<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1998
REGISTRATION NO. 333-49925
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO THE
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WASHINGTON BANKING COMPANY
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 6712 91-1725825
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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)
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
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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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======================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value.... 1,150,000 shares $13.00 $14,950,000 $4,410.25(3)
======================================================================================================================
</TABLE>
(1) Includes an option to purchase up to 150,000 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).
(3) Of which $3,053.25 has been previously submitted.
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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<PAGE> 2
WASHINGTON BANKING COMPANY
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NO. AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS
------------------------------ -------------------------------------
<C> <S> <C>
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 Not Applicable
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; Certain Beneficial Shares
Owners and Management Owners; Eligible for Future Sale
12. Description of Securities Description of Capital Stock; Shares
Eligible For Future Sale
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 Consolidated
Financial Statements
23. Changes In and Disagreements with Experts
Accountants on Accounting and Financial
Disclosure
</TABLE>
i
<PAGE> 3
INFORMATION CONTAINED HEREIN 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 JUNE 3, 1998
1,000,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of common stock, no par value, (the "Common Stock")
offered hereby (the "Offering") are being offered by Washington Banking Company
(the "Company"). 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 $11.00 and
$13.00 per share. For a discussion of factors considered in determining the
initial public offering price, see "Underwriting."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 8 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.
<TABLE>
=================================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...................................... $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total(3)....................................... $ $ $
=================================================================================================================
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriter and other matters.
(2) Before deducting estimated expenses of $510,000 payable by the Company.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
150,000 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 and proceeds to the
company 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.
------------------------
[LOGO]
------------------------
The date of this Prospectus is June , 1998.
<PAGE> 4
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."
<PAGE> 5
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 and the
3-for-2 stock split effective April 24, 1998 (collectively, the "1998 Stock
Splits"). 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 eleven branch offices located on Whidbey Island and Camano
Island in Island County, as well as the Burlington and Anacortes (Skagit County)
and Bellingham (Whatcom County) communities in northwestern Washington. At March
31, 1998, the Company had total assets of $170.8 million, total deposits of
$156.4 million and shareholders' equity of $13.3 million.
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 contribute 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 increase 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.
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 northwest of
Everett and southwest 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.
3
<PAGE> 6
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.
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, both with 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 $170.8 million at March 31, 1998 from $99.5 million at year end
1995. During that same period, loans receivable increased to $123.3 million from
$63.1 million, deposits grew to $156.4 million from $88.5 million and
shareholders' equity increased to $13.3 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. Net income for the three months ended
March 31, 1998 was $416,000 as compared to $328,000 for the three months ended
March 31, 1997.
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 full
service branch offices which provide all of the Company's products and services
in its targeted growth areas supported by mini branches, grocery or retail store
branches and/or automated teller machines ("ATM's") in the areas surrounding
those central locations 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, in the first and second quarter,
respectively, of 1998, the Company opened a full service branch 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. The Company expects to relocate the Bellingham office to
a larger office by the end of the first quarter of 1999.
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. New branch offices are often not
profitable for at least the first eighteen months after opening and management
expects that any earnings will be negatively affected as the Company pursues its
growth strategy.
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.
4
<PAGE> 7
THE OFFERING
COMMON STOCK OFFERED BY THE
COMPANY..................... 1,000,000 Shares(1)
COMMON STOCK OUTSTANDING
IMMEDIATELY PRIOR TO
OFFERING.................... 2,809,050 Shares(2)
COMMON STOCK TO BE OUTSTANDING
AFTER OFFERING.............. 3,809,050 Shares(1)(2)
USE OF PROCEEDS............... The Company intends to contribute approximately
$10.0 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."
DIVIDENDS..................... The Company has paid an annual dividend of
$0.13 per share, $0.12 per share and $0.11 per
share in 1997, 1996 and 1995, respectively, and
a semi-annual dividend of $0.07 per share for
the first half 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."
- ---------------
(1) Does not include up to 150,000 shares issuable upon exercise of the
Underwriter's over-allotment option. See "Underwriting."
(2) Excludes 467,700 shares of Common Stock issuable at prices ranging from
$2.93 per share to $9.25 per share upon exercise of outstanding options. See
"Management."
5
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents a summary of selected financial information
which should be read in conjunction with the Company's financial statements and
notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
------------------- -----------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net interest income.......................... $ 2,051 $ 1,603 $ 7,543 $ 5,912 $ 5,139
Provision for loan losses.................... 195 105 647 350 220
Noninterest income........................... 480 362 1,607 1,424 1,060
Noninterest expense.......................... 1,716 1,271 5,781 4,684 4,124
Provision for income taxes................... 204 261 818 738 534
Net income................................... 416 328 1,904 1,564 1,321
PER SHARE DATA:
Net income, basic............................ $ 0.15 $ 0.12 $ 0.68 $ 0.56 $ 0.47
Net income, diluted.......................... 0.14 0.11 0.65 0.55 0.47
Book value................................... 4.72 4.24 4.64 4.14 3.70
Dividend..................................... 0.07(1) -- 0.13 0.12 0.11
BALANCE SHEET DATA:
Total assets................................. $170,842 $129,366 $160,068 $117,280 $99,454
Loans receivable, net of unearned fees....... 123,293 86,864 117,535 81,269 63,136
Allowance for loan losses.................... 1,489 899 1,296 796 620
Deposits..................................... 156,377 116,648 146,394 105,212 88,506
Shareholders' equity......................... 13,259 11,927 13,035 11,570 10,357
SELECTED PERFORMANCE RATIOS:
Return on average assets(2).................. 1.01% 1.08% 1.35% 1.49% 1.44%
Return on average equity(2).................. 12.54 11.10 15.21 13.91 13.14
Net interest margin(2)(3)(5)................. 5.53 5.92 5.94 6.27 6.26
Net interest spread (2)(4)(5)................ 4.85 4.98 5.13 5.44 5.34
Noninterest expense to average assets(2)..... 4.18 4.20 4.09 4.46 4.50
Efficiency ratio (6)......................... 67.80 64.68 63.18 63.85 66.53
ASSET QUALITY RATIOS:
Nonperforming loans to period-end loans...... 0.94% 1.25% 0.98% 1.44% 0.42%
Allowance for loan losses to period-end
loans...................................... 1.22 1.03 1.10 0.98 0.98
Allowance for loan losses to nonperforming
loans...................................... 130.73 82.63 112.60 67.98 235.74
Nonperforming assets to total assets(7)...... 0.73 0.84 0.74 1.00 0.37
Net loan charge-offs to average loans
outstanding................................ -- -- 0.15 0.25 0.29
CAPITAL RATIOS:(8)
Total risk-based capital..................... 11.06% 13.87% 11.63% 14.97% 16.58%
Tier 1 risk-based capital.................... 9.94 12.89 10.67 14.00 15.64
Leverage ratio............................... 8.02 9.80 8.08 10.19 10.69
Equity to assets ratio....................... 7.76 9.22 8.14 9.87 10.41
OTHER DATA:
Number of banking offices.................... 10 9 9 8 8
Number of full time equivalent
employees(9)............................... 119 96 116 90 88
</TABLE>
6
<PAGE> 9
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(1) For the first half of 1998. See "Dividends".
(2) Three month data presented on annualized basis.
(3) Net interest margin is net interest income divided by average interest
earning assets.
(4) Net interest spread is the difference between the average yield on interest
earning assets and the average cost of interest bearing liabilities.
(5) For purposes of this calculation, interest earned on non-taxable securities
has been computed on a 34% tax equivalent basis.
(6) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(7) Nonperforming assets consist of nonaccrual and restructured loans and real
estate owned.
(8) Capital ratios are for the Bank.
(9) The increase in full-time equivalent employees in 1997 reflected branch
openings and anticipated branch openings, in addition to increases in
lending personnel and executive and administrative personnel.
7
<PAGE> 10
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 March 31, 1998, the Company's assets grew to
$170.8 million from $99.5 million, or by 71.7%. Additionally, the Company's
expansion plans anticipate the opening of approximately five 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; NO ASSURANCE OF ACTIVE AND LIQUID TRADING
MARKET
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."
8
<PAGE> 11
CERTAIN LENDING RISKS
Since 1995, the Company has expanded, and continues to expand, its loan
portfolio rapidly. From year end 1995 to March 31, 1998, the Company's loan
portfolio has grown to $123.3 million from $63.1 million, or by 95.4%. 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 and has also emphasized growth in
consumer loans. At March 31, 1998, $52.0 million, or 42.1%, of the Company's
loan portfolio consisted of commercial loans and $35.5 million or 28.8%
consisted of consumer loans. 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, at the 1998 Annual
Shareholders meeting which is expected to be held in July 1998, the Company
plans to seek shareholder approval for a new Employee Stock Option Plan
increasing the number of shares subject to options which will then be available
for grant to selected officers and employees. At March 31, 1998, there were
467,700 shares issuable upon exercise of stock options, equal to approximately
16.6% of Common Stock outstanding. If shareholders approve the new Employee
Stock Option Plan, the Company intends that the total number of shares subject
to options (from both the present plan and the anticipated new 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."
9
<PAGE> 12
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 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
10
<PAGE> 13
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."
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 to the Company from the Offering after deducting the
Underwriting Discount and estimated expenses are projected to be approximately
$10.7 million (approximately $12.4 million if the Underwriter's over-allotment
option is exercised in full) based on an assumed initial public offering price
of $12.00 per share. The Company intends to contribute approximately $10.0
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 March 31, 1998 was
approximately $13.3 million, or $4.72 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 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$12.00 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 March 31, 1998 would have been approximately $24.0
million or $6.29 per share of Common Stock. This represents an immediate
increase in such net tangible book value of $1.57 per share to the existing
shareholders of the Company and an immediate dilution in net tangible book value
of $5.71 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............. $12.00
Net tangible book value per share before Offering...... 4.72
Increase per share attributable to new investors....... 1.57
------
Pro forma net tangible book value per share after
Offering.................................................. 6.29
------
Dilution per share to new investors......................... $ 5.71
======
</TABLE>
11
<PAGE> 14
During the past five years officers, directors and affiliated persons of
such officers and directors have purchased 304,200 shares of Common Stock of the
Company at prices ranging from $2.93 to $9.33 (for an aggregate price of $1.9
million), as adjusted for the 1998 Stock Splits, compared to the price to the
public at which Common Stock is being offered by the Company hereby. According
to information furnished to the Company, during the twelve months ended March
31, 1998, sales of Common Stock of the Company took place at prices ranging from
$5.37 to $9.33, as adjusted for the 1998 Stock Splits.
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 common stock of the Company took place at
prices ranging from $5.37 to $9.33, as adjusted for the 1998 Stock Splits. 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
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 1998 Stock Splits, as dividends to its shareholders:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997................................................ $0.13
1996................................................ 0.12
1995................................................ 0.11
</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 $0.07 per outstanding share of Common Stock (adjusted for the 1998
stock splits) for the first half of 1998. 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." 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.
12
<PAGE> 15
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 March 31, 1998, on an
actual basis (adjusted to reflect the 1998 Stock Splits, and the reduction in
par value to no par value) and as adjusted for the issuance of 1,000,000 shares
of Common Stock offered by the Company hereby at an assumed price to the public
of $12.00 per share and application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED(1)(4)
------- -----------------
(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;
2,809,050 shares issued and outstanding, 3,809,050
shares as adjusted(2).................................. 2,943 13,653
Retained earnings......................................... 10,304 10,304
Accumulated comprehensive income, net..................... 12 12
------- -------
Total shareholders' equity........................ $13,259 $23,969
======= =======
Capital Ratios:(3)
Total risk-based capital ratio............................ 11.06% 18.3%
Tier I risk-based capital ratio........................... 9.94 17.2
Leverage ratio............................................ 8.02 13.3
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting."
(2) Does not include 467,700 shares issuable at prices ranging from $2.93 per
share to $9.25 per share upon exercise of outstanding options. See
"Management."
(3) Capital ratios are for the Bank.
(4) Assumes that $10.0 million of net proceeds is contributed by the Company to
the Bank and invested by the Bank in 20% risk weighted assets.
13
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The information presented below for the years ended December 31, 1997, 1996
and 1995 is derived in part from the audited consolidated financial statements
and notes thereto of the Company's Financial Statements. The information for the
three months ended March 31, 1998 and 1997 is derived in part from unaudited
consolidated financial statements and includes, in the opinion of management,
all adjustments, consisting only of normal recurring accruals, necessary to
present fairly the data for such periods. Operating results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or for the entire year ending December 31,
1998. 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 THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total interest income...... $ 3,366 $ 2,473 $ 11,901 $ 8,858 $ 7,613
Total interest expense..... 1,315 870 4,358 2,946 2,474
---------- ---------- ---------- ---------- ----------
Net interest income..... 2,051 1,603 7,543 5,912 5,139
Provision for loan
losses.................. 195 105 647 350 220
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 1,856 1,498 6,896 5,562 4,919
Service charges and other
fees.................... 312 274 1,116 1,024 893
Other noninterest income... 168 88 491 400 167
---------- ---------- ---------- ---------- ----------
Total noninterest
income................ 480 362 1,607 1,424 1,060
Total noninterest
expense............... 1,716 1,271 5,781 4,684 4,124
---------- ---------- ---------- ---------- ----------
Income before income
taxes................... 620 589 2,722 2,302 1,855
Provision for income
taxes................... 204 261 818 738 534
---------- ---------- ---------- ---------- ----------
Net income.............. $ 416 $ 328 $ 1,904 $ 1,564 $ 1,321
========== ========== ========== ========== ==========
Weighted average number of
common shares
outstanding............. 2,809,050 2,805,625 2,810,881 2,796,000 2,794,750
Weighted average number of
diluted common shares
outstanding............. 2,961,557 2,922,832 2,935,972 2,858,100 2,813,443
PER SHARE DATA:
Net income, basic............ $ 0.15 $ 0.12 $ 0.68 $ 0.56 $ 0.47
Net income, diluted.......... 0.14 0.11 0.65 0.55 0.47
Book value................... 4.72 4.24 4.64 4.14 3.70
Dividends.................... 0.07(1) -- 0.13 0.12 0.11
BALANCE SHEET DATA:
Total assets............... $ 170,842 $ 129,366 $ 160,068 $ 117,280 $ 99,454
Loans receivable, net of
unearned fees........... 123,293 86,864 117,535 81,269 63,136
Allowance for loan
losses.................. 1,489 899 1,296 796 620
Deposits................... 156,377 116,648 146,394 105,212 88,506
Shareholders' equity....... 13,259 11,927 13,035 11,570 10,357
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED PERFORMANCE RATIOS:
Return on average
assets(2)............... 1.01% 1.08% 1.35% 1.49% 1.44%
Return on average
equity(2)............... 12.54 11.10 15.21 13.91 13.14
Net interest
margin(2)(3)(5)......... 5.53 5.92 5.94 6.27 6.26
Net interest
spread(2)(4)(5)......... 4.85 4.98 5.13 5.44 5.34
Noninterest expense to
average assets(2)....... 4.18 4.20 4.09 4.46 4.50
Efficiency ratio(6)........ 67.80 64.68 63.18 63.85 66.53
Dividend payout ratio(7)... 46.7(8) -- 19.1 21.4 23.4
ASSET QUALITY RATIOS:
Nonperforming loans to
period-end loans........ 0.94% 1.25% 0.98% 1.44% 0.42%
Allowance for loan losses
to period-end loans..... 1.22 1.03 1.10 0.98 0.98
Allowance for loan losses
to nonperforming
loans................... 130.73 82.63 112.60 67.98 235.74
Nonperforming assets to
total assets(9)......... 0.73 0.84 0.74 1.00 0.37
Net loan charge-offs to
average loans
outstanding............. -- -- 0.15 0.25 0.29
CAPITAL RATIOS:(10)
Total risk-based capital... 11.06% 13.87% 11.63% 14.97% 16.58%
Tier 1 risk-based
capital................. 9.94 12.89 10.67 14.00 15.64
Leverage ratio............. 8.02 9.80 8.08 10.19 10.69
Equity to assets ratio..... 7.76 9.22 8.14 9.87 10.41
OTHER DATA:
Number of banking
offices................. 10 9 9 8 8
Number of full time
equivalent
employees(11)........... 119 96 116 90 88
</TABLE>
- ---------------
(1) For the first half of 1998. See "Dividends."
(2) Three month data presented on annualized basis.
(3) Net interest margin is net interest income divided by average interest
earning assets.
(4) Net interest spread is the difference between the average yield on interest
earning assets and the average cost of interest bearing liabilities.
(5) For purposes of this calculation, interest earned on non-taxable securities
has been computed on a 34% tax equivalent basis.
(6) Efficiency ratio is noninterest expense divided by the sum of net interest
income and noninterest income.
(7) The dividend payout ratio is dividends declared per share divided by net
income per share, basic.
(8) Dividend payout ratio represents dividends for the first half of 1998
divided by net income per share for the first quarter of 1998.
(9) Nonperforming assets consists of nonaccrual loans, restructured loans and
Real Estate Owned.
(10) Capital ratios are for the Bank.
(11) The increase in full-time equivalent employees in 1997 reflected branch
openings and anticipated branch openings, in addition to increases in
lending personnel and executive and administrative personnel.
15
<PAGE> 18
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. The data presented for the three month period ended March 31, 1998
and 1997, are derived from the unaudited interim financial statements of the
Company and include, in the opinion of management, all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the data for such
periods.
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. In pursuit of
its growth strategy, in the first and second quarter, respectively, of 1998, the
Company opened a full service branch 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. The Company
expects to relocate the Bellingham office to a larger office by the end of the
first quarter of 1999. 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. New branch offices are often not
profitable for at least the first eighteen months after opening and management
expects that any earnings will be negatively affected as the Company pursues its
growth strategy.
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 $170.8 million at March 31, 1998 from $99.5
million at December 31, 1995, an increase of 71.7%. This increase resulted
primarily from growth in the loan portfolio, which was funded by deposit growth.
Total loans amounted to $123.3 million, $117.6 million, $81.3 million and
$63.1 million at March 31, 1998, December 31, 1997, 1996 and 1995, respectively.
Commercial loans grew to $52.0 million at March 31, 1998 from $23.4 million at
December 31, 1995 while consumer loans increased to $35.5 million from $15.5
million during that same period. Commercial loans as a percentage of total loans
increased to 42.1% at March 31, 1998 from 37.1% at December 31, 1995, and
consumer loans increased to 28.8% of total loans from 24.5% at those dates. Real
estate loans decreased to 18.3% of total loans, at March 31, 1998 from 27.1% at
16
<PAGE> 19
year end 1995, while real estate construction loans decreased to 10.8% from
11.3%. See "Business -- Lending Activities."
Total investment securities were $29.5 million, $29.7 million and $26.0
million at March 31, 1998 and December 31, 1997, and 1996, respectively. The
increase since 1996 reflected the investment of excess liquidity. Premises and
equipment, net, were $5.5 million, $4.3 million and $3.5 million at March 31,
1998 and December 31, 1997 and 1996, respectively. The increase since 1996
reflects upgrading computer systems, remodeling of the administrative and other
offices, purchase of land for branch offices and construction of branch offices.
Deposit accounts totaled $156.4 million, $146.4 million, $105.2 million and
$88.5 million at March 31, 1998 and 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 $13.3 million,
$13.0 million, $11.6 million and $10.4 million at March 31, 1998 and December
31, 1997, 1996 and 1995, respectively. These increases primarily reflect net
income less dividends paid to shareholders.
Net Interest Income. Like most financial institutions, the primary
component of earnings for the Company 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 as well as levels of noninterest bearing
liabilities. During the first quarter of 1998 and the fiscal years ended
December 31, 1997, 1996 and 1995, average interest earning assets were $151.6
million, $129.7 million, $96.0 million, and $83.3 million, respectively. During
these same periods, the Company's net interest margins were 5.53%, 5.94%, 6.27%
and 6.26%, respectively.
17
<PAGE> 20
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 assets to
average interest bearing liabilities.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE MONTHS ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------------------- -------------------
1998 1997 1997
-------------------------------- -------------------------------- -------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST
AVERAGE EARNED/ YIELD/COST AVERAGE EARNED/ YIELD/COST AVERAGE EARNED/
BALANCE PAID (1) BALANCE PAID (1) BALANCE PAID
-------- -------- ---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans...................... $119,269 $2,924 9.81% $ 83,321 $2,088 10.02% $100,243 $10,207
Federal funds sold......... 2,452 32 5.22 1,768 22 4.98 2,187 116
Investments
Taxable.................. 19,071 274 5.75 17,760 264 5.95 17,986 1,118
Non-taxable(2)........... 10,795 182 6.74 7,812 133 6.81 9,241 616
-------- ------ -------- ------ -------- -------
Interest earning
assets................. 151,587 3,412 9.00 110,661 2,507 9.06 129,657 12,057
Noninterest earning
assets................... 12,764 10,288 11,775
-------- -------- --------
Total assets......... $164,351 $120,949 $141,432
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Interest bearing demand
and money market
accounts............... 47,810 342 2.86% 34,106 228 2.67% $ 40,600 $ 1,193
Savings accounts......... 22,416 174 3.10 17,561 188 4.28 21,789 778
Certificates of
deposits............... 56,517 799 5.65 33,691 454 5.39 42,220 2,387
-------- ------ -------- ------ -------- -------
Interest bearing
liabilities.............. 126,743 1,315 4.15 85,368 870 4.08 104,609 4,358
Noninterest bearing
liabilities.............. 24,341 23,772 24,301
-------- -------- --------
Total liabilities.... 151,084 109,130 128,910
Shareholders' equity....... 13,267 11,819 12,522
-------- -------- --------
Total liabilities and
shareholders' equity..... $164,351 $120,949 $141,432
======== ======== ========
Net interest income(2)....... $2,097 $1,637 $ 7,699
------ ------ -------
Net interest spread(2)....... 4.85% 4.98%
---- -----
Net interest margin(2)....... 5.53% 5.92%
---- -----
Interest earning assets to
interest bearing
liabilities................ 119.60% 129.64% 123.94%
-------- -------- --------
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996 1995
---------- -------------------------------- -------------------------------
INTEREST INTEREST
AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
YIELD/COST BALANCE PAID YIELD/COST BALANCE PAID YIELD/COST
---------- -------- -------- ---------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans...................... 10.18% $ 69,237 $7,334 10.59% $58,609 6,253 10.67
Federal funds sold......... 5.30 2,343 126 5.38 4,092 231 5.65
Investments
Taxable.................. 6.22 18,315 1,080 5.90 16,346 908 5.55
Non-taxable(2)........... 6.67 6,132 426 6.95 4,293 296 6.90
-------- ------ ------- ------
Interest earning
assets................. 9.30 96,027 8,966 9.34 83,340 7,688 9.23
Noninterest earning
assets................... 8,917 8,226
-------- -------
Total assets......... $104,944 $91,566
======== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Interest bearing demand
and money market
accounts............... 2.94% $ 28,753 $ 739 2.57% $24,556 $ 610 2.48%
Savings accounts......... 3.57 20,036 704 3.51 17,868 598 3.35
Certificates of
deposits............... 5.65 26,777 1,503 5.61 21,184 1,266 5.98
-------- ------ ------- ------
Interest bearing
liabilities.............. 4.17 75,566 2,946 3.90 63,608 2,474 3.89
Noninterest bearing
liabilities.............. 18,133 17,903
-------- -------
Total liabilities.... 93,699 81,511
Shareholders' equity....... 11,245 10,055
-------- -------
Total liabilities and
shareholders' equity..... $104,944 $91,566
======== =======
Net interest income(2)....... $6,020 $5,214
------ ------
Net interest spread(2)....... 5.13% 5.44% 5.34%
----- ----- -----
Net interest margin(2)....... 5.94% 6.27% 6.26%
----- ----- -----
Interest earning assets to
interest bearing
liabilities................ 127.08% 131.02%
-------- -------
</TABLE>
- ---------------
(1) Three month data are presented on an annualized basis.
(2) 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 $46,000, 34,000, $156,000, $108,000,
and $76,000 for the quarters ended March 31, 1998 and 1997 and years ended
December 31, 1997, 1996 and 1995, respectively.
18
<PAGE> 21
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 THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996 1996 COMPARED TO 1995
------------------------- -------------------------- --------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
---------- TOTAL ---------- TOTAL ---------- TOTAL
INCREASE/ INCREASE/ INCREASE/
VOLUME RATE DECREASE VOLUME RATE DECREASE VOLUME RATE DECREASE
------ ---- --------- ------ ----- --------- ------ ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans............................ $901 $(65) $836 $3,284 $(411) $2,873 $1,134 $ (53) $1,081
Securities (1)................... 67 (8) 59 171 57 228 222 80 302
Federal funds sold............... 9 1 10 (8) (2) (10) (99) (6) (105)
---- ---- ---- ------ ----- ------ ------ ----- ------
Total interest income..... 976 (71) 905 3,447 (356) 3,091 1,257 21 $1,278
---- ---- ---- ------ ----- ------ ------ ----- ------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand and
money market accounts........ 92 22 114 304 150 454 104 25 129
Savings accounts............... 52 (66) (14) 62 12 74 73 33 106
Certificates of deposit........ 308 37 345 867 17 884 334 (97) 237
---- ---- ---- ------ ----- ------ ------ ----- ------
Total interest expense.... 451 (6) 445 1,233 179 1,412 511 (39) 472
---- ---- ---- ------ ----- ------ ------ ----- ------
Increase (decrease) in net
interest income.............. $525 $(65) $460 $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 1998,
1997, 1996 and 1995. These adjustments were $46,000, $34,000, $156,000,
$108,000, and $76,000 for the quarters ended March 31, 1998 and 1997 and for
the years ended December 31, 1997, 1996 and 1995.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Income. For the three months ended March 31, 1998, the Company's net
income increased 26.8% to $416,000, compared with net income of $328,000 for the
same period in 1997. Net income per share, diluted, amounted to $0.14 during the
first quarter of 1998 compared with $0.11 for the first quarter in 1997. The
increase in net income was primarily due to increased net interest income
resulting from continued loan growth and increases in noninterest income,
partially offset by increases in noninterest expenses and an increase in the
provision for loan losses.
Net Interest Income. Net interest income for the first quarter of 1998
increased 27.9% to $2.1 million, from $1.6 million in the first quarter of 1997.
The increase in net interest income was largely due to overall growth of the
Company. Average interest earning assets increased $40.9 million primarily as a
result of an increase in average loans outstanding of $35.9 million, while
average interest bearing liabilities increased $41.4 million, compared with the
same period in 1997.
Net interest margin (net interest income divided by average interest
earning assets) decreased to 5.53% in the first quarter of 1998 from 5.92% in
the first quarter 1997. Average interest earning assets increased to $151.6
million at March 31, 1998, compared to $110.7 million at March 31, 1997, while
the average yield on interest earning assets decreased to 9.00%, compared with
9.06% in first quarter of the prior year. During the first quarter of 1998, the
average costs of interest bearing liabilities increased to 4.15% from 4.08% for
the same period in 1997. The change in the mix of interest bearing and
noninterest bearing liabilities at March 31, 1998 as compared to March 31, 1997
also contributed significantly to the decrease in the net interest margin.
19
<PAGE> 22
At March 31, 1998, noninterest bearing liabilities as a percentage of interest
earning assets decreased to 16.1% from 21.5% at March 31, 1997, resulting in a
larger portion of interest earning assets being funded by interest bearing
liabilities. The decrease in yields on interest earning assets was caused by a
general decline in rates applicable to loans and investments. The increase in
deposit rates is primarily the result of increases in interest bearing demand
and money market accounts and increases in certificates of deposit, in each case
coupled with increasing rates for those deposit products.
Provision for Loan Losses. Net loan chargeoffs amounted to $2,000 for the
first three months of 1998. The Company's provision for loan losses during the
first quarter of 1998 was $195,000, compared with $105,000 for the first three
months of 1997. The allowance for loan losses increased by $590,000 to $1.5
million, or 1.22% of loans, at March 31, 1998, as compared with 1.03% of loans
at March 31, 1997. Management considers the allowance for loan losses at March
31, 1998 to be adequate to cover anticipated loan losses based upon management's
evaluation of the collectability of the loan portfolio, including the nature of
the portfolio, trends in historical loss experience, specific impaired loans and
economic conditions.
Noninterest Income. Noninterest income increased $118,000, or 32.6%, for
the first three months of 1998, compared with the same period in 1997. Increases
in noninterest income in the first three months were centered in accounts
service charges and other fees and an increase in merchant credit card account
fees and fees from the sale of credit life and accident and health insurance.
Noninterest Expense. Noninterest expense increased $445,000, or 35.0%, in
the first three months of 1998, compared with the same period in 1997. The
increase was primarily due to personnel and occupancy costs associated with the
Company's rapid expansion. Other noninterest expense increases were primarily a
result of higher operating activity levels associated with the Company's growth.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS INCREASE/
ENDED MARCH 31, DECREASE
--------------------- MARCH 31, 1998
1998 1997 VS. 1997
-------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and benefits...................... $ 983 $ 757 $226
Less: loan origination costs............... 319 208 111
------ ------ ----
Net salaries and benefits (as reported).... 664 549 115
Occupancy expense.......................... 258 217 41
Merchant credit card expense............... 75 64 11
Office supplies and printing............... 65 81 (16)
Insurance expense.......................... 80 41 39
Data processing............................ 63 54 9
Consulting and professional fees........... 45 11 34
Other...................................... 466 254 212
------ ------ ----
Total noninterest expense........ $1,716 $1,271 $445
====== ====== ====
</TABLE>
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. Diluted net income per share was $0.65, $0.55 and $0.47, in each
case adjusted for the 1998 Stock Splits, for 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. 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 15.0%. 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
20
<PAGE> 23
$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 rates 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.
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 collectability 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
21
<PAGE> 24
below is a schedule showing additional detail concerning increases in the
Company's noninterest expense for 1997 compared with 1996 and 1995:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, INCREASE/ INCREASE/
-------------------------------- DECREASE DECREASE
1997 1996 1995 1997 VS. 1996 1996 VS. 1995
-------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<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 $156.4 million, $146.4 million, $105.2 and $88.5
million at March 31, 1998, December 31, 1997, 1996 and 1995, respectively. The
increases in deposits were 6.8% in the first quarter of 1998 and 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 March 31, 1998, the Company had $57.5
million in certificates of deposit of which approximately $52.9 million, or 92%,
are scheduled to mature on or prior to March 31, 1999. 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 $13.3 million at March 31,
1998 from $13.0 million at December 31, 1997 and from $11.6 million at December
31, 1996. At March 31, 1998, shareholders' equity was 7.76% of total assets
compared to 8.14% and 9.87% of total assets at December 31, 1997 and 1996. The
decrease in this ratio since year end 1996 is primarily a result of an increase
in total assets of $53.6 million from December 31, 1996 to March 31, 1998. The
increase in total assets is due primarily to an increase in total loans, and to
a lesser extent, to an increase in cash equivalents and other assets.
22
<PAGE> 25
CAPITAL RATIOS
The Bank is subject to minimum capital requirements. See "Supervision and
Regulation." As the following table indicates, at March 31, 1998 the Bank
exceeded regulatory capital requirements.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
------------------------------------------
MINIMUM WELL-CAPITALIZED ACTUAL
REQUIREMENT REQUIREMENT RATIO
----------- ----------------- ------
<S> <C> <C> <C>
Total risk-based capital ratio......................... 8.00% 10.00% 11.06%
Tier 1 risk-based capital ratio........................ 4.00% 6.00% 9.94%
Leverage ratio......................................... 4.00% 5.00% 8.02%
</TABLE>
Management expects that the net proceeds of the Offering, together with
internally generated funds, will allow the Bank 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.
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 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.
23
<PAGE> 26
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 interest bearing
liabilities...................... 67.87% 28.87% 3.25% --% 100.00%
======== ======== ======= ======= ========
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>
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
24
<PAGE> 27
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.
The Company adopted SFAS No. 130 effective January 1, 1998 and has reported
comprehensive income for the three months ended March 31,1998 and 1997 as a note
to the unaudited consolidated financial statements.
25
<PAGE> 28
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 eleven branch offices
located on Whidbey Island and Camano Island in Island County, as well as the
Burlington and Anacortes (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 contribute 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 increase 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.
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.
26
<PAGE> 29
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan.
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------- -------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.................... $ 51,975 42.1% $ 48,242 41.0% $34,522 42.4% $23,441 37.1%
Real estate commercial and 5
or more family
residential................. 8,021 6.5 8,711 7.4 5,593 6.9 3,876 6.2
Real estate construction...... 13,278 10.8 12,646 10.8 8,389 10.3 7,100 11.3
Real estate one to four
family...................... 14,533 11.8 14,258 12.1 13,264 16.3 13,225 20.9
Consumer...................... 35,526 28.8 33,721 28.7 19,568 24.1 15,494 24.5
-------- ----- -------- ----- ------- ----- ------- -----
Subtotal...................... 123,333 100.0% 117,578 100.0% 81,336 100.0% 63,136 100.0%
===== ===== =====
Less: Allowance for loan
losses...................... (1,489) (1,296) (796) (620)
Less: deferred loan fees and
other....................... (40) (43) (67) (104)
-------- -------- ------- -------
Net loans..................... $121,804 $116,239 $80,473 $62,412
======== ======== ======= =======
</TABLE>
The following table presents at March 31, 1998 (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......................................... $18,380 $17,505 $16,090 $51,975
Real estate construction........................... 7,781 2,261 3,236 13,278
------- ------- ------- -------
Total............................................ $26,161 $19,766 $19,326 $65,253
======= ======= ======= =======
Fixed-rate loans................................... $18,204
Variable-rate loans................................ 47,049
-------
Total............................................ $65,253
=======
</TABLE>
Commercial Loans. Commercial business lending is the primary focus of the
Company's lending activities. Commercial loans increased to $52.0 million at
March 31, 1998, representing 42.1% of its total loans, from $48.2 million, or
41.0%, at December 31, 1997, $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 March 31, 1998, the Company had outstanding $1.7 million,
or 3.3% of its commercial loan portfolio, in SBA commercial business loans.
Beginning 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 March 31, 1998, the Company had outstanding
$1.8 million, or 3.5% of its commercial loan portfolio, in dealer inventory
loans to dealers of used automobiles. With few exceptions, these loans are
personally guaranteed by the owner of the dealership. Such loans are
27
<PAGE> 30
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.
Residential one to four family loans amounted to $14.5 million at March 31,
1998, representing 11.8% of total loans, compared to $14.3 million, or 12.1%, at
December 31, 1997, $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 $17.5 million, compared with $7.9 million for the
year ended December 31, 1996 and $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 amounted to $8.0 million, or 6.5% of total
loans, at March 31,1998, $8.7 million, or 7.4%, $5.6 million, or 6.9%, and $3.9
million, or 6.2%, at December 31, 1997, 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 $13.3 million, or 10.8% of total loans, at
March 31, 1998 compared with $12.6 million, or 10.8%, $8.4 million, or 10.3%,
and $7.1 million, or 11.3%, at December 31, 1997, 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 $2.1
million, or 15.8% of the total construction loan portfolio at March 31, 1998.
The average loan size at March 31, 1998 was approximately $133,000. 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 March 31, 1998, consumer loans constituted $35.5
million, or 28.8% of total loans, compared with $33.7 million, or 28.7%, $19.6
million, or 24.1% and $15.5 million, or 24.5%, at December 31,
28
<PAGE> 31
1997, 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 March 31, 1998, $9.3 million, or 26.2%, 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 March 31,
1998, $983,000 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 March
31, 1998, approximately $10,200, or 1.0% 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 March 31, 1998.
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 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 processing 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 March 31, 1998. 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 $2.7 million at March 31, 1998. The Company seldom makes
loans approaching its legal lending limit.
29
<PAGE> 32
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,
AT MARCH 31, ----------------------------------
1998 1997 1996 1995
------------ ---------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans.................................. $ 521 $ 498 $ 390 $ 77
Restructured loans................................ 618 653 781 186
------ ------- ------ -------
Total nonperforming loans.................... 1,139 1,151 1,171 263
Real estate owned................................. 115 30 -- 108
------ ------- ------ -------
Total nonperforming assets................... $1,254 $ 1,181 $1,171 $ 371
====== ======= ====== =======
Accruing loans past due 90 days or more........... $ -- $ -- $ 2 $ 165
Potential problem loans........................... 56 11 7 --
Allowance for loan losses......................... 1,489 1,296 796 620
Nonperforming loans to period end loans........... 0.94% 0.98% 1.44% 0.42%
Allowance for loan losses to period-end loans..... 1.22 1.10 0.98 0.98
Allowance for loan losses to nonperforming
loans........................................... 130.73 112.60 67.98 235.74
Nonperforming assets to total assets.............. 0.73 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 collectability 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 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 March 31, 1998, the Company had $521,000 of nonaccrual loans. Interest
on nonaccrual loans foregone was approximately $14,000 and $16,000 for the three
months ended March 31, 1998 and 1997, respectively, and $40,000, $42,000 and
$4,000 for the years ended December 31, 1997, 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
30
<PAGE> 33
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................ $1,296 100.0 % $796 100.0 % $620 100.0 %
====== ====== ==== ====== ==== ======
</TABLE>
- ---------------
(1) Represents total of all outstanding loans in each category as a percent of
total loans outstanding.
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
AT OR FOR THE DECEMBER 31,
THREE MONTHS ENDED ---------------------------
MARCH 31, 1998 1997 1996 1995
------------------ ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period................. $1,296 $ 796 $ 620 $ 568
Charge-offs:
Commercial................................... -- (43) (166) (52)
Real estate.................................. -- (11) -- (34)
Consumer..................................... (18) (106) (63) (85)
------ ------ ----- -----
Total charge-offs.................... (18) (160) (229) (171)
------ ------ ----- -----
Recoveries:
Commercial................................... 1 -- 49 --
Real estate.................................. -- -- -- --
Consumer..................................... 15 13 6 3
------ ------ ----- -----
Total recoveries..................... 16 13 55 3
------ ------ ----- -----
Net charge-offs................................ (2) (147) (174) (168)
Provision for loan losses...................... 195 647 350 220
------ ------ ----- -----
Balance at end of period....................... $1,489 $1,296 $ 796 $ 620
====== ====== ===== =====
Ratio of net 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
31
<PAGE> 34
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:
<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>
32
<PAGE> 35
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>
33
<PAGE> 36
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 TO FIVE TO OVER TEN
ONE YEAR FIVE YEARS TEN 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.
34
<PAGE> 37
The following table sets forth for the periods indicated the average
balances outstanding and average interest rates for each major category of
deposits.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ----------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing demand and money
market accounts.................... $ 47,810 2.86% $ 40,600 2.94% $28,753 2.57% $24,556 2.48%
Savings accounts..................... 22,416 3.10 21,789 3.57 20,036 3.51 17,868 3.35
Certificates of deposit.............. 56,517 5.65 42,220 5.65 26,777 5.61 21,184 5.98
-------- -------- ------- -------
Total interest bearing
deposits.................. 126,743 104,609 75,566 63,608
Demand and other noninterest bearing
deposits........................... 23,405 21,346 17,487 17,207
-------- -------- ------- -------
Total average deposits...... $150,148 4.15% $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."
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.
35
<PAGE> 38
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 also leases space for its grocery store
branch on Camano Island, which opened 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 the end of first quarter 1999).
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 119 full time equivalent employees at March 31, 1998. 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.
36
<PAGE> 39
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
37
<PAGE> 40
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.
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
38
<PAGE> 41
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 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.
39
<PAGE> 42
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 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.
40
<PAGE> 43
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."
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.
41
<PAGE> 44
MANAGEMENT
DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth, as of March 31, 1998, 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. Anticipated purchases of Common Stock by the directors and certain
executive officers of the Company are set forth based on information provided to
the Company from such persons. Actual purchases may vary depending on the actual
number of shares sold in the Offering, regulatory limits or other factors.
Directors are elected for three years terms. The terms are staggered such that
one-third of the directors are elected each year. Directors Cann, Dean and
Knutson's current term expires in 1998. Directors Lien, Sherman and Wallgren's
current term expires in 1999. Directors Krieg, Olson and Pickering's current
term expires in 2000. Executive officers are elected generally to serve at the
discretion of the Company's Board of Directors.
<TABLE>
<CAPTION>
ANTICIPATED
COMMON STOCK PERCENT PRIOR COMMON STOCK PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OWNED PRIOR TO TO THE PURCHASES IN FOLLOWING THE
OFFICER OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING(1)(2) OFFERING THE OFFERING(3)(4) OFFERING(4)
- ---------------------------------------------- ------------------ ---------------- ------------------ -------------
<S> <C> <C> <C> <C>
MICHAL D. CANN, 49....................... 54,450(5) 1.83% 7,340 1.56%
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........................... 29,850(6) 1.01% 1,470 0.79%
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.
MARLEN KNUTSON, 65....................... 7,800(7) 0.26% 11,010 0.47%
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.
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
ANTICIPATED
COMMON STOCK PERCENT PRIOR COMMON STOCK PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OWNED PRIOR TO TO THE PURCHASES IN FOLLOWING THE
OFFICER OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING(1)(2) OFFERING THE OFFERING(3) OFFERING(4)
- ---------------------------------------------- ------------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C>
KARL C. KRIEG, III, 61.................... 36,900(8) 1.24% 22,030 1.49%
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........................... 49,200(9) 1.66% 4,410 1.35%
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....................... 55,500(10) 1.87% 11,010 1.68%
Co-owner and co-managing director of H&H
Properties, Inc., a land development company.
Mr. Olson has served as the President and
Chief Executive Officer of four community
banks in Washington and Oregon. Mr. Olson has
been a director of the Company since 1992. Mr.
Olson also serves as a director of WIB
Financial Services, Inc. and 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.
ANTHONY B. PICKERING, 50.................. 4,500 0.15% 14,680 0.48%
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...................... 17,250 0.58% 3,670 0.53%
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.
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
ANTICIPATED
COMMON STOCK PERCENT PRIOR COMMON STOCK PERCENT
NAME, AGE AND PRINCIPAL OCCUPATION OF OWNED PRIOR TO TO THE PURCHASES IN FOLLOWING THE
OFFICER OR DIRECTOR DURING THE PAST FIVE YEARS THE OFFERING(1)(2) OFFERING THE OFFERING(3) OFFERING(4)
- ---------------------------------------------- ------------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C>
EDWARD J. (BUD) WALLGREN, 59.............. 60,750(11) 2.05% 13,580 1.87%
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.................... 42,750(12) 1.44% 5,510 1.22%
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.
LARRY SCODELLER, 56....................... -- --% 5,290 0.13%
Executive Vice President and Chief Operating
Officer of Whidbey Island Bank beginning in
February 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 358,950 12.09% 100,000 11.57%
group (12 persons)......................
</TABLE>
- ---------------
(1) As adjusted for the 1998 Stock Splits.
(2) Unless otherwise noted, includes shares over which each individual
exercises sole voting or investment power. Includes 159,000 shares issuable
to directors and executive officers under options exercisable within 60
days.
(3) Based on an assumed initial public offering price of $12.00 per share.
(4) Assuming no exercise of the Underwriter's over-allotment option.
(5) Includes 49,500 shares issuable under options exercisable within 60 days.
(6) Includes 14,850 shares issuable under options exercisable within 60 days.
(7) All of these shares are owned by Knutson Hauling, Inc. Profit & Sharing
Trust, for which Mr. Knutson, is the Trustee.
(8) Includes 14,850 shares issuable under options exercisable within 60 days.
(9) 5,400 of the 49,200 shares are owned by Dan Garrison, Inc. Profit Sharing
Plan, for which Mr. Lien is the Trustee. Includes 14,850 shares issuable
under options exercisable within 60 days.
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<PAGE> 47
(10) Includes 14,850 shares issuable under options exercisable within 60 days.
(11) 7,350 of the 60,750 shares are owned by Island O.K. Tires, Inc. Profit
Sharing Plan for which Mr. Wallgren is the Trustee. Includes 14,850 shares
issuable under options exercisable within 60 days.
(12) Includes 35,250 shares issuable under options exercisable within 60 days.
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. Mr. Scodeller joined the Company in February 1998. 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.
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
150,000 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 7,500 shares of the Company's
Common Stock, as adjusted for the 1998 Stock Splits. The exercise price of each
option was $9.25 per share.
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<PAGE> 48
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>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------------
--------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITIONS SALARY BONUS COMPENSATION OPTIONS GRANTED COMPENSATION(3)
------------------ -------- ------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Michal D. Cann................. $109,590 $20,000 (1) 7,500(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 1998 Stock Splits.
(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. 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
450,000 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
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<PAGE> 49
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......................... 7,500 14.5% $-- 2007
Larry Scodeller........................ 15,000 29.0 $-- 2007
</TABLE>
- ---------------
(1) As adjusted for the 1998 Stock Splits.
The table below provides information on exercises of options during 1997 by
executive officers and information with respect to unexercised options held by
the named executive officers at March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES ACQUIRED VALUE OPTIONS(#) OPTIONS($)
NAME ON EXERCISE(#)(1) REALIZED($) EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(1)
---- ----------------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michal D. Cann....... -- $-- 49,500/25,500 $304,160/89,511
Larry Scodeller...... -- -- 0/15,000 $0/$1,200
</TABLE>
- ---------------
(1) As adjusted for the 1998 Stock Splits.
In furtherance of its employee compensation program, at the 1998 Annual
Shareholders meeting which is expected to be held in July 1998, the Company
plans to seek shareholder approval for a new Employee Stock Option Plan
increasing the number of shares subject to options which will then be available
for grant to selected officers and employees. At March 31, 1998, there were
467,700 shares issuable upon exercise of stock options, equal to approximately
16.6% of Common Stock outstanding. If shareholders approve the new Employee
Stock Option Plan the Company intends that the total number of shares subject to
options (from both the present plan and the anticipated new plan) will be equal
to approximately 15% of the total pro forma shares of Common Stock to be
outstanding upon completion of the Offering.
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.
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 collectability 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
47
<PAGE> 50
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.
CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning the beneficial
ownership of the common stock as of December 31, 1997 as adjusted for the 1998
Stock Splits by each person known to the Company to be the beneficial owner of
more than 5% of the outstanding common stock of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- --------- ---------
<S> <C> <C>
Frontier Financial Corporation........................ 150,000 5.34%
P.O. Box 2215
Everett WA 98203
</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
2,809,050 (as adjusted for the 1998 Stock Splits) shares of Common Stock
outstanding and 326 shareholders of record. Upon the closing of the Offering,
there will be 3,809,050 shares of Common Stock outstanding (assuming no exercise
of the Underwriter's over-allotment option). 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.
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
48
<PAGE> 51
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."
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
49
<PAGE> 52
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.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, the Company will have outstanding
3,809,050 shares of Common Stock (assuming no exercise of the Underwriters
over-allotment option and no exercise of outstanding stock options). Of these
shares, the 1,000,000 shares of Common Stock offered hereby will be freely
tradable without restriction or limitation under the Securities Act except to
the extent such shares become subject to the agreement with the Underwriters
described below or are held by "affiliates" of the Company as such term is
defined under Rule 144 under the Securities Act. In addition, the shares of
Common Stock presently outstanding are not restricted and, under certain
conditions, may be freely tradable without restriction or limitation under the
Securities Act. Shares owned by affiliates may only be sold if they are
registered under the Securities Act or if an exemption from registration, such
as that provided by Rule 144, is available.
The Company, its executive officers and directors and any affiliates
thereof, and a shareholder owning in excess of 5% of the outstanding shares,
holding in the aggregate 508,950 shares of Common Stock on an as converted or as
exercised basis, have agreed not to directly or indirectly offer, sell, pledge,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock of the Company (except
50
<PAGE> 53
pursuant to its stock plan or other employee benefit plans) for a period of 180
days after the date of this Prospectus, without the prior written consent of
Ryan, Beck & Co. See "Underwriting."
UNDERWRITING
Ryan, Beck & Co. (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.
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 150,000
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 for the Company 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 any
affiliates thereof, and a shareholder owning in excess of 5% of the outstanding
shares, 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
51
<PAGE> 54
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.
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 LLP, 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 Certified Public
Accounts & Consultants (now known as David Christensen, CPA & 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 dismiss David O.
Christensen was made by management of the Company and was approved by the Board
of Directors effective November 20, 1997.
52
<PAGE> 55
In the two most recent fiscal years preceding the Board's action, and
through December 15, 1997 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.
53
<PAGE> 56
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 Certified Public Accountants
& Consultants............................................. F-3
Consolidated Statements of Financial Condition at March 31,
1998 (unaudited), December 31, 1997 and 1996.............. F-4
Consolidated Statements of Income for the three months ended
March 31, 1998 and 1997 (unaudited) and the years ended
December 31, 1997, 1996, 1995............................. F-5
Consolidated Statements of Shareholders' Equity for the
three months ended March 31, 1998 (unaudited) and the
years ended December 31, 1997, 1996 and 1995.............. F-6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 (unaudited) and the years
ended December 31, 1997, 1996 and 1995.................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 57
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 April 24, 1998
F-2
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Washington Bank 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
Certified Public Accountants &
Consultants
Vancouver, Washington
January 31, 1997, except for Note (16),
as to which the date is April 24, 1998.
F-3
<PAGE> 59
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1998 1997 1996
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks..................................... $ 7,940 6,263 5,455
Federal funds sold.......................................... 3,900 1,750 500
-------- -------- -------
Total cash and cash equivalents................... 11,840 8,013 5,955
-------- -------- -------
Federal Home Loan Bank stock................................ 695 682 322
Investment securities, available-for-sale................... 6,018 5,521 4,989
Investment securities, held-to-maturity..................... 22,782 23,508 20,653
-------- -------- -------
Total investment securities....................... 29,495 29,711 25,964
-------- -------- -------
Loans receivable, net....................................... 121,804 116,239 80,473
Premises and equipment, net................................. 5,546 4,287 3,521
Other real estate owned..................................... 115 30 --
Deferred tax asset.......................................... 372 370 273
Other assets................................................ 1,670 1,418 1,094
-------- -------- -------
Total assets...................................... $170,842 160,068 117,280
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. 156,377 146,394 105,212
Other liabilities......................................... 1,206 639 498
-------- -------- -------
Total liabilities................................. 157,563 147,033 105,710
-------- -------- -------
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 2,809,050, 2,809,050 and
2,796,000 shares in 1998, 1997 and 1996,
respectively........................................... 2,943 2,943 3,032
Retained earnings......................................... 10,304 10,075 8,527
Accumulated comprehensive income, net..................... 12 17 11
-------- -------- -------
Total shareholders' equity........................ 13,259 13,035 11,570
-------- -------- -------
Total liabilities and shareholders' equity........ $170,842 160,068 117,280
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 60
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.............. $ 2,924 2,088 10,207 7,334 6,253
Interest on taxable investment
securities........................... 261 258 1,082 1,055 908
Interest on tax-exempt investment
securities........................... 136 99 460 318 221
Dividends on FHLB stock................. 13 6 36 25 --
Interest on Federal funds sold.......... 32 22 116 126 231
--------- --------- --------- --------- ---------
Total interest income........... 3,366 2,473 11,901 8,858 7,613
Interest expense.......................... 1,315 870 4,358 2,946 2,474
--------- --------- --------- --------- ---------
Net interest income............. 2,051 1,603 7,543 5,912 5,139
Provision for loan losses................. 195 105 647 350 220
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses..... 1,856 1,498 6,896 5,562 4,919
--------- --------- --------- --------- ---------
Non-interest income:
Service charges on deposits............. 312 274 1,116 1,024 893
Other................................... 168 88 491 400 167
--------- --------- --------- --------- ---------
Total non-interest income....... 480 362 1,607 1,424 1,060
--------- --------- --------- --------- ---------
Non-interest expense:
Salaries and benefits................... 664 549 2,385 2,019 1,720
Occupancy expense....................... 258 217 1,033 745 766
Merchant credit card expense............ 75 64 358 236 18
Office supplies and printing............ 65 81 275 220 228
Insurance expense....................... 80 41 271 251 222
Data processing......................... 63 54 219 125 80
Consulting and professional fees........ 45 11 202 165 176
Other................................... 466 254 1,038 923 914
--------- --------- --------- --------- ---------
Total non-interest expense...... 1,716 1,271 5,781 4,684 4,124
--------- --------- --------- --------- ---------
Income before income taxes...... 620 589 2,722 2,302 1,855
Provision for income taxes................ 204 261 818 738 534
--------- --------- --------- --------- ---------
Net income...................... $ 416 328 1,904 1,564 1,321
========= ========= ========= ========= =========
Net income per share, basic............... $ 0.15 0.12 0.68 0.56 0.47
========= ========= ========= ========= =========
Net income per share, diluted............. $ 0.14 0.11 0.65 0.55 0.47
========= ========= ========= ========= =========
Average number of shares outstanding,
basic................................... 2,809,050 2,805,625 2,810,881 2,796,000 2,794,750
========= ========= ========= ========= =========
Average number of shares outstanding,
diluted................................. 2,961,557 2,927,832 2,935,972 2,858,100 2,813,443
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 61
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK COMPREHENSIVE TOTAL
--------------- RETAINED INCOME (LOSS), SHAREHOLDERS'
SHARES AMOUNT EARNINGS NET OF TAX EQUITY
------ ------ -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994................. 2,790 $3,014 6,295 (34) 9,275
Cash dividend at $0.11 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....................... 6 18 -- -- 18
----- ------ ------ --- ------
Balances at December 31, 1995................. 2,796 3,032 7,299 26 10,357
Cash dividend at $0.12 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................. 2,796 3,032 8,527 11 11,570
Cash dividend at $0.13 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................. (23) (200) -- -- (200)
Stock options exercised....................... 36 111 -- -- 111
----- ------ ------ --- ------
Balances at December 31, 1997................. 2,809 2,943 10,075 17 13,035
Cash dividend at $0.07 per share.............. -- -- (187) -- (187)
Net income for the three months ended March
31, 1998 (unaudited)........................ -- -- 416 -- 416
Unrealized gains/losses for the three months
ended March 31, 1998 (unaudited)............ -- -- -- (5) (5)
----- ------ ------ --- ------
Balances at March 31, 1998 (unaudited)........ 2,809 $2,943 10,304 12 13,259
===== ====== ====== === ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 62
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 416 328 1,904 1,564 1,321
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends.... (13) (6) (36) (25) --
Deferred income tax benefit............... -- -- (99) (11) (42)
Amortization/accretion of investment
premiums/discounts, net................ (3) 13 271 (4) 57
Provision for loan losses................. 195 105 647 350 220
Depreciation of premises and equipment.... 92 49 323 248 214
Loss on sale of premises and equipment.... -- -- 2 -- 1
Net increase in other assets.............. (252) (47) (324) (132) (394)
Net increase (decrease) in other
liabilities............................ 380 293 141 (93) 324
Gain on the sale of other real estate
owned.................................. -- -- -- (30) --
------- ------- ------- ------- -------
Net cash provided by operating
activities........................... 815 735 2,829 1,867 1,701
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchases of investment securities,
available-for-sale.......................... (1,000) (500) (2,860) (3,500) (2,500)
Maturities of investment securities,
available-for-sale.......................... 500 -- 2,000 4,000 4,500
Purchases of investment securities,
held-to-maturity............................ (775) (1,610) (6,770) (8,455) (7,060)
Maturities of investment securities,
held-to-maturity............................ 1,500 2,600 3,980 4,715 2,515
Net increase in loans.......................... (5,845) (6,496) (36,443) (18,411) (7,510)
Purchases of premises and equipment............ (1,351) (595) (1,097) (641) (1,742)
Proceeds from sale of premises and equipment... -- -- 6 -- 2
Purchases of Federal Home Loan Bank stock...... -- (30) (324) (22) (275)
Proceeds from sales of other real estate
owned....................................... -- -- -- 138 --
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (6,971) (6,631) (41,508) (22,176) (12,070)
------- ------- ------- ------- -------
Cash flows from financing activities:
Net increase in deposits....................... 9,983 11,436 41,182 16,706 15,605
Dividends paid on common stock................. -- -- (356) (336) (317)
Proceeds from stock options exercised.......... -- 51 111 -- 18
Cash paid for common stock retired............. -- -- (200) -- --
------- ------- ------- ------- -------
Net cash provided by financing
activities........................... 9,983 11,487 40,737 16,370 15,306
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents..................... 3,827 5,591 2,058 (3,939) 4,937
Cash and cash equivalents at beginning of year... 8,013 5,955 5,955 9,894 4,957
------- ------- ------- ------- -------
Cash and cash equivalents at end of year......... $11,840 11,546 $ 8,013 5,955 9,894
======= ======= ======= ======= =======
Supplemental information:
Loans foreclosed and transferred to real estate
owned....................................... $ 85 -- 30 -- 108
Cash paid for interest......................... 1,319 855 4,236 2,907 2,351
Cash paid for taxes............................ 200 260 1,000 736 534
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 63
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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> 64
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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
F-9
<PAGE> 65
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
income in the periods in which those temporary differences are expected to be
recovered or settled. The effect 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
F-10
<PAGE> 66
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
(n) Reclassifications
Certain amounts in 1996 and 1995 have been reclassified to conform with the
1997 financial statement presentation.
(o) Interim Financial Data
The unaudited interim consolidated financial statements have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein in accordance with generally accepted accounting principles. The
Company's interim results may be subject to fluctuations. As a result, the
Company believes the results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
(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.
F-11
<PAGE> 67
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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-12
<PAGE> 68
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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-13
<PAGE> 69
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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
MARCH 31, ------------------
1998 1997 1996
--------- -------- ------
<S> <C> <C> <C>
Commercial loans............................... $ 51,975 48,242 34,522
Real estate loans.............................. 22,554 22,969 18,857
Real estate construction loans................. 13,278 12,646 8,389
Consumer loans................................. 35,526 33,721 19,568
-------- -------- ------
123,333 117,578 81,336
Less allowance for loan losses................. 1,489 1,296 796
Net deferred loan fees......................... 40 43 67
-------- -------- ------
Net loans.................................... $121,804 116,239 80,473
======== ======== ======
</TABLE>
As of March 31, 1998 and 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 $1,691, $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 $558, $772 and $552 as of March 31, 1998 and December 31, 1997 and 1996,
respectively.
The following is an analysis of the changes in the allowance for loan
losses:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31
------------- ----------------------
1998 1997 1997 1996 1995
------ ---- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Beginning balance.............................. $1,296 796 796 620 568
Provision for loan losses...................... 195 105 647 350 220
Recoveries..................................... 16 2 13 55 3
Charge-offs.................................... (18) (4) (160) (229) (171)
------ ---- ------ ---- ----
Ending balance................................. $1,489 $899 1,296 796 620
====== ==== ====== ==== ====
</TABLE>
At March 31, 1998 and December 31, 1997 and 1996, the Company had impaired
loans of $1,195, $1,162 and $1,178, respectively. Of these impaired loans, $412,
$285 and $358 have related valuation allowances of $126, $112 and $121, while
$767, $877 and $820 did not require a valuation allowance. Average impaired
loans for 1998, 1997 and 1996 totaled $1,179, $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 $14, $16, $40, $42 and $4 of interest income
would have been recorded for the three months ended March 31, 1998 and 1997,
respectively, and the years ended December 31, 1997, 1996, and 1995,
respectively.
F-14
<PAGE> 70
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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-15
<PAGE> 71
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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-16
<PAGE> 72
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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-17
<PAGE> 73
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders....... $416,000 2,809,050 $0.15
Effect of dilutive securities: stock
options..................................... -- 152,507
-------- ---------
DILUTED EPS................................... $416,000 2,961,557 $0.14
======== ========= =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
-------- -------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders....... $328,407 2,805,625 $0.12
Effect of dilutive securities: stock
options..................................... -- 117,207
-------- ---------
DILUTED EPS................................... $328,407 2,922,832 $0.11
======== ========= =====
</TABLE>
<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 2,810,881 $0.68
Effect of dilutive securities: stock options.... -- 125,091
------ ---------
DILUTED EPS..................................... $1,904 2,935,972 $0.65
====== ========= =====
</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 2,796,000 $0.56
Effect of dilutive securities: stock options.... -- 62,100 --
------ ---------
DILUTED EPS..................................... $1,564 2,858,100 $0.55
====== ========= =====
</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 2,794,750 $0.47
Effect of dilutive securities: stock
options..................................... -- 18,693 --
------ ---------
DILUTED EPS................................... $1,321 2,813,443 $0.47
====== ========= =====
</TABLE>
F-18
<PAGE> 74
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(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,
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 450,000 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 150,000 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 in twenty percent increments over five years and expire
five years after they become fully vested.
F-19
<PAGE> 75
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes incentive or nonqualified stock option
activity under the 1992 plan for the years ended December 31:
<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....... 302,250 $3.39 273,000 $3.20 243,000 $3.04
Options granted.................... 51,750 9.25 29,250 5.22 45,000 4.08
Less exercised..................... -- -- -- -- (6,000) 2.93
Expired or canceled................ -- -- -- -- (9,000) 2.93
-------- ----- ------- ----- ------- -----
Balance at end of year............. 354,000 $4.25 302,250 $3.39 273,000 $3.20
======== ===== ======= ===== ======= =====
Options exercisable at year-end.... 219,818 177,368 119,012
Weighted average fair value per
share of options granted......... $1.83 $1.05 $ .70
</TABLE>
Financial data pertaining to outstanding incentive stock options under the
1992 plan at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TOTAL VESTED EXERCISE
SHARES SHARES PRICE EXPIRATION
- ------- ------- -------- ----------
<C> <C> <C> <S>
165,000 123,000 $2.93 February 22, 2003
22,500 135,000 3.07 March 24, 2004
40,500 24,300 3.37 December 15, 2004
45,000 18,000 4.08 December 31, 2005
3,750 750 4.23 April 1, 2006
25,500 5,100 5.37 December 31, 2006
51,750 -- 9.25 December 31, 2007
- ------- -------
354,000 184,650
======= =======
</TABLE>
The following table summarizes stock option activity of the nonqualified
shares under the 1993 plan for the years ended December 31:
<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....... 120,750 $3.13 120,750 $3.13 108,750 $3.02
Options granted.................... 31,200 9.25 -- -- 12,000 4.08
Less exercised..................... (35,550) 3.14 -- -- -- --
Expired or canceled................ (2,700) 3.57 -- -- -- --
-------- ----- ------- ----- ------- -----
Balance at end of year............. 113,700 $4.79 120,750 $3.13 120,750 $3.13
======== ===== ======= ===== ======= =====
Options exercisable at year-end.... 72,713 79,838 55,538
Weighted average fair value per
share of options granted......... $1.58 $0.52 $0.52
</TABLE>
F-20
<PAGE> 76
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Financial data pertaining to outstanding nonqualified stock options under
the 1993 plan at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TOTAL VESTED EXERCISE
EXPIRATION SHARES SHARES PRICE
---------- ------- ------ --------
<S> <C> <C> <C>
February 22, 2003............................... 56,250 45,000 $3.00
March 24, 2004.................................. 18,750 11,250 3.07
December 31, 2005............................... 7,500 3,900 4.08
December 31, 2007............................... 31,200 -- 9.25
------- ------
113,700 60,150
======= ======
</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............................. 0.68 0.56 0.47
Basic EPS, pro forma............................... 0.66 0.55 0.47
Diluted EPS, as reported........................... 0.65 0.55 0.47
Diluted EPS, pro forma............................. 0.64 0.55 0.47
</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.
(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.
F-21
<PAGE> 77
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
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
F-22
<PAGE> 78
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
(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.
F-23
<PAGE> 79
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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>
(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-24
<PAGE> 80
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1997 IS UNAUDITED)
(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 EVENTS
On March 26, 1998, the Board of Directors declared a hundred-for-one stock
split and a cash dividend of $.07 per share for the first half of 1998. In
addition, the shareholders approved a resolution increasing the number of
shares authorized to 10 million of no par stock.
On April 24, 1998, the Board of Directors declared a three-for-two stock
split of the then currently issued and outstanding shares.
All share and per share amounts have been restated to retroactively reflect
these stock splits.
(17) COMPREHENSIVE INCOME (UNAUDITED)
Effective January 1, 1998, the Company implemented Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income."
Comprehensive income for the three months ended March 31, 1998 and 1997 was
$411 and $306, respectively.
F-25
<PAGE> 81
======================================================
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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 8
Use of Proceeds............................ 11
Dilution................................... 11
Market for Common Stock.................... 12
Dividends.................................. 12
Capitalization............................. 13
Selected Consolidated Financial Information
and Other Data........................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 16
Business................................... 26
Supervision and Regulation................. 36
Management................................. 42
Certain Transactions....................... 47
Stock Buy-Sell Agreement................... 47
Certain Beneficial Owners.................. 48
Description of Capital Stock............... 48
Shares Eligible for Future Sale............ 50
Underwriting............................... 51
Additional Information..................... 52
Legal Matters.............................. 52
Experts.................................... 52
Index to Consolidated Financial
Statement................................ F-1
</TABLE>
UNTIL , 1998, 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.
======================================================
======================================================
1,000,000 SHARES OF
COMMON STOCK
[LOGO]
------------------------
PROSPECTUS
------------------------
LOGO
JUNE , 1998
======================================================
<PAGE> 82
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................................ $ 4,410
NASD Filing Fee............................................ 1,995
Nasdaq National Market Listing Fees........................ 53,750
*Printing Expenses.......................................... 75,000
*Legal, Fees and Expenses................................... 140,000
*Accounting Fees and Expenses............................... 150,000
*Underwriter Counsel Fees and Expenses...................... 65,000
*Blue Sky Fees and Expenses (including fees of counsel)..... 5,000
Transfer Agent and Registrar Fees, Expenses................ 3,000
Miscellaneous Expenses..................................... 11,845
--------
Total............................................. $510,000
</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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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**
</TABLE>
II-1
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 Christensen CPA & 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 Christensen CPA & 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*
99 Soliciting Material*
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES.
Not applicable.
- ---------------
* Filed herewith.
** Previously filed.
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.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 84
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Oak Harbor, State of Washington, on May 29, 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 Amendment
No. 1 to the Registration Statement has been signed by the following persons on
May 29, 1998 in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/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
A MAJORITY OF THE BOARD OF DIRECTORS:
Orlan Dean, Director
Marlen Knutson, Director
Karl C. Krieg, III, Director
Jay T. Lien, Director
Robert B. Olson, Director
Anthony B. Pickering, Director
Alvin J. Sherman, Director
Edward J. (Bud) Wallgren, Director
</TABLE>
Michal Cann, by signing his name hereto, does hereby sign this document in
his capacity as a director and pursuant to powers of attorney duly executed by
the persons named, filed with the Securities and Exchange Commission as an
exhibit to this document, on behalf of such persons, all in the capacities and
on the date stated, such persons including a majority of the directors of the
registrant.
/s/ MICHAL CANN
--------------------------------------
Michal Cann
Attorney-in-Fact
II-3
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<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 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 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*
99 Soliciting Material*
</TABLE>
- ---------------
* Filed herewith
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
___________ Shares of Common Stock
(No Par Value Per Share)
WASHINGTON BANKING COMPANY
(a Washington corporation)
UNDERWRITING AGREEMENT
__________ ____, 1998
RYAN, BECK & CO., INC.
220 South Orange Avenue
Livingston, New Jersey 07039
Ladies and Gentlemen:
Washington Banking Company ("Company"), a Washington corporation and the
holding company for Whidbey Island Bank, a Washington-chartered bank ("Bank"),
whose deposits are insured by the Bank Insurance Fund ("BIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"), and each of the shareholders
of the Company named in Schedule A hereto ("Selling Shareholders"), confirm
their respective agreement with Ryan, Beck & Co., Inc. ("Underwriters") with
respect to (i) the sale by the Company and the purchase by the Underwriter of
_______ shares of common stock, no par value ("Common Stock"), of the Company,
(ii) the sale by the Selling Shareholders and the purchase by the Underwriter of
the respective number of shares of Common Stock set forth in Schedule A, and
(ii) the grant by the Company to the Underwriter of the option described in
Section 2(c) hereof to purchase all or any part of _______ additional shares of
Common Stock to cover over-allotments, in each case except as may otherwise be
provided in the Price Determination Agreement, as hereinafter defined. The
aforesaid _______ aggregate shares of Common Stock to be purchased by the
Underwriter from the Company and the Selling Shareholders (collectively,
"Initial Securities") and all or any part of the ______ shares of Common Stock
subject to the option described in Section 2(c) hereof ("Option Securities") are
collectively hereinafter called the "Securities."
Prior to the purchase and public offering of the Securities by the
Underwriter, the Company, the Bank, the Selling Shareholders and the Underwriter
shall enter in an agreement substantially in the form of Exhibit A hereto
("Price Determination Agreement"). The offering of the Securities will be
governed by this Agreement, as supplemented by the Price Determination
Agreement. From and after the date of the execution and delivery of the Price
Determination Agreement, this Agreement shall be deemed to incorporate the Price
Determination Agreement.
<PAGE> 2
The Company has filed with the Securities and Exchange Commission
("Commission") a registration statement on Form SB-2 (Commission File No.
333-49925), and related preliminary prospectuses, for the registration of the
Securities under the Securities Act of 1933, as amended ("Securities Act"), has
filed such amendments thereto, if any, and such amended preliminary prospectuses
as may have been required to the date hereof and will file such additional
amendments thereto and such amended prospectuses as may hereafter be required.
Such registration statement, as amended, and the prospectus constituting a part
thereof (including in each case the information, if any, deemed to be a part
thereof pursuant to Rule 430A(b) of the rules and regulations of the Commission
under the Securities Act ("Securities Act Regulations"), as from time to time
amended or supplemented hereafter), are hereinafter referred to as the
"Registration Statement" and the "Prospectus," respectively, except that if any
revised prospectus shall be provided to the Underwriter by the Company for use
in connection with the offering of the Securities which becomes effective
(whether or not such revised prospectus is required to be filed by the Company
with the Commission pursuant to Rule 424(b) of the Securities Act Regulations),
the term "Prospectus" shall refer to such revised prospectus from and after the
time it is first provided to the Underwriters for use.
The Company acknowledges that the Underwriter proposes to make a public
offering of the Securities as soon as the Underwriter deems advisable after the
Commission declares the Registration Statement effective and the Price
Determination Agreement has been executed and delivered. The Securities are to
be offered to the public at the public offering price set forth in the
Prospectus. The Underwriter may from time to time thereafter change the public
offering price and other selling terms. To the extent, if at all, that any of
the Option Securities are to be purchased pursuant to Section 3(c) hereof, the
Underwriter will offer them to the public on the foregoing terms.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE BANK.
(a) The Company and the Bank represent and warrant, jointly and
severally, to the Underwriter as of the date hereof, and as of the date of the
Price Determination Agreement (such latter date being hereinafter referred to as
the "Representation Date"), as of the Closing Time (as defined in Section 3(d)
hereof) and as of each Date of Delivery, if any (as defined in Section 3(c)
hereof), as follows:
(i) At the time the Registration Statement becomes effective and
at the Representation Date, the Registration Statement or any
post-effective amendment thereto will comply in all material respects
with the requirements of the Securities Act and the Securities Act
Regulations, and will not contain an untrue statement of material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. The Prospectus,
at the time the Registration Statement becomes effective, at the
Representation Date and at the Closing Time, complies in all material
respects with the requirements of the Securities Act and the Securities
Act Regulations, including the disclosure requirements of Industry Guide
3 ("Guide 3"), and will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made,
2
<PAGE> 3
not misleading; provided, however, that the representations and
warranties in this subsection shall not apply to statements in or
omissions from the Prospectus made in reliance upon and in conformity
with written information with respect to the Underwriter furnished to
the Company and the Bank in writing by the Underwriter expressly for use
in the Prospectus ("Underwriter Information").
(ii) Each of the accountants who certified the consolidated
financial statements and supporting schedules of the Company included in
the Prospectus are independent public accountants as required by the
Securities Act, the Securities Act Regulations and the Code of Ethics of
the American Institute of Certified Public Accountants.
(iii) The consolidated financial statements of the Company and
the related notes thereto included in the Prospectus present fairly the
consolidated financial position of the Company as at the dates indicated
and the consolidated results of operations, stockholders' equity and
cash flows for the periods specified and comply as to form in all
material respects with the applicable regulatory accounting requirements
and the applicable accounting requirements of the Securities Act and the
Securities Act Regulations, and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis;
the supporting schedules and tables included in the Prospectus present
fairly the information required to be stated therein; and the pro forma
financial information included in the Prospectus have been prepared, and
the related pro forma adjustments have been applied, in accordance with
the requirements of Regulation S-X promulgated by the Commission.
(iv) Since the respective dates as of which information is given
in the Prospectus, except as otherwise stated therein, (A) there has
been no material adverse change in the financial condition, results of
operations, or business of the Company and the Bank, taken as a whole,
whether or not arising in the ordinary course of business, and (B)
except for transactions specifically referred to or contemplated in the
Prospectus, there have been no transactions entered into by the Company
and the Bank, other than those in the ordinary course of business, which
are material with respect to the Company and the Bank, taken as a whole.
(v) The Company has been duly organized and is validly existing
as a Washington corporation with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus; the Company has obtained all licenses,
permits and other governmental authorizations currently required for the
conduct of its business, except where the failure to obtain such
licenses, permits or other governmental authorizations would not have a
material adverse effect on the financial condition, results of
operations or business of the Company; all such licenses, permits and
other governmental authorizations are in full force and effect and the
Company is in all material respects in compliance therewith; the Company
has not received notice of any proceeding or action relating to the
revocation or modification of any such license, permit
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<PAGE> 4
or other governmental authorization which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, might have
a material adverse effect on the financial condition, results of
operations or business of the Company; and the Company is in good
standing under the laws of the State of Washington and is qualified to
do business in any jurisdiction in which the failure to so qualify would
have a material adverse effect on the financial condition, results of
operations or business of the Company.
(vi) The Bank has been duly organized and is validly existing as
a Washington- chartered bank with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus; the Bank has obtained all licenses, permits
and other governmental authorizations currently required for the conduct
of its business, except where the failure to obtain such licenses,
permits or other governmental authorizations would not have a material
adverse effect on the financial condition, results of operations or
business of the Bank; all such licenses, permits and other governmental
authorizations are in full force and effect and the Bank is in all
material respects in compliance therewith; the Bank has not received
notice of any proceeding or action relating to the revocation or
modification of any such license, permit or other governmental
authorization which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse
effect on the financial condition, results of operations or business of
the Bank; and the Bank is in good standing under the laws of the State
of Washington and is qualified to do business in any jurisdiction in
which the failure to so qualify would have a material adverse effect on
the financial condition, results of operations or business of the Bank.
(vii) The deposit accounts of the Bank are insured by the Bank
Insurance Fund ("BIF") of the FDIC up to the applicable limits.
(viii) The Company has authorized and issued capital stock as set
forth under the heading "Capitalization" in the Prospectus; the
outstanding shares of Common Stock of the Company are validly issued and
outstanding, fully paid and nonassessable and have been issued in
compliance with all federal and state securities laws; the Securities
have been duly authorized for issuance and sale to the Underwriter
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
forth in the Price Determination Agreement, will be validly issued and
fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectus; the issuance of
the Securities is not subject to preemptive or other similar rights; and
no further approval or authority of the shareholders or the Board of
Directors of the Company is required for the sale of the Securities to
be sold by the Company as contemplated herein; other than as set forth
in the Prospectus, there are no outstanding rights, warrants or options
granted by the Company to purchase its capital stock; all of the
outstanding capital stock of the Company is owned as set forth in the
Prospectus.
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<PAGE> 5
(ix) The Company does not own or control or have the power to
vote, directly or indirectly, five percent (5%) or more of the
outstanding shares of any class of voting securities or partnership
interest of any corporation, association or entity, other than the Bank.
(x) The Company and the Bank have taken all corporate action
necessary for them to execute, deliver and perform this Agreement, and
this Agreement has been duly executed and delivered by, and is a valid
and binding agreement of, the Company and the Bank, enforceable in
accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization,
receivership, conservatorship or other similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights
of creditors of depository institutions whose accounts are insured by
the FDIC, or general equity principles, regardless or whether such
enforceability is considered in a proceeding in equity or at law, and
except to the extent that the provisions of Sections 7 and 8 hereof may
be unenforceable as against public policy or Section 23A of the Federal
Reserve Act ("Section 23A").
(xi) Subsequent to the respective dates as of which information
is given in the Prospectus and prior to the Closing Time, except as
otherwise may be indicated or contemplated therein, the Company and the
Bank will not have (A) issued any securities or incurred any liability
or obligation, direct or contingent, for borrowed money, except
borrowings in the ordinary course of business from the same or similar
sources indicated in the Prospectus, or (B) entered into any transaction
or series of transactions which is material in light of the business of
the Company and the Bank, taken as a whole, excluding the origination,
purchase and sale of loans or the purchase or sale of investment
securities or mortgage-backed securities in the ordinary course of
business.
(xii) No approval of any regulatory, supervisory or other public
authority is required to be received by the Company and the Bank in
connection with the execution and delivery of this Agreement or the
issuance of the Securities which has not been obtained (a copy of which
has been delivered to the Underwriter), except as may be required under
the securities laws of various jurisdictions.
(xiii) The Company and the Bank are not in violation of their
respective charter or bylaws or other organizational documents; and the
Company and the Bank is not in default (nor has any event occurred
which, with notice or lapse of time or both, would constitute a default)
in the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company and the
Bank is a party or by which they may be bound, or to which any of the
property or assets of the Company and the Bank is subject, except for
such defaults that would not, individually or in the aggregate, have a
material adverse effect on the financial condition, results of
operations or business of the Company and the Bank, taken as a whole.
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<PAGE> 6
(xiv) The execution, delivery and performance of this Agreement
and the Price Determination Agreement and the consummation of the
transactions contemplated herein and therein do not and will not
conflict with or constitute a breach of, or default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company and the Bank pursuant to, any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company and the Bank is a party or by which they
may be bound, or to which any of the property or assets of the Bank is
subject, except for such defaults that would not, individually or in the
aggregate, have a material adverse effect on the financial condition,
results of operations or business of the Company and the Bank, taken as
a whole, nor will such action result in any violation of the provisions
of the charter or bylaws or other organizational documents of the Bank,
or any applicable law, regulation or administrative or court decree.
(xv) No labor dispute with the employees of the Bank exists or,
to the knowledge of the Bank, is imminent; and the Bank is not aware of
any existing or imminent labor disturbance by the employees of any of
its principal suppliers or contractors which might be expected to result
in any material adverse change in the financial condition, results of
operations, business or prospects of the Bank.
(xvi) The Company and the Bank have good and marketable title to
all properties and assets for which ownership is material to the
business of the Company and the Bank and to those properties and assets
described in the Prospectus as owned by them, free and clear of all
liens, charges, encumbrances or restrictions, except as such are
described in the Prospectus or are not material in relation to the
business of the Company and the Bank, taken as a whole; and all of the
leases and subleases material to the business of the Company and the
Bank under which the Company and the Bank hold properties, including
those described in the Prospectus, are valid and binding agreements of
the Bank, enforceable in accordance with their terms.
(xvii) The Bank is not in violation of any directive from the
FDIC or the Washington Department of Financial Institutions
("Department") to make any change in the method of conducting its
business; the Bank has conducted and is conducting its business so as to
comply with all applicable statutes, regulations and administrative and
court decrees (including, without limitation, all regulations,
decisions, directives and orders of the FDIC and the Department) except
in such respects as would not have a material adverse effect upon the
Bank.
(xviii) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending,
or, to the best knowledge of the Company and the Bank, threatened,
against or affecting the Company or the Bank (other than as disclosed in
the Prospectus) which might result in any material adverse change in the
financial condition, results of operations or business of the Company
and the Bank, taken as a whole, or which might materially and adversely
affect the properties or assets thereof or
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<PAGE> 7
which might materially and adversely affect the consummation of the
transactions contemplated hereby; all pending legal or governmental
proceedings to which the Company and the Bank are a party or of which
any of their properties or assets is the subject which are not described
in the Prospectus, including ordinary routine litigation incidental to
its business, are, in the aggregate, not material; all agreements not
entered into in the ordinary course of business, orders, consents to
entry of an order, stipulations, directives, memoranda of understanding
or written commitments currently in effect involving (a) the Company or
the Bank, on the one hand, and (b) any of the Department, the FDIC or
any other regulatory agency with jurisdiction over the Bank, on the
other hand, are described in all material respects in the Prospectus.
(xix) The Company has obtained the opinion of its counsel,
Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C., with
respect to the legality of the Securities issued; all material aspects
of the aforesaid opinion are accurately summarized in the Prospectus;
the facts and representations upon which such opinions are based are
truthful, accurate and complete in all material respects, and the
Company has not taken, nor will take any action inconsistent therewith.
(xx) All of the loans represented as assets on the most recent
consolidated financial statements or selected financial information of
the Bank included in the Prospectus meet or are exempt from all
requirements of federal, state or local law pertaining to lending,
including without limitation truth in lending (including the
requirements of Regulation Z), real estate settlement procedures,
consumer credit protection, equal credit opportunity and all disclosure
laws applicable to such loans, except for violations which, if asserted,
would not result in a material adverse effect on the financial
condition, results of operations or business of the Company and the
Bank, taken as a whole.
(xxi) To the best knowledge of the Bank, none of the Bank or any
of the employees of the Bank has made any payment of funds of the Bank
as a loan for the purchase of the Securities or made any other payment
of funds prohibited by law, except for such other prohibited payments of
funds which would not result in a material adverse change in the
consolidated financial condition, results of operations or business of
the Company and the Bank, and no funds have been set aside to be used
for any payment prohibited by law.
(xxii) The Bank is in compliance in all material respects with
the applicable financial recordkeeping and reporting requirements of the
Currency and Foreign Transaction Reporting Act of 1970, as amended, and
the rules and regulations thereunder.
(xxiii) To the best knowledge of the Company and the Bank,
neither the Company, the Bank, nor any properties owned or operated by
the Bank, is in violation of or liable under any Environmental Law (as
defined below), except for such violations or liabilities that,
individually or in the aggregate, would not have a material adverse
effect on the financial condition, results of operations, or business of
the Company and the Bank, taken as a whole.
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<PAGE> 8
There are no actions, suits or proceedings, or demands, claims, notices
or investigations (including, without limitation, notices, demand
letters or requests for information from any environmental agency)
instituted or pending, or to the best knowledge of the Company and the
Bank, threatened, relating to the liability of any property owned or
operated by the Company or the Bank under any Environmental Law. For
purposes of this subsection, the term "Environmental Law" means any
federal, state, local or foreign law, statute, ordinance, rule,
regulation, code, license, permit, authorization, approval, consent,
order, judgment, decree, injunction or agreement with any regulatory
authority relating to (i) the protection, preservation or restoration of
the environment (including, without limitation, air, water, vapor,
surface water, groundwater, drinking water supply, surface soil,
subsurface soil, plant and animal life or any other natural resource),
and/or (ii) the use, storage, recycling, treatment, generation,
transportation, processing, handling, labeling, production, release or
disposal of any substance presently listed, defined, designated or
classified as hazardous, toxic, radioactive or dangerous, or otherwise
regulated, whether by type or by quantity, including any material
containing any such substance as a component.
(xxiv) The Company has filed all federal, state and local tax
returns required to be filed and has made timely payments of all taxes
shown as due and payable in respect of such returns, and no deficiency
has been asserted with respect thereto by any taxing authority.
(xxv) The Company has received approval to have the Securities
quoted on the National Market of The Nasdaq Stock Market, Inc.,
effective upon notice of issuance thereof.
(xxvi) There are no persons with registration or other similar
rights to have any shares of Common Stock authorized for issuance by the
Company under the Securities Act, except as indicated in the Prospectus.
(xxvii) The Company has obtained and delivered to the Underwriter
the agreement of each of the securityholders of the Company listed in
Schedule B hereto, that, except as may be provided in such agreement,
such securityholder will not, for a period of 180 days, without the
Underwriter's prior written consent, directly or indirectly, sell, offer
to sell, grant any option for the purchase of, or otherwise dispose of,
any Common Stock or any security convertible into or exchangeable or
exercisable for Common Stock.
(b) Any certificate signed by any officer of the Company and the Bank
and delivered to the Underwriter or counsel for the Underwriter at the Closing
Time (as hereinafter defined) shall be deemed a representation and warranty by
the Company and the Bank to the Underwriter as to the matters covered thereby.
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<PAGE> 9
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLING SHAREHOLDERS.
(a) Each of the Selling Shareholders severally represents and warrants
to, and agrees with, each Underwriter as of the date hereof and as of the
Representation Date and as of the Closing Date, as follows:
(i) The execution and delivery of this Agreement and the Pricing
Agreement and the consummation of the transactions herein and therein
contemplated will not (A) result in the creation or imposition of any lien,
charge or encumbrance upon the Initial Securities to be sold by such Selling
Shareholder or on any other material assets of such Selling Shareholder, (B)
result in a breach by such Selling Shareholder of, or constitute a default by
such Selling Shareholder under, any indenture, deed of trust, contract or other
agreement or instrument or any decree, judgment or order to which such Selling
Shareholder is a party or by which such Selling Shareholder may be bound and (C)
result in any violation of the provisions of the organizational documents, if
any, of such Selling Shareholder.
(ii) Such Selling Shareholder has and will have, at the Closing Time,
good and marketable title to the Initial Securities to be sold by such Selling
Shareholder under this Agreement, free and clear of any pledge, lien, security
interest, encumbrance, claim equity, community property rights, restriction on
transfer and claims whatsoever other than pursuant to this Agreement, such
Selling Shareholder has full right, power and authority and all authorizations
and approvals required by law to sell, transfer and deliver the Initial
Securities to be sold by such Selling Shareholder under this Agreement; and upon
delivery of such Initial Securities and payment of the purchase price therefor
as contemplated in this Agreement, the Underwriter will receive good and
marketable title to the Initial Securities purchased by it from such Selling
Shareholder, free and clear of any pledge, lien, security interest, encumbrance,
claim, equity, community property rights, restriction on transfer and claims
whatsoever.
(iii) Each such Selling Shareholder has executed and delivered, in the
form heretofore furnished to the Underwriter, a power of attorney ("Power of
Attorney") with ________________, or their duly designated substitutes, as
attorneys-in-fact (all of the foregoing attorneys-in-fact are hereinafter
called, collectively, the "Attorneys-in-Fact" and, individually, an
"Attorney-in-Fact"), and a Letter of Transmittal and Custody Agreement ("Custody
Agreement") with ____________________; each Power of Attorney and Custody
Agreement constitutes a valid and binding obligation of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; this Agreement has been and the Pricing Agreement
will have been duly executed and delivered by such Selling Shareholder, each of
such Selling Shareholder's Attorneys-in-Fact, acting alone, is authorized to
execute and deliver this Agreement, the Pricing Agreement and the certificates
referred to in Section 6(d) hereof on behalf of such Selling Shareholder, to
determine the purchase price to be paid by the Underwriter to such Selling
Shareholder as provided in Section 3 of this
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<PAGE> 10
Agreement, to authorize the delivery of the Initial Securities to be sold by
such Selling Shareholder under this Agreement, and to duly endorse (in blank or
otherwise) the certificate or certificates representing such Initial Securities
or a stock power or powers with respect thereto, to accept payment therefor, and
otherwise to act on behalf of such Selling Shareholder in connection with this
Agreement and the Pricing Agreement.
(iv) All authorizations, approvals, consents and orders necessary for
the execution and delivery by (A) each Selling Shareholder of the Power of
Attorney and Custody Agreement, and (B) each such Selling Shareholder of this
Agreement and the Pricing Agreement and the sale and delivery of the Initial
Securities to be sold by such Selling Shareholder under this Agreement and the
Pricing Agreement (other than, at the time of execution hereof, the issuance of
the order of Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws), have been obtained and are in full force and effect; each such Selling
Shareholder has full right, power and authority to enter into and perform its
obligations under the Power of Attorney and the Custody Agreement; each such
Selling Shareholder has full right, power and authority to enter into and
perform its obligations under this Agreement and the Pricing Agreement, and to
sell, transfer and deliver the Initial Securities to be sold by such Selling
Shareholder under this Agreement and the Pricing Agreement.
(v) Each Selling Shareholder will not, for a period of 180 days from the
date of the Pricing Agreement, without the Underwriter's prior written consent,
directly or indirectly, sell, offer to sell, grant any option for the sale of,
or otherwise dispose of, any Common Stock or any security convertible into or
exchangeable or exercisable for Common Stock or exercise any options to purchase
Common Stock, except for (i) the Initial Securities sold to the Underwriters
pursuant to this Agreement and (ii) Initial Securities sold by the Underwriters
in the public offering contemplated by this Agreement and the Pricing Agreement
and thereafter acquired by such Selling Shareholder.
(vi) Such Selling Shareholder has not taken, and will not take, directly
or indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the distribution of
the Initial Securities.
(vii) Certificates in negotiable form for all Initial Securities to be
sold by such Selling Shareholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Shareholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder and thereunder.
(viii) Such Selling Shareholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement at or prior to the Closing Time and
will advise the Company and, if applicable, one of its Attorneys-in-Fact prior
to the Closing Time, if any statement to be made on behalf of such Selling
Shareholder in the certificates contemplated by Section 6(d) hereof would be
inaccurate if made as of the Closing Time.
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<PAGE> 11
(ix) Such Selling Shareholder does not have any right of first refusal
or other similar right to purchase any of the Initial Securities that are to be
sold by any of the other Selling Shareholders to the Underwriter pursuant to
this Agreement.
(x) Such Selling Shareholder has reviewed and is familiar with the
Registration Statement as originally filed with the Commission and all
amendments and supplements thereto, if any, filed with the Commission prior to
the date hereof; and with the preliminary prospectus contained therein, as
supplemented, if applicable, to the date hereof; and the information relating to
such Selling Shareholder and such Selling Shareholder's Initial Securities that
is set forth in the Registration Statement, any such amendment or supplement
thereto, such preliminary prospectus, any such supplement thereto, the
Prospectus or any supplement thereto does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(xi) At the Closing Time, all stock transfer or other taxes (other than
income taxes) which are required to be paid in connection with the sale and
transfer of the Initial Securities to be sold by such Selling Shareholder to the
Underwriter hereunder will have been fully paid or provided for by such Selling
Shareholder and all laws imposing such taxes will have been fully complied with.
(B) Any certificate signed by any Selling Shareholder and delivered to
the Underwriter or its counsel at the Closing Time shall be deemed a
representation and warranty by such Selling Shareholder to the Underwriter as to
the matters covered thereby.
SECTION 3. SALE AND DELIVERY TO UNDERWRITER; CLOSING.
(a) On the basis of the representations and warranties herein contained,
and subject to the terms and conditions herein set forth, the Company and the
Selling Shareholders, agree to sell to the Underwriter, and the Underwriter
agrees to purchase from the Company and the Selling Shareholders, at the
purchase price per share for the Common Stock to be agreed upon by the
Underwriter, the Company and the Selling Shareholders, in accordance with
Section 3(b) and as set forth in the Price Determination Agreement, the
Securities.
(b) The public offering price per share for the Securities and the
purchase price per share for the Securities to be paid by the Underwriter shall
be agreed upon and set forth in the Price Determination Agreement, dated the
date hereof.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriter to purchase up to an
additional ________ shares of Common Stock at the price per share set forth in
the Price Determination Agreement for the purpose of covering over-allotments in
connection with distribution and sale of the Underwritten Shares. The option
hereby granted may be exercised in whole or in part on any date during the
period of 30 days from and after the date on which the Initial Securities are
initially offered to the public by giving written notice to the Bank
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<PAGE> 12
setting forth the number of Option Securities as to which the Underwriter is
exercising the option and the time and date of payment and delivery for such
Option Securities. Any such time and date of delivery ("Date of Delivery") shall
be determined by the Underwriter, but shall not be later than five full business
days after the exercise of said option, nor in any event prior to the Closing
Time.
(d) Payment of the purchase price for, and delivery of certificates for,
the Initial Securities shall be made at the offices of the Company, 1421 S.W.
Barlow Street, Oak Harbor, Washington 98277 or at such other place as shall be
agreed upon by the Company, the Selling Shareholders and you, at ___:____ __.m.
on the ______ full business day after execution of the Price Determination
Agreement, or at such other time not more than ____ full business days
thereafter as you and the Company shall determine (such date and time of payment
and delivery being herein called the "Closing Time"). Payment shall be made to
the Company and the Selling Shareholder by certified or official bank check or
checks in next day funds payable to the order of the Company and each of the
Selling Shareholders, against delivery to you for the respective accounts of the
Underwriter of certificates for the Securities to be purchased by them.
(e) Certificates for the Securities to be purchased by the Underwriter
shall be in such denominations and registered in such names as you may request
in writing at least two full business days before the Closing Time. The
certificates for the Securities will be made available in New York City for
examination and packaging by you not later than ___:____ __.m. on the business
day prior to the Closing Time.
SECTION 4. COVENANTS OF THE COMPANY AND THE BANK. The Company and the Bank
covenant, jointly and severally, with the Underwriter as follows:
(a) The Company will advise the Underwriter promptly upon receiving
notice of the issuance by any regulatory authority of any stop order with
respect to the offering of the Securities or of the institution of any
proceeding for that purpose, will use its reasonable best efforts to prevent the
issuance of any stop order and, should a stop order be issued, to obtain as soon
as possible the lifting thereof. The Company will notify the Underwriter
promptly of any request by any regulatory authority for amendment of or
supplement to the Prospectus or for additional information, and will not file
any amendment of or supplement to the Prospectus of which the Underwriter has
not been furnished a copy prior to the filing thereof or file any such amendment
or supplement to which the Underwriter has objected in writing to the Company.
(b) The Company will deliver to the Underwriter one signed copy and two
conformed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein), and from time to time and without charge such number of
copies of the Prospectus as the Underwriter may reasonably request, which
Prospectus the Company authorizes the Underwriter to use in connection with the
sale of the Securities.
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(c) The Company and the Bank will furnish to the Underwriter copies of
all written communications by or on behalf of the Company or the Bank with any
regulatory agency, including, without limitation, the Commission, FDIC or the
Department, relating to the Prospectus and the Securities.
(d) If any event or circumstance shall occur as a result of which it is
necessary, in the opinion of counsel for the Underwriter, to amend or supplement
the Prospectus in order to make the Prospectus not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, the
Company will forthwith amend or supplement the Prospectus (in form and substance
satisfactory to counsel for the Underwriter) so that, as so amended or
supplemented, the Prospectus will not include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances existing at the time it is delivered
to a purchaser, not misleading, and the Company will furnish to the Underwriter
a reasonable number of copies of such amendment or supplement. For the purpose
of this subsection, the Company will furnish such information with respect to
itself as the Underwriter may from time to time reasonably request.
(e) The Company will take all necessary action, in cooperation with the
Underwriter, to qualify the Securities for offering and sale under the
applicable securities laws of such states of the United States and other
jurisdictions and as the Underwriter and the Company have agreed; provided,
however, that the Company shall not be obligated to file any general consent to
service of process or to register its directors or officers as brokers, dealers,
salesmen or agents in any jurisdiction. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the date of
the Prospectus.
(f) The Company will make generally available to its security holders as
soon as practicable, but not later than 60 days after the close of the period
covered thereby, an earnings statement covering a twelve-month period beginning
not later than the first day of the Company's fiscal quarter next following the
date of the Prospectus.
(g) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish to its stockholders as soon as
practicable after the end of each such fiscal year an annual report (including
consolidated statements of financial condition and statements of income,
stockholders' equity and cash flows of the Company, certified by independent
public accountants) and, as soon as practicable after the end of each of the
first three quarters of each fiscal year (beginning with the fiscal quarter
ending after the date of the Prospectus), summary financial information of the
Company for such quarter in reasonable detail. In addition, such annual report
and quarterly consolidated summary financial information shall be made public
through the issuance of appropriate press releases at the same time or prior to
the time of the furnishing thereof to stockholders of the Company.
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(h) During the period ending on the third anniversary of the expiration
of the fiscal year during which the closing of the transactions contemplated
hereby occurs, the Company will furnish to the Underwriter (i) as soon as
available, a copy of each report or other document of the Company furnished
generally to stockholders of the Company or furnished to or filed with any
national securities exchange or system on which any class of securities of the
Company is listed, and (ii) from time to time, such other information concerning
the Company as the Underwriter may reasonably request.
(i) The Company will use the net proceeds received by it from the sale
of the Securities in the manner specified in the Prospectus under "Use of
Proceeds."
(j) The Company will file with The Nasdaq Stock Market, Inc. all
documents and notices required by the Nasdaq National Market of companies that
have issued securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market.
(k) The Company will take such actions and furnish such information as
are reasonably requested by the Underwriter in order for the Underwriter to
ensure compliance with the National Association of Securities Dealers, Inc.'s
("NASD") "Interpretation Relating to Free-Riding and Withholding."
(l) The Company will not sell or issue, contract to sell or otherwise
dispose of, for a period of 180 days after the Closing Time, without the
Underwriter's prior written consent, any shares of Common Stock other than the
Securities or other than in connection with any arrangement described in the
Prospectus.
SECTION 5. PAYMENT OF EXPENSES. The Company, and the Selling Shareholders, in
such proportions as they may agree upon among themselves (aggregating 100%),
agree to pay all expenses incident to the performance of its obligations under
this Agreement, including but not limited to (i) the cost of obtaining all
securities and bank regulatory approvals, (ii) the preparation, issuance and
delivery of the certificates for the Securities to the purchasers in the
Offering, (iii) the fees and disbursements of the Company's and Selling
Shareholders' counsel, accountants and other advisors, (iv) the qualification of
the Securities under securities laws in accordance with the provisions of
Section 4(e) hereof, including fees and disbursements of counsel in connection
therewith and in connection with the preparation of the Blue Sky Survey, (v) the
printing and delivery of the Prospectus and any amendments or supplements
thereto to the Underwriter, (vi) the copying and delivery to the Underwriter of
copies of a Blue Sky Survey, and (vii) the fees and expenses incurred in
connection with the listing of the Securities on the Nasdaq National Market. In
the event the Underwriter incurs any such fees and expenses on behalf of the
Company or the Selling Shareholders, the Company and the Selling Shareholders
will reimburse the Underwriter for its accountable out-of-pocket fees and
expenses whether or not the Offering is consummated.
The Company agrees to pay certain expenses incident to the performance
of the Underwriter's obligations under this Agreement, including (i) the filing
fees paid or incurred by the Underwriter
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in connection with all filings with the NASD and (ii) all reasonable
out-of-pocket expenses incurred by the Underwriter relating to the Offerings,
including, without limitation, advertising, promotional, syndication, travel and
delivery and settlement expenses and fees and expenses of the Underwriter's
counsel. All fees and expenses to which the Underwriter is entitled to
reimbursement under this paragraph of this Section 5 shall be due and payable
upon receipt by the Company of a written accounting therefor setting forth in
reasonable detail the expenses incurred by the Underwriter. Such fees and
expenses to which the Underwriter is entitled to reimbursement, other than legal
fees of counsel to the Underwriter, shall not exceed $15,000. The Underwriter
agrees not to incur legal fees (excluding legal fees relating to state
securities laws matters) in excess of $50,000 without the prior consent of the
Company.
Each Selling Shareholder agrees that he or she will pay any stamp duty,
transfer or similar tax payable by or on behalf of such Selling Shareholder or
the Underwriter in connection with (i) the sale to the Underwriter of the
Securities to be sold by such Selling Shareholder, (ii) the purchase by the
Underwriter of Securities from such Selling Shareholder or (iii) the
consummation by such Selling Shareholder of any of his or her obligations under
this Agreement, and further authorizes the payment of any such amount by
deduction from the proceeds of the Securities to be sold by him or her under
this Agreement and from funds from time to time held for hie or her account by
the custodian under the Custody Agreement.
If this Agreement is terminated by the Underwriter in accordance with
the provisions of Section ____ hereof, the Selling Shareholders shall reimburse
the Underwriter for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriter.
Anything herein to the contrary notwithstanding, the provisions of this
Section 5 shall not affect any agreement which the Company and the Selling
Shareholders have made or may make among themselves for the allocation or
sharing of such expenses and costs.
SECTION 6. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The Company and the
Underwriter agree that the issuance and sale of the Securities and all
obligations of the Underwriter hereunder are subject to the accuracy of the
representations and warranties of the Company and the Bank herein contained as
of the date hereof and the Closing Time, to the accuracy of the statements of
officers and directors of the Company and the Bank made pursuant to the
provisions hereof, to the performance by the Company and the Bank of its
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have been declared effective by the
Commission not later than 5:30 P.M., Eastern Time, on the date hereof, and no
order suspending the Offering shall have been issued or proceedings therefor
initiated or threatened by the Supervisor and no order suspending the sale of
the Securities in any jurisdiction shall have been issued.
(b) At Closing Time, the Underwriter shall have received:
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<PAGE> 16
(1) The favorable opinion, dated as of Closing Time, of Gordon, Thomas,
Honeywell, Malanca, Peterson & Daheim, P.L.L.C., special counsel for the Company
and the Bank, in form and substance satisfactory to counsel for the Underwriter,
to the effect that:
(i) The Company has been duly organized and is validly existing
under the laws of the State of Washington as a business corporation; the
Company is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property
or the conduct of business, except where the failure to so qualify would
not have a material adverse effect on the financial condition or results
of operations of the Company.
(ii) The Bank has been duly organized and is validly existing
under the laws of the State of Washington as a state chartered bank; the
Bank is duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure to so qualify would
not have a material adverse effect on the financial condition or results
of operations of the Bank.
(iii) The Company and the Bank each has full corporate power and
authority to own, lease and operate its respective properties and to
conduct its respective business as described in the Prospectus and to
enter into and perform its respective obligations under this Agreement.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization"; the
issued and outstanding shares of capital stock of the Company have been
duly authorized, are validly issued, fully paid and nonassessable.
(v) The deposit accounts of the Bank are insured by the BIF of
the FDIC up to the applicable legal limits.
(vi) The Securities have been duly and validly authorized for
issuance and sale to the Underwriter pursuant to this Agreement and,
when issued and delivered by the Company against payment of the
consideration set forth in the Price Determination Agreement, will be
duly and validly issued and fully paid and non-assessable.
(vii) The issuance of the Securities is not subject to
preemptive or other similar rights arising by operation of law or, to
such counsel's Actual Knowledge, under any instrument or Agreement to
which the Company or the Bank is a party or which either may be bound or
otherwise.
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<PAGE> 17
(viii) The Prospectus is effective under the Securities Act and,
to such counsel's Actual Knowledge, no stop order suspending the
effectiveness of the Prospectus has been issued by the Commission or
proceedings therefor initiated or threatened by the Commission.
(ix) At the time the Prospectus became effective and at the Time
of Delivery, the Prospectus (other than the financial statements and
supporting schedules include therein, as to which no opinion need be
rendered) complied as to form in all material respects with the
requirements of the Securities Act and the Securities Act Regulations.
(x) The execution and delivery of this Agreement and the Price
Determination Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by
all necessary action on the part of the Company and the Bank, and this
Agreement and the Price Determination Agreement each constitutes a
legal, valid and binding Agreement of the Company and the Bank,
enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, moratorium,
reorganization, receivership, conservatorship or other similar laws
relating to or affecting the enforcement of creditors' rights generally
or the rights of creditors of depository institutions whose accounts are
insured by the FDIC, general equity principles, regardless or whether
such enforceability is considered in a proceeding in equity or at law.
(xi) The execution and delivery of this Agreement and the Price
Determination Agreement, the incurrence of the obligations herein and
therein set forth and the consummation of the transactions contemplated
herein and therein will not conflict with or constitute a breach of, or
default under, and no event has occurred which, with notice or lapse of
time or both, would constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance, that,
individually or in the aggregate, would have a material adverse effect
on the financial condition, results of operations or business of the
Company and the Bank upon any property or assets of the Company and the
Bank pursuant to any material contract, indenture, mortgage, loan
Agreement, note, lease or other instrument to which the Company and the
Bank is a party or by which any of them may be bound, or to which any of
the property or assets of the Company and the Bank is subject, nor will
such execution or delivery result in any violation of the provisions of
the certificate of incorporation or bylaws of the Company or the Bank.
(xii) No further approval, authorization, consent or other order
of any public board or body is required to be received by the Company
and the Bank in connection with the execution and delivery of this
Agreement, the offering, issuance or sale of the Securities to the
Underwriter, except as may be required under the
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<PAGE> 18
Securities or Blue Sky laws of various jurisdictions as to which no
opinion need be rendered.
(xiii) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies with
all applicable statutory requirements.
(xiv) To such counsel's Actual Knowledge there are no legal or
governmental proceedings pending or threatened against or affecting the
Company or the Bank which are required to be disclosed in the
Prospectus, other than those disclosed therein, and all pending legal or
governmental proceedings to which the Company and the Bank is a party or
to which any of its respective property is subject which are not
described in the Prospectus, including ordinary routine litigation
incidental to its business, are, considered in the aggregate, not
material.
(xv) To such counsel's Actual Knowledge, there are no contracts,
indentures, mortgages, loan agreements, notes, leases or other
instruments to which the Company and the Bank is a party required to be
described or referred to in the Prospectus other than those described or
referred to therein, and the descriptions thereof or references thereto
are correct.
(xvi) The statements in the Prospectus under the captions
"Regulation" and "Description of Capital Stock", to the extent such
statements constitute summaries of matters of law, are, in all material
respects, accurate summaries of the matters set forth therein.
(xvii) To such counsel's Actual Knowledge, the Company and the
Bank have obtained all licenses, permits and other governmental
approvals and authorizations currently required for the conduct of their
businesses as described in the Prospectus, except where the failure to
obtain such licenses, permits, approvals or authorizations would not
result in a material adverse change in the financial condition, results
of operations or the business of the Company and the Bank, taken as a
whole, and all such licenses, permits and other governmental
authorizations are in full force and effect, and the Company and the
Bank are in all material respects complying therewith.
(xviii) To such counsel's Actual Knowledge, the Company and the
Bank are neither in violation of its respective charter nor in default
(nor has any event occurred which, with notice or lapse of time or both,
would constitute a default) in the performance or observance of any
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company and the Bank is a party or by which the
Company and the Bank or any of its property may be bound (in any respect
that
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<PAGE> 19
would have a material adverse effect upon the financial condition,
results of operations or business of the Company and the Bank, taken as
a whole).
In rendering such opinion, such counsel may rely as to matters
of fact, to the extent such counsel deems proper, on certificates of
officers or directors of the Company and the Bank and certificates of
public officials. Such counsel's opinion shall be limited to matters
governed by federal laws and by the laws of the State of Washington.
Such opinion may be governed by the Legal Opinion Accord ("Accord") of
the American Bar Association Section of Business Law (1991). The term
"Actual Knowledge" as used therein shall mean the conscious awareness of
facts or other information of the individual lawyers who were actively
involved in the transactions contemplated by this Agreement and in the
preparation of the documents involved and the opinion letter.
(2) The favorable opinion, dated as of the Closing Time, of
______________, counsel for the Selling Shareholders, in form and
substances satisfactory to counsel for the Underwriter, to the effect
that:
(i) This Agreement and the Pricing Agreement have each
been duly executed and delivered by or on behalf of, each of the
Selling Shareholders and constitute the valid and binding
obligations of each such Selling Shareholder, enforceable in
accordance with their terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors rights generally or by general equitable principles.
(ii) The Power of Attorney and Custody Agreement have
been duly executed and delivered by each of the Selling
Shareholders and constitute the valid and binding obligations of
each such Selling Shareholder, enforceable in accordance with
their terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(iii) To the Actual Knowledge, each of the Selling
Shareholders has good marketable title to the Initial Securities
to be sold by such Selling Shareholder under this Agreement,
free and clear of any pledge, lien, security interest,
encumbrance, claim or equity other than pursuant to this
Agreement, and has full right, power and authority to sell the
Initial Securities to be sold by such Selling Shareholder under
this Agreement; and upon the delivery of and payment for the
Initial Securities as contemplated in this Agreement, the
Underwriter will receive good and marketable title to the
Initial Securities purchased by it from the Selling
Shareholders, free and clear of any pledge,
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<PAGE> 20
lien, security interest, encumbrance, claim or equity. (In
rendering such opinion, counsel may assume that the Underwriter
is without notice of any defect in the title of the Selling
Shareholders to the Initial Securities being purchased from the
Selling Shareholders.)
In rendering such opinion, such counsel may rely as to matters
of fact, to the extent such counsel deems proper, on certificates of the
Selling Shareholders and public officials. Such counsel's opinion shall
be limited to matters governed by federal laws and by the laws of the
State of Washington. Such opinion may be governed by the Legal Opinion
Accord ("Accord") of the American Bar Association Section of Business
Law (1991). The term "Actual Knowledge" as used therein shall mean the
conscious awareness of facts or other information of the individual
lawyers who were actively involved in the transactions contemplated by
this Agreement and in the preparation of the documents involved and the
opinion letter.
(3) The favorable opinion, dated as of Closing Time, of Breyer &
Aguggia, counsel for the Underwriter, with respect to the matters set
forth in Section 5(b)(1)(i), (v), (vii) (solely as to preemptive rights
arising by operation of law), (ix) and (xii), and such other matters as
the Underwriter may reasonably require. In giving its opinion, Breyer &
Aguggia may also rely as to certain matters on the opinion of Gordon,
Thomas, Honeywell, Malanca, Peterson & Daheim, P.L.L.C. and
__________________________.
(4) A letter of Gordon, Thomas, Honeywell, Malanca, Peterson &
Daheim, P.L.L.C. and Breyer & Aguggia addressed to the Underwriter, in
form and substance reasonably satisfactory to the Underwriter, to the
effect that nothing has come to their attention that would lead them to
believe that the Prospectus (except for the financial statements, notes
to financial statements and schedules and other financial or statistical
data included therein, as to which counsel need make no statement), at
the time it became effective or at the Closing Time, contained an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) At the Closing Time, there shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Prospectus, any material adverse change in the financial condition, results of
operations or business of the Company and the Bank, taken as a whole, whether or
not arising in the ordinary course of business, and the Underwriter shall have
received a certificate of the President and Chief Executive Officer of the
Company and the Bank and the chief financial or chief accounting officer of the
Company and the Bank, dated as of the Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) there shall have been no material
transaction entered into by the Company and the Bank from the latest date as of
which the financial condition of the Company is set forth in the Prospectus
other than transactions referred to or contemplated therein and transactions in
the ordinary course of business, (iii) the Bank shall not have received from the
FDIC or the _________ any directive (oral or written) to make any
20
<PAGE> 21
change in the method of conducting its business with which it has not complied
(which directive, if any, shall have been disclosed to the Underwriter) or which
materially and adversely would affect the financial condition, results of
operations or business of the Company and the Bank, taken as a whole, (iv) the
representations and warranties in Section 1 hereof are true and correct with the
same force and effect as though expressly made at and as of the Closing Time,
(v) the Company and the Bank have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to the Closing
Time, and (vi) no order suspending the offering of the Securities or the
authorization for final use of the Prospectus has been issued and no proceedings
for that purpose have been initiated or threatened by the Commission.
(d) At the Closing Time the Underwriter shall have received a
certificate from an Attorney-in-Fact for each of the Selling Shareholders, dated
as of the Closing Time, to the effect that (i) the representations and
warranties of the Selling Shareholders contained in Section 2 are true and
correct with the same force and effect as though expressly made at and as of the
Closing Time, (ii) each of the Selling Shareholders has reviewed the Prospectus,
and to the best of each Selling Shareholder's knowledge, the information
contained therein relating to such Selling Shareholder and such Selling
Shareholder's Securities does not contain any untrue statement or omit to state
any material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading and (iii)
the Selling Shareholders have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to the Closing
Time.
(e) At the time of the execution of this Agreement, the Underwriter
shall have received from KPMG Peat Marwick LLP a letter dated such date, in form
and substance satisfactory to the Underwriter, to the effect that (i) they are
independent certified public accountants with respect to the Company; (ii) it is
their opinion that the consolidated financial statements and supporting
schedules included in the Prospectus and covered by their opinions therein
comply as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Securities Act Regulations; (iii)
based upon procedures as agreed upon by the Underwriter and KPMG Peat Marwick
LLP and set forth in detail in such letter, nothing has come to their attention
which causes them to believe that [(A) the unaudited consolidated financial
statements and supporting schedules of the Company included in the Prospectus do
not comply as to form in all material respects with the applicable accounting
requirements of the Securities Act and the Securities Act Regulations or are not
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited consolidated financial
statements included in the Prospectus,] (B) at a specified date not more than
five days prior to the date of this Agreement, there has been any increase in
the long-term or short-term debt of the Company or any decrease in total assets,
allowance for loan losses, total savings deposits or equity of the Company, in
each case as compared with the amounts shown in the December 31, 1997 balance
sheet included in the Prospectus or, (C) during the period from December 31,
1997 to a specified date not more than five days prior to the date of this
Agreement, there were any decreases, as compared with the corresponding period
in the preceding year, in net interest income, net interest income after
provision for loan losses, or net income of the Company, except in all instances
for increases or decreases
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<PAGE> 22
which the Prospectus disclose have occurred or may occur; and (iv) in addition
to the examination referred to in their opinions and the procedures referred to
in clause (iii) above, they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information which are included in the Prospectus and which are
specified by the Underwriter, and have found such amounts, percentages and
financial information to be in agreement with the relevant accounting, financial
and other records of the Company identified in such letter.
(f) At the time of the execution of this Agreement, the Underwriter
shall have received from David O. Christensen CPA and Consultant, PLLC a letter
dated such date, in form and substance satisfactory to the Underwriter, to the
effect that (i) until the date of termination of its engagement as independent
auditors of the Company, they were independent certified public accountants with
respect to the Company; (ii) based upon procedures as agreed upon by the
Underwriter and David O. Christensen CPA and Consultant, PLLC and set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that the consolidated financial statements and supporting schedules of
the Company at December 31, 1996 and 1995 and for the years ended December 31,
1996 and 1995 included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act and the Securities Act Regulations or are not presented in conformity with
generally accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in the
Prospectus, (iii) in addition to the examination referred to in their opinions
and the procedures referred to in clause (ii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Prospectus and which are specified by the Underwriter, and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting, financial and other records of the Company identified in
such letter.
(g) At the Closing Time, the Underwriter shall have received from KPMG
Peat Marwick LLP a letter, dated as of Closing Time, to the effect that they
reaffirm their statements made in the letter furnished pursuant to subsection
(e) of this Section, except that the specified date referred to shall be a date
not more than five days prior to the Closing Time.
(h) At the date hereof, the Securities shall have been approved for
listing on the Nasdaq National Market upon notice of issuance.
(i) At the Closing Time, counsel for the Underwriter shall have been
furnished with such documents and opinions as they may require for the purpose
of enabling them to pass upon the issuance and sale of the Securities as herein
contemplated and related proceedings, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company, the Bank
and the Selling Shareholders in connection with the issuance and sale of the
Securities as herein contemplated shall be satisfactory in form and substance to
the Underwriter and counsel for the Underwriter.
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(j) At any time prior to the Closing Time, (i) there shall not have
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of hostilities or escalation thereof or
other calamity or crisis the effects of which, in the judgment of the
Underwriter, are so material and adverse as to make it impracticable to market
the Securities or to enforce contracts, including subscriptions or orders, for
the sale of the Securities, and (ii) trading generally on either the American
Stock Exchange or the New York Stock Exchange shall not have been suspended, and
minimum or maximum prices for trading shall not have been fixed, or maximum
ranges for prices for securities have been required, by either of said Exchanges
or by order of the Securities and Exchange Commission or any other governmental
authority, and a banking moratorium shall not have been declared by Federal,
Washington or New York authorities.
SECTION 7. INDEMNIFICATION.
(a) The Company, the Bank and each Selling Shareholder agree, jointly
and severally, to indemnify and hold harmless the Underwriter, each person, if
any, who controls the Underwriter, within the meaning of Section 15 of the
Securities Act, and any officer, director, employee and agent as follows:
(i) Against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, arising out of or
based on an untrue statement or alleged untrue statement of a material
fact contained in any preliminary offering circular or the Prospectus
(or any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or similar
statements or omissions in or from other information furnished by or on
behalf of the Company, the Bank and the Selling Shareholders to the
Underwriter;
(ii) Against any and all loss, liability, claim, damage and
expense whatsoever, joint or several, as incurred, to the extent of the
aggregate amount paid in settlement of any litigation, or investigation
or proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission,
if such settlement is effected with the written consent of the Company,
the Bank and the Selling Shareholders; and
(iii) Subject to paragraph 7(c) below, against any and all
expense whatsoever, as incurred (including fees and disbursements of the
Underwriter's counsel and hourly charges of your directors, officers and
employees at your normal billing rates and the disbursements of the
Underwriter, and such person's reasonable travel and other out-of-pocket
expenses), reasonably incurred in investigating, preparing or defending
against any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under subparagraph (i) or (ii) above: provided,
however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent arising out of an
untrue
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<PAGE> 24
statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with the Underwriter Information. The
foregoing indemnification with respect to any preliminary prospectus
shall not inure to the benefit of the Underwriter from whom the person
asserting any such losses, claims, damages or liabilities purchased
shares (or any person controlling such Underwriter) if a copy of the
Prospectus (as then amended or supplemented if the Company, the Bank and
the Selling Shareholders shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if such is required by law, at or prior to
the written confirmation of the sale of such Shares to such person and
if the Prospectus (as so amended or supplemented) would have cured the
defect giving rise to such loss, claim, damage or liability, provided
that the Company, the Bank and the Selling Shareholders delivered the
Prospectus (as so amended or supplemented) to the Underwriter on a
timely basis to permit such delivery.
(b) The Underwriter agrees to indemnify and hold harmless the Company
and the Bank, and each of its directors, and officers, and each person, if any,
who controls the Company and the Bank within the meaning of Section 15 of the
Securities Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 7(a), as incurred, but only with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in any preliminary offering circular or the Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity the
Underwriter Information.
(c) Each indemnified party shall give prompt notice to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. If it so elects within a reasonable time after receipt
of such notice, an indemnifying party, jointly with any other indemnifying
parties receiving such notice, may assume the defense of such action with
counsel chosen by it and approved by the indemnified parties defendant in such
action, unless such indemnified parties reasonably object to such assumption on
the ground that there may be legal defenses available to them which are
different from or in addition to those available to such indemnifying party. If
an indemnifying party assumes the defense of such action, the indemnifying
parties shall not be liable for any fees and expenses of counsel for the
indemnified parties incurred thereafter in connection with such action. In no
event shall the indemnifying party or parties be liable for any fees and
expenses of more than one counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. The
indemnifying party shall not be liable for settlement effected without its prior
consent.
SECTION 8. CONTRIBUTION. In order to provide for just and equitable contribution
in circumstances in which the indemnity agreement provided for in Section 7
hereof is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company, the Bank, the
Selling Shareholders and the Underwriter shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
said
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<PAGE> 25
indemnity agreement incurred by the Company, the Bank and the Underwriter, as
incurred, in such proportions (i) that the Underwriter are responsible for that
portion represented by the percentage that the aggregate underwriting fees
appearing on the cover page of the Prospectus bears to the aggregate gross
proceeds appearing thereon and the Company, the Bank and the Selling
Shareholders are jointly and severally responsible for the balance or (ii) if,
but only if, the allocation provided for in clause (i) is for any reason held
unenforceable, in such proportion as is appropriate to reflect not only the
relative benefits to the Company, the Bank and the Selling Shareholders on the
one hand, and the Underwriter, on the other, as reflected in clause (i), but
also the relative fault of the Bank on the one hand and the Underwriter on the
other (relative fault shall be determined by reference to, among other things,
whether the untrue statement of a material fact or omission to state a material
fact relates to information supplied by the Company, the Bank and/or the Selling
Shareholder or the Underwriter and the parties' relative intent, knowledge, and
access to information), as well as any other relevant equitable considerations;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section, each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Securities Act
shall have the same rights to contribution as the Underwriter, and each director
of the Company and Bank, and each person, if any, who controls the Company, the
Bank and the Selling Shareholders within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as the Company and the
Bank and the Selling Shareholders. Notwithstanding anything to the contrary set
forth herein, to the extent permitted by applicable law, in no event shall the
Underwriter be required to contribute an aggregate amount in excess of the
aggregate fees to which the Underwriter is entitled and actually paid pursuant
to this Agreement.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
representations, warranties, indemnities, agreements and other statements of the
Company and the Bank or their officers and the Selling Shareholders set forth in
or made pursuant to this Agreement will remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Company, the
Bank, the Selling Shareholders or the Underwriter or controlling person and will
survive delivery of and payment for the Securities.
SECTION 10. TERMINATION OF AGREEMENT.
(a) You may terminate this Agreement, by notice to the Company and the
Bank and the Selling Shareholders, at any time at or prior to the Closing Time
(i) if there has been, since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition (financial
or otherwise), earnings, business affairs or business prospects of the Company
or the Bank, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any outbreak or escalation of existing hostilities or
other national or international calamity or crisis the effect of which on the
financial markets of the United States is such as to make it, in your reasonable
judgment, impracticable to market the Securities or enforce contracts for the
sale of the Securities, or (iii) if trading generally on the New York Stock
Exchange or in the
25
<PAGE> 26
over-the-counter market has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required, by such exchange or by order of the Commission, the NASD or any other
governmental authority with appropriate jurisdiction over such matters, or (iv)
if a banking moratorium has been declared by either Federal or Washington
authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 4. Notwithstanding any such termination, the
provisions of Sections 7, 8 and 9 shall remain in effect.
(c) This Agreement may also terminate pursuant to the provisions of
Section 6, with the effect stated in such Section.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS. If one or more
of the Selling Shareholders shall fail at the Closing Time to sell and deliver
the number of Initial Securities which such Selling Shareholder or Selling
Shareholders are obligated to sell hereunder on such date, and the
non-defaulting Selling Shareholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number of Securities to be sold by all Selling
Shareholders as set forth in Schedule A, then the Underwriter may at its option,
by notice from it to the Company, the Bank and the non-defaulting Selling
Shareholders, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party or (b) elect to purchase the Initial Securities
which the non-defaulting Selling Shareholders have agreed to sell hereunder.
In the event of a default by any Selling Shareholder as referred to in
this Section 11 each of the Underwriter, the Company, the Bank and the
non-defaulting Selling Shareholders shall have the right to postpone the Closing
Time for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents of
arrangements.
No action taken pursuant to this Section 11 shall relieve any Selling
Shareholder so defaulting from liability, if any, in respect of such default.
SECTION 12. NOTICES. All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given if delivered,
mailed or transmitted by any standard form of telecommunication.
If to the Underwriter: Ryan, Beck & Co., Inc.
220 South Orange Avenue
Livingston, New Jersey 07039
Attention: Ben A. Plotkin, President
with a copy to: John F. Breyer, Jr., Esquire
26
<PAGE> 27
Breyer & Aguggia
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
27
<PAGE> 28
If to the Company: Washington Banking Company
1421 S.W. Barlow Street
Oak Harbor, Washington 98277
Attention: Michal D. Cann, President
with a copy to: J. James Gallagher, Esquire
Gordon, Thomas, Honeywell, Malanca,
Peterson & Daheim, P.L.L.C.
1201 Pacific Avenue, Suite 2200
Tacoma, Washington 98401
If to the Bank: Whidbey Island Bank
1421 S.W. Barlow Street
Oak Harbor, Washington 98277
Attention: Michal D. Cann, President
with a copy to: J. James Gallagher, Esquire
Gordon, Thomas, Honeywell, Malanca,
Peterson & Daheim, P.L.L.C.
1201 Pacific Avenue, Suite 2200
Tacoma, Washington 98401
If to the Selling
Shareholders: ____________________________
____________________________
Attention: _________________
with a copy to: ____________________________
____________________________
____________________________
____________________________
____________________________
SECTION 13. PARTIES. This Agreement herein set forth is made solely for the
benefit of the Underwriter, the Company, the Bank and the Selling Shareholder
and, to the extent expressed, any person controlling the Company or the Bank or
of the Selling Shareholders or of the Underwriter, and the directors of the
Company and the Bank, their respective officers, and their respective executors,
administrators, successors and assigns and, subject to the provisions of Section
14, no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser, as
such purchaser, from the Underwriter of the Securities.
28
<PAGE> 29
SECTION 14. ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the entire
understanding of the parties hereto with reference to the transactions
contemplated hereby and supersedes any and all other oral or written agreements
heretofore made. No waiver, amendment or other modification of this Agreement
shall be effective unless in writing and signed by the parties hereto.
SECTION 15. ARBITRATION. Any claims, controversies, demands, disputes or
differences between or among the parties hereto or any persons bound hereby
arising out of, or by virtue of, or in connection with, or otherwise relating to
this Agreement shall be submitted to and settled by arbitration conducted in
Livingston, New Jersey before one or three arbitrators, each of whom shall be
knowledgeable in the field of securities law and investment banking. Such
arbitration shall otherwise be conducted in accordance with the rules then
obtaining of the American Arbitration Association. The parties hereto agree to
share equally the responsibility for all fees of the arbitrators, abide by any
decision rendered as final and binding, and waive the right to appeal the
decision or otherwise submit the dispute to a court of law for a jury or
non-jury trial. The parties hereto specifically agree that neither party may
appeal or subject to the award or decision of any such arbitrator to appeal or
review in any court of law or in equity or in any other tribunal, arbitration
system or otherwise. Judgment upon any award granted by such arbitrator may be
enforced in any court having jurisdiction thereof.
SECTION 16. GOVERNING LAW AND TIME. This Agreement shall be governed by the
laws of the State of New Jersey. Specified times of the day refer to Eastern
Time, unless otherwise indicated.
SECTION 17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and when a counterpart has been executed by each party, all such
counterparts taken together shall constitute one and the same agreement.
* * *
[Signature page follows]
29
<PAGE> 30
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
each of the Underwriter, the Company, the Bank and the Selling Shareholders in
accordance with its terms.
Very truly yours,
WASHINGTON BANKING COMPANY
By:
-----------------------------------------
Michal D. Cann
President and Chief Executive Officer
WHIDBEY ISLAND BANK
By:
-----------------------------------------
Michal D. Cann
President and Chief Executive Officer
THE SELLING SHAREHOLDERS
Name:
---------------------------------------
Name:
---------------------------------------
Name:
---------------------------------------
Name:
---------------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
RYAN, BECK AND CO., INC.
By:
---------------------------------
Name:
Title:
30
<PAGE> 31
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Name of Selling Shareholder Initial Securities
<S> <C>
</TABLE>
31
<PAGE> 32
SCHEDULE B
Name of Securityholder
32
<PAGE> 33
EXHIBIT A
WASHINGTON BANKING COMPANY
(a Washington corporation)
________ SHARES OF COMMON STOCK
(No Par Value Per Share)
PRICE DETERMINATION AGREEMENT
_________ ____, 1998
RYAN, BECK & CO., INC.
220 South Orange Avenue
Livingston, New Jersey 07039
Dear Sirs:
Reference is made to the Underwriting Agreement dated _________ ___,
1998 ("Underwriting Agreement") relating to the purchase by the Underwriter of
the above stated number of shares of common stock, no par value per share
("Securities"), of Washington Banking Company, a Washington corporation
("Company"). This Agreement is the Price Determination Agreement referred to in
the Underwriting Agreement.
Pursuant to Section 3 of the Underwriting Agreement, the Company, the
Bank and each of the Company's shareholders named in Schedule A to the
Underwriting Agreement ("Selling Shareholders"), severally and not jointly,
agree with each Underwriter as follows:
1. The public offering price per share for the Securities, determined as
provided in said Section 3, shall be $_____.
2. The purchase price per share for the Securities to be paid by the
Underwriter shall be $_______, representing an amount equal to the initial
public offering price set forth above less $_____ per share.
The Company and the Bank represent and warrant, jointly and severally,
to the Underwriter that the representations and warranties of the Company and
the Bank set forth in Section l of the Underwriting Agreement, and each of the
Selling Shareholders represents and warrants, jointly and severally, to the
Underwriter that the representations and warranties of the Selling Shareholders
set forth in Section 2 of the Underwriting Agreement, are, in each case,
accurate as though expressly made at and as of the date hereof.
<PAGE> 34
This Agreement shall be governed by the laws of the State of New Jersey.
If the foregoing is in accordance with your understanding of the
agreement among the Company, the Bank, the Selling Shareholders and the
Underwriter, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts and together with the
Underwriting Agreement, shall be a binding agreement among the Underwriters, the
Company, the Bank and the Selling Shareholders in accordance with its terms and
the terms of the Underwriting Agreement.
Very truly yours,
WASHINGTON BANKING COMPANY
By:
-----------------------------------------
Michal D. Cann
President and Chief Executive Officer
WHIDBEY ISLAND BANK
By:
-----------------------------------------
Michal D. Cann
President and Chief Executive Officer
THE SELLING SHAREHOLDERS
A-2
<PAGE> 35
Confirmed and accepted as of
the date first above written:
RYAN, BECK & CO., INC.
By:
-----------------------------------------
Name:
Title:
A-3
<PAGE> 1
EXHIBIT 5
June 3, 1998
Washington Banking Company
1421 S.W. Barlow Street
Oak Harbor, WA 98277
Re: Legality of Securities to be Issued
Dear Ladies and Gentlemen:
We have acted as your counsel in connection with the registration by
Washington Banking Company (the "Company") under the Securities Act of 1933 as
amended (the "Act") of up to 1,150,000 shares of the Company's common stock, no
par value, (the "Shares") to be issued and sold by the Company, in the manner
set forth in the Registration Statement on Form SB-2 ("Registration Statement"),
as amended, filed under the Act with respect to the offering of the Shares.
In connection with the offering of the Shares, we have examined (1) the
Company's Articles of Incorporation, (2) the Registration Statement, and (3)
such other documents as we have deemed necessary to form the opinion expressed
below. As to various questions of fact independently established, we have relied
upon statements of officers of the Company.
Based on this examination, we advise you that in our opinion the Shares,
or any portion of the Shares, have been duly authorized and when issued and sold
by the Company in the manner described in the Registration Statement and after
the Registration Statement has become effective, will be validly issued, fully
paid and non-assessable.
The foregoing opinion is limited to the federal laws of the United
States and the laws of the State of Washington, and we express no opinion as to
the effect of the laws of any other jurisdiction.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference in the Prospectus contained in the
Registration Statement to this firm under the caption "Legal Matters" as having
passed upon
<PAGE> 2
May 29, 1998
Page 2
the validity of the Shares. In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Act or the Rules and Regulations of the Securities and Exchange Commission
enacted under the Act.
Very truly yours,
GORDON, THOMAS, HONEYWELL,
MALANCA, PETERSON
& DAHEIM, P.L.L.C.
By: /s/ SANDRA L. GALLAGHER
--------------------------------
Sandra L. Gallagher
SLG:jwh
<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
June 2, 1998
Securities and Exchange Commission
450 5th St. N.W.
Washington D.C. 20549
REGARDING: WASHINGTON BANKING COMPANY
Dear Sirs:
I have been furnished with a copy of the Form SB-2 Registration Statement to be
filed by my former client, Washington Banking Company with the Securities and
Exchange Commission. I agree with the statements made under "Experts"
regarding the change in accountants insofar as they relate to my firm
(formerly David O. Christensen, Certified Public Accountants & Consultants).
Sincerely,
/s/ David O. Christensen
David O. Christensen
<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
/s/ KPMG PEAT MARWICK LLP
Seattle, Washington
May 29, 1998
<PAGE> 1
EXHIBIT 23.2
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
June 2, 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 of the report of David O. Christensen
Certified Public Accountants & Consultants (now known as David Christensen CPA
& Consultant, PLLC) dated January 31, 1997, except Note 16 that is dated April
24, 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 David O. Christensen Certified Public
Accountants & Consultants under the caption "Experts" in the Registration
Statement 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 SB-2 (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 21st day of May, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ MICHAL CANN
- --------------------------------------------------------
Michal Cann Director
/s/ ORLAN DEAN
- --------------------------------------------------------
Orlan Dean Director
/s/ MARLEN KNUTSON
- --------------------------------------------------------
Marlen Knutson Director
/s/ KARL C. KRIEG, III
- --------------------------------------------------------
Karl C. Krieg Director
/s/ JAY T. LIEN
- --------------------------------------------------------
Jay T. Lien Director
/s/ ROBERT B. OLSON
- --------------------------------------------------------
Robert B. Olson Director
/s/ ANTHONY B. PICKERING
- --------------------------------------------------------
Anthony B. Pickering Director
/s/ ALVIN J. SHERMAN
- --------------------------------------------------------
Alvin J. Sherman Director
/s/ EDWARD J. WALLGREN
- --------------------------------------------------------
Edward J. Wallgren Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 6,263 7,940
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 1,750 3,900
<TRADING-ASSETS> 628 695
<INVESTMENTS-HELD-FOR-SALE> 5,521 6,018
<INVESTMENTS-CARRYING> 23,508 22,782
<INVESTMENTS-MARKET> 23,824 29,495
<LOANS> 117,535 123,293
<ALLOWANCE> 1,296 1,489
<TOTAL-ASSETS> 160,068 170,842
<DEPOSITS> 146,394 156,377
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 639 1,206
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 2,943 2,943
<OTHER-SE> 10,092 10,316
<TOTAL-LIABILITIES-AND-EQUITY> 160,068 170,842
<INTEREST-LOAN> 10,207 2,924
<INTEREST-INVEST> 1,694 442
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 11,901 3,366
<INTEREST-DEPOSIT> 4,358 1,315
<INTEREST-EXPENSE> 4,358 1,315
<INTEREST-INCOME-NET> 7,543 2,051
<LOAN-LOSSES> 647 195
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 5,781 1,716
<INCOME-PRETAX> 2,722 620
<INCOME-PRE-EXTRAORDINARY> 1,904 416
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,904 416
<EPS-PRIMARY> 0.68<F1> 0.15
<EPS-DILUTED> 0.65 0.14
<YIELD-ACTUAL> 5.06<F2> 5.23
<LOANS-NON> 498 521
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 653 618
<LOANS-PROBLEM> 11 56
<ALLOWANCE-OPEN> 796 1,296
<CHARGE-OFFS> 160 18
<RECOVERIES> 13 16
<ALLOWANCE-CLOSE> 1,296 1,489
<ALLOWANCE-DOMESTIC> 1,065 1,258
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 231 231
<FN>
<F1>For Purposes of This Exhibit, Primary Means Basic.
<F2>Net int inc/total int earning asset
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
[LOGO]
June , 1998
Dear Potential Investor:
At the request of Washington Banking Company (the "Company"), Oak Harbor,
WA, we are enclosing a preliminary prospectus covering the Company's proposed
offering of common stock. Please read it carefully.
The offering will be underwritten, on a firm commitment basis, by Ryan,
Beck & Co. We will be taking indications of interest until the week of June
22nd, when the offering is expected to commence. However, the earlier we receive
your indication, the greater the likelihood that we will be able to accommodate
your wishes.
In addition, we will be hosting a Community Informational Meeting at 7:00
p.m. on Thursday, June 11, 1998. There will be a presentation related to the
offering and the Company, with a Question and Answer period immediately
following. The meeting will be held at The Best Western, Harbor Plaza, 33175
State Route 20, Oak Harbor, Washington.
If you have any questions, or want to learn more about how to register your
indication of interest for shares, please call 1-800-342-2325 and ask for Bob
Lewit at extension 5822, Mitch Krause at extension 5813, Scott Orzillo at
extension 5833 or Craig Tackett at extension 5857, as soon as possible.
Thank you for your interest.
Sincerely,
[LOGO]
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BY 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.