96 0.82 0.70
Diluted EPS, pro forma............................. 0.94 0.81 0.70
</TABLE>
The fair value of options granted is estimated on the date of grant using
the minimum value method with the following weighted-average assumptions used
for grants in 1997, 1996 and 1995: annual dividend yield of 3% for each year;
risk-free interest rates ranging from 5.49% to 6.43%; and expected lives of
seven to ten years.
F-19
<PAGE> 68
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(b) Stock Buy-Sell Agreement
In March 1993, all of the Bank's directors, as well as certain individual
shareholders, entered into a Stock Buy and Sell Agreement (the "Buy-Sell
Agreement") in their individual capacities as shareholders. The Buy-Sell
Agreement was amended, making it applicable to the Company's common stock
following its formation. Shares subject to the Buy-Sell Agreement constituted
approximately 14% of the total issued and outstanding common stock of the
Company on December 31, 1997. Essentially, the Buy-Sell Agreement provides a
right of first refusal among the directors and those certain shareholders to
purchase each other's shares of the Company's common stock. The Buy-Sell
Agreement terminates automatically upon the dissolution or entry into
receivership of the Company and, unless extended by written agreement of the
holders of two-thirds of the shares subject to it, in March 2003.
(13) REGULATORY CAPITAL MATTERS
Under Washington State Banking Regulations, WIB is limited as to the
ability to declare or pay dividends to the Company up to the amount of WIB's net
profits then on hand.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about risk components, asset
risk weighting and other factors.
Risk based capital guidelines issued by the Federal Deposit Insurance
Corporation establish a risk adjusted ratio relating capital to different
categories of assets and off balance sheet exposures for banks. The Bank's Tier
1 capital is comprised primarily of common equity, and excludes the equity
impact of adjusting available-for-sale securities to fair value. Total capital
also includes a portion of the allowance for loan losses, as defined according
to regulatory guidelines.
F-20
<PAGE> 69
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Quantitative measures established by regulation to ensure capital adequacy
require the company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets (as defined in
the regulations), and of Tier 1 capital to average assets (as defined in the
regulations). Management believes, as of December 31, 1997, that the Bank meets
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
WHIDBEY ISLAND ADEQUACY PROMPT CORRECTIVE
BANK PURPOSES ACTION PROVISIONS
--------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- -------- ------
(ACTUAL)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total risk-based capital (to
risk-weighted assets)............. $14,160 11.6% $9,736 >/=8% $12,170 >/=10%
Tier 1 capital (to risk-weighted
assets)........................... 12,986 10.7 4,868 >/=4 7,302 >/= 6
Leverage ratio...................... 12,986 8.1 6,429 >/=4 8,036 >/= 5
As of December 31, 1996:
Total risk-based capital (to
risk-weighted assets)............. 12,354 15.0 6,627 >/=8 8,284 >/=10
Tier 1 capital (to risk-weighted
assets)........................... 11,558 14.0 3,313 >/=4 4,970 >/= 6
Leverage ratio...................... 11,558 10.2 4,537 >/=4 5,671 >/= 5
</TABLE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of values. These calculations are subjective in nature,
involve uncertainties and matters of significant judgment and do not include tax
ramifications; therefore, the results cannot be determined with precision,
substantiated by comparison to independent markets and may not be realized in an
actual sale or immediate settlement of the instruments. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results. For all of these reasons, the
aggregation of the fair value calculations presented herein do not represent,
and should not be construed to represent, the underlying value of the Company.
When possible, quoted market prices are used to determine fair value. In
cases where a quoted market price is not available, the fair value of financial
instruments is estimated using the present value of future cash flows or other
valuation methods.
(a) Financial Instruments With Book Value Equal to Fair Value
The fair value of financial instruments that are short-term or reprice
frequently and that have little or no risk are considered to have a fair value
equal to book value. Assets that are included in this category include cash and
due from banks and interest-bearing deposits. Liabilities included in this
category include deposits with no contractual maturity such as demand accounts,
checking accounts, money market accounts, passbook savings accounts and FHLB
advances which reprice daily.
F-21
<PAGE> 70
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(b) Investment Securities
The fair value of all investment securities excluding FHLB stock was based
upon quoted market prices. FHLB stock is not publicly traded; however it may be
redeemed on a dollar-for-dollar basis, for any amount the Bank is not required
to hold. The fair value is therefore equal to the book value.
(c) Loans
The loan portfolio is composed of single family and income property
mortgages (both fixed rate and adjustable rate), construction, business and
consumer loans. For most loans, fair value is estimated using market prices for
mortgage-backed securities with similar rates and average maturities adjusted
for servicing costs or calculated by discounting expected cash flows over the
estimated life of the loans using a current market rate reflecting the risk
associated with comparable loans. Construction loans which are variable rate and
short-term are reflected with fair values equal to book value.
(d) Deposits
Deposits are comprised of passbook, commercial and basic checking, money
market and fixed maturity accounts. For deposits with no contractual maturity
such as demand accounts, checking accounts, money market accounts and passbook
savings accounts, SFAS No. 107 stipulates that the fair value is equal to the
book value. The fair value of fixed maturity deposits is based on discounted
cash flows using the difference between the deposit rate and an alternative cost
of funds rate.
(e) Off-Balance Sheet Financial Instruments
The fair value of off-balance sheet commitments to extend credit is
considered equal to its notional amount due primarily to the short-term nature
of these items.
The table below presents the book value amount of the Company's financial
instruments and their corresponding fair values at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks.................... $ 6,263 6,263 5,455 5,455
Federal funds sold......................... 1,750 1,750 500 500
FHLB stock................................. 682 682 322 322
Investment securities available-for-sale... 5,521 5,521 4,989 4,989
Investment securities held-to-maturity..... 23,508 23,824 20,653 20,685
Loans...................................... 117,578 116,752 81,336 81,554
Financial liabilities-deposits............... 146,394 143,074 105,212 105,260
Off-balance-sheet items:
Loan commitments........................... 5,717 5,717 6,236 6,238
Standby letters of credit.................. 648 648 301 301
</TABLE>
F-22
<PAGE> 71
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(15) WASHINGTON BANKING COMPANY INFORMATION
The summarized condensed financial information for Washington Banking
Company (parent company only) as of and for the years ended December 31, 1997
and 1996 are presented below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------
1997 1996
CONDENSED BALANCE SHEETS ------- ------
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $ 100 8
Other assets............................................ 16 26
Investment in subsidiary................................ 12,919 11,536
------- ------
Total assets.................................... $13,035 11,570
======= ======
Shareholders' equity:
Common stock............................................ 2,943 3,032
Retained earnings....................................... 10,075 8,527
Net unrealized loss on securities available-for-sale,
net.................................................. 17 11
------- ------
Total shareholders' equity...................... $13,035 11,570
======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------
1997 1996
CONDENSED STATEMENTS OF INCOME ------ -----
<S> <C> <C>
Noninterest expense......................................... $ (45) (77)
Income tax benefit.......................................... 15 26
------ -----
Loss before undistributed earnings of
subsidiary...................................... (30) (51)
Undistributed earnings of subsidiary........................ 1,934 1,615
------ -----
Net income........................................ $1,904 1,564
====== =====
</TABLE>
F-23
<PAGE> 72
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------
1997 1996
CONDENSED STATEMENTS OF CASH FLOWS ------- ------
<S> <C> <C>
Operating activities:
Net income.............................................. $ 1,904 1,564
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed earnings of subsidiaries... (1,934) (1,615)
Decrease (increase) in other assets................ 10 (26)
------- ------
Net cash used in operating activities........... (20) (77)
------- ------
Investing activities -- dividends received from
subsidiary.............................................. 557 421
------- ------
Financing activities:
Dividends paid to shareholders.......................... (356) (336)
Proceeds from exercise of stock options and stock
issuances............................................ 111 --
Repurchased and retired stock........................... (200) --
------- ------
Net cash used in financing activities........... (445) (336)
------- ------
Increase in cash and cash equivalents........... 92 8
Cash and cash equivalents at beginning of year............ 8 --
------- ------
Cash and cash equivalents at end of year.................. $ 100 8
======= ======
</TABLE>
(16) SUBSEQUENT EVENT
On March 26, 1998, the Board of Directors declared a hundred for one stock
split. In addition, the shareholders approved a resolution increasing the number
of shares authorized to 10 million of no par stock. All share and per share
amounts have been restated to retroactively reflect this stock split.
F-24
<PAGE> 73
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE ANY OF THE DATES AS TO WHICH INFORMATION IS
FURNISHED HEREIN OR SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
----------------------
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................3
RISK FACTORS..................................................................7
USE OF PROCEEDS..............................................................10
DILUTION.....................................................................10
MARKET FOR COMMON STOCK......................................................10
DIVIDENDS....................................................................11
CAPITALIZATION...............................................................12
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA...................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................................14
BUSINESS.....................................................................22
SUPERVISION AND REGULATION...................................................31
MANAGEMENT...................................................................36
CERTAIN TRANSACTIONS.........................................................42
STOCK BUY-SELL AGREEMENT.....................................................42
PRINCIPAL AND SELLING SHAREHOLDERS...........................................42
DESCRIPTION OF CAPITAL STOCK.................................................42
UNDERWRITING.................................................................44
ADDITIONAL INFORMATION.......................................................46
LEGAL MATTERS................................................................46
EXPERTS......................................................................46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
---------------------
Until _________, 1998, (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participation in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriter and
with respect to their unsold allotments or subscriptions.
================================================================================
_________ SHARES OF COMMON STOCK
WASHINGTON
BANKING COMPANY
----------
PROSPECTUS
----------
RYAN, BECK & CO.
___________, 1998
================================================================================
<PAGE> 74
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company'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 the Company 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 the Company from
any personal liability to the Company or its shareholders for conduct not found
to have been egregious.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Commission registration fee.............................. $
NASD Filing fee..........................................
Nasdaq National Market Listing Fees
Printing Expenses
Legal....................................................
Accounting Fees and Expenses.............................
Underwriting Agent Counsel Fees and Expenses:............
Transfer Agent and Registrar Fees, Expenses:.............
Miscellaneous Expenses:..................................
Total...............................................
</TABLE>
- ------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and exhibits filed as part of this
Registration Statement are as follows:
(a) List of Exhibits
1.1 Form of proposed Underwriting Agreement among Washington Banking
Company and Ryan Beck & Co., Inc.**
3.1 Articles of Amendment to Articles of Incorporation of the
Registrant*
3.2 Amended and Restated Articles of Incorporation of the Registrant*
3.3 Bylaws of the Registrant*
4 Form of Certificate for Common Stock*
5 Opinion of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim,
P.L.L.C. regarding legality of the Common Stock**
10.1 Washington Banking Company Employee Stock Option Plan*
10.2 Washington Banking Company Director Stock Option Plan*
II-1
<PAGE> 75
10.3 Washington Banking Company Form of Employee Stock Option
Agreement*
10.4 Washington Banking Company Form of Director Stock Option
Agreement*
10.5 Buy-Sell Agreement and First Amendment to Buy Sell Agreement
10.6 Form of Severance Agreement*
16 Letter from David O. Christensen CPA and Consultant, PLLC
regarding change in accountants*
21.1 List of all Subsidiaries of Registrant*
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of David O. Christensen CPA and Consultant, PLLC*
23.3 Consent of Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim,
P.L.L.C. (included in opinion filed as Exhibit 5 to this
Registration Statement)**
24 Power of Attorney*
27 Financial Data Schedule*
(b) Financial Statement Schedules.
Not applicable.
- --------------
* Filed herewith.
** To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act 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 Securities 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 action, 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 whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oak Harbor, State of
Washington, on April 10, 1998.
WASHINGTON BANKING COMPANY
By:/s/ Michal D. Cann
---------------------------------
Michal D. Cann
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on April 10,
1998 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
PRINCIPAL EXECUTIVE OFFICER:
<S> <C>
/s/ Michal D. Cann President and Chief Executive
- -------------------------------- Officer
Michal D. Cann
PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
/s/ Phyllis A. Hawkins Senior Vice President and Chief
- -------------------------------- Financial Officer
Phyllis A. Hawkins
</TABLE>
A MAJORITY OF THE BOARD OF DIRECTORS:
/s/ Orlan Dean*
- --------------------------------
Orlan Dean
/s/ Marlen Knutson*
- --------------------------------
Marlen Knutson
/s/ Karl C. Krieg, III*
- --------------------------------
Karl C. Krieg, III
/s/ Jay T. Lien*
- --------------------------------
Jay T. Lien
II-3
<PAGE> 77
/s/ Robert B. Olson*
- --------------------------------
Robert B. Olson
/s/ Anthony B. Pickering*
- --------------------------------
Anthony B. Pickering
/s/ Alvin J. Sherman*
- --------------------------------
Alvin J. Sherman
/s/ Edward J. (Bud) Wallgren*
- --------------------------------
Edward J. (Bud) Wallgren
*By: /s/ Michal D. Cann
- --------------------------------
Michal D. Cann
Attorney-in-Fact
II-4
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED
PAGE
<S> <C>
1.1 Form of proposed Underwriting Agreement among
Washington Banking Company and Ryan Beck &
Co., Inc.**
3.1 Articles of Amendment to Articles of
Incorporation of the Registrant*
3.2 Amended and Restated Articles of
Incorporation of the Registrant*
3.3 Bylaws of the Registrant*
4 Form of Certificate for Common Stock*
5 Opinion of Gordon, Thomas, Honeywell,
Malanca, Peterson & Daheim, P.L.L.C.
regarding legality of the Common Stock**
10.1 Washington Banking Company Employee Stock
Option Plan*
10.2 Washington Banking Company Director Stock
Option Plan*
10.3 Washington Banking Company Form of Employee
Stock Option Agreement*
10.4 Washington Banking Company Form of Director
Stock Option Agreement*
10.5 Buy Sell Agreement and First Amendment to Buy
Sell Agreement*
10.6 Form of Severance Agreement*
16 Letter from David O. Christensen CPA and
Consultant PLLC regarding change in
accountants*
21.1 List of all Subsidiaries of Registrant*
23.1 Consent of KPMG Peat Marwick LLP*
23.2 Consent of David O. Christensen CPA and
Consultant, PLLC*
23.3 Consent of Gordon, Thomas, Honeywell,
Malanca, Peterson & Daheim, P.L.L.C.
(included in opinion filed as Exhibit 5 to
this Registration Statement)**
24 Power of Attorney*
</TABLE>
<PAGE> 79
<TABLE>
<S> <C>
27 Financial Data Schedule*
</TABLE>
- ----------------
* Filed herewith
** To be filed by amendment
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
WASHINGTON BANKING COMPANY
The undersigned corporation adopts in duplicate the following Articles
of Amendment of the Articles of Incorporation of said corporation.
ARTICLE I
The name of the corporation, as set forth in the Articles of
Incorporation, is WASHINGTON BANKING COMPANY.
ARTICLE II
The Articles of Incorporation have been amended to reflect the following
amendments:
ARTICLE III is amended in its entirety to read as follows:
The aggregate number of shares which the corporation is
authorized to issue is 10,000,000 common shares with no par value per share, and
20,000 preferred shares with no par value.
ARTICLE III
The amendments do not provide for an exchange, reclassification, or
cancellation of issued shares.
ARTICLE IV
The Board of Directors adopted the amendments on February 26, 1998.
<PAGE> 2
ARTICLE V
The shareholders adopted the amendments on March 26, 1998, in accordance
with the provisions of RCW 23B.10.030 and RCW 23.B.10.040.
Executed in duplicate this 31st day of March, 1998.
WASHINGTON BANKING COMPANY
By: /s/ Michal Cann
-----------------------------
Michal Cann
President and Chief Executive
Officer
-2-
<PAGE> 1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WASHINGTON BANKING COMPANY
ARTICLE I
NAME
The name of this corporation is WASHINGTON BANKING COMPANY.
ARTICLE II
MAIN OFFICE LOCATION
The office and place of business of this corporation shall be in Oak
Harbor, Island County, State of Washington.
ARTICLE III
CAPITALIZATION
The aggregate number of shares which the corporation is authorized to
issue is one hundred thousand (100,000) common shares with a par value of $20.00
per share, and twenty thousand (20,000) preferred shares with no par value.
ARTICLE IV
BOARD OF DIRECTORS
Section 4.1 The Board of Directors shall consist of not fewer than five
(5) nor more than twelve (12) individuals. The exact number shall be determined
by resolution of the Board of Directors. The number of directors elected by the
shareholders at the last preceding annual meeting may be increased by not more
than two (2) directors by the Board between annual meetings of the shareholders,
and no decrease in the number of directors shall have the effect of shortening
the term of any incumbent director.
Section 4.2 Commencing with the 1996 Annual Meeting of Shareholders, the
Board of Directors shall be divided into three classes: Class 1, Class 2, and
Class 3, which shall be as nearly equal in number as possible. Each director
shall serve for a term ending on the date of the third annual meeting of
shareholders following the annual meeting at which such director was elected;
provided, however, that each initial director in Class 1 shall hold office until
the annual meeting of shareholders in 1997; each initial director in Class 2
shall hold office until the annual meeting of shareholders in 1998; and each
initial director in Class 3 shall hold office until the annual meeting of
shareholders in 1999; and in each case until their successors are duly elected
and have qualified or until their earlier resignation, removal from office or
death.
Section 4.3 No director may be removed from office without cause except
by a vote of 66-2/3% of the shares then entitled to vote at an election of
directors. Except as otherwise provided by law, cause for removal shall exist
only if the Board of Directors
- 1 -
<PAGE> 2
has reasonable grounds to believe that the corporation has suffered or will
suffer substantial injury as a result of the gross negligence or dishonesty of
the director whose removal is proposed.
ARTICLE V
SHAREHOLDER RIGHTS
Section 5.1 The shareholders of the corporation do not have preemptive
rights to acquire proportional amounts of the corporation's unissued shares upon
the decision of the Board of Directors to issue them.
Section 5.2 The shareholders of the corporation do not have cumulative
voting rights with respect to the election of Directors of the corporation.
ARTICLE VI
DIRECTOR LIABILITY
Section 6.1 - Defined Terms As used in this Article:
(a) The term "Egregious Conduct" by a person shall mean acts or
omissions that involve intentional misconduct or a knowing violation of law,
conduct violating section 23B.08.310 as amended of the Revised Code of
Washington, or participation in any transaction from which the person will
personally receive a benefit in money, property, or services to which the person
is not legally entitled.
(b) The term "finally adjudged" shall mean stated in a judgment based
upon clear and convincing evidence by a court having jurisdiction, from which
there is no further right to appeal.
(c) The term "Director" shall mean any person who is a director of the
corporation and any person who, while a director of the corporation, is serving
at the request of the corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other enterprise, or is a fiduciary or party in
interest in relation to any employee benefit plan covering any employee of the
corporation or of any employer in which it has an ownership interest; and
"conduct as a Director" shall include conduct while a Director is acting in any
of such capacities.
(d) The term "Officer-Director" shall mean any person who is
simultaneously both an officer and director of the corporation and any person
who, while simultaneously both an officer and director of the corporation, is
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, or is a fiduciary or
party in interest in relation to any employee benefit plan covering any employee
of the corporation or of any employer in which it has an ownership interest; and
"conduct as an Officer- Director" shall include conduct while such a person is
acting as an officer of the corporation or in any of such other capacities.
- 2 -
<PAGE> 3
(e) The term "Subsidiary Corporation" shall mean any corporation at
least eighty percent of the voting stock of which is held beneficially by this
corporation.
(f) The term "Subsidiary Outside Director" shall mean any person who,
while not principally employed by this corporation or any Subsidiary
Corporation, is a director of a Subsidiary Corporation and any such person who,
while a director of a Subsidiary Corporation, is serving at the request of such
corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust, or
other enterprise, or is a fiduciary or party in interest in relation to any
employee benefit plan covering any employee of such corporation or of any
employer in which it has an ownership interest; and "conduct as a subsidiary
Outside Director" shall include conduct while such a person is acting in any of
such capacities.
Section 6.2 - Director Standard of Care. No Director, Officer-Director,
former Director or former Officer-Director shall be personally liable to the
corporation or its shareholders for monetary damages for conduct as a Director
or Officer- Director occurring after the effective date of this Article unless
the conduct is finally adjudged to have been Egregious Conduct.
Section 6.3 - Subsidiary Director Standard of Care. No Subsidiary
Outside Director or former Subsidiary Outside Director shall be personally
liable in any action brought directly by this corporation as a shareholder of
the Subsidiary Corporation or derivatively on behalf of the Subsidiary
Corporation (or by any shareholder of this corporation double-derivatively on
behalf of this corporation and the Subsidiary Corporation) for monetary damages
for conduct as a Subsidiary Outside Director occurring after the effective date
of this Article unless the conduct is finally adjudged to have been Egregious
Conduct.
Section 6.4 - Mandatory Indemnification of Directors. Subject to
Sections 6.7 and 6.8 of this Article, the corporation shall indemnify any person
who is, or is threatened to be made, a party to any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, and whether by or in
the right of the corporation or its shareholders or by any other party, by
reason of the fact that the person is or was a Director, Officer-Director, or
Subsidiary Outside Director against judgments, penalties or penalty taxes,
fines, settlements (even if paid or payable to the corporation or its
shareholders or to a Subsidiary Corporation) and reasonable expenses, including
attorneys' fees, actually incurred in connection with such proceeding unless the
liability and expenses were on account of conduct finally adjudged to be
Egregious Conduct.
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<PAGE> 4
Section 6.5 - Advancing Expenses. The reasonable expenses, including
attorneys' fees, of a Director, Officer-Director or Subsidiary Outside Director
incurred in connection with a proceeding in which the individual is entitled to
indemnification under Section 4 shall be paid or reimbursed by the corporation,
upon request of such person, in advance of the final disposition of such
proceeding upon receipt by the corporation of a written, unsecured promise by
the person to repay such amount if it shall be finally adjudged that the person
is not eligible for indemnification. All expenses incurred by such person in
connection with such proceeding shall be considered reasonable unless finally
adjudged to be unreasonable.
Section 6.6 - Procedure. Except as required by Sections 6.7 and 6.8 of
this Article, no action by the board of directors, the shareholders, independent
counsel, or any other person or persons shall be necessary or appropriate to the
determination of the corporation's indemnification obligation in any specific
case, to the determination of the reasonableness of any expenses incurred by a
person entitled to indemnification under this Article, nor to the authorization
of indemnification in any specific case.
Section 6.7 - Exception for Internal Claims. Notwithstanding anything
else in these Articles, the corporation shall not be obligated to indemnify any
person for any expenses, including attorneys' fees, incurred to assert any claim
against the corporation (except a claim to enforce indemnification) or any
person related to or associated with it, including any person who would be
entitled hereby to indemnification in connection with the claim.
Section 6.8 - Regulatory Proceedings. The corporation may provide
indemnification and advancement of expenses in connection with administrative
proceedings or civil actions instituted by a federal banking agency ("Regulatory
Proceedings"), except to the extent prohibited by applicable banking
regulations. Any procedures for obtaining indemnification in Regulatory
Proceedings shall be consistent with the requirements of such banking
regulations.
Section 6.9 - Enforcement Procedure. If a claim under Section 6.4 of
this Article is not paid in full by the corporation within sixty (60) days after
a written claim has been received by the corporation, except in the case of a
claim for expenses incurred in defending a proceeding in advance of its final
disposition, in which case the applicable period shall be twenty (20) days, the
claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, to the extent successful in whole or
in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. The claimant shall be presumed to be entitled to
indemnification under this Article upon submission of a written claim (and, in
an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its
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<PAGE> 5
final disposition, where the required undertaking has been tendered to the
corporation), and thereafter the corporation shall have the burden of proving
that the claimant is not so entitled. Except in an action brought by a federal
banking agency, the claimant is entitled to indemnification even if the
corporation (including its Board of Directors, independent legal counsel or its
shareholders) failed to determine prior to the commencement of such action that
indemnification or reimbursement or advancement of expenses to the claimant is
proper in the circumstances or even if the corporation (including its Board of
Directors, independent legal counsel or its shareholders) actually determined
that the claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses.
Section 6.10 - Enforcement of Rights. The corporation shall indemnify
any person granted indemnification rights under this Article against any
reasonable expenses incurred by the person to enforce such rights.
Section 6.11 - Set-off of Claims. Any person granted indemnification
rights herein may directly assert such rights in set-off of any claim raised
against the person by or in the right of the corporation and shall be entitled
to have the same tribunal which adjudicates the corporation's claim adjudicate
the person's entitlement to indemnification by the corporation.
Section 6.12 - Non-Exclusive Remedy. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred by this Article shall not be exclusive of any other
right that any person may have or hereafter acquire under any statute, provision
of the Articles of Incorporation, Bylaws, agreement, vote of shareholders or
disinterested directors or otherwise.
Section 6.13 - Insurance. The corporation may maintain insurance, at its
expense, to protect itself and any director, trustee, officer, employee or agent
of the corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act, as amended from
time to time. The corporation may, without further shareholder action, enter
into contracts with any Director or Officer-Director of the corporation in
furtherance of the provisions of this Article and may create a trust fund, grant
a security interest or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Article. The proceeds of an insurance policy
or bond may not be used to pay or reimburse the cost of any judgment or civil
money penalty (except for legal and professional expenses) assessed in an
administrative proceeding or civil action instituted by any federal banking
agency.
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<PAGE> 6
Section 6.14 - Employees, Officers and Agents. The corporation may, by
action of its Board of Directors from time to time, provide indemnification and
pay expenses in advance of the final disposition of a proceeding to officers,
employees and agents of the corporation with the same scope and effect as the
provisions of this Article with respect to the indemnification and advancement
of expenses of Directors and Officer-Directors of the corporation, or pursuant
to rights granted pursuant to, or provided by, the Washington Business
Corporation Act, as amended from time to time, or otherwise.
Section 6.15 - Continuation of Rights. The indemnification rights
provided in this Article shall continue as to a person who has ceased to be a
Director, Officer-Director, or Subsidiary Outside Director and shall inure to
the benefit of the heirs, executors, and administrators of such person.
Section 6.16 - Effect of Amendment or Repeal. Any amendment or repeal of
this Article shall not adversely affect any right or protection of a Director,
Officer-Director, or Subsidiary Outside Director or person formerly serving in
any of such capacities existing at the time of such amendment or repeal with
respect to acts or omissions occurring prior to such amendment or repeal.
Section 6.17 - Severability of Provisions. Each of the substantive
provisions of this Article is separate and independent of the others, so that if
any provision hereof shall be held to be invalid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions.
ARTICLE VII
FAIR PRICE PROVISION
Section 7.1 For purposes of this Article:
(a) An interested shareholder transaction means any transaction between
a corporation, or any subsidiary thereof, and an interested shareholder of such
corporation or an affiliated person to an interested shareholder, that must be
authorized pursuant to applicable law by a vote of the shareholders.
(b) An interested shareholder:
(1) Includes any person or group of affiliated persons who beneficially
own twenty percent or more of the outstanding voting shares of a corporation. An
affiliated person is any person who either acts jointly or in concert with, or
directly or indirectly controls, is controlled by, or is under common control
with another person; and
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<PAGE> 7
(2) Excludes any person who, in good faith and not for the purpose of
circumventing this Article, is an agent, custodial bank, broker, nominee, or
trustee for another person, if such other person is not an interested
shareholder under Section 7.1(b)(1) of this Article.
Section 7.2 Except as provided in Section 7.3 of this Article, an
interested shareholder transaction must be approved by the affirmative vote of
the holders of two-thirds of the shares entitled to be counted under this
Section 7.2, or if any class of shares is entitled to vote thereon as a class,
then by the affirmative vote of two-thirds of the shares of each class entitled
to be counted under this Section 7.2 and of the total shares entitled to be
counted under this Section 7.2. All outstanding shares entitled to vote under
applicable law or the Articles of Incorporation shall be entitled to be counted
under this Section 7.2, except shares owned by or voted under the control of an
interested shareholder may not be counted to determine whether shareholders have
approved a transaction for purposes of this Section 7.2. The vote of the shares
owned by or voted under the control of an interested shareholder, however, shall
be counted in determining whether a transaction is approved under other
provisions of applicable law and for purposes of determining a quorum.
Section 7.3 This Article shall not apply to a transaction:
(a) Approved by a majority vote of the Board of Directors. For such
purpose, the vote of directors whose votes are otherwise entitled to be counted
under the Articles of Incorporation and applicable law who are directors or
officers of, or have a material financial interest in, an interested
shareholder, or who were nominated for election as a director as a result of an
arrangement with an interested shareholder and first elected as a director
within twenty-four months of the proposed transaction, shall not be counted in
determining whether the transaction is approved by such directors; or
(b) In which a majority of directors whose votes are entitled to be
counted under Section 7.3(a) determines that the fair market value of the
consideration to be received by noninterested shareholders for shares of any
class of which shares are owned by any interested shareholder is not less than
the highest fair market value of the consideration paid by any interested
shareholder in acquiring shares of the same class within twenty-four months of
the proposed transaction.
Section 7.4 This Article may be amended or repealed only by the
affirmative vote of the holders of two-thirds of the shares entitled to be
counted under this Section 7.4. All outstanding shares entitled to vote under
applicable law or the Articles of Incorporation shall be entitled to be counted
under this Section 7.4, except shares owned by or voted under the control of an
interested shareholder may not be counted to determine whether shareholders have
voted to approve the amendment or repeal. The
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<PAGE> 8
vote of the shares owned by or voted under the control of an interested
shareholder, however, shall be counted in determining whether the amendment or
repeal is approved under other provisions of applicable law and for purposes of
determining a quorum.
Section 7.5 The requirements imposed by this Article are to be in
addition to, and not in lieu of, requirements imposed on any transaction by any
provision of applicable law, or any other provision of the Articles of
Incorporation, or the Bylaws or otherwise.
ARTICLE VIII
CONSIDERATION OF NON-MONETARY FACTORS
The Board of Directors of this corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
this corporation, (b) merge or consolidate this corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of this corporation, shall, in connection with the
exercise of its judgment in determining what is in the best interests of this
corporation and its stockholders, give due consideration to all relevant
factors, including without limitation the social and economic effects on the
employees, customers, suppliers and other constituents of this corporation and
its subsidiaries and on the communities in which this corporation and its
subsidiaries operate or are located.
ARTICLE IX
AMENDMENTS TO ARTICLES
Section 9.1 The corporation reserves the right to amend, alter, change
or repeal any provision of its Articles of Incorporation to the extent permitted
by the laws of the State of Washington. All rights of shareholders are granted
subject to this reservation.
Section 9.2 The Board of Directors shall have full power to adopt,
alter, amend or repeal the Bylaws of the corporation or to adopt new Bylaws.
Nothing herein, however, shall deny the concurrent power of the shareholders to
adopt, alter, amend or repeal the Bylaws.
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<PAGE> 9
ARTICLE X
BOARD OF DIRECTORS
The initial Directors of the corporation and their addresses are as
follows:
<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C>
Michal D. Cann 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Orland D. Dean 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
F. Merrick Dunn 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Karl C. Krieg 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Jay T. Lien 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Robert J. Nelson 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Robert Olson 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
Edward J. Wallgren 9021 90th N.W
P.O. Box 990
Oak Harbor, WA 98277
</TABLE>
ARTICLE XI
REGISTERED AGENT AND OFFICE
The name and street address of the initial registered agent of the
corporation are G & D, Inc., 1420 Fifth Avenue, Suite 3300, Seattle, Washington
98101-2390.
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<PAGE> 10
ARTICLE XII
INCORPORATOR
The name and address of the incorporator of the corporation
are Stephen M. Klein, Graham & Dunn, 1420 Fifth Avenue, Suite 3300,
Seattle, Washington 98101-2390.
DATED this 23rd day of March, 1998.
By:/s/ MICHAL D. CANN
----------------------------------------
Michal D. Cann
Its: President and Chief Executive Officer
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<PAGE> 1
AMENDED AND RESTATED
BYLAWS OF
WASHINGTON BANKING COMPANY
JANUARY 10, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 - MEETINGS OF SHAREHOLDERS................................. 1
Section 1.1 - Shareholder Meetings.......................... 1
Section 1.2 - Annual Meeting................................ 1
Section 1.3 - Special Meetings.............................. 1
Section 1.4 - Notice........................................ 1
Section 1.5 - Quorum........................................ 2
Section 1.6 - Adjournment................................... 2
Section 1.7 - Chairperson of Meeting........................ 2
Section 1.8 - Secretary of Meeting.......................... 2
Section 1.9 - Conduct of Meetings........................... 2
Section 1.10 - Consent to Action............................. 2
Section 1.11 - Voting........................................ 2
Section 1.12 - Proxies....................................... 2
Section 1.13 - Shareholder Advisor........................... 3
Section 1.14 - Recording of Proceedings...................... 3
Section 1.15 - Record Date................................... 3
Section 1.16 - List of Shareholders.......................... 3
ARTICLE 2 - DIRECTORS................................................ 3
Section 2.1 - Authority and Size of Board.................... 3
Section 2.2 - Nomination of Directors........................ 4
Section 2.3 - Vacancies..................................... 4
Section 2.4 - Annual Meetings............................... 4
Section 2.5 - Place of Meetings............................. 4
Section 2.6 - Regular Meetings.............................. 4
Section 2.7 - Special Meetings.............................. 4
Section 2.8 - Notices....................................... 4
Section 2.9 - Quorum........................................ 5
Section 2.10 - Attendance by Conference
Telecommunication....................... 5
Section 2.11 - Consent to Action............................. 5
Section 2.12 - Compensation.................................. 5
Section 2.13 - Manifestation of Dissentt..................... 5
ARTICLE 3 - COMMITTEES OF THE BOARD OF DIRECTORS..................... 6
Section 3.1 - Committees..................................... 6
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 4 - OFFICERS AND EMPLOYEES................................... 6
Section 4.1 - Officers...................................... 6
Section 4.2 - Election...................................... 7
Section 4.3 - Removal and Vacancy........................... 7
Section 4.4 - Compensation .................................. 7
Section 4.5 - Exercise of Rights of Stockholders..............7
Section 4.6 - Duties of Chairperson of the Board............ 7
Section 4.7 - Duties of Vice Chairperson of the Board........ 7
Section 4.8 - Duties of the President ....................... 8
Section 4.9 - Duties of Vice President...................... 8
Section 4.10 - Duties of Secretary........................... 8
Section 4.11 - Duties of Treasurer........................... 9
Section 4.12 - Other Officers................................ 9
Section 4.13 - Clerks and Agents............................. 9
Section 4.14 - Extent of Coverage............................. 9
ARTICLE 5 - SHARES AND CERTIFICATES FOR SHARES.........................9
Section 5.1 - Consideration ..................................9
Section 5.2 - Stock Certificates............................. 9
Section 5.3 - Lost Certificates............................. 10
Section 5.4 - Transfer of Shares............................ 10
Section 5.5 - Holder of Record.............................. 10
Section 5.6 - Issuance of Shares............................ 10
Section 5.7 - Subscriptions................................. 10
Section 5.8 - Payment of Subscriptions...................... 11
Section 5.9 - Default in Payment of Subscriptions........... 11
ARTICLE 6 - MISCELLANEOUS PROVISIONS................................. 11
Section 6.1 - Corporate Seal................................ 11
Section 6.2 - Fiscal Year................................... 11
Section 6.3 - Records and Share Register.................... 11
ARTICLE 7 - BYLAWS .................................................. 12
Section 7.1 - Inspection.................................... 12
Section 7.2 - Amendments.................................... 12
CERTIFICATE OF ADOPTION...............................................13
</TABLE>
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<PAGE> 4
BYLAWS OF
WASHINGTON BANKING COMPANY
ARTICLE 1
MEETINGS OF SHAREHOLDERS
SECTION 1.1 - Shareholder Meetings. Shareholder meetings shall be held
at the principal office of the corporation, or at such other location within any
county in which the corporation has a branch or office, as shall be determined
by the Board of Directors and stated in the Notice of Meeting.
SECTION 1.2 - Annual Meeting. The regular annual meeting of the
shareholders for the election of directors and for the transaction of such other
business as may properly be brought before the meeting shall be held on such day
and at such time following the close of the corporation's fiscal year as shall
be determined each year by the Board of Directors, but not later than May 15 of
each year. If such annual meeting is omitted by oversight or otherwise during
such period, a subsequent annual meeting may nonetheless be held, and any
business transacted or elections held at such meeting shall be as valid as if
the annual meeting had been held during the period provided above.
SECTION 1.3 - Special Meetings. Special meetings of the shareholders may
be called at any time by the President, or by a majority of the Board of
Directors. No business shall be transacted at any special meeting of
shareholders except as is specified in the notice calling for said meeting.
SECTION 1.4 - Notice. Written notice stating the place, day, and hour of
the meeting, and in case of a special meeting the purpose or purposes for which
the meeting is called, shall be delivered not less than ten (10) days nor more
than sixty (60) days before the date of the meeting, either personally or by
mail to each shareholder of record entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the United States
mail, postage prepaid, addressed to the shareholder at the shareholder's address
as it appears on the stock transfer books of the corporation. Each shareholder
shall be responsible for providing the Secretary with the shareholder's current
mailing address to which notices of meetings and all other corporate notices may
be sent. A shareholder may waive any notice required for any meeting by
executing a written waiver of notice either before or after said meeting and
such waiver shall be equivalent to the giving of such notice. The attendance of
a shareholder at a shareholders' meeting, in person or by proxy, shall
constitute a waiver of notice of the meeting.
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<PAGE> 5
SECTION 1.5 - Quorum. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. When a quorum is present at any meeting, the affirmative vote of
the majority of the shares represented at the meeting and entitled to vote on
the subject matter shall be the act of the shareholders, unless otherwise
provided by law.
SECTION 1.6 - Adjournment. A majority of the shares represented at a
meeting, even if less than a quorum, may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally stated in the notice of meeting. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
SECTION 1.7 - Chairperson of Meeting. The Chairperson, or in the
Chairperson's absence, the President, shall preside at all meetings of the
shareholders unless the Board of Directors shall otherwise determine. The Board
of Directors may appoint any shareholder to act as Chairperson of the meeting.
SECTION 1.8 - Secretary of Meeting. The Secretary shall act as a
secretary at all meetings of the shareholders, and in the Secretary's absence,
the presiding officer may appoint any person to act as secretary.
SECTION 1.9 - Conduct of Meetings. Shareholder meetings shall be
conducted in an orderly and fair manner, but the presiding officer shall not be
bound by any technical rules of parliamentary procedure.
SECTION 1.10 - Consent to Action. Any action which may be taken at a
meeting of the shareholders, may be taken without a meeting if a consent in
writing, setting forth the actions so taken shall be signed by all of the
shareholders. Such consent shall have the same force and effect as a unanimous
vote at a duly convened meeting.
SECTION 1.11 - Voting. Each outstanding share shall be entitled to one
vote on each matter submitted to a vote at a meeting of shareholders.
SECTION 1.12 - Proxies. At all meetings of shareholders, a shareholder
may vote by proxy executed in writing by the shareholder or by the shareholder's
duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary
of the corporation before or at the time of the meeting. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy.
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<PAGE> 6
SECTION 1.13 - Shareholder Advisor. A shareholder or holder of a valid
proxy may be accompanied at any shareholders' meeting by one personal advisor,
but no such advisor may address the meeting without the consent of the presiding
officer.
SECTION 1.14 - Recording of Proceedings. The proceedings of a
shareholders' meeting may not be mechanically or electronically recorded other
than by the Secretary or acting secretary without the express approval of all
individuals in attendance at the meeting.
SECTION 1.15 - Record Date. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or entitled to receive payment of any dividend, or in order
to make a determination of shareholders for any other proper purpose, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders. Such date in any case shall not be more than
seventy (70) days and, in case of a meeting of shareholders, not less than ten
(10) days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed by the
Board of Directors, the date on which notice of the meeting is mailed or the
date on which the resolution of the Board declaring such dividend is adopted, as
the case may be, shall be the record date for such determination of
shareholders. When a determination of shareholders entitled to vote at any
meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment thereof.
SECTION 1.16 - List of Shareholders. The Secretary of the corporation
shall make a complete record of the shareholders entitled to vote at a meeting
of shareholders, or any adjournment thereof, arranged in alphabetical order,
with the address of and the number of shares held by each as shown on the
corporation's stock transfer books on the record date. Such record shall be kept
on file at the administrative office of the corporation for a period of ten (10)
days prior to the meeting of shareholders. Such record shall be produced and
kept open at the time and place of the shareholders' meeting and shall be
subject to the inspection of any shareholder during the meeting for any proper
purpose.
ARTICLE 2
DIRECTORS
SECTION 2.1 - Authority and Size of Board. All corporate powers shall be
exercised by, or under authority of, and the business and affairs of the
corporation shall be managed under the direction of the Board of Directors
(hereinafter sometimes referred to as the "Board"). The number of directors may
be increased or decreased from time to time within the limits stated in the
Articles of Incorporation. The exact number of directors within such minimum and
maximum limits shall be fixed and determined by resolution of the Board of
Directors.
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<PAGE> 7
SECTION 2.2 - Nomination of Directors. Any nomination to the Board of
Directors (other than one proposed by the existing Board of the corporation)
must be made in writing and delivered or mailed to the Chairman or President of
the corporation not less than fourteen (14) days nor more than fifty (50) days
prior to any meeting of shareholders called for the election of directors;
however, if less than twenty-one (21) days' notice of the meeting is given to
shareholders, such nomination shall be mailed or delivered not later than the
close of business on the seventh (7th) day following the day on which the notice
of meeting was mailed. Any nomination not made in accordance with these
provisions may, at the discretion of the Chairman of the meeting, be
disregarded.
SECTION 2.3 - Vacancies. Any vacancy occurring in the Board of
Directors, unless caused by the vote of the shareholders, may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors. A director elected to fill a vacancy shall be
elected for the unexpired term of the director's predecessor in office or until
his or her successor shall have been elected and qualified.
SECTION 2.4 - Annual Meetings. Immediately after the annual meeting of
shareholders, the directors shall meet to elect officers and transact any other
business.
SECTION 2.5 - Place of Meetings. Meetings of the Board of Directors,
regular or special, may be held within or without this state.
SECTION 2.6 - Regular Meetings. Regular meetings, at least quarterly, of
the Board of Directors shall be held without notice at such time and at such
place as the Board may by vote from time to time designate.
SECTION 2.7 - Special Meetings. Special meetings of the Board of
Directors may be held at any time and at any place whenever called by the
Chairperson, the President, or by any three (3) directors.
SECTION 2.8 - Notices. Notices of special meetings of the Board of
Directors stating the date, time, place, and in general terms the purpose or
purposes thereof shall be delivered to each director, by mailing written notice
at least five (5) days before the meeting or by telephoning, telegraphing or
personally advising each director at least three (3) days before the meeting. A
special meeting shall be held not more than twenty (20) days after the delivery
of said notice. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the director
at the address provided to the Secretary. An entry of the service of notice,
given in the manner above provided, shall be made in the minutes of the
proceedings of the Board of Directors, and such entry, if read and approved at
the subsequent meeting of the Board, shall be conclusive on the question of
service. Attendance of a director at
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<PAGE> 8
a special meeting shall constitute a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting was not lawfully called or
convened. A director may waive any notice required for any meeting by executing
a written waiver of notice either before or after said meeting, and such waiver
shall be equivalent to the giving of such notice.
SECTION 2.9 - Quorum. A majority of the directors shall constitute a
quorum for the transaction of business. Unless otherwise provided in these
Bylaws, the act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. A majority of
those present at the time and place of any regular or special meeting, although
less than a quorum, may adjourn from time to time, without further notice, until
a quorum shall attend. When a quorum shall attend, any business may be
transacted which might have been transacted at the meeting had the same been
held on the date stated in the notice of meeting.
SECTION 2.10 - Attendance by Conference Telecommunication. Members of
the Board of Directors may participate in a meeting of such Board by means of a
conference telephone or similar communications equipment, by means of which all
persons participating in the meeting can hear each other at the same time, and
participation by such means shall constitute presence in person at a meeting.
SECTION 2.11 - Consent to Action. Any action which may be taken at a
meeting of the Board of Directors, or at a meeting of any committee of the
Board, may be taken without a meeting if a consent in writing, setting forth the
action so taken shall be signed by all of the directors or all the members of
the committee. Such consent shall have the same force and effect as a unanimous
vote at a duly convened meeting.
SECTION 2.12 - Compensation. The directors shall receive such reasonable
compensation for their attendance at meetings of the Board and for their
services as members of any committee appointed by the Board as may be prescribed
by the Board of Directors, and may be reimbursed by the corporation for ordinary
and reasonable expenses incurred in the performance of their duties.
SECTION 2.13 - Manifestation of Dissent. A director of the corporation
who is present at a meeting of the Board at which action on any corporate matter
is taken shall be presumed to have assented to the action taken unless such
director's dissent shall be entered in the minutes of the meeting or unless such
director shall file a written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered or certified mail to the Secretary of the corporation
immediately after the adjournment of the meeting. Such right to dissent shall
not apply to a director who voted in favor of such action.
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ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 3.1 - Committees. The Board of Directors, by resolution adopted
by a majority of the full Board of Directors, may designate from among its
members an executive committee or one or more other committees. Each must
consist of two (2) or more persons. The committees will be governed by the same
rules regarding meetings, actions without meetings, notices, waivers of notice,
and quorum and voting requirements applied to the Board of Directors. To the
extent provided in the resolution forming the committee, each committee will
have and may exercise all the authority of the Board of Directors, except that
no committee will have the authority to:
(a) Authorize or approve a distribution except according to a
general formula or method prescribed by the Board of Directors;
(b) Approve or propose to shareholders action required to be
approved by shareholders;
(c) Fill vacancies on the Board of Directors or on any of its
committees;
(d) Amend the Articles of Incorporation of the corporation;
(e) Adopt, amend, or repeal the Bylaws of the corporation;
(f) Approve a plan of merger not requiring shareholder approval,
or
(g) Authorize or approve the issuance or sale or contract for
sale of shares, or determine the designation and relative rights,
preferences, and limitations of a class or series of shares, except as
authorized by the Board of Directors within limits specifically
prescribed by the Board.
The creation of, delegation of authority to, or action by such a committee of
the Board will not operate to relieve the Board of Directors, or any of its
members, of any responsibility imposed by law.
ARTICLE 4
OFFICERS AND EMPLOYEES
SECTION 4.1 - Officers. The Board of Directors may elect from its own
number a Chairperson of the Board (Chairperson). It shall also elect a
President, and a Secretary and/or a Treasurer, and may elect a Vice Chairperson
or one or more Vice Presidents, and such
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<PAGE> 10
additional officers as in the opinion of the Board the business of the
corporation requires. The Board may also elect or appoint, or in its discretion
delegate to the President the authority to appoint, from time to time such other
or additional officers as are desirable for the conduct of the business of the
corporation.
SECTION 4.2 - Election. None of the officers, except the Chairperson and
the President, need be a director. The officers shall be elected annually by the
Board of Directors at the meeting of the Board following the annual meeting of
shareholders, and they shall hold office at the pleasure of the Board of
Directors.
SECTION 4.3 - Removal and Vacancy. Any officer, agent, or employee of
the corporation may be removed by the Board of Directors at any time with or
without cause. Such removal, however, shall be without prejudice to the contract
rights, if any, of the persons so removed. Election or appointment of an officer
or agent or employee shall not of itself create contract rights. If any
corporate office becomes vacant by reason of death, resignation, removal or
otherwise, the Board of Directors or the executive officer possessing delegated
authority to appoint such an officer, shall have power to fill such vacancies.
In case of the absence or disability of any officer, the Board of Directors, or
the President, may delegate the powers or duties of any such officer to another
officer for the time being.
SECTION 4.4 - Compensation. The Board of Directors shall establish the
types and amounts of compensation for the President and other officers.
Compensation for all other employees, or agents of the corporation shall be
established by or at the direction of the President and/or the Compensation
Committee.
SECTION 4.5 - Exercise of Rights as Stockholders. Unless otherwise
ordered by the Board of Directors, the President, or the President's designee
acting by written designation, shall have full power and authority on behalf of
the corporation to attend and to vote at any meeting of shareholders of any
corporation in which this corporation may hold stock, other than in a fiduciary
capacity, and may exercise on behalf of this corporation any and all of the
rights and powers incident to the ownership of such stock at any such meeting,
and shall have power and authority to execute and deliver proxies and consents
on behalf of this corporation in connection with the exercise by this
corporation of the rights and powers incident to the ownership of such stock.
The Board of Directors, from time to time, may confer like powers upon any other
person or persons.
SECTION 4.6 - Duties of Chairperson of the Board. The Chairperson of the
Board shall preside over all stockholders and directors meetings and shall
perform such other duties as may from time to time be assigned by the Board of
Directors; provided, however, that the Chairperson of the Board shall not, by
reason of such office, be considered an executive officer of the corporation or
be assigned executive responsibilities or participate in the operational
management of the corporation.
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<PAGE> 11
SECTION 4.7 - Duties of Vice Chairperson of the Board. The Vice
Chairperson of the Board will assist the Chairperson in the performance of his
or her duties and will have such powers and exercise such other duties as will
be delegated by the Board of the Chairperson. In the absence of the Chairperson,
the Vice Chairperson will perform all of the duties and assume all of the
responsibilities of the Chairperson.
SECTION 4.8 - Duties of the President. The President shall have general
management of the business of the corporation. The President shall see that all
orders and resolutions of the Board of Directors and the Executive Committee are
carried into effect, and shall have general supervision over the property,
business, and affairs of the corporation and its several officers. The President
shall have the power and shall perform the duties as are regularly and
customarily performed by the chief executive officer of a corporation and may
delegate such duties as appropriate to a Vice President or other officers of the
corporation. The President may appoint officers, agents or employees other than
those appointed by the Board of Directors, and shall perform such other duties
as may be prescribed from time to time by the Board of Directors or by the
Bylaws.
SECTION 4.9 - Duties of Vice President. A Vice-President designated by
the Board of Directors shall perform all the duties of the President in case of
absence or disability of the President. The Vice Presidents shall have such
other powers and shall perform such other duties as may be assigned to them by
the President.
SECTION 4.10 - Duties of Secretary. The Secretary shall, subject to the
direction of the Chairman of the Board, keep the minutes of all meetings of the
shareholders and of the Board of Directors, and to the extent ordered by the
Board of Directors, or the President, the minutes of all meetings of all
committees. The Secretary shall cause notice to be given of the meetings of the
shareholders, of the Board of Directors, and of any committee appointed by the
Board. The Secretary shall have custody of the corporate seal and general charge
of the records, documents, and papers of the corporation not pertaining to the
performance of the duties vested in other officers, which shall at all
reasonable times be open to the examination of any director. Without limiting
the generality of the foregoing, the Secretary shall have charge (directly or
through such transfer agents or registrars as the Board of Directors may
appoint) of the issuance, transfer, and registration of certificates for shares
of the corporation and of the records pertaining thereto. Said records shall be
kept in such manner as to show at any time the number of shares of the
corporation issued and outstanding, the manner in which and the time when such
shares were paid for, the names and addresses of the holders of record thereof,
the numbers and classes of shares held by each, and the time when each became
such holder of record. The Secretary shall perform such other duties as may be
assigned by the President. The Treasurer or an Assistant Secretary appointed by
the Board may perform any or all of the duties of the Secretary in the
discretion of the Chairman of the Board.
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<PAGE> 12
SECTION 4.11 - Duties of Treasurer. Except as otherwise set forth
herein, the Treasurer shall, subject to the direction of the President, have
general custody of all the property, funds and securities of the corporation and
have general supervision of the collection and disbursement of funds of the
corporation. The Treasurer shall provide for the keeping of proper records of
all transactions of the corporation. The Treasurer shall perform such other
duties as may be assigned by the President.
SECTION 4.12 - Other Officers. Such other officers as shall be appointed
by the Board of Directors, or the President, acting pursuant to delegated
authority of the Board, shall exercise such powers and perform such duties as
pertain to their several offices, or as may be conferred upon, or assigned to,
them by the President, or their designee.
SECTION 4.13 - Clerks and Agents. The President, or any other officer of
the corporation authorized by the President, may appoint such custodians,
bookkeepers and other clerks, agents, and employees as the President shall deem
advisable for the prompt and orderly transaction of the business of the
corporation and shall define their duties, fix the salaries to be paid to them
and dismiss them.
SECTION 4.14 - Extent of Coverage. Each of the officers and employees
shall, when directed by the Board of Directors, furnish a fidelity bond to the
corporation in such amount and under such conditions as the Board shall direct.
The Board may direct that a blanket bond in such sum as it shall determine shall
be purchased by the corporation to cover all officers and employees.
ARTICLE 5
SHARES AND CERTIFICATES FOR SHARES
SECTION 5.1 - Consideration. Certificates for shares of the corporation
shall be issued only when fully paid for.
SECTION 5.2 - Stock Certificates. The certificates shall be in such form
as designated by the Board of Directors, shall be numbered in the order in which
they shall be issued, and shall be signed by either the President, or the Vice
President, and by the Secretary or Assistant Secretary or Treasurer or Assistant
Treasurer. The signatures may be facsimiles if the certificate is countersigned
by a transfer agent or registered by a registrar other than the corporation or
an employee of the corporation. If a corporate seal is maintained, it or a
facsimile thereof may be affixed to the certificate. Each certificate shall
state upon its face that the corporation is organized under the laws of the
State of Washington, the name of the person to whom it is issued, the number and
class of shares which the certificate represents, and the par value of each
share represented by the certificate or a statement that the shares are without
par value.
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<PAGE> 13
SECTION 5.3 - Lost Certificates. No new certificate shall be issued
until the former certificate for the shares represented thereby shall have been
surrendered and canceled, except in the case of lost or destroyed certificates,
and in that case only after the receipt of a bond or other security by the
corporation, satisfactory to the Board of Directors, indemnifying the
corporation and all persons against loss in consequence of the issuance of such
new certificate.
SECTION 5.4 - Transfer of Shares. Shares of the corporation may be
transferred by endorsement by the signature of the owner, the owner's agent,
attorney or legal representative, and the delivery of the certificate; but no
transfer shall be valid except between the parties thereto, until the same shall
have been entered upon the books of the corporation, so as to show the names of
the parties, by and to whom transferred, the numbers and designation of the
shares and the date of transfer.
SECTION 5.5 - Holder of Record. The person registered on the books of
the corporation as the owner of the issued shares shall be recognized by the
corporation as the person exclusively entitled to have and to exercise the
rights and privileges incident to the ownership of such shares. Notwithstanding
the preceding sentence, the Board of Directors may adopt by resolution a
procedure whereby a shareholder may certify in writing to the corporation that
all or a portion of the shares registered in the name of such shareholder are
held for the account of a specified person or persons. Upon receipt by the
corporation of a certification complying with such an adopted procedure, the
person specified in the certification shall be deemed, for the purpose or
purposes set forth in the certification, to be the holders of record of the
number of shares specified in place of the shareholder making the certification.
SECTION 5.6 - Issuance of Shares. Any shares authorized but not issued
shall be issued, sold, or otherwise transferred by this corporation only upon
authorization of the Board of Directors.
SECTION 5.7 - Subscriptions. A subscription for shares of this
corporation shall be in writing and upon such terms as may be approved by the
Board of Directors.
SECTION 5.8 - Payment of Subscriptions. A subscription for shares shall
be paid in accordance with the terms set forth in the subscription or related
subscription agreement, if any. If the subscription or subscription agreement
does not require payment on or before a stated date or at a fixed period after a
stated date, then payment shall be made in such manner and at such times as may
be determined by the Board of Directors and expressed by it in a written call
for payment; provided that the call shall be uniform as to all shares of the
same class or series and that the call shall be mailed to each subscriber at the
subscriber's last post office address known to the corporation at least thirty
(30) days in advance of the date upon which payment or the first installment, if
installment payments are called for, is due.
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<PAGE> 14
SECTION 5.9 - Default in Payment of Subscriptions. If a payment required
by a subscription, a subscription agreement, or a call of the Board of Directors
is not paid when due, then the corporation may make written demand for payment
upon the defaulting subscriber by personal service or by mailing a copy of the
demand to the subscriber at the subscriber's last post office address known to
the corporation. If the payment is not made within twenty (20) days of the
serving or mailing of the demand for payment, the corporation may terminate the
subscription, forfeit the subscriber's rights thereunder, retain as liquidated
damages any sums previously paid on the subscription, and hold and dispose of
the shares as though never subject to the subscription. In lieu of forfeiture,
the corporation may proceed to collect the amount due in the same manner as any
debt due the corporation.
ARTICLE 6
MISCELLANEOUS PROVISIONS
SECTION 6.1 - Corporate Seal. In the exercise of its discretion the
Board of Directors may adopt and maintain a suitable seal for the corporation.
SECTION 6.2 - Fiscal Year. The fiscal year of the corporation shall be
the calendar year.
SECTION 6.3 - Records and Share Register. The corporation will keep at
either its principal place of business, its registered office, or another place
permitted by law, as the Board of Directors may designate, (a) complete books
and records of account and complete minutes or records of all of the proceedings
of the Board of Directors, Director committees, and shareholders, and (b) a
record of shareholders, giving the names of the shareholders in alphabetical
order by class of shares and showing their respective addresses and the number
and class of shares held by each.
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<PAGE> 15
ARTICLE 7
BYLAWS
SECTION 7.1 - Inspection. A copy of the Bylaws, with all amendments
thereto, shall at all times be kept in a convenient place at the administrative
office of the corporation, and shall be open for inspection of all shareholders
during normal business hours.
SECTION 7.2 - Amendments. The Bylaws may be amended, altered or
repealed, at any regular or special meeting of the Board of Directors, by a vote
of the majority of the whole Board of Directors, provided that a written
statement of the proposed action shall have been personally delivered or mailed
to all directors at least two (2) days prior to any such meeting.
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<PAGE> 16
CERTIFICATE OF ADOPTION
The undersigned, being the Secretary of Washington Banking Company,
certifies that these are the Bylaws of the corporation, adopted by the Board of
Directors on January 10, 1997.
DATED this 10th day of January, 1998.
/s/ ROBERT J. NELSON
-------------------------------
Robert J. Nelson
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<PAGE> 1
INCORPORATED UNDER THE LAWS OF THE STATE OF WASHINGTON
WASHINGTON BANKING COMPANY
NO PAR VALUE PER SHARE
This certifies that ____________________________________ is the owner of
________________________________ Shares of the Capital Stock of
WASHINGTON BANKING COMPANY
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed.
Attested: this _______ day of ___________ A.D. __
- ----------------------------------- -------------------------------------
SECRETARY/CASHIER PRESIDENT
<PAGE> 2
CERTIFICATE FOR SHARES OF THE CAPITAL STOCK
WASHINGTON BANKING COMPANY
ISSUED TO
DATE
For Value Received ____ hereby sell, assign and transfer unto_________
____________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate and do hereby
irrevocably constitute and appoint ________________________________________
_________________________________________________________________ Attorney
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________________________________________________
In presence of ______________________________________________
NOTICE: THE SIGNATURE
OF THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME
AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 10.1
WHIDBEY ISLAND BANK
EMPLOYEE STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this Plan is to provide
additional incentives to key employees of Whidbey Island Bank and any of its
future Subsidiaries, thereby helping to attract and retain the best available
personnel for positions of responsibility with those corporations and otherwise
promoting the success of the business activities of such corporations. It is
intended that Options issued pursuant to this Plan shall constitute either
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code or nonqualified stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Employer.
(b) "Common Stock" shall mean the Employer's common stock, par value
$20.00 per share.
(c) "Committee" shall mean the Board or the Committee appointed by the
Board in accordance with Section 4(a) of the Plan.
(d) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of sick leave, military
leave, or any other approved leave of absence.
(e) "Employee" shall mean any person employed by the Employer or any
Parent or Subsidiary of the Employer which is hereafter organized or is acquired
by the Employer.
(f) "Employer" shall mean Whidbey Island Bank, a Washington banking
corporation.
(g) "Option" shall mean a stock option granted pursuant to the Plan.
Options shall include both Incentive Stock Options under Section 422A of the
Internal Revenue Code and Nonqualified Stock Options.
(h) "Optioned Stock" shall mean the Common Stock subject to an Option.
(i) "Optionee" shall mean an Employee who receives an Option.
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<PAGE> 2
(j) "Plan" shall mean this Employee Stock Option Plan.
(k) "Parent" shall mean any corporation having a relationship with the
Employer as described in Section 425(e) of the Internal Revenue Code.
(l) "Shareholder-Employee" shall mean an Employee who owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Employer or of any Parent or Subsidiary. For this
purpose, the attribution of stock ownership rules provided in Section 425(d) of
the Internal Revenue Code shall apply.
(m) "Subsidiary" shall mean any bank or other corporation of which not
less than 50% of the voting shares are held by the Employer or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Employer or a Subsidiary.
3. Stock Subject to Options.
(a) Number of Shares Reserved. The maximum number of shares which may be
optioned and sold pursuant to the Plan shall be 3,000 shares of the Common Stock
of the Employer (subject to adjustment as provided in subparagraph 6(i) of the
Plan). During the term of this Plan, the Employer will at all times reserve and
keep available a sufficient number of shares of its Common Stock to satisfy the
requirements of the Plan.
(b) Expired Options. If any outstanding Option expires or becomes
unexercisable for any reason without having been exercised in full, the shares
of Common Stock allocable to the unexercised portion of such Option shall again
become available for other Options.
4. Administration of the Plan.
(a) The Committee. The Plan shall be administered by the Board directly,
acting as a Committee of the whole, or if the Board elects, by a separate
Committee appointed by the Board for that purpose and consisting of at least
three Board members. All references in the Plan to the "Committee" shall refer
to such separate Committee, if any is established, or if none is then in
existence, shall refer to the Board as a whole. Once appointed, any such
Committee shall continue to serve until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause), appoint new
members in substitution therefor, and fill vacancies however caused. The
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<PAGE> 3
Committee shall select one of its members as chairman, and shall hold meetings
at such times and places as the chairman or a majority of the Committee may
determine.
At all times, a majority of the members of the Committee shall consist
of members of the Board who are not eligible to receive Options under the Plan.
Members of the Committee who are either eligible for Options or who have been
granted Options shall be counted for all purposes in determining the existence
of a quorum at any meetings of the Committee and shall be eligible to vote on
all matters before the Committee respecting the granting of Options or
administration of the Plan, except only that no such members shall vote or
otherwise act upon the grant or the modification of the terms of any Option
granted or to be granted to himself.
At least annually, the Committee shall present a written report to the
Board indicating the Employees to whom Options have been granted since the date
of the last such report, and in each case the date or dates of Options granted,
the number of shares optioned, and the Option price per share.
At all times, the Board shall have the power to remove all members of
the Committee and thereafter to directly administer the Plan as a Committee of
the whole.
(b) Powers of the Committee. Subject to all provisions and limitations
of the Plan, the Committee shall have the authority and discretion:
(1) to determine the Employees to whom Options are to be granted,
the times of grant, and the number of shares to be represented by each Option;
(2) to determine the Option price for the shares of Common Stock
to be issued pursuant to each Option, subject to the provisions of subparagraph
6(b) of the Plan in the case of Incentive Stock Options;
(3) to determine all other terms and conditions of each Option
granted under the Plan (including specifying the dates upon which Options become
exercisable), which need not be identical;
(4) to modify or amend the terms of any Option previously
granted, or to grant substitute Options, subject to the provisions of
subparagraphs 6(1) and 6(m) of the Plan;
(5) to interpret the Plan;
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<PAGE> 4
(6) to authorize any person or persons to execute and deliver
Option agreements or to take any other actions deemed by the Committee to be
necessary or appropriate to effectuate the grant of Options by the Committee;
(7) to make all other determinations and take all other actions which
the Committee deems necessary or appropriate to administer the Plan in
accordance with its terms and conditions.
All actions of the Committee shall be either by (i) a majority vote of
the members of the full Committee at a meeting of the Committee, or (ii) by
unanimous written consent of all members of the full Committee without a meeting
thereof.
All decisions, determinations and interpretations of the Committee shall
be final and binding upon all persons, including all Optionees and any other
holders or persons interested in any Options, unless otherwise expressly
determined by a vote of the majority of the entire Board. No member of the
Committee or of the Board shall be liable for any action or determination made
in good faith with respect to the Plan or any Option.
5. Eligibility. Options may be granted only to Employees whom the
Committee, in its discretion, determines to be key Employees.
Granting of Options pursuant to the Plan shall be entirely discretionary
with the Committee, and the adoption of this Plan shall not confer upon any
Employee any right to receive any Option or Options pursuant to the Plan unless
and until said Options are granted by the Committee, in its sole discretion.
Neither the adoption of the Plan nor the granting of any Options pursuant to the
Plan shall confer upon any Employee or Optionee any right with respect to
continuation of employment, nor shall the same interfere in any way with his
right or with the right of the Employer or any Subsidiary to terminate his
employment at any time.
6. Terms and Conditions of Options. All Options granted pursuant to the
Plan must be authorized by the Committee, and must be documented in written
agreements in such form as the Committee shall from time to time approve, which
agreements shall comply with and be subject to all of the following terms and
conditions:
(a) Number of Shares; Annual Limitation. Each Option agreement shall
state whether the Option is an Incentive Stock Option or a Nonqualified Stock
Option and the number of shares subject to Option. Any number of Options may be
granted to a single eligible Employee at any time and from time to time, except
that, in the case of
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<PAGE> 5
Incentive Stock Options, the aggregate fair market value (determined as of the
time each Option is granted) of all shares of Common Stock with respect to which
Incentive Stock Options become exercisable for the first time by such Employee
in any one calendar year (under all incentive stock option plans of the
Employer, its Parent and all of its Subsidiaries taken together) shall not
exceed $100,000.
(b) Option Price and Consideration. The Option price for the shares of
Common Stock to be issued pursuant to the Option shall be such price, not less
than the par value, as is determined by the Committee, but, in the case of
Incentive Stock Options, shall in no event be less than the fair market value of
the Common Stock on the date of grant of the Incentive Stock Option.
In the case of an Incentive Stock Option granted to an Employee who,
immediately before the grant of such Incentive Stock Option, is a
Shareholder-Employee, the Incentive Stock Option price shall be at least 110% of
the fair market value of the Common Stock on the date of grant of the Incentive
Stock Option.
The fair market value shall be determined by the Committee in its
discretion; provided, however, that in the event that there is a public market
for the Common Stock, the fair market value shall be the mean of the bid and
asked prices of the Common Stock as of the date of grant as reported on the
National Association of Securities Dealers Automatic Quotation System (NASDAQ),
or, in the event the Common Stock is listed on a stock exchange, the fair market
value shall be the closing price on the exchange as of the date of grant of the
Option.
The Option price shall be payable either (i) in United States dollars
upon exercise of the Option, or (ii) if approved by the Board, other
consideration including without limitation Common Stock of the Employer,
services, or other property.
(c) Term of Option. No Incentive Stock Option granted pursuant to the
Plan shall in any event be exercisable after the expiration of ten (10) years
from the date such Option is granted, except that the term of an Incentive Stock
Option granted to an Employee who, immediately before such Incentive Stock
Option is granted, is a Shareholder-Employee shall be for not more than five (5)
years from the date of grant thereof. Subject to the foregoing and other
applicable provisions of the Plan including but not limited to Section 6(e)
herein, the term of each Option shall be determined by the Committee in its
discretion.
(d) Manner of Exercise: Rights as Shareholder. An Option shall be deemed
to be exercised when written notice of exercise has been given to the Employer
in
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<PAGE> 6
accordance with the terms of the Option by the person entitled to exercise the
Option, together with full payment for the shares of Common Stock subject to
said notice.
(e) Death of Optionee. In the event of the death of an Optionee who at
the time of his death was an Employee and who had been in Continuous Status as
an Employee since the date of grant of the Option, the Option shall terminate on
the earlier of (i) one year after the date of death of the Optionee, or (ii) the
expiration date otherwise provided in the Option agreement except that if the
expiration date of a Nonqualified Stock Option should occur during the 90-day
period immediately following the Optionee's death, such Option shall terminate
at the end of such 90-day period. The Option shall be exercisable at any time
prior to such termination by the Optionee's estate, or by such person or persons
who have acquired the right to exercise the Option by bequest or by inheritance
or by reason of the death of the Optionee.
(f) Disability of Optionee. If an Optionee's status as an Employee is
terminated at any time during the Option period by reason of a disability
(within the meaning of Section 22(e)(3) of the Internal Revenue Code) and if
said Optionee had been in Continuous Status as an Employee at all times between
the date of grant of the Option and the termination of his status as an
Employee, his Incentive Stock Option shall terminate on the earlier of (i) one
year after the date of termination of his status as an Employee, or (ii) the
expiration date otherwise provided in his Option agreement.
(g) Termination of Status as an Employee.
(1) If an Optionee's status as an Employee is terminated at any
time after the grant of his Option for any reason other than death or
disability, as provided in subparagraphs (e) and (f) above, and not by reason of
fraud or willful misconduct, as provided in (2) below, his Option shall
terminate on the earlier of (i) the same day of the third month after the date
of termination of his status as an Employee, or (ii) the expiration date
otherwise provided in his Option agreement.
(2) If an Optionee's status as an Employee is terminated at any
time after the grant of his Option by reason of fraud or willful misconduct,
then his Option shall terminate on the date of termination of his status as an
Employee.
(h) Non-transferability of Options. No Option granted pursuant to the
Plan may be sold, pledged, assigned, hypothecated, transferred, or disposed of
in any manner other than by will or by the laws of descent or distribution and
may be exercised, during the lifetime of the Optionee, only by the Optionee.
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(i) Adjustments Upon Chances in Capitalization. Subject to any required
action by the shareholders of the Employer, the number of shares of Common Stock
covered by each outstanding Option, the number of shares of Common Stock
available for grant of additional Options, and the price per share of Common
Stock specified in each outstanding Option, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from any stock split or other subdivision or consolidation of shares,
the payment of any stock dividend (but only on the Common Stock) or any other
increase or decrease in the number of such shares of Common Stock effected
without receipt of consideration by the Employer; provided, however, that
conversion of any convertible securities of the Employer shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive.
No Incentive Stock Option shall be adjusted by the Committee pursuant to
this subparagraph 6(i) in a manner which causes the Option to fail to continue
to qualify as an incentive stock option within the meaning of Section 422A of
the Internal Revenue Code.
Except as otherwise expressly provided in this subparagraph 6(i), no
Optionee shall have any rights by reason of any stock split or the payment of
any stock dividend or any other increase or decrease in the number of shares of
Common Stock. Except as otherwise expressly provided in this subparagraph 6(i),
any issue by the Employer of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect the number of
shares or price of Common Stock subject to any Options, and no adjustments in
Options shall be made by reason thereof. The grant of an Option pursuant to the
Plan shall not affect in any way the right or power of the Employer to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure.
(j) Date of Grant of Option. The date of grant of an Option shall, for
all purposes, be the date on which the Committee makes the determination
granting such Option. Said date of grant shall be specified in the Option
agreement.
(k) Conditions Upon Issuance of Shares. Shares of Common Stock shall not
be issued with respect to an Option granted under the Plan unless the exercise
of such Option and the issuance and delivery of such shares pursuant thereto
shall comply with all applicable provisions of law, including, applicable
federal and state securities laws.
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<PAGE> 8
As a condition to the exercise of an Option, the Employer may require
the person exercising such Option to represent and warrant at the time of
exercise that the shares of Common Stock are being purchased only for investment
and without any present intention to sell or distribute such Common Stock if, in
the opinion of counsel for the Employer, such a representation is required by
any of the aforementioned relevant provisions of law.
(1) Mergers, Sale of Assets, Etc. In the event of the merger or
reorganization of the Employer with or into any other corporation, or in the
event of a proposed sale of substantially all of the assets of the Employer, or
in the event of a proposed dissolution or liquidation of the Employer
(collectively, "sale transaction"): (1) all outstanding Options that are not
then fully exercisable shall become exercisable upon the date of closing of any
sale transaction or such earlier date as the Committee may fix; and (2) the
Committee may, in the exercise of its sole discretion, terminate all outstanding
Options as of a date fixed by the Committee. In such event, however, the
Committee shall notify each Optionee of such action in writing not less than
sixty (60) days prior to the termination date fixed by the Committee, and each
Optionee shall have the right to exercise his Option prior to said termination
date.
(m) Substitute Stock Options. In connection with the acquisition or
proposed acquisition by the Employer or any Subsidiary, whether by merger,
acquisition of stock or assets, or other reorganization transaction, of a
business any employees of which have been granted incentive stock options, the
Committee is authorized to issue, in substitution of any such unexercised stock
option, a new Option under this Plan which confers upon the Optionee
substantially the same benefits as the old option; provided, however, that the
issuance of any new Option for an old incentive stock option shall satisfy the
requirements of Section 425(a) of the Internal Revenue Code.
(n) Tax Compliance. The Employer, in its sole discretion, may take any
actions reasonably believed by it to be required to comply with any local,
state, or federal tax laws relating to the reporting or withholding of taxes
attributable to the grant or exercise of any Option or the disposition of any
shares of Common Stock issued upon exercise of an Option, including, but not
limited to, (i) withholding from any Optionee exercising an Option a number of
shares of Common Stock having a fair market value equal to the amount required
to be withheld by Employer under applicable tax laws, and (ii) withholding from
any form of compensation or other amount due an Optionee or holder of shares of
Common Stock issued upon exercise of an Option any amount required to be
withheld by Employer under applicable tax laws. Withholding or reporting shall
be considered required for purposes of this subparagraph if any tax
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<PAGE> 9
deduction or other favorable tax treatment available to Employer is conditioned
upon such reporting or withholding.
(o) Other Provisions. Option agreements executed pursuant to the Plan
may contain such other provisions as the Committee shall deem advisable,
provided in the case of Incentive Stock Options that the provisions are not
inconsistent with the provisions of Section 422A(b) of the Internal Revenue Code
or with any of the other terms and conditions of this Plan.
7. Term of the Plan. The Plan shall become effective on the earlier of
(a) the date of adoption of the Plan by the Board; or (b) the date of
shareholder approval of the Plan as provided in paragraph 9 of the Plan. Unless
sooner terminated as provided in subparagraph 8(a) of the Plan, the Plan shall
terminate on the tenth anniversary of its effective date. Options may be granted
at any time after the effective date and prior to the date of termination of the
Plan.
8. Amendment or Early Termination of the Plan.
(a) Amendment or Early Termination. The Board may terminate the
Plan at any time. Subject to the prior approval of the Washington Supervisor of
Banking, the Board may amend the Plan at any time and from time to time in such
respects as the Board may deem advisable, except that, without approval of the
holders of a majority of the outstanding shares of the Common Stock, no such
revision or amendment shall:
(1) increase the number of shares of Common Stock subject
to the Plan other than in connection with an adjustment under subparagraph 6(i)
of the Plan; or
(2) change the designation of the class of Employees
eligible to be granted Options, as provided in paragraph 5 of the Plan.
(b) Effect of Amendment or Termination. No amendment or
termination of the Plan shall affect Options granted prior to such amendment or
termination, and all such Options shall remain in full force and effect
notwithstanding such amendment or termination.
9. Shareholder Approval. Continuance of the Plan shall be subject to
approval of the Plan by affirmative vote of the holders of a majority of the
outstanding shares of Common Stock of the Employer at a duly convened meeting of
the
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<PAGE> 10
shareholders of the Employer, which approval must occur within twelve (12)
months before or after the date of adoption of the Plan by the Board.
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<PAGE> 11
CERTIFICATE OF ADOPTION
I certify that the foregoing plan was adopted by the shareholders of
Whidbey Island Bank on June 11, 1992.
_____________________________
Secretary
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<PAGE> 1
WHIDBEY ISLAND BANK
DIRECTOR STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of this Plan is to provide
additional incentives to directors of Whidbey Island Bank, thereby helping to
attract and retain the best available personnel for positions as directors of
those corporations and otherwise promoting the success of the business
activities of such corporations. It is intended that Options issued pursuant to
this Plan shall constitute nonqualified stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Bank.
(b) "Common Stock" shall mean the Bank's common stock, par value
$20.00 per share.
(c) "Committee" shall mean the Board or the Committee appointed
by the Board in accordance with Section 4(a) of the Plan.
(d) "Continuous Status as a Director" shall mean the absence of
any interruption or termination of service as a Director.
(e) "Director" shall mean any person serving as a member of the
Board of the Bank.
(f) "Bank" shall mean Whidbey Island Bank, a Washington banking
corporation.
(g) "Option" shall mean a stock option granted pursuant to the
Plan, which shall constitute a Nonqualified Stock Option.
(h) "Optioned Stock" shall mean the Common Stock subject to an
Option.
(i) "Optionee" shall mean a Director who receives an Option.
(j) "Plan" shall mean this Director Stock Option Plan.
(k) "Parent" shall mean any corporation owning at least eighty
percent (80%) of the total voting power of the issued and outstanding
stock of the Bank, and eighty percent (80%) of the total value of the
issued and outstanding stock of the
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<PAGE> 2
Bank.
(l) "Subsidiary" shall mean any bank or other corporation of
which not less than 50% of the voting shares are held by the Bank or a
Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Bank or a Subsidiary.
3. Stock Subject to Options.
(a) Number of Shares Reserved. The maximum number of shares which
may be optioned and sold pursuant to the Plan shall be 1,000 shares of
the Common Stock of the Bank (subject to adjustment as provided in
subparagraph 6(i) of the Plan). During the term of this Plan, the Bank
will at all times reserve and keep available a sufficient number of
shares of its Common Stock to satisfy the requirements of the Plan.
(b) Expired Options. If any outstanding Option expires or becomes
unexercisable for any reason without having been exercised in full, the
shares of Common Stock allocable to the unexercised portion of such
Option shall again become available for other Options.
4. Administration of the Plan.
(a) The Committee. The Plan shall be administered by the Board
directly, acting as a Committee of the whole, or if the Board elects, by
a separate Committee appointed by the Board for that purpose and
consisting of at least three Board members. All references in the Plan
to the "Committee" shall refer to such separate Committee, if any is
established, or if none is then in existence, shall refer to the Board
as a whole. Once appointed, any such Committee shall continue to serve
until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members
thereof, remove members (with or without cause), appoint new members in
substitution therefor, and fill vacancies however caused. The Committee
shall select one of its members as chairman, and shall hold meetings at
such times and places as the chairman or a majority of the Committee may
determine.
Members of the Committee who are either eligible for Options or
who have been granted Options shall be counted for all purposes in
determining the existence of a quorum at any meetings of the Committee
and shall be eligible to vote on all matters before the Committee
respecting the granting of Options or administration of the Plan.
At least annually, the Committee shall present a written
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<PAGE> 3
report to the Board indicating the Directors to whom Options have been
granted since the date of the last such report, and in each case the
date or dates of Options granted, the number of shares optioned, and the
Option price per share.
At all times, the Board shall have the power to remove all
members of the Committee and thereafter to directly administer the Plan
as a Committee of the whole.
(b) Powers of the Committee. Subject to all provisions and
limitations of the Plan, the Committee shall have the authority and
discretion:
(1) to determine the Directors to whom Options are to be
granted, the times of grant, and the number of shares to be
represented by each Option;
(2) to determine the Option price for the shares of Common
Stock to be issued pursuant to each Option, subject to the
provisions of subparagraph 6(b) of the Plan;
(3) to determine all other terms and conditions of each
Option granted under the Plan (including specifying the dates
upon which Options become exercisable), which need not be
identical;
(4) to modify or amend the terms of any Option previously
granted, or to grant substitute Options, subject to the
provisions of subparagraphs 6(l) and 6(m) of the Plan;
(5) to interpret the Plan;
(6) to authorize any person or persons to execute and
deliver Option agreements or to take any other actions deemed by
the Committee to be necessary or appropriate to effectuate the
grant of Options by the Committee;
(7) to make all other determinations and take all other
actions which the Committee deems necessary or appropriate to
administer the Plan in accordance with its terms and conditions.
All actions of the Committee shall be either by (i) a majority vote of
the members of the full Committee at a meeting of the Committee, or (ii) by
unanimous written consent of all members of the full Committee without a meeting
thereof.
All decisions, determinations and interpretations of the
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<PAGE> 4
Committee shall be final and binding upon all persons, including all Optionees
and any other holders or persons interested in any Options, unless otherwise
expressly determined by a vote of the majority of the entire Board. No member of
the Committee or of the Board shall be liable for any action or determination
made in good faith with respect to the Plan or any Option.
5. Eligibility. Options may be granted only to Directors.
Granting of Options pursuant to the Plan shall be entirely discretionary
with the Committee, and the adoption of this Plan shall not confer upon any
Director any right to receive any Option or Options pursuant to the Plan unless
and until said Options are granted by the Committee, in its sole discretion.
Neither the adoption of the Plan nor the granting of any Options pursuant to the
Plan shall confer upon any Director or Optionee any right with respect to
continuation of status as a Director, nor shall the same interfere in any way
with his right or with the right of the shareholders of the Bank or any
Subsidiary to terminate his status as a Director at any time.
6. Terms and Conditions of Options. All Options granted pursuant to the
Plan must be authorized by the Committee, and must be documented in written
agreements in such form as the Committee shall from time to time approve, which
agreements shall comply with and be subject to all of the following terms and
conditions:
(a) Number of Shares. Each Option agreement shall state the
number of shares subject to Option. Any number of Options may be granted
to a single eligible Director at any time and from time to time.
(b) Option Price and Consideration. The Option price for the
shares of Common Stock to be issued pursuant to the Option shall be such
price, not less than the net book value of the Common Stock, as is
determined by the Committee.
The Option price shall be payable either (i) in United States
dollars upon exercise of the Option, or (ii) if approved by the Board,
other consideration including without limitation Common Stock of the
Bank, services, or other property.
(c) Term of Option. Subject to other applicable provisions of the
Plan including but not limited to Section 6(e) herein, the term of each
Option shall be determined by the Committee in its discretion.
(d) Manner of Exercise; Rights as Shareholder. An Option shall be
deemed to be exercised when written notice of exercise has been given to
the Bank in accordance with the
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<PAGE> 5
terms of the Option by the person entitled to exercise the Option,
together with full payment for the shares of Common Stock subject to
said notice.
(e) Death of Optionee. In the event of the death of an Optionee
who at the time of his death was a Director and who had been in
Continuous Status as an Director since the date of grant of the Option,
the Option shall terminate on the earlier of (i) one year after the date
of death of the Optionee, or (ii)' the expiration date otherwise
provided in the Option agreement, except that if the expiration date
should occur during the 90-day period immediately following the
Optionee's death, such Option shall terminate at the end of such 90-day
period. The Option shall be exercisable at any time prior to such
termination by the Optionee's estate, or by such person or persons who
have acquired the right to exercise the Option by bequest or by
inheritance or by reason of the death of the Optionee.
(f) Disability of Optionee. If an Optionee's status as a Director
is terminated at any time during the Option period by reason of a
disability (within the meaning of Section 22(e) (3) of the Internal
Revenue Code) and if said Optionee had been in Continuous Status as a
Director at all times between the date of grant of the Option and the
termination of his status as a Director, his Option shall terminate on
the earlier of (i) one year after the date of termination of his status
as a Director, or (ii) the expiration date otherwise provided in his
Option agreement.
(g) Termination of Status as a Director.
(1) If an Optionee's status as a Director is terminated at
any time after the grant of his Option for any reason other than
death or disability, as provided in subparagraphs (e) and (f)
above, and excepting if the Director is removed for cause, as
provided in (2) below, his Option shall terminate on the earlier
of (i) the same day of the third month after the date of
termination of his status as a Director, or (ii) the expiration
date otherwise provided in his Option agreement.
(2) If an Optionee is removed as a Director for cause at
any time after the grant of his Option, then his Option shall
terminate on the date of termination of his status as an
Director. For this purpose, cause shall be deemed to exist only
if the Board has reasonable grounds to believe that the Bank has
suffered or will suffer substantial injury as a result of the
gross negligence or dishonesty of the Director whose removal is
proposed.
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<PAGE> 6
(h) Non-transferability of Options. No Option granted pursuant to
the Plan may be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent
or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
(i) Adjustments Upon Changes in Capitalization. Subject to any
required action by the shareholders of the Bank, the number of shares of
Common Stock covered by each outstanding Option, the number of shares of
Common Stock available for grant of additional Options, and the price
per share of Common Stock specified in each outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from any stock split or other
subdivision or consolidation of shares, the payment of any stock
dividend (but only on the Common Stock) or any other increase or
decrease in the number of such shares of Common Stock effected without
receipt of consideration by the Bank; provided, however, that conversion
of any convertible securities of the Bank shall not be deemed to have
been "effected without receipt of consideration." Such adjustment shall
be made by the Committee, whose determination in that respect shall be
final, binding and conclusive.
Except as otherwise expressly provided in this subparagraph 6(i),
no Optionee shall have any rights by reason of any stock split or the
payment of any stock dividend or any other increase or decrease in the
number of shares of Common Stock. Except as otherwise expressly provided
in this subparagraph 6(i), any issue by the Bank of shares of stock of
any class, or securities convertible into shares of stock of any class,
shall not affect the number of shares or price of Common Stock subject
to any Options, and no adjustments in Options shall be made by reason
thereof. The grant of an Option pursuant to the Plan shall not affect in
any way the right or power of the Bank to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure.
(j) Date of Grant of Option. The date of grant of an Option
shall, for all purposes, be the date on which the Committee makes the
determination granting such Option. Said date of grant shall be
specified in the Option agreement.
(k) Conditions Upon Issuance of Shares. Shares of Common Stock
shall not be issued with respect to an Option granted under the Plan
unless the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all applicable provisions of
law, including, applicable federal and state securities laws.
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<PAGE> 7
As a condition to the exercise of an Option, the Bank may require
the person exercising such Option to represent and warrant at the time
of exercise that the shares of Common Stock are being purchased only for
investment and without any present intention to sell or distribute such
Common Stock if, in the opinion of counsel for the Bank, such a
representation is required by any of the aforementioned relevant
provisions of law.
(l) Merger, Sale of Assets, Etc. In the event of the merger or
reorganization of the Bank with or into any other corporation, or in the
event of a proposed sale of substantially all of the assets of the Bank,
or in the event of a proposed dissolution or liquidation of the Bank
(collectively, "sale transaction"): (1) all outstanding Options that are
not then fully exercisable shall become exercisable upon the date of
closing of any sale transaction or such earlier date as the Committee
may fix; and (2) the Committee may, in the exercise of its sole
discretion, terminate all outstanding Options as of a date fixed by the
Committee. In such event, however, the Committee shall notify each
Optionee of such action in writing not less than sixty (60) days prior
to the termination date fixed by the Committee, and each Optionee shall
have the right to exercise his Option prior to said termination date.
(m) Substitute Stock Options. In connection with the acquisition
or proposed acquisition by the Bank or any Subsidiary, whether by
merger, acquisition of stock or assets, or other reorganization
transaction, of a business any employees of which have been granted
incentive stock options, the Committee is authorized to issue, in
substitution of any such unexercised stock option, a new Option under
this Plan which confers upon the Optionee substantially the same
benefits as the old option.
(n) Tax Compliance. The Bank, in its sole discretion, may take
any actions reasonably believed by it to be required to comply with any
local, state, or federal tax laws relating to the reporting or
withholding of taxes attributable to the grant or exercise of any Option
or the disposition of any shares of Common Stock issued upon exercise of
an Option, including, but not limited to, (i) withholding from any
Optionee exercising an Option a number of shares of Common Stock having
a fair market value equal to the amount required to be withheld by Bank
under applicable tax laws, and (ii) withholding from any form of
compensation or other amount due an Optionee or holder of shares of
Common Stock issued upon exercise of an Option any amount required to be
withheld by Bank under applicable tax laws. Withholding or reporting
shall be considered required for purposes of this subparagraph
- 7 -
<PAGE> 8
if any tax deduction or other favorable tax treatment available to Bank
is conditioned upon such reporting or withholding.
(o) Other Provisions. Option agreements executed pursuant to the
Plan may contain such other provisions as the Committee shall deem
advisable.
7. Term of the Plan. The Plan shall become effective on the date of
shareholder approval of the Plan as provided in paragraph 9 of the Plan. Unless
sooner terminated as provided in subparagraph 8(a) of the Plan, the Plan shall
terminate on the tenth anniversary of its effective date. Options may be granted
at any time after the effective date and prior to the date of termination of the
Plan.
8. Amendment or Early Termination of the Plan.
(a) Amendment or Early Termination. The Board may terminate the
Plan at any time. The Board may amend the Plan at any time and from time
to time in such respects as the Board may deem advisable, except that,
without approval of the shareholders, no such revision or amendment
shall increase the number of shares of Common Stock subject to the Plan
other than in connection with an adjustment under subparagraph 6(i) of
the Plan.
(b) Effect of Amendment or Termination. No amendment or
termination of the Plan shall affect Options granted prior to such
amendment or termination, and all such Options shall remain in full
force and effect notwithstanding such amendment or termination.
9. Shareholder Approval. Effectiveness of the Plan shall be subject to
approval of the Plan by affirmative vote of the shareholders of the Bank at a
duly convened meeting.
CERTIFICATE OF ADOPTION
I certify that the foregoing Director Stock Option Plan was approved by
the Board of Directors of Whidbey Island Bank on _________ 1993, and by its
shareholders on ____________, 1993.
---------------------------------------
Secretary
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<PAGE> 1
WHIDBEY ISLAND BANK
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into by and between Whidbey Island Bank (the
"Bank") and _________________ ("Employee"). The Bank and Employee agree as
follows:
Pursuant to the Bank's Employee Stock Option Plan as presently in effect
(the "Plan"), the Bank hereby grants to Employee an irrevocable incentive stock
option to purchase ___ shares of common stock (par value $20.00 per share) of
the Bank at an option price of $___ per share, payable in cash.
The date of grant of this option is ________________. This option shall
terminate on __________________, unless sooner terminated by reason of death,
disability or other termination of status as an employee, as provided in the
Plan.
This option shall become exercisable (i.e., vest) subject to the
provisions of the Plan, as follows: in 20% portions (i.e., __ shares) on each
succeeding anniversary of the date of grant. From the date that this option (or
any portion thereof) first becomes exercisable through the date of its
termination, Employee may exercise it, in whole or in part at any time and from
time to time. This option may only be exercised if it is exercised in the manner
provided by the Plan. Exercise must be by actual delivery to the Bank of a
written notice of exercise signed by Employee specifying the number of shares
and option price and accompanied by payment of the full amount of the option
price.
All of the terms and conditions of the Plan are incorporated by this
reference as part of this Agreement as if such terms and conditions had been
included in this Agreement.
EXECUTED as of _________________.
EMPLOYEE: BANK:
WHIDBEY ISLAND BANK
- ----------------------- ---------------------------------
___________________ Name:
Title:
<PAGE> 2
WHIDBEY ISLAND BANK
NONQUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into by and between Whidbey Island Bank (the
"Bank") and _______________ ("Employee"). The Bank and Employee agree as
follows:
Pursuant to the Bank's Employee Stock Option Plan as presently in effect
(the "Plan"), the Bank hereby grants to Employee an irrevocable nonqualified
stock option to purchase ___ shares of common stock (par value $20.00 per share)
of the Bank at an option price of $___ per share, payable in cash.
The date of grant of this option is _________________. This option shall
terminate on _________________, unless sooner terminated by reason of death,
disability or other termination of status as an employee, as provided in the
Plan.
This option shall become exercisable (i.e., vest) on ________________.
From the date that this option first becomes exercisable through the date of its
termination, Employee may exercise it, in whole or in part at any time and from
time to time. This option may only be exercised if it is exercised in the manner
provided by the Plan. Exercise must be by actual delivery to the Bank of a
written notice of exercise signed by Employee specifying the number of shares
and option price and accompanied by payment of the full amount of the option
price.
All of the terms and conditions of the Plan are incorporated by this
reference as part of this Nonqualified Stock Option Agreement as if such terms
and conditions had been included in this Agreement.
EXECUTED as of _________________.
EMPLOYEE: BANK:
WHIDBEY ISLAND BANK
- ---------------------------------- --------------------------------------
__________________________ Edwin Sherman
Chairman of hte Board
<PAGE> 1
EXHIBIT 10.4
WHIDBEY ISLAND BANK
DIRECTOR STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into by and between Washington Banking Company (the
"WBC") and _____________ ("Director"). The WBC and Director agree as follows:
Pursuant to the Bank's Director Stock Option Plan as presently in effect (the
"Plan"), the Bank hereby grants to Director an irrevocable nonqualified stock
option to purchase __ shares of common stock (par value $20.00 per share) of the
WBC at an option price of $1,387.90 per share, payable in cash.
The date of grant of this option is _________________. This option shall
terminate on_________________, unless sooner terminated by reason of death,
disability or other termination of status as a director, as provided in the
Plan.
This option shall become exercisable (i.e., vest) subject to the provisions of
the Plan, as follows: in 20% portions (i.e., ___ shares) on each succeeding
anniversary of the date of grant. From the date that this option (or any portion
thereof) first becomes exercisable through the date of its termination, Director
may exercise it, in whole or in part at any time and from time to time. This
option may only be exercised if it is exercised in the manner provided by the
Plan. Exercise must be by actual delivery to the WBC of a written notice of
exercise signed by Director specifying the number of shares and option price and
accompanied by payment of the full amount of the option price.
All of the terms and conditions of the Plan are incorporated by this reference
as part of this Agreement as if such terms and conditions had been included in
this Agreement.
EXECUTED as of _________________.
DIRECTOR: WBC:
WASHlNGTON BANKING COMPANY
- ---------------------------- ----------------------------------
_________________ Michal D. Cann, President & CEO
<PAGE> 1
STOCK BUY AND SELL AGREEMENT
THIS AGREEMENT is entered into and executed by and between each of the
undersigned Shareholders of Whidbey Island Bank, a Washington banking
corporation (the "Bank"). The parties to this Agreement are individually and
collectively referred to in this Agreement as the "Shareholders".
RECITALS
1. The Bank currently has authorized capitalization of 100,000 shares
of Common Stock, with a par value of $20.00 (the "Stock").
2. Each of the Shareholders holds of record and beneficially the
number of shares of the Stock shown below opposite his name and signature.
3. The Shareholders agree that the continued success of the Bank is
dependent in part upon the continued active interest and participation of the
Shareholders, and that it is in the best interests of the Bank and the
Shareholders to encourage the retention of ownership of a substantial portion
of the Stock by the Shareholders.
AGREEMENT
In consideration of the mutual promises set forth in this Agreement, the
Shareholders agree as follows:
1. RESTRICTION ON SALE OF STOCK
No Shareholder shall sell, assign, transfer, bequeath, encumber, pledge
or otherwise hypothecate or dispose of any shares of Stock now held or
hereafter acquired except as provided in this Agreement. Any shares of Stock
acquired after the date of this Agreement shall be delivered promptly to the
Bank for endorsement as provided in Section 5(c) of this Agreement.
2. PERMISSIBLE ASSIGNMENT OR PLEDGE
Shares of Stock (i) shall be freely assignable by any Shareholder to
such Shareholder's spouse, children or other lineal descendants, or to any
trust for the benefit of any of the foregoing family members, either by gift or
sale during lifetime or by bequest or gift at time of death, and (ii) may be
pledged to collateralize any borrowing from a financial institution; provided,
however, that any such transferee shall take such shares subject to all of the
terms and conditions of this Agreement.
- 1 -
<PAGE> 2
3. RIGHT OF FIRST REFUSAL
a. NOTICE OF OFFER TO PURCHASE. If any Shareholder wishes to
accept a bona fide offer (the "Offer") to purchase any or all of his shares of
Stock, he shall first deliver to all of the other Shareholders ("Remaining
Shareholders") a written notice (the "Notice"), stating (i) that the
Shareholder has received a written Offer for his Stock from a prospective
purchaser (a copy of such written Offer, which must set forth the specific
terms of the Offer, shall be enclosed), (ii) the name and address of the
prospective purchaser, (iii) the number of shares of Stock to be purchased, and
(iv) the price, terms and conditions of the Offer, and offering to sell the
shares of Stock covered by the Offer to the Remaining Shareholders at the same
price per share and on the same terms and conditions as proposed in the Offer;
except that if the Offer consists, in whole or in part, of securities to be
issued by the proposed purchaser, then the Remaining Shareholders may acquire
the Stock for cash in an amount equivalent to the then fair market value ("Fair
Market Value") of such securities. Fair Market Value for purposes of this
Agreement shall mean the average of the mean between the high and low closing
prices of the securities as reported in the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") for the twenty consecutive
trading days immediately preceding the date of the Offer, or if the securities
are not reported on NASDAQ, as determined by a qualified independent appraiser
to be selected by the Board of Directors of the Bank. The valuation determined
by the appraiser shall be conclusive.
b. SHAREHOLDER'S RIGHT TO PURCHASE. The Remaining Shareholders
shall have the right to purchase the shares of Stock subject to the Notice on a
pro rata basis based upon the number of Remaining Shareholders who elect to
purchase. The Stock may be purchased at the price per share and on the terms
and conditions stated in the Notice (or the cash equivalent described above) or
on such other terms as shall be agreeable to the offering Shareholder and the
Remaining Shareholders electing to to purchase.
c. EXERCISE OF RIGHT TO PURCHASE. Acceptance by any Shareholder
of the Offer described in the Notice must be by written notice of acceptance
delivered to the offering Shareholder within 30 days of the date on which the
Notice is first sent to the accepting Shareholder, accompanied by the Remaining
Shareholder's good and sufficient check for the full amount of the purchase
price.
d. SALE BY SHAREHOLDER. If the Remaining Shareholders elect to
acquire the Stock covered by the Notice, they must acquire all of such Stock.
If all of the Stock covered by the Notice is not acquired by the Remaining
Shareholders in accordance with the preceding paragraphs, then the offering
Shareholder shall have the
- 2 -
<PAGE> 3
right for a period of 60 days from the date that the Notice is first sent to
the other Shareholders to transfer all of the Stock covered by the Notice to
the purchaser named in the Notice at the price and on the terms and conditions
stated in the Notice.
4. Involuntary Assignment
In the event of the involuntary assignment or transfer of any
Shareholder's Stock, the Remaining Shareholders shall have the option to
purchase all of the Stock involuntarily assigned, on the following terms and
conditions:
a. The Remaining Shareholders shall have the right and option to
purchase any of the shares of Stock involuntarily assigned, on a pro rata basis
as provided in Section 3(b) of this Agreement, by delivery to the assignee of
written notice of exercise within 90 days after the date of actual notice to
the Shareholders of the involuntary assignment.
b. The option price shall be the Fair Market Value of the Stock
involuntarily assigned.
5. Successors and Assigns
a. This Agreement shall be binding upon, and inure to the benefit
of, all of the Shareholders, all other shareholders, if any, who become parties
to this Agreement pursuant to the provisions of Section 10 of this Agreement,
and all other parties who acquire any interest in any Stock from any of
the Shareholders, including without limitation, all beneficiaries, personal
representatives, heirs, successors and assigns. The term "Shareholder" shall
include any person who becomes subject to this Agreement pursuant to this
Section 5.
b. All parties to this Agreement shall, as a condition of any
transfer of shares of Stock subject to this Agreement, require the transferee to
consent and agree in writing to all of the terms and conditions of this
Agreement.
c. All certificates representing Stock held by the Shareholders
shall be immediately delivered to the Bank for purposes of endorsement, and
shall be endorsed as follows, and each new certificate hereafter issued to any
Shareholder, regardless of the circumstances of such issuance, shall be
similarly endorsed:
Any sale, assignment, transfer, pledge or other disposition of the
shares of stock represented by this certificate is restricted by, and subject
to the terms and provisions of, an Agreement dated the ___ day of ____________,
199_, and by acceptance of this
-3-
<PAGE> 4
certificate, the holder of this certificate agrees to be bound by the
terms of such Agreement.
d. A copy of this Agreement shall be filed with the Secretary of the
Bank.
6. Termination
a. This Agreement shall automatically terminate in the event of the
sale, receivership, or dissolution of the Bank.
b. This Agreement may be amended or terminated at any time by the
written agreement of two-thirds of more of the Shareholders when subject to
this Agreement.
c. This Agreement shall automatically terminate ten (10) years
from the date of this Agreement, unless otherwise extended by the affirmative
action of two-thirds or more of the Shareholders then subject to this
Agreement.
7. Notices
Any notice provided for in this Agreement to be given to any party shall
be in writing and shall be deemed effectively delivered if delivered personally
or if deposited in the United States mail, postage prepaid, addressed to the
person to be notified at his most recent post office address according to the
records of the Bank.
8. Securities Laws
Nothing contained in this Agreement shall relieve any selling Shareholder
from the obligation to comply with all applicable federal and state securities
laws. The parties to this Agreement covenant and agree that the Bank may
require, as a condition of the acceptance of any transfer of record of Stock,
that the Bank be furnished with an opinion of counsel satisfactory to the Bank
that such sale or transfer is not in violation of applicable federal and state
securities laws.
9. Miscellaneous
a. Severability. If any term of this Agreement shall be invalid,
illegal or unenforceable, in whole or in part, the validity of any of the other
terms of the Agreement shall not in any way be affected thereby.
b. Time of the Essence. Time is of the essence in the
performance of this Agreement.
- 4 -
<PAGE> 5
c. Remedies. Each party to this Agreement, including those who
shall subsequently become Shareholders, shall have the right to require specific
performance of the covenants in this Agreement, and shall be entitled to a
judgment or decree to such effect from any court of competent jurisdiction.
d. Governing Law/Venue. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Washington,
and any action brought to constrain or enforce the terms of this Agreement shall
be in _______________County, Washington.
e. Counterparts. This Agreement may be executed in several
counterparts, and all counterparts so executed shall constitute one instrument,
binding on all of the executing parties.
10. Additional Shareholders
In the event that an additional party who owns shares of Stock desires to
become a party to this Agreement, then upon the execution and delivery of a
completed counterpart of this document to the other Shareholders and acceptance
of such additional party by a majority of the Shareholders then subject to this
Agreement, such party shall become a party to this Agreement, and such party and
his/her heirs, successors and assigns shall be bound by all of the terms and
conditions of the Agreement in this same manner as all other Shareholders.
EXECUTED this 10th day of March, 1993.
SHAREHOLDERS
<TABLE>
<CAPTION>
Shareholder No. of Shares
- ----------- -------------
<S> <C>
/s/ MICHAL D. CANN 24
- ----------------------------------
Michal D. Cann
/s/ ORLAN DEAN
- ----------------------------------
Orlan Dean
/s/ F. MERRICK DUNN
- ---------------------------------- 20 plus option on 600 shares
F. Merrick Dunn
</TABLE>
-5-
<PAGE> 6
<TABLE>
<CAPTION>
Shareholder No. of Shares
- ----------- -------------
<S> <C>
/s/ KARL C, KRIEG
- -----------------------------
Karl C. Krieg
/s/ JAY T. LIEN 160
- -----------------------------
Jay T. Lien
/s/ ROBERT J. NELSON 250
- -----------------------------
Robert J. Nelson
/s/ ROBERT OLSON 23
- -----------------------------
Robert Olson
/s/ EDWIN R. SHERMAN
- -----------------------------
Edwin R. Sherman
/s/ Edward J. Wallgren
- -----------------------------
Edward J. Wallgren
/s/ PHYLLIS A. HAWKINS
- -----------------------------
Phyllis A. Hawkins
/s/ BARBARA L. JOHNSON
- -----------------------------
Barbara L. Johnson
</TABLE>
- 6 -
<PAGE> 7
SHAREHOLDER NO. OF SHARES
- ----------- -------------
The undersigned, being the spouses of the persons named above, hereby
consent and agree to all terms and conditions of the foregoing Agreement, in
each case on his or her own behalf and on behalf of his or her marital
community.
<TABLE>
<S> <C>
/s/ Marline Dunn Date: March 10, 1993
- ----------------------------- ------------------------
/s/ Carol M. Olson Date: March 11, 1993
- ----------------------------- ------------------------
/s/ Dorothy Lien Date: March 22, 1993
- ----------------------------- ------------------------
/s/ Susan E. Cann Date: March 23, 1993
- ----------------------------- ------------------------
/s/ Damaris I. Dean Date: March 26, 1993
- ----------------------------- ------------------------
/s/ Jean H. Sherman Date: March 29, 1993
- ----------------------------- ------------------------
/s/ Waleda Mia Wallgren Date: April 7, 1993
- ----------------------------- ------------------------
/s/ Darlyne Krieg Date: April 16, 1993
- ----------------------------- ------------------------
/s/ Thomas E. Hawkins Date: March 19, 1993
- ----------------------------- ------------------------
Date:
- ----------------------------- ------------------------
</TABLE>
- 7 -
<PAGE> 8
FIRST AMENDMENT TO STOCK BUY AND SELL AGREEMENT
DATED AS OF APRIL 30, 1996
RECITALS
A. The parties to this First Amendment, in their capacity as shareholders
of Whidbey Island Bank, a Washington banking corporation (the "Bank"),
have previously entered into and executed a Stock Buy and Sell Agreement
dated as of March 10, 1993 (the "Agreement") relating to their shares of
Bank Common Stock.
B. On January 18, 1996, the Board of Directors of the Bank (of which
certain of the parties also is a member) approved a Plan and Agreement
of Reorganization ("Plan"), whereby the Bank would reorganize into a
bank holding company under the name Washington Banking Corporation
("WBC"), subject to shareholder and regulatory approval, and each share
of Bank common stock would be exchanged for one share of WBC common
stock.
C. The Agreement restricts the transfer of Bank stock by the parties except
as provided in the Agreement.
D. The parties to the Agreement wish to have their shares of Bank stock
exchanged for shares of WBC stock upon consummation of the
Reorganization pursuant to the Plan and accordingly agree to enter into
this First Amendment.
AMENDMENT
1. All references in the Agreement to the Bank are hereby amended to refer
to Washington Banking Corporation, a Washington business corporation.
2. Except as expressly amended herein or where the context otherwise
requires, all other terms of the Agreement shall remain in full force
and effect.
3. For any purpose, the Agreement as amended hereby may be set forth in a
composite form giving effect to the amendments made hereby.
4. This Amendment shall take effect on the Exchange Date
specified in the Plan and all shares of WBC common stock
issued to the parties to the Agreement shall bear the legend
specified in Section 5c of the Agreement. This Amendment
shall be binding on all parties upon execution, unless the
Plan should be abandoned for any reason, in which event this
Amendment shall be void and have no effect on the existing
Agreement.
- 1 -
<PAGE> 9
This Agreement has been executed and delivered by the parties hereto as
of the date first hereinabove written.
SHAREHOLDERS
<TABLE>
<CAPTION>
SHAREHOLDER NO. OF SHARES
- ----------- -------------
<S> <C>
/s/ MICHAL D. CANN 33
- -----------------------------------
Michal D. Cann
/s/ ORLAN DEAN 97
- -----------------------------------
Orlan Dean
/s/ F. MERRICK DUNN 280
- -----------------------------------
F. Merrick Dunn
/s/ PHYLLIS A. HAWKINS 48
- -----------------------------------
Phyllis A. Hawkins
401
- -----------------------------------
Barbara L. Johnson
/s/ KARL C. KRIEG 147
- -----------------------------------
Karl C. Krieg
/s/ JAY T. LIEN 193
- -----------------------------------
Jay T. Lien
/s/ ROBERT J. NELSON 260
- -----------------------------------
Robert J. Nelson
/s/ ROBERT OLSON 249
- -----------------------------------
Robert Olson
91
- -----------------------------------
Jean Sherman
/s/ EDWARD J. WALLGREN 240
- -----------------------------------
Edward J. Wallgren
</TABLE>
- 2 -
<PAGE> 10
The undersigned, being the spouses of parties to the foregoing
Amendment, hereby consent and agree to all terms and conditions of the foregoing
Amendment, in each case on his or her own behalf and on behalf of his or her
marital community.
/s/ SUSAN E. CANN
- -----------------------------------
Susan E. Cann
- -----------------------------------
Damaris I. Dean
- -----------------------------------
Marline Dunn
- -----------------------------------
Thomas E. Hawkins
- -----------------------------------
Darlyne Krieg
- -----------------------------------
Dorothy Lien
- -----------------------------------
Carol M. Olson
/s/ WALEDA MIA WALLGREN
- -----------------------------------
Waleda Mia Wallgren
- 3 -
<PAGE> 1
CONFIDENTIAL
EXECUTIVE SEVERANCE AGREEMENT
This Agreement is made and entered into by and between WHIDBEY ISLAND BANK,
a Washington banking corporation (hereinafter called the "Bank") and __________
___________ (hereinafter called the "Executive").
WHEREAS, the Executive is employed by the Bank in a key managerial
capacity, presently holding the position of ____________________________ of the
Bank; and
WHEREAS, the Bank wishes to ensure that the Executive will be available to
assist the Board of Directors of the Bank (the "Board") in responding to and,
if deemed appropriate by the Board, completing any proposed change in control
of the Bank;
NOW, THEREFORE, the Bank and the Executive agree to the following
provisions:
1. Change in Control. For purposes of this Agreement, the term "Change
in Control" shall mean a change "in the ownership or effective control" or "in
the ownership of a substantial portion of the assets" of the Bank, with the
quoted phrases of this sentence having the same meaning as when used in Section
280G(b)(2)(A) of the Internal Revenue Code.
2. Commitment of Executive. In the event that any person extends any
proposal or offer which could result in a Change in Control, the Executive
will, at the Board's request, assist the Board in evaluating such proposal or
offer. Further, the Executive specifically agrees that he will not resign his
position with the Bank during any period from the receipt of a specific Change
in Control proposal up to the closing or termination of the transaction
contemplated by the proposal.
3. Severance Payment Events. In the event of --
(i) the voluntary or involuntary termination (excluding termination due to
death, disability or commission of a crime) of the Executive's employment
with the Bank within three (3) years after a Change in Control; or
(ii) the involuntary termination (excluding termination due to death,
disability, or commission of a crime) by the Bank of the Executive's
employment on or after the date that any party announces (or should
announce) any prospective Change in Control transaction, if a Change in
Control does occur within Fifteen (15) months of such termination,
- 1 -
<PAGE> 2
then the Bank shall pay to Executive a severance payment, in the amount
determined pursuant to the next paragraph, payable on the later of the date of
termination or the date of the change in control.
4. Amount of the Severance Payments. The severance payment shall be an
amount equal to _______________ (_____) times the highest compensation (as
reportable on the Executive's IRS W-2 form) received by the Executive from the
Bank during any of the most recent three (3) calendar years ending before, or
simultaneously with, the date on which the Change in Control occurs; provided,
however, that the severance payment shall be less than the amount which would
cause the payment to be a "parachute payment" as defined in section
280G(b)(2)(A) of the Internal Revenue Code; and provided, further, that such
severance payment shall be reduced by any compensation (as reportable on the
Executive's IRS W-2 form) received from the Bank or its successor in interest
after the Change in Control.
5. Revocability. This Agreement may be terminated unilaterally by the
Bank, but (i) only as of a prospective effective date which follows by at least
15 months the date that written notice is given to Executive that the Bank, by a
vote of at least a majority of its directors, has determined to terminate the
Agreement, and (ii) only if no Change in Control occurs prior to such effective
date; provided, however, that this Agreement automatically terminates if, at any
time prior to the closing of a Change in Control transaction, the Executive (a)
voluntarily terminates his employment with the Bank, or (b) is terminated by the
Bank for reasonable cause (i.e. acts of dishonesty, disloyalty, illegality or
moral turpitude adversely impacting the Bank; repeated failure or refusal to
follow reasonable directions from the Board following a written warning). If not
earlier terminated, this Agreement will terminate three (3) years after any
Change in Control occurs.
IN WITNESS WHEREOF, the parties have executed this Agreement this ____ day
of _______, ____.
WHIDBEY ISLAND BANK EXECUTIVE
By
- --------------------------------- ------------------------------------
Edwin Sherman _____________________________
Chairman of the Board _____________________________
-2-
<PAGE> 1
EXHIBIT 16
DAVID CHRISTENSEN CPA & CONSULTANT, PLLC
Park Tower
Suite 272
201 N.E. Park Plaza Drive
Vancouver, WA 98684
(360) 892-0800
Fax (360) 604-4587
April 10, 1998
Securities and Exchange Commission
450 5th St. N.W.
Washington D.C. 20549
REGARDING: WASHINGTON BANKING COMPANY
Dear Sirs:
We have been furnished with a copy of the Form SB-2, EXPERTS, related to the
event that occurred on February 20, 1998, to be filed by our former client,
Washington Banking Company. We agree with the statements made in response to
that item insofar as they relate to our firm.
Sincerely,
David O. Christensen
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WASHINGTON BANKING COMPANY
Whidbey Island Bank
Oak Harbor, Washington
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Washington Banking Company:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Seattle, Washington
April 10, 1998
<PAGE> 1
[LETTERHEAD, DAVID CHRISTENSEN CPA & CONSULTANT, PLLC]
April 10, 1998
Washington Banking Company
1421 SW Barlow Street
Oak Harbor, Washington 98277
RE: CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To: The Board of Directors
Washington Banking Company
I consent to the incorporation by reference in the Registration Statement of
Washington Banking Company on Form SB-2 relating to Washington Banking Company
my report of January 31, 1997, except Note 16 that is dated March 26, 1998, on
the audits of the Consolidated Financial Statements and Notes of Washington
Banking Company as of December 31, 1996 and 1995, all of which were incorporated
by reference in the SB-2 Registration Statement.
I also consent to the reference to our firm under the caption "Experts" in the
Registration Statements and the Prospectus relating thereto, and the filing of
this letter as an Exhibit to the Registration Statement.
Very truly yours,
/s/ DAVID O. CHRISTENSEN
- ------------------------------
David O. Christensen
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
-----------------
Each director of Washington Banking Company (the "Company"), whose
signature appears below, hereby appoints Michal Cann, as his attorney to sign,
in his name and behalf and in any and all capacities stated below, (i) the
Company's Registration Statement on Form S-1 (the "Registration Statement") for
the registration of securities in connection with the Company's offering of
common stock, no par value, ("Common Stock"), as described in the Prospectus
included in the Registration Statement, and likewise to sign any and all
amendments and other documents relating thereto as shall be necessary to cause
the Registration Statement to become effective (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission;
(ii) any document deemed necessary by such attorney to cause the issuance of
securities to be made in compliance with the Blue Sky and securities laws of any
state or foreign jurisdiction (the signing of any such document to be conclusive
evidence that the attorney considers such document necessary or desirable); and
(iii) any and all such documents upon the advice of legal counsel to carry out
the offering of the Common Stock to the public, each such person hereby granting
to each such attorney power to act with our without the other and full power of
substitution and revocation, and hereby ratifying all that any such attorney or
his substitute may do by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Power
of Attorney has been signed by the following persons in the capacities
indicated, on the 26th day of March, 1998.
SIGNATURE TITLE
--------- -----
/s/Michal Cann Director
- ------------------------------
Michal Cann
/s/Orlan Dean Director
- ------------------------------
Orlan Dean
/s/Marlen Knutson Director
- ------------------------------
Marlen Knutson
/s/Karl C. Krieg, III
Karl C. Krieg Director
- ------------------------------
/s/Jay T. Lien Director
- ------------------------------
Jay T. Lien
<PAGE> 2
/s/Robert B. Olson Director
- ------------------------------
Robert B. Olson
/s/Anthony B. Pickering Director
- ------------------------------
Anthony B. Pickering
/s/Alvin J. Sherman Director
- ------------------------------
Alvin J. Sherman
/s/Edward J. Wallgren Director
- ------------------------------
Edward J. Wallgren
-2-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,263
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,750
<TRADING-ASSETS> 628
<INVESTMENTS-HELD-FOR-SALE> 5,521
<INVESTMENTS-CARRYING> 23,508
<INVESTMENTS-MARKET> 23,824
<LOANS> 117,535
<ALLOWANCE> 1,296
<TOTAL-ASSETS> 160,068
<DEPOSITS> 146,394
<SHORT-TERM> 0
<LIABILITIES-OTHER> 639
<LONG-TERM> 0
0
0
<COMMON> 2,943
<OTHER-SE> 10,092
<TOTAL-LIABILITIES-AND-EQUITY> 160,068
<INTEREST-LOAN> 10,207
<INTEREST-INVEST> 1,694
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,901
<INTEREST-DEPOSIT> 4,358
<INTEREST-EXPENSE> 4,358
<INTEREST-INCOME-NET> 7,543
<LOAN-LOSSES> 647
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,781
<INCOME-PRETAX> 2,722
<INCOME-PRE-EXTRAORDINARY> 1,904
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,904
<EPS-PRIMARY> 1.02<F1>
<EPS-DILUTED> .96
<YIELD-ACTUAL> 5.06<F2>
<LOANS-NON> 498
<LOANS-PAST> 0
<LOANS-TROUBLED> 653
<LOANS-PROBLEM> 83
<ALLOWANCE-OPEN> 796
<CHARGE-OFFS> 160
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 1,296
<ALLOWANCE-DOMESTIC> 1,065
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 231
<FN>
<F1>For Puposes of This Exhibit, Primary means Basic.
<F2>Net int inc/total int earning asset
</FN>
</TABLE>
